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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
AMENDMENT NO. 2
[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.
[ ] 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
[X] 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 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 $2,371 per $1,000
investment to Limited Partners during the life of the Partnership (or
approximately $1,185.50 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), but do not include
aggregate interest payments of $56 per $1,000 investment projected for certain
post-closing distributions. 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"). The MGP and AGP or
their affiliates collectively hold an aggregate of 30 units or approximately 0.2
percent of the outstanding limited partnership units. 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 with this letter, the
Agreement will be terminated without penalty. Following Closing, which is
expected to occur in early July 1998, the Partnership will be dissolved.
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.
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. A total aggregate of approximately $6.9 million cash is
anticipated to be distributed to Limited Partners within 30 days of Closing. The
Managing General Partner will be the maker and sole obligor of the Note, which
is expected to be in the principal amount of approximately $4.5 million. On the
date of the Closing, Northland will have approximately $______ of indebtedness
outstanding (without giving effect to the Note) of which approximately $_______
will be senior to the Note.
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 $620 per
$1,000 investment (plus interest on the Note of $56 per $1,000 investment), will
be made as and when payments are made by Northland 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, which is expected to
consist solely of commercial bank debt, including that anticipated to be
incurred by Northland in connection with financing the proposed transaction. The
Note will not be the obligation of, or guaranteed by, Northland's wholly-owned
subsidiary, Northland Cable Properties, Inc. Assuming that the Closing occurs in
July 1998, distributions to the Limited Partners are expected to approximate
$310 per $1,000 investment (plus interest on the Note of $37 per $1,000
investment) in July 1999, and $310 per $1,000 investment (plus interest on the
Note of $19 per $1,000 investment) in July 2000.
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. If
the Partnership incurs any unanticipated liabilities or expenses which arise
from operations of the Partnership prior to or on the date of Closing and which
exceed amounts set aside for the payment of known and anticipated current
liabilities, such liabilities or expenses could reduce the amount of cash
available for distribution to the Limited Partners. However, if at any time
prior to the Closing the Managing General Partner believes that the aggregate
amount of cash available for distribution to the Limited Partners will be
reduced by more than $300,000 from these estimates, the transaction will not
proceed and Closing will
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not occur without again obtaining approval of the Limited Partners. Accordingly,
the minimum amount of cash which will be distributed to the Limited Partners
without re-solicitation of approval of the Limited Partners is anticipated to be
at least $925 or a cumulative total of $2,351 per $1,000 investment to Limited
Partners during the life of the Partnership (or approximately $1,175.50 per $500
unit of limited partnership interest).
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, not including those held by the General Partners or their affiliates.
Each non-affiliated 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 to any
affiliate of the General Partners 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 on December 1, 1997, will enable Limited Partners to
liquidate their investment at a favorable price. Adjustments will not be made to
this valuation without resubmitting the proposal to the Limited Partners for a
new vote.
As further described in the Notice of Special Meeting and the Proxy
Statement, to accomplish the proposed transaction, Limited Partners must approve
an amendment to the Partnership's Amended and Restated Certificate and Agreement
of Limited Partnership (the "Partnership Agreement"). The amendment, if
approved, would authorize the General Partners to sell the undivided portion of
the Assets that is attributable to the LPs' Interest to Northland. The existing
provisions of the Partnership Agreement permit the sale of assets of the
Partnership, except to the General Partners or their affiliates. Other effects
of the proposed amendment are described in the section of the accompanying Proxy
Statement entitled "Proposed Transaction - Amendment to Partnership Agreement."
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.
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
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NOTICE OF SPECIAL MEETING OF LIMITED PARTNERS
OF NORTHLAND CABLE PROPERTIES FIVE LIMITED PARTNERSHIP
TO BE HELD ______________, 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 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 $2,371 per $1,000
investment to Limited Partners during the life of the Partnership (or
approximately $1,185.50 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), but do not include
aggregate interest payments of $56 per $1,000 investment projected for certain
post-closing distributions.
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 late 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, not including those held by the General Partners or their affiliates.
Each non-affiliated 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 to any affiliate of
the General Partners 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:
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, not including units of limited
partnership interest held by the General Partners or their affiliates.
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
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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
2
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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, not including units of limited partnership
interest held by the General Partners or their affiliates. As of _____, 1998,
the record date, there were 14,735 units of limited partnership interest
outstanding, held by 995 Limited Partners of record. The General Partners and
their affiliates hold 30 of such units, none of which will be counted in
determining whether the requisite approval of a majority in interest 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 to any
affiliate of the General Partners 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
PAGE
Introduction......................................................... 1
Special Factors...................................................... 3
Summary Historical Financial Information............................. 6
Proposed Transaction................................................. 6
Certain Consequences Of The Transaction.............................. 16
Certain Consequences Of Limited Partners' Determination Not To Sell.. 18
Projected Cash Available From Liquidation............................ 18
Projected Cash Available If Closing Occurs........................... 18
Management's Discussion And Analysis Of Financial Condition And
Results Operations................................................ 20
Federal Income Tax Consequences...................................... 23
Conflicts Of Interest................................................ 26
Overview of Partnership Business and Properties...................... 27
Certain Affiliates Of The Partnership................................ 31
Plan Of Solicitation................................................. 33
Incorporation By Reference........................................... 33
Financial Statements................................................. 34
Exhibits:
Form of Proxy.................................................... A-1
Form of Amendment to Partnership Agreement....................... B-1
Form of Asset Purchase Agreement................................. C-1
Form of Promissory Note.......................................... D-1
Daniels Appraisal................................................ E-1
i
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INTRODUCTION
GENERAL
This Proxy Statement is being furnished to the Limited Partners of the
Partnership by the Managing General Partner, whose principal executive offices
are located at 1201 Third Avenue, Suite 3600, Seattle, Washington 98101 and
whose telephone number is (206) 621-1351. The principal executive offices and
telephone number of the Partnership are the same. The Proxy Statement is to be
used in connection with the solicitation of proxies for use at the Special
Meeting.
The purpose of the Special Meeting is to consider and vote upon the
proposed liquidation by the Partnership of 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 operating
groups, including Cedar Creek, Lamesa and Corsicana, Texas, and Forest City,
North Carolina, as well as control of Corsicana Media, Inc. ("Corsicana Media"),
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. The form of Asset
Purchase Agreement is attached to this Proxy as Exhibit C. 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. The
Managing General Partner believes that the Northland affiliate to whom the
Assets would be assigned is Northland Cable Properties, Inc. ("NCPI") other than
those relating to Corsicana Media which would be assigned to Northland Media,
Inc. ("NMI"). Each of NCPI and NMI are wholly-owned subsidiaries of the Managing
General Partner.
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 form of Note to be delivered to the
Partnership is attached to this Proxy as Exhibit D.
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
result in an aggregate of $11,901,714 distributable to the Limited Partners or a
total of approximately $2,371 per $1,000 investment to Limited Partners during
the life of the Partnership (or approximately $1,185.50 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), but do not include aggregate interest payments of $56 per $1,000
investment projected for certain post-closing distributions.
Following Closing, distributions to Limited Partners will be made in
three installments. See "Projected Cash Available If Closing Occurs." The
initial distribution of approximately $6.9 million or $945 per $1,000
investment, will be made within 30 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 $620 per $1,000 investment plus interest
of $56 per $1,000 investment, will be made as and when payments are made by
Northland to the Partnership pursuant to the Note. The Note is expected to be in
the principal amount of approximately $4.5 million, will have a two-year term,
and will provide for 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, and expects that it will incur commercial bank debt in
connection with financing the proposed transaction. The Note will not be the
obligation of, or guaranteed by, Northland's wholly-owned subsidiary, Northland
Cable Properties, Inc. Assuming that the Closing occurs in July 1998,
distributions to the Limited Partners are expected to approximate $310 per
$1,000 investment, plus interest of $37 per $1,000 investment, in July 1999, and
$310 per $1,000 investment, plus interest of $19 per $1,000 investment, in July
2000. 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. If the
Partnership incurs any unanticipated liabilities or expenses which arise from
operations of the Partnership prior to or on the date of Closing and which
exceed amounts set aside for the payment of known and anticipated current
liabilities, such liabilities and expenses could reduce the amount of cash
available for distribution to the Limited Partners. However, if at any time
prior to the Closing the Managing General Partner believes that the amount of
cash available for distribution to the Limited Partners will be reduced by more
than $300,000 from these estimates, the transaction will not proceed and Closing
will not occur without again obtaining approval of the Limited Partners.
Accordingly, the
<PAGE> 9
minimum amount of cash which will be distributed to the Limited Partners without
re-solicitation of approval of the Limited Partners is anticipated to be at
least $925 or a cumulative total of $2,351 per $1,000 investment to Limited
Partners during the life of the Partnership (or approximately $1,175.50 per $500
unit of limited partnership interest).
The proposed transaction is subject to the approval of a majority in
interest of Limited Partners, not including those held by the General Partners
or their affiliates. 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 unaffiliated
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 unaffiliated Limited Partner is entitled to one vote
for each limited partnership unit held. The affirmative vote of Limited Partners
holding a majority of the outstanding units, not including an aggregate of 30
units held by the General Partners and their affiliates, 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
unaffiliated 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.
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. Northland currently
owns other cable television systems in the vicinity of the Assets which will
afford Northland the opportunity to achieve certain economies of scale and which
will have the effect of potentially making the Assets more valuable to Northland
than to a third party. Alternatively, it is possible that, subsequent to the
Closing, Northland may receive a bid by one or more third parties which exceeds
the appraised value of the Assets. 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 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, including a
contract with respect to the sale by Northland of certain unrelated cable
television assets, and the General Partners expect that Northland and its
affiliates may 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. Units of limited
partnership interest held by the General Partners or their affiliates will not
be included in determining whether the requisite approval has been obtained.
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.
2
<PAGE> 10
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.
Although the General Partners have not undertaken any general solicitation or
survey of the Limited Partners to determine the desire of the Limited Partners'
to liquidate their investment, based on (i) unsolicited comments and questions
from Limited Partners with respect to a liquidation of their investment, (ii)
the lack of public market for the units of limited partnership, and (iii) the
duration of the Limited Partnership, the General Partners believe such liquidity
is sought by the Limited Partners. 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 Partnership having obtained an independent appraisal of
the Assets, 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 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's 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 or may receive an offer from a third party in excess of the
appraisal value provided by Daniels. In addition, the Managing General Partner
estimates that payments to be made to Northland and its affiliates in connection
with the proposed transaction include approximately $25,000 in costs and $64,739
of accrued but unpaid management fees due to the Managing General Partner. See
"Conflicts of Interest - Certain Payments to the Managing General Partner.
The General Partners have faced a substantial conflict of interest in
proposing, negotiating and structuring the proposed transaction. See "Conflicts
of Interest." Although, as discussed above, the General Partners believe that
Limited Partners are interested in a means of liquidating their investment, the
proposed transaction has not been solicited by Limited Partners. The only steps
taken to provide the Limited Partners with procedural safeguards are the
commissioning of an independent appraisal of the 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 unaffiliated Limited Partners is required to
be obtained. (The 30 units of limited partnership interest held and voted by the
General Partners and their affiliates will not 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.
As further discussed in the Daniels Appraisal, Daniels relied on a discounted
cash flow analysis 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. To that extent, in relying on the Daniels
Appraisal, the General Partners indirectly considered the going concern value of
the Assets, as well as a hypothetical liquidation value at the end of a
projected period. However, the General Partners did not separately evaluate the
going concern's value of the Assets. Nor did the General Partners consider the
current liquidation value of the Assets, particularly because, in their view,
such a value would be significantly lower than the gross valuation. 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. Based upon experience in the cable television industry, as
well as general familiarity with industry news as reported by trade journals,
the General Partners believe that the appraised fair market value of the Assets
as determined by Daniels is fair and reasonable. A copy of the Daniels Appraisal
is included in this Proxy Statement as Exhibit E.
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. The Partnership Agreement currently does not permit the
disposition of the Partnership's assets to the General Partners or their
affiliates, and the amendment to the Partnership Agreement proposed herein is
necessary to effect the proposed transaction. See "Proposed Transaction -
Amendment to Partnership Agreement" and "Fairness of the Proposed Transaction."
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. The appraised value as of
December 1, 1997 substantially exceeds the net book value of the Partnership as
of December 1, 1997 which was a deficit of ($5,817,756). 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 not sought 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
4
<PAGE> 11
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 the sale of other small
entity cable operations and the small cable system marketplace generally, 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. 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. The Managing General Partner and certain of its
affiliates (not including the Partnership), however, have retained Daniels to
provide certain brokerage services in connection with the proposed sale of
certain of such affiliates' cable television system assets. See "Conflicts of
Interest." 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 E 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."
4
<PAGE> 12
SUMMARY HISTORICAL FINANCIAL INFORMATION
INCOME STATEMENT DATA:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------
1993 1994 1995 1996 1997
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenue $ 4,724,194 $ 5,598,494 $ 7,897,009 $ 9,244,966 $ 9,549,197
Expenses 3,847,615 4,884,942 7,371,230 8,074,521 8,173,600
----------- ----------- ----------- ----------- -----------
Operating Income 876,579 713,552 525,779 1,170,445 1,375,597
Other Income (Expenses) (561,873) (751,338) (1,515,159) (1,898,178) (1,709,280)
----------- ----------- ----------- ----------- -----------
Net Income (Loss) $ 314,706 $ (37,786) $ (989,380) $ (727,733) $ (333,683)
=========== =========== =========== =========== ===========
Allocation of Net Income
(Loss):
General Partners $ 3,147 $ (378) $ (9,893) $ (7,277) $ (3,337)
Limited Partners 311,559 (37,408) (979,487) (720,456) (330,346)
Net Income (Loss) Per Limited
Partnership Unit 21 (3) (66) (49) (22)
BALANCE SHEET DATA:
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------------------------------------
1993 1994 1995 1996 1997
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Total Assets $ 6,270,667 $ 15,099,388 $ 17,951,250 $ 16,683,277 $ 15,378,739
Total Liabilities 9,591,252 18,641,032 22,631,152 22,165,350 21,196,495
Partners' Deficit:
General Partners (135,475) (137,346) (148,727) (156,748) (160,085)
Limited Partners (3,185,110) (3,404,298) (4,531,175) (5,325,325) (5,657,671)
</TABLE>
5
<PAGE> 13
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 Lake, 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., 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
December 31, 1997, the outstanding principal balance owing on the Partnership's
bank financing was $20,154,766. In addition, the Partnership owed the Managing
General Partner an aggregate of approximately $64,739 for accrued but unpaid
management fees.
Due to the General Partners' belief, based in part on the fact that many
investors have held their units for more than twelve years without liquidity and
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 and the General Partners
are not aware of any sales or transfers of units of limited partnership
interests by any holder thereof other than in connection with estate and
retirement planning, by will, gift, settlement or other non-arms length
transaction in the last two years. Based on the General Partners' experience in
connection with transactions involving similar sized cable television systems,
and after considering the current small cable system marketplace, the General
Partners concluded that soliciting a third party purchaser of the Assets would
require the Partnership to retain a broker. Believing that the cost and delay
associated with the retention of such a broker, the seeking of potential
purchasers, the conduct of negotiations and due diligence with the prospective
purchaser(s) and the consummation of such a transaction, the General Partners
concluded that 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.
AMENDMENT TO PARTNERSHIP AGREEMENT
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. Under the current provisions of the Partnership Agreement, the
General Partners are authorized to effect a sale of the Assets, except to the
General Partners or their affiliates. Accordingly, the Partnership Agreement
requires amendment to accomplish the proposed sale of such undivided portion of
the Assets to Northland. In addition, the amendment modifies certain allocation
provisions in the Partnership Agreement for purposes of allowing the cash
payments in the proposed transaction to be allocated to the Limited Partners and
the Administrative General Partner in accordance with their undivided interest
in the Partnership, and to permit the in-kind distribution to Northland of the
undivided portion of the Assets attributable to the MGP's Interest. The effect
to the Limited Partners is to allocate to them the same gain as a result of the
proposed transaction as would result were the Assets to be sold to a third party
for $35,463,000, or the estimated fair market value of the Partnership as of the
valuation date of December 1, 1997.
If the proposed transaction and the amendment to the Partnership
Agreement are approved by the requisite majority of the outstanding units of
Limited Partnership interest, not including the aggregate 30 units held by the
General Partners or their affiliates, and if 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. If
the Closing does not occur within 180 days of the date of the Special Meeting,
the amendment will have no effect.
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 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'
6
<PAGE> 14
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 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 obtaining 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 purchasers, and the conduct of
negotiations and due diligence and the consummation of such a transaction 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 and who are each
shareholders of Northland Telecommunications Corporation, the sole shareholder
of the Managing General Partner. As such, Messrs. Whetzell and Clark were in a
position to assess the opportunity presented to both 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 and their
ownership interest in the Managing General Partner, 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' 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.
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. Such proximity will afford Northland the
opportunity to take advantage of certain economies of scale such as centralized
or regionalized billing, management and advertising functions, existing
maintenance, installation, customer service and support personnel and
utilization of existing regional infrastructure such as sales and maintenance
offices. While other third party cable system owners and operators have cable
systems adjacent to certain Partnership Assets, the Partnership is not aware of
any single entity which owns or operates cable television systems near all or
substantially all of the systems owned by the Partnership. Accordingly, such a
third party would not be likely to experience the same economies of scale as
those available to Northland.
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."
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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 E.
SUMMARY OF APPRAISAL
The following summary is qualified by, and should be read in conjunction
with, the Daniels Appraisal attached hereto as Exhibit E.
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 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 cable 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 cable system operating group and
Corsicana Media. The combined values for each cable 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
operating group, plus an analysis of non-subscriber based revenue sources. Its
expense forecasts were based on assumed rates of inflation over the forecast
period, adjusted to reflect the particular growth characteristics of each system
operating group. The capital expenditure forecasts were based upon costs
associated with new construction of cable plant, plant maintenance, 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 E.
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
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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 blended 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).
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.
INTRODUCTION
The operation of cable television systems is extensively regulated by
the FCC, some state governments and most local governments. The 1996
Telecommunications Act alters the regulatory structure governing the nation's
telecommunications providers. The 1996 Telecommunications Act 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
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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 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 Telecommunications 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 Telecommunications 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. The United States Supreme Court has granted
certiorari to hear an appeal of the Eighth Circuit Court of Appeals 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
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
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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 Telecommunications 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 Telecommunications 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 Telecommunications 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 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
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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.
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.
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.
Northland or its affiliates own 20 units of limited partnership, representing
approximately 0.1% of the outstanding limited partnership units, and the
affiliates of the Administrative General Partner own 10 units, representing
approximately 0.07% of the outstanding limited partnership units. Such
affiliated units will not be taken into account in determining whether the
requisite approval of Limited Partners has been obtained.
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
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for the LPs' Interest and the AGP's Interest. See "Projected Cash Available If
Closing Occurs." Northland estimates it will require approximately $28,200,000
of debt financing at closing to complete the purchase. This amount represents
the purchase price of $35,463,000 less (i) an amount equal to the distribution
in-kind to Northland for its undivided portion of the Assets attributable to the
Managing General Partner's interest in the Partnership, and (ii) the principal
amount of the Note. Based on discussions with its lenders, Northland expects to
obtain the necessary financing, although no formal commitment has been received.
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 $620 per
$1,000 investment plus interest of $56 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, including commercial bank debt
anticipated to be incurred by Northland in connection with financing the
proposed transaction. The Note will not be the obligation of, or guaranteed by,
Northland's wholly-owned subsidiary, Northland Cable Properties, Inc. The
interest rate on the Note is not intended to represent the interest rate which
would be charged to Northland by an unaffiliated third party lender or to
provide a rate of return on the Note equal to that which the Limited Partners
could have received had the purchase price for the units of limited partnership
interest been paid in full in cash at Closing. The 6% interest rate instead
reflects the economic terms under which Northland is willing to undertake the
proposed transaction. Although Northland has not sought to obtain third party
financing in lieu of the Note, Northland believes it is likely that such
financing would be obtainable, if at all, at a higher interest rate than offered
on the Note.
Assuming that Closing occurs in July 1998, distributions to the Limited
Partners are expected to approximate $310 per $1,000 investment plus interest of
$37 per $1,000 investment, in July 1999 and $310 per $1,000 investment, plus
interest of $19 per $1,000 investment, in July 2000. 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. If the Partnership incurs any
unanticipated liabilities or expenses which arise from operations of the
Partnership prior to or on the date of Closing and which exceed amounts set
aside for the payment of known and anticipated current liabilities, such
liabilities and expenses could reduce the amount of cash available for
distribution to the Limited Partners. However, if at any time prior to Closing
the Managing General Partner believes that the amount of cash available for
distribution to the Limited Partners will be reduced by more than $300,000 from
these estimates, the transaction will not proceed and Closing will not occur
without again obtaining approval of the Limited Partners. Accordingly, the
minimum amount of cash which will be distributed to the Limited Partners without
re-solicitation of approval of the Limited Partners is anticipated to be at
least $925 or a cumulative total of $2,351 per $1,000 investment to Limited
Partners during the life of the Partnership (or approximately $1,175.50 per $500
unit of limited partnership interest).
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 had discussions with its lender
concerning financing of 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 to any affiliate of the
General Partners 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. Due to the fluctuating
nature of certain "non-system" assets of the Partnership such as cash, accounts
receivable and prepaid sums, the value of such Partnership 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
13
<PAGE> 21
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.
Following Closing, the Partnership will remain liable for post-Closing
adjustments, claims, liquidation expenses and undisclosed liabilities relating
to events or conditions concerning the Assets and operations of the Partnership
arising on or prior to the date of Closing. All such liabilities, including
liabilities to Northland arising out of the sale of 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 fairness of the proposed transaction was considered by the General
Partners and by John S. Whetzell both in his capacity as President of the
Managing General Partner and individually as an affiliate of the Managing
General Partner. The General Partners and Mr. Whetzell 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, Mr. Whetzell 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. Based upon
experience in the cable television industry, as well as general familiarity with
industry news as reported by trade journals, the General Partners and Mr.
Whetzell believe that the appraised fair market value of the Assets as
determined by Daniels is fair and reasonable.
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 the General Partners believe makes it
reasonably probable that a brokered sale to an unrelated third party would yield
lower net proceeds to the Limited Partners. Additionally, because the General
Partners do not intend to obtain an updated appraisal from Daniels closer to the
date of the proposed Special Meeting, there is a risk that the fair market value
of the Assets could increase prior to Closing in which case Northland would
purchase the Assets at a price lower than the then current market value.
In determining the fairness of the proposed transaction, the General
Partners and Mr. Whetzell, as President of the Managing General Partner and
individually as an affiliate of the Managing General Partner 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. 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 due primarily to the economies of scale available to Northland due
to its unique position of operating cable systems near all but one of the
Partnership's systems and the time and expense which would be incurred by a
third party in undertaking the requisite business, legal, financial, engineering
and technical due diligence review and negotiating and consummating the
transaction. Even if a third party or parties were willing to pay the same
price, the net proceeds available to the Limited Partners would likely be less
due to brokerage and other transactional costs which would be borne by the
Partnership. In reaching their decision as to fairness, the General Partners and
Mr. Whetzell 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 30 units of limited partnership
interest held and voted by the General Partners or their affiliates will not be
included in determining whether the requisite approval has been obtained.)
Issues of fairness on behalf of the General Partners 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
14
<PAGE> 22
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
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.
15
<PAGE> 23
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.
The Partnership anticipates winding up its business in the third quarter
of 1998. Until the Partnership has wound up its affairs it will continue to file
periodic reports under the Security Exchange Act of 1934. In the event winding
up the dissolution takes longer than anticipated, the Partnership will continue
to file such reports until such dissolution has occurred.
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. Once the process of
winding-up the business of the Partnership is complete and a certificate of
cancellation of the Partnership has been filed, the Note will be assigned to a
liquidating trust for the benefit of limited partners. See "Projected Cash
Available From Liquidation" for certain financial information regarding the
anticipated effect that the proposed transaction will have on Limited Partners.
THE LIQUIDITY TRUST
After the partnership is wound up and a certificate of dissolution
filed, the Note will be assigned to a liquidating trust (the "Trust") created
and maintained for the benefit of the Limited Partners. The Trust will permit
the Partnership to dissolve after it ceases operations and will facilitate
administration and distribution of the proceeds of the Note to the Limited
Partners. The Trust will not engage in any business activities other than those
incident to the distribution of proceeds of the Note to the Limited Partners and
will be terminated once the proceeds of the Note have been paid to the Limited
Partners, which is anticipated to occur on or about the second anniversary of
the Note.
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.
FRAUDULENT TRANSFER STATUTES
The payments to the Limited Partners may be subject to review under
relevant state and federal fraudulent conveyance laws if a bankruptcy case or
lawsuit is commenced by or on behalf of unpaid creditors of the Partnership.
Under these laws, if a court were to find that, after giving effect to the sale
of the Partnership's Assets and the subsequent liquidation of the Partnership,
either (a) the Partnership sold its Assets and liquidated with the intent of
hindering, delaying or defrauding creditors or (b) the Partnership received less
than reasonably equivalent value or consideration in the sale of its Assets and:
(i) was insolvent or rendered insolvent by reason of the sale of the Assets and
its subsequent liquidation; (ii) was engaged in a business or transaction for
which the assets remaining with the Partnership constituted unreasonably small
capital; or (iii) intended to incur, or believed that it would incur debts
beyond its ability to pay such debts as they matured, such court may subordinate
payments to be made under the Note to presently existing and future indebtedness
of the Partnership, direct the repayment of any amounts paid to the Limited
Partners to the Partnership's creditors or take other action detrimental to the
Limited Partners.
The measure of insolvency for purposes of determining whether a transfer
is avoidable as a fraudulent transfer varies depending on the law of the
jurisdiction in which it is being applied. Generally, however, a debtor would be
considered insolvent if the sum of all its liabilities, including contingent
liabilities, were greater than the value of all its property at a fair
valuation, or if the present fair saleable value of the debtor's assets were
less than the amount required to repay its probable liabilities on its debts,
including contingent liabilities, as they become absolute and matured.
The Partnership believes that it will receive equivalent value for the
Assets. In addition, the Partnership does not believe that it, after giving
effect to the sale of the Assets and its subsequent liquidation: (i) was or will
be insolvent or rendered insolvent; (ii) was or will be engaged in a business or
transaction for which its remaining assets constituted unreasonably small
capital; or (iii) intends or intended to incur, or believes or believed that it
will or would incur, debts beyond its ability to pay such debts as they mature.
These beliefs are based on the fact that the Partnership believes it is
receiving equivalent value for its Assets, the fact that the Partnership will be
discharging all of its liabilities prior to distributing the balance of the
proceeds of the sale of the Assets to the Limited Partners and the fact that the
Partnership will not be conducting operations or incurring indebtedness after
the distribution to Limited Partners.
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.
16
<PAGE> 24
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.
17
<PAGE> 25
TAX RESULTS FROM DISPOSITION OF THE ASSETS AND RESULTING LIQUIDATION
(PER $1,000 INVESTMENT)
Overall Ordinary Income Per $1,000 Investment (1) (2).......... $ 620
Overall Long-Term Capital Gain Per $1,000 Investment (2) (3)... $ 996
- ----------
(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 $562 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.
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<PAGE> 26
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. For example, legal
and accounting fees incurred by the Partnership, including assisting in the
extensive business, legal, engineering, technical and financial due diligence
review customarily undertaken by third party purchasers, as well as preparation
and negotiation of transaction documentation, would be likely to exceed the
estimated transaction costs set forth on the following page. These expenses
would be further compounded if multiple purchasers were required to sell all of
the Partnership's assets. Moreover, were the Partnership to retain a broker to
solicit one or more purchaser(s), such broker's commission would likely exceed
the $25,000 appraisal fee paid to Daniels in this transaction. 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 December 31, 1997, and thus reflects payments of
principal and interest on Partnership indebtedness and certain accrued receipts
and costs as of December 31, 1997. As discussed in the preceding paragraph,
certain expenses such as appraisal expenses and costs of this proxy
solicitation, including legal and accounting costs could be materially different
if the transaction involved the sale of the Assets to a third party. Although
such expenses will vary depending on the timing and structure of such a
transaction, the expenses incurred would likely be equal to or greater than
those set forth in the table. Other expenses, such as partnership administrative
costs and miscellaneous costs represent expenses which would be incurred by the
Partnership regardless of the parties to or structure of a sale of the
Partnership's assets. 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 CONCERNING THE ASSETS AND OPERATIONS OF THE
PARTNEERSHIP ARISING ON OR PRIOR TO THE DATE OF CLOSING THAT ACCRUE PRIOR TO
SUCH DATE, IN ANY EVENT, THE AMOUNT OF THE VARIANCE COULD BE SIGNIFICANT. IF AT
ANY TIME THE MANAGING GENERAL PARTNER BELIEVES THAT THE AMOUNT OF CASH TO BE
DISTRIBUTED TO THE LIMITED PARTNERS WILL BE REDUCED BY MORE THAN THREE HUNDRED
THOUSAND DOLLARS ($300,000) FROM THESE PROJECTIONS, THE TRANSACTION WILL NOT
PROCEED AND CLOSING WILL NOT OCCUR WITHOUT AGAIN OBTAINING APPROVAL OF THE
LIMITED PARTNERS. 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 December 31, 1997, the General Partners do not
anticipate that any events will occur between December 31, 1997 and the Closing
date that will materially affect the figures.
PROJECTED CASH AVAILABLE IF CLOSING OCCURS
<TABLE>
<CAPTION>
<S> <C>
PARTNERSHIP PROJECTED CASH VALUE:
Gross Valuation for Assets (1) ................................................. $ 35,463,000
Plus (Less):
Cash on Hand, Receivables & Other Assets (2) ............................... 794,001
Appraisal Expenses (3) ..................................................... (25,000)
Transaction and Proxy Costs (4) ............................................ (100,000)
Partnership Administrative Costs (5) ....................................... (100,000)
Debt Repayment to Others (6) ............................................... (21,196,495)
Miscellaneous Costs (7) .................................................... (100,000)
Net Repayments of Debt Through Closing (8) ................................. 550,000
------------
Projected Net Cash Value (9) (10) .............................................. 15,285,506
LIMITED PARTNERS' PROJECTED CASH AVAILABLE (10) ................................ 11,901,714
------------
Per $1,000 Capital Contribution - INITIAL DISTRIBUTION FROM CLOSING ............ $ 945
Per $1,000 Capital Contribution - DISTRIBUTION FROM FIRST NOTE PAYMENT,
EXCLUDING INTEREST ......................................................... 310
Per $1,000 Capital Contribution - DISTRIBUTION FROM FINAL NOTE PAYMENT,
EXCLUDING INTEREST ......................................................... 310
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
Per $1,000 Capital Contribution - AGGREGATE INTEREST ON FIRST AND SECOND
NOTE PAYMENTS .............................................................. 56
TOTAL OVERALL POTENTIAL RETURN OVER THE LIFE OF THE PARTNERSHIP
------------
PER $1,000 LIMITED PARTNER CAPITAL CONTRIBUTION (INCLUDING INTEREST) ....... $ 2,427
============
</TABLE>
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<PAGE> 27
(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 $236,449 (ii) accounts
receivable of $427,836, and (iii) prepaid expenses of $129,716, all of
which were determined as of December 31, 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. Services
provided by the Managing General Partner will include ongoing accounting
and legal services as well as administrative and investor relations
services during the dissolution and winding up of the Partnership. The
amount to be paid to the Managing General Partner represents an estimate
of the actual cost incurred by the Managing General Partner to provide
these services to the Partnership.
(6) Consists of (i) notes payable of $20,154,766 to the Partnership's lender,
(ii) management fees of $64,739 payable to the Managing General Partner
net of $16,255 due from affiliates, and (iii) accounts payable, accrued
expenses and other liabilities of $993,245, all of which were determined
as of December 31, 1997.
(7) Estimated amount to be set aside to cover unrecorded liabilities that may
exist at closing.
(8) Represents scheduled amortization of notes payable of $375,000 due March
31 and June 30, 1998, net of anticipated borrowings of $200,000 subsequent
to December 31, 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>
<TABLE>
<S> <C>
Projected Net Cash Value $15,285,506
Distribution to the General Partners equal to 1.01% of the excess of capital
contributions over prior cash distributions pursuant to Section 16(d)(3) (18,233)
Projected value of assets distributed to the General Partners less share of
liabilities as determined after the Limited Partners receive 100% return on their
aggregate capital contributions pursuant to Section 16(d)(5) (3,365,559)
Limited Partners Projected Cash Available $11,901,714
===========
</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 ... 3,365,559 10,096,676 13,462,235
----------- ----------- -----------
Distribution of Projected Net Cash Value ..... $ 3,383,792 $11,901,714 $15,285,506
=========== =========== ===========
</TABLE>
(11) See "Certain Consequences of the Transaction -- State Tax Considerations."
20
<PAGE> 28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS OF THE LIMITED PARTNER
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. The Partnership has
historically generated significant net losses due, in part, to non-cash charges
to income for depreciation and amortization. Prior to the deduction for these
non-cash items, the Partnership has generated sufficient operating income to
service its debt and achieve certain levels of cash distributions to Limited
Partners in prior years. 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
1997 AND 1996
Total revenues reached 9,549,197 for the year ended December 31, 1997,
representing an increase of approximately 3% over the same period in 1996. Of
these revenues $6,471,315 (68%) is derived from subscriptions to basic service,
$883,261 (9%) is derived from subscriptions to premium services, $951,913 (10%)
from tier service subscriptions and $1,242,708 (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 24% due to the launch of a tier service in the Corsicana
System and the continued increase in penetration of tiers launched in 1996.
As of December 31, 1997 the Assets served approximately 22,840 basic
subscribers, 8,805 premium subscribers and 10,680 tier subscribers.
Operating expenses totaled $866,958 for the year ended December 31,
1997, representing an increase of approximately 5% over the same period in 1996.
The increase was attributable to wage and benefit cost increases of
approximately 7% over 1996. 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 $2,495,544 for the year
ended December 31, 1997, representing an increase of 2% over the same period in
1996. The increase was attributable to a 27% 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 $2,591,577 for the year ended December 31,
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 attributable to a rise in the average number of
tier subscribers from 9,092 in 1996 to 10,213 in 1997.
Depreciation and amortization expenses totaled $2,219,521 for the year
ended December 31, 1997, representing a decline of $168,022 from the same period
in 1996. This decrease is a result of certain Partnership assets being fully
depreciated.
Interest expense totaled $1,718,610 for the year ended December 31,
1997, representing a decrease of $21,703 from the same period in 1996. The
Partnership's average outstanding bank debt under its revolving credit and term
loan with First Union National Bank decreased to $20,444,945 for the 1997 period
from $21,275,304 for the 1996 period as a result of quarterly principal
payments.
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. Approximately
70% of 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. The remaining increase is primarily attributable to rate
increases for basic service which averaged 6%. 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>
21
<PAGE> 29
Operating expenses totaled $823,200 for 1996, representing an increase
of approximately 9% over 1995. Approximately 50% of this increase is due to the
addition of employees from the purchase in 1995 of the Phoenix Systems. The
remaining increase is due to increases in salary and benefit costs for all
employees which averaged 5% in 1996. 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. Approximately 65% of
this increase is due to the acquisition of the Phoenix Systems. The remaining
increase is due to 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 outstanding bank debt under its
revolving credit and term loan with First Union National Bank increased from
approximately $19,477,652 in 1995 to $21,181,554 in 1996, mainly due to a
borrowing of $4,126,000 to finance the acquisition of the Phoenix Systems in
December 1995. In addition, 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
$1,545,983, $2,150,354 and $1,341,667 for the years ended December 31, 1997,
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. The indebtedness is secured by a first lien position
on all present and future assets of the Partnership. As of December 31, 1997,
this loan facility had an outstanding balance of $20,154,766. Graduated
principal plus interest payments are due quarterly until maturity on March 31,
2001. Pursuant to an amendment to its loan agreement effective December 31,
1997, 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 5.50 to 1 and a minimum ratio
of annualized operating cash flow to fixed charges of 1.00 to 1 at December 31,
1997. 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. The
Partnership was in compliance with its financial covenants at December 31, 1997.
As of September 30, 1997, the Partnership was not in compliance with the
required ratio of debt to annualized operating cash flow. The Partnership has
received a waiver from its lender for this covenant violation. The waiver
granted by the lender applies specifically to this event of default and shall
remain in effect with respect to this specific item throughout the remaining
term of the loan agreement.
The amendment to the loan agreement and issuance of the waiver 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 $200,000
subsequent to December 31, 1997. These conditions would provide the
22
<PAGE> 30
Partnership with $350,000 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 General Partner believes these modifications
could be achieved, if necessary, with no material adverse effect on the
Partnership.
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: $14,823,212 fixed at a LIBOR rate of 8.53% expiring March 31, 1998;
$5,131,554 fixed at a LIBOR rate of 8.34% expiring June 30, 1998; and $200,000
bearing interest at a floating rate, currently 9.875%. 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 year ended December 31, 1997, the Partnership incurred
approximately $1,188,000 in capital expenditures including a vehicle upgrade and
new office construction in the Corsicana System; a vehicle replacement in the
Cedar Creek System; the first phase of a plant upgrade to the Ellenboro portion
of the Forest City System; and the construction of a fiber optic backbone in the
Cedar Creek System.
Should the Partnership continue operating it is expected that
significant capital expenditures would be required to continue the upgrading of
its systems in order to expand channel capacity and improve reliability. These
expenditures would allow the Partnership to remain competitive with other video
service providers such as DBS as well as generate additional revenue through the
launch of new or expanded services. Although the total cost of these upgrades
and the time span over which they would occur have not been determined, the
Managing General Partner believes the Partnership could finance these
expenditures from cash provided from operations and moderate borrowings under a
bank loan facility. It is not expected that these expenditures and any resulting
debt incurred would have a material adverse effect on the Partnership's results
of operation or financial condition.
YEAR 2000 ISSUES
The efficient operation of the Partnership's business is dependent in
part on its computer software programs and operating systems (collectively,
"Programs and Systems"). These Programs and Systems are used in several key
areas of the Partnership's business, including subscriber billing and
collections and financial reporting. The Managing General Partner has evaluated
the Programs and Systems utilized in the conduct of the Partnership's business
for the purpose of identifying Year 2000 compliance problems. Failure to remedy
these issues could adversely affect the ability of the Partnership to timely
bill its subscribers for service provided and properly report its financial
condition and results of operations which could have a material impact on its
liquidity and capital resources.
The Programs and Systems utilized in subscriber billing and collections
have been modified to address Year 2000 compliance issues. These modifications
are currently in the process of being installed in the Partnership's various
billing sites. The Partnership expects this implementation to be completed by
the end of 1998. The Managing General Partner is currently in the process of
replacing Programs and Systems related to financial reporting to resolve Year
2000 compliance issues which is expected to be completed by the end of 1998. The
aggregate cost to the Partnership to address Year 2000 compliance issues is not
expected to be material to its results of operations, liquidity and capital
resources.
SELECTED FINANCIAL DATA AND MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF THE MANAGING GENERAL PARTNER
GENERAL
Northland is the managing general partner of the Partnership and four
other affiliated limited partnerships which collectively own and operate cable
television systems in Washington, Texas, Mississippi, South Carolina, North
Carolina, Alabama and Georgia. Northland Cable Properties, Inc. ("NCPI"), a
wholly owned subsidiary of Northland, was formed in 1995 to own and operate
cable television systems.
Northland receives a fee in its capacity as managing general partner of
the five limited partnerships (including the Partnership) and from management
fees paid by NCPI, which fees range from 5% to 6% of the managed entity's gross
revenues, excluding any revenues from the sale of cable television systems or
franchises by such entities. The management fee revenue derived from providing
management services to the limited partnerships and NCPI, together with expenses
associated with providing such services, are hereinafter referred to as
"Management Operations." Revenues and expenses associated with the operations of
NCPI (exclusive of management fees paid by NCPI) are hereinafter referred to as
"Cable Operations."
The Note will constitute an obligation of Northland and will not be an
obligation of, or guaranteed by, NCPI. Therefore, Northland's ability to pay the
Note is dependent on the results of its Management Operations without giving
effect to NCPI's Cable Operations (other than management fees payable by NCPI to
Northland with respect thereto).
23
<PAGE> 31
Selected Financial Data
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------------------------
Income Statement Data: 1997 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Management Operations:
Revenues(1) $ 2,171,668 $ 2,486,875 $ 2,061,528 $ 2,182,266 $ 2,080,646
General and Administrative
Expenses(2) 681,536 313,076 193,863 501,148 424,732
Depreciation and 124,613 104,267 93,890 98,596 100,392
Amortization
216,531 -- -- 55,877 103,076
----------- ----------- ----------- ----------- -----------
Interest Expense
Income from Management
Operations 1,148,988 2,069,532 1,973,775 1,526,645 1,452,445
----------- ----------- ----------- ----------- -----------
Cable Operations:(3)
Revenues 9,865,545 1,460,094 863,274 -- --
Operating Expenses 4,992,181 770,792 428,077 -- --
Depreciation and 3,344,588 424,217 260,198 -- --
Amortization
2,338,553 254,539 156,624 -- --
----------- ----------- ----------- ----------- -----------
Interest Expense
Income (Loss) From Cable
Operations (809,737) 10,546 18,375 -- --
----------- ----------- ----------- ----------- -----------
Income from Operations(3) 339,251 2,080,078 1,792,150 1,526,645 1,452,445
Other Income (Expense)(4) (350,544) (745,243) (211,279) 1,959,548 (430,025)
----------- ----------- ----------- ----------- -----------
Net Income (Loss) $ (11,293) $ 1,334,835 $ 1,580,871 $ 3,486,193 $ 1,022,420
=========== =========== =========== =========== ===========
</TABLE>
(1) Revenues from Management Operations do not reflect management fees earned
from NCPI of $490,619 and $70,038 for 1997 and 1996, respectively, as they
are eliminated on consolidation.
(2) General and Administrative Expenses do not reflect expenses allocated to
NCPI of $414,533 and $103,061 in 1997 and 1996, respectively, as they are
eliminated on consolidation.
(3) Revenue and expense from Cable Operations, although reflected herein, is
derived from Cable Operations conducted by NCPI. Because the Note will not
be an obligation of, or guaranteed by, NCPI, such amounts will not impact
Northland's ability to pay the Note.
(4) Substantially all of these amounts represent non-cash items related
principally to provisions in lieu of federal income tax, which Northland
has not been obligated to pay in any of the periods reflected. The other
income reflected in the year ended December 31, 1994 results from gain
associated with the sale of certain managed cable television systems in
that year.
RESULTS OF MANAGEMENT OPERATIONS 1997 AND 1996
Revenues totaled $2,171,668 in 1997 representing a decline of $315,207
or approximately 13% from 1996. This is primarily a result of NCPI's January
1997 purchase of the assets of Northland Cable Properties Four Limited
Partnership ("NCP Four"), a limited partnership previously managed by Northland.
As a result of this acquisition Northland no longer earned management fees from
NCP Four and began earning management fees from NCPI equal to 5% of the gross
revenues generated from these assets. Management fees earned in 1997 and 1996
from NCPI of $490,619 and $70,038, respectively, are not reflected in the
Selected Financial Data above, as they are eliminated on consolidation.
Excluding the effects of this elimination, revenues from Management Operations
totaled $2,662,287 and $2,556,913 for 1997 and 1996, respectively, a 4%
increase.
General and administrative expenses totaled $681,536 in 1997
representing an increase of $368,460, or approximately 118%, over 1996. This
increase is primarily attributable to NCPI's acquisition of NCP Four's assets in
January, 1997. Prior to this acquisition certain general and administrative
expenses were allocated to NCP Four and effectively reduced the net expenses
incurred in Management Operations. Expenses allocated to NCPI of $414,533 and
$103,061 in 1997 and 1996, respectively, are not reflected in the Selected
Financial Data above as they are eliminated on consolidation. Excluding the
effects of this elimination, general and administrative expenses from Management
Operations totaled $267,003 and $210,015 for 1997 and 1996, respectively, a 27%
increase. This increase is attributable to employment agency fees paid in 1997,
expenses associated with a new telephone system and an increase in office
supplies expense.
24
<PAGE> 32
Depreciation and amortization totaled $124,613 in 1997 representing an
increase of $20,346, or 20%, over the 1996 figure of $104,267. This increase is
attributable to depreciation expense on assets placed into service in late 1996
and during 1997, consisting mainly of office furniture and equipment.
Interest Expense totaled $216,531 in 1997 compared with no interest
expense in 1996. The 1997 expense relates to a note payable in connection with
the acquisition of NCP Four's assets in the aggregate amount of $3,936,925 (the
"NCP Four Note").
Income from Management Operations totaled $1,148,988 in 1997
representing a decline of $920,544, or 44%, from 1996. Excluding the effects of
the eliminations of management fee revenue and general and administrative
expenses discussed above, income from Management Operations totaled $2,054,140
and $2,242,631 for 1997 and 1996, respectively. This decline is primarily a
result of the aforementioned interest expense.
LIQUIDITY AND CAPITAL RESOURCES
Northland's sole sources of liquidity for its Management Operations are
cash on hand and funds provided from management fees earned from both managed
limited partnerships and its wholly-owned subsidiary, NCPI. Of the $2,662,287
management fees earned in 1997, $2,171,668, or 82%, was earned from limited
partnerships and $490,619, or 18%, was earned from NCPI. Additionally, excluding
NCPI, Northland had cash on had totaling $2,207,046 as of December 31, 1997.
Under the terms of the NCP Four Note, Northland is obligated to make two
installments each in the amount of $1,968,000 plus accrued interest at 6% per
annum in February 1998 and 1999. Additionally, under the terms of the proposed
transaction, Northland will assume the Note which has a projected principal
amount of $4,500,000 and will be payable in two equal annual installments plus
interest at 6% commencing on the first anniversary date of the Closing. It is
expected that cash provided from Management Operations will be sufficient to
repay amounts outstanding under the NCP Four Note and the Note to be issued in
connection with the proposed transaction.
25
<PAGE> 33
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. The following discussion of tax consequences
represents the Managing General Partner's best knowledge and belief, based upon
its experience in reporting the tax consequences of cable system operations and
of transactions similar to the disposition of assets described in this Proxy to
various tax authorities. The Managing General Partner has not sought, nor will
it receive, a legal opinion as to the matters discussed below. 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. To the General Partner's best
knowledge and belief, such allocations will have "substantial economic effect,"
as required by regulations issued by the Treasury Department. In the event the
IRS should prevail in any contention that the taxable gain from the sale should
be allocated differently from the manner reported by the General Partner, the
amounts of capital gain (or loss) and ordinary income (or loss) of the Limited
Partners would be adjusted in equal offsetting amounts.
The Assets being sold by the Partnership will be treated as "Section
1231 assets" 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 will 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 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.
If the Internal Revenue Service were to argue successfully that the
allocations of taxable income among the Partners should differ from the
allocations that would be reported on the Partnership tax returns, the amounts
of ordinary income and loss and capital gain and loss reported by the Partners
would change. The Managing General Partner believes any such change would not
have a material adverse effect upon the Partners.
Northland Communications Corporation, the Managing General Partner, will
not recognize any gain or loss upon the disposition of the Assets. The
Partnership will distribute in-kind to Northland the undivided portion of the
Assets that are attributable to their interest in the Partnership, and Northland
will assume operating control of the disposed Assets and the Assets distributed
in-kind.
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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 ($2,371 per $1,000 investment) ........ $ 11,855
UBTI tax liability -- 1998 ............................................... (1,588)
--------
NET CASH AFTER TAXES TO IRA INVESTOR ..................................... $ 10,267
========
</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 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%,
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<PAGE> 35
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 will 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 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> 36
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. Northland currently owns other cable television systems in the
vicinity of all but one of the systems comprising the Assets, which will afford
Northland the opportunity to take advantage of certain economies of scale and
potentially make the Assets a more valuable asset to Northland. Alternatively,
it is possible that, subsequent to the Closing, Northland may receive a bid from
one or more third parties that exceeds the appraised value of the Assets.
Based upon experience in the cable television industry, as well as
general familiarity with industry news as reported by trade journals, the
General Partners believe that the appraised fair market value of the Assets as
determined by Daniels is fair and reasonable. 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
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. On February 11, 1998 the Managing General Partner, on
behalf of Northland Cable Properties Six Limited Partnership, Northland Cable
Properties Eight Limited Partnership and NCPI, entered into a contract with
Daniels whereby Daniels was retained to act as a broker in the sale of certain
cable systems owned by such affiliates. The agreement provides that Daniels will
be reimbursed for certain expenses and will receive a commission equal to
approximately 3% of the sale price of the assets. It is anticipated that the
assets to be sold will have an aggregate purchase price of over $6 million.
However, because the assets have not yet been sold, the commission payable
cannot be accurately estimated but is anticipated to be approximately $200,000.
In addition, 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 30 units of limited partnership interest held and voted by the
General Partners or their affiliates will not 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.
CERTAIN PAYMENTS TO THE MANAGING GENERAL PARTNER
In connection with the proposed transaction, the Managing General
Partner estimates that approximately $25,000 will be payable to it for
partnership administrative costs, for its services in the dissolution and
winding up of the Partnership. Services provided by the Managing General Partner
will include ongoing accounting and legal services as well as administrative and
investor relations services during the dissolution and winding up of the
Partnership. The amount to be paid to the Managing General Partner represents an
estimate of the actual cost incurred by the Managing General Partner to provide
these services to the Partnership. In addition, in connection with the payment
of the Partnership's liabilities from the proceeds of the transaction, the
Managing General Partner will be paid accrued but unpaid management fees in the
amount of $64,739. See "Projected Cash Available From Liquidation -- Projected
Cash Available If Closing Occurs" and notes thereto.
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<PAGE> 37
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 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 Lake, 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 December 31, 1997, the total number of
basic subscribers served by the systems comprising the Assets was approximately
22,840, 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.
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 December 31, 1997 is as follows:
Basic Subscribers 4,049
Tier Subscribers 1,083
Premium Subscribers 1,093
Estimated Homes Passed 8,445
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 December
31, 1997 is as follows:
Basic Subscribers 3,332
Tier Subscribers 1,447
Premium Subscribers 937
Estimated Homes Passed 4,085
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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
December 31, 1997, is as follows:
Basic Subscribers 9,268
Tier Subscribers 6,987
Premium Subscribers 3,675
Estimated Homes Passed 15,240
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 December 31, 1997 is as
follows:
Basic Subscribers 6,198
Tier Subscribers 1,161
Premium Subscribers 3,100
Estimated Homes Passed 10,250
The Partnership had 36 employees as of December 31, 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 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.
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<PAGE> 39
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").
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-
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.
32
<PAGE> 40
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
December 31, 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.
33
<PAGE> 41
CERTAIN AFFILIATES OF THE PARTNERSHIP
The Partnership is a Washington limited partnership with no directors of
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 Partners").
To the knowledge of the Partnership and the General Partners, as of
March 5, 1998, no person owned more than five percent of any class of the
Partnership's voting securities. The General Partners and their affiliates
collectively own less than 0.5% of the outstanding units of limited partnership
of the Partnership.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Security ownership of management as of March 31, 1998 is as follows:
<TABLE>
<CAPTION>
TITLE OF NAME AND ADDRESS OF AMOUNT AND NATURE OF
CLASS BENEFICIAL OWNER BENEFICIAL OWNERSHIP PERCENT OF CLASS
-------- ------------------- -------------------- ----------------
<S> <C> <C> <C>
General Partner's Northland Communications (See Note A) (See Note A)
Interest Corporation
1201 Third Avenue, Suite 3600
Seattle, Washington 98101
General Interest FN Equities Joint Venture (See Note B) (See Note B)
Partner's 2780 Skypark Drive, Suite 300
Torrance, California 90505
</TABLE>
Note A: Northland has a 1% interest in the Partnership, which increases
to 20% interest in the Partnership at such time as the Limited Partners have
received 100% of their aggregate cash contributions.
Northland also owns eight units of limited partnership interest.
Note B: FN Equities Joint Venture has no interest (0%) in the
Partnership until such time as the Limited Partners have received 100% of their
aggregate cash contributions, at which time FN Equities Joint Venture will have
a 5% interest in the Partnership.
CHANGES IN CONTROL.
Northland has pledged its ownership interest as Managing General Partner
of the Partnership to the Partnership's lender as collateral pursuant to the
terms of the term loan agreement between the Partnership and its lender.
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.
34
<PAGE> 42
JOHN E. IVERSON. Mr. Iverson is the Assistant Secretary of Northland
Communications Corporation and has served on the Board of Directors since
December 1984. He also serves on the Board of Directors of Northland
Telecommunications Corporation and each of its subsidiaries. He is currently a
partner in the law firm of Ryan, Swanson & Cleveland, Northland's general
counsel. He is a member of the Washington State Bar Association and American Bar
Association and has been practicing law for more than 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.
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.
35
<PAGE> 43
JOHN S. SIMMERS. Mr. Simmers is Vice President and Secretary of FNE and
Executive Vice President and Chief Operating Officer of FNIC and has held those
positions since 1983. From June 1980 through April 1983 he was Executive Vice
President of University Securities Corporation, Vice President of University
Capital Corporation, and Vice President of University Asset Management Group.
From 1974 through May 1980 he was employed by the National Association of
Securities Dealers.
HARRY M. KITTER. Mr. Kitter is Treasurer of FNE and Controller for FNIC
and has held those positions since 1983. Prior to this association from 1981 to
1983 he was employed as the Los Angeles Internal Audit Manager at the Pacific
Stock Exchange. From 1978 to 1981, he was Senior Accountant at Arthur Young &
Co., C.P.A. He holds an MBA from the University of Pittsburgh and a bachelor's
degree in economics from Lafayette College, Easton, Pennsylvania.
36
<PAGE> 44
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 transaction described in this
Proxy Statement 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 unaffiliated
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 unaffiliated 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, 1997 pursuant to requirements of the Securities Exchange Act
of 1934 (the "Exchange Act"). These reports are incorporated herein by this
reference.
37
<PAGE> 45
FINANCIAL STATEMENTS
Included in this Proxy Statement are the Partnership's audited financial
statements for the years ended December 31, 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, 1997 and 1996, as well as an audited balance sheet and associated
materials for the Administrative General Partner as of December 31, 1997. Any
Limited Partner seeking additional information regarding financial statements
should contact the Managing General Partner.
38
<PAGE> 46
NORTHLAND CABLE PROPERTIES FIVE
LIMITED PARTNERSHIP AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1997 AND 1996
TOGETHER WITH AUDITORS' REPORT
<PAGE> 47
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 (a Washington limited partnership)and
subsidiary as of December 31, 1997 and 1996, 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, 1997. 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, 1997 and 1996, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
/s/ ARTHUR ANDERSON LLP
Seattle, Washington,
February 6, 1998
<PAGE> 48
NORTHLAND CABLE PROPERTIES FIVE LIMITED PARTNERSHIP AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
ASSETS
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
CASH $ 236,449 $ 414,811
ACCOUNTS RECEIVABLE 427,836 483,208
INSURANCE RECEIVABLE -- 126,000
PREPAID EXPENSES 129,716 61,985
INVESTMENT IN CABLE TELEVISION PROPERTIES:
Property and equipment, at cost 15,510,616 22,922,054
Less- Accumulated depreciation (5,868,755) (13,074,555)
------------ ------------
9,641,861 9,847,499
Franchise agreements (net of
accumulated amortization of
$1,992,979 in 1997 and $1,426,830
in 1996) 4,106,121 4,711,637
Organization costs and other
intangibles (net of accumulated
amortization of $1,193,560 in
1997 and $990,440 in 1996)
836,756 1,038,137
------------ ------------
Total investment in cable
television properties
14,584,738 15,597,273
------------ ------------
Total assets $ 15,378,739 $ 16,683,277
============ ============
</TABLE>
LIABILITIES AND PARTNERS' DEFICIT
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
LIABILITIES:
Accounts payable and accrued
expenses $ 721,740 $ 816,707
Due to General Partner and
affiliates 48,484 276,161
Deposits 17,578 21,602
Subscriber prepayments 253,927 231,419
Notes payable 20,154,766 20,819,461
------------ ------------
Total liabilities 21,196,495 22,165,350
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 8)
PARTNERS' DEFICIT:
General partners-
Contributed capital, net (56,075) (56,075)
Accumulated deficit (104,010) (100,673)
------------ ------------
(160,085) (156,748)
------------ ------------
Limited partners-
Contributed capital, net -
14,735 units in 1997 and 14,739
in 1996 591,327 593,327
Accumulated deficit (6,248,998) (5,918,652)
------------ ------------
(5,657,671) (5,325,325)
------------ ------------
Total liabilities and
partners' deficit $ 15,378,739 $ 16,683,277
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
<PAGE> 49
NORTHLAND CABLE PROPERTIES FIVE LIMITED PARTNERSHIP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
REVENUE $ 9,549,197 $ 9,244,966 $ 7,897,009
----------- ----------- -----------
EXPENSES:
Operating (including $42,140, $29,748 and
$34,057, net, paid to affiliates in 1997, 1996
and 1995, respectively) 866,958 823,200 754,573
General and administrative (including $931,067,
$910,206 and $806,840, net, paid to affiliates
in 1997, 1996 and 1995, respectively) 2,495,544 2,437,295 2,028,131
Programming (including $339,368,
$299,319 and $203,025, net, paid to
affiliates in 1997, 1996 and 1995,
respectively) 2,591,577 2,426,483 2,044,429
----------- ----------- -----------
5,954,079 5,686,978 4,827,133
----------- ----------- -----------
Operating income before other income
(expense), depreciation and
amortization expense and loss on
disposal of assets 3,595,118 3,557,988 3,069,876
OTHER INCOME (EXPENSE):
Interest income 27,695 8,975 5,601
Interest expense (1,718,610) (1,740,313) (1,505,965)
----------- ----------- -----------
Income before depreciation and
amortization expense and loss on
disposal of assets 1,904,203 1,826,650 1,569,512
DEPRECIATION AND AMORTIZATION EXPENSE (2,219,521) (2,387,543) (2,544,097)
OTHER (18,365) (166,840) (14,795)
----------- ----------- -----------
Net loss $ (333,683) $ (727,733) $ (989,380)
=========== =========== ===========
ALLOCATION OF NET LOSS:
General partners $ (3,337) $ (7,277) $ (9,893)
=========== =========== ===========
Limited partners $ (330,346) $ (720,456) $ (979,487)
=========== =========== ===========
NET LOSS PER LIMITED PARTNERSHIP UNIT $ (22) $ (49) $ (66)
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of
these consolidated statements.
<PAGE> 50
NORTHLAND CABLE PROPERTIES FIVE LIMITED PARTNERSHIP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
REVENUE $ 9,549,197 $ 9,244,966 $ 7,897,009
----------- ----------- -----------
EXPENSES:
Operating (including $42,140, $29,748
and $34,057, net, paid to affiliates
in 1997, 1996 and 1995, respectively) 866,958 823,200 754,573
General and administrative (including
$931,067, $910,206 and $806,840, net,
paid to affiliates in 1997, 1996 and 1995,
respectively) 2,495,544 2,437,295 2,028,131
Programming (including $339,368,
$299,319 and $203,025, net, paid to
affiliates in 1997, 1996 and 1995,
respectively) 2,591,577 2,426,483 2,044,429
Depreciation and amortization 2,219,521 2,387,543 2,544,097
----------- ----------- -----------
8,173,600 8,074,521 7,371,230
----------- ----------- -----------
Operating income 1,375,597 1,170,445 525,779
OTHER INCOME (EXPENSE):
Interest income 27,695 8,975 5,601
Interest expense (1,718,610) (1,740,313) (1,505,965)
Other (18,365) (166,840) (14,795)
----------- ----------- -----------
Net loss $ (333,683) $ (727,733) $ (989,380)
=========== =========== ===========
ALLOCATION OF NET LOSS:
General partners $ (3,337) $ (7,277) $ (9,893)
=========== =========== ===========
Limited partners $ (330,346) $ (720,456) $ (979,487)
=========== =========== ===========
NET LOSS PER LIMITED PARTNERSHIP UNIT $ (22) $ (49) $ (66)
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of
these consolidated statements.
<PAGE> 51
NORTHLAND CABLE PROPERTIES FIVE LIMITED PARTNERSHIP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
General Limited
Partners Partners Total
----------- ----------- -----------
<S> <C> <C> <C>
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)
Repurchase of limited partnership units -- (2,000) (2,000)
Net loss (3,337) (330,346) (333,683)
----------- ----------- -----------
BALANCE, December 31, 1997 $ (160,085) $(5,657,671) $(5,817,756)
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of
these consolidated statements.
<PAGE> 52
NORTHLAND CABLE PROPERTIES FIVE LIMITED PARTNERSHIP AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (333,683) $ (727,733) $ (989,380)
Adjustments to reconcile loss to net cash provided by
operating activities-
Depreciation and amortization expense 2,219,521 2,387,543 2,544,097
(Gain) loss on disposal of assets (23,336) 166,840 14,795
(Increase) decrease in operating assets:
Accounts receivable 55,372 (71,346) (237,040)
Prepaid expenses (67,731) 19,324 (13,029)
Increase (decrease) in operating liabilities:
Accounts payable and accrued expenses (94,967) 242,396 (32,293)
Due to General Partner and affiliates (227,677) 85,308 94,274
Deposits (4,024) (5,159) (4,294)
Subscriber prepayments 22,508 53,181 (35,463)
------------ ------------ ------------
Net cash provided by operating activities 1,545,983 2,150,354 1,341,667
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of cable systems and radio station -- -- (5,278,375)
Purchase of property and equipment, net (1,188,492) (1,016,520) (530,340)
Hold-back note payable (12,907) (91,528) 104,000
Proceeds from sale of assets 9,957 -- --
Insurance recovery 151,661 -- --
Increase in intangibles (30,776) -- --
------------ ------------ ------------
Net cash used in investing activities (1,070,557) (1,108,048) (5,704,715)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable 400,000 -- 21,931,554
Principal payments on notes payable (1,051,788) (750,000) (17,773,780)
Distributions to partners -- (74,438) (148,878)
Repurchase of limited partnership units (2,000) -- --
Loan fees -- (44,770) (556,421)
------------ ------------ ------------
Net cash (used in) provided by financing activities (653,788) (869,208) 3,452,475
------------ ------------ ------------
(DECREASE) INCREASE IN CASH (178,362) 173,098 (910,573)
CASH, beginning of year 414,811 241,713 1,152,286
------------ ------------ ------------
CASH, end of year $ 236,449 $ 414,811 $ 241,713
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 1,775,712 $ 1,663,208 $ 1,663,654
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
<PAGE> 53
NORTHLAND CABLE PROPERTIES FIVE LIMITED PARTNERSHIP AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
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> 54
-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:
Property and Equipment
Property and equipment are stated at cost. 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:
Buildings 20 years
Distribution plant 10 years
Other equipment and leasehold improvements 5-20 years
The Partnership periodically reviews the carrying value of its long-lived
assets, including property, equipment and intangible assets, whenever events or
changes in circumstances indicate that the carrying value may not be
recoverable. To the extent the estimated future cash inflows attributable to the
asset, less estimated future cash outflows, is less than the carrying amount, an
impairment loss is recognized.
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
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. Revenues resulting from the sale of local spot
advertising are recognized when the related advertisements or commercials appear
before the public. Local spot advertising revenues earned were $369,493,
$371,983 and $308,253 in 1997, 1996 and 1995, respectively.
<PAGE> 55
-3-
Derivatives
The Partnership has only limited involvement with derivative financial
instruments and does not use them for trading purposes. They are used to manage
well-defined interest rate risks. The Partnership periodically enters into
interest rate swap agreements with major banks or financial institutions
(typically its bank) in which the Partnership pays a fixed rate and receives a
floating rate with the interest payments being calculated on a notional amount.
Gains or losses associated with changes in fair values of these swaps and the
underlying notional principal amounts are deferred and recognized as interest
expense over the term of the agreements in the Partnership's statements of
operations.
The Partnership is exposed to credit-related losses in the event of
nonperformance by counterparties to financial instruments but does not expect
any counterparties to fail to meet their obligations. The Partnership deals only
with highly rated counterparties, and usually only its bank. Notional amounts do
not represent amounts exchanged by the parties and, thus, are not a measure of
exposure to the Partnership through its use of derivatives. The exposure in a
derivative contract is the net difference between what each party is required to
pay based on the contractual terms against the notional amount of the contract,
which in the Partnership's case are interest rates. The use of derivatives does
not have a significant effect on the Partnership's result of operations or its
financial position.
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.
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 $555,039, $533,011 and $453,521 for 1997, 1996 and 1995,
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
<PAGE> 56
-4-
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, 1997, $5,650,553 ($377
per limited partnership unit) has been distributed to the limited partners and
the Partnership has repurchased $132,500 of limited partnership units ($500 per
unit).
Reimbursements
The General Partner provides or causes to be provided certain centralized
services to the Partnership and other affiliated entities. The General Partner
is entitled to reimbursement from the Partnership for various expenses incurred
by it or its affiliates on behalf of the Partnership allocable to its management
of the Partnership, including travel expenses, pole and site rental, lease
payments, legal expenses, billing expenses, insurance, governmental fees and
licenses, headquarters supplies and expenses, pay television expenses, equipment
and vehicle charges, operating salaries and expenses, administrative salaries
and expenses, postage and office maintenance.
The amounts billed to the Partnership are based on costs incurred by affiliates
in rendering the services. The costs of certain services are charged directly to
the Partnership, based upon the personnel time spent by the employees rendering
the service. The cost of other services is allocated to the Partnership and
affiliates based upon relative size and revenue. Management believes that the
methods used to allocate services to the Partnership are reasonable. Amounts
charged to the Partnership by the General Partner for these services were
$538,669, $497,090 and $406,603 for the years ended December 31, 1997, 1996 and
1995, respectively.
In 1997, 1996 and 1995, the Partnership was charged a maintenance fee for
billing system support provided by an affiliate, amounting to $65,276, $66,672
and $50,302, respectively.
The Partnership pays 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 1997, 1996 and 1995 were $289,303, $267,021 and $165,281, 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 $54,816, $37,097 and $37,602 in 1997,
1996 and 1995, 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 $76,635, under the terms of
these agreements during 1997.
<PAGE> 57
-5-
Due to General Partner and Affiliates
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1996
--------- ---------
<S> <C> <C>
Management fees $ 102,425 $ 137,394
Reimbursable operating costs (37,686) 123,975
Due to affiliates, net (16,255) 14,792
--------- ---------
$ 48,484 $ 276,161
========= =========
</TABLE>
4. PROPERTY AND EQUIPMENT:
<TABLE>
<CAPTION>
December 31,
--------------------------
1997 1996
----------- -----------
<S> <C> <C>
Land and buildings $ 618,251 $ 562,498
Distribution plant 13,310,636 20,885,763
Other equipment 969,465 1,402,152
Leasehold improvements 16,013 16,013
Construction in progress 596,251 55,628
----------- -----------
$15,510,616 $22,922,054
=========== ===========
</TABLE>
5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
<TABLE>
<CAPTION>
December 31,
--------------------
1997 1996
-------- --------
<S> <C> <C>
Programmer license fees $282,745 $226,009
Accrued franchise fees 163,349 205,072
Other 275,646 385,626
-------- --------
$721,740 $816,707
======== ========
</TABLE>
<PAGE> 58
-6-
6. NOTES PAYABLE:
Notes payable consist of the following:
<TABLE>
<CAPTION>
December 31,
--------------------------
1997 1996
----------- -----------
<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 8.46%
(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, 1997, the Partnership had
$1,831,554 outstanding on its revolving credit
facility
$20,154,766 $20,806,554
Hold-back notes due to seller settled in 1997 -- 12,907
-- ------- -----------
$20,154,766 $20,819,461
=========== ===========
</TABLE>
Annual maturities of notes payable after December 31, 1997, are as follows:
1998 $ 1,500,000
1999 2,000,000
2000 2,650,000
2001 14,004,766
-----------
$20,154,766
===========
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 1.00 to 1, an Interest Coverage Ratio of 1.85
to 1 and a Maximum Leverage Ratio of 5.5 to 1, among other restrictions. The
General Partner submits quarterly debt compliance reports to the Partnership's
creditor under this agreement.
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.
<PAGE> 59
-7-
Taxable loss to the limited partners was approximately $377,819, $1,064,000 and
$566,000 for each of the three years in the period ended December 31, 1997, and
is different from that reported in the consolidated statements of operations
principally 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 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.
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 $170,881, $173,451 and $165,872 in 1997, 1996
and 1995, respectively. Minimum lease payments through the end of the lease
terms are as follows:
1998 $ 9,920
1999 8,520
2000 8,520
2001 8,520
2002 8,520
Thereafter 41,595
-------
$85,595
=======
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
<PAGE> 60
-8-
determined at this time. A summary of the provisions affecting the cable
television industry, more specifically those affecting the Partnership'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 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; 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 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.
Self-Insurance
The Partnership began self-insuring for aerial and underground plant in 1996.
Beginning in 1997, the Partnership began making quarterly contributions into an
insurance fund maintained by an affiliate which covers all Northland entities
and would defray a portion of any loss should the Partnership be faced with a
significant uninsured loss. To the extent the Partnership's losses exceed the
fund's balance, the Partnership would absorb any such loss. If the Partnership
were to sustain a material uninsured loss, such reserves could be insufficient
to fully fund such a loss. The resulting reduction in cash flow caused by
interrupted service, together with the capital cost of replacing such equipment
and physical plant, could have a material adverse effect on the Partnership, its
financial condition, prospects and debt service ability.
Amounts paid to affiliate, which maintains the fund for the Partnership and its
affiliates, are expensed as incurred and are included in the consolidated
statements of operations. To the extent a loss has been incurred related to
risks that are self-insured, the Partnership records an expense and an
associated liability for the amount of the loss, net of any amounts to be drawn
from the fund. For the year ended December 31, 1997, the Partnership made
payments of $13,604 to the fund. As of December 31, 1997, the fund had a balance
of $129,700.
<PAGE> 61
-9-
9. SUBSEQUENT EVENT:
Subsequent to year-end, the Partnership filed a Proxy statement with the
Securities and Exchange Commission related to a proposed sale of the cable
television and other assets of the Partnership to the Managing General Partner
or an affiliate of the Managing General Partner. If approved by a majority of
the outstanding limited partner units, the sale would result in the liquidation,
wind-up and dissolution of the Partnership. If approved, the closing is expected
to occur in the summer of 1998.
<PAGE> 62
NORTHLAND COMMUNICATIONS CORPORATION AND SUBSIDIARY
(A wholly owned subsidiary of Northland
Telecommunications Corporation)
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1997 AND 1996
TOGETHER WITH AUDITORS' REPORT
<PAGE> 63
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, 1997 and 1996, 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, 1997 and 1996, and the results of
their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
Seattle, Washington, Arthur Andersen LLP
April 6, 1998
<PAGE> 64
NORTHLAND COMMUNICATIONS CORPORATION AND SUBSIDIARY
(A wholly owned subsidiary of
Northland Telecommunications Corporation)
CONSOLIDATED BALANCE SHEETS -- DECEMBER 31, 1997 AND 1996
ASSETS
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
CASH $ 2,507,838 $ 419,260
ACCOUNTS RECEIVABLE 360,348 28,027
RECEIVABLES FROM MANAGED LIMITED PARTNERSHIPS 393,812 1,469,869
UNSECURED NET ADVANCES TO PARENT AND AFFILIATES 14,068,937 14,103,160
OTHER ASSETS 211,351 127,354
INVESTMENT IN CABLE TELEVISION PROPERTIES:
Property and equipment, at cost 20,061,238 3,067,107
Less- Accumulated depreciation (2,261,424) (458,955)
----------- -----------
17,799,814 2,608,152
Franchise agreements (net of accumulated
amortization of $1,401,232 and
$151,346, respectively) 13,002,452 998,036
Other intangibles (net of accumulated
amortization of $347,229 and $74,113,
respectively) 1,542,964 155,194
----------- -----------
Total investment in cable
television properties 32,345,230 3,761,382
----------- -----------
OTHER PROPERTY AND EQUIPMENT 1,464,918 1,386,276
Less- Accumulated depreciation (728,210) (869,347)
----------- -----------
736,708 516,929
----------- -----------
Total assets $50,624,224 $20,425,981
=========== ===========
LIABILITIES AND SHAREHOLDER'S EQUITY
1997 1996
----------- -----------
LIABILITIES:
Accounts payable and accrued expenses $ 1,303,012 $ 212,057
Subscriber prepayments 319,619 44,146
Deposits 57,683 5,565
Taxes payable to parent -- 388,037
Notes payable 31,669,757 2,792,729
Deferred tax liabilities, net 4,704,368 4,295,532
Accumulated deficit in managed limited
partnerships 626,183 733,020
----------- -----------
Total liabilities 38,680,622 8,471,086
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 8)
SHAREHOLDER'S EQUITY:
Common stock, par value $.00625 per share;
4,000,000 shares authorized;
10,000 shares issued and outstanding and
additional paid-in capital 995,164 995,164
Retained earnings 10,948,438 10,959,731
----------- -----------
Total shareholder's equity 11,943,602 11,954,895
----------- -----------
Total liabilities and shareholder's
equity $50,624,224 $20,425,981
=========== ===========
</TABLE>
The accompanying notes are an integral
part of these consolidated balance sheets.
<PAGE> 65
NORTHLAND COMMUNICATIONS CORPORATION AND SUBSIDIARY
(A wholly owned subsidiary of
Northland Telecommunications Corporation)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
MANAGEMENT OPERATIONS:
Management fee revenue $2,171,668 $2,486,875
General and administrative expenses, net of reimbursed operating
expenses (681,536) (313,076)
---------- ----------
Income from management operations 1,490,132 2,173,799
---------- ----------
CABLE TELEVISION OPERATIONS:
Service revenues 9,865,545 1,460,094
Expenses, including reimbursements to affiliates-
Operating (1,167,475) (165,172)
General and administrative (1,622,550) (229,202)
Programming (2,202,116) (376,418)
---------- ----------
Income from cable television operations 4,873,404 689,302
---------- ----------
Income from operations before depreciation and
amortization 6,363,536 2,863,101
DEPRECIATION AND AMORTIZATION EXPENSE (3,469,202) (528,483)
---------- ----------
Income from operations 2,894,334 2,334,618
---------- ----------
OTHER INCOME (EXPENSE):
Interest income 34,014 16,217
Interest expense (2,555,084) (254,539)
Equity in net losses of managed limited partnerships (28,439) (46,981)
Other 56,151 (6,261)
---------- ----------
(2,493,358) (291,564)
---------- ----------
Income before income taxes 400,976 2,043,054
PROVISION IN LIEU OF INCOME TAXES 412,269 708,219
---------- ----------
NET INCOME (LOSS) $ (11,293) $1,334,835
========== ==========
</TABLE>
The accompanying notes are an integral part of
these consolidated statements.
<PAGE> 66
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, 1997 AND 1996
<TABLE>
<CAPTION>
Common Stock and
Additional Paid-In
Capital
-------------------
Number Retained
of Shares Amount Earnings Total
--------- -------- ----------- -----------
<S> <C> <C> <C> <C>
BALANCE, at December 31, 1995 10,000 $995,164 $ 9,624,896 $10,620,060
Net income -- -- 1,334,835 1,334,835
------ -------- ----------- -----------
BALANCE, at December 31, 1996 10,000 995,164 10,959,731 11,954,895
Net loss -- -- (11,293) (11,293)
------ -------- ----------- -----------
BALANCE, at December 31, 1997 10,000 $995,164 $10,948,438 $11,943,602
====== ======== =========== ===========
</TABLE>
The accompanying notes are an integral part of
these consolidated statements.
<PAGE> 67
NORTHLAND COMMUNICATIONS CORPORATION AND SUBSIDIARY
(A wholly owned subsidiary of
Northland Telecommunications Corporation)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
1997 1996
------------ -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (11,293) $ 1,334,835
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities-
Depreciation and amortization 3,469,202 528,483
Equity in net losses of managed
limited partnerships 28,439 46,981
Decrease (increase) in operating
assets:
Receivables from managed
limited partnerships 1,076,057 (1,057,857)
Accounts receivable (332,321) 11,676
Other assets (83,997) 3,471
Increase (decrease) in operating
liabilities:
Accounts payable and accrued
expenses 1,090,955 (23,070)
Subscriber prepayments 275,473 (2,094)
Deposits 52,118 (534)
Current and deferred income
taxes 20,799 708,219
------------ -----------
Net cash provided by operating
activities 5,585,432 1,550,110
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of cable television system (26,001,594) (567,327)
Purchases of property and equipment (1,675,186) (316,913)
Cash distributions from managed limited
partnerships -- 3,632
Increase in other intangibles (49,188) --
------------ -----------
Net cash used in investing
activities (27,725,968) (880,608)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Unsecured net advances to parent and
affiliates 34,223 (474,485)
Proceeds from notes payable 28,300,000 --
Principal payments on notes payable (3,359,897 ) (200,000)
Loan fees (745,212) --
----------- ---------
Net cash provided by (used in)
financing activities 24,229,114 (674,485)
----------- ---------
INCREASE (DECREASE) IN CASH 2,088,578 (4,983)
CASH, beginning of year 419,260 424,243
----------- ---------
CASH, end of year $ 2,507,838 $ 419,260
=========== =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for Interest
$ 2,193,698 $ 255,302
=========== =========
State income taxes $ 3,433 $ 4,804
=========== =========
</TABLE>
The accompanying notes are an
integral part of these consolidated statements.
<PAGE> 68
NORTHLAND COMMUNICATIONS CORPORATION AND SUBSIDIARY
(A wholly owned subsidiary of
Northland Telecommunications Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES:
Formation and Business
Northland Communications Corporation (NCC), a Washington corporation, is the
managing general partner of five limited partnerships which own and operate
cable television systems throughout the western United States, Texas,
Mississippi, South Carolina, 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 and currently has 48 nonexclusive franchises to operate cable
television systems which expire at various dates through 2012. NCC and NCP, Inc.
are collectively referred to as the Company.
The Company and its affiliates, Northland Cable Television, Inc. and subsidiary
(NCTV); Northland Cable Services Corporation and subsidiaries (NCSC); and
Northland Media, Inc. and subsidiary (NMI) are wholly owned subsidiaries of
Northland Telecommunications Corporation and subsidiaries (NTC). NCTV was formed
to own and operate cable television systems. Northland Cable News, Inc. (NCN)
was formed to develop and distribute programming to affiliated entities and is a
wholly owned subsidiary of NCTV. NCSC is the parent company of Cable
Ad-Concepts, Inc. (CAC) and provides billing support services to cable systems
owned and managed by limited partnerships and wholly owned systems of the
Company and NCTV. 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.
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 historical cost and consists primarily of
distribution plant. Replacements, renewals and improvements are capitalized.
Maintenance and repairs are charged to expense as incurred. Depreciation of
<PAGE> 69
-2-
property and equipment is provided using the straight-line method over the
following estimated service lives:
<TABLE>
<S> <C>
Buildings 20 years
Distribution plant 10 years
Other equipment 5-10 years
</TABLE>
The Company periodically reviews the carrying value of its long-lived assets,
including property, equipment and intangible assets, whenever events or changes
in circumstances indicate that the carrying value may not be recoverable. To the
extent the estimated future cash inflows attributable to the asset, less
estimated future cash outflows, is less than the carrying amount, an impairment
loss is recognized.
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 1-8 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. Revenues resulting from the
sale of local spot advertising revenues are recognized when the related
advertisements or commercials appear before the public. Local spot advertising
revenues earned were $427,264 and $85,215 in 1997 and 1996, respectively.
Derivatives
The Company has only limited involvement with derivative financial instruments
and does not use them for trading purposes. They are used to manage well-defined
interest rate risks. As discussed in Note 5, the Company enters into interest
rate swap agreements with major banks or financial institutions (typically its
bank) in which the Company pays a fixed rate and receives a floating rate with
the interest payments being calculated on a notional amount. Gains or losses
associated with changes in fair values of these swaps and the underlying
notional principal amounts are deferred and recognized against interest expense
over the term of the agreements in the Company's consolidated statements of
operations.
The Company is exposed to credit-related losses in the event of nonperformance
by counterparties to financial instruments but does not expect any
counterparties to fail to meet their obligations. The Company deals only with
highly rated counterparties, and usually only its bank. Notional amounts do not
represent amounts exchanged by the parties and, thus, are not a measure of
exposure to the Company through its use of derivatives. The exposure in a
derivative contract is the net difference between what each party is required to
pay based on the contractual terms against the notional amount of the contract,
which in the Company's cases are interest rates. The use of derivatives does not
have a significant effect on the Company's result of operations or its financial
position.
<PAGE> 70
-3-
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.
2. TRANSACTIONS WITH MANAGED LIMITED PARTNERSHIPS AND OTHER RELATED PARTIES:
Management Fees
NCC 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.
Reimbursed Operating Expenses
NCC provides or causes to be provided certain centralized services to managed
limited partnerships and other affiliated entities. NCC is entitled to
reimbursement for various expenses incurred by it or its affiliates on behalf of
the managed limited partnerships and other affiliates, including travel
expenses, pole and site rental, lease payments, legal expenses, billing
expenses, insurance, governmental fees and licenses, headquarters supplies and
expenses, pay television expenses, equipment and vehicle charges, operating
salaries and expenses, administrative salaries and expenses, postage and office
maintenance.
The amounts billed to the managed limited partnerships and other affiliates are
based on costs incurred by affiliates in rendering the services. The costs of
certain services are charged directly to the managed limited partnership and
other affiliates, based upon the personnel time spent by the employees rendering
the service. The cost of other services is allocated to the managed limited
partnership and other affiliates based upon relative size and revenue.
Management believes that the methods used to allocate services to the managed
limited partnership and other affiliates are reasonable. Amounts charged to the
managed limited partnership and other affiliates by NCC for these services were
$4,721,678 and $4,423,993 for the years ended December 31, 1997 and 1996,
respectively.
Accumulated Deficit in Managed Limited Partnerships
NCC is a general partner in limited partnerships that own and operate cable
television systems. All items of income, loss, deduction and credit are
allocated 99% to the limited partners and 1% to NCC, 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.
<PAGE> 71
-4-
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 NCC. The price to be paid will be based upon an independent
appraisal. NCC is not obligated to purchase the interests offered.
Other Services
Affiliates of NCC charge fees to certain affiliated entities and managed limited
partnerships for providing program production, advertising and billing support
services.
Receivables from Managed Limited Partnerships
<TABLE>
<CAPTION>
December 31,
----------------------
1997 1996
-------- ----------
<S> <C> <C>
Northland Cable Properties Four $ -- $ 569,484
Northland Cable Properties Five 61,074 263,049
Northland Cable Properties Six 107,768 138,238
Northland Cable Properties Seven 19,694 165,544
Northland Cable Properties Eight 27,972 248,993
Northland Premier Cable 177,304 84,561
-------- ----------
$393,812 $1,469,869
======== ==========
</TABLE>
3. PROPERTY AND EQUIPMENT:
Investment in cable television properties include the following:
<TABLE>
<CAPTION>
December 31,
----------------------
1997 1996
-------- ----------
<S> <C> <C>
Land and buildings $ 255,000 $ 30,000
Distribution plant 19,047,311 2,921,376
Other equipment 574,249 115,557
Construction in progress 184,678 174
----------- ----------
$20,061,238 $3,067,107
=========== ==========
</TABLE>
<PAGE> 72
-5-
Other property and equipment includes the following:
<TABLE>
<CAPTION>
December 31,
----------------------
1997 1996
-------- ----------
<S> <C> <C>
Office furniture $1,196,293 $1,199,964
Other 185,376 179,714
Construction in progress 83,249 6,598
---------- ----------
$1,464,918 $1,386,276
========== ==========
</TABLE>
4. ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
<TABLE>
<CAPTION>
December 31,
----------------------
1997 1996
-------- ----------
<S> <C> <C>
Accounts payable $ 243,456 $ 83,737
Programmer license fees 208,880 46,495
Accrued franchise fees 150,348 46,241
Accrued interest payable 362,051 665
Other 338,277 34,919
---------- --------
$1,303,012 $212,057
========== ========
</TABLE>
5. NOTES PAYABLE:
<TABLE>
<CAPTION>
December 31,
-------------------------
1997 1996
----------- -----------
<S> <C> <C>
Term loan agreement paid in full January 31, 1997 $ -- $2,750,000
Revolving credit and term loan agreement, collateralized by a first lien
position on all present and future assets of the Company. Interest rates vary
based on certain financial covenants; currently 8.74%. Graduated principal
payments due quarterly until maturity on June 30, 2005. The Company has a
revolving credit facility with its creditor allowing for borrowings not to
exceed $5,000,000. At December 31, 1997, the Company had $4,300,000
outstanding on its revolving credit facility. The first pay down of the
revolving credit facility begins March 31, 1999 27,700,000 --
Note payable to the limited partners of the partnership purchased by
NCP, Inc. that was assumed by NCC on behalf of NCP, Inc. Interest
is 6%. Principal payments are due in 1998 and 1999 3,936,925 --
Other 32,832 42,729
----------- -----------
$31,669,757 $2,792,729
=========== ===========
</TABLE>
<PAGE> 73
-6-
Annual maturities of notes payable for periods ending after December 31, 1997,
are as follows:
<TABLE>
<S> <C>
1998 $ 3,184,860
1999 4,181,610
2000 2,853,287
2001 3,500,000
2002 4,010,000
Thereafter 13,940,000
-----------
$31,669,757
===========
</TABLE>
Under the revolving credit and term loan agreement, NCP, Inc. has agreed to
restrictive covenants which require the maintenance of certain ratios, including
a Maximum Leverage Ratio of 5.5 to 1, Minimum Interest Coverage Ratio of 2.0 to
1, Minimum Fixed Charge Coverage Ratio of 1.0 to 1 and a restriction on the
level of capital expenditures, among other restrictions. NCP, Inc. submits
quarterly debt compliance reports to its creditor under this agreement.
NCP, Inc. has entered into interest rate swap agreements to reduce the impact of
changes in interest rates. Interest rate swap transactions generally involve the
exchange of fixed and floating interest payment obligations without the exchange
of the underlying principal amounts. At December 31, 1997, NCP, Inc. had
outstanding two interest rate swap agreements with its bank, having notional
principal amounts of $13,900,000 and $12,000,000. The swap agreements
effectively change NCP, Inc.'s interest rate exposure to fixed rates of 6.015%
and 6.22%, respectively plus an applicable margin based on certain financial
covenants (the margin at December 31, 1997, was 2.875%). The interest rate swap
agreements mature on February 8, 1999 and August 14, 2000, respectively. At
December 31, 1997, NCP, Inc. would have been required to pay approximately
$144,244 to settle these agreements, based on fair value estimates received from
the financial institution.
6. STOCK-BASED COMPENSATION:
In 1990, NTC established a nonqualified stock option plan for certain key
executives of NCC. Under the terms of this plan, 75,000 options were available
to be granted which vest in incremental amounts over specified time periods and
are exercisable through March 31, 1999. The exercise price of each option is
$2.50. Since the establishment of the plan, 68,000 options have vested and were
exercised. At December 31, 1997, no options were exercisable. During 1997 and
1996, options were exercised for 2,000 and 5,000 shares, respectively.
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 1997 and 1996, 2,500 and 500, respectively, shares were awarded.
Also, in December of 1997, 6,000 shares were awarded to certain executives of
NTC. These awards, made at the discretion of the President, were not associated
with any plan.
<PAGE> 74
-7-
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, 1997, no options were
exercisable. During 1997 and 1996, 5,000 and 3,000 options, respectively, 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 1997 and 1996, 27,299
and 21,483 shares, respectively, were awarded.
NCC accounts for its stock-based compensation plans under Accounting Principles
Board Opinion No. 25. Total compensation cost recognized was $154,890 and
$93,336 in 1997 and 1996, respectively. Had compensation cost for these plans
been determined consistent with Statement of Financial Accounting Standards
(SFAS) No. 123, NCC's net income would not have been materially different.
7. 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.
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 net deferred tax liabilities, as of December 31, are
as follows:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward $ 765,927 $ --
---------- ----------
Deferred tax liabilities:
Property and equipment 494,987 245,569
Accumulated deficit in managed limited partnerships 4,975,308 4,049,963
---------- ----------
5,470,295 4,295,532
---------- ----------
Net deferred tax liabilities $4,704,368 $4,295,532
========== ==========
</TABLE>
The net operating loss carryforward of approximately $2,130,000 as of December
31, 1997, expires in 2012.
<PAGE> 75
-8-
8. COMMITMENTS AND CONTINGENCIES:
Lease Arrangements
The Company rents office space, certain tower sites and pole attachments under
agreements accounted for as operating leases. Rental expense (including
month-to-month leases) was approximately $711,023 and $491,000 in 1997 and 1996,
respectively, before reimbursements from managed limited partnerships and
affiliates. Future minimum lease payments for noncancelable leases are as
follows:
<TABLE>
<S> <C>
1998 $ 497,591
1999 481,724
2000 493,276
2001 500,098
2002 485,948
Thereafter 19,260
----------
$2,477,897
==========
</TABLE>
Self-Insurance
The Company began self-insuring for aerial and underground plant in 1996.
Beginning in 1997, the Company began making quarterly contributions into an
insurance fund maintained by NTC which covers all Northland entities and would
defray a portion of any loss. Should the Company's losses exceed the fund's
balance, the Company would absorb any such loss. If the Company were to sustain
a material uninsured loss, such reserves could be insufficient to fully fund
such a loss. The resulting reduction is cash flow caused by interrupted service,
together with the capital cost of replacing such equipment and physical plant,
could have a material adverse effect on the Company, its financial condition,
prospects and debt service ability.
Amounts paid to NTC, which maintains the fund for the Company and its
affiliates, are expensed as incurred and are included in the consolidated
statements of operations. To the extent a loss has been incurred related to
risks that are self-insured, the Company records an expense and an associated
liability for the amount of the loss, net of any amounts to be drawn from the
fund. For the year ended December 31, 1997, the Company made payments of $15,839
to the fund. As of December 31, 1997, the fund had a balance of $129,700.
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 the Company's
operations cannot be determined at this time. A summary of the provisions
affecting the cable television industry, more specifically those affecting the
Company's operations, follows.
<PAGE> 76
-9-
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
$94,438,761 as of December 31, 1997.
9. UNSECURED NET ADVANCES TO PARENT AND AFFILIATES:
<TABLE>
<CAPTION>
December 31,
--------------------------
1997 1996
----------- ------------
<S> <C> <C>
Northland Cable Services Corp. $ 484,402 $ 494,303
Northland Telecommunications Corporation 13,319,534 5,916,462
Northland Cable Television, Inc. 252,326 7,684,032
Northland Media, Inc. 12,675 8,363
----------- -----------
$14,068,937 $14,103,160
=========== ===========
</TABLE>
<PAGE> 77
-10-
The Company had previously advanced amounts to NCTV to meet working capital and
debt service requirements. During 1997, NTC made a non-cash capital contribution
to NCTV equal to the amount of NCTV's net unsecured advances outstanding at the
time. As a result of this transaction NTC assumed NCTV's previous obligation to
NCC. 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.
10. 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.
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 primarily based upon an independent appraisal performed pursuant to the
terms of the partnership agreement. The purchase price was $31,918,095, of which
$24,807,934 was paid in cash on the closing date and $2,509,132 was contributed
in kind. The balance of $4,601,029 at closing, represented 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.
Approximate pro forma consolidated operating results of the Company for the
years ended December 31, 1997 and 1996, assuming the acquisition described above
had been made at the beginning of 1996, follow:
<TABLE>
<CAPTION>
For the years ended December 31,
--------------------------------
1997 1996
-------------- -------------
(unaudited) (unaudited)
<S> <C> <C>
Management fee and
service revenues $12,800,000 $12,200,000
=========== ===========
Net loss $ (200,000) $ (200,000)
=========== ===========
</TABLE>
<PAGE> 78
FN EQUITIES JOINT VENTURE
(A CALIFORNIA LIMITED PARTNERSHIP)
FINANCIAL REPORT
DECEMBER 31, 1997
<PAGE> 79
FN EQUITIES JOINT VENTURE
(A CALIFORNIA LIMITED PARTNERSHIP)
CONTENTS
AS OF DECEMBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page
<S> <C>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 1
FINANCIAL STATEMENT
Balance Sheet 2
Notes to Financial Statement 3 - 6
</TABLE>
<PAGE> 80
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Partners
FN Equities Joint Venture
(A California Limited Partnership)
Torrance, California
We have audited the balance sheet of FN Equities Joint Venture (a California
limited partnership) as of December 31, 1997. This financial statement is the
responsibility of the Joint Venture's management. Our responsibility is to
express an opinion on this financial statement based on our audit. We did not
audit the financial statements of the three Northland Cable Properties Limited
Partnerships, the investments in which, as discussed in Note 2 to the financial
statement, are accounted for by the equity method of accounting. The financial
statements of the three Northland Cable Properties Limited Partnerships were
audited by other auditors whose reports thereon have been furnished to us and
our opinion, insofar as it relates to the amounts included for the three
Northland Cable Properties Limited Partnerships, is based solely on the reports
of the other auditors.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the balance sheet is free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the balance sheet. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall balance sheet presentation. We believe that our audit
and the reports of the other auditors provide a reasonable basis for our
opinion.
In our opinion, based on our audit and the reports of other auditors, the
balance sheet referred to above presents fairly, in all material respects, the
financial position of FN Equities Joint Venture as of December 31, 1997 in
conformity with generally accepted accounting principles.
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
March 30, 1998
<PAGE> 81
FN EQUITIES JOINT VENTURE
(A CALIFORNIA LIMITED PARTNERSHIP)
BALANCE SHEET
AS OF DECEMBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS
<S> <C>
CURRENT ASSETS
Cash $ 209
Current portion of receivable from trust (Note 3) 105,626
--------
Total current assets 105,835
RECEIVABLE FROM TRUST, net of current portion (Note 3) 95,175
EQUITY IN INVESTMENTS IN LIMITED PARTNERSHIPS --
--------
TOTAL ASSETS $201,010
========
PARTNERS' CAPITAL
PARTNERS' CAPITAL $201,010
--------
TOTAL PARTNERS' CAPITAL $201,010
========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE> 82
FN EQUITIES JOINT VENTURE
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENT
DECEMBER 31, 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.
3
<PAGE> 83
FN EQUITIES JOINT VENTURE
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENT
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
NOTE 3 -- INVESTMENTS IN LIMITED PARTNERSHIPS
Partnership in Liquidation
At December 31, 1997, the Joint Venture was a beneficiary of the
NCP-Four Liquidating Trust (the "Trust").
At December 31, 1997, the Joint Venture valued the investment in the
Trust at $200,801 based on its liquidation value of $190,350 plus
interest at 6% per annum. The Trust was formed in 1997 to administer the
distribution of proceeds from Northland Cable Properties Four Limited
Partnership ("NCP4") which was terminated when substantially all the
assets of NCP4 were sold to an affiliate of Northland Communications
Corporation ("NCC"), Northland Cable Properties, Inc. The assets were
purchased for cash and a subordinated note payable to NCP4 for
approximately $4,600,000 with payments due on January 31, 1998 and
January 31, 1999, subject to unknown liabilities at the closing date.
This note has been assumed by NCC.
The first of two principal plus interest installments was received by
the Trust from NCC on January 31, 1998, and the Trust distributed to the
Joint Venture its share of the installment in the amount of $95,175 plus
accrued interest. The Joint Venture's share of the second and final
installment from NCC to the Trust is $95,175 plus accrued interest from
January 31, 1998. When the second and final installment from NCC to the
Trust is received and distributed by the Trust to the Joint Venture and
the other parties due funds, the Trust will be terminated.
Active Partnerships
At December 31, 1997, the Joint Venture was the Administrative General
Partner of the following partnerships (the "Northland Partnerships"):
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 Managing General Partner, NCC, and the Administrative General
Partner) are allocated 25%, and the limited partners are allocated 75%
of partnership income, loss, and distributions. As of December 31, 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.
4
<PAGE> 84
FN EQUITIES JOINT VENTURE
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENT
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
NOTE 3 -- INVESTMENTS IN LIMITED PARTNERSHIPS (CONTINUED)
Active Partnerships (Continued)
Northland Communications Corporation is the Managing General Partner of
each of the Northland Partnerships. The Northland Partnerships were
formed to acquire, develop, and operate cable television systems. Each
Northland Partnership owns non-exclusive franchises to operate cable
systems as follows:
<TABLE>
<CAPTION>
Number of Franchise Area --
Franchises Various Towns In: Expiration Date
---------- ------------------------------ --------------------
<S> <C> <C> <C> <C>
NCP5 25 Texas and North Carolina Various through 2014
NCP6 24 Mississippi and North Carolina Various through 2017
NCP7 26 Texas, Washington, and Georgia Various through 2024
</TABLE>
Summarized financial information of the Northland Partnerships as of
December 31, 1997 was as follows:
<TABLE>
<CAPTION>
Unaudited
-----------------------------------------
NCP5 NCP6 NCP7
------------ ----------- -----------
<S> <C> <C> <C>
Assets
Cash $ 236,449 $ 173,034 $ 586,000
Other assets 557,552 663,721 924,286
Property and equipment, net 9,641,861 6,539,222 13,877,059
Intangible assets, net 4,942,877 6,233,409 20,961,739
----------- ----------- -----------
TOTAL ASSETS $15,378,739 $13,609,386 $36,349,084
=========== =========== ===========
Liabilities
Notes payable $20,154,766 $10,899,421 $41,543,600
Other liabilities 1,041,729 1,613,966 2,204,582
----------- ----------- -----------
Total liabilities 21,196,495 12,513,387 43,748,182
----------- ----------- -----------
Partners' equity (deficit)
General (160,085) (116,135) (286,460)
Limited (5,657,671) 1,212,134 (7,112,638)
----------- ----------- -----------
Total partners' equity (deficit) (5,817,756) 1,095,999 (7,399,098)
----------- ----------- -----------
TOTAL LIABILITIES AND PARTNERS'
EQUITY (DEFICIT) $15,378,739 $13,609,386 $36,349,084
=========== =========== ===========
</TABLE>
5
<PAGE> 85
FN EQUITIES JOINT VENTURE
(A CALIFORNIA LIMITED PARTNERSHIP)
NOTES TO FINANCIAL STATEMENT
DECEMBER 31, 1997
- --------------------------------------------------------------------------------
NOTE 4 -- SUBSEQUENT EVENT
Subsequent to year-end, NCP5 filed a Proxy statement with the Securities
and Exchange Commission related to a proposed sale of the cable
television and other assets of NCP5 to the Managing General Partner or
an affiliate of the Managing General Partner. If approved by a majority
of the outstanding limited partner units, the sale would result in the
liquidation, wind-up, and dissolution of NCP5. If approved, the closing
is expected to occur in the summer of 1998.
6
<PAGE> 86
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> 87
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> 88
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.
This Amendment shall have no further force and effect if the transaction
contemplated by Article 22 set forth herein does not close within 180 days
of the date of the special meeting of limited partners as set forth in the
Notice of Special Meeting accompanying the Proxy Statement as defined in
such Article 22.
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> 89
EXHIBIT C
ASSET PURCHASE AGREEMENT
This Asset Purchase Agreement is made as of
_______________________________, 1998, and is by and between NORTHLAND CABLE
PROPERTIES FIVE LIMITED PARTNERSHIP, a Washington limited partnership ("Seller")
and NORTHLAND CABLE PROPERTIES, INC., a Washington corporation ("Buyer").
RECITALS
A. Seller currently is engaged in the business of (i) providing cable
television service to various communities in Texas and North Carolina organized
into four operating groups, including Cedar Creek, Corsicana and Lamesa, Texas
and Forest City, North Carolina (collectively, the "CATV Systems") and (ii)
providing, through its wholly-owned subsidiary Corsicana Media, Inc. ("Corsicana
Media"), radio broadcast services to areas in and around Corsicana, Texas
through radio station KAND-AM (the "Radio Station").
B. Buyer is the wholly-owned subsidiary of the Managing General Partner
of Seller and has accepted the assignment of the Managing General Partner's
Purchase Option to acquire the CATV Systems and all of the stock of Corsicana
Media, all as more particularly described below and in that certain Proxy
Statement, dated ______, 1998, which transactions were approved by an
affirmative vote of the limited partners of Seller at a special meeting of its
shareholders held on ____________, 1998 (the "Proxy Statement").
AGREEMENT
For good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties agree as follows:
SECTION 1. DEFINITIONS
For the purposes of this Agreement, the following capitalized terms
shall have the respective meanings ascribed to them below (terms defined in the
singular shall have the same meanings when used in the plural, and vice versa):
1.1 Assets shall mean all properties, privileges, rights and interests,
real and personal, tangible and intangible, of every type and description in
which Seller has any right, title or interest, and that are owned, held, used,
or useful in connection with the operation of the Systems as of the Closing
Date, including, without limitation, all of the issued and outstanding stock of
Corsicana Media held by Seller on the Closing Date, except only for the Excluded
Assets as defined below.
1.2 CATV Systems shall have the meaning attributed to it in Recital A
above.
1.3 Closing shall mean the consummation of transactions contemplated by
this Agreement. The day on which such meeting takes place shall be referred to
as the "Closing Date."
Asset Purchase Agreement Page 1
<PAGE> 90
1.4 Corsicana Media shall have the meaning attributed to it in Recital A
above.
1.5 Excluded Assets shall mean Seller's cash on hand at Closing, and
only those other assets mutually agreed to by the parties.
1.6 Purchased Assets shall mean the undivided portion of the Assets
attributable to the Limited Partners' and the Administrative General Partner's
collective interest in the Seller.
1.7 Purchase Price shall mean the total consideration to be paid by
Buyer to Seller for the Purchased Assets, as more particularly described in the
Proxy Statement.
1.8 Radio Station shall have the meaning attributed to it in Recital A
above.
1.9 Required Consents shall mean the written consents to be obtained
from governmental agencies, franchising authorities, lessors, and any other
third parties whose consents and approvals are reasonably necessary or required
for Seller to sell, transfer, assign, convey and deliver the Assets to Buyer and
for Buyer to conduct the business of the CATV Systems and the Radio Station and
to own, lease, use, and operate, as the case may be, the Assets at the places
and in the manner in which the Assets are presently conducted or used and will
be conducted or used on the Closing Date.
1.10 Security Interest shall mean any mortgage, deed-of-trust, lien,
security agreement, limitation, pledge, hypothecation, assignment for security
purposes, option, put, charge, capital or financing lease arrangement, priority,
encumbrance, claim, suit, judgment or restraint on transfer (including, without
limitation, any agreement to give or suffer to exist any of the foregoing)
against title with respect to any Asset to be sold under this Agreement.
SECTION 2. SALE OF ASSETS
2.1 Agreement to Purchase and Sell. Subject to the terms and conditions
set forth in this Agreement, at Closing Buyer shall purchase from Seller, and
Seller shall sell, transfer, assign, convey and deliver to Buyer, the Purchased
Assets.
2.2 Assets to Be Sold. Except as otherwise specifically provided in this
Agreement, all of the Assets, whether or not described in the Schedules to this
Agreement, are intended to be sold, transferred, assigned, conveyed and
delivered to Buyer, free and clear of all Security Interests.
SECTION 3. PURCHASE PRICE
3.1 Purchase Price. Buyer shall pay to Seller the Purchase Price for the
Purchased Assets.
3.2 Prorations and Other Adjustments. All prepaid expenses, accrued
expenses and prepaid revenue shall be adjusted on a prorata basis between Seller
and Buyer, all as determined in accordance with generally accepted accounting
principles, to reflect the principle that all expenses arising out of and all
income attributable to the Purchased Assets for the period prior to 11:59 p.m.
local time on the Closing Date are for the account of Seller, and that all
expenses arising out of and all income attributable to the Purchased Assets for
the period after 11:59 p.m. local time on the Closing Date are for the account
of Buyer. All overlapping items of income or expense, including without
limitation the following, shall be prorated or reimbursed, as the case may be,
as of 11:59 p.m. local time on the Closing Date:
Asset Purchase Agreement Page 2
<PAGE> 91
(a) Prepaid expenses and deposits (including without limitation
lessee security deposits) made prior to Closing, as permitted by the terms
hereof, for or in connection with goods or services where all or a part of such
goods or services have not been received or used as of the Closing Date (e.g.,
rents paid in advance for a rental period extending beyond the Closing Date);
(b) Liabilities customarily accrued, arising from expenses
incurred but unpaid as of Closing, including without limitation liabilities
under any and all obligations assumed by Buyer pursuant to this Agreement (e.g.,
rents, sales commissions, fees for business and professional services, and other
similar matters);
(c) Taxes and utility charges related to the Assets or in respect
of any of the Purchased Assets (other than state sales taxes that may be due as
a consequence of the consummation of the transactions contemplated by this
Agreement, and any taxes that may be imposed upon Buyer on the basis of Buyer's
income);
(d) Deposits made and unearned prepayments received by Seller in
connection with any of Seller's obligations assumed by Buyer pursuant to this
Agreement; and
(e) Franchise fees, copyright payments, railroad and/or highway
crossing charges, satellite service fees, antenna space leases, billing company
charges, and other fees, expenses, costs and charges normally prorated in the
sale of the assets of a business.
No payments or adjustments shall be made with respect to any assets other than
the Purchased Assets.
SECTION 4. ASSUMPTION OF LIABILITIES
4.1 Assignment and Assumption. Except only as specifically provided in
this Section 4.1, Buyer shall assume only (a) the obligations of Seller
contained in those agreements assigned to Buyer pursuant to this Agreement, (b)
Seller's obligations to subscribers of the CATV Systems that accrue after the
Closing Date with respect to (i) subscriber deposits held by Seller (and for
which Buyer receives credit) as of the Closing Date which are refundable, and
(ii) subscriber advance payments held by Seller (and for which Buyer receives
credit) as of the Closing Date for services to be rendered in connection with
the operation of the CATV Systems subsequent to the Closing Date, and (c) those
obligations which Buyer otherwise agreed in writing, in its sole discretion, to
assume (collectively, the "Assumed Liabilities"). At Closing, Seller shall
assign and Buyer shall assume the Assumed Liabilities.
4.2 Limitation of Liability. It is expressly understood and agreed that
Buyer shall not be liable for, and does not assume, any obligations or
liabilities of Seller of any kind or nature, other than the Assumed Liabilities.
4.3 Sales and Transfer Taxes; Third-Party Consents. Seller shall assume
the liability for and shall pay any and all reasonable costs, fees and taxes
associated with the consummation of the transactions contemplated by this
Agreement; provided, however, that Seller shall not be obligated either to pay
any unreasonable fees or expenses or to undertake any unreasonable obligations
as a part of Seller's performance. If Buyer and Seller determine that
extraordinary measures are necessary to obtain the consent or agreement to any
part of the transactions contemplated by this Agreement of any governmental
authority or any independent third-party with whom Seller is contractually
bound, any extraordinary fees or expenses, or the initiation or prosecution of
legal proceedings, shall be paid one-half by Seller and one-half by Buyer.
Seller shall assume the liability for and shall pay any and all taxes
Asset Purchase Agreement Page 3
<PAGE> 92
that may be imposed on Seller on the basis of Seller's income. Notwithstanding
the foregoing, unless specifically set forth herein, each party shall bear the
expenses of its own attorneys, accountants and experts.
SECTION 5. CLOSING; CLOSING DATE; TERMINATION
5.1 Closing Date. Subject to the terms and conditions of this Agreement,
Closing shall be conducted at the offices of Buyer or such other location on a
Closing Date as may be mutually agreed to by the parties.
5.2 Termination. This Agreement may be terminated at any time prior to
Closing by the mutual written consent of Seller and Buyer.
5.3 Effect of Termination. In the event this Agreement is terminated
pursuant to Section 5.2, neither Seller nor Buyer shall be liable to each other
for any legal or equitable remedies.
SECTION 6. CONDITIONS OF BUYER'S OBLIGATIONS
Buyer's obligations to close hereunder are subject to the satisfaction
of all of the following conditions, each of which must be satisfied on or before
the Closing Date and any of which may be waived in writing by Buyer.
6.1 Required Consents. Buyer shall have obtained all Required Consents
to the assignment and assumption of the Purchased Assets.
6.2 Financing. Buyer shall have obtained financing from an institutional
lender on terms satisfactory to it, in its sole discretion.
6.3 Conveyance of Title to Assets. Buyer shall have received
documentation reasonably satisfactory to it of the release and discharge of any
and all Security Interests, on or against Seller (but only to the extent such
Security Interests relate to the Purchased Assets), the Purchased Assets or the
Systems, except to the extent Buyer assumes such Security Interests pursuant to
Section 4.1.
SECTION 7. CONDITIONS OF SELLER'S OBLIGATIONS
Seller's obligations to close are subject to all of the following
conditions, any of which may be waived in writing by Seller.
7.1 Approval of Sale. The Limited Partners of Seller shall have approved
the sale of the Purchased Assets.
7.2 Restraint of Proceedings. No action, proceeding or investigation
shall have been instituted or threatened on or prior to Closing, to set aside or
modify the transactions provided for in this Agreement or to enjoin or prevent
its consummation.
7.3 No Governmental Action. No investigation, action or proceeding shall
have been commenced by the Department of Justice or Federal Trade Commission or
any other governmental entity challenging or seeking to enjoin the consummation
of this transaction and neither Buyer nor Seller shall have been notified of a
present intention by the Assistant Attorney General in charge of the Antitrust
Asset Purchase Agreement Page 4
<PAGE> 93
Division of the Department of Justice, the Director of the Bureau of Competition
of the Federal Trade Commission or any governmental entity (or their respective
agents or designees) to commence, or recommend the commencement of, such an
action or proceeding.
SECTION 8. MISCELLANEOUS
8.1 Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Washington.
8.2 Assignment and Delegation of Agreement. Seller shall not assign this
Agreement or any interest in this Agreement without the prior written consent of
Buyer. Buyer may assign and delegate all or a part of its rights and obligations
under this Agreement to one or more entities affiliated with Buyer without the
prior written consent of Seller.
8.3 Binding Effect. This Agreement shall be binding upon and shall inure
to the benefit of the parties to this Agreement and their respective permitted
successors and assigns.
8.4 Additional Agreements. Seller and Buyer shall sign any additional
agreements and other documents necessary or desirable to carry out the terms of
this Agreement.
BUYER: NORTHLAND CABLE PROPERTIES, INC.
By ________________________________
James A. Penney, Vice President
SELLER: NORTHLAND CABLE PROPERTIES FIVE
LIMITED PARTNERSHIP
By: Northland Communications Corporation,
Managing General Partner
By ______________________________
James A. Penney, Vice President
Asset Purchase Agreement Page 5
<PAGE> 94
EXHIBIT D
PROMISSORY NOTE
$____________ ___________, 1998
Seattle, Washington
FOR VALUE RECEIVED, NORTHLAND COMMUNICATIONS CORPORATION, a Washington
corporation, and its assigns (the "Maker"), promises to pay to NORTHLAND CABLE
PROPERTIES FIVE LIMITED PARTNERSHIP, a Washington limited partnership
("NCP-Five"), upon the terms and conditions stated herein, the principal sum of
_______________________________ Dollars ($_________), which sum shall be payable
in two equal payments of principal, plus accrued interest, due annually
commencing on the first anniversary of the date of this Note. Payments shall be
made in lawful money of the United States, at such place as NCP-Five may
designate in writing. The Maker shall have the privilege of prepaying all or any
portion of this Note without premium or penalty.
This Note is issued in connection with that certain Capital Contribution
and Novation Agreement among the Maker, Northland Cable Properties, Inc., a
Washington corporation ("NCP-Inc.") and NCP-Five dated as of _________, 1998, in
which the Maker, among other things, has agreed to assume the obligation of
NCP-Inc. to pay NCP-Five the deferred portion of the purchase price payable by
NCP-Inc. to NCP-Five pursuant to that certain Asset Purchase Agreement between
NCP-Inc. and NCP-Five dated as of _________, 1998 (the "Agreement"). The Maker
may be entitled to the right of offset, as provided in the Agreement, and may,
without being in default under this Note, effect such offset against any amounts
payable under this Note.
The principal sum of this Note shall bear interest at a per annum rate
of six percent (6%). If any portion of this Note shall not be paid when due,
then the principal balance of the Note shall thereafter bear interest at the
rate of twelve percent (12%) per annum, from the date of such default. A default
shall exist as to any failure of the Maker to make any payment required
hereunder in a timely manner; provided, however, there shall be no default and
no payment shall be due hereunder if the Maker is effecting an offset to account
for any prorations or other adjustments provided for pursuant to the Agreement.
In the event a suit is commenced to enforce the payment of this Note,
the Maker hereby agrees to pay all costs of collection, including a reasonable
sum as the fees of attorneys and certified public accountants.
The indebtedness and all other obligations evidenced by this Note are
subordinated to the prior payment in full in cash of all obligations of the
Maker from time to time outstanding in respect of all other indebtedness of the
Maker, other than any indebtedness which by its terms is expressly subordinated
to this Note, including, without limitation, amounts that would become due
except for the operation of the automatic stay under Section 362(a) of the
Bankruptcy Code, 11 U.S.C. Section 362(a), and interest, fees, charges and other
amounts that, but for the filing of a petition in bankruptcy with respect to the
Maker, would accrue on such indebtedness whether or not a claim is allowed
against the Maker for the same in such proceeding (collectively, "Senior Debt").
The Maker agrees that upon the occurrence and during the continuance of any
default under any Senior Debt or upon any distribution of the assets or
readjustment of the obligations of the Maker whether by reason of voluntary or
involuntary liquidation, dissolution, winding up, composition, bankruptcy,
reorganization, arrangement, receivership, assignment for the benefit of
creditors or any marshalling of its assets or the readjustment of its
liabilities, whether partial or total, the holders of the Senior Debt shall be
entitled to receive cash payment in full of lawful money of the United States of
America of all of the Senior Debt in accordance with their respective terms
prior to payment of, or other distribution in respect of, all or any part of the
indebtedness or other obligations hereunder. NCP-Five agrees, by its acceptance
of this Note, that at any time that payment under this Note is prohibited by
operation of this paragraph, it shall not take any action to enforce or
otherwise collect any such payment
<PAGE> 95
Promissory Note Page 2
and in the event that, notwithstanding the foregoing, NCP-Five shall have
received any payment under or in respect of this Note at a time when such
payment is prohibited, then such payment shall be received and held in trust for
the benefit of the holders of the Senior Debt and shall be paid over and
delivered to such holders or their agent to the extent necessary to pay the
Senior Debt in full in cash after giving effect to any other concurrent payment
or distribution to such holders in respect of the Senior Debt.
THIS NOTE IS AND SHALL FOR ALL PURPOSES BE DEEMED NONASSIGNABLE AND
NONNEGOTIABLE; provided, however, that the NCP-Five may assign its rights and
delegate its duties and obligations under this Note , including without
limitation the right to receive payment hereunder, to a liquidating trust
established for the purpose of distributing amounts due hereunder for the
benefit of the beneficiaries of such liquidating trust, and provided further the
Maker may assign its rights and delegate its duties and obligations under this
Note to any affiliate of Maker.
This Note is to be construed in all respects and enforced according to
the laws of the State of Washington.
NORTHLAND COMMUNICATIONS CORPORATION
By:_________________________________
Gary S. Jones, Vice President
By:__________________________________
James A. Penney, Vice President
<PAGE> 96
EXHIBIT E
================================================================================
CONFIDENTIAL
APPRAISAL OF THE ASSETS OF
NORTHLAND CABLE PROPERTIES FIVE
LIMITED PARTNERSHIP
AS OF DECEMBER 1, 1997
PREPARED BY
DANIELS & ASSOCIATES, L.P.
================================================================================
<PAGE> 97
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>
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<PAGE> 98
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
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<PAGE> 99
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
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<PAGE> 100
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
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<PAGE> 101
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> 102
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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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> 104
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.
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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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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.
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<PAGE> 107
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
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<PAGE> 108
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.
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<PAGE> 109
<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> 110
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.
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<PAGE> 111
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.
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