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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE
SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant [X]
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 Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or
[ ] Rule 14a-12
NORTHLAND CABLE PROPERTIES SIX
LIMITED PARTNERSHIP
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(Name of Registrant as Specified in Its Charter)
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(Name of Person(s) Filing Proxy Statement, if Other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No Fee Required
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(4)
and 0-11
CALCULATION OF FILING FEE
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PER UNIT PRICE OR
OTHER UNDERLYING
VALUE OF PROPOSED
TRANSACTION MAXIMUM
TITLE OF EACH CLASS OF AGGREGATE NUMBER OF COMPUTED PURSUANT AGGREGATE
SECURITIES TO WHICH SECURITIES TO WHICH TO EXCHANGE VALUE OF
TRANSACTION APPLIES: TRANSACTION APPLIES: ACT RULE 0-11: TRANSACTION: TOTAL FEE PAID
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L.P. UNITS 29,784 $62,250,000 $62,250,000 $12,450
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[ ] Fee paid previously with preliminary materials.
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[ ] 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:
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(2) Form, Schedule, or Registration Statement no.:
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(3) Filing Party:
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(4) Date Filed:
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NORTHLAND CABLE PROPERTIES SIX LIMITED PARTNERSHIP
PROXY STATEMENT
This proxy statement solicits your vote for two separate proposals. The
first proposal, if approved, will extend the term of Northland Cable Properties
Six Limited Partnership ("NCP-Six") for six years until December 31, 2007. The
partnership term of NCP-Six is currently scheduled to expire on December 31,
2001. The second proposal, if approved, will provide authority to sell all of
its existing assets, leading to the winding up of NCP-Six. These two proposals
are not mutually exclusive. Even if a limited partner desires to liquidate its
investment in NCP-Six and therefore approves of the sale of all of NCP-Six's
assets as proposed in this proxy statement, there is a possibility that such
sale will not close, or will otherwise be delayed beyond the current maturity
date of NCP-Six's outstanding debt. In order to protect against such an outcome,
a limited partner is hereby provided an opportunity to extend the term of
NCP-Six, while separately voting on whether the limited partner desires to
approve of the proposed sale of NCP-Six's assets as further set forth in this
proxy statement.
This proxy statement describes a proposal to amend the Amended and
Restated Agreement of Limited Partnership of Northland Cable Properties Six
Limited Partnership dated November 3, 1986 (the "NCP-Six Partnership
Agreement"), which is the current partnership agreement governing NCP-Six, to
extend the term of NCP-Six for an additional six years to better protect against
the possibility that NCP-Six could be required by its current lenders to
liquidate its assets in an unreasonably short time period at values that may not
be in the best interest of the limited partners, to raise proceeds to replay
NCP-Six 's current debt at its maturity date of June 30, 2001. The current
lenders of NCP-Six have expressed an unwillingness to renew that credit facility
if the NCP-Six Partnership Agreement is not extended for a reasonable period of
time. In order to extend the term of NCP-Six beyond its current expiration date
of December 31, 2001, the NCP-Six Partnership Agreement will need to be amended
and that amendment is further described in this proxy statement as "Proposed
Amendment No. 1."
NCP-Six is currently anticipating the sale of its Bennettsville, South
Carolina, operating system to Adelphia Communications Corporation ("Adelphia")
for a purchase price of $8,388,000 (the "Adelphia Transaction"). If the Adelphia
Transaction is consummated, pursuant to the second proposal for which your vote
is solicited in this proxy statement NCP-Six would sell and distribute its
remaining cable television systems and other assets to Northland Communications
Corporation, managing general partner of NCP-Six, or its assigns, in a
transaction valued at $62,250,000 (the "Proposed Transaction"). Based on these
transaction valuations, projected cash distributions to be made to limited
partners over the life of the partnership following closing of the Proposed
Transaction would be approximately $33,300,000 in the aggregate or $1,246 per
$500 partnership unit, or $2,491 per $1,000 investment (excluding aggregate
interest payments of approximately $31 per unit, or $62 per $1,000 investment).
For details, see "PROJECTED CASH AVAILABLE FROM LIQUIDATION" on page __. If the
Proposed Transaction is closed, it will lead to the dissolution of NCP-Six prior
to its current termination date of December 31, 2001. As a condition to the
Proposed Transaction, a majority of the limited partners of NCP-Six will need to
approve an amendment to the NCP-Six Partnership Agreement as described in this
proxy statement. The amendment required to consummate the Proposed Transaction
is referred to herein as the "Proposed Amendment No. 2."
If the Proposed Transaction is approved and closes, Northland will
acquire the entirety of the assets of NCP-Six remaining after the Adelphia
Transaction and NCP-Six will be liquidated and dissolved. Although Northland
presently intends to consummate the Proposed Transaction if it is approved by
the limited partners, Northland will be under no obligation to do so unless
conditions to closing of the Proposed Transaction are satisfied. If the Proposed
Transaction is approved, it must close within 180 days after the special meeting
called for herein. If the Proposed Transaction does not close within this time
period, or if at any time prior to closing we determine that cumulative
distributions to limited partners from the Proposed Transaction may be reduced
by more than $622,250 from the proposed estimated distributions (an amount that
represents one percent of the total Proposed Transaction), NCP-Six will not sell
the assets to Northland, any affiliate of Northland, or any third party without
again obtaining approval of the limited partners of NCP-Six. See "PROJECTED CASH
AVAILABLE FROM LIQUIDATION" on page ___ for details about current estimated
distributions. Closing of the Proposed Transaction is also conditioned upon the
prior closing of the Adelphia Transaction.
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If both Proposed Amendment No. 1 and Proposed Amendment No.2 are
approved, so long as the Proposed Transaction closes, NCP-Six will commence
dissolution prior to December 31, 2001 as further discussed in this proxy
statement. If Proposed Amendment No. 1 is not approved, and the Proposed
Transaction is not closed before June 30, 2001, NCP-Six's current credit
facility will come due on June 30, 2001, and the term of NCP-Six will expire on
December 31, 2001. These events may lead to NCP-Six's inability to further
extend the maturity of its debt and NCP Six-s lenders may require the
liquidation of assets in a time frame and at values that may not be in the best
interest of the limited partners. The purpose of the proposed extension of the
term of NCP-Six is to allow the pursuit of liquidating the Partnership's assets
in the event the Proposed Transaction is not approved, or is approved and not
consummated.
These proposals are being made jointly by Northland Communications
Corporation, the managing general partner and FN Equities Joint Venture, the
administrative general partner, of NCP-Six.
(Throughout this proxy statement, when we use "we," "us" or "our," we
refer to Northland Communications Corporation and FN Equities Joint Venture, the
two general partners of NCP-Six. When we use "Northland," we refer to Northland
Communications Corporation and its subsidiaries, or its assigns, in its capacity
as purchaser of the assets of NCP-Six in the Proposed Transaction. When we use
"Managing General Partner," we refer to Northland Communications Corporation
only in its capacity as the managing general partner of NCP-Six. Similarly when
we use "Administrative General Partner," we refer to FN Equities Joint Venture
only in its capacity as the administrative general partner of NCP-Six.)
Extending the term of NCP-Six from its current expiration date of
December 31, 2001 through December 31, 2007 is subject to the approval of the
majority in interest of the limited partners of NCP-Six excluding any units of
limited partnership interest held by us or our affiliates. If both Proposed
Amendment No. 1 and Proposed Amendment No. 2 are approved, and the Proposed
Transaction is subsequently consummated as described in this proxy statement, we
will commence the dissolution and winding up of NCP-Six upon consummation of the
Proposed Transaction even though the term of NCP-Six will have been extended,
since upon closing the Proposed Transaction, all of the assets of NCP-Six will
have been sold. Meanwhile, we will strive to negotiate an extension of NCP-Six's
current credit facility beyond its present June 30, 2001 maturity in case the
Proposed Transaction is not consummated by that date. Our goal is not, however,
to operate NCP-Six until December 31, 2007. Instead, our goal in extending the
term of NCP-Six is to explore additional opportunities to sell the assets of
NCP-Six for a price that we believe is fair in the event the Proposed
Transaction does not close.
The Proposed Transaction is also subject to the approval of a majority
in interest of the limited partners, excluding any units of limited partnership
interest held by us or our affiliates. IF YOU DO NOT APPROVE OF THE PROPOSED
TRANSACTION, YOU SHOULD VOTE TO "DISAPPROVE" PROPOSED AMENDMENT NO. 2, which in
turn will equate to a vote against the Proposed Transaction. Your vote on
whether to approve the Proposed Amendment No. 1 is separate and apart from your
vote to approve Proposed Amendment No. 2. You should therefore evaluate each
proposal separately, and vote for each proposal independent of your vote on the
other proposal as you see fit.
As of December 31, 2000, the record date for the special meeting at
which Proposed Amendment No. 1 and Proposed Amendment No. 2 will be voted upon,
there were 29,784 units ($500/unit) of limited partnership interest outstanding,
held by 1,807 limited partners of record. We and our affiliates hold 30 units,
none of which will be counted in determining whether the requisite approval has
been obtained. All abstentions shall be counted as a "no" vote for Amendment No.
1, as well as a "no" vote for Amendment No. 2. Any signed and returned proxy
cards that fail to vote on one or both proposed amendments will be treated as a
vote to approve the proposed amendment for which a vote was not cast.
We are furnishing this proxy statement and the accompanying proxy card
in connection with the solicitation of proxies for use at a special meeting of
limited partners to be held at 3:00 p.m. on May 31, 2001. The special meeting,
and any postponements or adjournments, will be held at the offices of NCP-Six
located at 1201 Third Avenue, Suite 3600, Seattle, Washington 98101. Only
limited partners of record as of December 31, 2000 will be entitled to notice of
and to vote at the special meeting. We are first mailing this proxy statement to
limited partners on April 15, 2001.
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THE PROPOSED TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION. THE COMMISSION HAS NOT PASSED UPON THE
FAIRNESS OR MERITS OF THE PROPOSED TRANSACTION, NOR UPON THE ACCURACY OR
ADEQUACY OF THE INFORMATION CONTAINED IN THIS PROXY STATEMENT. ANY
REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
This proxy statement is being furnished to the limited partners of
NCP-Six 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 NCP-Six are the same.
YOU ARE URGED TO CAREFULLY REVIEW THIS PROXY STATEMENT
AND TO RETURN YOUR PROXY CARD PROMPTLY IN ORDER FOR IT TO BE
RECEIVED BY THE MANAGING GENERAL PARTNER ON OR BEFORE
MAY 30, 2001.
The date of this proxy statement is April 15, 2001.
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TABLE OF CONTENTS
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SUMMARY .................................................................................1
Proposed Amendment No. 1 (see page _____)........................................1
The Adelphia Transaction (see page ___)..........................................1
The Proposed Transaction and Proposed Amendment No. 2 (see page __)..............1
Reasons for the Proposed Transaction (see page ___)..............................2
Fairness of the Adelphia Transaction (see page __)...............................3
Fairness of the Proposed Transaction (see page __)...............................3
Our Recommendation (see page ___)...............................................4
Consequences of a Determination by the Limited Partners not to Approve
Proposed Amendment No. 1 and Proposed Amendment No. 2.....................4
Appraisals (see page __).........................................................5
Third-Party Bid Process (see page ____)..........................................5
Houlihan Lokey Fairness Opinion..................................................6
Special Factors Pertaining to the Proposed Transaction (see page ____)..........6
Conflicts of Interest of the Managing General Partner (see page ___).............7
Conflict of Interest of the Administrative General Partner.......................8
Summary of the Proposed Transaction (see page __)...............................8
Approval of Limited Partners to the Transaction (see page __).............8
Payment of the Purchase Price; Promissory Note (see page __)..............8
Liquidation of the Partnership; Distributions to Limited Partners
(see page ___).....................................................9
Consideration of Alternatives and Approval of the Adelphia Transaction..........10
Summary of Federal Income Tax Consequences of the Transaction
(see page ____)..........................................................10
Voting at the Special Meeting...................................................11
You may revoke your proxy at any time prior to the special meeting 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. Your
attendance at the special meeting, by itself, will not revoke your
proxy....................................................................11
You Do Not Have Dissenters' Rights (see page __)................................11
Solicitation of Proxies (see page __)...........................................11
SUMMARY HISTORICAL FINANCIAL INFORMATION................................................13
SPECIAL FACTORS (Pertaining to the Proposed Transaction)................................13
Factors Related to the Proposed Transaction.....................................13
Although we believe that the total price to be received by NCP-Six
for those assets remaining after the Adelphia Transaction
represents fair value for those assets, those assets may
increase in value prior to closing or after the Proposed
Transaction closes................................................13
The Managing General Partner has conflicts of interest in the
Proposed Transaction..............................................14
The Administrative General Partner has conflicts of interest in the
Proposed Transaction..............................................15
While we did obtain a fairness opinion with respect to the Proposed
Transaction, we did not retain an unaffiliated, independent
third party to represent your interests in the structuring
of the Proposed Transaction.......................................15
The Proposed Transaction has not been solicited by limited
partners..........................................................15
You do not have any dissenters' or appraisal rights in this
transaction.......................................................16
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There are potential alternatives to the Proposed Transaction;
however, if the Proposed Transaction is approved, this
will effectively preclude any of these alternatives being
pursued ..........................................................16
If a majority of the holders of limited partnership units approve
the Proposed Transaction, you will be bound by that
decision, even if you vote to "DISAPPROVE" the Proposed
Transaction.......................................................16
The promissory note that will be issued from Northland as partial
payment of the transaction price will be an unsecured
obligation of Northland...........................................16
The amount and timing of final distributions to limited partners
may be affected by unanticipated or contingent liabilities,
including any potential litigation arising out of the
Adelphia Transaction and/or the Proposed Transaction..............17
The Proposed Transaction will be a taxable event for U.S. federal
income tax purposes. This may result in substantial
recognition of gain to you........................................17
Even if the requisite majority of the limited partners of NCP-Six
vote to APPROVE the Proposed Transaction, the Proposed
Transaction may not close due to a lack of required
financing.........................................................17
Factors Related to NCP-Six's Business and the Cable Television Industry..18
NCP-Six operates in a very competitive business environment, which
can affect its business and operations............................18
NCP-Six may not be able to fund the capital expenditures necessary
to keep pace with technological developments or its
customers' demand for new products or services. This could
limit its ability to compete effectively..........................18
NCP-Six operates its cable systems under franchises that are
non-exclusive. Local franchising authorities can grant
additional franchises and create competition in market areas
where none existed previously.....................................18
NCP-Six's cable systems are operated under franchises that are
subject to non-renewal or termination. The failure to renew
a franchise could adversely affect NCP-Six's business in a
key market........................................................19
Local franchise authorities have the ability to impose additional
regulatory constraints on NCP-Six's business. This can
further increase expenses.........................................19
NCP-Six's business is subject to extensive governmental legislation
and regulation. The applicable laws and regulations, and
changes to them, could adversely affect NCP-Six's business
by increasing its expenses........................................19
NCP-Six may be required to provide Internet service providers
access to its networks. This could significantly increase
NCP-Six's competition and adversely affect the upgrade of
its systems or its ability to provide new products and
services..........................................................19
Despite recent deregulation of expanded basic cable programming
packages, we are concerned that cable rate increases could
give rise to further regulation. This could impair
NCP-Six's ability to raise rates to cover its increasing
costs or cause NCP-Six to delay or cancel service or
programming enhancements..........................................20
PROJECTED CASH AVAILABLE FROM LIQUIDATION...............................................21
Projected Cash Available if the Adelphia Transaction and the Proposed Transaction
Closings Occur..................................................................23
THE SPECIAL MEETING.....................................................................26
Purpose of Special Meeting......................................................26
Record Date; Limited Partners Entitled to Vote at the Special Meeting...........26
Quorum; Vote Required for Approval..............................................27
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Use of Proxies at the Special Meeting...........................................27
Revocation of Proxies...........................................................27
Solicitation of Proxies.........................................................28
No Dissenters' Rights...........................................................28
Recommendation of the General Partners..........................................28
BACKGROUND AND REASONS FOR EXTENDING THE TERM OF NCP-SIX................................28
BACKGROUND AND REASONS FOR THE PROPOSED TRANSACTION.....................................29
General ........................................................................29
Background of the Proposed Transaction..........................................30
Chronology of Events leading up to the Proposed Transaction.....................30
Reasons for the Transaction.....................................................34
FAIRNESS OF THE PROPOSED TRANSACTION....................................................36
Our Belief as to Fairness.......................................................36
Material Factors Underlying Belief as to Fairness...............................36
Appraisal Process; Summary of Appraisals........................................38
Daniels & Associates Appraisal..................................................39
Communications Equity Associates Appraisal......................................41
1999 Third-Party Bid Solicitation Process.......................................43
Northland's 1999 Offer to Purchase NCP-Six Assets...............................44
Recission of Northland's 1999 Offer Due to Lack of Acceptable Financing.........46
2000 Third-Party Bid Solicitation Process.......................................46
The Adelphia Transaction........................................................48
Northland's 2000 Offer to Purchase NCP-Six Assets...............................48
Houlihan Lokey Fairness Opinions................................................49
Discounted Cash Flow Analysis:...........................................50
Comparable Transaction Analysis:.........................................51
Compensation and Material Relationships.........................................52
CONFLICTS OF INTEREST...................................................................52
Fiduciary Responsibilities......................................................52
Conflicts of Interest of the Managing General Partner...........................53
Conflict of Interest of the Administrative General Partner and Related
Matters..................................................................53
Certain Payments to the Managing General Partner................................53
PROPOSED AMENDMENT NO. 1 TO THE NCP-SIX PARTNERSHIP AGREEMENT...........................54
PROPOSED AMENDMENT NO. 2 TO THE NCP-SIX PARTNERSHIP AGREEMENT...........................54
SPECIFIC TERMS OF THE PROPOSED TRANSACTION..............................................56
General ........................................................................56
Payment of the Purchase Price...................................................56
Distributions to Limited Partners...............................................57
Conditions to Completion of the Proposed Transaction............................59
Representations and Warranties..................................................60
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Termination.....................................................................60
DISSOLUTION AND LIQUIDATION CONSEQUENCES OF THE PROPOSED TRANSACTION....................61
Dissolution Procedures..........................................................61
Description of Liquidating Trust................................................61
Effect of Fraudulent Transfer Statutes..........................................62
FEDERAL AND STATE INCOME TAX CONSEQUENCES...............................................63
Tax Considerations..............................................................63
Tax Consequences of Disposition of the Assets and Liquidation of NCP-Six........64
Unrelated Business Taxable Income...............................................65
Tax Consequences of a Decision not to Sell......................................65
Other Tax Law Changes...........................................................66
State Income Tax Considerations.................................................67
North Carolina...........................................................67
Mississippi..............................................................68
South Carolina...........................................................68
INFORMATION ABOUT NCP-SIX...............................................................69
General ........................................................................69
Business........................................................................69
The Systems.....................................................................70
Starkville, Mississippi..................................................70
Philadelphia, Mississippi................................................71
Highlands, North Carolina................................................71
Barnwell, South Carolina.................................................72
Bennettsville, South Carolina............................................72
Employees................................................................72
Customers................................................................72
Seasonality..............................................................72
Competition.....................................................................72
Regulation and Legislation......................................................74
Summary .................................................................74
Cable Rate Regulation....................................................74
Cable Entry into Telecommunications......................................75
Internet Service.........................................................76
Telephone Company Entry into Cable Television............................77
Electric Utility Entry into Telecommunications and Cable Television......77
Ownership Restrictions...................................................77
Must Carry and Retransmission Consent....................................78
Access Channels..........................................................78
Access to Programming....................................................78
Inside Wiring; Subscriber Access.........................................79
Other Regulations of the Federal Communications Commission......................79
Copyright................................................................80
State and Local Regulation...............................................80
Legal Proceedings...............................................................81
NCP-Six's Management's Discussion and Analysis of Financial Condition and
Results Of Operations....................................................81
General .................................................................81
Results of Operations for the Three Months Ended September 30,
2000, and 1999...................................................82
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Results of Operations for the Nine Months Ended September 30,
2000, and 1999...................................................82
Results of Operations for Years Ended 1999 and 1998......................83
Results of Operations for the Years Ended 1998 and 1997..................84
Liquidity and Capital Resources..........................................85
Capital Expenditures.....................................................86
Recent Acquisitions and Dispositions.....................................86
Affiliates of NCP-Six...........................................................87
MANAGEMENT AND BENEFICIAL OWNERSHIP OF NCP-SIX..........................................87
Management of NCP-Six...........................................................87
General .................................................................87
Officers and Directors of Northland Communications Corporation...........87
Officers and Directors of FN Equities Joint Venture......................89
Beneficial Ownership............................................................90
Changes in Control..............................................................90
FINANCIAL STATEMENTS....................................................................90
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EXHIBIT A -- FORM OF PROXY...........................................................A-1
EXHIBIT B -- AMENDED AND RESTATED CERTIFICATE AND AGREEMENT OF LIMITED PARTNERSHIP
OF NORTHLAND CABLE PROPERTIES SIX LIMITED PARTNERSHIP..............................B-1
EXHIBIT C -- FORM OF PROPOSED AMENDMENT NO. 1........................................C-1
EXHIBIT D -- FORM OF PROPOSED AMENDMENT NO. 2........................................D-1
EXHIBIT E -- ADELPHIA TRANSACTION ASSET PURCHASE AGREEMENT...........................E-1
EXHIBIT F -- PROPOSED TRANSACTION ASSET PURCHASE AGREEMENT...........................F-1
EXHIBIT G -- PROPOSED TRANSACTION PROMISSORY NOTE....................................G-1
EXHIBIT H -- APPRAISAL OF DANIELS & ASSOCIATES.......................................H-1
EXHIBIT I -- APPRAISAL OF COMMUNICATIONS EQUITY ASSOCIATES...........................I-1
EXHIBIT J -- FAIRNESS OPINION OF HOULIHAN LOKEY HOWARD & ZUKIN AS TO THE ADELHPIA
TRANSACTION........................................................................J-1
EXHIBIT K -- FAIRNESS OPINION OF HOULIHAN LOKEY HOWARD & ZUKIN AS TO THE PROPOSED
TRANSACTION........................................................................K-1
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SUMMARY
This summary highlights selected information, and may not contain all of
the information that is important to you. You should carefully read this entire
proxy statement and the attached exhibits for a more complete understanding of
the Proposed Transaction, and Proposed Amendment No. 1 and Proposed Amendment
No. 2 to the NCP-Six Partnership Agreement. In particular, you should read the
NCP-Six Partnership Agreement, the proposed amendments to the NCP-Six
Partnership Agreement, the Proposed Transaction asset purchase agreement, the
appraisals of Daniels & Associates and of Communications Equity Associates, and
the fairness opinions of Houlihan Lokey Howard & Zukin Financial Advisors, Inc.
("Houlihan Lokey"), each of which are attached as Exhibits B, C, D, F, G, H, J
and K, respectively, to this proxy statement.
PROPOSED AMENDMENT NO. 1 (SEE PAGE _____)
This proxy statement relates to a proposal being made to the limited
partners of NCP-Six to consider and vote on an amendment to the NCP-Six
Partnership Agreement that would extend the term of NCP-Six from its current
expiration date of December 31, 2001 until December 31, 2007. Without such
amendment to the NCP-Six Partnership Agreement, NCP-Six is currently scheduled
to terminate on December 31, 2001 and upon such termination the general partners
will be required to initiate the winding up of NCP-Six's affairs pursuant to the
terms and conditions set forth in the NCP-Six Partnership Agreement and further
pursuant to Washington law. Even before December 31, 2001, however, NCP-Six will
face the maturity of its current credit facility. As of September 30, 2000, the
balance owed on that facility was $28,965,281. We recommend approval of Proposed
Amendment No. 1 in order to facilitate an extension of NCP-Six's current credit
facility, which NCP-Six requires for operations, and which will need to be
extended or replaced if the Proposed Transaction does not close before June 30,
2001, the date to which NCP-Six's lenders have agreed to extend the term of the
current credit facility. Based on discussions with NCP-Six's lenders, we feel
there is a strong likelihood that NCP-Six will be able to renew or replace its
current credit facility upon its June 30, 2001 expiration, but only if the term
of NCP-Six is extended for a reasonable period of time. If the Proposed
Transaction is not consummated by June 30, 2001, and an amendment to extend the
Partnership's life is not approved, the lenders may require NCP-Six to liquidate
its assets to pay off debt under time constraints that may have material
negative affects on the purchase price obtained for those assets. We also
believe that six years is the shortest period over which we can amortize the
renewed credit facility to result in loan payments that can be supported by cash
flow generated in the anticipated ordinary cause of business of NCP-Six. We,
therefore, recommend that you vote to approve Proposed Amendment No. 1, which
will extend the term of NCP-Six for six more years through December 31, 2007.
Regardless of whether you vote to approve the Proposed Transaction, we recommend
that you vote to approve Proposed Amendment No. 1. Please refer to the section
titled "BACKGROUND AND REASONS FOR EXTENDING THE TERM OF NCP-SIX" at page ____.
THE ADELPHIA TRANSACTION (SEE PAGE ___)
If consummated as currently planned, the Adelphia Transaction will
result in the sale of the entirety of NCP-Six's Bennettsville, South Carolina
operating system to Adelphia Communications Corporation, its affiliates or
assigns, (collectively, "Adelphia") for $8,388,000. The Adelphia Transaction
does not require the approval of limited partners and is expected to close on
February 28, 2001 pursuant to the terms and conditions of the asset purchase
agreement between Adelphia and NCP-Six, a copy of which is attached to this
proxy statement as Exhibit E. The net proceeds from the Adelphia Transaction
will be used to pay down the current balance of owed on the NCP-Six credit
facility as required by the applicable loan agreement for that credit facility
between NCP-Six and its lenders.
THE PROPOSED TRANSACTION AND PROPOSED AMENDMENT NO. 2 (SEE PAGE __)
This proxy statement also relates to a proposal being made to the
limited partners of NCP-Six to consider and vote on an amendment to the NCP-Six
Partnership Agreement that would authorize the sale and distribution by NCP-Six
of the remaining cable television systems and other assets owned by it to
Northland Communications
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Corporation or an affiliate thereof following the sale of NCP-Six's
Bennettsville, South Carolina operating system to Adelphia, and the subsequent
dissolution, winding up and liquidation of NCP-Six. After the sale of the
Bennettsville, South Carolina operating system to Adelphia, the remaining assets
of NCP-Six will include the cable television franchises and cable television
systems of four operating groups located in the following geographic areas:
- Starkville, Mississippi;
- Philadelphia, Mississippi;
- Highlands, North Carolina; and
- Barnwell, South Carolina.
We are also asking you to approve Proposed Amendment No. 2 to the
NCP-Six Partnership Agreement and the Proposed Transaction as described in this
proxy statement. If Proposed Amendment No. 2 is approved, NCP-Six will be
authorized to consummate the Proposed Transaction resulting in the sale and
distribution of all of NCP-Six's remaining assets to Northland. The form of the
asset purchase agreement between NCP-Six and Northland for the Proposed
Transaction is attached to this proxy statement as Exhibit F. Pursuant to
section 6.2.4 of that asset purchase agreement, closing of the Proposed
Transaction is conditioned upon the approval of a majority vote of the limited
partners of NCP-Six, as required by section 11(a)(3) of the NCP-Six Partnership
Agreement. Closing of the Proposed Transaction is also conditioned upon the
prior closing of the Adelphia Transaction.
Following closing of the Proposed Transaction, if approved, net proceeds
from both the Adelphia Transaction and the Proposed Transaction remaining after
the payment of NCP-Six's debt and provisions for requirements associated with
winding up the partnership will be distributed only to the limited partners and
to the Administrative General Partner of NCP-Six, pursuant to their respective
interests as set forth in the NCP-Six Partnership Agreement. Northland, as the
managing general partner, will instead receive only an in-kind distribution of
its percentage interest of the assets of NCP-Six as provided for in Proposed
Amendment No. 2. The result will be that Northland will receive a credit towards
the purchase price equal to its ownership interest in the assets being
purchased. This adjustment will, however, have no impact on the distribution to
be made to limited partners, who will still receive the same distribution as if
a purchase price equal to $62,250,000 for the Proposed Transaction was paid by a
third-party purchaser.
REASONS FOR THE PROPOSED TRANSACTION (SEE PAGE ___)
We are proposing the Proposed Transaction in an effort to provide you
liquidity for your units of limited partnership interest in NCP-Six and a
positive return on your investment over the life of the partnership. NCP-Six was
originally formed in 1986 and we believe that many limited partners have held
their investment since that time. There is currently no established public
trading market for the units of limited partnership interest in NCP-Six.
Secondary sales activity for the units has been limited and sporadic, at prices
that we believe to be generally below fair value. In addition, we are concerned
by recent activity by unrelated third parties in making tender offers and other
offers to purchase units at prices that, in our opinion, do not fairly represent
the underlying value of the units. We are proposing the Proposed Transaction
because we believe many limited partners may desire an opportunity to liquidate
their investment in NCP-Six at this time.
While the Adelphia Transaction, which does not require limited partner
approval due to its size, will help pay down a portion of NCP-Six's outstanding
debt, we believe that the consummation of the Proposed Transaction, and the
subsequent liquidation of NCP-Six will provide limited partners of NCP-Six with
liquidity, resulting in an opportunity to take advantage of a greater array of
investment opportunities than are presently provided by continuation of NCP-Six.
See "PROJECTED CASH AVAILABLE FROM LIQUIDATION" on page ___. Notwithstanding,
even if the Proposed Transaction is not approved, we believe the price offered
by Adelphia in the Adelphia Transaction provides an opportunity to achieve some
cash to pay down existing debt of NCP-Six at a fair price, without adversely
impacting the ability of NCP-Six to continue operations through its four
remaining operating groups. Pursuant to NCP-Six's loan agreement with its
lenders, the entire net proceeds from the
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Adelphia Transaction must be paid toward NCP-Six's outstanding credit facility
debt if the Adelphia Transaction is consummated.
Provided the term of NCP-Six is extended as a result of approval of
Proposed Amendment No. 1, if the Proposed Transaction is not closed, we will
continue to look for opportunities for the limited partners of NCP-Six to
liquidate their investment for what we believe to be a fair price. If, however,
Proposed Amendment No. 1 fails to receive approval and the Proposed Transaction
is not consummated by June 30, 2001, we may be unable to look for such
opportunities due to time constraints that will otherwise likely be imposed by
NCP-Six's lenders for the expedited sale of assets to raise funds to pay off
NCP-Six debt upon the June 30, 2001 credit facility maturity date.
FAIRNESS OF THE ADELPHIA TRANSACTION (SEE PAGE __)
Regardless of whether the Proposed Transaction is approved, we believe
that the terms of the Adelphia Transaction are fair to both NCP-Six and its
limited partners. We have based our determination as to the fairness of the
Adelphia Transaction on the following material factors, each of which are
described in greater detail in this proxy statement:
- the form and amount of consideration offered by Adelphia for the
Bennettsville, South Carolina operating system;
- two independent appraisals prepared by Daniels & Associates and
by Communications Equity Associates, which were used in part in
evaluating the offers received in the third-party bid
solicitation process used to secure offers for NCP-Six's assets;
- the third-party bid solicitation process undertaken by NCP-Six
to obtain bids from third parties for the purchase of the assets
of NCP-Six, which bids were used in part in the determination of
the fair market value of the assets and in evaluating the
Adelphia Transaction price; and
- the conclusions reached in the fairness opinion rendered by
Houlihan Lokey Howard & Zukin Financial Advisors, Inc.
("Houlihan Lokey"), following their evaluation and analysis of
the consideration to be received separately in the Adelphia
Transaction, and the Proposed Transaction.
FAIRNESS OF THE PROPOSED TRANSACTION (SEE PAGE __)
We also believe the terms of the Proposed Transaction are fair as a
whole to NCP-Six and to you. We have based our determination as to the fairness
of the Proposed Transaction on the following material factors, each of which are
described in greater detail in this proxy statement:
- the form and amount of consideration offered to you as a result
of the Proposed Transaction;
- the two independent appraisals prepared by Daniels & Associates
and by Communications Equity Associates, which were used in part
in evaluating the offers received in the third-party bid
solicitation process and the Proposed Transaction price for the
assets;
- the third-party bid solicitation process undertaken by NCP-Six
to obtain bids from third parties for the purchase of the assets
of NCP-Six, which bids were used in part in the determination of
the fair market value of the assets and in evaluating the
Proposed Transaction price; and
- the conclusions reached in the fairness opinion rendered by
Houlihan Lokey, following their evaluation and analysis of the
consideration to be received separately in the Adelphia
Transaction, and the Proposed Transaction.
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In addition, under the terms of the NCP-Six Partnership Agreement, you
have the opportunity to vote to "DISAPPROVE" the Proposed Transaction if you
disagree with the Proposed Transaction. Before the Proposed Transaction can be
consummated, Proposed Amendment No. 2 must be approved by limited partners
holding a majority in interest of the outstanding units of NCP-Six. IF YOU DO
NOT APPROVE OF THE PROPOSED TRANSACTION, YOU SHOULD REFRAIN FROM APPROVING
PROPOSED AMENDMENT NO. 2, WHICH IN TURN WILL RESULT IN A VOTE AGAINST THE
PROPOSED TRANSACTION.
OUR RECOMMENDATION (SEE PAGE ___)
BECAUSE THERE IS NO GUARANTEE THAT THE PROPOSED TRANSACTION WILL
ACTUALLY CLOSE EVEN IF IT IS APPROVED, WE RECOMMEND THAT YOU VOTE TO "APPROVE"
PROPOSED AMENDMENT NO. 1, REGARDLESS OF HOW YOU VOTE ON PROPOSED AMENDMENT NO.
2. We have determined that the term of NCP-Six should be extended from its
current expiration date of December 31, 2001 for an additional six years through
December 31, 2007, in order to allow for continued operation of NCP-Six and
sufficient time for future disposition of its assets in the event the Proposed
Transaction does not close by December 31, 2001. If the Adelphia Transaction and
Proposed Transaction are consummated prior to December 31, 2001, the entirety of
the assets of NCP-Six will have been sold and liquidation of the partnership and
winding up of its affairs will be the natural next step to pursue in bringing
the activities of NCP-Six to a close, in which case the term of NCP-Six need not
be extended. If, however, the Proposed Transaction is not consummated prior to
June 30, 2001, NCP-Six's current credit facility matures on June 30, 2001, and
we do not believe it will be extended without first extending the term of
NCP-Six. Furthermore, even if we are successful in extending the term of
NCP-Six's credit facility maturity date, the NCP-Six Partnership Agreement
currently provides that upon expiration of the term of NCP-Six on December 31,
2001, the general partners of NCP-Six are to liquidate the assets of NCP-Six and
wind up its affairs. Either of these events would impose unnecessary time
constraints on the disposition of the assets of NCP-Six which, we believe, may
translate to a lower return on those assets, and a corresponding lower
distribution to the limited partners of NCP-Six upon final dissolution.
Furthermore, WE THEREFORE RECOMMEND THAT YOU VOTE TO "APPROVE" PROPOSED
AMENDMENT NO. 1 WHICH WILL EXTEND THE TERM OF NCP-SIX THROUGH DECEMBER 31, 2007.
Units of limited partnership interest held by us or our affiliates will not be
included in determining whether the requisite approval for Proposed Amendment
No. 1 has been obtained.
AFTER CAREFUL CONSIDERATION OF THE PROPOSED TRANSACTION AND OUR
CONFLICTS OF INTEREST, WE HAVE ALSO DETERMINED THAT THE PROPOSED TRANSACTION IS
IN YOUR BEST INTERESTS. WE BELIEVE THE PROPOSED TRANSACTION IS THE MOST
ATTRACTIVE ALTERNATIVE CURRENTLY AVAILABLE FOR PROVIDING YOU WITH THE
OPPORTUNITY TO LIQUIDATE YOUR INVESTMENT AND OBTAIN A POSITIVE RETURN ON YOUR
INVESTMENT IN NCP-SIX. WE THEREFORE ALSO RECOMMEND THAT YOU VOTE TO "APPROVE"
PROPOSED AMENDMENT NO. 2. Units of limited partnership interest held by us or
our affiliates will not be included in determining whether the requisite
approval for Proposed Amendment No. 2 has been obtained.
CONSEQUENCES OF A DETERMINATION BY THE LIMITED PARTNERS NOT TO APPROVE PROPOSED
AMENDMENT NO. 1 AND PROPOSED AMENDMENT NO. 2
If a majority in interest of the limited partners does not approve the
Proposed Transaction, or if the requisite approval is obtained but the Proposed
Transaction nevertheless does not close, NCP-Six will continue to operate as a
separate legal entity and will continue to own and operate those of its assets
remaining after consummation of the Adelphia Transaction. We are unable to
determine whether the future fair market value of those remaining 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. You should also be
aware that the current term of the partnership will expire on December 31, 2001,
pursuant to the NCP-Six Partnership Agreement, unless Proposed Amendment No. 1
is approved. As a result, because it is possible that the Proposed Transaction
may not close, we hereby solicit limited partners to vote to approve Proposed
Amendment No. 1 to extend the term of NCP-Six which would allow for continuation
of NCP-Six through December 31, 2007. If Proposed Amendment No. 1 fails to
receive the requisite approval, we do not believe NCP-Six will be able to extend
its existing operating credit facility beyond June 30, 2001, the date to which
NCP-Six's lenders have agreed to extend the term of the current credit facility.
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Furthermore, the term of NCP-Six will expire on December 31, 2001. These two
events will require NCP-Six to find another purchaser for its assets in order to
generate sufficient cash to pay off its existing credit facility. It is likely
that the sale of those assets will be required to be made under significant time
constraints that could have material negative affects on the purchase price
obtained for those assets. We therefore recommend extending the term of NCP-Six
for an additional six-year period even if you approve of the Proposed
Transaction, so that we are in a position to negotiate an extension of NCP-Six's
credit facility in the event the Proposed Transaction is not consummated prior
to June 30, 2001.
APPRAISALS (SEE PAGE __)
Recognizing that the end of the term of NCP-Six was growing near, in the
second quarter of 1999 we retained the services of two internationally
recognized, independent appraisal firms to conduct appraisals on the assets
owned by NCP-Six as we evaluated available alternatives for NCP-Six. These two
firms were:
- Daniels & Associates, L.P., of Denver, Colorado; and
- Communications Equity Associates, of Berwyn, Pennsylvania.
Both Daniels & Associates and Communications Equity Associates are
recognized internationally for their expertise in the appraisal of cable
television systems and other media-related businesses. Each firm appraised the
assets with a valuation date as of July 1, 1999. As of the date of their
appraisal, Daniels & Associates appraised the fair market value of the entirety
of NCP-Six's assets at $73.3 million. As of that same date, Communications
Equity Associates appraised the fair market value of those assets at $74.6
million. These appraisals have been used as a benchmark in evaluating the
subsequent offers received in the third-party bid solicitation process further
described in this proxy statement.
THIRD-PARTY BID PROCESS (SEE PAGE ____)
In connection with the Proposed Transaction, we also retained Daniels &
Associates on two separate occasions to solicit bids from third parties for the
purchase of NCP-Six's assets. We believed that, although the appraisals
represented a measure of the value of the assets, the better reflection of fair
market value of the assets was the price that an unaffiliated third party would
be willing to pay for the assets.
During the first bid solicitation in July 1999, we received four offers
from unrelated third parties for the purchase of all or portions of NCP-Six's
assets. Two of the offers were to purchase all of the assets. One offer proposed
to purchase all of the assets for $70.4 million, and the other offer proposed to
purchase all of the assets for $76 million. The remaining two offers proposed to
purchase only portions of the assets. By the end of September, 2000, we rejected
all these offers as not in the best interests of NCP-Six or you for reasons
further discussed in this proxy statement under the section entitled "CHRONOLOGY
OF EVENTS LEADING UP TO PROPOSED TRANSACTION" (commencing on page ___).
After the first bid solicitation, Northland offered to purchase the
entirety of the assets of NCP-Six for a purchase price of $76,000,000, which was
an amount equal to the highest offer made by third parties in the first bid
solicitation for all of the assets of NCP-Six. We also believe that Northland's
offer was more in line with the interests of the limited partners of NCP-Six
because it did not include some of the terms we felt were onerous in the other
$76,000,000 bid. In particular, the other $76,000,000 bid contained a liquidated
penalty clause in the event the transaction was not consummated due to failure
of the limited partners to approve that transaction. That liquidated penalty
clause called for the payment of the greater of (i) $3,800,000 or (ii) fifty
percent (50%) of the difference between the actual sale price for those assets
and the $76,000,000 bid. We did not feel that such a break-up fee was
appropriate, for reasons including that we did not want the limited partners of
NCP-Six to feel compelled to approve that transaction simply to avoid subjecting
NCP-Six to the break-up fee. As we were preparing a proxy statement to submit
Northland's initial offer to you for approval, Northland concluded that it was
unable to secure acceptable financing to consummate their purchase of the
entirety of the assets of NCP-Six for
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<PAGE> 16
$76,000,000. Northland, therefore, terminated its offer pursuant to its
financing contingency, and the proposed proxy statement was withdrawn. We then
retained Daniels to assist with a second bid solicitation in June 2000.
The second bid solicitation was conducted by Daniels & Associates using
a sealed bid process that precluded any third party bidders, including
Northland, from knowing the amount of other parties' offers until all offers
were received. Pursuant to the procedures established by Daniels & Associates
for the second bid solicitation process, all interested parties were to submit
their bid to an independent third party law firm, Hubbard & Johnson, PC. All
bids were then held by Hubbard & Johnson in confidence until expiration of the
deadline for submitting bids. All bids were then opened at the same time by a
member of the Hubbard & Johnson law firm in the presence of a representative of
Daniels & Associates. No interested party, including Northland, was apprised of
the nature of any bids received in the second bid solicitation process until all
bids were received. The second bid solicitation procedure further required that
any bidders submitting offers within two percent of the top offer for any
particular operating group of assets of NCP-Six would be invited to participate
in a second round bid. Because Adelphia and Northland's respective bids for the
Bennettsville, South Carolina operating group were within two percent of one
another, they were both invited to submit a second bid for the Bennettsville,
South Carolina operating group. In its second bid, Adelphia materially exceeded
Northland's bid for the Bennettsville, South Carolina operating group, while
Northland confirmed its bid for the remaining assets of NCP-Six. Adelphia's
final bid for the Bennettsville operating group was $8,388,000, while the
valuation of Northland's offer for the remaining assets of NCP-Six was
$62,250,000, of which $9,875,000 is to be paid pursuant to a promissory note at
six and one-half percent interest payable in two equal installments on the first
and second anniversaries of the closing of the Proposed Transaction. Northland's
current offer continues to be subject to financing.
HOULIHAN LOKEY FAIRNESS OPINION
In connection with the Proposed Transaction and the Adelphia
Transaction, we also retained Houlihan Lokey to review each of the transactions
and provide two separate fairness opinions as to the consideration to be
received by the limited partners of NCP-Six in both the Adelphia Transaction and
the Proposed Transaction. Those fairness opinions were issued by Houlihan Lokey
as of December __, 2000, and are attached hereto as Exhibits J and K,
respectively. Subject to and based upon the considerations referred to in the
Houlihan Lokey opinions, as stated in those opinions, Houlihan Lokey has
concluded that the consideration to be received by NCP-Six in connection with
both the Proposed Transaction, and the Adelphia Transaction, is fair to NCP-Six
from a financial point of view. WE ENCOURAGE YOU TO READ THESE OPINIONS IN THEIR
ENTIRETY. THESE OPINIONS ARE DIRECTED TO THE MANAGING GENERAL PARTNER AND THE
ADMINISTRATIVE GENERAL PARTNER OF NCP-SIX AND ARE NOT RECOMMENDATIONS TO THE
LIMITED PARTNERS WITH RESPECT TO ANY OF THE PROPOSALS. THE OPINIONS SPEAK ONLY
AS OF THEIR RESPECTIVE DATES AND HOULIHAN LOKEY IS UNDER NO OBLIGATION TO
CONFIRM EITHER OPINION AS OF A LATER DATE. FURTHERMORE, THE MANAGING GENERAL
PARTNER AND THE ADMINISTRATIVE GENERAL PARTNER MAY NOT NECESSARILY REQUEST THAT
HOULIHAN LOKEY CONFIRM ITS OPINIONS AT A LATER date. See "HOULIHAN LOKEY
FAIRNESS OPINION" on page __.
SPECIAL FACTORS PERTAINING TO THE PROPOSED TRANSACTION (SEE PAGE ____)
The following is a summary of some of the potential disadvantages,
adverse consequences and other factors of the Proposed Transaction of which you
should be aware. This is only a summary and you should also carefully consider
the more detailed discussion in the section entitled "SPECIAL FACTORS" contained
in this proxy statement. These factors include, among others, the following:
- The Managing General Partner initiated and participated in the
structuring of the Proposed Transaction and has conflicts of
interest with respect to its completion. If the Proposed
Transaction is approved, the Managing General Partner or its
affiliate will, subject to financing, be acquiring those assets
of NCP-Six remaining after the Adelphia Transaction, and will
continue to operate those remaining systems and will receive
revenue from those systems.
- While we have obtained a fairness opinion for the Proposed
Transaction, we did not retain an unaffiliated third party to
represent your interests in structuring and implementing the
Proposed
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<PAGE> 17
Transaction. Had we retained an unaffiliated third party to
represent your interests, that party may have been able to
negotiate, on your behalf, more favorable terms for the
structure of the Proposed Transaction and for different
consideration to have been distributed to you.
- There are alternatives to the Proposed Transaction. If you
approve the Proposed Transaction, you will effectively preclude
the pursuit of these alternatives.
- If limited partners holding a majority in interest of NCP-Six
approve the Proposed Transaction, you will be bound by this
approval even if you vote to "DISAPPROVE" the Proposed
Transaction or "ABSTAIN" from voting.
- The promissory note that will be issued as part payment of the
Proposed Transaction price will be an unsecured obligation of
Northland and will be junior to substantially all other debt of
Northland. The note will bear interest at a fixed rate that may
be lower than rates on other debt instruments that may be
perceived as having comparable or lower risks than the note.
- Both the Adelphia Transaction and the Proposed Transaction will
be a taxable transaction for federal income tax purposes and may
result in recognition of significant gain to you.
- Closing of the Proposed Transaction is still subject to
Northland securing suitable financing. As a result, even if a
majority of the limited partners of NCP-Six vote in favor of the
Proposed Transaction, it may not close.
CONFLICTS OF INTEREST OF THE MANAGING GENERAL PARTNER (SEE PAGE ___)
The Managing General Partner has faced and will continue to face
substantial conflicts of interest in connection with the Proposed Transaction.
These conflicts of interest arise out of its relationship with NCP-Six and the
proposed agreement with Northland to acquire the assets. The Managing General
Partner participated in the initiation and structuring of the Proposed
Transaction and expects to receive benefits as a result of its completion.
Assuming that the requisite approval of the limited partners is obtained,
NCP-Six will be authorized to enter into an agreement with Northland for the
disposition of the majority of its assets. The terms of the Proposed Transaction
have been set by Northland acting in its capacity as the Managing General
Partner.
The Managing General Partner has faced substantial conflicts of interest
in determining the terms of the proposed disposition of the assets to Northland.
Those conflicts of interest include the following:
- It is possible that the fair market value and net cash flow of
the assets will increase over time, and that following closing
Northland would receive all benefits from any increase in value.
In that case, you could receive a greater return on your
investment if the Proposed Transaction did not take place and
NCP-Six continued to own and operate those assets to be conveyed
to Northland in the Proposed Transaction.
- It is also possible that following closing Northland will
experience a rate of return on its investment in excess of that
experienced by NCP-Six. Northland currently owns other cable
television systems in the vicinity of the assets which are
anticipated to afford Northland the opportunity to achieve
certain economies of scale and which would have the effect of
potentially making the assets more valuable to Northland than
NCP-Six or to a third party;
- The Managing General Partner retained Daniels & Associates and
Communications Equity Associates to appraise the assets of
NCP-Six, and also retained Daniels & Associates to solicit third
party bids for the sale of the assets. The Managing General
Partner has retained Daniels & Associates to act as a broker for
the purchase or sale of assets of NCP-Six in the past. In
addition, Northland and its affiliates have retained both
Daniels & Associates and
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Communications Equity Associates for brokerage or valuation
services in the past involving the purchase or sale of cable
television systems, and can reasonably expect to do so in the
future. Both firms were advised at the time of their engagement
that Northland would be a potential purchaser of the assets. It
is possible that these firms, in an attempt to maintain a
business relationship with Northland or its affiliates, would
undertake their brokerage and valuation services in a manner
that would be beneficial to Northland and its affiliates (and
consequently detrimental to NCP-Six); and
- It is possible that, before or after the Proposed Transaction
closes, Northland may receive an offer from one or more
third-parties which exceeds the value being paid for the assets
in the Proposed Transaction.
CONFLICT OF INTEREST OF THE ADMINISTRATIVE GENERAL PARTNER
In contrast to Northland as the Managing General Partner, the
Administrative General Partner will have no economic or ownership interest in
the assets following the closing of the Proposed Transaction, other than its
right to receive payment with the limited partners of the liquidation proceeds.
Still, both the Managing General Partner and the Administrative General Partner
will receive economic benefits as a result of the disposition of NCP-Six's
assets and subsequent liquidation of the partnership. Under the terms of the
NCP-Six Partnership Agreement, and to the extent the Administrative General
Partner holds any limited partner units, the Administrative General Partner is
entitled to its respective percentage share of any distribution made by NCP-Six.
The Managing General Partner will be receiving its share by an in-kind
distribution of an undivided portion of NCP-Six's assets, and the Administrative
General Partner will receive cash at the same time that distributions are made
to limited partners. The estimated total cash proceeds (excluding interest on
the note) payable to the Administrative General Partner as a result of the
Proposed Transaction is approximately $1,480,000. See "PROJECTED CASH AVAILABLE
FROM LIQUIDATION" for a detailed discussion of the relative distributions
expected to be made to the general partners and the limited partners.
SUMMARY OF THE PROPOSED TRANSACTION (SEE PAGE __)
APPROVAL OF LIMITED PARTNERS TO THE TRANSACTION (SEE PAGE __)
The Proposed Transaction is subject to the approval of holders of a
majority in interest of the units of limited partnership (excluding the 30 units
held by us or our affiliates), and is also subject to the prior closing of the
Adelphia Transaction. Although Northland presently intends to consummate the
Proposed Transaction if it is approved by the limited partners, it is under no
obligation to do so unless other conditions to closing the Proposed Transaction,
including securing acceptable financing, are satisfied. If the limited partners
approve the Proposed Transaction and closing does not occur within 180 days of
the special meeting, or if at any time prior to closing we determine that
cumulative distributions to limited partners may be reduced by more than
$622,500 from the proposed estimated distributions (an amount that represents
one percent of the total Proposed Transaction price), NCP-Six will not sell the
assets to Northland, any affiliate of Northland or any third party without again
obtaining approval of the limited partners. If the requisite approval of limited
partners is not obtained, NCP-Six will continue to own and operate those assets
remaining after the Adelphia Transaction. IF YOU DO NOT APPROVE OF THE PROPOSED
TRANSACTION, YOU SHOULD VOTE TO "DISAPPROVE" PROPOSED AMENDMENT NO. 2.
PAYMENT OF THE PURCHASE PRICE; PROMISSORY NOTE (SEE PAGE __)
The total value of the assets proposed to be sold and distributed to
Northland is $62,250,000. If closing occurs, we will set aside appropriate
amounts for payment of liabilities not assumed by Northland in the transaction
and other partnership obligations. This includes an aggregate amount of $750,000
to be funded from cash paid by Northland at closing, which will be retained by
NCP-Six in a liquidating trust to secure any contingent or unknown liabilities
and indemnification obligations of NCP-Six. At closing, Northland will assume
some partnership liabilities, which will result in a downward adjustment to the
purchase price, and NCP-Six will
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make an in-kind distribution to Northland of assets equal in value to
Northland's partnership interest in NCP-Six. Northland will pay for the
remaining assets with cash and a $9,875,000 promissory note. It is currently
estimated that the total amount of cash payable by Northland will be
approximately $45,900,000. The total value of the cash and promissory note
payable by Northland and the in-kind distribution to Northland will be
$62,250,000, as adjusted for assumed liabilities and other matters. See
"PROJECTED CASH AVAILABLE FROM LIQUIDATION." At closing, Northland will deliver
to NCP-Six a promissory note in the principal amount of $9,875,000, and will pay
the balance of the transaction price in cash.
The promissory note will be due and payable in two equal installments
(the first installment on the first anniversary of closing the Proposed
Transaction and the second installment on the second anniversary of closing the
Proposed Transaction) and will be held by a liquidating trust that we will
establish. The form of promissory note to be delivered by Northland is attached
to this proxy statement as Exhibit G. The note will bear interest at a fixed
rate per annum of six and one-half percent, will be full recourse and unsecured.
The maker on the note will be Northland Communications Corporation ("NCC"), and
the note will be subordinated to NCC's senior debt, of which NCC currently has
senior debt in the aggregate amount of $1,600,000. NCC expects that it will
assign its rights under the asset purchase agreement to an affiliate of NCC to
consummate the Proposed Transaction. In such event, NCC expects that such
affiliate will incur bank debt in order to finance the acquisition, and NCC may
be required to be a guarantor on such debt. NCC's obligations under any such
guarantee would be senior to the note. In addition, the note would be
subordinated to any other senior debt that may be incurred in the future by NCC.
LIQUIDATION OF THE PARTNERSHIP; DISTRIBUTIONS TO LIMITED PARTNERS (SEE
PAGE ___)
Within 120 days after closing the Proposed Transaction, even if the term
of NCP-Six is extended pursuant to Proposed Amendment No. 1, NCP-Six will be
dissolved and liquidated and all available cash will be distributed to the
limited partners and the administrative general partner, in accordance with the
NCP-Six Partnership Agreement and amended by Proposed Amendment No. 2. Following
closing, distributions to limited partners will be made in three installments.
See "PROJECTED CASH AVAILABLE FROM LIQUIDATION" on page ___. The initial
distribution of approximately $710 per partnership unit, or $1,421 per $1,000
investment, will be made within 120 days after the date of closing the Proposed
Transaction. We believe that this initial distribution will occur in June, 2001.
The second distribution to the limited partners will be made one year after
closing the Proposed Transaction upon payment of the first installment under the
Northland promissory note and the release of $1,000,000 to be held for one year
in a hold-back escrow pursuant to the terms of the Adelphia Transaction purchase
agreement. Assuming that closing occurs in June, 2001, we expect the second
distribution to the limited partners will be approximately $191 per partnership
unit, or $382 per $1,000 investment, plus interest of approximately $20 per
partnership unit, or $40 per $1,000 investment. The third, and final,
distribution to the limited partners will be made two years after closing the
Proposed Transaction upon payment of the second installment under the Northland
promissory note. Assuming the closing occurs in June, 2001, we expect the third
distribution to the limited partners will be approximately $159 per partnership
unit, or $318 per $1,000 investment, plus interest of approximately $11 per
partnership unit or $22 per $1,000 investment. The following table summarizes
the estimated distributions -- for more detail see "PROJECTED CASH AVAILABLE
FROM LIQUIDATION."
<TABLE>
<CAPTION>
INITIAL
DISTRIBUTION
120 DAYS AFTER ONE YEAR AFTER TWO YEARS AFTER
ANTICIPATED CLOSING THE PROPOSED NON-RESIDENT CLOSING THE CLOSING THE PROPOSED
DISTRIBUTIONS TRANSACTION TAX PROPOSED TRANSACTION TRANSACTION TOTAL
-------------- -------------------- ------------ -------------------- --------------------- ------
Principal and
Escrowed Funds Interest Principal Interest
-------------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
- Per $500
partnership
unit $ 710 $ 58 $ 191 $ 20 $ 159 $ 11 $1,277
- Per $1,000
investment $1,421 $ 115 $ 382 $ 40 $ 318 $ 22 $2,553
</TABLE>
After closing the Proposed Transaction, we estimate the cumulative total
amount of cash distributed to limited partners over the life of NCP-Six will be
approximately $1,277 per partnership unit (or $2,553 per $1,000 investment).
This cumulative estimate includes:
-9-
<PAGE> 20
- prior cash distributions to date of $128 per partnership unit
(or $255 per $1,000 investment, plus
- an initial post-closing distribution of $710 per partnership
unit (or $1,421 per $1,000 investment) from the Proposed
Transaction, plus
- the first promissory note installment and Adelphia escrow
distribution of $191 per partnership unit (or $382 per $1,000
investment), plus interest of $20 per partnership unit (or $40
per $1,000 investment), plus
- the second promissory note installment distribution of $159 per
partnership unit (or $318 per $1,000 investment), plus interest
of $11 per partnership unit (or $22 per $1,000 investment), and
- a non-resident tax paid on behalf of the limited partners of $58
per partnership unit (or $115 per $1,000 investment).
These estimates take into account the payment of all known or
anticipated liabilities of NCP-Six attributable to the limited partners'
collective interest in NCP-Six (including any liquidation expenses and any
claims against NCP-Six of which we are currently aware). These estimates also
include $750,000 that will be placed in a liquidating trust to secure any
contingent liabilities and indemnification obligations of NCP-Six. See
"DESCRIPTION OF LIQUIDATING TRUST" at page ___, for more details. We currently
intend that this escrow will be maintained until the later of 18 months from
closing the Proposed Transaction or final resolution of any contingent
liabilities that may arise. Upon termination of the liquidating trust, all
remaining funds, if any, will be released by the liquidating trust to be
distributed to limited partners and the administrative general partner pursuant
to the NCP-Six Partnership Agreement and applicable law. If NCP-Six incurs any
unanticipated liabilities or expenses which arise from operations of NCP-Six
prior to or on the date of closing, or from the Adelphia Transaction or the
Proposed Transaction, and which exceed amounts set aside for the payment of
known or anticipated current liabilities or contingent liabilities, these
liabilities and expenses could reduce the amount of cash available for
distribution to you. However, if at any time prior to the closing of the
Proposed Transaction we believe that the amount of cash available for
distribution to the limited partners may be reduced by more than $622,500 from
these estimates (an amount that represents one percent of the total Proposed
Transaction price), the Proposed Transaction will not proceed and closing will
not occur without again obtaining approval of the limited partners.
CONSIDERATION OF ALTERNATIVES AND APPROVAL OF THE ADELPHIA TRANSACTION
In addition to the Proposed Transaction, we considered alternatives,
including the continued management of NCP-Six as currently structured and the
liquidation of NCP-Six through sales of all or portions of the systems remaining
after the closing of the Adelphia Transaction to third-party purchasers. As
described in more detail in this proxy statement, except for the Adelphia
Transaction, we rejected each of the alternative purchase offers in favor of the
Proposed Transaction. We did, however, feel that the terms of the Adelphia
Transaction were favorable to NCP-Six regardless of whether the Proposed
Transaction is ever consummated. We also felt that the price to be paid by
Adelphia for those assets being acquired in the Adelphia Transaction exceeded
both the price Northland was willing to pay for those assets, as well as the
price of any other third-party that was contacted in conjunction with the
applicable bid process. Finally, we have determined that if the Proposed
Transaction is not consummated by the expiration of NCP-Six's current term on
December 31, 2001, that the best alternative for NCP-Six is to still consummate
the Adelphia Transaction in order to raise proceeds to pay down debt, and to
then extend the partnership's life until December 31, 2007, during which time
additional options may be considered.
SUMMARY OF FEDERAL INCOME TAX CONSEQUENCES OF THE TRANSACTION (SEE PAGE ____)
The receipt of cash in both the Adelphia Transaction and the Proposed
Transaction will be taxable for federal income tax purposes and those
transactions may also be a taxable transaction under applicable state, local and
foreign tax laws. Accordingly, you will recognize a gain or loss on the payment
of cash on your limited partnership units to the extent of the difference
between the amount realized and your adjusted tax basis in your
-10-
<PAGE> 21
units. In addition, upon closing of the Proposed Transaction and dissolution of
NCP-Six, any net losses of NCP-Six that were suspended under the passive loss
rules of the Internal Revenue Code may be used to offset income and gain from
the Adelphia Transaction and the Proposed Transaction.
VOTING AT THE SPECIAL MEETING
You are entitled to one vote at the special meeting for each unit of
limited partnership interest in NCP-Six that you own. You will receive notice of
the special meeting and will be entitled to vote at the special meeting only if
you are a holder of record of NCP-Six limited partnership units on the close of
business on December 31, 2000, the record date.
The affirmative vote of limited partners holding a majority of the
outstanding units (excluding an aggregate of 30 units held by us and our
affiliates, which will not be voted) is required to "APPROVE" both: (i) Proposed
Amendment No. 1 (which is required to extend the term of NCP-Six from its
current expiration date of December 31, 2001, until December 31, 2007) and (ii)
the Proposed Transaction and Proposed Amendment No. 2 (which is required to
consummate the Proposed Transaction). If you "ABSTAIN" from voting, it will have
the same effect as a vote to "DISAPPROVE" the proposal, or proposals, for which
you abstain. IF YOU DO NOT APPROVE OF THE PROPOSED TRANSACTION YOU SHOULD VOTE
TO "DISAPPROVE" PROPOSED AMENDMENT NO. 2. SIMILARLY, IF YOU DO NOT APPROVE OF
EXTENDING THE TERM OF NCP-SIX UNTIL DECEMBER 31, 2007, YOU SHOULD VOTE TO
"DISAPPROVE" PROPOSED AMENDMENT NO. 1. NOTWITHSTANDING, EVEN IF YOUR DESIRE IS
TO LIQUIDATE YOUR INVESTMENT IN NCP-SIX AND YOU APPROVE OF THE PROPOSED
TRANSACTION, WE RECOMMEND THAT YOU ALSO VOTE TO APPROVE PROPOSED AMENDMENT NO. 1
TO EXTEND THE TERM OF NCP-SIX. See discussion titled "BACKGROUND AND REASONS FOR
EXTENDING TERM OF NCP-SIX" at page ____.
A proxy card is included with this proxy statement and we are asking you
to complete, date and sign the proxy card and return it in the enclosed envelope
as soon as possible. A proxy card that is properly completed, dated, signed and
returned in time for voting with a vote specified on the proxy will be voted as
requested. If you sign and return your proxy card without indicating a vote, it
will be deemed to be marked to "APPROVE" both (i) Proposed Amendment No. 2
extending the term of NCP-Six until December 31, 2007, and (ii) the Proposed
Transaction and Proposed Amendment No. 2 so as to authorize the proposed
disposition of the assets remaining after the Adelphia Transaction to Northland.
YOU MAY REVOKE YOUR PROXY AT ANY TIME PRIOR TO THE SPECIAL MEETING 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. YOUR ATTENDANCE AT THE SPECIAL MEETING, BY ITSELF, WILL
NOT REVOKE YOUR PROXY.
YOU DO NOT HAVE DISSENTERS' RIGHTS (SEE PAGE __)
You are not entitled to dissenters' or appraisal rights in connection
with the proposed transaction, under either the NCP-Six Partnership Agreement or
Washington law.
SOLICITATION OF PROXIES (SEE PAGE __)
In addition to use of the mail, proxies may be solicited by telephone or
personally by the general partners and any of our directors, officers, partners
and employees. We will not pay any additional compensation to any of these
people for their services in this regard. The expenses of the solicitation will
be borne by NCP-Six.
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE
PRIVATE LITIGATION REFORM ACT OF 1995. STATEMENTS CONTAINED OR
INCORPORATED BY REFERENCE IN THIS DOCUMENT THAT ARE NOT BASED ON
HISTORICAL FACT ARE "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF
THE PRIVATE SECURITIES REFORM ACT OF 1995. FORWARD-LOOKING STATEMENTS
MAY BE IDENTIFIED BY USE OF FORWARD-LOOKING TERMINOLOGY SUCH AS
"BELIEVE",
-11-
<PAGE> 22
"INTENDS", "MAY", "WILL", "EXPECT", "ESTIMATE", "ANTICIPATE",
"CONTINUE", OR SIMILAR TERMS, VARIATIONS OF THOSE TERMS OR THE NEGATIVE
OF THOSE TERMS.
-12-
<PAGE> 23
SUMMARY HISTORICAL FINANCIAL INFORMATION
NCP-Six is providing the following financial information to help you in
your analysis of the Proposed Transaction. You should read the following
financial information in conjunction with the Consolidated Financial Statements
of NCP-Six and related notes, and Management's Discussion and Analysis of
Financial Condition and Results of Operations included in this proxy statement.
The information as of September 30, 1999 and 2000 and for the nine-month periods
ended September 30, 1999 and 2000, is unaudited and reflects all adjustments
that are, in the opinion of NCP-Six, necessary for a fair statement of the
results as of the dates and for the periods presented and is not necessarily
indicative of the operating results for the entire year.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------
1995 1996 1997 1998 1999
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
HISTORICAL STATEMENT OF OPERATIONS
DATA:
Revenues $ 8,611,947 $ 9,262,702 $ 9,644,320 $ 14,746,766 $ 15,005,218
Expenses $ 7,488,670 $ 7,883,536 $ 7,582,824 $ 13,125,628 $ 13,692,895
Operating income $ 1,123,277 $ 1,394,255 $ 2,061,496 $ 1,621,138 $ 1,312,323
Other income (expense) $ (917,104) $ (997,715) $ (845,597) $ (2,990,739) $ (1,213,467)
Net income (loss) $ 206,173 $ 381,451 $ 1,215,899 $ (1,369,601) $ 98,856
Allocation of net income (loss):
General Partners $ 2,062 $ 3,815 $ 12,159 $ (13,696) $ 989
Limited Partners $ 204,111 $ 377,636 $ 1,203,740 $ (1,355,905) $ 97,867
Net income (loss) per limited
partnership unit $ 7 $ 13 $ 40 $ (46) $ 3
Cash distributions per limited
partnership unit (1) $ 10 $ 2.5 $ 0 $ 0 $ 0
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
-----------------------------
1999 2000
------------ ------------
<S> <C> <C>
HISTORICAL STATEMENT OF OPERATIONS (UNAUDITED) (UNAUDITED)
DATA:
Revenues $ 11,207,212 $ 11,369,454
Expenses $ 9,988,668 $ 9,970,289
Operating income $ 1,218,544 $ 1,399,165
Other income (expense) $ (323,794) $ (2,088,999)
Net income (loss) $ 894,750 $ (689,834)
Allocation of net income (loss):
General Partners $ 8,948 $ (6,898)
Limited Partners $ 885,803 $ (682,936)
Net income (loss) per limited
partnership unit $ 30 $ (23)
Cash distributions per limited
partnership unit (1) $ 0 $ 0
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31
--------------------------------------------------------------------------------
1995 1996 1997 1998 1999
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
HISTORICAL BALANCE SHEET DATA:
Total assets $ 14,778,671 $ 13,253,610 $ 13,609,386 $ 32,971,969 $ 30,603,533
Total liabilities $ 15,196,729 $ 13,365,510 $ 12,513,387 $ 33,249,571 $ 30,786,279
Partners' capital (deficit):
General Partners $ (131,356) $ (128,294) $ (116,135) $ (129,831) $ (128,842)
Limited Partners $ (286,702) $ 16,394 $ 1,212,134 $ (147,771) $ (53,904)
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30
-----------------------------
1999 2000
------------ ------------
<S> <C> <C>
HISTORICAL BALANCE SHEET DATA: (UNAUDITED) (UNAUDITED)
Total assets $ 31,017,181 $ 29,810,270
Total liabilities $ 30,404,033 $ 30,682,850
Partners' capital (deficit):
General Partners $ (120,884) $ (135,740)
Limited Partners $ 734,032 $ (736,840)
</TABLE>
----------
(1) Total cash distributions per limited partnership unit as of September
30, 2000 are $127.50 per partnership unit (or $255 per $1,000
investment).
SPECIAL FACTORS
(PERTAINING TO THE PROPOSED TRANSACTION)
A number of special factors apply to the Proposed Transaction. You
should consider the following factors carefully in evaluating the Proposed
Transaction. You are also urged to read all of this proxy statement and all
exhibits carefully in evaluating the Proposed Transaction and NCP-Six and its
business before completing the accompanying proxy card.
FACTORS RELATED TO THE PROPOSED TRANSACTION
ALTHOUGH WE BELIEVE THAT THE TOTAL PRICE TO BE RECEIVED BY NCP-SIX FOR
THOSE ASSETS REMAINING AFTER THE ADELPHIA TRANSACTION REPRESENTS FAIR
VALUE FOR THOSE ASSETS, THOSE ASSETS MAY INCREASE IN VALUE PRIOR TO
CLOSING OR AFTER THE PROPOSED TRANSACTION CLOSES.
We believe that the Proposed Transaction is fair to you and we have
taken steps to structure the Proposed Transaction in a manner which we believe
provides you with fair value for those assets, through the two
-13-
<PAGE> 24
independent appraisals and the third-party bid process, as well as the fairness
opinion of Houlihan Lokey providing some confirmation as to the fairness of the
consideration to be received from the Proposed Transaction. Although we believe
that the total transaction price offered by Northland represents the fair value
of those assets covered by the Proposed Transaction, we cannot predict whether
the fair value of those systems will increase prior to closing or after the
Proposed Transaction closes. You should be aware that we do not intend to obtain
an updated appraisal from either Daniels & Associates or Communications Equity
Associates, nor do we intend to resolicit third-party bids prior to closing. As
a result, assuming the Proposed Transaction closes in June 2001, at closing
those two appraisals will be more than 23 months out of date and the closing
will take place almost 10 months after receipt of the most recent third-party
bid. We are choosing not to update the appraisals because we relied on the
appraisals primarily as a benchmark to evaluate the offers received in the
third-party bid solicitation process and because we have since obtained a more
recent fairness opinion endorsing the price to be paid in the Proposed
Transaction. That fairness opinion is dated as of December ___, 2000. We also
believe that the better measure of the fair value of the assets is the price
that an unrelated third party would be willing to pay, and accordingly we have
relied more heavily on the third-party solicitation process in establishing fair
value. We are not resoliciting third-party offers prior to closing because we
believe the Proposed Transaction value is fair to you and because a
resolicitation would require additional expense and would further delay closing.
We are aware that there has been recent consolidation activity in the cable
television industry generally; however, we cannot predict whether the market for
small, rural cable television systems such as those owned and operated by
NCP-Six will be impacted by this activity. In the event that the Proposed
Transaction is approved and the fair value increases prior to closing, Northland
would be acquiring the assets at a price lower than the then-current market
value.
In determining the value of the systems to be included in the Proposed
Transaction, we did not consider current market prices or historical market
prices for limited partnership units in NCP-Six due to the absence of an
established public market in which units of limited partnership interests are
being traded. Although we are aware of limited trading activity among the
limited partners, including recent tender offer activity by unaffiliated third
parties, we believe the purchase prices proposed in the tender offer
transactions are less than the fair value for the units. Furthermore, while we
relied in part on the appraisals in evaluating the fair value for the assets, we
did not receive or review the actual financial forecasts prepared by either
appraiser in arriving at its valuation. We did not receive or review any such
forecasts because we believed it is important to maintain the independence of
the appraisal process and did not want to influence either appraiser. We also
did not actively participate in the financial evaluation performed by Houlihan
Lokey when preparing their favorable fairness opinion of the Proposed
Transaction, but we met with them to review their findings and opinion.
The fair market value and the net cash flow of the systems to be
included in the Proposed Transaction may increase over time and the assets may
appreciate in value in the future. If closing of the Proposed Transaction
occurs, Northland would receive all the benefit of any appreciation. We cannot
evaluate or quantify whether or to what extent any future appreciation may
occur. It is possible that you would receive a greater return on your investment
if NCP-Six continued to own and operate those systems, instead of consummating
the Proposed Transaction. Similarly, if Northland acquires those systems,
Northland may experience a rate of return on its investment in excess of that
experienced by NCP-Six. Any increase in value or cash flow will be affected by
and partially off-set by competition from providers of cable television,
Internet, and other services, as well as the costs of future system upgrades
required to remain competitive or to offer additional services to customers of
the systems.
THE MANAGING GENERAL PARTNER HAS CONFLICTS OF INTEREST IN THE PROPOSED
TRANSACTION.
The Managing General Partner initiated and participated in the
structuring of the Proposed Transaction and has conflicts of interest with
respect to its completion. Northland, the managing general partner of NCP-Six,
or its affiliate will be acquiring those assets that are not included in the
Adelphia Transaction from NCP-Six and will own and continue to operate those
cable television systems following closing in the same way as currently being
operated. Northland does not currently intend to liquidate any of the assets it
acquires. Northland will be the sole owner of the systems and will receive all
operating income from the systems. The Managing General Partner will also
receive economic benefits as a result of the disposition of NCP-Six's assets and
subsequent liquidation of the partnership. Under the terms of the NCP-Six
Partnership Agreement, as the Managing General Partner, and to the extent
Northland holds any limited partner units, Northland is entitled to its
respective
-14-
<PAGE> 25
percentage share of any distribution made by NCP-Six. The Managing General
Partner will be receiving its share by an in-kind distribution of an undivided
portion of NCP-Six's assets, at the same time that initial cash distributions
are made to the Administrative General Partner and the limited partners. See
"PROJECTED CASH AVAILABLE FROM LIQUIDATION" for a detailed discussion of the
relative distributions expected to be made to the general partners and the
limited partners. In addition, the Managing General Partner and certain
affiliates of NCP-Six are entitled to receive payment of management and other
fees from NCP-Six for its services and for cost reimbursements prior to closing
of the Proposed Transaction. The estimated amounts payable to the Managing
General Partner and affiliates as of September 30, 2000 is $70,313. In addition,
it is estimated that the in-kind distribution to be received by the Managing
General Partner upon consummation of the Proposed Transaction will equal
approximately $6,031,000.
THE ADMINISTRATIVE GENERAL PARTNER HAS CONFLICTS OF INTEREST IN THE
PROPOSED TRANSACTION.
Unlike Northland, the Administrative General Partner will have no
economic or ownership interest in the assets following the closing of the
Proposed Transaction, other than its right to receive payment with the limited
partners of the liquidation proceeds. Still, both the Managing General Partner
and the Administrative General Partner will receive economic benefits as a
result of the disposition of NCP-Six's assets and subsequent liquidation of the
partnership. Under the terms of the NCP-Six Partnership Agreement, and to the
extent the Administrative General Partner holds any limited partner units, the
Administrative General Partner is entitled to its respective percentage share of
any distribution made by NCP-Six. The Managing General Partner will be receiving
its share by an in-kind distribution of an undivided portion of NCP-Six's
assets, and the Administrative General Partner will receive cash at the same
time that distributions are made to limited partners. The estimated total cash
proceeds (excluding interest on the note) payable to the Administrative General
Partner as a result of the Proposed Transaction is approximately $1,480,000. See
"PROJECTED CASH AVAILABLE FROM LIQUIDATION" for a detailed discussion of the
relative distributions expected to be made to the general partners and the
limited partners.
WHILE WE DID OBTAIN A FAIRNESS OPINION WITH RESPECT TO THE PROPOSED
TRANSACTION, WE DID NOT RETAIN AN UNAFFILIATED, INDEPENDENT THIRD PARTY
TO REPRESENT YOUR INTERESTS IN THE STRUCTURING OF THE PROPOSED
TRANSACTION.
In implementing and structuring the Proposed Transaction, we did not
retain an unaffiliated independent third party to represent the interests of the
limited partners. Had we retained an independent third party to represent your
interests, that party may have been able to negotiate, on your behalf, a more
favorable transaction structure or more favorable terms. However, we believe
that the procedural steps taken and to be taken, as described in "FAIRNESS OF
THE TRANSACTION -- Our Belief as to Fairness" below, and the confirmation
provided by the fairness opinion we have obtained constitute sufficient
safeguards for your interests. We have commissioned two independent appraisals
of the systems, undertaken an extensive sealed bid third-party bid solicitation
process, secured a favorable fairness opinion and are submitting the Proposed
Transaction to you for your approval. We believe that the steps taken and to be
taken constitute sufficient safeguards for your interests with respect to the
Proposed Transaction.
THE PROPOSED TRANSACTION HAS NOT BEEN SOLICITED BY LIMITED PARTNERS.
Although we believe that limited partners are interested in a means of
liquidating their investment in NCP-Six, no limited partner in NCP-Six has
solicited the sale or other disposition of the partnership's assets. We have not
taken any survey of the limited partners to determine their desire to liquidate
their investment. However, based on unsolicited comments and questions from
unaffiliated limited partners with respect to a liquidation of their investment,
the lack of a public market for the units of limited partnership and the 14-year
duration of NCP-Six, we believe that limited partners may welcome the
opportunity to liquidate their investment. We have not solicited or received
comments from any limited partners regarding any alternative investment
strategies or liquidation proposals.
-15-
<PAGE> 26
YOU DO NOT HAVE ANY DISSENTERS' OR APPRAISAL RIGHTS IN THIS TRANSACTION.
You are not entitled to dissenters' appraisal rights under either the
NCP-Six Partnership Agreement or Washington law with respect to the Proposed
Transaction, or the subsequent liquidation of NCP-Six. We will not voluntarily
afford you with any similar rights in connection with the Proposed Transaction.
Therefore, even if you disagree with the value of the assets being sold and you
vote to "DISAPPROVE" the Proposed Transaction but the Proposed Transaction is
nevertheless approved, you will not be able to demand that the assets be
re-appraised to determine fair value for your units.
THERE ARE POTENTIAL ALTERNATIVES TO THE PROPOSED TRANSACTION; HOWEVER,
IF THE PROPOSED TRANSACTION IS APPROVED, THIS WILL EFFECTIVELY PRECLUDE
ANY OF THESE ALTERNATIVES BEING PURSUED.
Alternatives to the Proposed Transaction include, among others, (1)
continued management of NCP-Six as currently operated, (2) selling some or all
of the assets to an independent third-party in one or more transactions similar
to the Adelphia Transaction and distributing resulting proceeds to the general
and limited partners as received, subject to operating capital needs and debt
service requirements, and (3) liquidating NCP-Six through sales of entire
systems or individual properties. We considered these alternatives in
structuring the Proposed Transaction and determined that the current Proposed
Transaction with Northland provides the best method for you to obtain liquidity
for your investment and a positive return on your investment over the life of
the partnership. As described in greater detail below at "PROPOSED CASH
AVAILABLE FROM LIQUIDATION", the estimated distributions to limited partners
from closing the Proposed Transaction will be approximately $1,149 per $500
partnership unit, and approximately $1,277 in total distributions over the life
of the partnership, including an aggregate interest payment of approximately $31
per $500 unit. Still, completion of the Proposed Transaction effectively
precludes NCP-Six from further exploring or pursuing any of the other
alternatives listed above.
IF A MAJORITY OF THE HOLDERS OF LIMITED PARTNERSHIP UNITS APPROVE THE
PROPOSED TRANSACTION, YOU WILL BE BOUND BY THAT DECISION, EVEN IF YOU
VOTE TO "DISAPPROVE" THE PROPOSED TRANSACTION.
Under NCP-Six's Partnership Agreement and Washington law, NCP-Six may
proceed with the Proposed Transaction if its general partners and a majority in
interest of its limited partners approve the Proposed Transaction and Proposed
Amendment No. 2. If this majority approval is obtained, you will be bound by the
decision of the majority, even if you vote to disapprove Proposed Amendment No.
2 or abstain from voting.
THE PROMISSORY NOTE THAT WILL BE ISSUED FROM NORTHLAND AS PARTIAL
PAYMENT OF THE TRANSACTION PRICE WILL BE AN UNSECURED OBLIGATION OF
NORTHLAND.
Assuming completion of the Proposed Transaction, Northland will issue a
promissory note for $9,875,000 as partial payment for the transaction price. The
promissory note will be payable in two equal installments on the first and
second anniversary of closing the Proposed Transaction and will bear interest at
a fixed rate per annum of six and one-half percent. The note, which will be
prepayable at any time, will be an unsecured obligation of Northland and will be
subordinated to Northland's senior debt. Northland currently has senior debt in
the approximate amount of $1,600,000. Northland expects that it will assign its
rights under the asset purchase agreement to an affiliate of Northland to
consummate the proposed Transaction. In such event, Northland expects that such
affiliate will incur bank debt in order to finance the acquisition, and
Northland may be required to be a guarantor on such debt. Northland's
obligations under any such guarantee would be senior to the note. In addition,
the note would be subordinated to any other senior debt that may be incurred in
the future by Northland.
The note will bear interest at a fixed rate that may be lower than rates
on other debt instruments that may be perceived as having comparable or lower
risks than the note. The interest rate on the note is below the prime rate in
effect as of the date of this proxy statement. In addition, there is no
guarantee that Northland will not default on the note. The interest rate on the
note is not intended to represent the 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 Proposed
Transaction purchase been paid all in cash at closing.
-16-
<PAGE> 27
Instead, the fixed six and one-half percent interest rate of the note reflects
the economic terms under which Northland is willing to undertake the Proposed
Transaction.
THE AMOUNT AND TIMING OF FINAL DISTRIBUTIONS TO LIMITED PARTNERS MAY BE
AFFECTED BY UNANTICIPATED OR CONTINGENT LIABILITIES, INCLUDING ANY
POTENTIAL LITIGATION ARISING OUT OF THE ADELPHIA TRANSACTION AND/OR THE
PROPOSED TRANSACTION.
We have included in the estimate of cumulative cash distributions to
limited partners from the Adelphia Transaction and the Proposed Transaction
payment of all known or anticipated liabilities of NCP-Six, including any
liquidation expense and any claims against NCP-Six of which we are currently
aware. We have also provided that an aggregate of $750,000 from the cash
proceeds will be retained by NCP-Six in a liquidating trust to secure any
contingent or unknown liabilities and indemnification obligations of NCP-Six. To
the extent that unanticipated liabilities or expenses arise which exceed the
amounts set aside, those liabilities could reduce the amount of cash available
for distribution to you. In addition, to the extent any such liabilities or
expenses continue post-closing, any final distribution to you of these amounts
held back may be delayed pending final resolution of the liabilities. You should
be aware that the NCP-Six Partnership Agreement provides that NCP-Six will
indemnify the general partners from liabilities in connection with NCP-Six, to
the extent permitted by the NCP-Six Partnership Agreement. You should also be
aware that Northland serves, and has served, as managing general partner of
other limited partnerships involved in the cable television industry. In June
1998, the limited partners of one such limited partnership, Northland Cable
Properties Five Limited Partnership, voted by a 74% majority vote to approve the
disposition of the partnership assets to Northland and the subsequent
liquidation of that partnership. A class action lawsuit was subsequently filed
against that partnership and its general partners alleging various claims,
including that the purchase price paid did not represent fair value and breaches
of fiduciary duties in the transaction. The court in that matter orally ruled
that the purchase price paid by Northland in that transaction was fair and
reasonable, but that the 6% interest rate on the promissory note issued as
partial payment of the purchase price, was too low. The parties to that action
ultimately settled and dismissed the lawsuit after trial. If the limited
partners of NCP-Six vote to approve Proposed Amendment No. 2 and the Proposed
Transaction closes, and if a similar lawsuit is brought against NCP-Six and its
general partners, such a lawsuit will have the effect of delaying payment of or
reducing the amount of cumulative distributions to you. Furthermore, such delay
may last through termination of the current term of NCP-Six, which is presently
scheduled to expire on December 31, 2001, unless extended until December 31,
2007 upon approval of Proposed Amendment No. 1.
THE PROPOSED TRANSACTION WILL BE A TAXABLE EVENT FOR U.S. FEDERAL INCOME
TAX PURPOSES. THIS MAY RESULT IN SUBSTANTIAL RECOGNITION OF GAIN TO YOU.
The receipt of cash in the Proposed transaction will be a taxable
transaction for federal income tax purposes and may also be a taxable
transaction under applicable state, local and foreign tax laws. Accordingly, you
will recognize a gain or loss on the payment of cash on your limited partnership
units to the extent of the difference between the amount realized and your
adjusted tax basis in your units. In addition, upon closing of the Proposed
Transaction and dissolution of NCP-Six, any net losses of NCP-Six that were
suspended under the passive loss rules of the Internal Revenue Code may be used
to offset income and gain in the transaction.
EVEN IF THE REQUISITE MAJORITY OF THE LIMITED PARTNERS OF NCP-SIX VOTE
TO APPROVE THE PROPOSED TRANSACTION, THE PROPOSED TRANSACTION MAY NOT
CLOSE DUE TO A LACK OF REQUIRED FINANCING.
Northland's offer to consummate the Proposed Transaction is subject to
Northland obtaining financing on terms satisfactory to Northland. As of the date
of this proxy statement, Northland has yet to enter into a binding commitment
for financing, or to otherwise waive its financing contingency. Therefore, even
if the requisite majority of the limited partners of NCP-Six vote to APPROVE the
Proposed Transaction, the Proposed Transaction may not close due to a lack of
required financing.
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<PAGE> 28
FACTORS RELATED TO NCP-SIX'S BUSINESS AND THE CABLE TELEVISION INDUSTRY
NCP-SIX OPERATES IN A VERY COMPETITIVE BUSINESS ENVIRONMENT, WHICH CAN
AFFECT ITS BUSINESS AND OPERATIONS.
The industry in which NCP-Six operates is highly competitive, and
NCP-Six faces competition from many sources. In some instances NCP-Six competes
against companies with fewer regulatory burdens, easier access to financing,
greater personnel resources, greater brand name recognition and long-standing
relationships with regulatory authorities. Mergers, joint ventures and alliances
among cable television operators, regional telephone companies, long distance
telephone service providers, electric utilities, local exchange carriers (which
are local phone companies that provide local area telephone services and access
to long distance services to customers), providers of cellular and other
wireless communications services and others may result in providers capable of
offering cable television and other telecommunications services in direct
competition with NCP-Six.
NCP-Six also faces competition from companies distributing television
broadcast signals without a subscription fee and from other communications and
entertainment media, including conventional off-air television and radio
broadcasting services, direct-to-home satellite broadcasting services,
newspapers, movie theaters, the Internet, live sports events and home video
products. Federal legislation was recently passed that will give direct-to-home
satellite broadcasting services the authority to transmit local television
broadcast signals to their subscribers. We believe this may enhance the
attractiveness of satellite broadcasting services and could make program
offerings more competitive. NCP-Six also experiences competition from
overbuilders which are parties who have been given permits to build duplicate
cable systems in a geographic area where an operational cable system already
exists. In order to maintain competitiveness, NCP-Six anticipates incurring
significant capital expenditures to upgrade its systems. We cannot assure you
that NCP-Six will upgrade its systems in a timely manner or at all or that
upgrading NCP-Six's cable systems will allow NCP-Six to compete effectively.
Additionally, as NCP-Six expands and introduces new and enhanced services,
including additional telecommunications services, NCP-Six will be subject to
competition from other telecommunications providers. We cannot predict the
extent to which this competition may affect NCP-Six's business and operations in
the future.
NCP-SIX MAY NOT BE ABLE TO FUND THE CAPITAL EXPENDITURES NECESSARY TO
KEEP PACE WITH TECHNOLOGICAL DEVELOPMENTS OR ITS CUSTOMERS' DEMAND FOR
NEW PRODUCTS OR SERVICES. THIS COULD LIMIT ITS ABILITY TO COMPETE
EFFECTIVELY.
The cable business is characterized by rapid technological change and
the introduction of new products and services. We cannot assure you that NCP-Six
will be able to fund the capital expenditures necessary to keep pace with
technological developments, or that NCP-Six will successfully anticipate the
demand of its customers for products or services requiring new technology. This
type of rapid technological change could adversely affect NCP-Six's plans to
upgrade or expand its systems and respond to competitive pressures. NCP-Six's
inability to upgrade, maintain and expand its systems and provide enhanced
services in a timely manner, or to anticipate the demands of the marketplace,
could adversely affect its ability to compete. Consequently, NCP-Six's growth,
results of operations and financial condition could suffer materially.
NCP-SIX OPERATES ITS CABLE SYSTEMS UNDER FRANCHISES THAT ARE
NON-EXCLUSIVE. LOCAL FRANCHISING AUTHORITIES CAN GRANT ADDITIONAL
FRANCHISES AND CREATE COMPETITION IN MARKET AREAS WHERE NONE EXISTED
PREVIOUSLY.
NCP-Six's cable systems are operated under franchises granted by local
franchising authorities. These franchises are non-exclusive. Consequently, these
local franchising authorities can grant additional franchises to competitors in
the same geographic area. As a result, competing operators may build systems in
areas in which NCP-Six holds franchises. The existence of more than one cable
system operating in the same territory is referred to as an "overbuild."
Overbuilds can adversely affect NCP-Six's operations. We are currently facing
overbuild situations in two of NCP-Six's systems. Additional overbuild
situations may occur in other systems.
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<PAGE> 29
NCP-SIX'S CABLE SYSTEMS ARE OPERATED UNDER FRANCHISES THAT ARE SUBJECT
TO NON-RENEWAL OR TERMINATION. THE FAILURE TO RENEW A FRANCHISE COULD
ADVERSELY AFFECT NCP-SIX'S BUSINESS IN A KEY MARKET.
NCP-Six's cable systems operate pursuant to non-exclusive franchises,
permits or licenses granted by a municipality or other state or local government
controlling the public rights-of-way. Many franchises establish comprehensive
facilities and service requirements, as well as specific customer service
standards and establish monetary penalties for non-compliance. In many cases,
franchises are terminable if the franchisee fails to comply with material
provisions set forth in the franchise agreement governing system operations.
Franchises are generally granted for fixed terms and must be periodically
renewed. Local franchising authorities may resist granting a renewal if either
past performance or the prospective operating proposal is considered inadequate.
Franchise authorities often demand concessions or other commitments as a
condition to renewal, which may result in costs to NCP-Six that are
unreasonable. We cannot assure you that NCP-Six will be able to renew these or
other franchises in the future. In the future, a sustained and material failure
to renew a franchise could adversely affect NCP-Six's business in the affected
geographic area.
LOCAL FRANCHISE AUTHORITIES HAVE THE ABILITY TO IMPOSE ADDITIONAL
REGULATORY CONSTRAINTS ON NCP-SIX'S BUSINESS. THIS CAN FURTHER INCREASE
EXPENSES.
In addition to franchises, cable authorities have also adopted in some
jurisdictions cable regulatory ordinances that further regulate the operation of
cable systems. This additional regulation could increase the expenses of
operating NCP-Six's business. We cannot assure you that the local franchising
authorities will not impose new and more restrictive requirements.
NCP-SIX'S BUSINESS IS SUBJECT TO EXTENSIVE GOVERNMENTAL LEGISLATION AND
REGULATION. THE APPLICABLE LAWS AND REGULATIONS, AND CHANGES TO THEM,
COULD ADVERSELY AFFECT NCP-SIX'S BUSINESS BY INCREASING ITS EXPENSES.
Regulation of the cable industry has increased the administrative and
operational expenses and limited the revenues of cable systems. Cable operators
are subject to, among other things:
- limited rate regulation;
- requirements that, under specified circumstances, a cable system
must carry all local broadcast stations or obtain consent to
carry a local or distant broadcast station;
- rules for franchise renewals and transfers; and
- other requirements covering a variety of operational areas such
as equal employment opportunity, technical standards and
customer service requirements.
Additionally, many aspects of this regulation are currently the subject
of judicial proceedings and administrative or legislative proposals. We expect
further regulatory efforts, but cannot predict whether any of the states or
localities in which NCP-Six now operates will expand regulation of its cable
systems in the future or how they will do so.
NCP-SIX MAY BE REQUIRED TO PROVIDE INTERNET SERVICE PROVIDERS ACCESS TO
ITS NETWORKS. THIS COULD SIGNIFICANTLY INCREASE NCP-SIX'S COMPETITION
AND ADVERSELY AFFECT THE UPGRADE OF ITS SYSTEMS OR ITS ABILITY TO
PROVIDE NEW PRODUCTS AND SERVICES.
There are proposals before the United States Congress and the Federal
Communications Commission to require all cable operators to make a portion of
their cable systems' bandwidth available to Internet service providers, such as
America Online. Some local franchising authorities are considering or have
already approved these "open access" requirements. A federal district court in
Portland, Oregon recently upheld the legality of an
-19-
<PAGE> 30
open access requirement. Recently, a number of companies, including telephone
companies and Internet service providers, have requested local authorities and
the FCC to require cable operators to provide access to cable's broadband
infrastructure, which allows cable to deliver a multitude of channels and/or
services, so that these companies may deliver Internet services directly to
customers over cable facilities. Broward County, Florida recently granted "open
access" as a condition to a cable operator's transfer of its franchise for cable
service. The cable operator has commenced legal action at the district level.
Allocating a portion of NCP-Six's bandwidth capacity to other Internet service
providers would impair its ability to use its bandwidth in ways that would
generate maximum revenues. In addition, if NCP-Six were required to provide
access in this manner, it may adversely impact NCP-Six's profitability in many
ways, including significantly increasing competition; increasing the expenses
NCP-Six incurs to maintain its systems; and increasing the expense of upgrading
or expanding its systems.
DESPITE RECENT DEREGULATION OF EXPANDED BASIC CABLE PROGRAMMING
PACKAGES, WE ARE CONCERNED THAT CABLE RATE INCREASES COULD GIVE RISE TO
FURTHER REGULATION. THIS COULD IMPAIR NCP-SIX'S ABILITY TO RAISE RATES
TO COVER ITS INCREASING COSTS OR CAUSE NCP-SIX TO DELAY OR CANCEL
SERVICE OR PROGRAMMING ENHANCEMENTS.
On March 31, 1999, the pricing guidelines of expanded basic cable
programming packages were deregulated, permitting cable operators to set their
own rates. This deregulation was not applicable to basic services. However, the
FCC and the United States Congress continue to be concerned that cable rate
increases are exceeding inflation. It is possible that either the FCC or the
United States Congress will again restrict the ability of cable television
operators to implement rate increases. Should this occur, it would impede
NCP-Six's ability to raise its rates. If NCP-Six is unable to raise its rates in
response to increasing costs, its financial condition and results of operations
could be materially adversely affected.
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<PAGE> 31
PROJECTED CASH AVAILABLE FROM LIQUIDATION
If closing of the Proposed Transaction occurs, the limited partners are
expected to receive the same amount of cash they would receive if the assets
were sold at a purchase price of $62,250,000 to an unaffiliated third party in
accordance with the procedures described in the NCP-Six Partnership Agreement.
However, a sale to a third party could involve additional transaction costs,
which would result in lower net proceeds to the limited partners. For example,
legal and accounting fees incurred by NCP-Six, 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 likely exceed the estimated
transaction costs set forth on the following page. These expenses would be
further compounded if multiple purchasers were involved in the sale of all of
NCP-Six's assets. We are not aware of any material costs undertaken by NCP-Six
in this Proposed Transaction that would not also be incurred in a sale to an
unaffiliated third party. If the assets were to be sold to an independent third
party at a price in excess of the purchase price, such a sale might result in
net proceeds to limited partners sufficiently higher to offset transaction
costs. In any event, if closing of the Proposed Transaction occurs, the amount
of cash distributed to you will not be less than the amount you would receive if
the assets of NCP-Six remaining after the Adelphia Transaction were sold to an
unaffiliated third party at a purchase price of $62,250,000.
The following table sets forth the amount of cash projected for
distribution to you assuming that NCP-Six closes the Adelphia Transaction and
disposes of its remaining assets in the Proposed Transaction based on the
Proposed Transaction's valuation of $62,250,000 and fully liquidates. The
estimated total cash distributions to you over the life of the partnership are
approximately $1,246 per partnership unit, or $2,491 per $1,000 investment
(excluding aggregate interest payments of approximately $31 per unit, or $62 per
$1,000 investment). The projected net cash available assumes that both the
Adelphia Transaction and the Proposed Transaction occur on September 30, 2000,
and thus reflects payments of principal and interest on partnership indebtedness
and certain accrued receipts and costs as of September 30, 2000. The current
estimated total expenses in the Proposed Transaction are approximately
$1,100,000, excluding administrative costs of dissolution and winding up
NCP-Six. As discussed in the preceding paragraph, expenses of this proxy
solicitation, including legal and accounting costs, could be materially
different if the Proposed Transaction involved the sale of the assets to a third
party. See "FAIRNESS OF THE TRANSACTION -- Comparison of Northland's Offer to
Highest Third-Party Bid -- Lower Transaction Costs." Although these expenses
will vary depending on the timing and structure of the sales 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 that would be incurred by NCP-Six
regardless of the parties to or structure of a sale of NCP-Six's assets. The
estimated expenses include an aggregate amount of $750,000 which will be held by
NCP-Six in a liquidating trust to secure contingent or unknown liabilities and
indemnification obligations of NCP-Six. Regardless of whether NCP-Six were
selling its remaining assets to Northland or to an independent third party, we
would require this reserve to secure these contingent liabilities and
indemnification obligations. Additionally, pursuant to the terms of the Adelphia
Transaction purchase agreement, $1,000,000 of the purchase price to be received
in the Adelphia Transaction will be held in escrow to secure contingent
liabilities and indemnification obligations arising out of the Adelphia
Transaction for a period of one year from the closing of the Adelphia
Transaction. It is assumed that these proceeds will be distributed in full along
with the first installment payment from Northland's promissory note that is to
be issued as part of the purchase price for the Proposed Transaction. The table
also indicates projected net cash available for distribution based on both a
per-partnership unit basis and an initial $1,000 capital contribution by a
limited partner.
THESE AMOUNTS SET FORTH ON THE FOLLOWING TABLE ARE PROVIDED ON A PRO
FORMA BASIS AS OF SEPTEMBER 30, 2000, AND ARE BEING PROVIDED FOR ILLUSTRATIVE
PURPOSES ONLY. WE CURRENTLY ANTICIPATE CLOSING OF THE PROPOSED TRANSACTION TO
OCCUR IN JUNE 2001. ACTUAL AMOUNTS WILL VARY FROM THE PROJECTIONS INCLUDED ON
THE FOLLOWING TABLE. THE AMOUNT OF CASH ACTUALLY DISTRIBUTED TO YOU 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 NCP-SIX PRIOR TO SUCH DATE, AND THE EXTENT OF ANY CURRENTLY
UNKNOWN LIABILITIES CONCERNING THE ASSETS AND OPERATIONS OF THE PARTNERSHIP
ARISING ON OR PRIOR TO THE DATE OF CLOSING
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<PAGE> 32
THAT ACCRUE PRIOR TO SUCH DATE. IN ANY EVENT, THE AMOUNT OF THE VARIANCE COULD
BE SIGNIFICANT. IF AT ANY TIME WE BELIEVE THAT THE AMOUNT OF CASH TO BE
DISTRIBUTED TO YOU MAY BE REDUCED BY MORE THAN $622,500 FROM THESE PROJECTIONS
(AN AMOUNT THAT REPRESENTS ONE PERCENT OF THE TOTAL PROPOSED TRANSACTION PRICE),
THE PROPOSED TRANSACTION WILL NOT PROCEED AND CLOSING WILL NOT OCCUR WITHOUT
AGAIN OBTAINING APPROVAL OF THE LIMITED PARTNERS.
The figures presented take into account, where applicable, the projected
costs associated with the proposed disposition of the assets, including proxy
solicitation expenses, and estimated general and administrative and operating
expenses. Those assets of NCP-Six that are not included in the assets to be sold
to Northland in the Proposed Transaction or to Adelphia in the Adelphia
Transaction (which include 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 Adelphia Transaction
and the Proposed Transaction occurred on September 30, 2000, we do not currently
anticipate that any events will occur between September 30, 2000 and the closing
date of either of these transactions that will materially affect the figures.
-22-
<PAGE> 33
PROJECTED CASH AVAILABLE IF THE ADELPHIA TRANSACTION AND THE PROPOSED
TRANSACTION CLOSINGS OCCUR
<TABLE>
PARTNERSHIP PROJECTED CASH VALUE:
<S> <C>
Gross Valuation for Proposed Transaction Assets ..... $ 62,250,000
Gross Valuation for Adelphia Transaction Assets ..... 8,388,000
Adjustments to Gross Valuation:
Current Liabilities Assumed by Northland (1) ........ 412,388
Current Liabilities Assumed by Adelphia (1) ......... 21,952
Combined Adjusted Gross Valuation ................... 70,203,660
Plus (Less) Partnership Liabilities and Other Assets:
Receivables and Other Assets (2) .............. 872,119
Cash on Hand ........................................ 1,917,554
Appraisals and Broker Expenses (3) .................. (706,380)
Transaction and Proxy Costs (4) ..................... (400,000)
Partnership Administrative Costs (5) ................ (100,000)
Debt Repayment to Others (6) ........................ (30,237,180)
Other Costs; Contingencies (7) ...................... (750,000)
Projected Net Cash Value (8) (9) .................... 40,799,773
LIMITED PARTNERS' PROJECTED CASH AVAILABLE (9) ........... 33,289,416
</TABLE>
<TABLE>
<CAPTION>
PER $500
PARTNERSHIP
PER $1,000 UNIT
INVESTMENT (ROUNDED)
---------- -----------
<S> <C> <C>
INITIAL DISTRIBUTION FROM CLOSING THE ADELPHIA TRANSACTION AND THE
PROPOSED TRANSACTION ...................................................... $1,421 $ 710
DISTRIBUTION FROM THE FIRST NOTE PAYMENT AND THE $1,000,000
ADELPHIA HOLDBACK ESCROW, EXCLUDING INTEREST .............................. 382 191
DISTRIBUTIONS FROM THE SECOND NOTE PAYMENT, EXCLUDING INTEREST ............ 318 159
PREVIOUSLY RECEIVED CASH DISTRIBUTIONS .................................... 255 128
NORTH CAROLINA, SOUTH CAROLINA, AND MISSISSIPPI NON-RESIDENT TAX
PAID ON BEHALF OF THE LIMITED PARTNERS -- (Treated as a Cash
Distribution) (Applies only to North Carolina, South Carolina, and
Mississippi Non-Resident Limited Partners) (9) ............................ 115 58
AGGREGATE INTEREST ON FIRST AND SECOND NOTE PAYMENTS ...................... 62 31
TOTAL OVERALL POTENTIAL RETURN OVER THE LIFE OF THE PARTNERSHIP
(INCLUDING INTEREST) ...................................................... $2,553 $1,277
====== ======
</TABLE>
----------
(1) Consists of advance subscriber payments and deposits.
(2) Consists of NCP-Six's (i) accounts receivable of $664,162 and (ii) prepaid
expenses of $207,957, all of which were determined as of September 30, 2000.
(3) Under its agreement with Daniels & Associates, NCP-Six is obligated to pay
Daniels & Associates a fee equal to $706,380 for its brokerage services which
amount represents one percent of the gross valuation of the assets being sold.
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<PAGE> 34
(4) Estimated costs of this proxy solicitation and closing of the Adelphia
Transaction and the Proposed Transaction, including legal fees and expenses of
approximately $150,000, fees and costs associated with the issuance of separate
fairness opinions for the Adelphia Transaction and the Proposed Transaction of
approximately $150,000, printing costs of approximately $75,000, mailing
expenses of approximately $15,000, and SEC filing fees of approximately $10,000.
NCP-Six will be responsible for all of these costs. No significant 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 June, 2003. It is estimated that approximately $50,000 of this amount
will be payable to the managing general partner for its services in the
dissolution and winding up of NCP-Six. 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 NCP-Six. 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 NCP-Six.
(6) Consists of (i) notes payable of $28,965,281 to NCP-Six's lender, (ii)
management fees and other allocated operating costs of $70,313 payable to the
managing general partner and affiliates, and (iii) accounts payable, accrued
expenses and other liabilities of $1,201,586, all of which were determined as of
September 30, 2000.
(7) Estimated amount to be set aside to cover contingent liabilities that may
exist at closing of the Proposed Transaction.
(8) "Projected Net Cash Value" includes the partners' distributive share of cash
and the value of Northland's in-kind distribution of assets.
(9) The difference between "Projected Net Cash Value" and "Limited Partners'
Projected Cash Available" represents the projected value of (i) the assets
distributed to Northland in-kind, plus the managing general partner's share of
non-system assets, less the managing general partner's share of liabilities, and
(ii) the projected cash available for distribution to the administrative general
partner, all as the 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 $14,892,000
Prior Cash Distributions .... 127.50 255 3,797,460
Excess ...................... $372.50 $ 745 $11,094,540
======= =========== ===========
</TABLE>
<TABLE>
<S> <C>
Projected Net Cash Value ............................................................ $ 40,799,773
Distribution to the general partners equal to 1% until Limited Partners receive
100% of capital contributions pursuant to Section 16(d)(iii) ........................ (112,066)
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)(iv) ................. (7,398,291)
Limited Partners Projected Cash Available ........................................... $ 33,289,416
============
</TABLE>
<TABLE>
<CAPTION>
GENERAL LIMITED
Distribution of Projected Net Cash Value: PARTNERS PARTNERS TOTAL
----------------------------------------- -------- ----------- -----------
<S> <C> <C> <C>
Section 16(d)(iii):
Distributions to limited partners equal to
the excess of capital contributions over
prior cash distributions $ $11,094,540 $11,094,540
</TABLE>
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<PAGE> 35
<TABLE>
<S> <C> <C> <C>
($372.50 per limited partnership unit)
Distributions to the general partners equal
to 1% until Limited Partners receive 100% of
capital contributions 112,066 -- 112,066
Section 16(d)(iv):
Balance distributed 75% to the limited
partners and 25% to the general partners 7,398,291 22,194,876 29,593,166
----------- ----------- -----------
Distribution of Projected Net Cash Value $ 7,510,357 $33,289,416 $40,799,773
=========== =========== ===========
</TABLE>
(9) See "FEDERAL AND STATE INCOME TAX CONSEQUENCES -- State Tax Considerations."
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<PAGE> 36
THE SPECIAL MEETING
This proxy statement is being furnished to you in connection with the
solicitation by the general partners of NCP-Six of proxies for use at the
special meeting of limited partners. The special meeting will be held on May 31,
2001 at 3:00 p.m., local time, at the office of NCP-Six at 1201 Third Avenue,
Suite 3600, Seattle, Washington 98101, and at any adjournment or postponement of
the meeting. The purpose of the meeting is to vote regarding two proposals,
which include:
- Proposed Amendment No. 1, which if approved, will extend the
term of NCP-Six for an additional six years, from its current
expiration date of December 31, 2001, until December 31, 2007,
in order to allow for extension of NCP-Six's current credit
facility; and
- Proposed Amendment No. 2 which, if approved, will result in
approval of the Proposed Transaction, approval of the proposed
amendment to the NCP-Six Partnership Agreement that is required
to effectuate the Proposed Transaction described in this proxy
statement and the dissolution of NCP-Six.
You are invited to attend the special meeting and are urged to submit a
proxy even if you will be able to attend the special meeting. The approximate
date of mailing this proxy statement and the accompanying proxy card to you is
April 15, 2001.
PURPOSE OF SPECIAL MEETING
We are calling the special meeting for the purpose of providing you with
an opportunity to vote on the extension the term of NCP-Six for an additional
six years for financing purposes and to vote on the proposed disposition of
NCP-Six's assets and the dissolution of NCP-Six, or in the alternative, to
continue , from its current expiration date of December 31, 2001, until December
31, 2007.
Limited partners who approve Amendment No. 1 will be consenting to the
following:
- to continue the term of NCP-Six for an additional six years,
from its current expiration date of December 31, 2001, until
December 31, 2007.
Limited partners who approve Proposed Amendment No. 2 will be consenting
to the following:
- the disposition of the entirety of the assets of NCP-Six that
are not included in the Adelphia Transaction for a purchase
price valued at $62,250,000 and an amendment to the NCP-Six
Partnership Agreement authorizing the acquisition of those
assets by Northland; and
- the dissolution, winding up and termination of NCP-Six following
closing of the Proposed Transaction, but only if that closing
occurs.
LIMITED PARTNERS WHO ABSTAIN FROM VOTING, OR WHO OTHERWISE FAIL TO APPROVE
EITHER PROPOSED AMENDMENT NO. 1 OR PROPOSED AMENDMENT NO. 2, WILL BE CONSIDERED
TO HAVE VOTED AGAINST THE PROPOSAL(S) FOR WHICH THEY HAVE ABSTAINED. ALSO, ANY
SIGNED AND RETURNED PROXY CARDS THAT FAIL TO VOTE ON ONE OR BOTH OF THE PROPOSED
AMENDMENTS WILL BE TREATED AS A VOTE TO APPROVE THE PROPOSED AMENDMENT FOR WHICH
A VOTE WAS NOT CAST.
RECORD DATE; LIMITED PARTNERS ENTITLED TO VOTE AT THE SPECIAL MEETING
Only persons who are limited partners of record of NCP-Six at the close
of business on December 31, 2000 will be entitled to notice of and to vote at
the special meeting and at any adjournment or postponement of the meeting. As of
the record date for the special meeting, there were 29,784 units of limited
partnership interest
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<PAGE> 37
outstanding, held by 1,807 limited partners of record. We and our affiliates
hold 30 units, none of which will be voted or counted in determining whether the
requisite approval has been obtained. Limited partners will be entitled to one
vote on each matter presented for approval at the special meeting for each unit
of limited partnership held on the record date.
QUORUM; VOTE REQUIRED FOR APPROVAL
Pursuant to the NCP-Six Partnership Agreement, the presence in person or
by proxy of holders of limited partnership units representing a majority of the
votes entitled to be cast at the special meeting constitutes a quorum for the
transaction of business at the special meeting. Abstentions are included in the
calculation of the number of votes represented at a meeting for purposes of
determining whether a quorum has been achieved.
The approval of either of the proposed amendments requires the
affirmative vote of the holders of a majority of the outstanding units of
limited partnership interest. We and our affiliates hold 30 units, none of which
will be voted or counted in determining whether the requisite approval has been
obtained. A failure to submit a proxy card (or to vote in person at the special
meeting) will have the same effect as a vote to "DISAPPROVE" both amendments.
You should be aware that if holders of a majority of the units approve either
proposed amendment, that amendment will be adopted and even if you vote to
"DISAPPROVE" or "ABSTAIN" you will be bound by that vote.
IF YOU DO NOT APPROVE OF THE PROPOSED TRANSACTION YOU SHOULD VOTE TO
"DISAPPROVE" PROPOSED AMENDMENT NO. 2.
USE OF PROXIES AT THE SPECIAL MEETING
We will assure that all properly executed proxies that we receive before
the special meeting are voted at the special meeting as you instruct on the
proxy. Signed proxies returned by limited partners who do not specify whether
they wish to approve the extension of the partnership or the Proposed
Transaction will be voted to "APPROVE" both (i) Proposed Amendment No. 1
extending the term of NCP-Six until December 31, 2007 and (ii) the Proposed
Transaction and the corresponding Proposed Amendment No. 2 . All questions as to
the validity, form, eligibility, time of receipt, and acceptance of any proxies
will be determined by the managing general partner in its sole discretion, which
determination will be final and binding.
The proposals described in this proxy statement are integrated
transactions. Therefore, you may not vote for or against individual elements of
either Proposed Amendment No. 1 or Proposed Amendment No. 2, but must vote
either to "APPROVE" or "DISAPPROVE" each proposed amendment as a whole. We know
of no matters that will be presented for a vote at the special meeting other
than the matters identified in this proxy statement and on the proxy card. If
any other matters are properly presented, the persons designated as proxies on
the enclosed proxy card intend to vote on the matters in accordance with their
judgment.
A form of the proxy being solicited is included as Exhibit A to this
proxy statement. An actual, execution-ready proxy card accompanies this proxy
statement. By submitting a completed and executed proxy, you will be appointing
each of John S. Whetzell and Richard I. Clark as your attorney-in-fact to vote
your interest at the special meeting with respect to approval or disapproval, as
you specify on the proxy card, of the disposition and related actions described
in the proxy. Messrs. Whetzell and Clark serve as President and Vice
President/Assistant Treasurer, respectively, of the managing general partner. We
request that you complete, date and sign the accompanying proxy card and return
it promptly in the enclosed postage-paid envelope, even if you are planning to
attend the special meeting.
REVOCATION OF PROXIES
Once you submit a signed proxy, you may change your vote only by (1)
delivering to the managing general partner before the special meeting either a
signed notice of revocation or a signed proxy dated subsequent to the date of
the proxy previously given, or (2) personally appearing at the special meeting
and, prior to the
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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.
SOLICITATION OF PROXIES
NCP-Six will bear the cost of solicitation of proxies for the special
meeting. Solicitation may be in person, by telephone, mail, facsimile or other
means. The general partners and their directors, officers, partners and
employees may solicit the vote of limited partners. These persons will receive
no additional compensation for their assistance in soliciting proxies.
NO DISSENTERS' RIGHTS
You are not entitled to dissenters' or appraisal rights in connection
with the Proposed Transaction, under either the NCP-Six Partnership Agreement or
Washington law. Appraisal rights will not be voluntarily accorded to dissenting
partners in connection with the Proposed Transaction.
Limited 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 NCP-Six on behalf of both the general partners and the limited
partners. Records of NCP-Six are available for inspection by limited partners
upon reasonable notice and during reasonable business hours.
RECOMMENDATION OF THE GENERAL PARTNERS
We recommend that you vote to "APPROVE" both (i) Proposed Amendment No.
1 and (ii) the Proposed Transaction and corresponding Proposed Amendment No. 2.
The 30 units of limited partnership interest held by us or our affiliates will
not be included in determining whether the requisite approval has been obtained.
BACKGROUND AND REASONS FOR EXTENDING THE TERM OF NCP-SIX
NCP-Six was formed as a limited partnership in 1986 by the filing of its
certificate and agreement of limited partnership with the State of Washington.
At the time of formation of NCP-Six, it was contemplated that the partnership
term would expire 15 years after its formation, as set forth in Article 7 of the
NCP-Six Partnership Agreement. That expiration date is December 31, 2001.
In order to finance its operations beyond amounts received by NCP-Six
from its investors, NCP-Six has entered into credit facility loan agreements
from time to time. Such financing arrangements are customary in the industry,
and are also customarily secured by the assets of the borrower. In the case of
NCP-Six, its current credit facility is secured by a first lien on the entirety
of the assets of NCP-Six.
NCP-Six's current credit facility, as amended in 1997, was originally
entered into with a maturity date of December 31, 2000. While lenders are
willing to loan funds to limited partnerships, provided the lender is satisfied
that the limited partnership is an acceptable credit risk, lenders become less
willing to extend such credit as the expiration date of the partnership grows
near. In the case of NCP-Six, its lenders have agreed to extend the NCP-Six
credit facility until June 30, 2001, but they have also expressed an
unwillingness to further extend NCP-Six's debt maturity beyond June 30, 2001 if
the term of NCP-Six is not first extended for a reasonable period of time. While
we believe, based on our discussions with NCP-Six's lenders, that they continue
to feel that NCP-Six is an acceptable credit risk and as such are willing to
continue to extend credit to NCP-Six, it has been made clear to us that a
condition to obtaining such an extension is that the term of NCP-Six must first
be extended for a reasonable period of time.
As of September 30, 2000, the outstanding balance on NCP-Six credit
facility was $28,965,281. In order to amortize that debt through the anticipated
normal course of operations of NCP-Six, we believe that the shortest acceptable
extension for the term of NCP-Six is six years. As a result, as set forth in
this proxy statement, we are
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soliciting your approval of Proposed Amendment No. 1 that will result in
extending the term of NCP-Six through December 31, 2007.
If, instead, the term of NCP-Six is not extended, and the Proposed
Transaction is not closed by June 30, 2001, we believe NCP-Six will be unable to
pay its debts when they become due upon the maturity of the NCP-Six credit
facility on June 30, 2001. The consequences will be that NCP-Six's lenders would
have the right to foreclose upon the assets of NCP-Six in order to raise
proceeds to pay off NCP-Six's credit facility. We believe that a sale of those
assets under the time constraints imposed by pressures from NCP-Six lenders may
result in a materially negative impact on the price received for those assets,
which would correspond to a materially lower return to the limited partners of
NCP-Six upon liquidation of the partnership.
Even if we were successful in extending NCP-Six's credit facility until
NCP-Six's current December 31, 2001 expiration date, NCP-Six would be faced with
the same situation at the end of 2001. Furthermore, pursuant to the terms of the
NCP-Six Partnership Agreement, if the term of NCP-Six is not extended, we will
be required to commence liquidation of NCP-Six upon the partnership's December
31, 2001 expiration. Again, we believe that either of these events may result in
a materially negative impact on the price received for the assets of NCP-Six
because those assets may have to be sold under significant time constraints,
which could correspond to a materially lower return to the limited partners of
NCP-Six upon liquidation of the partnership. In order to avoid these adverse
potentially consequences, we are proposing that the limited partners of NCP-Six
approve Proposed Amendment No. 1, which will result in extending the term of
NCP-Six for an additional six years until December 31, 2007. Even if you approve
of the Proposed Transaction, we cannot provide assurance that the Proposed
Transaction will close by the current June 30, 2001 maturity date of the
existing NCP-Six credit facility. We therefore recommend that you vote to
approve Proposed Amendment No. 1 regardless of how you vote on Proposed
Amendment No. 2. Then, if Proposed Amendment No. 1 is approved, and the Proposed
Transaction is either not approved, or is not closed after being approved, we
will be able to explore other opportunities for you to liquidate your investment
in NCP-Six for what we feel is a fair price, without being required to sell
those assets under significant time constraints that we believe will negatively
impact the proceeds received by NCP-Six and by you upon its liquidation.
BACKGROUND AND REASONS FOR THE PROPOSED TRANSACTION
GENERAL
NCP-Six was formed on January 22, 1986 and began operations in 1986 with
the acquisition of cable television systems serving several communities and
surrounding areas in Mississippi and North Carolina. In a series of transactions
since then, NCP-Six acquired and now operates the cable television systems of
five operating groups located in the following geographic areas:
- Starkville, Mississippi;
- Philadelphia, Mississippi;
- Highlands, North Carolina;
- Barnwell, South Carolina; and
- Bennettsville, South Carolina.
All of the initial acquisitions were financed through a combination of
limited partners' equity and bank loans and the later acquisitions were financed
through a combination of partnership cash flow and bank loans. As of September
30, 2000, the outstanding principal balance owing on NCP-Six's bank financing
was approximately $28,965,000. In addition, as of September 30, 2000 NCP-Six
owed the managing general partner and its affiliates an aggregate of
approximately $70,300 for unreimbursed operating expenses.
As of September 30, 2000, the total number of limited partners in
NCP-Six was 1,807, holding a total of 29,784 units ($500/unit) of limited
partnership interest.
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BACKGROUND OF THE PROPOSED TRANSACTION
We believe that many investors have held their units for more than 14
years without liquidity and that a significant number of limited partners may
desire to liquidate their investment in NCP-Six at this time. We have been
concerned about the lack of meaningful liquidity available for limited partners
in NCP-Six. There is no established secondary or public market in which the
units are being actively traded, although we are aware that there has been some
recent private sales activity and tender offers for units of limited partnership
interests, in addition to transfers in connection with estate and retirement
planning, by will, gift or settlement. Pending a liquidation of NCP-Six, we
believe the units will likely remain an illiquid investment. This lack of a
formal secondary market for the units restricts the ability of investors to
increase or decrease their investment in response to changing personal
circumstances or the performance of NCP-Six.
We have not undertaken any general solicitation or survey of the limited
partners to determine the desire of the limited partners to liquidate their
investment. However, based on unsolicited comments and questions from
unaffiliated limited partners with respect to a liquidation of their investment,
the lack of public market for the units of limited partnership and the 14-year
duration of NCP-Six, we believe that limited partners may welcome the
opportunity to liquidate their investment. We concluded that it was in the best
interest of limited partners for NCP-Six to develop a transaction, which would
provide an opportunity for liquidity, and for a positive return on their
investment over the life of the partnership.
When NCP-Six was formed, it was anticipated that term would extend
through December 31, 2001. Accordingly, pursuant to the terms of the NCP-Six
Partnership Agreement, NCP-Six is currently scheduled to terminate on December
31, 2001 unless the NCP-Six Partnership Agreement is amended to extend its term.
Under these circumstances, in the spring of 1999, the managing general
partner began to explore potential means to sell NCP-Six's assets in order to
provide a liquidity event for the limited partners. Our efforts were motivated
by the length of time over which limited partners have held their investment,
and the belief that limited partners would welcome the opportunity to liquidate
their investment.
Our concerns have recently increased due to activity by unrelated third
parties in making tender offers and other offers to purchase units of NCP-Six at
prices which, in our opinion, do not fairly represent the underlying value of
the partnership interests of NCP-Six.
CHRONOLOGY OF EVENTS LEADING UP TO THE PROPOSED TRANSACTION
On May 13, 1998, the general partners in their capacities as general
partners of Northland Cable Properties Five Limited Partnership ("NCP-Five")
distributed a proxy statement to the limited partners of NCP-Five calling a
special meeting to consider a sale of NCP-Five's assets to Northland and the
subsequent liquidation of NCP-Five. The transaction was similar to that
described in this proxy statement save that the assets were valued by a single
appraiser and third-party bids were not solicited.
On June 3, 1998, Mr. Paul Issac filed a class action lawsuit on behalf
of himself and a class of the limited partners of NCP-Five challenging the
proposed sale of NCP-Five's assets (the "NCP-Five lawsuit"). On June 18, 1998,
the Managing General Partner wrote to the limited partners of NCP-Five alerting
them to the lawsuit and outlining the allegations.
The special meeting of NCP-Five was held on June 25, 1998. The votes of
limited partners, cast in person and by proxy, were counted and the results
indicated that the holders of 77% of the outstanding units had voted and, of
those units voted, 95% were voted in favor of the transaction. On September 1,
1998, the managing general partner closed the purchase and sale of the assets of
NCP-Five.
Beginning in the spring of 1999, the Managing General Partner began to
explore potential proposals to sell NCP-Six's assets in order to provide a
liquidity event for the limited partners of NCP-Six. At that time,
representatives of the Managing General Partner contacted Cairncross &
Hempelman, NCP-Six's legal counsel, to
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discuss options available to NCP-Six to provide an opportunity for liquidity to
the limited partners. Representatives of the Managing General Partners held
similar discussions with appraisal firms (Daniels & Associates and
Communications Equity Associates), and the Managing General Partner and the
Administrative General Partner engaged in general discussions regarding a
liquidity event for the limited partners. 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. See "INFORMATION ABOUT NCP-SIX -- Certain
Affiliates of NCP-Six." The possibility that Northland might acquire the assets
of NCP-Six arose from the outset of these discussions. It was recognized that
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, were required
to assess the opportunity presented to both NCP-Six and Northland by the
prospect of a sale or other disposition of the assets. 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 this assessment. See
"CONFLICTS OF INTEREST" on page __.
In the spring of 1999, the Managing General Partner and the
Administrative General Partner discussed the feasibility of soliciting offers
for the proposed sale of the assets of NCP-Six from third parties. In evaluating
the possibility of Northland or an independent third party acquiring the assets,
the general partners' primary motivating factor was their desire to obtain
liquidity for the limited partners at a maximized value. The general partners
recognized that the assets might be more attractive to Northland than to a third
party. Factors identified that could make the acquisition more attractive to
Northland included its familiarity with the operation of the assets and the
ownership by Northland of other cable television systems in the vicinity of the
assets. This proximity may afford Northland the opportunity to take advantage of
economies of scale, including centralized or regionalized billing, management
and advertising functions, existing maintenance, installation, customer service
and support personnel and utilization of existing regional infrastructure. While
other third-party cable system owners and operators have cable systems adjacent
to certain of the assets, NCP-Six is not aware of any single entity which owns
or operates cable television systems near all or substantially all of the
systems owned by NCP-Six. Accordingly, 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 of NCP-Six, and Northland's management is familiar with NCP-Six'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.
In April 1999, the general partners determined that it was an
appropriate time to obtain an appraisal of the fair market value of the assets.
Representatives of the Managing General Partner met with representatives of
Daniels & Associates and Communications Equity Associates, to discuss the
potential sale of NCP-Six and an appraisal of the assets. These firms are
internationally recognized for their experience in appraising cable television
systems and other media-related businesses and were selected in large part based
on their experience in the cable television industry generally and on their
research capabilities and resources.
Between April 26, 1999 and May 5, 1999, representatives of Daniels &
Associates and Communications Equity Associates met with Richard I. Clark, Vice
President of the Managing General Partner, to perform on-site due diligence
inspections of the systems and the communities served.
On May 25, 1999, NCP-Six formally engaged Communications Equity
Associates to perform an appraisal of the fair market value of NCP-Six's assets
with a valuation date as of July 1, 1999. On June 25, 1999, NCP-Six formally
engaged Daniels & Associates to perform an appraisal of the fair market value of
NCP-Six's assets with the same valuation date of July 1, 1999.
In early July 1999, each of Communications Equity Associates and Daniels
& Associates delivered its written appraisal to the Managing General Partner
valuing NCP-Six's assets as of July 1, 1999. The
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Communications Equity Associates appraisal valued the assets at $74.6 million.
The Daniels & Associates appraisal valued the assets at $73.3 million.
Concurrently with the appraisal process, representatives of the general
partners generally evaluated the possibility of obtaining third-party bids for
the purchase of the assets. Notwithstanding Northland's interest in acquiring
the assets, we determined to open the proposed sale of NCP-Six for the
solicitation of bids from interested third parties. Based on the Managing
General Partners' experience in connection with transactions involving similar
sized cable television systems, and after considering the current small, rural
cable system marketplace, the physical location of NCP-Six's systems and the
cable operators known to the Managing General Partners who own systems in the
vicinity of NCP-Six's systems, the general partners concluded that soliciting a
third-party purchaser for the assets would require NCP-Six to retain a broker.
In an effort to obtain the best transaction value for the limited partners, we
decided on a strategy, whereby we would engage a broker to identify qualified
potential buyers, and to solicit the highest and best offer from each potential
purchaser, after which we would review the dollar amount of the offers and
consider the other terms and factors of each offer.
Accordingly, on July 2, 1999, NCP-Six engaged Daniels & Associates to
assist in brokering the sale of NCP-Six's cable systems to a third party. During
July and early August 1999, Daniels & Associates contacted 35 potential
purchasers regarding the solicitation of bids for the sale of all or a portion
of NCP-Six's assets. Daniels & Associates provided each potential purchaser that
was interested in the bidding process with an identical three ring binder
containing information about NCP-Six and its assets, together with a form of
asset purchase agreement, which bidders were free to mark up in submitting their
offers to the general partners.
During July 1999, we discussed the formation of a special committee to
review the transaction and concluded that the expense of forming a special
committee outweighed any benefits to the limited partners that might result from
independent representation. As part of forming a special committee, we would
have been required to, among other things, establish a procedure for selecting
representative limited partners to serve on the committee, locate limited
partners who would be willing to serve, incur management time and expense in
educating the committee as to all the aspects of NCP-Six's business, including
travel to each of the systems and travel for committee meetings, and obtain
liability and indemnification insurance for each committee member. We believed
that a special committee was not necessary because we believe that the steps
taken and to be taken constitute sufficient safeguards for the limited partners'
interests, including:
- the solicitation of bids from third parties through Daniels &
Associates, an experienced, internationally-recognized broker of
cable television systems; and
- the commissioning of two independent appraisals of the fair
market value of the assets to be used as a benchmark for
evaluating the third-party bids.
In addition, we believed that the submission of the proposed sale of
NCP-Six's assets to limited partners for their approval, as required by the
NCP-Six's Partnership Agreement, provided procedural safeguards to protect your
interests.
In early August 1999, potential purchasers performed on-site due
diligence reviews of the systems under the supervision of Daniels & Associates.
On August 20, 1999, the submission date for third-party bids, Daniels &
Associates received offers from Comcast, Galaxy and Mediacom. The offer
submitted by Galaxy included two options -- first, for all of the assets at a
price of $70.4 million and, secondly, for all of the Mississippi operating group
assets at a price of $46,635,000. The offer submitted by Comcast also proposed
the purchase of a portion of the systems only, namely, the Starkville,
Mississippi system at a price of $19 million. The remaining offer by Mediacom
proposed the purchase of all of the systems at a price of $76 million.
On August 30, 1999, Messrs. Whetzell, Clark, other senior officers of
the Managing General Partner, and representatives of Cairncross & Hempelman met
to review and evaluate the four offers. They reviewed the scope of the offers,
the terms and amount of the proposed purchase prices, and other conditions to
the four offers. The representatives of the Managing General Partner, expressing
the goal of maximizing value to the limited partners,
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rejected the offers of Galaxy and Comcast for less than all the systems and also
rejected the lower priced offer for all the systems made by Galaxy. They
discussed the terms of the offer for $76 million and came up with a list of
questions and clarification points to follow-up with Mediacom.
On September 3, 1999, Cairncross & Hempelman responded in writing to
Mediacom, requesting clarification on several threshold matters on the proposal,
including conditions to signing of a definitive agreement, financing and the
availability of funds and remedies for breaches of the definitive agreement.
On September 9, 1999, Messrs. Whetzell, Clark, other senior officers of
the Managing General Partner, and representatives of Cairncross & Hempelman met
to discuss oral comments provided by representatives of Mediacom. We decided to
request from Mediacom a written response to the letter of September 3, 1999, and
set a deadline of September 17, 1999 for the response.
On September 17, 1999, Mediacom responded in writing to the letter of
September 3, 1999. The response included, among other things, a new condition
that the transaction include provision for payment of a break-up fee if the
transaction was not consummated due to the failure of the limited partners to
approve the transaction and the assets were subsequently sold to another party
within three years. The break-up fee payment was to be the greater of (i) $3.8
million; or (ii) fifty percent (50%) of the difference between the actual sale
price for those assets and Mediacom's offer.
On September 23, 1999, Messrs. Whetzell and Clark, other senior officers
of the Managing General Partner, the Administrative General Partner and
representatives of Cairncross & Hempelman participated in a conference call to
discuss the offer from Mediacom as revised by its letter of September 17, 1999.
The representatives of the general partners discussed the terms of the offer,
including the break-up fee, payment terms for the purchase price and the terms
of the proposed asset purchase agreement. The representatives decided to reject
Mediacom's offer as presented and informed Mediacom of this decision in late
September 1999.
Following the rejection of all of the third-party bids, Northland
submitted an offer to acquire all of the assets of NCP-Six. The Northland offer
was conditional upon its obtaining financing on satisfactory terms. The
Northland offer proposed a total valuation of $76 million, an amount equal to
that of Mediacom, the highest third-party bid. The Northland offer included a
$3.8 million promissory note as partial consideration for the transaction,
representing an amount substantially equal to the hold-back amount proposed by
Mediacom, the highest third-party bidder. The promissory note was included in
the consideration to facilitate Northland's obtaining satisfactory financing for
the cash portion of the purchase price.
In October, 1999, representatives of the Managing General Partner met
with representatives of Cairncross & Hempelman to discuss a preliminary draft of
a Proxy Statement soliciting the consent of limited partners to the sale of
NCP-Six's assets to Northland on the terms set forth in the Northland bid. On
December 6, 1999, the general partners filed with the Securities and Exchange
Commission a preliminary draft of the corresponding proxy statement
From October, 1999 to January, 2000, Northland attempted to secure
satisfactory financing for the proposed transaction. Northland was unable to
secure acceptable financing and concluded that it could not pursue its offer to
buy the assets of NCP-Six. The preliminary Proxy Statement filed on December 6,
1999 was therefore subsequently withdrawn before being submitted to any limited
partners for consideration.
As a result of our continuing belief that many investors have held their
partnership units in NCP-Six for more than 14 years without liquidity, and that
a significant number of limited partners may desire to liquidate their
investment, the Managing General Partner decided to institute a second round of
bids in which Northland would actively participate. Accordingly, NCP-Six once
again engaged Daniels & Associates to assist in brokering the sale of NCP-Six's
cable systems using a blind bid process. During July, 2000, Daniels & Associates
contacted several potential purchasers regarding the solicitation of bids for
the sale of all or a portion of NCP-Six's assets. Daniels & Associates provided
each potential purchaser that was interested in the bidding process with an
identical three-ring binder containing updated information similar to that in
the three-ring binder distributed in July 1999.
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On August 8, 2000, the submission date for third party bids, Hubbard and
Johnson, P.C., counsel to Daniels & Associates, received offers from Adelphia,
Etan Industries, Mediacom and Northland. The bids were opened by Bruce Hubbard,
a partner of Hubbard and Johnson on August 8, 2000, in the presence of a
representative from Daniels & Associates. Up until this point, the bids had
remained sealed and no person connected with either NCP-Six or Northland had any
knowledge of the identity of the other bidders or the nature of their bids. The
offer submitted by Mediacom, proposed the purchase of all of the assets
pertaining to the NCP-Six's operating groups in the state of Mississippi at a
price of $40,000,000. The offer submitted by Etan Industries also proposed a
price of $40,000,000 for NCP-Six's Mississippi operating group assets. Adelphia
proposed a purchase of only the Bennettsville, South Carolina operating system
for a purchase price of $7,922,000. The remaining offer by Northland proposed
the purchase of the entirety of the assets applicable to all five of NCP-Six's
operating groups for a purchase price of $70,200,000.
On August 9, 2000, Messrs. Whetzell, Clark, other senior officers of the
Managing General Partner, and a representative from Cairncross & Hempelman met
to review and evaluate the four offers. They reviewed the scope of the offers,
the terms and amounts of the proposed purchase prices, and other conditions of
the four offers. The representatives of the Managing General Partner, expressing
the goal of maximizing the value to limited partners, rejected the offers of
Etan Industries and Mediacom.
The Northland bid proposed the purchase of all of the NCP-Six operating
group assets for a price of $70,200,000, which included a bid of $7,950,000 for
the Bennettsville, South Carolina system. The offer submitted by Adelphia for
the Bennettsville, South Carolina system at a price of $7,922,000 was within two
percent of the figure of $7,950,000 allocated to that system in the Northland
bid. Pursuant to the terms of the bidding process, Northland and Adelphia were
invited to rebid the Bennettsville, South Carolina system. A revised and
increased offer from Adelphia was received by Hubbard and Johnson on August 15,
2000, while Northland confirmed that it would stand by its original bid, and
would not revise its offer for the Bennettsville system. The revised bid by
Adelphia became the highest bid for the Bennettsville system at $8,388,000.
Consequently it was determined that the offer of Adelphia to purchase the
Bennettsville, South Carolina system for $8,388,000 and Northland's offer to
acquire the remaining systems of NCP-Six for $62,250,000 were the highest offers
for the respective assets and should be accepted.
On August 28, 2000, the trial of the NCP-Five lawsuit commenced in King
County Superior Court, in Seattle, Washington.
On September 28, 2000, Messrs. Whetzell, Clark, other senior officers of
the Managing General Partner, and representatives of Perkins Coie LLP met to
discuss a preliminary draft of this proxy statement.
During November 2000, Messrs. Whetzell, Clark, and other senior officers
of the Managing General Partner discussed the utility of pursuing the sale of
the Bennettsville, South Carolina operating system to Adelphia regardless of
whether or not the sale of all of NCP-Six's assets was approved by the limited
partners. Following our evaluation of the impacts upon NCP-Six's ability to
continue operations without the Bennettsville system, the purchase price to be
paid by Adelphia for that system, the desire to pay down a portion of NCP-Six's
outstanding debt, and our concern that delaying the Adelphia Transaction could
result in a recission by Adelphia of its offer to purchase the Bennettsville
system, we decided that it was in the best interests of the limited partners of
NCP-Six to pursue the sale to Adelphia of the Bennettsville, South Carolina
system for a purchase price of $8,388,000 regardless of whether the Proposed
Transaction was consummated.
On December 20, 2000, the general partners filed with the Securities and
Exchange Commission a preliminary copy of this Proxy Statement.
REASONS FOR THE TRANSACTION
In deciding to present the Proposed Transaction to the limited partners
and in structuring the terms of the Proposed Transaction, we considered the
benefits to be derived as a result of the Proposed Transaction. These
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benefits include providing the limited partners an opportunity to liquidate
their investment for an amount that we believe represents reasonable value for
the partnership's assets.
In reaching our conclusion to present to the limited partners the
Proposed Transaction, we considered a number of factors, including, among other:
- the past and projected financial and operational performance of
NCP-Six;
- the relative lack of liquidity for limited partnership units in
NCP-Six;
- recent tender offer activity to purchase units at prices which,
in our opinion, do not fairly represent the underlying value of
the units;
- the term of the partnership expires on December 31, 2001,
according to the NCP-Six Partnership Agreement, and the need
either to extend the term or to sell and liquidate the assets;
- various alternatives to the Proposed Transaction, including the
alternative of remaining as an independent active operator of
the systems and of selling portions or all of the systems to
unaffiliated third-parties;
- the two appraisals for the assets prepared by Daniels &
Associates and Communications Equity Associates;
- the fairness opinion received from Houlihan Lokey , evaluating
the fairness of the consideration to be received by the limited
partners of NCP-Six in both the Adelphia Transaction and the
Proposed Transaction;
- the terms of the proposed asset purchase agreement presented by
Northland; and
- the relative lesser costs and shorter time-line involved in
connection with selling the assets to Northland, compared with
the potential protracted period of negotiations and due
diligence and increased transaction costs resulting from sale of
the assets to one or more unaffiliated third-party purchasers.
We also considered a variety of risks and potentially negative factors
in deliberations concerning the Proposed Transaction with Northland. In
particular, we considered the following:
- the possibility that the value of the systems and assets might
increase from the Proposed Transaction valuation prior to or
following closing of the Proposed Transaction;
- conflicts of interest facing the general partners in structuring
and implementing the Proposed Transaction;
- terms of the promissory note proposed by Northland as part of
the purchase price to be delivered in the Proposed Transaction,
including that it will be unsecured debt of Northland and junior
to all current and future senior debt of Northland;
- the tax impact of the Proposed Transaction on limited partners;
and
- the costs of the Proposed Transaction and the effect of
transaction expenses and other known and contingent liabilities
on the net amount to be distributed to limited partners.
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Following our analysis of the factors considered, we concluded that the
anticipated benefits of the Proposed Transaction outweighed the possible
drawbacks.
FAIRNESS OF THE PROPOSED TRANSACTION
OUR BELIEF AS TO FAIRNESS
We considered the issues of fairness of the Proposed Transaction. In
analyzing the fairness issue, discussions focused on appropriate valuation of
the assets and conflicts of interest faced by the Managing General Partner. We
determined at the outset that concurrence by the Administrative General Partner
would be required with respect to decisions made regarding the Proposed
Transaction, because the Administrative General Partner is not subject to
conflicts in the Proposed Transaction to the same extent as the Managing General
Partner.
We, the Managing General Partner and the Administrative General Partner,
both believe that the terms of the Proposed Transaction are reasonable and fair
to you. This determination of fairness, as well as the decision to recommend
that limited partners vote to "APPROVE" the Proposed Transaction, was unanimous
among our management personnel. We based this conclusion on the following
material factors:
- the form and amount of consideration in the Proposed Transaction
offered to you;
- the two independent appraisals prepared by Daniels & Associates
and by Communications Equity Associates, which were used in part
in evaluating the fair market value of the assets;
- the third-party bid solicitation process undertaken by NCP-Six
to obtain bids from third parties for the purchase of the assets
of NCP-Six, which bids were used in part in the determination of
the fair market value of the assets and the Proposed Transaction
valuation;
- the favorable fairness opinions of Houlihan Lokey concluding
that the consideration to be received in the Proposed
Transaction is fair from a financial point of view; and
- the opportunity for you to vote to "DISAPPROVE" the Proposed
Transaction and the requirement that the Proposed Transaction be
approved by limited partners holding a majority in interest of
the outstanding units.
MATERIAL FACTORS UNDERLYING BELIEF AS TO FAIRNESS
The following is a discussion of some of the material factors underlying
our belief that the Proposed Transaction is fair to you. There were no specific
factors that did not support our belief that the Proposed Transaction is fair to
you.
CONSIDERATION OFFERED. We believe that the transaction valuation of
$62,250,000 for those assets that are not included in the Adelphia Transaction,
constitutes fair value. In reaching this conclusion, we considered the
appraisals of the fair market value of the assets prepared by Daniels &
Associates and by Communications Equity Associates, the bids solicited from
independent third parties through Daniels & Associates, and the favorable
fairness opinion of Houlihan Lokey.
INDEPENDENT APPRAISALS. In concluding that the Proposed Transaction is
fair to you, we considered the appraisals of the fair market value of the assets
assembled by Daniels & Associates and by Communications Equity Associates. See
"-- Appraisal Process; Summary of Appraisals" below. Daniels & Associates
concluded that the fair market value of the entirety of the NCP-Six assets was
$73.3 million, and Communications Equity Associates concluded that the fair
market value of those assets was $74.6 million. The assets valued in both of
those appraisals included the combined assets to be conveyed in both the
Adelphia Transaction and the Proposed Transaction.
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In evaluating the appraisals of Daniels & Associates and Communications
Equity Associates, we did not review any information other than a copy of each
appraisal. In particular, we did not review the actual forecasts prepared by
either Daniels & Associates or Communications Equity Associates in arriving at
the valuations contained in their appraisals. Based on our experience in the
cable television industry and our general familiarity with industry news as
reported by trade journals, however, we believe that the fair market value of
the assets as determined by Daniels & Associates and by Communications Equity
Associates was an assessment of the value of the assets at the time of those
appraisals. You should note that in November 1999 we were made aware of an
additional overbuild situation facing one of NCP-Six's systems in Highlands,
North Carolina. This potential second overbuild in the Highlands system may have
a negative impact on the present or future value or revenues of that system.
This second overbuild situation was not present at the time of either of the
appraisals or at the time of the third-party bid solicitation and could not be
considered in either the appraisal process or third-party bids. We cannot
predict whether or to what extent this second overbuild situation would have
affected the results of either appraisal or the third-party bids we received.
You should also note that the combined purchase price for NCP-Six's
assets pursuant to the Adelphia Transaction and Proposed Transaction totals
$70,638,000. This combined amount is less than the appraised value for those
assets of $73.3 million by Daniels & Associates, and $74.6 million by
Communications Equity Associates. While we believe that the third-party bid
process established a fair actual value for the assets and that it provided
evidence of what a third-party was willing to pay for those assets, we also feel
the difference between the appraised value for those assets and the purchase
prices obtained in the third-party bid process from Adelphia and Northland may
also reflect market fluctuations in values for cable systems between the date of
the appraisals which were established with a valuation date of July 1, 1999, and
the actual date of obtaining the third-party bids from Adelphia and Northland on
August 15, 2000. We have not, however, reviewed actual comparable sales
information or other industry market analysis to support such a conclusion.
THIRD-PARTY BID SOLICITATION. In concluding the Proposed Transaction is
reasonable to you, we have also considered the bids solicited from third parties
by Daniels & Associates, an experienced and independent broker of cable
television systems. Daniels & Associates first contacted 35 potential purchasers
to solicit bids for some or all of the assets of NCP-Six in July and August of
1999. Ultimately, two bids for some of the assets and two bids for all of the
assets were submitted. One bid for all of the assets offered an amount of $76
million, and the other offered an amount of $70.4 million. The two bids for
portions of the assets offered an amount, on a per subscriber basis, that did
not differ materially from the higher bid for all the assets. We rejected all of
the third party bids for reasons explained in "-- Third-Party Bid Solicitation
Process" below. We then had Daniels solicit bids a second time from interested
third parties between June and August, 2000. Daniels received four bids in
response, with Northland submitting the highest bid for all of NCP-Six's cable
systems, except Bennettsville, South Carolina, for which Adelphia offered a
higher purchase price.
FAIRNESS OPINION. We have also considered and reviewed the favorable
fairness opinions of Houlihan Lokey Howard & Zukin with respect to both the
Adelphia Transaction and Proposed Transaction. Those fairness opinions were
dated as of December ___, 2000, and concluded that the consideration to be
received by the limited partners of NCP-Six in both the Adelphia Transaction and
Proposed Transaction is fair from a financial point of view.
CONSENT PROCEDURES. The Proposed Transaction can take place only if
limited partners holding a majority of the limited partnership units (not
including units held by us or our affiliates) approve Proposed Amendment No. 2
to the NCP-Six Partnership Agreement. IF YOU DO NOT APPROVE OF THE PROPOSED
TRANSACTION, YOU SHOULD VOTE TO "DISAPPROVE" PROPOSED AMENDMENT No. 2. If
holders of a majority of the units vote to disapprove Proposed Amendment No. 2,
we will not proceed with the Proposed Transaction. In addition, even if the
Proposed Transaction is approved, it must close within 180 days after the
special meeting. If the Proposed Transaction does not close within this time
period, or if at any time prior to closing we determine that cumulative
distributions to limited partners from the Proposed Transaction may be reduced
by more than $622,500 from the estimated distribution projections (an amount
that represents one percent of the total Proposed Transaction price), NCP-Six
will not sell those assets to Northland, any affiliate of Northland,
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or any third party without again obtaining approval of the limited partners. We
believe that these approval requirements provide you with additional procedural
safeguards in the Proposed Transaction.
In addition to the material factors just described, we considered a
variety of potentially negative factors relating to the Proposed Transaction. We
discuss these potentially negative factors more thoroughly in this proxy
statement at "SPECIAL FACTORS" above.
- Although we believe that the Proposed Transaction price represents the
fair market value of the assets as of the date we received third-party bids for
those assets, the assets may appreciate in value prior to, or after, the date
that the Proposed Transaction closes.
- We, and in particular the Managing General Partner, have substantial
conflicts of interest in the Proposed Transaction.
- Although we believe that limited partners are interested in a means of
liquidating their investment, the Proposed Transaction has not been solicited by
limited partners.
- We did not retain an unaffiliated, independent third party to
represent your interests in structuring the Proposed Transaction.
- In determining the value of the systems, we did not consider current
market prices or historical market prices for limited partnership units in
NCP-Six due to the absence of an established public market in which units of
limited partnership interests are being traded.
Following our analysis of the factors considered, we concluded that that
these negative factors are not sufficient to outweigh the advantages of the
Proposed Transaction.
APPRAISAL PROCESS; SUMMARY OF APPRAISALS
In May 1999, NCP-Six retained Communications Equity Associates, an
internationally-recognized cable brokerage, appraisal and investment banking
firm to appraise the fair market value of the entirety of NCP-Six's assets at
that time, which comprise the combined assets covered by the Adelphia
Transaction, and the Proposed Transaction. In June 1999, NCP-Six also retained
Daniels & Associates, an internationally-recognized cable brokerage, appraisal
and investment banking firm to conduct a second appraisal of the fair market
value of those assets. Given Daniels & Associates' and Communications Equity
Associates' experience, we did not retain any other outside experts to conduct
appraisals of the NCP-Six assets, but we subsequently retained Houlihan Lokey to
render an opinion as to the fairness of the consideration to be received by the
limited partners of NCP-Six in both the Adelphia Transaction and the Proposed
Transaction from a financial point of view as discussed in greater detail later
in the proxy statement under "HOULIHAN LOKEY FAIRNESS OPINION" at page ____.
NCP-Six has already paid the fees and expenses of Daniels & Associates and
Communications Equity Associates in connection with their appraisals.
NCP-Six instructed both Daniels & Associates and Communications Equity
Associates to prepare appraisals on the basis that the assets were to be sold to
an independent third party on the open market. Daniels & Associates and
Communications Equity Associates were advised at the time of the engagement that
Northland would be a potential buyer of the assets. Daniels & Associates
delivered a written report in July 1999 that the fair market gross asset value
of the entirety of NCP-Six's assets as of July 1, 1999 was $73.3 million.
Communications Equity Associates delivered a written report in July 1999 that
the fair market gross asset value of those assets as of July 1, 1999 was $74.6
million.
Daniels & Associates and Communications Equity Associates each relied on
a discounted cash flow analysis based on the projected operating results of the
systems over a ten-year period, and applied a factor for the residual value of
the assets at the end of that ten-year period. Daniels & Associates and
Communications Equity Associates also each undertook a comparable private market
transaction multiples analysis, to correlate and
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validate the findings of the discounted cash flow analysis. This methodology
involved a review of other cable system sales that have occurred in the recent
past, and a comparison of the value-per-subscriber and multiple of cash flows
for those system sales with the same statistics for NCP-Six.
The following summaries are qualified by, and should be read in
conjunction with, the Daniels & Associates appraisal and the Communications
Equity Associates appraisal. YOU ARE ENCOURAGED TO REVIEW THE APPRAISALS
PREPARED BY DANIELS & ASSOCIATES AND COMMUNICATIONS EQUITY ASSOCIATES WHICH ARE
ATTACHED TO THIS PROXY STATEMENT AS EXHIBITS H AND I, RESPECTIVELY.
DANIELS & ASSOCIATES APPRAISAL
GENERAL. Daniels & Associates was engaged by NCP-Six to appraise the
entirety of NCP-Six's assets comprising the cable television systems serving the
seven communities in Mississippi, South Carolina and North Carolina. Daniels
delivered a written summary, based upon the review, analysis, scope and
limitations described in its written summary, as to the fair market value of
these systems as of July 1, 1999. Some of the material assumptions,
qualifications, limitations and methods used in the Daniels appraisal are
described below.
SUMMARY OF METHODOLOGY. Daniels evaluated each system 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.
In valuing the assets, Daniels relied on a discounted operating 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. The discounted cash flow analysis is also
correlated and validated by a review of private market transactions in cable
systems that have occurred in the recent past. The market transaction approach
applies the value per subscriber and operating cashflow multiples from the
private market sales to the respective statistics of NCP-Six's assets. According
to Daniels, both the discounted cashflow analysis and the comparable private
market transaction multiple analysis are standard valuation methodologies used
in the cable television industry.
In the course of performing the valuation, Daniels engaged in
discussions with employees of the managing general partner's corporate office
and local systems offices, 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 local cable system
management, researched demographic information relating to the various
communities served by NCP-Six, analyzed forecasted financial and operating
information, and drew upon its own general knowledge about the cable television
industry. On the basis of this information and these efforts, Daniels prepared
summaries of relevant operating, technical, financial and demographic
characteristics of NCP-Six's operating systems.
Thereafter, in order to assess the fair market value of NCP-Six's
assets, Daniels prepared detailed operating and financial forecasts for each of
the seven cable system operating systems, taking into account operating revenues
and expenses as well as capital expenditure requirements. These financial
forecasts formed the basis for determining a discounted cashflow for each cable
system operating system. The combined values for each cable system operating
system constituted the value of the cable operating assets for NCP-Six on a
discounted cashflow basis. In addition to this methodology, Daniels used the
comparable private market transaction multiple methodology to derive an
aggregate value for NCP-Six 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 NCP-Six's assets.
ASSUMPTIONS. In performing its discounted cash flow analysis of the
value of the assets, Daniels assumed the assets have been and will continue to
be operated as efficiently as comparable cable systems, and that the
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franchises and asset leases used by NCP-Six 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. You should note that
events occurring after July 1, 1999, and before the effective date of the
Proposed Transaction could affect the properties or assumptions used in
preparing the appraisals. Daniels will not deliver any additional written
summary of the analysis and will not prepare an update to its appraisal closer
to the time of closing the Proposed Transaction.
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 free 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 the ten-year
period. 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 system, plus an analysis of non-subscriber based revenue sources. Its
expense forecast was based on assumed rates of inflation over the forecast
period, adjusted to reflect the particular growth characteristics of each system
operating system. 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. Daniels did
include residential data services revenue and expenses where appropriate. 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.
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 industry that are capable of consummating a sale
similar in size to the acquisition of the assets. Daniels described the weighted
average cost of capital as the rate of return required by an entity on its
investment in order to satisfy the expectations of the entity's debt and equity
investors. After some analysis, Daniels assumed that the prime rate on July 1,
1999 (7.5%) was a fair estimate of the cost of debt. It determined the cost of
equity by sampling the estimated private market cost of equity for cable
television investments and blended this cost with the equity return objectives
for large publicly traded companies. Daniels determined the cost of equity to be
22.5%. Daniels arrived at a weighted cost of capital of 13.50%.
Applying the discount rate to its cash flow forecasts, Daniels arrived
at a valuation of $73.3 million for NCP-Six's assets, representing a value equal
to 10.9 times annualized free cash flow and $2,200 per equivalent basic
subscriber.
COMPARABLE TRANSACTIONS VALUATION. In addition to the discounted
cashflow methodology, Daniels used the comparable private market transaction
multiple 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 of similar size, situated in similar markets, and of
similar technical condition to the assets. In these transactions, the purchase
prices paid ranged from 9.0 to 14.0 times operating cash flow, with a weighted
average of 10.0. Prices per subscriber ranged from $1,500 to $2,732, with a
weighted average of $1,940. All information provided to the managing general
partner relating to the basis for Daniels' selection of comparable transactions
is contained in the Daniels appraisal.
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VALUATION. Based on its analysis using these two methodologies, Daniels
arrived at an estimated fair market value for NCP-Six's cable television system
assets as of July 1, 1999 of $73.3 million, representing 10.9 times the
estimated operating cash flow and a value per equivalent basic subscriber of
$2,200. This cash flow multiple is slightly higher than the weighted average
multiple for comparable transactions and equal to the multiple derived from the
discounted cash flow analysis. The value per subscriber is higher than the
weighted average value per subscriber derived from the comparable transaction
analysis and equal to the value per subscriber derived from the discounted
cashflow analysis. This appraised value appears fair and reasonable to the
Managing General Partner.
COMMUNICATIONS EQUITY ASSOCIATES APPRAISAL
GENERAL. Communications Equity Associates ("CEA") was engaged by NCP-Six
to appraise the entirety of NCP-Six's assets comprising the seven cable
television systems serving the seven communities in Mississippi, South Carolina
and North Carolina. CEA delivered a written summary, based upon the review,
analysis, scope and limitations described in its written summary, as to the fair
market value of these systems as of July 1, 1999. Some of the material
assumptions, qualifications, limitations and methods used in the CEA appraisal
are described below.
SUMMARY OF METHODOLOGY. CEA evaluated each system based 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. In valuing the assets, CEA relied on a discounted
cash flow analysis and market approach. The discounted cash flow approach is
based on the projected operating results of the assets over a ten-year period
and applies a factor for the residual value of the assets at the end of that
ten-year period. The market transaction approach reviews and compares recent
private market transactions involving comparable assets. The market approach
provides a comparison of (1) the multiple of cash flow represented by the
purchase price of such other systems with the multiple of NCP-Six's cash flow
represented by the appraised value for the assets, and (2) the
value-per-subscriber of such other system sales with the value-per-subscriber
valuation of the assets. According to CEA, both the discounted cashflow analysis
and the comparable private market transaction multiple analysis are generally
accepted valuation methodologies for cable television systems.
In the course of performing the valuation, CEA engaged in discussions
with employees of the managing general partner's corporate office and local
systems offices, 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 local cable system management,
researched demographic information relating to the various communities served by
NCP-Six, analyzed forecasted financial and operating information, and drew upon
its own general knowledge about the cable television industry. On the basis of
this information and these efforts, CEA prepared summaries of relevant
operating, technical, financial and demographic characteristics of NCP-Six's
operating systems.
In order to assess the fair market value of NCP-Six's assets, CEA
prepared detailed operating and financial forecasts for each of the seven cable
system operating systems, taking into account operating revenues and expenses as
well as capital expenditure requirements. These financial forecasts formed the
basis for determining a discounted cashflow for each cable system operating
system. The combined value for each cable system operating group constituted the
value of the cable operating assets for NCP-Six on a discounted cashflow basis.
In addition to this methodology, CEA used the comparable private market
transaction multiple methodology to derive an aggregate value for NCP-Six 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, CEA then determined a final appraised value for NCP-Six's assets.
ASSUMPTIONS. In performing its discounted cash flow analysis of the
value of the assets, CEA 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 NCP-Six in the operation of the assets will be renewed
indefinitely as needed without material change, other than upgrade and/or
rebuild requirements. CEA further assumed that the systems were in
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material compliance with all franchise, regulatory and FCC requirements. CEA
relied substantially on financial statements and operational information
provided by the general partners and CEA did not independently verify the
information. You should note that events occurring after July 1, 1999, and
before the effective date of the transaction could affect the properties or
assumptions used in preparing the appraisals. CEA will not deliver any
additional written summary of the analysis and will not prepare an update to its
appraisal closer to the time of closing the Proposed Transaction.
DISCOUNTED CASH FLOW APPROACH. The discounted cashflow approach measures
the present value of the assets' forecasted free cashflow from operations less
capital expenditures including all rebuild or upgrade costs. CEA 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. CEA then calculated the
projected residual value of the assets at the end of the ten-year period. This
terminal value was calculated by multiplying the projected free cash flow by a
multiple which CEA determined to be reasonable in light of its experience in the
cable system transaction market. All information provided to the managing
general partner relating to CEA's operating revenue and expense forecasts and
the assumptions underlying these forecasts is contained in the CEA appraisal. We
did not receive, nor did we request that additional information or analysis be
included in the CEA appraisal because we looked to CEA to develop the appraisal
methodology they deemed appropriate in their professional judgment. We did not
want to otherwise influence the appraisal performed by CEA by requiring changing
to their prepared methodology.
Once CEA 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 cable television system
operators. CEA described the weighted average cost of capital as the rate of
return likely required by equity and debt investors in order to satisfy the
expectations of the investors. CEA assumed, based on its experience in raising
debt financing for cable operators, that a lender would likely charge an
interest rate of 8% for debt financing. It determined the cost of equity, based
on its experience in the cable system transaction market, as being a 25% return
on investors' equity. Applying these rates, CEA arrived at a weighted cost of
capital of 14.8%.
Applying the discount rate to its cash flow forecasts, CEA arrived at a
total present valuation of $74.6 million for NCP-Six's assets, representing a
value equal to 11.1 times the estimated operating cash flow and a price of
$2,263 per basic subscriber.
COMPARABLE MARKET APPROACH. In addition to the discounted cash flow
methodology, CEA used the comparable market transaction approach. CEA describes
this as another generally accepted valuation methodology for valuing businesses
and for correlating and validating the findings of the discounted cash flow
analysis with private market realities. CEA noted in its appraisal that there
has been significant consolidation activity in the cable industry during the
first six months of 1999. CEA observed that although there had been dramatic
increases in the prices paid for large cable systems, due in part to the size
and location of the systems and the introduction of cable Internet services,
there have been fewer transactions involving cable systems of comparable size
and markets as NCP-Six's assets and that the prices paid these smaller systems
have not seen dramatic increases.
Under the market transaction methodology, CEA evaluated and compared
transactions occurring during the first six months of 1999 involving cable
systems of similar size and markets as NCP-Six's assets. In these transactions,
the purchase prices paid ranged from 9.2 to 12.7 times operating cash flow, with
a weighted average of 10.8 and a median of 11.3. Prices per subscriber ranged
from $1,500 to $2,755, with a weighted average of $2,313 and a median on $2,134.
Based on CEA's experience in the cable system transaction market, it determined
that a cash flow multiple of 11.0 was appropriate to value the systems. CEA
applied this multiple to the annualized cash flow of $6,731,196 resulting in a
valuation of $74,043,156, representing a per subscriber price of $2,246.
VALUATION. Based on its analysis using these two methodologies, CEA
arrived at an estimated fair market value for NCP-Six's cable television system
operation assets as of July 1, 1999 of $74.6 million, which represents a value
equal to 11.1 times the estimated operating cash flow and a price of $2,263 per
basic subscriber. This cash flow multiple of 11.1 is slightly higher than the
weighted average multiple for comparable market transactions and
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is equal to the multiple derived from the discounted cash flow analysis. The
value per subscriber of $2,263 is slightly higher than the weighted average
value per subscriber for comparable market transactions) and is equal to the
value per subscriber derived from the discounted cash flow analysis. This
appraised value appears fair and reasonable to the Managing General Partner.
1999 THIRD-PARTY BID SOLICITATION PROCESS
On July 2, 1999, NCP-Six engaged Daniels & Associates to assist in
brokering the sale of NCP-Six's cable systems to a third party. During July and
early August 1999, Daniels contacted 35 potential purchasers regarding the sale
of NCP-Six's systems. On August 6, 1999, Daniels provided each of the eight
potential purchasers who had expressed interest in the bidding process with a
form asset purchase agreement and with information about NCP-Six and its assets.
Bidders were instructed to submit to Daniels, by August 20, 1999, an offer for
some or all of the assets. Submitted offers were to include the bidder's highest
non-negotiable purchase price and a mark-up of the form asset purchase
agreement, indicating the terms on which the purchaser was willing to acquire
the assets. NCP-Six would evaluate and review all submitted bids, but would be
under no obligation to accept any offer.
On August 20, 1999, Daniels received four bids for NCP-Six assets from
three different bidders. The following table summarizes the four bids, including
identifying the NCP-Six assets subject to the bid, the total purchase price
offered and the purchase price divided by the number of subscribers in the
systems subject to the offer (which is a well-accepted statistic in the cable
television industry):
<TABLE>
<CAPTION>
Estimated Price
Bid Bidder Assets Purchase Price per Subscriber
--------- ------------ ------------------------- ---------------------- ----------------------
<S> <C> <C> <C> <C>
1 Bidder A All $76,000,000 $2,303
2 Bidder B All $70,400,000 $2,136
3 Bidder B Mississippi only $46,635,000 $2,389
4 Bidder C Starkville, Mississippi $19,000,000 $2,312
</TABLE>
On August 30, 1999, after a meeting of senior officers of the managing
general partner, NCP-Six rejected the bids of Bidder B and Bidder C. NCP-Six
rejected Bidder B's bid for all of the assets because the purchase price that
Bidder B proposed was significantly lower than the purchase price proposed by
Bidder A. NCP-Six rejected Bidder B's bid for the assets of the Mississippi
systems, and rejected Bidder C's bid for the assets of the Starkville System,
because we concluded that selling only a portion of the assets of NCP-Six
without a mechanism for selling the remaining assets of NCP-Six was not in the
best interests of NCP-Six or its limited partners because it did not provide the
potential for sufficient liquidity of the limited partners' investment if they
so desired. Neither bid proposed a purchase price that was materially higher (on
a per subscriber basis) than the bid for all the assets submitted by Bidder A.
Moreover, given the extent of the brokerage effort undertaken by Daniels, we did
not believe any other potential purchasers would come forward to buy the other
systems. In order to negotiate what, at the time, seemed to be the bid most in
line with the interests of the limited partners of NCP-Six, the general partners
focused their efforts on the offer of Bidder A.
Representatives of the general partners exhaustively reviewed the terms
of Bidder A's bid for the NCP-Six assets, including holding discussions with
Daniels, who had verbal communications with representatives of Bidder A, and
reviewing a letter from Bidder A clarifying its original bid. Finally, on
September 23, 1999, NCP-Six rejected the bid of Bidder A. NCP-Six determined
that the $76 million purchase price proposed by Bidder A provided excellent
value to the limited partners, since the proposed purchase price exceeded the
appraised value of the assets as determined by Daniels & Associates and by
Communications Equity Associates. However, we concluded that the other terms of
the purchase agreement submitted by Bidder A under which the assets would be
sold, were not as advantageous to NCP-Six and could significantly decrease the
value of the transaction to the limited partners of NCP-Six, such as through a
break-up fee, payment provisions in the event of a short-fall in the number of
subscribers, the more stringent representations and warranties and a $3.5
million hold back escrow.
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<PAGE> 54
NORTHLAND'S 1999 OFFER TO PURCHASE NCP-SIX ASSETS
Following the rejection of the third-party bids, Northland submitted an
offer to acquire all of the assets of NCP-Six with a total valuation of $76
million. The Northland offer, which was to be the subject of a proxy statement
proposal in 1999 had Northland been able to secure acceptable financing,
proposed a valuation of $76 million, an amount equal to that of the highest
third-party bid submitted by Bidder A. After reviewing the Northland offer, we
believed that Northland's 1999 offer was more favorable to NCP-Six and you than
any of the third-party bids we had received. The following is a discussion of
some of the material factors underlying our belief that Northland's 1999 offer
was more favorable than the those third-party bids also received in 1999.
- No Break-Up Fee. A significant difference between the terms of
the proposals that lead us to favor the Northland's 1999 offer
was a break-up fee proposed by Bidder A. If the asset purchase
agreement was signed with Bidder A, but the transaction failed
to close because the limited partners of NCP-Six failed to
approve it, then NCP-Six would have been liable to Bidder A for
its costs and expenses (including attorneys' fees) incurred with
respect to the transaction (such as due diligence expenses and
costs of negotiating the agreement). In addition, if at any time
in the subsequent three years NCP-Six were to sell the assets to
another party, NCP-Six would have been required to pay to Bidder
A the greater of $3.8 million or 50% of the amount for which the
assets were sold in excess of $76 million. We believed that
these provisions regarding payment of a break-up fee and
reimbursement of costs and attorneys' fees represented a
significant potential liability to NCP-Six had we proceeded with
the transaction with Bidder A. Additionally, we were concerned
that this break-up fee provision may have had the negative
effect of inducing limited partners to approve the transaction,
regardless of its merits, merely to avoid payment of the
break-up fee. In contrast, Northland's 1999 offer did not
include a break-up fee or reimbursement of expense provision.
- Lower Transaction Costs. The sale of the assets to Bidder A, a
third party, could have involved significant transaction costs
not applicable to Northland's 1999 proposed transaction, such as
costs of due diligence and of negotiating a definitive
agreement. We expected that the professionals' fees that NCP-Six
would pay in connection with Northland's 1999 proposed
transaction would be far lower than the fees that NCP-Six would
have paid in a transaction with Bidder A or another unaffiliated
third party. We estimated that we would save between $100,000
and $250,000 in expenses in the transaction with Northland as
compared to a third party.
- Limited Representations and Warranties. Another significant
difference between Northland's 1999 offer and Bidder A's bid was
the breadth of the representations and warranties that NCP-Six
would be required to make in a transaction with a third party.
It is typical in business asset purchase agreements for the
seller to make extensive representations and warranties about
the seller's business and the assets to be acquired. The
accuracy and completeness of such representations by the seller
is a condition to the buyer's obligation to close the
transaction. Claims for indemnification made by the buyer
against the seller after the closing of an asset purchase
transaction are often based on the seller's representations and
warranties. In the proposed asset purchase agreement submitted
by Bidder A, NCP-Six would have been required to make extensive
representations and warranties about the systems, the
subscribers, and other aspects of its business. On the other
hand, because Northland, as managing general partner of NCP-Six,
has extensive knowledge about NCP-Six's operations, Northland
required NCP-Six to make only a very limited number of
representations and warranties, relating to partnership power
and authorization matters, rather than representations about the
systems or the business. The limited number of representations
requested of NCP-Six by Northland in 1999 were the minimum
required to assist Northland with its application for financing.
- No Survival Period. Northland's 1999 offer did not impose a
survival period for the representations and warranties. It is
typical in business transactions for the representations and
warranties made by the seller to remain in effect for a
determined period of time after closing,
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<PAGE> 55
enabling the buyer to bring claims against the seller if the
buyer is able to determine during the survival period that a
representation or warranty made by seller was inaccurate.
Preliminary negotiations with Bidder A indicated that a survival
period of one year would be required. However, in conjunction
with Northland's 1999 offer, Northland was willing to enter into
the transaction with no survival period.
- No Adjustment for Number of Equivalent Basic Subscribers.
Northland's 1999 offer did not include any adjustment to the
transaction price based on the number of equivalent basic
subscribers served by the systems at closing. In contrast, the
bid submitted by Bidder A included a downward adjustment to the
purchase price of $2,300 for every subscriber at closing served
by the systems fewer than a minimum of 33,000 subscribers. We
felt that this was a significant negative factor of Bidder A's
bid due to the recent historical attrition in subscriber counts
experienced by NCP-Six. As of July 1999, the total estimated
number of equivalent basic subscribers served by the systems was
32,597, representing an approximate 1.8% decrease in the number
of these subscribers from the estimated total of 33,183 for the
prior year at July 1998. That amount as of July 1999 also
represented a 1.1% decrease from the number of equivalent basic
subscribers at March 31, 1999 of 32,963, which number of
subscribers at March 31, 1999 was provided to all third-party
bidders by Daniels & Associates. Based on the number of
equivalent basic subscribers at July 1999, the purchase price
from Bidder A would have been adjusted downward from $76 million
to approximately $75,073,100, and it would have been subject to
further decrease if the number of subscribers at closing
declined from the July 1999 amount.
- No Post-Closing Escrow Deposit by NCP-Six. The offer received
from Bidder A included a provision requiring NCP-Six to deposit
$3.5 million of the sales proceeds into a hold-back escrow
account to secure any indemnification rights of Bidder A after
closing. This post-closing escrow would have had the effect of
reducing the funds payable to the limited partners at closing.
Northland's 1999 offer, on the other hand, did not require
NCP-Six to deposit any amount into an escrow account. However,
the general partners had determined to deposit $750,000 from the
cash paid by Northland at closing into an escrow to secure
contingent liabilities and potential indemnification obligations
of NCP-Six that may arise. Regardless of whether NCP-Six were
selling its assets to Northland or an independent third party,
we would include in an escrow account funds to secure these
contingent liabilities and indemnification obligations.
- Limitation on Liability of NCP-Six. Northland's 1999 offer
included a maximum cap on NCP-Six's liability for any
indemnification obligations under the purchase agreement in an
amount equal to four percent of the total valuation price (which
is approximately $3.04 million). Northland's 1999 offer also
included a provision that NCP-Six would not be liable for
indemnification until the total amount of claims exceeds
$250,000. The form asset purchase agreement sent to prospective
third party bidders also contained the four percent cap on
liability and the $250,000 deductible. However, the bid and
further clarification received from Bidder A indicated that the
four-percent cap was not acceptable and that the amount of the
cap and the deductible would need to be negotiated.
In addition to the favorable terms described above, we considered a
variety of factors of Northland's 1999 offer that may have been less favorable
to NCP-Six than the terms of Bidder A's bid.
- Terms of the Promissory Note. The $3.8 million promissory note
to have been issued by Northland at closing was to be an
unsecured obligation of Northland and was to be subordinated to
Northland's senior debt (including approximately $53 million in
then current senior debt and approximately $66.4 million in
additional bank financing that Northland would have needed to
obtain in connection with the transaction proposed by
Northland's 1999 offer). Northland's promissory note was not to
be guaranteed by any other party. The note was to bear interest
at a fixed rate of six percent per annum.
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<PAGE> 56
- No Earnest Money Deposit by Buyer. The form asset purchase
agreement sent to prospective third party bidders contained a
provision that required the buyer to deposit five percent of the
total purchase price into an escrow account when the asset
purchase agreement was signed to secure the Buyer's obligations
to close the transaction. The offer received from Bidder A
included an agreement by Bidder A to deposit $3.8 million into
an escrow account. The Northland offer, however, did not require
Northland to deposit any amount into an escrow account either at
the time the asset purchase agreement was signed, or at any time
prior to closing.
We believed that these potentially less favorable terms did not outweigh
the benefits and more favorable terms of Northlands 1999 offer over the proposed
transaction of Bidder A. Therefore, we believed that Northland's offer to
acquire all the assets of NCP-Six was superior to any of the third-party bids
submitted in 1999.
RECISSION OF NORTHLAND'S 1999 OFFER DUE TO LACK OF ACCEPTABLE FINANCING
In October 1999, Northland began preliminary discussions with the agent
bank of its lending group regarding the financing of its 1999 offer. In January,
2000, the lender presented to Northland financing terms that were deemed by
Northland to be unacceptable due to the overall cost of the debt, and other
terms and conditions that were required as part of the proposed loan commitment.
As a result, Northland exercised its financing contingency and rescinded its
1999 offer.
2000 THIRD-PARTY BID SOLICITATION PROCESS
In June 2000 NCP-Six again engaged Daniels & Associates to assist in
brokering the sale of NCP-Six's cable systems to a third party. During June and
July 2000, Daniels contacted several potential purchasers regarding the sale of
NCP-Six's systems, including all of the 1999 bidders. On July 18, 2000, Daniels
also provided each of the potential purchasers who expressed an interest in
purchasing some or all of the assets with a form asset purchase agreement and
with information about NCP-Six and its assets. Bidders were instructed to submit
to Daniels, by August 8, 2000, an offer for some or all of the assets of
NCP-Six. Submitted offers were to include the bidder's highest non-negotiable
purchase price and a mark-up of the form asset purchase agreement, indicating
the terms on which the purchaser was willing to acquire the assets. NCP-Six
would evaluate and review all submitted bids, but would be under no obligation
to accept any offer. Bidders were also advised that Northland or its affiliates
might bid on some or all of the assets. In order to avoid the possibility that
Northland could learn of the specific terms of a third-party's bid before
Northland's bid submission, Daniels advised all bidders that the bids were to be
marked as "confidential" and then sent only to an independent law firm, Hubbard
and Johnson, P.C., who would hold each bid on a blind bid basis and would only
disclose the results after the deadline for submission of bids had passed. Then,
on July 28, 2000, Daniels sent each of the potential bidders follow-up bid
instructions and advised that if any bidders submitted offers within two percent
of the top bid (as separately evaluated for each operating system), those
bidders would be invited to resubmit a second offer for each operating system
for which their bid was within the two percent threshold.
On August 8, 2000, Daniels received bids for NCP-Six assets from four
different bidders, including Northland. Of those bids, only Northland offered to
purchase all of the assets of NCP-Six. The other three bidders limited their
offers to between one and two operating systems.
The following table summarizes the four initial bids, including
identifying the NCP-Six assets subject to each bid, the total purchase price
offered, and the purchase price divided by the number of subscribers in the
systems subject to each offer (which is a well-accepted valuation statistic in
the cable television industry):
<TABLE>
<CAPTION>
Estimated Price
Bid Bidder Assets Purchase Price per Subscriber
--------- ---------------- --------------------------- ---------------- ----------------------
<S> <C> <C> <C> <C>
1 Bidder A Bennettsville, South $7,922,000 $1,661
Adelphia Carolina
</TABLE>
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<PAGE> 57
<TABLE>
<CAPTION>
Estimated Price
Bid Bidder Assets Purchase Price per Subscriber
--------- ---------------- --------------------------- ---------------- ----------------------
<S> <C> <C> <C> <C>
Bidder B Starkville, Mississippi $26,300,000 $2,113
2 Philadelphia, Mississippi $13,700,000 $1,982
TOTAL FOR MISSISSIPPI $40,000,000 $2,067
SYSTEMS
3 Bidder C Starkville, Mississippi $40,000,000 $2,067
Philadelphia, Mississippi
TOTAL FOR MISSISSIPPI
SYSTEMS
4 Bidder D Starkville, Mississippi $32,750,000 $2,632
Northland Philadelphia, Mississippi $13,500,000 $1,953
TOTAL FOR MISSISSIPPI $46,250,000 $2,389
SYSTEMS
$4,600,000 $1,767
Highlands, North Carolina $11,400,000 $1,896
Barnwell, South Carolina $7,950,000 $1,667
Bennettsville, South
Carolina $70,200,000 $2,144
TOTAL FOR ALL SYSTEMS
</TABLE>
Pursuant to Daniels' follow up bid procedures sent to bidders on July,
18, 2000 because Adelphia and Northland's bids for the Bennettsville system were
within two percent of one another, Daniels contacted both Adelphia and Northland
and informed them of their respective opportunities to submit follow up bids for
the Bennettsville system to Daniels by August 15, 2000. In response, Northland
confirmed the terms of its original bid, but did not increase its offer for
Bennettsville, while Adelphia increased its offer to $8,388,000. Similarly,
Bidder B's bid of $13,700,000 for the Philadelphia, Mississippi system was
higher than, but still within two percent of, Northland's second highest bid for
that system. As a result, both Bidder B and Northland were invited to submit
their second round bids for the Philadelphia, Mississippi system. Northland
responded by confirming its original bid without change, while Bidder B replied
that it was only interested in the Philadelphia system if it could also acquire
the Starkville, Mississippi system, and based on Northland's combined offer for
both the Starkville and Philadelphia system, Etan withdrew from further
consideration. After the closing of the second round of bidding, the winning
bids from Daniels' year 2000 bid solicitation process are shown in the following
table.
<TABLE>
<CAPTION>
Estimated Price
Bidder Assets Purchase Price per Subscriber
------------------- --------------------------- ---------------- ----------------------
<S> <C> <C> <C>
Bidder A Bennettsville, South $ 8,388,000 $1,759
Adelphia Carolina
Bidder D Starkville, Mississippi $32,750,000 $2,632
Northland Philadelphia, Mississippi $13,500,000 $1,953
TOTAL FOR MISSISSIPPI
SYSTEMS $46,250,000 $2,389
Highlands, North Carolina $ 4,600,000 $1,767
Barnwell, South Carolina $11,400,000 $1,896
</TABLE>
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<PAGE> 58
<TABLE>
<CAPTION>
Estimated Price
Bidder Assets Purchase Price per Subscriber
------------------- --------------------------- ---------------- ----------------------
<S> <C> <C> <C>
TOTAL NORTHLAND BID
FOR SYSTEMS $62,250,000 $2,275
</TABLE>
On August 17, after a meeting of senior officers of the managing general
partner, we determined that it was in the best interest of NCP-Six to accept the
offers of Adelphia and Northland, subject to limited partner approval in the
case of the Northland offer. We based our determination on our conclusion that
Adelphia and Northland submitted the highest bid for the assets covered by their
respective offers. We also believe that Adelphia and Northland's offers proposed
the best terms and conditions for consummation of their respective sales.
Lastly, we believe that the sale to Northland will result in lower transaction
costs due to Northland's existing familiarity with the assets and operations
proposed to be purchased by Northland in the Proposed Transaction.
THE ADELPHIA TRANSACTION
The Adelphia Transaction is to be made pursuant to the terms and
conditions of the Adelphia asset purchase agreement, a copy of which is attached
as Exhibit E. Adelphia's offer for NCP-Six's Bennettsville, South Carolina
operating system is for a purchase price of $8,388,000 subject to two possible
adjustments. First, the purchase price shall be adjusted dollar for dollar for
any net liabilities of the Bennettsville operating system assumed by Adelphia at
the closing of the Adelphia Transaction. Second, the purchase price shall be
adjusted in the event the Bennettsville operating system serves less than 4,660
basic subscribers on the date of closing the Adelphia Transaction, in which
case, the purchase price shall be reduced by $1,800 for each basic subscriber
under 4,660. The entire adjusted purchase price for the Adelphia Transaction is
to be paid at closing with $1,000,000 of the adjusted purchase price to be
deposited in an escrow account to secure contingent liabilities and
indemnification obligations of NCP-Six potentially arising out of the Adelphia
Transaction. The balance of any amounts remaining in the escrow are to be
released on the first anniversary of closing the Adelphia Transaction.
NORTHLAND'S 2000 OFFER TO PURCHASE NCP-SIX ASSETS
The Proposed Transaction with Northland is to be made pursuant to the
terms and conditions of the Northland asset purchase agreement, a copy of which
is attached as Exhibit F. Northland's most recent offer to acquire all of the
assets of NCP-Six, except for the Bennettsville system to be sold to Adelphia,
is for a total purchase price valuation of $62,250,000. The purchase price
includes $9,875,000 to be paid pursuant to a promissory note from Northland to
NCP-Six accruing interest from closing at a rate of six and one-half percent,
and to be paid in two equal installments, one on the first anniversary of the
closing of the Proposed Transaction, and the other on the second anniversary of
closing the Proposed Transaction. The maker on the note will be Northland
Communications Corporation ("NCC"), and the note will be subordinated to NCC's
senior debt, of which NCC currently has senior debt in the aggregate amount of
$1,600,000. NCC expects that it will assign its rights under the asset purchase
agreement to an affiliate of NCC to consummate the Proposed Transaction. In such
event, NCC expects that such affiliate will incur bank debt in order to finance
the acquisition, and NCC may be required to be a guarantor on such debt. NCC's
obligations under any such guarantee would be senior to the note. In addition,
the note would be subordinated to any other senior debt that may be incurred in
the future by NCC. 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 receive if the entire purchase price was paid in full in
cash at closing. The fixed six and one-half percent interest rate instead
reflects the economic terms under which Northland is willing to undertake the
Proposed Transaction. In the second bid solicitation process, bidders were
advised that offers to be paid in all cash at closing would be considered more
favorable than offers that included a deferment of part of the purchase price
through promissory notes or other financing. When evaluating Northland's offer,
we took into account that Northland's offer included a proposed promissory note
with an interest rate below what would customarily be charged in the
marketplace.
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<PAGE> 59
HOULIHAN LOKEY FAIRNESS OPINIONS
Upon completion of the second third-party bid process and determination
of the winning bids, we wanted to obtain an independent third-party evaluation
as to whether the consideration to be received by NCP-Six as a result of the
Adelphia Transaction, and separately the Proposed Transaction, was fair from a
financial point of view. Our desire to obtain independent review of the fairness
of each of those transactions was further motivated by our recognition that the
prior appraisals of both Daniels and Associates, and Communication Equity
Associates, each valued the assets of NCP-Six as of July 1, 1999. Rather than
update those appraisals, we concluded that it would be more beneficial to
NCP-Six if we obtained a fairness opinion that not only evaluated the assets to
be sold in each transaction, but that further evaluated whether the
consideration to be received by NCP-Six was fair from a financial point of view.
Following our investigation of investment banking firms and financial advisory
services that are recognized to have expertise in valuing assets and
transactions in our industry, we concluded that Houlihan Lokey was the most
suitable third-party to evaluate the fairness of both the Adelphia Transaction
and the Proposed Transaction.
Pursuant to an engagement letter dated October 24, 2000, the Managing
General Partner on behalf of NCP-Six engaged Houlihan Lokey to render opinions
as to the fairness of the consideration to be paid to NCP-Six, from a financial
point of view, in both the Adelphia Transaction and the Proposed Transaction.
Houlihan Lokey did not assist the general partners in any of the negotiations
leading to the agreement of the principle terms of the Adelphia Transaction or
the Proposed Transaction.
On [ ], at a meeting of the general partners of NCP-Six, Houlihan Lokey
rendered to the Managing General Partner and the Administrative General Partner
separate fairness opinions as to each of the Adelphia Transaction and the
Proposed Transaction. Based on the assumptions, qualifications, and limitations
stated therein, the opinions conclude that the consideration to be received by
NCP-Six in both the Adelphia Transaction and the Proposed Transaction was fair,
from a financial point of view as of the date the opinions.
The full text of the Houlihan Lokey opinions in connection with the
Adelphia Transaction and the Proposed Transaction, which set forth, among other
things, assumptions made, matters considered and limitations on the review
undertaken, are attached as Exhibits J and K, respectively, and are incorporated
in this proxy statement by reference. We urge you to read the Houlihan Lokey
opinions in their entirety. The Houlihan Lokey opinions were prepared for the
benefit and the use of the Managing General Partner and the Administrative
General Partner of NCP-Six in connection with their evaluation of the Adelphia
Transaction and the Proposed Transaction and do not constitute a recommendation
to the limited partners of NCP-Six as to how they should vote on matter
presented in this proxy statement.
The Houlihan Lokey opinions do not address the underlying business
decisions of the general partners of NCP-Six to proceed with the Adelphia
Transaction or the Proposed Transactions. Instead, the Houlihan Lokey opinions
are limited to Houlihan Lokey's independent evaluation of whether the
consideration to be received in each of the Adelphia Transaction and the
Proposed Transaction was fair as of the date of those opinions. Any summary of
the Houlihan Lokey opinions set forth in this proxy statement is qualified in
its entirety by reference to the full text of the Houlihan Lokey opinions as
attached hereto.
In connection with the preparation of the Houlihan Lokey opinions,
Houlihan Lokey, among other things:
- reviewed certain publicly available financial statements and
other business and financial information of Adelphia, Northland
and NCP-Six;
- reviewed certain internal financial statements and other
financial and operating data concerning NCP-Six prepared by the
management of NCP-Six;
- reviewed certain financial forecasts and other forward looking
financial information prepared by the management of NCP-Six;
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<PAGE> 60
- held discussions with the respective managements of Northland
and NCP-Six concerning the business, past and current
operations, financial condition and future prospects of NCP-Six;
- visited the operations of NCP-Six in Starkville, Mississippi;
Philadelphia, Mississippi; Barnwell, South Carolina; and
Bennettsville, South Carolina;
- reviewed the financial terms and conditions set forth in each of
the asset purchase agreements for the Adelphia Transaction and
the Proposed Transaction;
- compared the financial performance and condition of the assets
of NCP-Six's with that of public and private companies it deemed
comparable;
- compared the financial terms of the Adelphia Transaction and the
Proposed Transaction to the extent available, with other
transactions that it deemed relevant; and
- made such other studies and inquiries, and reviewed such other
data, is it deemed relevant.
The Houlihan Lokey opinions are necessarily based upon market, economic
and other conditions as in effect on, and information made available to Houlihan
Lokey as of, the date of the Houlihan Lokey opinions. The Houlihan Lokey
opinions are limited to the fairness, from a financial point of view and as of
their date, of the consideration to be received by NCP-Six as a result of the
Adelphia Transaction, and separately the Proposed Transaction.
The following is a summary of the material financial analyses performed
by Houlihan Lokey in connection with rendering the Houlihan Lokey opinion
related to the Proposed Transaction. Although a similar analysis was performed
by Houlihan Lokey with respect to the Adelphia Transaction, the following
discussion describes the process followed by Houlihan Lokey specific to the
Proposed Transaction. The summary of the analyses is not a complete description
of all of the analyses performed by Houlihan Lokey. The Houlihan Lokey opinions
are based upon the totality of the various analyses performed by Houlihan Lokey
and no particular portion of the analyses has any merit standing alone.
DISCOUNTED CASH FLOW ANALYSIS:
The discounted cash flow ("DCF") approach values a company on a
going-concern basis. The DCF approach determines the present risk-adjusted value
of the expected future cash flow stream, with expected growth incorporated into
the projections. There are three steps involved in using the discounted cash
flow approach as follows:
- Determination of cash flow projections that are supportable in
light of historical performance, industry performance and
industry expectations, and reasonable future expectations of the
company;
- Determination of the "Terminal Value" of the company at the end
of the projection period; and
- Determination of the appropriate discount rate to be used to
discount the projected cash flows.
In its analysis of NCP-Six, Houlihan Lokey used forecasts and
projections prepared under the direction of NCP-Six management for the years
ended December 31, 2000 through 2004. Debt-free cash flows are generally defined
as debt-free earnings less capital expenditures plus depreciation and
amortization less increases in net working capital. Houlihan Lokey then
discounted the value of the debt-free cash flow streams to present values using
discount rates from [ ]% to [ ]%. Houlihan Lokey selected the discount rates by
estimating the weighted average cost of capital for the combined operating units
of NCP-Six associated with the Proposed Transaction.
In order to determine the terminal value of the assets at the end of the
projection period, Houlihan Lokey utilized a capitalization of debt-free cash
flow approach. Houlihan Lokey then discounted the terminal value of the
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<PAGE> 61
assets associated with the Proposed Transaction to present values using the same
discount rate range as the interim cash flows. Houlihan Lokey added together the
present value of the interim cash flows and the present value of the terminal
value to arrive at a total value range of [$ ] to [$ ].
COMPARABLE TRANSACTION ANALYSIS:
Using publicly available information, Houlihan Lokey analyzed the
consideration offered and the implied transaction value multiples paid in
selected acquisition transactions in the cable system industry including, but
not limited to:
<TABLE>
<CAPTION>
DATE BUYER SELLER
------------ ---------------------- --------------------
<S> <C> <C>
January 2000 Bresnan Midwest Video
January 2000 Omega Bresnan
March 2000 Charter Communications Cablevision Systems
Inc. Corp
March 2000 Sandler Capital James Cable
June 2000 Adelphia Tri-Lakes
June 2000 Cable One Telepartners
June 2000 Charter Communications Enstar 6-B
Inc.
June 2000 Gans Multimedia Enstar
July 2000 Mediacom Spirit Lake CATV
July 2000 Mediacom So. KY Service Corp.
July 2000 Omega Rifkin Acquisition
Partners
August 2000 Gans Multimedia Enstar
October 2000 Mediacom Illinet Cable Systems
</TABLE>
In analyzing these comparable transactions, Houlihan Lokey compared,
among other things, the total consideration paid in such transactions as a
multiple of the number of subscribers as well as the latest twelve months and
estimated calendar 2000 cash flows, where available.
Houlihan Lokey then reviewed the composite range of multiples indicated
for the comparable transactions and arrived at a multiple range for the NCP-Six
operating groups to be transferred in the Proposed Transaction of:
2000 Cash Flow Multiple Range [ ] -- [ ]
2001 Cash Flow Multiple Range [ ] -- [ ]
Subscriber Multiple Range [ ] -- [ ]
After applying these ranges of multiples to NCP-Six's respective
representative values, Houlihan Lokey arrived at a valuation range from this
approach of [$ ] -- [$ ].
In addition to the analyses mentioned above, Houlihan Lokey:
- performed an analysis of all previous purchases and sales of
cable systems by NCP6;
- performed an analysis of Classic Cable, a comparable public
company, analyzing its financial performance, size, growth,
plant quality and cash flow and subscriber multiples;
- reviewed the returns to the original limited partners and
limited partners from secondary trading;
- analyzed the change in valuations of U.S. cable systems over the
last two years;
- reviewed the implied multiples for the Proposed Transaction; and
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- held discussions with Daniels and Associates regarding the sale
procedures and bid processes followed in connection with the
sale of the assets of NCP-Six.
After completion of their analysis, Houlihan Lokey reached those
conclusions set forth in each of the Houlihan Lokey fairness opinion as of the
dates set forth therein.
COMPENSATION AND MATERIAL RELATIONSHIPS
NCP-Six paid Daniels & Associates and Communications Equity Associates
$50,000 each plus out-of-pocket expenses for their appraisal services. If the
Adelphia Transaction, or the Proposed Transactions consummated, NCP-Six will
also pay Daniels & Associates $8,388 and $62,250, for each respective
transaction, as a brokerage fee for its efforts in soliciting bids for the
assets from independent third parties.
NCP-Six retained Daniels & Associates and Communications Equity
Associates based upon each company's experience and expertise as an
internationally recognized cable brokerage, appraisal and investment banking
firm. Each firm, as part of its investment banking business, is continuously
engaged in the valuation of cable businesses and securities in connection with
mergers and acquisitions, competitive biddings, private placements and
valuations. We decided not to retain appraisers other than Daniels & Associates
and Communication Equity Associates, because we believed they were the best
available and had the best understanding and expertise in the rural cable
television system market in which NCP-Six's systems are located. Both Daniels &
Associates and Communications Equity Associates are independent of Northland and
NCP-Six and neither firm has any ownership interest in or management control
over Northland or NCP-Six, although we are aware of one individual at
Communications Equity Associates who owns 8 units of limited partnership
interest in NCP-Six (out of 29,784 units outstanding). This individual has
agreed not to vote his units at the special meeting. In the past, Daniels &
Associates has provided brokerage and appraisal services to NCP-Six, including
assisting in brokering the sale of the Sandersville, Mississippi system in April
1999. In addition, both Daniels & Associates and Communications Equity
Associates have previously provided brokerage and appraisal services to
Northland and affiliates of Northland and it is expected that they may provide
similar services in the future. In all cases, each firm has received customary
fees for the rendering of these services.
NCP-Six has also paid Houlihan Lokey a fee of $125,000 plus
out-of-pocket expenses for its services in connection with rendering opinions as
to the fairness of the consideration to be received by the limited partners of
NCP-Six in both the Adelphia Transaction and the Proposed Transaction. The
amounts to be paid to Houlihan Lokey were not conditioned upon the outcome of
their fairness opinion and were negotiated prior to Houlihan Lokey 's evaluation
of any of the assets of NCP-Six. NCP-Six retained Houlihan Lokey to evaluate the
assets of NCP-Six and the consideration to be received in both the Adelphia
Transaction and the Proposed Transaction due to Houlihan Lokey 's experience and
reputation in evaluating transactions and rendering fairness opinions for
various companies in various industries, including companies operating in the
telecommunications sector. Prior to this engagement, neither Northland, nor any
of its affiliates had entered into a relationship with Houlihan Lokey , and to
our knowledge Houlihan Lokey does not own any interest in, or have any
management control over, Northland or NCP-Six.
CONFLICTS OF INTEREST
FIDUCIARY RESPONSIBILITIES
As general partners, we are accountable to NCP-Six as fiduciaries and
consequently must exercise good faith in the resolution of any conflicts of
interest and in handling NCP-Six's business. These 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 NCP-Six, the general partners must take into account the
specific duties, obligations and limitations imposed upon them by the NCP-Six
Partnership Agreement.
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CONFLICTS OF INTEREST OF THE MANAGING GENERAL PARTNER
The Managing General Partner is subject to substantial conflicts of
interest arising out of its relationship with NCP-Six and the Proposed
Transaction.
For example, assuming that the requisite approval of limited partners is
obtained, Northland will be granted the right to acquire a majority of the
assets of NCP-Six. The terms of the Proposed Transaction have been determined by
Northland as the Managing General Partner. The Managing General Partner has
faced a substantial conflict of interest in determining these terms. In
addition, the Managing General Partner faced a significant conflict of interest
in proposing that it acquire the assets itself, after retaining experts to
appraise the assets and soliciting bids to sell the assets through a broker to
an unaffiliated third party.
The fair market value and net cash flow of the assets may increase over
time. It is possible that limited partners would receive a greater return on
their investment if NCP-Six 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 NCP-Six. 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, at any time prior to or
subsequent to the closing, Northland may receive a bid from one or more third
parties that exceeds the price to be paid in the Proposed Transaction.
Although neither Daniels & Associates, nor Communications Equity
Associates, the appraisers of the assets, is affiliated with the general
partners or NCP-Six, Northland and its affiliates have entered into material
contracts with each of Daniels & Associates and Communications Equity Associates
for the purchase or sale of cable television systems in transactions where such
firm or its affiliates acted either as broker or as principal. Recently, in
April 1999, Daniels assisted as a broker in the sale of NCP-Six's cable system
located in Sandersville, Mississippi. In addition, we expect that Northland and
its affiliates may enter into similar transactions with Daniels & Associates or
Communications Equity Associates or their affiliates in the future. Because the
limited partners have not participated in either the appraisal process or the
selection of Daniels & Associates and Communications Equity Associates as the
two appraisers, there can be no assurance that a different appraisal procedure
or different appraisers would not generate a higher valuation of the assets.
CONFLICT OF INTEREST OF THE ADMINISTRATIVE GENERAL PARTNER AND RELATED MATTERS
In contrast to Northland's involvement as Managing General Partner of
NCP-Six, neither the Administrative General Partner nor any affiliate of the
Administrative General Partner will be acquiring any interest in any assets of
NCP-Six as a result of either the Adelphia Transaction or the Proposed
Transaction.
The 30 units of limited partnership interest held by us and our
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."
We 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 of the proposed transaction. We have, however, retained
the services of Houlihan Lokey who have rendered favorable opinions from a
financial point of view as to the consideration to be received by the limited
partners of NCP-Six in both the Adelphia Transaction, and the Proposed
Transaction, respectively.
CERTAIN PAYMENTS TO THE MANAGING GENERAL PARTNER
In connection with the Proposed Transaction, the managing general
partner estimates that approximately $50,000 will be payable to it for
partnership administrative costs, for its services in the dissolution and
winding up
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of NCP-Six. 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 NCP-Six. 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
NCP-Six. In addition, in connection with the payment of NCP-Six's liabilities
from the proceeds of the Proposed Transaction, the Managing General Partner will
be paid accrued but unpaid management fees that may exist as of the closing
date. See "PROJECTED CASH AVAILABLE FROM LIQUIDATION" and notes thereto.
PROPOSED AMENDMENT NO. 1 TO THE NCP-SIX PARTNERSHIP AGREEMENT
Proposed Amendment No. 1 to the NCP-Six Partnership Agreement, if
approved by the requisite majority of the outstanding units of limited
partnership interest (excluding the 30 units held by us or our affiliates), will
extend the term of NCP-Six for an additional six years from its current
expiration date of December 31, 2001 through a new expiration date of December
31, 2007. If both the Adelphia Transaction and the Proposed Transaction are
consummated prior to December 31, 2001, all of the assets of NCP-Six will have
been sold and pursuant to the terms of the NCP-Six Partnership Agreement NCP-Six
will be wound up and final distributions to its partners will be made pursuant
to the terms of the NCP-Six Partnership Agreement. If, however, the Adelphia
Transaction or the Proposed Transaction fail to close by December 31, 2001,
NCP-Six will continue to own at least one cable system operating system as of
the currently scheduled date for expiration of NCP-Six, and its term will only
be extended past December 31, 2001 if Proposed Amendment No. 1 is approved. See
"BACKGROUND AND REASONS FOR EXTENDING THE TERM OF NCP-SIX" at page ___.
PROPOSED AMENDMENT NO. 2 TO THE NCP-SIX PARTNERSHIP AGREEMENT
Proposed Amendment No. 2 to the NCP-Six Partnership Agreement contains
provisions that authorize NCP-Six to enter into an agreement with Northland for
the sale of the undivided portion of the assets which are attributable to the
collective interests of the limited partners and the administrative general
partner in NCP-Six, excluding those assets to be included in the Adelphia
Transaction. The amendment modifies the allocation provisions in the NCP-Six
Partnership Agreement for purposes of allowing the cash payments in the Proposed
Transaction to be allocated solely to the limited partners and the
Administrative General Partner in accordance with their undivided interest in
NCP-Six, and to permit an in-kind distribution to Northland of the undivided
portion of the assets attributable to the Managing General Partner'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 $62,250,000 and all proceeds were distributed in cash. The
overall effect of Proposed Amendment No. 2 is that it will provide Northland a
credit towards the purchase price in the Proposed Transaction in an amount equal
to Northland's ownership interest in NCP-Six. Rather than receiving a cash
distribution equal to the portion of the purchase price attributable to
Northland's partnership interest upon liquidation of NCP-Six, Northland will
instead receive an in-kind distribution of NCP-Six assets equal in value to the
cash that would otherwise be distributed to Northland. While the effect of
Proposed Amendment No. 2 may have a beneficial tax impact for Northland in the
Proposed Transaction, it will have no negative impact on the limited partners of
NCP-Six. As a result of Proposed Amendment No. 2, and based on the valuations of
the Adelphia Transaction and the Proposed Transaction, the value of the
projected in-kind distribution to Northland would be approximately $6,031,000.
This amount will reduce cash due from Northland at the closing of the Proposed
Transaction. For details, see "PROJECTED CASH AVAILABLE FROM LIQUIDATION" on
page ___. Thereafter, the purchase price paid by Northland will be distributed
solely amongst the limited partners and the Administrative General Partner as a
cash distribution. If the Proposed Transaction and Proposed Amendment No. 2 are
approved by the requisite majority of the outstanding units of limited
partnership interests in NCP-Six (excluding the 30 units held by us or our
affiliates) and if closing of the Proposed Transaction occurs, the entire net
proceeds from the sale will be distributed solely to the limited partners and
the Administrative General Partner which will equal the same cash to be
distributed to the limited partners and the Administrative General Partner as
would be available if a third-party purchaser paid $62,250,000 in the Proposed
Transaction. Proposed Amendment No. 2 to the Partnership
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Agreement also authorizes the Proposed Transaction as contemplated by this proxy
statement, since a condition to closing the Proposed Transaction is approval of
Proposed Amendment No. 2.
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SPECIFIC TERMS OF THE PROPOSED TRANSACTION
GENERAL
If Proposed Amendment No. 2 is approved, NCP-Six will be authorized to
enter into an agreement with Northland under which Northland will acquire the
entirety of the assets of NCP-Six that are not included in the Adelphia
Transaction in a transaction valued at $62,250,000. The agreement will
specifically provide for the following:
- the sale to Northland of the undivided portion of the assets
that is attributable to the limited partners' and the
Administrative General Partner's interest in NCP-Six; and
- the distribution in-kind to Northland of the undivided portion
of the assets that is attributable to the Managing General
Partner's interest in NCP-Six.
The Managing General Partner and its affiliates own 20 units of limited
partnership interest (out of the 29,784 units outstanding), representing
significantly less than one percent of the outstanding limited partnership
units. Affiliates of the Administrative General Partner own 10 units (out of the
29,784 units outstanding), which represents significantly less than one percent
of the outstanding limited partnership units. None of the units owned by any of
the Managing General Partner, the Administrative General Partner or their
affiliates will be taken into account in determining whether the requisite
approval of limited partners has been obtained.
PAYMENT OF THE PURCHASE PRICE
Net proceeds from the sale of the limited partners' interest and the
Administrative General Partner's interest in the Proposed Transaction 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 prior closing of the Adelphia Transaction. The managing general
partner believes that these terms and conditions will be satisfied but absolute
assurances cannot be provided. If closing does not occur within 180 days of the
date of the special meeting, NCP-Six will not sell the assets to Northland, any
affiliate of Northland or any third party without again obtaining limited
partner approval. Following closing of the Proposed Transaction, which is
expected to occur in June 2001, NCP-Six will be dissolved, wound-up and
terminated pursuant to the terms of the NCP-Six Partnership Agreement.
At closing, Northland will acquire the limited partners' interest and
the administrative general partner's interest in the assets from NCP-Six by
payment of the following:
- by making an initial payment to NCP-Six equal to that amount
that, after retiring partnership liabilities attributable to the
limited partners' interest and the administrative general
partner's interest and withholding the required state income
taxes, will enable NCP-Six to distribute to the limited partners
an amount equal to $710 for each partnership unit ($500/unit) in
NCP-Six; and
- delivering to NCP-Six a promissory note in the principal amount
of $9,875,000.
Northland estimates it will require approximately $46,900,000 of debt
financing at closing to complete the acquisition. This amount represents the
valuation price of $62,250,000 plus financing costs estimated to be $1,000,000
less:
- an amount equal to the value of the distribution in-kind to
Northland for its undivided portion of the assets attributable
to the Managing General Partner's interest in NCP-Six;
- certain liabilities of NCP-Six assumed by Northland; and
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- the principal amount of the promissory note.
Based on preliminary discussions with its lenders as of the date of this proxy
statement, Northland expects to obtain the necessary financing, although no
formal commitment has been received.
DISTRIBUTIONS TO LIMITED PARTNERS
The Proposed Transaction contemplates that NCP-Six will dispose of the
entirety of its assets by June, 2001 at a valuation of $8,338,000 for Adelphia
Transaction and $62,250,000 for the Proposed Transaction, resulting in a
combined total valuation of $70,638,000. Due to the fluctuating nature of
"non-system" assets of NCP-Six, including cash, accounts receivable and prepaid
sums, the value of these 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 to approve the Proposed Transaction described in this proxy
statement shall be deemed to constitute consent to any variation in the
distributed proceeds. Notwithstanding the foregoing, if at any time prior to
closing we determine that the cumulative distribution to limited partners may be
reduced by more than $622,500 from the current projected distributions (an
amount that represents one percent of the total Proposed Transaction price), we
will not sell the assets to Northland, any of its affiliates or any third party
without again obtaining approval of the limited partners. See "PROJECTED CASH
AVAILABLE FROM LIQUIDATION."
Because Northland is the acquiring entity, the undivided portion of the
assets attributable to the Managing General Partner's interest will be
distributed to the Managing General Partner in-kind, rather than sold for cash.
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 NCP-Six Partnership Agreement, subject
to certain adjustments. 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 managing general partner's interest in the assets. Northland
anticipates that it will obtain from its lender the cash funds required to
purchase the limited partners' interest and the Administrative General Partner's
interest, although Northland has not yet received a formal commitment from its
lender.
In determining the net amount distributable to the limited partners, the
Proposed Transaction valuation of $62,250,000 will be adjusted as follows:
- it will be decreased by the value of advance payments and
deposits, which represent current liabilities to be assumed by
Northland;
- it will be increased by any other partnership assets not sold to
Northland (such as cash on hand and accounts receivable); and
- it will be decreased by expenses and liabilities attributable to
the assets being sold, including the following:
- the costs of the fairness opinions and broker expenses;
- costs related to the proposed transaction, including costs in
connection with this proxy solicitation;
- partnership administrative costs;
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- amounts to repay outstanding debt obligations to NCP-Six's
lender, management fees and other allocated operating costs,
accounts payable, accrued expenses and other partnership
liabilities; and
- the amount of $750,000, to secure payment of any contingent or
unknown liabilities and indemnification obligations.
The net amount distributable to the limited partners and the general
partners will be distributed as provided in the NCP-Six Partnership Agreement.
The NCP-Six Partnership Agreement requires that distributions be made in the
following order:
- 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.
The Managing General Partner will receive its distribution as an in-kind
distribution of assets. The limited partners and Administrative General Partner
will receive their respective distributions in cash within 120 days after
closing and on the first and second anniversaries of the closing upon payment of
the two equal annual installments called for in the promissory note to be
delivered by Northland at the closing of the Proposed Transaction. The aggregate
amount distributable to limited partners will be allocated among the limited
partners based on the number of units held by each. See "PROJECTED CASH
AVAILABLE FROM LIQUIDATION -- Projected Cash Available If Closing Occurs" and
the subsequent notes.
Distributions to limited partners will be made in three installments.
The first estimated distribution of $1,421 per $1,000 investment will be made
within 120 days after the date of closing the Proposed Transaction. We believe
that the first distribution will occur in June 2001. The balance of the
distribution to be made to the limited partners will be made in two separate
installments as and when payments are made by Northland to NCP-Six pursuant to
the promissory note, and upon release of those funds deposited in the holdback
escrow as required by the Adelphia Transaction purchase agreement. We anticipate
the amount of the first distribution consisting of the first installment under
the note and the escrow proceeds from the Adephia Transaction to approximate a
total of $382 per $1,000 investment plus interest of $40 per $1,000 investment.
We further estimate the amount of the second of the two distributions under the
note to approximate a total of $318 per $1,000 investment plus interest of $22
per $1,000 investment.
The promissory note will have the following provisions:
- a term of two years;
- two equal payments of principal and accrued interest, due in
full on the first and second anniversaries of closing;
- a fixed interest rate of six and one-half percent per annum;
- full recourse and unsecured; and
- subordinated to Northland's senior debt.
Northland currently has debt and other obligations in the approximate
amount of $1.6 million that would be senior to the note. The note which will be
prepayable at any time, will be an unsecured obligation of Northland. Northland
expects that it will assign its rights under the Proposed Transaction asset
purchase agreement to an affiliate of Northland to purchase the assets to be
conveyed in the Proposed Transaction. In such event, Northland expects that such
affiliate will incur bank debt in order to finance the acquisition, and
Northland may be required to be a guarantor on such debt. Northland's
obligations under any such guarantee would be senior to the note. In addition,
the note will be subordinated to any other senior debt of Northland that may be
incurred by Northland in the future. The note will bear interest at a fixed rate
that may be lower than rates on debt instruments that may be
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perceived to have comparable or lower risks than the note. The interest rate on
the note is currently less than the prime rate in effect as of the date of this
proxy statement. In addition, there is no guarantee that Northland, or its
assignee, will not default on the note. 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 Proposed
Transaction price been paid in full in cash at closing. The fixed six and
one-half percent interest rate instead reflects the economic terms under which
Northland is willing to undertake the Proposed Transaction.
These distribution estimates take into account the payment of all known
or anticipated partnership liabilities attributable to the limited partners'
interest in NCP-Six, including any liquidation expenses and any claims against
NCP-Six of which we are aware. These estimates also include $750,000 to be
funded from cash paid by Northland at closing, to secure contingent and unknown
liabilities and indemnification obligations of NCP-Six. If NCP-Six incurs any
unanticipated liabilities or expenses which arise from operations of NCP-Six
prior to or on the date of closing or becomes liable for an indemnification
obligation under the asset purchase agreements with Adelphia or Northland or
under the NCP-Six Partnership Agreement, either of which exceeds amounts set
aside for the payment of known and anticipated current liabilities or contingent
liabilities, these liabilities and expenses could reduce the amount of cash
available for distribution to the limited partners. If at any time prior to
closing the Proposed Transaction, we believe that the amount of cash available
for distribution to the limited partners will be reduced by more than $622,500
from these estimates (an amount that represents one percent of the total
transaction price), the Proposed Transaction will not proceed and closing will
not occur without again obtaining approval of the limited partners.
Following closing of the Proposed Transaction, NCP-Six will remain
liable for post-closing adjustments, claims, liquidation expenses and unknown
and contingent liabilities, as well as any indemnification obligation under the
asset purchase agreements with Adelphia and Northland and the NCP-Six
Partnership Agreement. All liabilities, including liabilities owing to Northland
arising out of the disposition of the assets or otherwise, will be shared by the
limited partners and general partners ratably in accordance with the NCP-Six
Partnership Agreement. See "PROJECTED CASH AVAILABLE FROM LIQUIDATION."
CONDITIONS TO COMPLETION OF THE PROPOSED TRANSACTION
The obligation of Northland to consummate the Proposed Transaction is
subject to the satisfaction, at the closing, of a number of conditions,
including, among others:
- the Proposed Transaction and Proposed Amendment No. 1 to the
NCP-Six Partnership Agreement must have been approved by the
holders of a majority of the outstanding limited partnership
units;
- the representations and warranties of NCP-Six in the asset
purchase agreement with Northland must be true and correct in
all material respects at the closing;
- NCP-Six must have complied with its covenants and obligations in
the asset purchase agreement in all material respects through
the closing;
- there must be no action, suit or other proceeding pending or
threatened to prevent or otherwise restrict the Proposed
Transaction that would have a material adverse effect;
- the Hart-Scot-Rodino waiting period must have expired or
terminated;
- NCP-Six must have received consents from all franchising
authorities and from the FCC relating to the systems;
- Northland must have obtained its necessary financing;
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- there must have been no material change in the financial
condition of NCP-Six; and
- the Adelphia Transaction must have already closed.
Even if the Proposed Transaction is approved, Northland will have no
obligation to consummate the transaction, unless the other closing conditions
are satisfied, including Northland securing necessary financing. In the event
that a material closing condition is waived, we will resolicit limited partner
approval.
REPRESENTATIONS AND WARRANTIES
NCP-Six is being asked to make a limited number of representations and
warranties in the asset purchase agreement regarding facts pertinent to the
Proposed Transaction. These representations include the following:
- organization, qualification to do business and partnership
power;
- authorization of the purchase agreement by NCP-Six;
- enforceability of the purchase agreement against NCP-Six; and
- third-party consents required to consummate the transaction.
Northland is making a number of representations and warranties in the
asset purchase agreement regarding facts pertinent to the transaction. These
representations include the following:
- organization, qualification to do business and corporate power;
- authorization of the purchase agreement by Northland;
- third-party consents required to consummate the transaction.
- the effect of the transaction on Northland and its assets and
under applicable law;
- Northland's ability to obtain adequate financing for the
transaction by closing; and
- Northland's qualifications to own and operate the systems under
the cable franchises.
TERMINATION
The asset purchase agreement may be terminated at any time before the
completion of the Proposed Transaction under the circumstances described below:
- NCP-Six and Northland may terminate the purchase agreement by
mutual consent;
- Either NCP-Six or Northland may terminate the purchase agreement
if:
- the Federal Trade Commission or the Department of
Justice notifies either party of its intent to enjoin
the transaction; or
- any action, suit or other proceeding is pending or
threatened to prevent or otherwise restrict the proposed
transaction that would have a material adverse effect;
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- Northland may terminate the purchase agreement if any of the
conditions to its closing obligations are not satisfied or
waived, unless the failure to fulfill the condition is a result
of a breach of the purchase agreement by Northland;
- NCP-Six may terminate the purchase agreement if any of the
conditions to its closing obligations are not satisfied or
waived, unless the failure to fulfill the condition is a result
of a breach of the purchase agreement by NCP-Six; or
- The agreement will terminate without action by either party if
closing does not occur within 180 days after the date of the
special meeting.
DISSOLUTION AND LIQUIDATION CONSEQUENCES OF THE PROPOSED TRANSACTION
DISSOLUTION PROCEDURES
If the limited partners approve Proposed Amendment No. 2 and the
Proposed Transaction closings occur, we will proceed with the distribution of
proceeds in accordance with the provisions of the NCP-Six Partnership Agreement
regarding dissolution, winding-up and termination.
NCP-Six anticipates winding up its business in the fourth quarter of
2001. Until NCP-Six has wound up its affairs it will continue to file periodic
reports with the Securities and Exchange Commission under the Securities
Exchange Act of 1934. In the event winding up the partnership takes longer than
anticipated, NCP-Six will continue to file its reports until the dissolution has
occurred. Upon its dissolution NCP-Six will file a Certification and Notice of
Termination on Form 15 with the SEC, and will thereafter no longer be subject to
the Securities Exchange Act and will cease filing periodic reports with the SEC.
However, as discussed below under "-- Description of Liquidating Trust," the
trust will continue to provide annual financial information to the limited
partners until the proceeds of Northland's promissory note are paid to the
limited partners.
DESCRIPTION OF LIQUIDATING TRUST
After NCP-Six is wound up and a certificate of cancellation filed with
the Washington Secretary of State, the note will be assigned to a liquidating
trust created and maintained for the benefit of the limited partners. In
addition to the Northland note, NCP-Six's rights to the $1,000,000 hold-back
escrow required in the Adelphia Transaction will be transferred to the trust.
NCP-Six will also deposit $750,000 from the cash received upon closing the
Proposed Transaction with the trust to secure any contingent or unknown
liabilities of NCP-Six during the partnership's winding up and dissolution
The trust will permit NCP-Six to dissolve after it ceases operations and
will facilitate administration and distribution of the proceeds of the note to
the limited partners. Interests in the trust will be non-transferable. 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 final proceeds of the note have been paid to the limited
partners, which is anticipated to occur on or about the second anniversary of
closing the Proposed Transaction. The trust is prohibited from conducting a
trade or business and from making investments (other than short-term investments
in demand or time deposits or other temporary investments) and will not hold
itself out as an investment company. The trust will terminate the sooner of the
date upon which the trustee has disbursed all the proceeds of the note to the
limited partners or December 31, 2004.
Income and expenses of the trust will be allocated among the limited
partners as beneficiaries of the trust according to their percentage interest in
NCP-Six. The trust is designed as a "spendthrift trust" and expressly precludes
voluntary transfer of a beneficiary's interests in the trust, whether by
assignment or otherwise. Although the terms of the trust also prohibit
involuntary transfer of beneficial interests in the trust, whether by creditors,
judgement or operation of law, there can be no assurance that these provisions
will be enforceable in all circumstances. Subject to the restrictions on the
trust's actions as described above, the trustee of the trust has all rights and
authorities granted to trustees generally under Washington law.
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The trust will not be required to file periodic reports with the SEC.
However, pursuant to the terms of the trust, the trustee is obligated to provide
the beneficiaries of the trust with annual financial statements related to the
trust until it is liquidated in accordance with its terms. In addition, the
trustee will provide additional reports to the beneficiaries of the trust each
time a material event or change occurs which effects either the trust or the
rights of the beneficiaries under the trust. These reports shall fully disclose
the material event or change and shall be delivered to each beneficiary as soon
as practicable after the event or change.
EFFECT OF 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 NCP-Six. Under these
laws, the court may subordinate payments to be made under the note to presently
existing and future indebtedness of NCP-Six, direct the repayment of any amounts
paid to the limited partners to NCP-Six's creditors or take other action
detrimental to the limited partners if the court were to find that, after giving
effect to the disposition of NCP-Six's assets and the subsequent liquidation of
NCP-Six, either:
- NCP-Six sold its assets and liquidated with the intent of
hindering, delaying or defrauding creditors; or
- NCP-Six received less than reasonably equivalent value or
consideration in the disposition of its assets, and:
- was insolvent or rendered insolvent by reason of the
disposition of the assets and its subsequent
liquidation;
- was engaged in a business or transaction for which the
assets remaining with NCP-Six constituted unreasonably
small capital; or
- intended to incur, or believed that it would incur debts
beyond its ability to pay its debts as they matured.
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.
NCP-Six believes that it will receive equivalent value for the assets.
This belief is further supported by the favorable fairness opinion of Houlihan
Lokey . In addition, NCP-Six does not believe that, after giving effect to the
sale and distribution of the assets and its subsequent liquidation, it:
- is or will be insolvent or rendered insolvent;
- is or will be engaged in a business or transaction for which its
remaining assets constituted unreasonably small capital; or
- intends or intended to incur, or believes or believed that it
will or would incur, debts beyond its ability to pay its debts
as they mature.
These beliefs are based on the fact that NCP-Six believes it is
receiving equivalent value for its assets, the fact that NCP-Six will be
discharging all of its liabilities prior to distributing the balance of the
proceeds of the sale
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of the assets to the limited partners and the administrative general partner,
and that NCP-Six will not be conducting operations or incurring indebtedness
after the distribution to limited partners.
FEDERAL AND STATE 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 various subsequent
tax acts (collectively referred to as the "Tax Acts"). It is not possible to
discuss all of the provisions of the Code and 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 of the regulations not yet issued will take.
In addition, since the proposed transaction is not expected to close until June
2001, Congress could pass further legislation 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 Code
and Tax Acts. The following discussion of tax consequences represents our best
knowledge and belief, based upon our experience in reporting the tax
consequences of transactions similar to the disposition of assets described in
this proxy statement to various tax authorities. We have not sought, nor will we
receive, a legal opinion as to the matters discussed below.
YOU ARE STRONGLY ENCOURAGED TO REVIEW THE CODE, THE TAX ACTS, AND THIS SECTION
OF THE PROXY STATEMENT WITH YOUR PERSONAL TAX ADVISORS.
TAX CONSIDERATIONS
There are certain material tax consequences to you resulting from the
Proposed Transaction. In order to avoid the additional expense, NCP-Six has not
obtained a tax opinion in connection with either the Proposed Transaction or the
Adelphia Transaction. The table below sets forth certain estimated federal
income tax consequences per $1,000 investment if both the Proposed Transaction
and the Adelphia Transaction close as contemplated. The table relates only to
persons who purchased units in the initial offering, and have an initial tax
basis of $500 per unit. The table does not reflect estimated federal income tax
consequences for those persons who received their interests through transfer
from other limited partners or have tax basis adjustments to their interest in
NCP-Six arising from transactions other than the operations of NCP-Six.
The table below sets forth the amount of long-term capital gain and
ordinary income that is expected to result from the disposition of the assets
and the liquidation of NCP-Six. For this purpose it is assumed that the entire
amount of Section 1231 gain allocated by NCP-Six to the limited partners will be
treated as long-term capital gain income on their individual tax returns. The
dollar amounts reflect allocations as required pursuant to the limited
partnership agreement. As of September 30, 2000, there were 29,784 units
($500/unit) of limited partnership interest outstanding.
ALL FIGURES SET FORTH IN THE TABLE ARE NECESSARILY IMPRECISE AND
REPRESENT ONLY OUR 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, this
section of the proxy statement, and their individual tax situations with their
personal tax advisors.
TAX RESULTS FROM DISPOSITION OF THE ASSETS AND RESULTING LIQUIDATION
(Per $1,000 Investment)
<TABLE>
<S> <C>
Overall Ordinary Income per $1,000 Investment (1)(2) $1,559
Overall Long-Term Capital Gain per $1,000 Investment (2)(3) $ 531
</TABLE>
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(1) Assumes that depreciation recapture per $1,000 investment will be equal
to $1,559.
(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 NCP-Six. Assumes that the limited partners' remaining
basis in NCP-Six may be used upon termination of NCP-Six to offset
capital gain from the disposition of the assets of $145 per $1,000
investment.
TAX CONSEQUENCES OF DISPOSITION OF THE ASSETS AND LIQUIDATION OF NCP-SIX
Upon the disposition of the assets, taxable income will be recognized by
NCP-Six to the extent that the amount realized from the 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 NCP-Six Partnership
Agreement. The allocation of gain to the limited partners will increase your
adjusted tax basis in NCP-Six and increase your "amount at risk" with respect to
NCP-Six's activity. Suspended or current passive activity losses from your other
passive activities 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. We believe
that these allocations will have "substantial economic effect," as required by
regulations issued by the Treasury Department. In the event the Internal Revenue
Service ("IRS") should prevail in any contention that the taxable gain from the
sale should be allocated differently from the manner reported by the general
partners, the amounts of capital gain (or loss) and ordinary income (or loss) of
the limited partners would be adjusted in equal offsetting amounts.
The majority of assets being sold by NCP-Six will be treated as "Section
1231 assets" and, therefore, your share of gain or loss on the sale of the
assets (excluding ordinary income depreciation recapture, discussed below) will
be combined with any other Section 1231 gain or loss you incur in that taxable
year and your 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 you have 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 your tax situation. In addition,
cost recovery deductions which have been taken with respect to certain assets
will be subject to recapture as ordinary income upon the sale to the extent of
gain on the sale, and you will be allocated a share of this ordinary income
depreciation recapture in proportion to the cumulative net losses previously
allocated to you under the limited partnership agreement. You will also
recognize gain or loss upon the liquidation of NCP-Six following the disposition
of the assets to the extent that the cash distributed in the liquidation exceeds
or is less than your adjusted tax basis in your partnership interest. See "--
Other Tax Law Changes" below for a discussion of the applicable tax rates for
ordinary income and capital gains.
A recent tax law change eliminated the ability of an accrual-basis
taxpayer (such as NCP-Six) to use the installment method of reporting the gain
on the sale of its assets. Accordingly, the entire gain on the sale of NCP-Six's
assets will be recognized at the time of sale, regardless of the amount of cash
actually received upon the sale or the amount of the sale price that is deferred
pursuant to the terms of a note or other debt obligation. The gain recognized by
NCP-Six will be allocated in the year of sale to the limited partners under the
limited partnership agreement, and will be taxable regardless of the amount of
cash actually received in the year of sale.
Neither NCP-Six 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 NCP-Six in connection with the issuance and marketing of the units
of limited partnership interest, including sales commission costs. Upon
liquidation of NCP-Six, the Treasury Regulations provide that NCP-Six may not
deduct the capitalized syndication expenses. However, there is uncertainty in
the law concerning whether you may claim a capital loss for the remaining
portion of your tax basis in NCP-Six, which is attributable to the capitalized
syndication costs. For purposes of the calculations presented in the "Tax
Results from Disposition of the Assets and Resulting Liquidation" table above,
the general partners have assumed that the limited partners' remaining basis in
NCP-Six may be used upon the termination of NCP-Six to offset capital gain from
the sale of the assets. The IRS may contend, however, that the limited partners
are not entitled to claim a capital loss because they should have reduced their
basis in their partnership interests for the syndication fees, as expenditures
of NCP-Six which are not deductible in computing its taxable income and not
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properly chargeable to capital accounts, and the IRS may, in fact, contend that
the limited partners should recognize an additional amount of capital gain. YOU
SHOULD CONSULT WITH YOUR INDIVIDUAL TAX ADVISOR WITH RESPECT TO YOUR TREATMENT
OF SYNDICATION COSTS UPON TERMINATION OF NCP-SIX.
If the IRS were to argue successfully that the allocations of taxable
income among the partners should differ from the allocations that would be
reported on NCP-Six tax returns, the amounts of ordinary income and loss and
capital gain and loss you report would change. The managing general partner
believes this change would not have a material adverse effect on you.
UNRELATED BUSINESS TAXABLE INCOME
Unrelated business taxable income ("UBTI") will be generated by the sale
of the assets and allocated 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 assets, the following is an analysis which assumes that a $5,000 IRA
investment is the sole UBTI investment of the IRA. It also assumes that a
limited partner has properly reported and is carrying over net operating losses
generated in the early years of NCP-Six.
<TABLE>
<CAPTION>
INITIAL NCP-SIX IRA INVESTMENT - $5,000
<S> <C>
Cash distributions received over the life of NCP-Six,
excluding interest payments in 2002 and 2003 ($62 per
$1,000 investment) ......................................... $ 12,455
UBTI tax liability in 2001 ................................... (1,922)
--------
NET CASH AFTER TAXES TO IRA INVESTOR ......................... $ 10,533
========
</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 (2001). In addition, should the IRA be able to utilize a
capital loss in 2001, the remaining basis in LCP-Six in the year of termination
(2001) would result in a $725 tax deduction 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 you will continue to be allocated your share
of NCP-Six's income, deduction, gain and loss, and will be distributed your
share of cash available for distribution, as determined under the NCP-Six
Partnership Agreement. In general, income or loss from operations of NCP-Six
constitute ordinary income or loss, and are allocated to limited partners in
accordance with the NCP-Six 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, you may not deduct losses
allocated to you to the extent the losses exceed the adjusted tax basis of your
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 your
NCP-Six 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,
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interest, royalties and investment capital gains. However, passive activity
losses can be used to offset passive activity taxable income from another
passive activity. In addition, disallowed losses and credits from one tax year
may be suspended and carried forward by a taxpayer 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. You should
also note that the Treasury Department prescribed regulations that 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 NCP-Six. 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.
YOU SHOULD ALSO NOTE THAT THE EFFECT OF PASSIVE ACTIVITY LOSS
LIMITATIONS MAY VARY FROM ONE TAXPAYER TO ANOTHER DEPENDING UPON YOUR INDIVIDUAL
TAX SITUATION. THEREFORE, YOU SHOULD CONSULT YOUR PROFESSIONAL TAX ADVISOR WITH
RESPECT TO THE APPLICATION OF THE PASSIVE ACTIVITY LOSS LIMITATIONS TO YOUR
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 that 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
that do not currently apply to NCP-Six.
OTHER TAX LAW CHANGES
The discussion below relates primarily to individual taxpayers.
Different tax rules may apply to other taxpayers (e.g. corporations, estates,
trusts, etc.). 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.
Capital gains from sales of certain property held more than one year are
now taxed at maximum tax rates that vary from 10% to 28%, depending on the type
of property sold, the taxpayer's marginal tax rate, and the holding period of
the property. In summary, capital gain assets held for more than one year
("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
these gains that would otherwise be taxed at the taxpayer's 15% tax bracket.
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. Long-term
capital gain arising from the sale of certain designated assets (works of art,
antiques, gems, coins and other collectibles) are taxed at a maximum rate of
28%. 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 attributable to
prior depreciation deductions not recaptured as ordinary income under the
depreciation recapture rules discussed above.
The large majority of NCP-Six's assets will have been held by NCP-Six
for more than one year at the time of the proposed transaction. None of
NCP-Six's assets are collectibles. 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 that you have non-recaptured net Section 1231
losses, your 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
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on personal property will be taxed as ordinary income under the depreciation
recapture rules. Finally, a small portion of NCP-Six gain may be attributable to
depreciable real estate that would be subject to 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, and using longer lives for personal property placed in service before
1999). 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. However, the
exemption amount is phased out once a taxpayer's alternative minimum taxable
income exceeds certain threshold amounts. 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 the
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. Long-term gains from business property (such as NCP-Six's
assets) are not included 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 NCP-Six
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.
STATE INCOME TAX CONSIDERATIONS
In addition to the federal income tax considerations outlined above, the
Proposed Transaction has state income tax consequences. Partners who are
residents of states imposing income taxes should consult their tax advisors or
their own state law to determine the state tax consequences and their state's
filing requirements. The following is only a brief summary of the potential
state tax considerations of the proposed transaction for nonresidents of North
Carolina, Mississippi and South Carolina. You should consult your own tax
advisors concerning the application of each state's income tax laws and other
state and local laws to your specific situation.
NORTH CAROLINA
The State of North Carolina, where certain of NCP-Six's assets are
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. This state tax will apply to you.
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NCP-Six 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 NCP-Six's operations, including the income to be generated by the
Proposed Transaction, as apportioned to North Carolina under state law. The
North Carolina personal income tax rates increase on a graduated scale,
beginning at 6% up to a maximum marginal tax rate of 7.75%. NCP-Six anticipates
making the required tax calculations on your behalf when the North Carolina
partnership income tax return is prepared. The tax paid on your behalf will be
reported on your Schedule K-1 for 2001, and will be treated for federal income
tax purposes as cash distributed to you.
A nonresident individual partner 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.
Payment of the tax due by the partnership on behalf of corporations,
partnerships, trusts or estates does not relieve the person from filing a North
Carolina return. 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, you may file a North
Carolina income tax return if you so choose. If you choose to file in North
Carolina, the tax paid by NCP-Six on your behalf may be claimed as a credit
towards the North Carolina tax liability.
MISSISSIPPI
The State of Mississippi, where certain of NCP-Six's assets are located,
imposes an income tax on the net income earned by nonresident partners from
property located in Mississippi or from a business operation conducted in the
State of Mississippi. This includes property owned or a business conducted
through a partnership. This state tax will apply to you.
NCP-Six is responsible for reporting each non-resident partner's share
of the income derived from Mississippi, and will withhold 5% of the net gain or
profit allocated to each non-resident partner and remit it to the State Tax
Commission. The tax will be based on the income generated by NCP-Six's
operations, including the income to be generated by the Proposed Transaction, as
apportioned to Mississippi under state law. The Mississippi personal income tax
rates increase on a graduated scale, beginning at 3% up to a maximum marginal
tax rate of 5%.
The Mississippi tax paid on your behalf will be reported on your
Schedule K-1 for 2001, and will be treated for federal income tax purposes as
cash distributed to you. You should claim the amount withheld as estimated tax
paid on your Mississippi individual tax return for the year of withholding.
SOUTH CAROLINA
The State of South Carolina, where certain of NCP-Six's assets are
located, imposes an income tax on the net income earned by nonresident partners
from property located in South Carolina or from a business operation conducted
in the State of South Carolina. This includes property owned or a business
conducted through a partnership. This state tax will apply to you.
South Carolina tax will be based on the income generated by NCP-Six's
operations, including the income to be generated by the Proposed Transaction, as
apportioned to South Carolina under state law. South Carolina allows individuals
a deduction equal to 44% of net capital gains with a two year holding period
reported as South Carolina income on the South Carolina tax return. The South
Carolina personal income tax rates increase on a graduated scale, beginning at
2.5%, up to a maximum marginal tax rate of 7%. NCP-Six is required to withhold
5% of the South Carolina taxable income of partners who are nonresidents of
South Carolina, and remit it to the South Carolina Department of Revenue.
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The South Carolina tax paid on your behalf will be reported on your
Schedule K-1 for 2001, and will be treated for federal income tax purposes as
cash distributed to you. You should claim the amount withheld as estimated tax
paid on your South Carolina individual income tax return for the year of
withholding.
INFORMATION ABOUT NCP-SIX
GENERAL
NCP-Six is a Washington limited partnership consisting of two general
partners and approximately 1,807 limited partners as of September 30, 2000.
Northland Communications Corporation, a Washington corporation, is the managing
general partner of NCP-Six. FN Equities Joint Venture, a California general
partnership, is the administrative general partner of NCP-Six.
Northland was initially formed in March 1981. Northland is principally
involved in the ownership and management of cable television systems. Northland
currently manages the operations and serves as the general partner for cable
television systems owned by four limited partnerships. Northland is also the
parent company of Northland Cable Properties, Inc., which was formed in February
1995 and is principally involved in direct ownership of cable television
systems. Northland Cable Properties, Inc. is the managing member of Northland
Cable Ventures, LLC. Northland Telecommunications Corporation is Northland's
parent company. Other direct and indirect subsidiaries of Northland
Telecommunications Corporation 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.
- 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 a holding
company. Sole shareholder of the following two entities:
- Statesboro Media, Inc. - formed in April 1995 and principally
involved in operating an AM radio station serving the community
of Statesboro, Georgia and surrounding areas.
- Corsicana Media, Inc. - purchased in September 1998 from an
affiliate and principally involved in operating an AM radio
station serving the community of Corsicana, Texas and
surrounding areas.
The following organizational chart shows the interrelationship between
NCP-Six, its general partners, and Northland and its affiliated entities as of
September 30, 2000.
BUSINESS
NCP-Six was formed on January 22, 1986 and began operations in 1986 with
the acquisition of cable television systems serving several communities and the
surrounding areas in Mississippi and North Carolina. In a
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series of transactions since then, NCP-Six acquired and now operates cable
television systems through five operating groups located in the following
geographic areas:
- Starkville, Mississippi;
- Philadelphia, Mississippi;
- Highlands, North Carolina;
- Barnwell, South Carolina; and
- Bennettsville, South Carolina.
All of the initial acquisitions were financed through a combination of
limited partners' equity and bank loans and the later acquisitions were financed
through a combination of partnership cash flow and bank loans. As of September
30, 2000, the outstanding principal balance owing on NCP-Six's bank financing
was approximately $28,965,000. In addition, NCP-Six owed the managing general
partner and affiliates an aggregate of approximately $70,300 for unreimbursed
operating expenses.
NCP-Six's 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 four major television networks (ABC, NBC, CBS
and Fox), 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 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 services
as Showtime, Home Box Office, Cinemax or The Movie Channel.
As of September 30, 2000, the total number of basic subscribers served
by NCP-Six's systems was approximately 32,370, and NCP-Six's penetration rate
(basic subscribers as a percentage of the total number of estimated homes passed
by NCP-Six's cable distribution system) was approximately 63%. NCP-Six's
properties are located in rural areas, which to some extent, do not offer
consistently acceptable off-air network signals. This factor, combined with the
existence of fewer entertainment alternatives than in large markets contributes
to a larger proportion of the population in rural areas than in larger, more
urban areas subscribing to cable television (higher penetration).
NCP-Six has 38 non-exclusive franchises to operate its systems. These
franchises, which will expire at various dates through the year 2017, have been
granted by local, county, state and other governmental authorities in the areas
in which NCP-Six's systems currently 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 system derived from its operations in a
particular community. The franchises may be terminated for failure to comply
with their respective conditions.
THE SYSTEMS
NCP-Six operates five groups of "clusters" of cable systems serving the
communities and surrounding areas of Starkville, Kosciusko, Philadelphia and
Forest, Mississippi; Highlands, North Carolina; and Barnwell and Bennettsville,
South Carolina. The following is a description of these operating groups.
STARKVILLE, MISSISSIPPI
The Starkville operating group serves the communities and surrounding
areas of Starkville and Kosciusko, Mississippi. The City of Starkville is the
home of Mississippi State University with an enrollment of approximately 12,000
students. The university's 10 colleges and schools comprise 58 departments that
offer more than 120 majors. Mississippi State is also the largest employer in
Starkville, with nearly 1,300 faculty members or professionals and 1,450 support
staff. Also located in Starkville is the Mississippi Research and Technology
Park, which is a long-range economic development project initiated through the
joint efforts of the City of Starkville,
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Oktibbeha County, Mississippi State University and the local business community.
The Park is located on approximately 220 acres across from the entrance to the
university and will enhance high-technology research for application to the
economic sector. The developers and businesses that comprise the Park intend to
work hand in hand with research efforts at the university, and companies that
locate in the Park will have the benefit of university facilities and faculty.
The following provides subscriber information regarding the Starkville,
Mississippi operating group as of September 30, 2000:
<TABLE>
<S> <C>
Basic Subscribers 11,751
Tier Subscribers 6,086
Premium Subscribers 4,111
Estimated Homes Passed 16,525
</TABLE>
PHILADELPHIA, MISSISSIPPI
The Philadelphia operating group serves the communities and surrounding
areas of Philadelphia and Forest, Mississippi. The systems are located in
central Mississippi in an area where the local economies are based primarily in
manufacturing. The region has excellent highway and railroad transportation, a
year-round mild climate, and the availability of a trained, cost-effective labor
force. One of the main industries in the area is poultry. Nearly two million
birds are dressed weekly in the city of Forest, which ranks as the
second-largest producer of broilers in the nation. Other industries in the area
include apparel, ready mix concrete, frozen food products, lumber, small
appliances, electronic assembly, steel and meat processing.
The following provides subscriber information regarding the
Philadelphia, Mississippi operating group as of September 30, 2000:
<TABLE>
<S> <C>
Basic Subscribers 6,701
Tier Subscribers 2,905
Premium Subscribers 2,794
Estimated Homes Passed 8,910
</TABLE>
HIGHLANDS, NORTH CAROLINA
Located on a high plateau of the Blue Ridge Mountains where the corners
of Georgia, North Carolina and South Carolina meet, Highlands has long offered a
cool and beautiful summer retreat for the affluent families from such southern
cities as Atlanta, New Orleans and Tampa. The Highlands region is almost
encircled by the 200,000 acres of the End National Forest, and boasts a lush
mixture of hardwoods and evergreens because of an abundant rainfall. Highlands
has an average altitude of over 4,000 feet, and thus maintains a temperate
summer climate. The influx of tourists increases Highland's year-round
population of approximately 2,000 to over 20,000 between May and October.
The Highlands area is perhaps best known for its exclusive golf clubs.
There are three beautiful golf courses in the Highlands area, the oldest being
the Highlands Country Club. About half the land in the Highlands area is under
private ownership; the rest is part of the End National Forest, and is open for
hiking, fishing, hunting, camping and other outdoor activities. The private land
near the golf courses consists largely of exclusive housing developments, many
of which feature rambling, ranch-style vacation homes with values ranging from
$200,000 to $500,000. The Great Smokey Mountains National Park and the Blue
Ridge Parkway are within easy driving distance of Highlands. Several lakes in
the area offer swimming, boating, skiing, fishing and other water sports.
Rafting is also popular in the area due to the close proximity of the Chattooga
and Cullasaja Rivers.
The following provides subscriber information regarding the Highlands
system as of September 30, 2000:
<TABLE>
<S> <C>
Basic Subscribers 3,279
</TABLE>
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<TABLE>
<S> <C>
Premium Subscribers 749
Estimated Homes Passed 4,190
</TABLE>
BARNWELL, SOUTH CAROLINA
Barnwell, Bamberg and Allendale are located approximately sixty miles
south of Columbia, South Carolina. The economy is based primarily on
agricultural and manufacturing activities.
The following provides subscriber information regarding the Barnwell
system as of September 30, 2000:
<TABLE>
<S> <C>
Basic Subscribers 5,809
Premium Subscribers 3,743
Estimated Homes Passed 12,125
</TABLE>
BENNETTSVILLE, SOUTH CAROLINA
The City of Bennettsville is located approximately 100 miles northeast
of Columbia, South Carolina and serves as the county seat of Marlboro County.
The economy is primarily driven by agriculture and manufacturing: three of the
largest employers are Mohawk Carpet, United Technologies Automotive and
Willamette Industries.
The following provides subscriber information regarding the
Bennettsville system as of September 30, 2000:
<TABLE>
<S> <C>
Basic Subscribers 4,576
Premium Subscribers 2,934
Estimated Homes Passed 9,090
</TABLE>
EMPLOYEES
NCP-Six had 48 employees as of September 30, 2000. Management of these
systems is handled through offices located in the towns of Starkville, Forest,
Kosciusko and Philadelphia, Mississippi; Highlands, North Carolina; and Barnwell
and Bennettsville, South Carolina.
CUSTOMERS
The business of NCP-Six is not dependent upon a single customer or a few
customers, so the loss of any one or more customers would not have a material
adverse effect on its business. No customer accounts for 10% or more of
revenues. No material portion of NCP-Six'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 local franchising authorities. See "-- Regulation and
Legislation" below. During the last fiscal year, NCP-Six did not engage in any
research and development activities.
SEASONALITY
NCP-Six's cable television business is generally not seasonal, with the
exception of the Highlands Systems, which is subject to seasonal fluctuations in
the number of subscribers, which affects revenues and results of operations.
COMPETITION
Cable television systems currently experience competition from several
sources, including broadcast television (digital and analog); cable overbuilds
by cable operators, municipalities, private electric utilities and telephone
companies; direct broadcast satellite services; private cable; and multichannel
multipoint distribution service systems. Cable television systems are also in
competition in various degrees with other communications
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and entertainment media, including motion pictures, home video cassette
recorders (including digital video recorders that have the capability to pause
live television programs and digitally record television shows without the use
of videotape), Internet data delivery and Internet video delivery. The following
provides a summary description of these sources of competition.
BROADCAST TELEVISION. Cable television systems have traditionally
competed with broadcast television, which consists of television signals that
the viewer is able to receive directly on his television without charge using an
"off-air" antenna. The extent of this competition is dependent in part upon the
quality and quantity of signals available by antenna reception as compared to
the services provided by the local cable system. Accordingly, cable operators
find it less difficult to obtain higher penetration rates in rural areas (where
signals available off-air are limited) than in metropolitan areas where
numerous, high quality off-air signals are often available without the aid of
cable television systems. Licensing of digital spectrum by the FCC has provided
incumbent broadcast licensees with the ability to deliver high definition
television pictures and multiple digital-quality program streams, as well as
advanced digital services such as subscription video.
OVERBUILDS. Cable television franchises are not exclusive, so that more
than one cable television system may be built in the same area. This is known as
an "overbuild." Overbuilds have the potential to result in loss of revenues to
the operator of the original cable television system. Constructing and
developing a cable television system is a capital intensive process, and it is
often difficult for a new cable system operator to create a marketing edge over
the existing system. Generally, an overbuilder would be required to obtain
franchises from the local governmental authorities, although in some instances,
the overbuilder could be the local government itself. In any case, an
overbuilder would be required to obtain programming contracts and, in most
cases, would have to build a complete cable system such as headends, trunk lines
and drops to individual subscriber's homes throughout the franchise areas.
Federal cross-ownership restrictions historically limited entry by local
telephone companies into the cable television business. The 1996 Telecom Act
eliminated this cross-ownership restriction. (See "Regulation and Legislation"
below.) It is therefore possible for companies with considerable resources to
overbuild existing cable operators and enter the business. Several telephone
companies have secured cable television franchises from local governmental
authorities and constructed cable television systems, although those efforts
recently have declined. NCP-Six cannot predict at this time the extent of
telephone company competition that will emerge in areas served by NCP-Six's
cable television systems. The entry of telephone companies as direct
competitors, however, is likely to continue over the next several years and
could adversely affect the profitability and market value of NCP-Six's systems.
The entry of electric utility companies into the cable television business, as
now authorized by the 1996 Telecom Act, could have a similar adverse effect.
DIRECT BROADCAST SATELLITE ("DBS") SERVICE. High powered direct-to-home
satellites have made possible the wide-scale delivery of programming (including
Internet services) to individuals throughout the United States using small
roof-top or wall-mounted antennas. The two leading DBS providers have
experienced dramatic growth over the last several years and together now serve
over 13 million customers nationwide. Companies offering DBS service use video
compression technology to increase channel capacity of their systems to more
than 100 channels and to provide packages of movies, satellite networks and
other program services which are competitive to those of cable television
systems. DBS companies historically faced significant legal and technological
impediments to providing popular local broadcast programming to their customers.
Recent federal legislation reduced this competitive disadvantage. Nevertheless,
technological limitations still affect DBS companies, and it is expected that
DBS companies will offer local broadcast programming only in the top 50 to 100
U.S. markets for the foreseeable future. The same legislation reduced the
compulsory copyright fees paid by DBS companies and allowed them to continue
offering distant network signals to rural customers. In addition to emerging
high-powered DBS competition, cable television systems face competition from
several low-powered providers, whose service requires use of much larger home
satellite dishes. The availability of DBS equipment at reasonable prices, and
the relative attractiveness of the programming options offered by the cable
television industry and DBS competitors will impact the ability of DBS service
providers to compete successfully with the cable television industry.
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PRIVATE CABLE. Additional competition is provided by private cable
television systems, known as satellite master antenna television, serving
multi-unit dwellings such as condominiums, apartment complexes, and private
residential communities. These private cable systems may enter into exclusive
agreements with apartment owners and homeowners associations, which may preclude
operators of franchised systems from serving residents of these private
complexes. Operators of private cable, which do not cross public rights of way,
are free from the federal, state and local regulatory requirements imposed on
franchised cable television operators. In addition, recent FCC and Circuit Court
rulings suggest that private cable operators can lease distribution capacity
from local telephone companies that cross public rights of way and provide
service without obtaining a cable franchise.
MULTICHANNEL, MULTIPOINT DISTRIBUTION SERVICE ("MMDS") SYSTEMS. Cable
television systems also compete with wireless program distribution services such
as MMDS systems, commonly called wireless cable, which are licensed to serve
specific areas. MMDS systems use low-power microwave frequencies to transmit
television programming over-the-air to paying subscribers. This industry is less
capital intensive than the cable television industry, and it is therefore more
practical to construct systems using this technology in areas of lower
subscriber penetration.
REGULATION AND LEGISLATION
SUMMARY
The following summary addresses the key regulatory developments and
legislation affecting the cable television industry. Other existing federal
legislation and regulations, copyright licensing and, in many jurisdictions,
state and local franchise requirements are currently the subject of a variety of
judicial proceedings, legislative hearings and administrative and legislative
proposals, which could change, in varying degrees, the manner in which cable
television systems operate. Neither the outcome of these proceedings nor their
impact upon the cable television industry or NCP-Six can be predicted at this
time.
NCP-Six expects to adapt its business to adjust to the changes that may
be required under any scenario of regulation. At this time, NCP-Six cannot
assess the effects, if any, that present regulation may have on NCP-Six's
operations and potential appreciation of its Systems. There can be no assurance
that the final form of regulation will not have a material adverse impact on
NCP-Six's operations.
The operation of a cable system is extensively regulated at the federal,
local and, in some instances, state levels. The Cable Communications Policy Act
of 1984, the Cable Television Consumer Protection and Competition Act of 1992
(the "1992 Cable Act"), and the 1996 Telecommunications Act (the "1996 Telecom
Act", and, collectively, the "Cable Act") establish a national policy to guide
the development and regulation of cable television systems. The Federal
Communications Commission ("FCC") has principal responsibility for implementing
the policies of the Cable Act. Many aspects of such regulation are currently the
subject of judicial proceedings and administrative or legislative proposals.
Legislation and regulations continue to change, and NCP-Six cannot predict the
impact of future developments on the cable television industry. Future
regulatory and legislative changes could adversely affect NCP-Six's operations.
CABLE RATE REGULATION
The 1992 Cable Act imposed an extensive rate regulation regime on the
cable television industry, which limited the ability of cable companies to
increase subscriber fees. Under that 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 satisfaction of conditions rarely
satisfied in the current marketplace.
Although the FCC established the underlying regulatory scheme, local
government units, commonly referred to as local franchising authorities, are
primarily responsible for administering the regulation of the lowest level of
cable service called the basic service tier. The basic service tier typically
contains local broadcast stations and public, educational, and government access
channels. Local franchising authorities also have primary
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responsibility for regulating cable equipment rates. Under federal law, charges
for various types of cable equipment must be unbundled from each other and from
monthly charges for programming services. Before a local franchising authority
begins basic service rate regulation, it must certify to the FCC that it will
follow applicable federal rules. Many local franchising authorities have
voluntarily declined to exercise their authority to regulate basic service
rates.
As of December 15, 2000, approximately 14% of NCP-Six's local
franchising authorities were certified to regulate basic service tier rates. The
1992 Cable Act permits communities to certify and regulate rates at any time, so
that it is possible that additional localities served by the systems may choose
to certify and regulate rates in the future.
The FCC itself historically administered rate regulation of cable
programming service tiers, which represent the expanded level of non-"basic" and
non-"premium", programming services. The 1996 Telecom Act, however, provided
immediate rate relief for small cable operators offering cable programming
service tiers. All of NCP-Six's systems qualified for this cable programming
service tier deregulation. The elimination of cable programming service tier
regulation afforded NCP-Six substantially greater pricing flexibility.
Under the rate regulations of the FCC, most cable systems were required
to reduce their basic service tier and cable programming service tier 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 carriage. 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 to bypass this "benchmark" regulatory scheme
in favor of traditional "cost-of-service" regulation in cases where the latter
methodology appears favorable. Cost of service regulation is a traditional form
of rate regulation, under which a utility is allowed to recover its costs of
providing the regulated service, plus a reasonable profit.
In a particular effort to ease the regulatory burden on small cable
systems, the FCC created special rate rules applicable for systems with fewer
than 15,000 subscribers owned by an operator with fewer than 400,000
subscribers. The special rate rules allow for a simplified cost-of-service
showing. All of NCP-Six's systems are eligible for these simplified
cost-of-service rules, and have calculated rates generally in accordance with
those rules.
Under the FCC's rate rules, premium cable services offered on a
per-channel or per-program basis remain unregulated, as do affirmatively
marketed packages consisting entirely of new programming product. However,
federal law requires that the basic service tier be offered to all cable
subscribers and limits the ability of operators to require purchase of any cable
programming service tier if a customer seeks to purchase premium services
offered on a per-channel or per-program basis, subject to a technology exception
which sunsets in 2002. The 1996 Telecom Act 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.
Regulation by the FCC of cable programming service tier rates for all
systems, regardless of size, sunset pursuant to the 1996 Telecom Act on March
31, 1999. Certain legislators, however, have called for new rate regulations.
Should this occur, all rate deregulation, including that applicable to small
operators like NCP-Six, could be jeopardized.
CABLE ENTRY INTO TELECOMMUNICATIONS
The 1996 Telecom Act creates a more favorable environment for us to
provide telecommunications services beyond traditional video delivery. It
provides that no state or local laws or regulations may prohibit or have the
effect of prohibiting any entity from providing any interstate or intrastate
telecommunications service. A cable operator is authorized under the 1996
Telecom Act to provide telecommunications services without obtaining a separate
local franchise. States are authorized, however, to impose "competitively
neutral" requirements
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regarding universal service, public safety and welfare, service quality, and
consumer protection. State and local governments also retain their authority to
manage the public rights-of-way and may require reasonable, competitively
neutral compensation for management of the public rights-of-way when cable
operators provide telecommunications service.
The favorable pole attachment rates afforded cable operators under
federal law can be gradually increased by utility companies owning the poles,
beginning in 2001, if the operator provides telecommunications services, as well
as cable services, over its plant. The FCC recently clarified that a cable
operator's favorable pole rates are not endangered by the provision of Internet
services, but the U.S. Court of Appeals for the 11th Circuit recently ruled in
Gulf Power Co. v. FCC, 208 F.3d 1263 (11th Cir. 2000) ("Gulf Power") that the
FCC has no authority to regulate pole rents for cable systems providing Internet
services (because, the court ruled, Internet services are not telecommunications
services or cable services). The court subsequently stayed the issuance of the
mandate in Gulf Power pending the filing of and final action on a petition for
writ of certiorari seeking review of the Gulf Power decision in the U.S. Supreme
Court. The stay allows for the orderly review of the decision in the U.S.
Supreme Court. In the interim, the FCC may continue to process pending pole
attachment complaints under its existing rules and procedures. If the 11th
Circuit decision goes into effect, it could significantly increase pole
attachment rates and adversely impact cable operators.
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 Telecom Act to facilitate the entry of new
telecommunications providers (including cable operators) is the interconnection
obligation imposed on all telecommunications carriers. The Supreme Court
effectively upheld most of the FCC interconnection regulations, but recently the
8th Circuit Court of Appeals vacated other portions of the FCC's rules on
slightly different grounds. More recently, the 9th Circuit Court of Appeals
ruled in the FCC's favor on these same rules, creating a split in authority that
may be resolved by the Supreme Court. Although these regulations should enable
new telecommunications entrants to reach viable interconnection agreements with
incumbent carriers, many issues, including which specific network elements the
FCC can mandate that incumbent carriers make available to competitors, remain
unresolved.
Similarly, if another FCC decision requiring that incumbent telephone
companies permit colocation of competitors' equipment on terms more favorable to
competitors is sustained on administrative and judicial appeal, this decision,
too, would make it easier for new entrants, including NCP-Six, to provide
telecommunications service.
INTERNET SERVICE
There is at present no significant federal regulation of cable system
delivery of Internet services. Furthermore, the FCC recently issued several
reports finding no immediate need to impose this type of regulation. However,
this situation may change as cable systems expand their broadband delivery of
Internet services. In particular, proposals have been advanced at the federal
level that would require cable operators to provide access to unaffiliated
Internet-service providers and online service providers. In one instance, the
Federal Trade Commission is considering whether and to what extent to impose, as
a condition of Time Warner's merger with America Online, certain "open access"
requirements on Time Warner's cable systems, thereby allowing unaffiliated
Internet-service providers access to Time Warner's broadband distribution
infrastructure.
Some local franchising authorities unsuccessfully tried to impose
mandatory Internet access or "open access" requirements as part of cable
franchise renewals or transfers. In AT&T Corp. v. City of Portland, No. 99-35609
(9th Cir., June 22, 2000), the federal Court of Appeals for the Ninth Circuit
overturned a federal district court in Portland, Oregon's ruling that local
franchising authorities have the lawful authority to impose these type of
conditions. The lower court had ruled that the City of Portland had inherent
authority to require, as a condition of the City's consent to the transfer of
TCI's cable franchise to AT&T, that AT&T provide "open access" to the "cable
modem platform" of the Excite@Home Internet service. On appeal, the Court of
Appeals rejected the City's attempt to impose "open access" conditions on AT&T's
delivery of Internet service over the cable system because that service,
according to the Court, is not a cable service, but a "telecommunications
service." The potential
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regulatory state and federal implications of this rationale are unclear, given
the various regulatory requirements for the provision of telecommunications
services. There have been at least two additional court rulings that have
rejected local imposition of "open access" conditions on cable-provided Internet
access, but those rulings have employed very different legal reasoning. A
federal court in Virginia found that Internet service was a cable service, but
as such was exempt from local "open access" regulation. Another federal court in
Florida even more recently ruled that "open access" could not be imposed on
local operators because doing so would violate the First Amendment. Other local
authorities have imposed or may impose mandatory Internet access requirements on
cable operators. These developments could, if they become widespread, burden the
capacity of cable systems and complicate any plans NCP-Six may have or develop
for providing Internet service.
TELEPHONE COMPANY ENTRY INTO CABLE TELEVISION
The 1996 Telecom Act allows telephone companies to compete directly with
cable operators by repealing the historic telephone company/cable
cross-ownership ban. Local exchange carriers, including the regional telephone
companies, can now compete with cable operators both inside and outside their
telephone service areas with certain regulatory safeguards. Because of their
resources, local exchange carriers could be formidable competitors to
traditional cable operators. Various local exchange carriers currently are
providing video programming services within their telephone service areas
through a variety of distribution methods, including both the deployment of
broadband wire facilities and the use of wireless transmission.
Under the 1996 Telecom Act, local exchange carriers providing video
programming should be regulated as a traditional cable operator, subject to
local franchising and federal regulatory requirements, unless the local exchange
carrier elects to deploy its plant as an open video system. To qualify for
favorable open video system status, the competitor must reserve two-thirds of
the system's activated channels for unaffiliated entities. The Fifth Circuit
Court of Appeals reversed certain of the FCC's open video system rules,
including its preemption of local franchising. The FCC recently revised its OVS
rules to eliminate this general preemption, thereby leaving franchising
discretion to local and state authorities. It is unclear what effect this ruling
will have on the entities pursuing open video system operation.
Although local exchange carriers and cable operators can now expand
their offerings across traditional service boundaries, the general prohibition
remains on local exchange carrier buyouts of co-located cable systems. Cable
operator buyouts of co-located local exchange carrier systems, and joint
ventures between cable operators and local exchange carriers in the same market
also are prohibited. The 1996 Telecom Act provides a few limited exceptions to
this buyout prohibition, including a carefully circumscribed "rural exemption."
The 1996 Telecom Act also provides the FCC with the limited authority to grant
waivers of the buyout prohibition.
ELECTRIC UTILITY ENTRY INTO TELECOMMUNICATIONS AND CABLE TELEVISION
The 1996 Telecom Act provides that registered utility holding companies
and subsidiaries may provide telecommunications services, including cable
television, notwithstanding the Public Utility Holding Company Act. Electric
utilities must establish separate subsidiaries, known as "exempt
telecommunications companies" and must apply to the FCC for operating authority.
Like telephone companies, electric utilities have substantial resources at their
disposal, and could be formidable competitors to traditional cable systems.
Several of these utilities have been granted broad authority to engage in
activities which could include the provision of video programming.
OWNERSHIP RESTRICTIONS
The 1996 Telecom 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 Telecom Act
leaves in place existing restrictions on cable cross-ownership with satellite
master antenna television and multichannel multipoint distribution service
facilities, but lifts those restrictions where the cable operator is subject to
effective competition. FCC regulations permit cable operators to own and operate
satellite master antenna television systems within their franchise area,
provided that their operation is consistent with local cable franchise
requirements.
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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 video program services. Although the 1992 Cable
Act also precluded any cable operator from serving more than 30% of all U.S.
domestic cable subscribers, this provision is still subject to judicial review.
MUST CARRY AND RETRANSMISSION CONSENT
The 1992 Cable Act contains broadcast signal carriage requirements.
Broadcast signal carriage is the transmission of broadcast television signals
over a cable system to cable customers. These requirements, among other things,
allow local commercial television broadcast stations to elect once every three
years between "must carry" status or "retransmission consent" status. Less
popular stations typically elect must carry, which is the broadcast signal
carriage rule that allows local commercial television broadcast stations to
require a cable system to carry the station. Must carry requests can dilute the
appeal of a cable system's programming offerings because a cable system with
limited channel capacity may be required to forego carriage of popular channels
in favor of less popular broadcast stations electing must carry. More popular
stations, such as those affiliated with a national network, typically elect
retransmission consent, which is the broadcast signal carriage rule that allows
local commercial television broadcast stations to negotiate terms (such as
mandating carriage of an affiliated cable network) for granting permission to
the cable operator to carry the stations. Retransmission consent demands may
require substantial payments or other concessions.
NCP-Six has been able to reach agreements with all of the broadcasters
who elected retransmission consent. To date, compliance with the "retransmission
consent" and "must carry" provisions of the 1992 Cable Act has not had a
material effect on NCP-Six, although these provisions may affect the operations
of NCP-Six in the future, depending on factors as market conditions, the
introduction of digital broadcasts, channel capacity and similar matters when
these arrangements are negotiated or renegotiated.
The burden associated with must carry may increase substantially if
broadcasters proceed with planned conversion to digital transmission and the FCC
determines that cable systems must carry all analog and digital broadcasts in
their entirety. This burden would reduce capacity available for more popular
video programming and new Internet and telecommunications offerings. The
broadcast industry continues to press the FCC on the issue of digital must
carry. A rulemaking regarding must carry obligations during the transition from
analog to digital broadcasting remains pending at the FCC. It remains unclear
when a final decision will be released.
ACCESS CHANNELS
Local franchising authorities can include franchise provisions requiring
cable operators to set aside certain channels for public, educational and
governmental access programming. Federal law also requires cable systems to
designate a portion of their channel capacity, up to 15% in some cases, for
commercial leased access by unaffiliated third parties. The FCC has adopted
rules regulating the terms, conditions and maximum rates a cable operator may
charge for commercial leased access use. We believe that requests for commercial
leased access carriage to date have been relatively limited.
ACCESS TO PROGRAMMING
To spur the development of independent cable programmers and competition
to incumbent cable operators, the 1992 Cable Act imposed restrictions on the
dealings between cable operators and cable programmers. Of special significance
from a competitive business posture, the 1992 Cable Act precludes video
programmers affiliated with cable companies from favoring their cable operators
over new competitors and requires these programmers to sell their
satellite-delivered programming to other multichannel video distributors. This
provision limits the ability of vertically integrated cable programmers to offer
exclusive programming arrangements to cable companies. There also has been
interest expressed in further restricting the marketing practices of cable
programmers, including subjecting programmers who are not affiliated with cable
operators or programmers who deliver their service by terrestrial means (rather
than by satellite) to the program access
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requirements. These changes should not have a dramatic impact on NCP-Six, but
would limit potential competitive advantages NCP-Six enjoys.
INSIDE WIRING; SUBSCRIBER ACCESS
In an order issued in 1997, the FCC established rules that require an
incumbent cable operator upon expiration of a multiple dwelling unit service
contract to sell, abandon, or remove "home run" wiring that was installed by the
cable operator in a multiple dwelling unit building. These inside wiring rules
are expected to assist building owners in their attempts to replace existing
cable operators with new programming providers who are willing to pay the
building owner a fee, where this fee is permissible. The FCC has also proposed
abrogating all exclusive multiple dwelling unit service agreements held by
incumbent operators.
With limited exceptions, existing FCC regulations prohibit any state or
local law or regulation, or private covenant, private contract, lease provision,
homeowners' association rule or similar restriction, impairing the installation,
maintenance or use of certain video reception antennas on property within the
exclusive control of a tenant or property owner.
OTHER REGULATIONS OF THE FEDERAL COMMUNICATIONS COMMISSION
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 nonduplication,
- local sports blackouts,
- indecent programming,
- lottery programming,
- political programming,
- sponsorship identification,
- children's programming advertisements, and
- closed captioning,
- registration of cable systems and facilities licensing,
- maintenance of various records and public inspection
files,
- aeronautical frequency usage,
- lockbox availability,
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- antenna structure notification,
- tower marking and lighting,
- consumer protection and customer service standards,
- technical standards,
- consumer electronics equipment compatibility, and
- emergency alert systems.
The FCC recently ruled that cable customers must be allowed to purchase
cable converters from third parties and established a multi-year phase-in during
which security functions, which would remain in the operator's exclusive
control, would be unbundled from basic converter functions, which could then be
satisfied by third party vendors.
The FCC has the authority to enforce its regulations through the
imposition of substantial fines, the issuance of cease and desist orders and/or
the imposition of other administrative sanctions, such as the revocation of FCC
licenses needed to operate certain transmission facilities used in connection
with cable operations.
COPYRIGHT
Cable television systems are subject to federal copyright licensing
covering carriage of television and radio broadcast signals. In exchange for
filing certain reports and contributing a percentage of their revenues to a
federal copyright royalty pool, cable operators can obtain blanket permission to
retransmit copyrighted material included in broadcast signals. Effective July 1,
2000, the federal Copyright Office increased the cable compulsory license rates
used to calculate cable systems' copyright payments under the cable compulsory
license. The possible modification or elimination of this compulsory copyright
license is the subject of continuing legislative review and could adversely
affect NCP-Six's ability to obtain desired broadcast programming. We cannot
predict the outcome of this legislative activity. Copyright clearances for
nonbroadcast programming services are arranged through private negotiations.
Cable operators distribute locally originated programming and
advertising that use music controlled by the two principal major music
performing rights organizations, the American Society of Composers, Authors and
Publishers (ASCAP) and Broadcast Music, Inc. (BMI). The cable industry has had a
long series of negotiations and adjudications with both organizations. A prior
voluntarily negotiated settlement with BMI has now expired, and is subject to
further proceedings. The governing rate court recently set retroactive and
prospective cable industry rates for ASCAP music based on the previously
negotiated BMI rate. Although we cannot predict the ultimate outcome of these
industry proceedings or the amount of any license fees NCP-Six may be required
to pay for past and future use of association-controlled music, we do not
believe these license fees will be significant to NCP-Six's business and
operations.
STATE AND LOCAL REGULATION
Cable television systems generally are operated pursuant to nonexclusive
franchises granted by a municipality or other state or local government entity
in order to cross public rights-of-way. Federal law now prohibits local
franchising authorities from granting exclusive franchises or from unreasonably
refusing to award additional or renew existing franchises.
Cable franchises generally are granted for fixed terms and in many cases
include monetary penalties for non-compliance and may be terminable if the
franchisee fails to comply with material provisions. The specific terms and
conditions of franchises vary materially among jurisdictions. Each franchise
generally contains
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provisions governing cable operations, service rates, franchising fees, system
construction and maintenance obligations, system channel capacity, design and
technical performance, customer service standards, and indemnification
protections. A number of states subject cable systems to the jurisdiction of
centralized state governmental agencies, some of which impose regulation of a
character similar to that of a public utility. Although local franchising
authorities have considerable discretion in establishing franchise terms, there
are certain federal limitations. For example, local franchising authorities
cannot insist on franchise fees exceeding 5% of the system's gross cable-related
revenues, cannot dictate the particular technology used by the system, and
cannot specify video programming other than identifying broad categories of
programming.
Federal law contains renewal procedures designed to protect incumbent
franchisees against arbitrary denials of renewal. Even if a franchise is
renewed, the local franchising authority may seek to impose new and more onerous
requirements, such as significant upgrades in facilities and service or
increased franchise fees as a condition of renewal. Similarly, if a local
franchising authority's consent is required for the sale of a cable system or
franchise, the local franchising authority may attempt to impose more burdensome
or onerous franchise requirements in connection with a request for consent. The
Cable Act requires franchising authorities to act on any franchise transfer
request within 120 days after receipt by the franchising authority of all
information required by FCC regulations. Approval is deemed to be granted if the
franchising authority fails to act within such 120-day period. Historically,
most franchises have been renewed and transfer consents granted to cable
operators that have provided satisfactory services and have complied with the
terms of their franchise.
Under the 1996 Telecom Act, local franchising authorities are prohibited
from limiting, restricting, or conditioning the provision of competitive
telecommunications services except for certain "competitively neutral"
requirements necessary to manage public rights of way. In addition, local
franchising authorities may not require a cable operator to provide any
telecommunications service or facilities, other than institutional networks
under certain circumstances, as a condition of an initial cable franchise grant,
franchise renewal, or franchise transfer. The 1996 Telecom Act also provides
that franchising fees are limited to an operator's cable-related revenues and do
not apply to revenues that a cable operator derives from providing new
telecommunications services.
LEGAL PROCEEDINGS
NCP-Six is not subject to any material legal proceedings.
NCP-SIX'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The purpose of the Proposed Transaction is to provide limited partners
the opportunity to receive significant cash distributions upon the disposition
of the assets of NCP-Six. The Proposed Transaction is not a result of
insufficient working capital or declining results of operations. NCP-Six 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, NCP-Six 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 and certain amendments to NCP-Six's bank loan agreement can be
negotiated. The amounts and timing of any future distributions are dependent in
part on NCP-Six's ability to increase cash flow from operations.
NCP-Six's current revolving credit and term loan facility matures on
December 31, 2000 with a projected outstanding principal balance of
approximately $28,965,000 due and payable on that date. Should NCP-Six continue
its operations beyond this date an amendment to the existing loan agreement
would be required to extend the loan maturity and revise certain financial
covenants. An agreement was reached with NCP-Six's lenders to extend the loan
maturity to June 30, 2001 to allow sufficient time to close the Adelphia
Transaction and the Proposed Transaction. It is probable that any agreement by
the lenders to further extend the loan maturity beyond June 30, 2001 would be
conditioned upon an amendment to the NCP-Six Partnership Agreement to extend the
life
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of NCP-Six, which currently expires on December 31, 2001. Proposed Amendment No.
2 to the NCP-Six Partnership Agreement is aimed at effectuating such an
extension, and if approved by the requisite majority of limited partner
interests will result in extending the life of NCP-Six for six additional years
until December 31, 2007. If the Adelphia Transaction and Proposed Transaction
are closed, Proposed Amendment No. 2 will be ineffective since NCP-Six will have
sold all of its operating assets which will lead to dissolution of the
partnership pursuant to the NCP-Six Partnership Agreement. In our opinion,
subject to the extension of the term of the partnership, amendments to the loan
agreement could be obtained from the lenders at a cost and on terms that would
not adversely affect NCP-Six's ability to continue operating as a going concern.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2000, AND 1999
Total Revenue. Revenues totaled $3,812,503 for the three months ended
September 30, 2000, representing an increase of approximately 3% over the same
period in 1999. Of these revenues, $2,755,246 (72%) was derived from basic
service charges, $340,089 (9%) from premium services, $234,049 (6%) from tier
services, $100,321 (3%) from installation charges, $99,246 (3%) from service
maintenance contracts, $147,368 (4%) from advertising, and $136,184 (3%) from
other sources. The growth in revenue is attributable to rate increases
implemented in the Partnership's systems.
Operating Expenses. Operating expenses totaled $289,230 for the three
months ended September 30, 2000, representing a decrease of approximately 11%
over the same period in 1999. This is primarily due to decreased operating
salaries, regional management expense, system maintenance offset by increased
pole rental and vehicle operating expenses.
General and Administrative Expenses. General and administrative expenses
totaled $956,831 for the three months ended September 30, 2000, representing an
increase of approximately 4% over the same period in 1999. This increase is due
to higher revenue based expenses such as management fees, franchise fees and
copyright fees as well as increased property taxes and administrative services
offset by reduced bad debt expense.
Programming Expenses. Programming expenses totaled $984,345 for the
three months ended September 30, 2000, representing an increase of approximately
1% over the same period in 1999. This is mainly due to higher costs charged by
various program suppliers offset by reduced local programming expense.
Depreciation and Amortization Expenses. Depreciation and amortization
expenses totaled $1,104,290 for the three months ended September 30, 2000,
representing an increase of approximately 4% over the same period in 1999. This
is mainly due to depreciation on plant and equipment acquired during the last
year offset by assets becoming fully depreciated during the year.
Interest Expense. Interest expense for the three months ended September
30, 2000 increased approximately 9% over the same period in 1999. The average
bank debt was $28,965,281 during the third quarter of 2000, remaining consistent
with the same period in 1999, and the Partnership's effective interest rate
increased from 8.13% in 1999 to 8.89% in 2000.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000, AND 1999
Total Revenue. Revenues totaled $11,369,454 for the nine months ended
September 30, 2000, representing an increase of approximately 1% over the same
period in 1999. Of these revenues, $8,224,685 (72%) was derived from basic
service charges, $1,032,478 (9%) from premium services, $704,615 (6%) from tier
services, $285,062 (2%) from installation charges, $297,294 (3%) from service
maintenance contracts, $422,180 (4%) from advertising, and $403,140 (4%) from
other sources. The April 1999 disposition of the Sandersville System decreased
revenues approximately $189,000 or 2%. Assuming the Sandersville System was
disposed of at the beginning of each of the respective periods, revenues would
have increased approximately 3%. The growth in revenue is attributable to rate
increases implemented in the Partnership's systems and a 9% increase in the
number of tier subscribers.
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Operating Expenses. Operating expenses totaled $872,353 for the nine
months ended September 30, 2000, representing a decrease of approximately 12%
over the same period in 1999. Excluding the impact of the Sandersville System
disposition, operating expenses would have decreased approximately 10% for the
nine months ended September 30, 2000. This is primarily due to decreased
operating salaries, regional management expense, system maintenance costs offset
by increased vehicle operating expenses.
General and Administrative Expenses. General and administrative expenses
totaled $2,804,169 for the nine months ended September 30, 2000, representing an
increase of approximately 1% over the same period in 1999. Excluding the impact
of the Sandersville System disposition, general and administrative expenses
would have increased approximately 3% for the nine months ended September 30,
2000. This increase is primarily attributable to: (i) increases in salary and
benefit costs due to cost of living adjustments; (ii) increases in revenue based
expenses such as management fees and franchise fees as well as increased
property taxes.
Programming Expenses. Programming expenses totaled $2,956,457 for the
nine months ended September 30, 2000, representing a 1% increase over the same
period in 1999. Adjusting for the Sandersville System disposition, programming
expenses would have increased approximately 3% for the nine months ended
September 30, 2000 compared to the same period in 1999. This is mainly due to
higher costs charged by various program suppliers offset by reduced local
programming expense.
Depreciation and Amortization Expenses. Depreciation and amortization
expenses totaled $3,337,310 for the nine months ended September 30, 2000,
representing a 1% increase over the same period in 1999. This is mainly due to
depreciation on plant and equipment acquired during the last year offset by
assets becoming fully depreciated during the year.
Interest Expense. Interest expense for the nine months ended September
30, 2000 increased approximately 4% over the same period in 1999. The average
bank debt decreased from $30,090,421 during the first nine months of 1999 to
$28,965,281 during the same period in 2000, and the Partnership's effective
interest rate increased from 8.00% in 1999 to 8.60% in 2000.
RESULTS OF OPERATIONS FOR YEARS ENDED 1999 AND 1998
Total Revenue. Total revenue reached $15,005,218 for the year ended
December 31, 1999, representing an increase of approximately 2% over 1998. Of
the 1999 revenue, $10,781,941 (72%) is derived from subscriptions to basic
services, $1,509,949 (10%) from subscriptions to premium services, $846,215 (6%)
from subscriptions to tier services, $507,932 (3%) from advertising, $384,380
(3%) from service maintenance revenue, $367,300 (2%) from installation charges
and $607,501 (4%) from other sources. The increase in revenue is attributable
primarily to rate increases placed into effect in August 1999 as well as new
product services introduced in 1999. In April 1999, the Partnership sold the
cable television system and assets relating to its Sandersville, Mississippi
system, resulting in the disposition of approximately 1,400 subscribers and
decreased revenues approximately $200,000 or 2%. Assuming the Sandersville,
Mississippi system was disposed of at the beginning of each of the respective
periods, revenues would have increased approximately 4%.
The following table displays historical average rate information for
various services offered by the Partnership's systems (amounts per subscriber
per month):
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Basic Rate ............... $ 26.50 $ 24.20 $ 23.00 $ 22.24 $ 21.53
Tier Rate ................ 8.50 7.65 6.90 6.35 5.95
HBO Rate ................. 10.25 10.50 11.35 11.25 11.10
Cinemax Rate ............. 7.70 7.30 8.70 8.50 8.25
Showtime Rate ............ 7.95 6.30 4.50 8.45 8.45
Movie Channel Rate ....... 6.00 6.60 -- -- 7.00
Disney Rate .............. 6.50 6.20 5.10 6.00 6.75
Encore Rate .............. 1.50 1.50 -- -- --
</TABLE>
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<TABLE>
<S> <C> <C> <C> <C> <C>
Starz Rate ............... 8.50 8.50 -- -- --
Service Contract Rate .... 2.30 2.35 2.60 2.65 2.65
</TABLE>
Operating Expenses. Operating expenses totaled $1,320,255 for the year
ended December 31, 1999, representing an increase of approximately 5% over the
same period in 1998. Excluding the impact of the disposition of the
Sandersville, Mississippi system, operating expenses would have increased
approximately 9% for the year. This is primarily due to increased operating
salaries and pole rental expense offset by decreased system maintenance expenses
and drop materials. Salary and benefit costs are a major component 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 operating expenses to increase in future years.
General and Administrative Expenses. General and administrative expenses
totaled $4,064,866 for the year ended December 31, 1999, representing an
increase of approximately 7% over the same period in 1998. Excluding the impact
of the Sandersville, Mississippi system disposition, general and administrative
expenses would have increased approximately 10% compared to the same period in
1998. This is due to higher revenue based expenses such as management fees and
franchise fees as well as increased utilities, legal expenses, property taxes
and bad debt expense offset by reduced billing expenses, marketing expense and
copyright fees. Significant general and administrative expenses are based on
revenues. As the Partnership's revenue increases the trend of increased
administrative expenses is expected to continue.
Programming Expenses. Programming expenses totaled $3,915,701 for the
year ended December 31, 1999, representing an increase of approximately 3% over
1998. Adjusting for the Sandersville, Mississippi system disposition,
programming expenses would have increased approximately 6% compared to the same
period in 1998. This is mainly due to higher costs charged by various program
suppliers as well as increased advertising expenses and production expense.
Programming expenses consist mainly of payments made to the suppliers of various
cable programming services. Since these costs are based on the number of
subscribers served, future subscriber increases will cause the trend of
increasing programming costs to continue. Additionally, rate increases from
program suppliers, as well as new fees associated with the launch of additional
channels will also contribute to increased programming costs.
Depreciation and Amortization Expenses. Depreciation and amortization
expenses totaled $4,392,073 for the year ended December 31, 1999, representing
an increase of approximately 2% over the same period in 1998. This increase is
due to depreciation and amortization on purchases of plant and equipment in 1999
offset by assets becoming fully depreciated.
Interest Expense. Interest expense for the 1999 decreased approximately
7% over 1998. The average bank debt decreased from $31,373,000 during 1998 to
$30,169,000 during 1999, offset by an increase to the Partnership's effective
interest rate from 7.88% in 1998 to 8.18% in 1999.
RESULTS OF OPERATIONS FOR THE YEARS ENDED 1998 AND 1997
Total Revenue. Total revenue reached $14,746,766 for the year ended
December 31, 1998, representing an increase of approximately 53% over 1997. Of
the 1998 revenue, $10,772,905 (73%) was derived from subscriptions to basic
services, $1,581,530 (11%) from subscriptions to premium services, $685,200 (5%)
from subscriptions to tier services, $456,007 (3%) from advertising, $396,381
(3%) from service maintenance revenue, $356,404 (2%) from installation charges
and $498,339 (3%) from other sources. The January 1998 addition of approximately
11,200 subscribers acquired in the purchase of cable systems serving the
communities of Bennettsville, Barnwell, Bamberg and Allendale, South Carolina
increased revenues 49%. The remaining 4% of revenue growth is attributable to
rate increases placed into effect in August of 1998.
Operating Expenses. Operating expenses totaled $1,262,672 for the year
ended December 31, 1998, representing an increase of approximately 38% as
compared to 1997. The acquisition of the Bennettsville, Barnwell, Bamberg and
Allendale, South Carolina systems increased operating expenses 43%. The expenses
for the other systems decreased approximately 5% primarily related to a
reduction in regional management costs offset
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by increased salary and benefit costs. Salary and benefit costs are a major
component 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 operating expenses to increase in future years.
General and Administrative Expenses. General and administrative expenses
totaled $3,790,975 for the year ended December 31, 1998, representing an
increase of approximately 61% over 1997. The acquisition of the Bennettsville,
Barnwell, Bamberg and Allendale, South Carolina systems increased general and
administrative expenses 60%. The expenses for the remaining systems increased 1%
primarily due to higher revenue based expenses such as franchise fees, copyright
fees and management fees as a result of revenue gains discussed above, offset by
a one time correction to copyright fees. Significant general and administrative
expenses are based on revenues. As the Partnership's revenue increases the trend
of increased administrative expenses is expected to continue.
Programming Expenses. Programming expenses totaled $3,784,358 for the
year ended December 31, 1998, representing an increase of approximately 64% over
1997. Approximately 9% of the increase is the result of increased costs charged
by various program suppliers and new channel launches, as well as additional
salary and benefit costs related to local programming and production support,
with the acquisition of the Bennettsville, Barnwell, Bamberg and Allendale,
South Carolina systems resulting in the remaining 55%. Programming expenses
consist mainly of payments made to the suppliers of various cable programming
services. Since these costs are based on the number of subscribers served,
future subscriber increases will cause the trend of increasing programming costs
to continue. Additionally, rate increases from program suppliers, as well as new
fees associated with the launch of additional channels will also contribute to
increased programming costs.
Depreciation and Amortization Expenses. Depreciation and amortization
expenses totaled $4,287,623 for the year ended December 31, 1998, representing
an increase approximately 113% over 1997. Excluding the effects of the
acquisition of the Bennettsville, Barnwell, Bamberg and Allendale, South
Carolina systems, depreciation and amortization decreased 2% as a result of
assets becoming fully depreciated and amortized in 1998, offset by depreciation
and amortization on current year purchases. The addition of assets acquired in
the purchase of the Bennettsville, Barnwell, Bamberg and Allendale, South
Carolina systems increased depreciation and amortization expense 115%.
Interest Expense. Interest expense increased from $846,609 in 1997 to
$2,566,743 in 1998 (approximately 203%). The Partnership's average debt balance
increased from approximately $11,410,121 during 1997 to $21,136,135 during 1998.
The Partnership's effective interest rate decreased from approximately 8.75% in
1997 to 7.88% in 1998. The increase in average debt outstanding was a result of
borrowings to finance the acquisition of the Bennettsville, Barnwell, Bamberg
and Allendale, South Carolina systems.
LIQUIDITY AND CAPITAL RESOURCES
The Partnership's primary sources of liquidity are cash flow provided
from operations and availability under an $8,000,000 revolving credit line, of
which approximately $6,200,000 was outstanding as of September 30, 2000. Based
on management's analysis, the Partnership's cash flow from operations and
amounts available for borrowing under the Partnership's loan agreement are
sufficient to cover operating costs and planned capital expenditures up to
December 31, 2000. Under the terms of the Partnership's revolving credit and
term loan agreement, as extended all amounts outstanding under the note payable
become due and payable on June 30, 2001. The Partnership's continuing operations
will not provide sufficient liquidity to satisfy this obligation at its stated
maturity. Alternatives available to the Partnership include a sale of a portion
or all of its assets to generate proceeds sufficient to repay the outstanding
debt or to renegotiate the terms of the credit agreement with its lenders to
extend the maturity date. Management believes agreement by the lenders to extend
the maturity date would be contingent upon the approval of the limited partners
to extend the expiration of the Partnership's life, which currently expires on
December 31, 2001.
The general partners are currently in the process of formulating a
proposal to liquidate the assets of the partnership, which, in the opinion of
the Managing General Partner, would provide sufficient proceeds to retire all
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the Partnership's obligations. Such a proposal would require approval by a
majority in interest of limited partners. It is anticipated this liquidation
would occur in 2001. Based on preliminary discussions with the lenders,
management and the lenders believe it is not unreasonable that the Partnership
could arrange financing to continue its operations if necessary, assuming no
deterioration in its operations and the bank credit markets remain open.
During the three months ended September 30, 2000, the Partnership's
primary sources of liquidity were cash provided from operations and credit
available under its revolving credit and term loan agreement. The Partnership
generates cash on a monthly basis through the monthly billing of subscribers for
cable services. Losses from uncollectible accounts have not been material.
During the three months ended September 30, 2000, cash generated from monthly
billings was sufficient to meet the Partnership's needs for working capital,
capital expenditures and scheduled debt service.
Under the terms of the Partnership's loan agreement, the Partnership has
agreed to restrictive covenants which require the maintenance of certain ratios
including a senior debt to annualized operating cash flow ratio of 5.25 to 1.00,
and an annual operating cash flow to interest expense ratio of not less than
2.25 to 1.00. As of September 30, 2000, the Partnership was in compliance with
its required financial covenants.
As of the date of this filing, the balance under the credit facility is
$28,965,281. Certain fixed rate agreements expired during the third quarter of
2000. As of the date of this filing, interest rates on the credit facility were
as follows: $28,965,281 fixed at Libor based rate of 8.6206% expiring October
30, 2000. The above includes a margin paid to the lender based on overall
leverage, and may increase or decrease as the Partnership's leverage fluctuates.
CAPITAL EXPENDITURES
During the nine months ended September 30, 2000, NCP-Six incurred
approximately $1,627,000 of capital expenditures. Those expenditures included
ongoing upgrades to the Starkville and Forest, Mississippi, and Barnwell, South
Carolina systems, and the launch of digital programming services in Starkville,
Mississippi.
During 1999, the Partnership incurred approximately $2,660,000 in
capital expenditures. These expenditures included the ongoing system upgrade to
550 MHz and a vehicle replacement in the Starkville System, the completion of a
system upgrade to 450 MHz in the Koscuisko System, the continued system upgrade
to 450 MHz, a vehicle replacement and channel additions in the Philadelphia
System, the continued deployment of fiber in the Highlands System, a vehicle
replacement and a standby generator in the Bennettsville System and a vehicle
replacement and continued system upgrade to 450 MHz in the Barnwell System, as
well as various line extensions in all of the systems.
During 1998, NCP-Six incurred approximately $2.8 million in capital
expenditures. These expenditures included the continued construction of a fiber
backbone in the Starkville, Mississippi system, the continuation of a system
upgrade to 450 MHz in the Kosciusko, Mississippi system, vehicle replacements
and a continued system upgrade to 450 MHz in the Philadelphia, Mississippi
system, the continued deployment of fiber in the Highlands, North Carolina
system, computer hardware and software upgrades in the Bennettsville, South
Carolina system and the purchase of a new office building and system upgrade to
450 MHz in the Barnwell, South Carolina system, as well as various line
extensions in all of the systems.
RECENT ACQUISITIONS AND DISPOSITIONS
On April 30, 1999, NCP-Six sold the assets of its cable television
system serving approximately 1,400 subscribers in and around the communities of
Sandersville, Mississippi. The sales price for the system was $1.9 million, and
the net proceeds were utilized to reduce outstanding debt. NCP-Six determined to
sell the Sandersville system due to the significant "overbuild" situation facing
the system and the surrounding geographic area. Due to the overbuild and lack of
other interested purchasers for the system, NCP-Six sold the Sandersville system
to the overbuilder.
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On January 2, 1998, NCP-Six purchased cable television systems serving
approximately 11,200 subscribers in and around the communities of Allendale,
Bamberg, Barnwell and Bennettsville, South Carolina. The purchase price of these
systems was $20.5 million. NCP-Six borrowed approximately $20.47 million under
an amended and restated revolving credit and term loan agreement with its lender
to finance the acquisition of the South Carolina cable systems.
AFFILIATES OF NCP-SIX
NCP-Six is a Washington limited partnership with no directors or
officers. The managing general partner of NCP-Six is Northland Communications
Corporation, a Washington corporation. The administrative general partner of
NCP-Six is FN Equities Joint Venture, a California general partnership. To the
best of our knowledge, as of December 31, 2000, no person owned more than five
percent of any class of NCP-Six's voting securities. We and our affiliates
collectively own less than one percent of the outstanding units of limited
partnership of NCP-Six.
MANAGEMENT AND BENEFICIAL OWNERSHIP OF NCP-SIX
MANAGEMENT OF NCP-SIX
GENERAL
NCP-Six is a Washington limited partnership with no directors or
officers. The managing general partner of NCP-Six is Northland Communications
Corporation, a Washington corporation. The administrative general partner of
NCP-Six is FN Equities Joint Venture, a California joint venture.
The sole partners of the administrative general partner are FN Equities,
Inc., FN Network Partners, Ltd., a California limited partnership, and John
Simmers, the sole owner of FN Equities. The principal business of each of the
administrative general partner and FN Equities is to provide administrative
services as administrative general partner of cable television limited
partnerships. FN Network Partners is an investment partnership. The address of
the principal executive offices of each of the administrative general partner,
FN Equities, FN Network Partners and John Simmers is 2780 Sky Park Drive, Suite
300, Torrance, California 90505.
OFFICERS AND DIRECTORS OF NORTHLAND COMMUNICATIONS CORPORATION
The following table sets forth information about the executive officers
and directors of Northland Communications Corporation:
<TABLE>
<CAPTION>
NAME AGE POSITION
----------------- ---- --------------------------------------------------
<S> <C> <C>
John S. Whetzell 59 Board Chairman and President
Richard I. Clark 43 Director, Vice President, Assistant Treasurer and
Assistant Secretary
John E. Iverson 64 Director and Secretary
Gary S. Jones 43 Vice President
James E. Hanlon 67 Divisional Vice President
Richard J. Dyste 55 Vice President, Technical Services
H. Lee Johnson 57 Divisional Vice President
R. Gregory Ferrer 45 Vice President and Treasurer
Matthew J. Cryan 36 Vice President, Budgets and Planning
Laura N. Williams 33 Vice President and Senior Counsel
</TABLE>
JOHN S. 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 26 years. Between March 1979 and February 1982, he
was in charge of the Ernst & Whinney national cable television
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<PAGE> 98
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 FCC from May 1974 to February 1979. He provided economic studies to support
the deregulation of cable television both in federal and state arenas. He
participated in the formulation of accounting standards for the industry and
assisted the FCC in negotiating and developing the pole attachment rate formula
for cable television. His undergraduate degree is in economics from George
Washington University, and he has an MBA degree from New York University.
RICHARD I. CLARK, an original incorporator of Northland Communications
Corporation, serves as Vice President, Assistant Secretary and Assistant
Treasurer of Northland Communications Corporation. He also serves as Vice
President, Assistant Secretary and Treasurer of Northland Telecommunications
Corporation. Mr. Clark has served on the Board of Directors of both Northland
Communications Corporation and Northland Telecommunications Corporation since
July 1985. In addition to his other responsibilities, Mr. Clark is responsible
for the administration and investor relations activities of Northland, including
financial planning and corporate development. From July 1979 to February 1982,
Mr. Clark was employed by Ernst & Whinney in the area of providing cable
television consultation services and has been involved with the cable television
industry for nearly 22 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 through the application of these programs. In 1979, Mr. Clark graduated
cum laude from Pacific Lutheran University with a Bachelor of Arts degree in
accounting.
JOHN E. IVERSON is the Secretary of Northland Communications Corporation
and has served on the Board of Directors since December 1984. He also is the
Secretary and serves on the Board of Directors of Northland Telecommunications
Corporation and each of its subsidiaries. He is currently a member in the law
firm of Ryan, Swanson & Cleveland P.L.L.C. He is a member of the Washington
State Bar Association and American Bar Association and has been practicing law
for more than 38 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.
GARY S. JONES is Vice President for Northland Communications
Corporation. 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 by the Certified Public Accounting firm of 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.
JAMES E. HANLON has served as a Divisional Vice President for Northland
Communications Corporation since June 1985 and is currently responsible for the
management of systems serving subscribers in Texas. 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 Controller of New York Yankees, Inc. Mr. Hanlon
has a Bachelor degree in Business Administration from St. Johns University.
RICHARD J. 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 current member of the Society of Cable
Telecommunications Engineers, Inc. Mr. Dyste joined Northland in 1986 as an
engineer and served as Operations Consultant to Northland Communications
Corporation from August 1986 until April 1987. From 1977 to 1985, Mr. Dyste
owned and operated Bainbridge TV Cable. He is a graduate of Washington
Technology Institute.
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<PAGE> 99
H. LEE JOHNSON has served as Divisional Vice President for Northland
Communications Corporation's Statesboro, Georgia regional office since March
1994. He is responsible for the management of systems serving subscribers in
Alabama, Georgia, Mississippi, North Carolina and South Carolina. Prior to his
association with Northland he served as Regional Manager for Warner
Communications, managing four cable systems in Georgia from 1968 to 1973. Mr.
Johnson has also served as President of Sunbelt Finance Corporation and was
employed as a System Manager for Statesboro CATV when Northland purchased the
system in 1986. Mr. Johnson has been involved in the cable television industry
for over 32 years and is a current member of the Society of Cable Television
Engineers. He is a graduate of Swainsboro Technical Institute and has attended
numerous training seminars, including courses sponsored by Jerrold Electronics,
Scientific Atlanta, The Society of Cable Television Engineers and CATA.
R. GREGORY FERRER joined Northland Communications Corporation in March
1984 as Assistant Controller and serves as Vice President and Treasurer of
Northland Communications Corporation. Mr. Ferrer also serves as Vice President
and Assistant Treasurer of Northland Telecommunications Corporation. Mr. Ferrer
is responsible for coordinating all of Northland's property tax filings,
insurance requirements and system programming contracts as well as interest rate
management and other treasury functions. Prior to joining Northland, he was a
Certified Public Accountant at Benson & McLaughlin, a local public accounting
firm, from 1981 to 1984. Mr. Ferrer received his Bachelor of Arts in Business
Administration from Washington State University with majors in marketing in 1978
and accounting and finance in 1981.
MATTHEW J. CRYAN is Vice President - Budgets and Planning and has been
with Northland Communications Corporation since September 1990. Mr. Cryan is
responsible for the development of current and long-term operating budgets for
all Northland entities. Additional responsibilities include the development of
financial models used in support of acquisition financing, analytical support
for system and regional managers, financial performance monitoring and reporting
and programming analysis. Prior to joining Northland, Mr. Cryan was employed as
an analyst with NKV Corp., a securities litigation support firm located in
Redmond, Washington. Mr. Cryan graduated from the University of Montana in 1988
with honors and holds a Bachelor of Arts in Business Administration with a major
in finance.
LAURA N. WILLIAMS is Vice President and Senior Counsel for Northland
Communications Corporation and has served in this role since August 2000. Prior
to this time, she served as Associate Counsel for each of the Northland entities
from August 1995. She is a member of the Washington State Bar Association,
American Bar Association and Women in Telecommunications. Ms. Williams received
her B.S. in Business Administration with a major in finance and an M.B.A. from
California State University, Long Beach, and has a Juris Doctor degree from
Seattle University School of Law.
OFFICERS AND DIRECTORS OF FN EQUITIES JOINT VENTURE
The following table sets forth information about the executive officers
and directors of FN Equities:
<TABLE>
<CAPTION>
NAME AGE POSITION
--------------- --- --------------------------------------
<S> <C> <C>
Miles Z. Gordon 52 President and Director
John S. Simmers 49 Vice President, Secretary and Director
</TABLE>
MILES Z. GORDON is President of FN Equities 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.
-89-
<PAGE> 100
JOHN S. SIMMERS is Vice President and Secretary of FN Equities and
Executive Vice President and Chief Operating Officer of Financial Network
Investment Corporation 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.
BENEFICIAL OWNERSHIP
Security ownership of management in NCP-Six as of September 30, 2000 is
as follows:
<TABLE>
<CAPTION>
Name and Address of Percent of Amount and Nature of
Beneficial Owner Title of Class Beneficial Ownership
------------------------------------ ------------------------------- --------------------
<S> <C> <C>
Northland Communications Corporation General Partner's Interest (See (See Note A)
1201 Third Avenue Note A)
Suite 3600
Seattle, WA 98101
FN Equities Joint Venture General Partner's Interest (See (See Note B)
2780 Skypark Dr. Note B)
Suite 300
Torrance, CA 90505
</TABLE>
-------------------------
Note A: Northland has a 1% interest in NCP-Six, which increases to a 20%
interest in NCP-Six when the limited partners have received 100% of
their aggregate cash contributions. The natural person who exercises
voting and/or investment control over these interests is John S.
Whetzell.
Note B: FN Equities Joint Venture has no interest in NCP-Six until the limited
partners have received 100% of their aggregate cash contributions, at
which time FN Equities Joint Venture will have a 5% interest in NCP-Six.
The natural person who exercises voting and/or investment control over
these interests is John S. Simmers.
CHANGES IN CONTROL
Northland has pledged its ownership interest as managing general partner
of NCP-Six to NCP-Six's lender as collateral pursuant to the terms of the term
loan agreement between NCP-Six and its lender.
The principal business of Northland 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 NCP-Six, and liquidating partnership assets
upon dissolution. Northland is a wholly-owned subsidiary of Northland
Telecommunications Corporation, a Washington corporation. The address of the
principal executive offices of each of Northland and Northland
Telecommunications Corporation is 1201 Third Avenue, Suite 3600, Seattle,
Washington 98101.
FINANCIAL STATEMENTS
Included with this proxy statement, starting on the following page, are
NCP-Six's audited financial statements for fiscal years ending as of December
31, 1999 and 1998, and as Exhibit L are NCP-Six's unaudited financial statements
as of September 30, 2000 for the nine months ended September 30, 2000 and 1999.
Financial statements for prior years and periods have previously been
distributed to the limited partners on an ongoing basis. The information, as of
September 30, 2000 and for the nine months ended September 30, 2000 and 1999, is
unaudited and reflects all adjustments that are, in the opinion of NCP-Six,
necessary for a fair statement of the
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<PAGE> 101
results as of the dates and for the periods presented and is not necessarily
indicative of the operating results for the entire year.
If you desire any additional information regarding financial statements,
please contact the managing general partner.
-91-
<PAGE> 102
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
LITIGATION REFORM ACT OF 1995. STATEMENTS CONTAINED OR INCORPORATED BY REFERENCE
IN THIS DOCUMENT THAT ARE NOT BASED ON HISTORICAL FACT ARE "FORWARD-LOOKING
STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES REFORM ACT OF 1995.
FORWARD-LOOKING STATEMENTS MAY BE IDENTIFIED BY USE OF FORWARD-LOOKING
TERMINOLOGY SUCH AS "BELIEVE", "INTENDS", "MAY", "WILL", "EXPECT", "ESTIMATE",
"ANTICIPATE", "CONTINUE", OR SIMILAR TERMS, VARIATIONS OF THOSE TERMS OR THE
NEGATIVE OF THOSE TERMS.
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<PAGE> 103
NORTHLAND CABLE PROPERTIES SIX LIMITED PARTNERSHIP
UNAUDITED BALANCE SHEET, AND STATEMENTS OF LIABILITIES AND PARTNERSHIP EQUITY,
OPERATIONS, AND CASH FLOW FOR THE NINE MONTH PERIODS ENDING
AS OF SEPTEMBER 30, 2000 AND 1999
NORTHLAND CABLE PROPERTIES SIX LIMITED PARTNERSHIP
BALANCE SHEETS - (Unaudited)
(Prepared by the Managing General Partner)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------ -----------
<S> <C> <C>
ASSETS
Cash $ 1,917,554 $ 556,962
Due from affiliates 11,330 24,885
Accounts receivable 664,162 781,827
Prepaid expenses 207,957 78,012
Property and equipment, net of accumulated depreciation
of $16,071,239 and $14,639,656, respectively 14,052,176 14,273,156
Intangible assets, net of accumulated amortization of
$16,273,428 and $14,329,374, respectively 12,957,091 14,888,691
------------ ------------
Total assets $ 29,810,270 $ 30,603,533
============ ============
LIABILITIES AND PARTNERS' EQUITY
Accounts payable and accrued expenses $ 1,201,586 $ 1,326,560
Due to managing general partner and affiliates 81,643 46,388
Converter deposits 31,408 35,422
Subscriber prepayments 402,932 412,628
Notes payable 28,965,281 28,965,281
------------ ------------
Total liabilities 30,682,850 30,786,279
------------ ------------
Partners' equity:
General Partners:
Contributed capital, net (37,565) (37,565)
Accumulated deficit (98,175) (91,277)
------------ ------------
(135,740) (128,842)
------------ ------------
Limited Partners:
Contributed capital, net 8,982,444 8,982,444
Accumulated deficit (9,719,284) (9,036,348)
------------ ------------
(736,840) (53,904)
------------ ------------
Total partners' equity (872,580) (182,746)
------------ ------------
Total liabilities and partners' equity $ 29,810,270 $ 30,603,533
============ ============
</TABLE>
The accompanying notes to unaudited financial statements
are an integral part of these statements
93
<PAGE> 104
NORTHLAND CABLE PROPERTIES SIX LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS - (Unaudited)
(Prepared by the Managing General Partner)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------
2000 1999
------------ ------------
<S> <C> <C>
Service revenues $ 11,369,454 $ 11,207,212
Expenses:
Operating (including $224,777 and $225,107 to
affiliates, respectively) 872,353 995,578
General and administrative (including $1,120,142 and
$1,170,594 to affiliates, respectively) 2,804,169 2,767,836
Programming (including $72,274 and $186,236 to
affiliates, respectively) 2,956,457 2,933,546
Depreciation and amortization 3,337,310 3,291,708
------------ ------------
9,970,289 9,988,668
------------ ------------
Income from operations 1,399,165 1,218,544
Other income (expense):
Interest expense (1,867,435) (1,805,262)
Amortization of loan fees (151,388) (140,269)
Interest income 34,017 17,515
(Loss) gain on sale of assets (104,190) 1,604,222
------------ ------------
(2,088,996) (323,794)
------------ ------------
Net (loss) income $ (689,831) $ 894,750
============ ============
Allocation of net (loss) income:
General Partners $ (6,898) $ 8,948
============ ============
Limited Partners $ (682,933) $ 885,803
============ ============
Net (loss) income per limited partnership unit:
(29,784 units) $ (23) $ 30
============ ============
Net (loss) income per $1,000 investment $ (46) $ 59
============ ============
</TABLE>
94
<PAGE> 105
NORTHLAND CABLE PROPERTIES SIX LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS - (Unaudited)
(Prepared by the Managing General Partner)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------
2000 1999
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (689,831) $ 894,750
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation and amortization 3,337,310 3,291,708
Amortization of loan fees 151,388 140,269
Loss (gain) on sale of assets 104,190 (1,604,222)
(Increase) decrease in operating assets:
Due from managing general partner and affiliates 13,555 36,771
Accounts receivable 117,665 160,192
Prepaid expenses (129,945) (152,809)
Increase (decrease) in operating liabilities
Accounts payable and accrued expenses (124,974) (180,755)
Due to managing general partner and affiliates 35,255 (38,484)
Converter deposits (4,014) (19,980)
Subscriber prepayments (9,696) (191,757)
Net cash from operating activities 2,800,903 2,335,683
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment, net (1,435,558) (2,029,503)
Proceeds from sale of property 7,700 --
Proceeds from disposition of cable system 1,718,279
Increase in intangibles (12,453) (29,062)
----------- -----------
Net cash (used in) from investing activities (1,440,311) (340,286)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on borrowings -- (2,407,567)
Repurchase of limited partner interest -- (4,000)
----------- -----------
Net cash used in financing activities -- (2,411,567)
----------- -----------
INCREASE (DECREASE) IN CASH 1,360,592 (416,170)
CASH, beginning of period 556,962 706,907
----------- -----------
CASH, end of period $ 1,917,554 $ 290,737
----------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 1,855,582 $ 1,805,719
=========== ===========
</TABLE>
95
<PAGE> 106
(1) These unaudited financial statements are being filed in conformity
with Rule 10-01 of Regulation S-X regarding interim financial statement
disclosure and do not contain all of the necessary footnote disclosures required
for a fair presentation of the balance sheets, statements of operations and
statements of cash flows in conformity with generally accepted accounting
principles. However, in the opinion of management, this data includes all
adjustments, consisting only of normal recurring accruals, necessary to present
fairly the Partnership's financial position at September 30, 2000, its
statements of operations for the nine and three months ended September 30, 2000
and 1999 and its statements of cash flows for the nine months ended September
30, 2000 and 1999. Results of operations for these periods are not necessarily
indicative of results to be expected for the full year. These financial
statements and notes should be read in conjunction with the Partnership's Annual
Report on Form 10-K for the year ended December 31, 1999.
(2) In June 1998, the Financial Accounting Standards Board issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." The
statement establishes accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments embedded in
other contracts) be recorded in the balance sheet as either an asset or
liability measured at its fair value. The statement requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. Special accounting for qualifying hedges
allows a derivative's gains and losses to offset related results on the hedged
item in the statement of operations, and requires that a company must formally
document, designate, and assess the effectiveness of transactions that are
subject to hedge accounting.
Pursuant to SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities -- Deferral of the Effective Date of FASB No. 133 -- an
Amendment to FASB Statement No. 133" the effective date of SFAS No. 133 has been
deferred until fiscal years beginning after January 15, 2000. SFAS No. 133
cannot be applied retroactively. SFAS No. 133 must be applied to (a) derivative
instruments and (b) certain derivative instruments embedded in hybrid contracts
that were issued, acquired, or substantively modified after December 31, 1998
(and, at the company's election, before January 1, 1999).
The Partnership has not yet quantified the impacts of adopting SFAS No.
133 on the financial statements and has not determined the timing or method of
adoption of SFAS No. 133. However, the statement could increase volatility in
earnings and other comprehensive income.
(3) In November of 1999, the SEC released SAB No. 101 "Revenue
Recognition in Financial Statements." This bulletin becomes effective for the
quarter ended December 31, 2000. This bulletin establishes more clearly defined
revenue recognition criteria, than previously existing accounting
pronouncements, and specifically addresses revenue recognition requirements for
nonrefundable fees, such as installation fees, collected by a company upon
entering into an arrangement with a customer. The Partnership believes that the
effects of this bulletin will not have a material impact on the Partnership's
financial position or results of operations.
(4) Certain reclassifications have been made to conform prior years'
financial statements with the current year presentation.
96
<PAGE> 107
(5) Under the terms of the Partnership's revolving credit and term loan
agreement, all amounts outstanding under the note payable become due and payable
on December 31, 2000. The Partnership's continuing operations will not provide
sufficient liquidity to satisfy this obligation at its stated maturity.
Alternatives available to the Partnership include a sale of a portion or all of
its assets to generate proceeds sufficient to repay the outstanding debt or to
renegotiate the terms of the credit agreement with its lenders to extend the
maturity date. Management believes agreement by the lenders to extend the
maturity date would be contingent upon the approval of the limited partners to
extend the expiration of the Partnership's life, which currently expires on
December 31, 2001.
The general partners are currently in the process of formulating a
proposal to liquidate the assets of the partnership, which, in the opinion of
the Managing General Partner, would provide sufficient proceeds to retire all
the Partnership's obligations. Such a proposal would require approval by a
majority in interest of limited partners. It is anticipated this liquidation
would occur in 2001. Based on preliminary discussions with the lenders,
management and the lenders believe it is not unreasonable that the Partnership
could arrange financing to continue its operations if necessary, assuming no
deterioration in its operations and the bank credit markets remain open.
(6) On April 30, 1999, the Partnership sold cable television systems
serving approximately 1,400 subscribers in and around the communities of
Sandersville, Heidelberg and Laurel, Mississippi. The sales price of these
systems was $1,900,000. The Partnership used net proceeds of $1,540,000 to pay
down existing bank debt.
Pro Forma operating results for the nine months ended September 30,
1999, assuming the disposition described above had been made as of the beginning
of the period, are as follows:
<TABLE>
<CAPTION>
<S> <C>
Service revenues $ 11,018,044
------------
Net loss $ (644,344)
------------
Net loss per limited
partnership unit $ (22)
------------
</TABLE>
97
<PAGE> 108
NORTHLAND CABLE PROPERTIES SIX LIMITED PARTNERSHIP
AUDITED FINANCIAL STATEMENTS FOR THE YEARS ENDING
AS OF DECEMBER 31, 1999 AND 1998
TOGETHER WITH AUDITORS' REPORT
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of
Northland Cable Properties Six Limited Partnership:
We have audited the accompanying balance sheets of Northland Cable
Properties Six Limited Partnership (a Washington limited partnership) as of
December 31, 1999 and 1998, and the related statements of operations, changes in
partners' deficit and cash flows for each of the three years in the period ended
December 31, 1999. 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 in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Northland Cable
Properties Six Limited Partnership as of December 31, 1999 and 1998, and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1999, in conformity with generally accepted accounting
principles in the United States.
Seattle, Washington,
January 28, 2000
98
<PAGE> 109
NORTHLAND CABLE PROPERTIES SIX LIMITED PARTNERSHIP
BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
ASSETS
1999 1998
------------ ------------
<S> <C> <C>
CASH $ 556,962 $ 706,907
ACCOUNTS RECEIVABLE, including $24,885 and $43,766 due from
affiliates in 1999 and 1998, respectively 806,712 722,919
PREPAID EXPENSES AND OTHER ASSETS 78,012 109,387
INVESTMENT IN CABLE TELEVISION PROPERTIES:
Property and equipment, at cost 28,912,812 28,835,350
Less -- Accumulated depreciation (14,639,656) (14,744,674)
------------ ------------
14,273,156 14,090,676
Franchise agreements (net of accumulated amortization of
$13,309,803 in 1999 and $11,179,542 in 1998) 13,917,591 16,047,851
Acquisition costs (net of accumulated amortization of
$107,709 in 1999 and $60,545 in 1998) 129,862 177,026
Loan fees and other intangibles (net of accumulated
amortization of $911,862 in 1999 and $609,832 in 1998) 841,238 1,117,203
------------ ------------
Total investment in cable television properties 29,161,847 31,432,756
------------ ------------
Total assets $ 30,603,533 $ 32,971,969
============ ============
LIABILITIES AND PARTNERS' DEFICIT
LIABILITIES:
Accounts payable $ 607,156 $ 399,031
Other current liabilities 719,404 782,712
Due to general partner and affiliates 46,388 142,746
Deposits 35,422 57,057
Subscriber prepayments 412,628 495,177
Note payable 28,965,281 31,372,848
------------ ------------
Total liabilities 30,786,279 33,249,571
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 8)
PARTNERS' DEFICIT:
General partners --
Contributed capital, net (37,565) (37,565)
Accumulated deficit (91,277) (92,266)
------------ ------------
(128,842) (129,831)
------------ ------------
Limited partners --
Contributed capital, net -- 29,784 units in 1999 and 29,792
in 1998 8,982,444 8,986,444
Accumulated deficit (9,036,348) (9,134,215)
------------ ------------
(53,904) (147,771)
------------ ------------
Total liabilities and partners' deficit $ 30,603,533 $ 32,971,969
============ ============
</TABLE>
The accompanying notes are an integral part of these balance sheets.
99
<PAGE> 110
NORTHLAND CABLE PROPERTIES SIX LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
REVENUE $ 15,005,218 $ 14,746,766 $ 9,644,320
------------ ------------ ------------
EXPENSES:
Operating (including $286,365, $285,212 and $238,691,
net, paid to affiliates in 1999, 1998
and 1997, respectively) 1,320,255 1,262,672 913,361
General and administrative (including $1,575,500,
$1,632,936 and $1,075,881, net, paid to affiliates
in 1999, 1998 and 1997, respectively) 4,064,866 3,790,975 2,357,842
Programming (including $233,163, $241,521 and
$258,388, net, paid to affiliates in 1999, 1998
and 1997, respectively) 3,915,701 3,784,358 2,301,320
Depreciation and amortization 4,392,073 4,287,623 2,010,301
------------ ------------ ------------
13,692,895 13,125,628 7,582,824
------------ ------------ ------------
Operating income 1,312,323 1,621,138 2,061,496
OTHER INCOME (EXPENSE):
Interest income 26,668 17,932 9,074
Interest expense (2,379,744) (2,566,743) (846,609)
Gain (loss) on disposal of assets 1,330,533 (229,940) 7,095
Other expense (190,924) (211,988) (15,157)
------------ ------------ ------------
Net income (loss) $ 98,856 $ (1,369,601) $ 1,215,899
============ ============ ============
ALLOCATION OF NET INCOME (LOSS):
General partners $ 989 $ (13,696) $ 12,159
============ ============ ============
Limited partners $ 97,867 $ (1,355,905) $ 1,203,740
============ ============ ============
NET INCOME (LOSS) PER LIMITED PARTNERSHIP UNIT $ 3 $ (46) $ 40
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
100
<PAGE> 111
NORTHLAND CABLE PROPERTIES SIX LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 98,856 $ (1,369,601) $ 1,215,899
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization expense 4,392,073 4,287,623 2,010,301
Amortization of loan costs 190,923 182,859 15,157
(Gain) loss on disposal of assets (1,330,533) 229,940 (7,095)
(Increase) decrease in operating assets:
Accounts receivable 131,092 (278,190) (74,688)
Prepaid expenses and other assets (120,998) 153,371 (181,817)
Increase (decrease) in operating liabilities:
Accounts payable and other
current liabilities 144,817 224,658 254,763
Due to General Partner and affiliates (121,243) (12,090) (57,662)
Deposits (21,635) (35,036) (22,106)
Subscriber prepayments (82,549) 85,225 (5,718)
------------ ------------ ------------
Net cash provided by operating
activities 3,280,803 3,468,759 3,147,034
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment, net (2,659,141) (2,820,143) (1,662,999)
Acquisition of cable system -- (20,500,000) --
Proceeds from disposal of assets 1,726,026 500 9,475
Purchase of other intangibles (59,887) (77,199) (210,414)
------------ ------------ ------------
Net cash used in investing activities (993,002) (23,396,842) (1,863,938)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable -- 20,473,427 760,000
Principal payments on notes payable (2,407,567) -- (1,781,400)
Repurchase of limited partnership units (4,000) (4,000) (8,000)
Loan fees and other costs (26,179) (7,471) (495,637)
------------ ------------ ------------
Net cash (used in) provided
by financing activities (2,437,746) 20,461,956 (1,525,037)
------------ ------------ ------------
(DECREASE) INCREASE IN CASH (149,945) 533,873 (241,941)
CASH, beginning of year 706,907 173,034 414,975
------------ ------------ ------------
CASH, end of year $ 556,962 $ 706,907 $ 173,034
============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the year for interest $ 2,373,440 $ 2,562,492 $ 847,682
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
101
<PAGE> 112
NORTHLAND CABLE PROPERTIES SIX LIMITED PARTNERSHIP
STATEMENTS OF CHANGES IN PARTNERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
GENERAL LIMITED
PARTNERS PARTNERS TOTAL
----------- ----------- -----------
<S> <C> <C> <C>
BALANCE, December 31, 1996 $ (128,294) $ 16,394 $ (111,900)
Repurchase of limited partnership units -- (8,000) (8,000)
Net income 12,159 1,203,740 1,215,899
----------- ----------- -----------
BALANCE, December 31, 1997 (116,135) 1,212,134 1,095,999
Repurchase of limited partnership units -- (4,000) (4,000)
Net loss (13,696) (1,355,905) (1,369,601)
----------- ----------- -----------
BALANCE, December 31, 1998 (129,831) (147,771) (277,602)
Repurchase of limited partnership units -- (4,000) (4,000)
Net income 989 97,867 98,856
----------- ----------- -----------
BALANCE, December 31, 1999 $ (128,842) $ (53,904) $ (182,746)
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
102
<PAGE> 113
NORTHLAND CABLE PROPERTIES SIX LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
1. ORGANIZATION AND PARTNERS' INTERESTS:
Formation and Business
Northland Cable Properties Six Limited Partnership (the Partnership), a
Washington limited partnership, was formed on January 22, 1986. The Partnership
was formed to acquire, develop and operate cable television systems. The
Partnership began operations on November 3, 1986 by acquiring a cable television
system in Mississippi. Subsequently, additional cable television systems were
acquired in Mississippi, North Carolina and South Carolina. The Partnership has
35 nonexclusive franchises to operate cable systems for periods, which will
expire at various dates through 2017.
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.
Under the terms of the Partnership's credit agreement, all amounts
outstanding under the note payable become due and payable on December 31, 2000.
The Partnership's continuing operations will not provide sufficient liquidity to
satisfy this obligation at its stated maturity. Alternatives available to the
Partnership include a sale of a portion or all of its assets to generate
proceeds sufficient to repay the outstanding debt or to renegotiate the terms of
the credit agreement with its lenders to extend the maturity date. Management
believes agreement by the lenders to extend the maturity date would be
contingent upon the approval of the limited partners to extend the expiration of
the Partnership's life, which currently expires on December 31, 2001.
The general partners are currently in the process of formulating a
proposal to liquidate the assets of the partnership, which, in the opinion of
the General Partner, would provide sufficient proceeds to retire all the
Partnership's obligations. Such a proposal would require approval by a majority
in interest of limited partners. It is anticipated this liquidation would occur
in the first quarter of 2001. Based on preliminary discussions with the lenders,
management and the lenders believe it is not unreasonable that the Partnership
could arrange financing to continue its operations if necessary, assuming no
deterioration in its operations and the bank credit markets remain open.
Contributed Capital, Commissions and Offering Costs
The capitalization of the Partnership is set forth in the accompanying
statements of changes in partners' deficit. No limited partner is obligated to
make any additional contribution to Partnership capital.
The general partners purchased their 1% interest in the Partnership by
contributing $1,000 to Partnership capital.
Pursuant to the Partnership Agreement, brokerage fees paid to an
affiliate of the Administrative General Partner and other offering costs paid to
the General Partner were recorded as a reduction of limited partners' capital.
The Administrative General Partner received a fee for providing certain
administrative services to the Partnership.
103
<PAGE> 114
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:
<TABLE>
<S> <C>
Buildings 20 years
Distribution plant 10 years
Other equipment and leasehold improvements 5-20 years
</TABLE>
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 undiscounted future cash inflows
attributable to the asset, less estimated undiscounted future cash outflows, is
less than the carrying amount, an impairment loss would be 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; then any excess is allocated to goodwill.
Intangible Assets
Costs assigned to franchise agreements, loan fees, acquisition costs and
other intangibles are being amortized using the straight-line method over the
following estimated useful lives:
<TABLE>
<S> <C>
Franchise agreements 10-20 years
Acquisition costs 5 years
Loan fees and other intangibles 1-10 years
</TABLE>
Revenue Recognition
Cable television service revenue, including service maintenance and
installation revenues, 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 $507,932,
$456,007, and $441,308 respectively, in 1999, 1998 and 1997.
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
104
<PAGE> 115
amounts are deferred and recognized against 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, as the Partnership
currently deals only with 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.
Reclassifications
Certain reclassifications have been made to conform prior years'
financial statements with the current year presentation.
Recently Issued Accounting Pronouncements
Statement of Financial Accounting Standards (SFAS) No. 133 -- In June
1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities." The statement establishes
accounting and reporting standards requiring that every derivative instrument
(including certain derivative instruments embedded in other contracts) be
recorded in the balance sheet as either an asset or liability measured at its
fair value. The statement requires that changes in the derivative's fair value
be recognized currently in earnings unless specific hedge accounting criteria
are met. Special accounting for qualifying hedges allows a derivative's gains
and losses to offset related results on the hedged item in the statement of
operations, and requires that a company must formally document, designate, and
assess the effectiveness of transactions that are subject to hedge accounting.
Pursuant to SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities -- Deferral of the Effective Date of FASB No. 133 -- an
Amendment to FASB Statement No. 133" the effective date of SFAS No. 133 has been
deferred until fiscal years beginning after January 15, 2000. SFAS No. 133
cannot be applied retroactively. SFAS No. 133 must be applied to (a) derivative
instruments and (b) certain derivative instruments embedded in hybrid contracts
that were issued, acquired, or substantively modified after December 31, 1998
(and, at the company's election, before January 1, 1999).
The Partnership has not yet quantified the impacts of adopting SFAS No.
133 on the financial statements and has not determined the timing or method of
adoption of SFAS No. 133. However, the statement could increase volatility in
earnings and other comprehensive income.
Staff Accounting Bulletin (SAB) No. 101 -- In November of 1999, the SEC
released SAB No. 101 "Revenue Recognition in Financial Statements." This
bulletin will become effective for the quarter ended March 31, 2000. This
bulletin establishes more clearly defined revenue recognition criteria, than
previously existing accounting pronouncements, and specifically addresses
revenue recognition requirements for nonrefundable fees, such as installation
fees, collected by a company upon entering into an arrangement with a customer.
The Partnership believes that the effects of this bulletin will not have a
material impact on the Partnership's financial position or results of
operations.
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
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.
105
<PAGE> 116
3. TRANSACTIONS WITH 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 $900,313, $884,806, and $578,720 in 1999, 1998 and 1997,
respectively.
Income Allocation
All items of income, loss, deduction and credit are allocated 99% to the
limited partners and 1% to the general partners until the limited partners have
received aggregate cash distributions in an amount equal to aggregate capital
contributions. Thereafter, the general partners receive 25% and the limited
partners are allocated 75% of partnership income and losses. Prior to the
general partners receiving a distribution in any year, the limited partners must
receive distributions equal to at least 50% of their allocable share of net
income for such year, based on projections by the Managing General Partner of
the net income of the Partnership for the year. If cash distributions to the
general partners are deferred because of this 50% limitation, those deferred
cash distributions will be paid to the general partners in subsequent years or
upon liquidation of the Partnership. Any distributions other than from cash
flow, such as from the sale or refinancing of a system or upon dissolution of
the Partnership, will be determined according to contractual stipulations in the
Partnership Agreement.
The limited partners' total initial contributions to capital were
$15,000,000 ($500 per partnership unit). As of December 31, 1999, $3,817,997
($127.50 per partnership unit) has been distributed to the limited partners, and
the Partnership has repurchased $100,745 of limited partnership units (173 units
at $500 per unit and 43 units at $325 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 for these services were $719,456, $663,191, and
$497,964 for 1999, 1998 and 1997, respectively.
In 1999, 1998 and 1997, the Partnership paid installation charges and
maintenance fees for billing system support provided by an affiliate, amounting
to $73,965, $79,590, and $68,685, respectively.
The Partnership has entered into operating management agreements with
affiliates managed by the General Partner. Under the terms of these agreements,
the Partnership or an affiliate serves as the executive managing agent for
certain cable television systems and is reimbursed for certain operating and
administrative expenses. The Partnership paid $160,722, $290,147, and $179,807,
net, under the terms of these agreements during 1999, 1998 and 1997,
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 paid to
NCN during 1999, 1998 and 1997 were $178,797, $165,147, and $176,333,
respectively.
106
<PAGE> 117
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 $69,752, $57,611, and $70,777 in 1999,
1998 and 1997, respectively, for these services.
Due to General Partner and Affiliates
<TABLE>
<CAPTION>
December 31,
----------------------------
1999 1998
-------- --------
<S> <C> <C>
Management fees $ -- $ 68,187
Reimbursable operating costs and other 12,417 45,940
Other amounts due to affiliates, net 33,971 28,619
-------- --------
$ 46,388 $142,746
======== ========
</TABLE>
4. PROPERTY AND EQUIPMENT:
<TABLE>
<CAPTION>
December 31,
----------------------------------
1999 1998
----------- -----------
<S> <C> <C>
Land and buildings $ 858,198 $ 881,669
Distribution plant 26,230,081 26,424,483
Other equipment 1,738,465 1,488,648
Leasehold improvements 40,550 40,550
Construction in progress 45,518 --
----------- -----------
$28,912,812 $28,835,350
=========== ===========
</TABLE>
5. OTHER CURRENT LIABILITIES:
<TABLE>
<CAPTION>
December 31,
-----------------------------
1999 1998
-------- --------
<S> <C> <C>
Programmer license fees $ 52,159 $363,130
Accrued property taxes 133,728 12,653
Accrued franchise fees 253,003 245,867
Other 280,514 161,062
-------- --------
$719,404 $782,712
======== ========
</TABLE>
6. NOTE PAYABLE:
The Partnership's note payable consisted of a 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 8.18%. It is due in full on December 31, 2000.
107
<PAGE> 118
Under the terms of the revolving credit and term loan agreement, the
Partnership has agreed to restrictive covenants which require the maintenance of
certain ratios, including an Annual Operating Cash Flow to Interest Expense
Ratio greater than 2.00 to 1, and a Senior Debt to Annualized Operating Cash
Flow Ratio of 5.25 to 1, amongst others. The General Partner submits quarterly
debt compliance reports to the Partnership's creditor under this agreement. As
of December 31, 1999, the Partnership was in compliance with the terms of the
loan agreement.
7. INCOME TAXES:
Income taxes payable 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.
There was no taxable income to the limited partners in any of the three
years in the periods ended December 31, 1999. Generally, subject to the
allocation procedures discussed in the following paragraph, taxable income to
the limited partners is different from that reported in the statements of
operations principally due to differences in depreciation and amortization
expense allowed for tax purposes and the amount recognizable under generally
accepted accounting principles. Traditionally, there are no other significant
differences between taxable income and the net income reported in the statements
of operations.
The Partnership agreement provides that tax losses may not be allocated
to the Limited Partners if such loss allocation would create a deficit in the
Limited Partners' Capital Account. Such excess losses are reallocated to the
General Partner ("Reallocated Limited Partner Losses"). In general, in
subsequent years, 100% of the Partnership's net income is allocated to the
General Partner until the General Partner has been allocated net income in
amounts equal to the Reallocated Limited Partner Losses.
In general, under current federal income tax laws, a partner's allocated
share of tax losses from a partnership is allowed as a deduction on his
individual income tax return only to the extent of the partner's adjusted basis
in his partnership interest at the end of the tax year. Any excess losses over
adjusted basis may be carried forward to future tax years and are allowed as a
deduction to the extent the partner has an increase in his adjusted basis in the
Partnership through either an allocation of partnership income or additional
capital contributions to the Partnership.
In addition, the current tax law does not allow a taxpayer to use losses
from a business activity in which he does not materially participate (a "passive
activity," e.g., a limited partner in a limited partnership) to offset other
income such as salary, active business income, dividends, interest, royalties
and capital gains. However, such losses can be used to offset 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 $214,581, $209,627, and $123,776 in 1999,
1998 and 1997, respectively. Minimum lease payments through the end of the lease
terms are as follows:
<TABLE>
<S> <C>
2000 $15,583
2001 12,431
</TABLE>
108
<PAGE> 119
<TABLE>
<S> <C>
2002 3,133
2003 1,083
2004 283
Thereafter 1,954
-------
$34,467
=======
</TABLE>
Effects of Regulation
On February 8, 1996, the Telecommunications Act of 1996 (the 1996 Act)
was enacted. This 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 Partnership's
operations cannot be determined at this time. A summary of the provisions
affecting the cable television industry, more specifically those affecting the
Partnership's operations, follows.
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) and having no more than $250 million in
annual revenue. The Partnership qualifies as a small cable company and all of
the Partnership's cable systems qualify as small cable systems. Basic tier rates
remain subject to regulations by the local franchising authority under most
circumstances until effective competition exists. The 1996 Act expands the
definition of effective competition to include the offering of video programming
services directly to subscribers in a franchised area served by a local
telephone exchange carrier, its affiliates or any multichannel video programming
distributor which uses the facilities of the local exchange carrier. The FCC has
not yet determined the penetration criteria that will trigger the presence of
effective competition under these circumstances.
Telephone Companies. The 1996 Act allows telephone companies to offer
video programming services directly to customers in their service areas
immediately upon enactment. They may provide video programming as a cable
operator fully subject to any provision of the 1996 Act, or a radio-based
multichannel programming distributor not subject to any provisions of the 1996
Act, or through nonfranchised "open video systems" offering nondiscriminatory
capacity to unaffiliated programmers, subject to select provisions of the 1996
Act. Although management's opinion is that the probability of competition from
telephone companies in rural areas is unlikely in the near future, there are no
assurances that such competition will not materialize.
The 1996 Act encompasses many other aspects of providing cable
television service including prices for equipment, discounting rates to multiple
dwelling units, lifting of anti-trafficking restrictions, cable-telephone cross
ownership provisions, pole attachment rate formulas, rate uniformity, program
access, scrambling and censoring of Public, Educational and Governmental and
leased access channels.
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 defrays 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 absorbs 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 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.
109
<PAGE> 120
Amounts paid to the affiliate, which maintains the fund for the
Partnership and its affiliates, are expensed as incurred and are included in the
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 1999, 1998, and 1997, respectively, the Partnership was
charged $20,197, $20,878 and $14,324 by the fund. As of December 31, 1999, the
fund had a balance of $360,815.
9. ACQUISITION OF SYSTEMS AND DISPOSITION OF ASSETS:
On January 2, 1998, the Partnership purchased cable television systems
located in and around the communities of Allendale, Bamberg, Barnwell and
Bennettsville, all in the state of South Carolina. The purchase price of these
systems was $20,500,000. The systems are operated from four headends and serve
11,200 subscribers.
The Partnership borrowed an additional $20,473,427 under an amended and
restated revolving credit and term loan agreement with its lender to finance the
acquisition of the South Carolina cable systems.
On April 30, 1999, the Partnership sold cable television systems serving
approximately 1,400 subscribers in and around the communities of Sandersville,
Heidelberg and Laurel, Mississippi. The system was sold at a sales price of
$1,900,000 of which the Partnership received $1,710,000. The remaining balance
of $190,000 will be held in escrow for one year from the date of sale. The
Partnership used net proceeds of $1,540,000 to pay down the existing bank debt.
Pro Forma operating results of the Partnership for 1999 and 1998,
assuming the disposition described above had been completed as of the beginning
of 1998 follows:
<TABLE>
<CAPTION>
For the Years Ended
December 31,
-------------------------------------
1999 1998
------------ ------------
(unaudited) (unaudited)
<S> <C> <C>
Revenue $ 14,813,800 $ 14,183,431
============ ============
Net loss $ (1,482,272) $ (1,271,034)
============ ============
Net loss per limited partnership unit (50) (43)
============ ============
</TABLE>
10. SUBSEQUENT EVENT:
The Partnership previously filed a Preliminary Proxy Statement with the
Securities and Exchange Commission related to the proposed sale of the cable
television and other assets of the Partnership to Northland Cable Properties,
Inc., a wholly owned subsidiary of the General Partner for an aggregate purchase
price of $76,000,000. In the first quarter of 2000, the General Partner made a
decision to terminate the proposal and withdraw the proxy statement. The General
Partner plans to formulate another liquidation proposal to the limited partners
in 2000. It is estimated that any sale of the Partnership would not occur until
the first quarter of 2001.
110
<PAGE> 121
EXHIBIT A
PROXY CARD
NORTHLAND CABLE PROPERTIES SIX LIMITED PARTNERSHIP
The undersigned hereby acknowledges receipt of the Notice of Special
Meeting of limited partners of NORTHLAND CABLE PROPERTIES SIX LIMITED
PARTNERSHIP ("NCP-Six") and accompanying Proxy Statement, each dated April 15,
2000 ("Proxy Materials"). The undersigned appoints John S. Whetzell and Richard
I. Clark, or either of them, as proxies, each with full power to appoint his
substitute. The undersigned represents that he or she holds of record as of
December 31, 2000 the number of units of limited partnership interest in NCP-Six
set forth below and 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 May 31, 2001 and at any postponements or adjournments
thereof. THIS PROXY IS BEING SOLICITED ON BEHALF OF THE MANAGING GENERAL PARTNER
OF NCP-SIX.
The undersigned directs the proxies to vote on the following proposal as
follows:
PROPOSED AMENDMENT NO. 1
BEFORE VOTING ON THIS PROPOSED AMENDMENT NO. 1, THE GENERAL PARTNERS OF
NCP-SIX STRONGLY ENCOURAGE YOU TO READ THAT SECTION TITLED "BACKGROUND
AND REASONS FOR EXTENDING THE TERM OF NCP-SIX" AS FOUND ON PAGE ____ OF
THE PROXY MATERIALS.
To authorize the extension of the term of NCP-Six for an additional six
years so that its current expiration date of December 31, 2001 is changed
to a future expiration date of 2007. Specifically, to effectuate the
six-year extension of the term of NCP-Six, the general partner shall
cause the Amended and Restated Agreement of Limited Partnership of
NCP-Six to be amended pursuant to Proposed Amendment No. 1 as set forth
in Exhibit C of the Proxy Materials.
APPROVE [ ] DISAPPROVE [ ] ABSTAIN [ ]
PROPOSED AMENDMENT NO. 2
To authorize NCP-Six and its general partners to sell all of its cable
systems and other assets owned by NCP-Six, following the sale of its
Bennettsville, South Carolina operating system to Adelphia Communications
Corporation or its assigns (the "Assets") to Northland Communications
Corporation or to one of its affiliates ("Northland") and then to
dissolve and wind up the affairs of NCP-Six, to distribute the proceeds
of the liquidation and any remaining assets in accordance with the
Amended and Restated Agreement of Limited Partnership of NCP-Six and the
Proxy Materials, and to take any action deemed necessary or appropriate
by it to accomplish the foregoing, including approval of certain
amendments to the Amended and Restated Certificate and Agreement of
Limited Partnership of NCP-Six, as such amendments are set forth in
Exhibit D to the Proxy Materials. This authorization includes the
authority of NCP-Six and its general partners 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' collective interest
in NCP-Six, and the distribution to Northland, in kind, of the undivided
portion of the Assets that are attributable to the Managing General
Partner's interest in NCP-Six, all on the terms and conditions described
in the Proxy Materials, and all such other and future actions reasonably
necessary to accomplish the foregoing.
APPROVE [ ] DISAPPROVE [ ] ABSTAIN [ ]
This proxy will be voted as directed by the undersigned. The
above-referenced proposals are independent of one another. Therefore, a vote for
or against one of the two proposals does not dictate how a limited partner must
vote for the other proposal. Notwithstanding, limited partners may not vote for
or against individual elements of either proposal, but must vote either for or
against the proposed amendment in its entirety. IF THIS PROXY IS EXECUTED AND
RETURNED AND NO DIRECTION IS INDICATED, THIS PROXY WILL BE VOTED TO APPROVE BOTH
OF THE ABOVE-REFERENCED PROPOSALS. SIMILARLY, IF THIS PROXY IS EXECUTED AND
RETURNED AND DIRECTION IS INDICATED AS TO ONLY ONE OF THE TWO PROPOSALS, THIS
PROXY WILL BE VOTED TO APPROVE THE PROPOSAL FOR WHICH NO DIRECTION IS INDICATED.
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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:___________________, 2001
Number of Limited Partnership $500 Units Held: __________
X
-----------------------------------
-----------------------------------
(Signature)
X
-----------------------------------
-----------------------------------
(Signature, if held jointly)
PLEASE COMPLETE, SIGN, DATE AND RETURN PROMPTLY IN THE ENCLOSED ENVELOPE.
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EXHIBIT B
AMENDED AND RESTATED CERTIFICATE AND AGREEMENT OF LIMITED PARTNERSHIP OF
NORTHLAND CABLE PROPERTIES SIX LIMITED PARTNERSHIP
AMENDED AND RESTATED
CERTIFICATE AND AGREEMENT OF LIMITED PARTNERSHIP
OF
NORTHLAND CABLE PROPERTIES SIX LIMITED PARTNERSHIP
THIS AMENDED AND RESTATED CERTIFICATE AND AGREEMENT OF LIMITED
PARTNERSHIP (the "Agreement") is made and entered into by and between NORTHLAND
COMMUNICATIONS CORPORATION ("Northland"), a Washington corporation, FN EQUITIES
JOINT VENTURE ("FNEJV"), a California joint venture (Northland and FNEJV
collectively referred to herein as the "General Partners"), RICHARD I. CLARK
(the "Original Limited Partner"), and remaining parties who now or hereafter
from time to time are accepted by the Managing General Partner as Limited
Partners (the "Limited Partners") of NORTHLAND CABLE PROPERTIES SIX LIMITED
PARTNERSHIP (the "Partnership"). Northland shall be the managing general partner
("Managing General Partner") and FNEJV shall be the administrative general
partner ("Administrative General Partner") of the Partnership. This Agreement
amends and restates the Certificate and Agreement of Limited Partnership of
Northland Cable Properties Six Limited Partnership filed with the office of the
Secretary of State of the State of Washington on January 22, 1986, as amended as
of the date hereof.
The Partnership is formed pursuant to the Washington Uniform Limited
Partnership Act.
1. Formation of Limited Partnership. The parties do hereby agree to
operate as a limited partnership pursuant to the Washington Uniform Limited
Partnership Act on the terms and conditions set forth in this Agreement. The
General Partners will cause this Agreement to be duly recorded forthwith in the
office of the Secretary of the State of Washington, in accordance with the
provisions of the Washington Uniform Limited Partnership Act, and will qualify
the Partnership as a limited partnership in other jurisdictions, as required,
where the Partnership shall do business. The General Partners shall not be
required to deliver or-mail a copy of the "filed" Agreement to the Limited
Partners.
2. Name. The name under which the Partnership business shall be con
ducted is NORTHLAND CABLE PROPERTIES SIX LIMITED PARTNERSHIP. The General
Partners will cause, wherever necessary or appropriate, the execution of a
fictitious business name statement and cause such statement to be published and
filed where appropriate.
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3. Office and Principal Place of Business. The office and principal
place of business for the Partnership shall be 3500 One Union Square Building,
Seattle, Washington 98101, or at such other place or places as the Managing
General Partner may from time to time determine. The Managing General Partner
may establish and maintain such other offices and places of business of the
Partnership, either in the state of Washington or elsewhere, as the Managing
General Partner may from time to time determine.
4. Agent for Service. The agent of the Partnership for service of
process in the state of Washington shall be Northland Communications
Corporation, a Washington corporation having its principal place of business at
3500 One Union Square Building, Seattle, Washington 98101. The agent of the
Partnership for service of process in any other state requiring an agent shall
be as designated by the Managing General Partner.
5. Purpose and Nature of Business. The purpose and primary business of
the Partnership is (a) to acquire, develop and operate cable television systems
in the United States, (b) to provide any or all services and products related to
that business, (c) to own, lease or otherwise acquire, encumber and dispose of
any or all assets and services related to such business, and (d) to do any other
act necessary or convenient in connection therewith.
6. Definitions. The defined terms used in this Agreement shall, unless
the context otherwise requires, have the meanings specified in this Article 6.
"Administrative General Partner" means FN Equities Joint Venture, or its
successors as designated in accordance with the terms of this Agreement.
"Affiliate" of another person means (a) any person directly or
indirectly owning, controlling, or holding with power to vote 10 degrees. or
more of the outstanding voting securities of such other person; (b) any person
10 degrees- or more of whose outstanding voting securities are directly or
indirectly owned, controlled, or held with power to vote, by such other person;
(c) any person directly or indirectly controlling such other person; (d) any
officer, director or partner of such other person; and (e) if such other person
is an officer, director or partner, any company for which such person acts in
any such capacity.
"Agreement" means this Amended and Restated Certificate and Agreement of
Limited Partnership, as amended, modified or supplemented from time to time.
"Capital Account" means the account established and maintained on the
books of the Partnership for each Partner pursuant to Article 10.
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"Capital Contribution" means all cash actually contributed (but not
loans) to the Partnership by a Partner.
"Cash Available for Distribution" means cash funds of the Partnership in
excess of amounts reasonably required for the repayment of Partnership
borrowings, interest thereon, other liabilities, Partnership working capital and
reserves which the Managing General Partner deems to be reasonably required or
appropriate for the proper operation of the business of the Partnership.
"Cash Distributions" shall include cash sad property, at its net fair
market value, distributed to the Partners.
"Cash Flow" means Gross Revenues for a given period less all operating
and other expenses actually incurred and related to the Gross Revenues for such
period.
"Code" means Internal Revenue Code of 1954, as amended.
"General Partners" means Northland Communications Corporation, a
Washington corporation; EN Equities Joint Venture, a California joint venture;
and any other person or entity which is subsequently admitted to the Partnership
as a General Partner in accordance with the terms of this Agreement.
"Gross Revenues" means all revenues and receipts actually received from
the service of providing secondary transmissions of primary broadcast
transmitters and from related activities including, but not limited to the full
amount of monthly (or other periodic) service fees for any and all basic and pay
services or tiers of basic and pay services, additional set fees, converter
fees, installation (including connection, relocation, disconnection or
reconnection) fees, separate charges for security, alarm OF facsimile services,
charges for late payments, charges for program origination services and
advertising revenues.
"Limited Partner" means any person or entity accepted by the General
Partners as a limited partner of the Partnership pursuant to the terms of this
Agreement and who is named on Schedule A hereto.
"Majority Vote of the Limited Partners" means a vote by Limited Partners
who collectively hold of record more than 50 degrees O of the Units.
"Managing General Partner" means Northland Communication Corporation, or
its successor as duly designated in accordance with the terms of this Agreement.
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"Net Income and Net Losses" means the amount of the aggregate
Partnership taxable income or loss (including items requiring separate
computation under Section 702 of the Code) as determined for federal income tax
purposes.
"Noncash Additions" means the sum of all increases to a Partner's
Capital Account other than increases for the contribution of money or property
to the Partnership.
"Noncash Reductions" means the sum of all reductions to a Partner's
Capital Account other than reductions for the distribution of cash or property
to such Partner.
"Offering and Organization Costs" means the costs of offering and
marketing the Units and organizing the Partnership (not including sales
commissions or due diligence fees), including printing costs and legal,
accounting and other professional fees incurred in connection with any offering
documents and this Agreement, and related filing and retardation costs, and the
registration, or application for exemption therefrom, of the Units under
applicable federal and state securities laws.
"Partners" means, collectively, the Limited Partners, as constituted
from time to time, and the General Partners.
"Partnership" means Northland Cable Properties Six Limited Partnership,
a Washington limited partnership.
"Substitute Limited Partner" means a transferee of a limited partnership
interest who has been admitted to the Partnership in accordance with the terms
of this Agreement.
"Systems" means, collectively, the cable television systems which will
be owned, directly or indirectly, by the Partnership.
"Units" means participation interests in the Partnership owned by
Limited Partners. Each Unit represents a $;00 Capital Contribution.
7. Term of the Partnership. The Partnership commenced as of the date of
filing and recording the original certificate of limited partnership of the
Partnership and shall continue until the date of the first of the following
events:
(a) December 31, 2001; or
(b) Dissolution as provided in Article 16 of this Agreement.
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8. Capital Contributions.
(a) Contributions by General Partners. The Managing General
Partner shall contribute $1,000 as the collective Capital Contribution of the
General Partners to the Partnership. The General Partners shall have no further
obligation to make any Capital Contributions to the Partnership, except as may
be required by paragraph (e) of Article 16.
(b) Contribution by Original Limited Partner. The Original
Limited Partner shall contribute $100 to the Partnership as his Capital
Contribution. Upon admission of additional Limited Partners, the Original
Limited Partner shall withdraw from the Partnership and his Capital Contribution
shall then be refunded to him; provided, however, that he may again become a
Limited Partner in accordance with the provisions of paragraph (d) below.
Notwithstanding the provisions of Articles 15 and 16 and other provisions of
this Agreement to the contrary, the interest of the Original Limited Partner, as
such, in income, gain, loss, deduction, credit distributions or capital shall
not exceed one percent of the total of any of such amount and the balance shall
be allocated or distributed to, or owned by, the General Partners.
(c) Offering and Organization Costs. The Managing General
Partner, or any agent thereof, is hereby authorized to take any and all actions
as may in its judgment be necessary or advisable in order to raise the capital
authorized in this Article, including, without limitation, the filing of such
documents or instruments as are necessary or advisable to claim exemption from
the registration requirements of federal or state securities laws, the
registration and/or qualification of the Units under federal and state
securities laws, the qualification of the Partnership as a foreign limited
partnership in any jurisdiction wherein the Partnership does business, the
engagement of legal counsel, accountants, or any other experts necessary for the
preparation of any documents required in connection with the Units, or the
engagement of one or more broker-dealers to assist with the offering of the
Units. The Partnership will pay all Offering and Organization Costs up to a
maximum of 3.5~ of the aggregate Capital Contributions from Limited Partners.
All Offering and Organization Costs in excess of 3.5 degrees O of aggregate
Capital Contributions from Limited Partners shall be borne by the General
Partners.
The Partnership shall also pay Financial Network Investment Corporation,
an Affiliate of the Administrative General Partner, a selling commission and due
diligence fee equal in the aggregate to 10.5 degrees o of aggregate Capital
Contributions from Limited Partners, provided, however, that no such commission
or fee shall be payable with respect to Units purchased by the Managing General
Partner or its Affiliates, officers, directors, employees or agents.
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(d) Limited Partners. The Partnership shall offer 30,000 Units,
at $500 per Unit, to be subscribed for by the Limited Partners to be admitted
subsequent to the original formation of the Partnership. The minimum purchase is
eight Units ($4,000). The Managing General Partner reserves the right, however,
in its sole discretion, to accept subscriptions for less than eight Units but
not less than four Units ($2,000) from Individual Retirement Accounts (IRAs) or
HR-10 (Keogh) plans. The Managing General Partner does not intend to accept
subscriptions for more than twenty percent (20 degrees,o) of the Units from
IRAs, Keogh plans or other "tax-exempt entities", as defined in Section
168(j)(4) of the Code, or from any pass-thru entities (as defined in Code
Section 267(e)(2) in which a tax-exempt entity has an interest. The General
Partners may purchase Units of limited partnership interest on the same basis as
other investors and hold such Units as a Limited Partner. Such Limited Partners
as subscribe for Units shall be admitted to the Partnership in accordance with
paragraph (f) below upon the conditions contained herein. No Limited Partners
shall be admitted pursuant to this paragraph (d) unless subscriptions for at
least 2,000 Units have been received and accepted by the Managing General
Partner by July 31, 1987.
Limited Partners shall make their Capital Contributions to the
Partnership in cash at the time of subscription.
(e) Withdrawal of Capital Contributions. No Partner shall have
the right to withdraw or reduce the amount of his or her Capital Contribution,
except to the extent that any such withdrawal or reduction may be required or
expressly permitted by this Agreement. In addition, no part of any Capital
Contribution shall be withdrawn until all obligations and liabilities of the
Partnership (except such as may be due to the General Partners and to the
Limited Partners on account of their Capital Contributions) have been paid or
unless, in the opinion of the Managing General Partner, sufficient assets for
the payment of such obligations and liabilities have been set aside and
designated for that purpose.
(f) Acceptance of Subscriptions. Acceptance of each subscription
for Units shall be discretionary with the Managing General Partner, and the
Managing General Partner may reject any subscription for any reason it deems
appropriate. Upon acceptance of a Limited Partner's subscription and the release
from the escrow account of his or her subscription funds to the Partnership or
the direct deposit of such subscription funds in the Partnership's general
business account, the Managing General Partner shall file an amendment to this
Agreement in accordance with the Washington Uniform Limited Partnership Act
together with a list of the names, addresses and interests of the newly-admitted
Limited Partners pursuant to paragraph (d) of Article 19.
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(g) Additional Capital. The General Partners are authorized to
raise at any time additional capital for the Partnership, in addition to that
authorized by paragraph (d) above, by selling additional limited partnership
interests upon terms and conditions and for such prices as the Managing General
Partner may determine; provided, however, that the General Partners must first
offer such interests to the then current Limited Partners in proportion to their
then current ownership upon such terms and conditions and for such price as the
Managing General Partner proposes to sell such interests to third parties. Any
person who is not a then current Limited Partner and who acquires an interest in
the Partnership which has been offered in accordance with the provisions of this
paragraph (g) shall be admitted to the Partnership as a new Limited Partner upon
acceptance by the Managing General Partner, and no further consent to such
admission by the then current Partners or any execution of documents by them
shall be required.
(h) Initial Investment. Pending initial investment of its funds,
or to provide a source from which to meet contingencies, the Partnership may
temporarily invest its funds in short-term, highly liquid investments that
provide appropriate safety of principal, such as bank certificates of deposit,
money market funds, short-term debt obligations and interest-bearing accounts.
(i) Priority and Return of Capital. Except as expressly provided
by the provisions of this Agreement, no Partner shall have priority over any
other Partner, either as to the return of Capital Contributions or as to net
income, net losses or Cash Distributions. No Partner shall be entitled to the
return of any amount contributed by such Partner to the capital of the
Partnership out of any assets other than the assets of the Partnership and then
only in accordance with the provisions of this Agreement.
9. Advances by General Partners. A General Partner, or any Affiliate
thereof, may in its discretion advance monies to the Partnership for use in
acquiring the Systems or other assets or funding Partnership operations when the
Partnership is in need of such monies. The aggregate amount of such advances
shall become an obligation of the Partnership to such General Partner or
Affiliate, and shall be paid with interest; provided, that the interest rate or
other finance charges and fees with respect to any such loan shall be payable at
a per annum rate not greater than the average interest rate charged, from time
to time, to such General Partner or Affiliate by the financial institution which
principally finances the activities and affairs of such entity or, if the source
of the loan funds is an unaffiliated third-party lender that has loaned such
funds to such General Partner or Affiliate, the per annum rate charged, from
time to time, with respect to such funds by such unaffiliated lender to such
General Partner or Affiliate; and provided, further, that no repayment charge or
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penalty shall be imposed with respect to any such loan, except to the extent
that such prepayment charge or penalty is attributable to an underlying
encumbrance.
10. Capital Accounts.
(a) Establishment of Capital Accounts. The Partnership shall
establish and maintain a Capital Account for each Partner in accordance with
Treasury Regulations promulgated under Code Section 704(b).
(b) Adjustments to Capital Accounts. The Capital Account of each
Partner shall be increased to reflect (i) such Partner's cash contributions,
(ii) the fair market value of property contributed by such Partner (net of
liabilities securing such contributed property that the Partnership is
considered to assume or take subject to under Code Section 752), (iii) the
Partner's share of the Net Income (including all gain as calculated pursuant to
Section 1001 of the Code) of the Partnership, (iv) such Partner's share of
income and gain exempt from tax, and (v) such Partner's share of any basis
increase pursuant to Code Section 48(q)(2). The Capital Account of each Partner
shall be reduced to reflect (i) the amount of money distributed to such Partner,
(ii) the fair market value of property distributed to such Partner (net of
liabilities securing such distributed property that such Partner is considered
to assume or take subject to under Section 752), (iii) such Partner's share of
noncapitalized expenditures not deductible by the Partnership in computing its
taxable income as determined under Code Section 705(a)(2)(B), (iv) such
Partner's share of the amount of any basis adjustment pursuant to Code Sections
48(q)(1) and 48(q)(3), (v) such Partner's share of Net Losses, and (vi) such
Partner's share of amounts paid or incurred to organize the Partnership or to
promote the sale of Partnership Units to the extent that an election under Code
Section 709(b) has not properly been made for such amounts. The Managing General
Partner shall determine the fair market value of all Partnership property which
is distributed in kind, and the Capital Accounts of the Partners shall be
adjusted on the basis of such fair market value determination by the Managing
General Partner as though the property had been sold for its fair market value
and the proceeds (net of liabilities) had been distributed to the Partner
receiving the property in kind. In the event of a contribution or distribution
of property with a fair market value which is not equal to its adjusted basis
(as determined for federal income tax purposes), the Partnership shall maintain
both "tax" and "book" capital accounts in accordance with the rules prescribed
in Treasury Regulations promulgated under Code Section 704.
11. Management of Partnership Activities and Indemnification. The
General Partners shall conduct, direct and exercise full control over all the
activities of the Partnership. The Limited Partners shall have no power over the
conduct of the
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affairs of the Partnership except as specifically set forth herein.
Notwithstanding anything in this Agreement to the contrary, in the event of a
dispute between the Managing General Partner and the Administrative General
Partner, the Managing General Partner shall control.
(a) General Powers of the General Partners. Subject to the
provisions of paragraphs (b) and (c) of Article 12, and in addition to the
powers granted to general partners of a limited partnership under the laws of
the State of Washington, or which are granted to the General Partners under
other provisions of this Agreement, and within the limitations of the purposes
for which the Partnership has been formed, the General Partners shall have full
power to do all things deemed necessary, appropriate or desirable by them to
conduct the business of the Partnership, including, but not limited to:
(i) The making of expenditures and the incurring of any
obligations they deem necessary or desirable to
implement the purposes of the Partnership; the
employment of such personnel as they deem desirable for
the conduct of such activities, including permanent,
temporary, or part-time employees, themselves, and
outside consultants or contractors, and the
determination of their compensation and other terms of
employment; provided, however, that any contract for
services with the General Partners or their Affiliates
may be cancelled upon a Majority Vote of the Limited
Partners.
(ii) Subject only to any express limitations contained in
this Agreement, the acquisition and the disposition,
exchange, mortgage, or other hypothecation of any or all
of Assets of the Partnership, including the Systems, the
borrowing of monies, and the use of the revenues or
borrowing proceeds of the Partnership for any purpose
and on any terms the General Partners see fit,
including, without limitation, the financing of the
activities of the Partnership (with or without the
pledge of the Partnership's revenues or other assets),
the repayment of borrowings, the lease or purchase of
properties and equipment, and the conduct of additional
activities by the Partnership, provided that assets and
revenues attributable to the interests of the Limited
Partners shall not be pledged or used for the benefit of
the General Partners or their Affiliates, and provided
that (except upon dissolution of the Partnership) a
Majority Vote of the Limited Partners shall be required
for the sale or hypothecation of all, or substantially
all,
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of the Partnership's assets in connection with any
transaction not in the normal and ordinary course of
Partnership business, and provided further that no
lender shall be required to look to the application of
proceeds hereunder and shall be entitled to rely on the
representations of the General Partners as to their
authority to enter into financing arrangements and shall
be entitled to deal with the General Partners as if they
were the sole party in interest therein, both legally
and beneficially.
Notwithstanding any other provisions herein limiting the General
Partners' power to borrow on behalf of the Partnership or hypothecate all or
substantially all of the Partnership's assets in connection with such borrowing,
the General Partners may, on behalf of the Partnership, borrow and secure said
borrowings with Partnership assets for the express purpose of providing funds to
the Partnership for Cash Distributions to the Partners in accordance with
Article 15.
No creditor who makes a non-recourse loan to the Partnership shall have
or acquire at any time as a result of making such loan any direct or indirect
interest in the profits, capital, or property of the Partnership other than as a
secured creditor.
The amount of Partnership cash flow used in any calendar year to acquire
Systems will in no event exceed 50 degreesn of the Net Income before
depreciation allocated to Limited Partners for that year.
(iii) The negotiation and execution on any terms deemed
desirable by them of all necessary agreements, or other
instruments required or deemed beneficial to implement
the powers granted under this Agreement.
(iv) The formation of any further limited or general
partnerships, joint ventures, or other relationships
which they deem desirable, provided that the Partnership
shall not invest in any other partnership or joint
venture or engage in any other relationship except for
the purpose of operating the: Systems and unless it has
a controlling interest in such venture or partnership;
and provided that neither the General Partner nor any
Affiliate shall receive any fees or compensation from
such venture or partnership; and provided that all
Systems owned by the Partnership shall be owned
directly, and not indirectly through an ownership
interest in any limited or general partnership, joint
venture or other entity.
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(v) The execution of operating, management or agency
agreements with any parties selected by them to
supervise or assist in the operation of any activities
undertaken by the Partnership and the making of
agreements for the conduct of operations, or the
furnishing of facilities, services and personnel.
(vi) The lease or sale of any assets of the Partnership for
any Partnership purpose, including but not limited to
franchises or similar operating authorizations of any
portion of the Systems, except to the General Partners
or their Affiliates and subject to the limitations in
subparagraph (ii) above; provided, however, that
notwithstanding anything else herein, upon a Majority
Vote of the Limited Partners approving the terms of the
transaction, all or any portion of the Partnership's
assets may be sold to the Managing General Partner or
its Affiliates; and provided, further, no Majority Vote
of the Limited Partners shall be required for the sale
to the Managing General Partner or its Affiliates of a
System previously acquired by the Partnership if (a) the
Managing General Partner or its Affiliates had advanced
funds to the Partnership in order to enable the
Partnership to acquire the System and an amount equal to
at least 50% of the funds so advanced remains an
outstanding obligation of the Partnership to the
Managing General Partner or its Affiliates at the time
of the proposed acquisition of the System by the
Managing General Partner or its Affiliates and (b) the
purchase price to be paid to the Partnership by the
Managing General Partner or its Affiliates is equal to
or in excess of the purchase price originally paid by
the Partnership for the System.
(vii) The exercise on behalf of the Partnership, in such
manner as they in their sole judgment deem appropriate,
of all rights, elections, and obligations granted to or
imposed upon the Partnership by agreements entered into
by it, including but not limited to elections permitted
the Partnership by any taxing authority.
(viii) The establishment and maintenance of bank accounts on
behalf of the Partnership, provided that the General
Partners will employ all funds and assets of the
Partnership for the Partnership's sole benefit and use
and will not commingle the Partnership's funds with the
funds of any other person.
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(ix) The control of any matters affecting the rights and
obligations of the Partnership or its Partners,
including the employment of attorneys and others, the
incurring of legal expenses and the prosecution,
defense, compromise, arbitration or settlement of claims
and litigation.
Any transaction which the General Partners are authorized hereby to
enter into on behalf of the Partnership, including but not limited to the
acquisition, disposition, exchange, mortgage or other hypothecation of
Partnership assets and revenues, the borrowing of monies, the formation of
general or limited partnerships, joint ventures, or other relationships, and the
making of operating, agency, management or other agreements for the conduct of
operations or the furnishing of goods, facilities, services or personnel, may be
entered into by the Partnership with the General Partners or their Affiliates
provided that (a) the fees and prices charged are in accordance with paragraph
(d) of Article 12 herein, if applicable, and competitive with the fees, prices
and compensation of any other person who is rendering comparable services or
selling or leasing comparable goods which could reasonably be made available to
the Partnership, and (b) any such agreement may be terminated upon a Majority
Vote of the Limited Partners without penalty upon 60 days' notice. Further, the
General Partners will not engage in any practices such as rebates, give-ups or
reciprocal arrangements in connection with providing such services or goods. The
General Partners also may subcontract and delegate all or any part of their
duties hereunder to any agency chosen by them, including an Affiliate, but such
delegation by them shall not relieve them of their responsibilities hereunder.
In no event will a General Partner or its Affiliates engage in any real estate
transactions with the Partnership where such General Partner or Affiliate is a
principal without an affirmative Majority Vote of the Limited Partners, unless
the General Partner or Affiliate is selling such real estate to the Partnership
at cost and on identical terms.
(b) Other Activities of the General Partners. The General
Partners shall devote such part of their time as they, in their sole discretion,
deem necessary to carry out the operations contemplated under this Agreement and
shall make available at reasonable times their respective offices, organizations
and facilities to carry out the purposes of the Partnership. Each of the parties
hereto may engage in whatever other activities it chooses. It is specifically
recognized that the General Partners and their Affiliates will each engage in
the cable television business both for their own account and for others, and
nothing contained herein shall be deemed to prevent such parties from engaging
in such activities individually, jointly with others, or as a partner of any
other partnership, joint venture, or other entity to which they are or may
become a party, in any locale, fields or areas of operation, including those in
which the Partnership may likewise be active, or from dealing with the
Partnership as
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independent parties or through any other entity in which they may be interested,
including the sale or lease of goods and equipment to, and the performance of
accounting, technical and management services for, the Partnership at a profit,
nor as requiring them to permit the Partnership or any Partner thereof to
participate in any such operations in which they may be interested, except as
indicated herein. Neither the General Partners nor their Affiliates shall be
obligated to present any particular investment opportunity to the Partnership or
the Partners even if such opportunity is of a character which, if presented to
the Partnership, could be taken by the Partnership, and each of the General
Partners shall have the right to take such investment for his or its own account
(individually or on behalf of others) or to recommend to others any particular
investment opportunity. A Limited Partner, because of his or her interest in the
Partnership, shall not acquire any rights or interest in any other partnership
managed, operated or otherwise affiliated with the General Partners or their
Affiliates. Nothing in this paragraph (b) shall be deemed to diminish the
General Partners' fiduciary obligations nor waive any rights that the
Partnership or the Limited Partners may have against the General Partners.
(c) Indemnification. Neither the General Partners nor any
director, officer, partner, employee, agent or Affiliate thereof shall be
liable, responsible or accountable in damages or otherwise to the Partnership or
any of the Partners for, and the Partnership and any receivers and/or trustees
thereof shall hold harmless, indemnify and defend the General Partners and such
other persons from and against, any claim, liability, loss, damage or expense
(including, without limitation, reasonable attorneys' fees) suffered by the
General Partners or such other persons by virtue of any act performed or omitted
to be performed in connection with the Partnership's activities, provided that
if such claim, liability or expense arises out of any action or inaction by a
General Partner or such other persons, the Managing General Partner must have
determined, in good faith, that such course of conduct was carried out in a
manner reasonably believed to be in the best interest of the Partnership, and
that such course of conduct did not constitute fraud, negligence or breach of
fiduciary duty by the General Partners. All judgments against the Partnership,
the General Partners, or such other persons, wherein the General Partners or
such other persons are entitled to indemnification, must first be satisfied from
Partnership assets before the General Partners or such other persons are
responsible for obligations.
Notwithstanding anything herein to the contrary, the General Partners
and their Affiliates, shareholders, directors, officers or other employees shall
not be indemnified for liability imposed or expenses incurred in connection with
any claim arising out of a violation of the Securities Act of 1933, as amended,
with respect to the offer and sale of the Units, unless: (1) the General
Partners are successful in defending such action; or (2) a final adjudication
that such indemnification is contrary
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to public policy as expressed in said Act has not been made by a court of
appropriate jurisdiction.
Subject to the above, expenses incurred by a General Partner or any
Affiliate, shareholder, partner, director, officer, agent or other employee, in
defending any claim with respect to which such General Partner or such other
person may be entitled to indemnification by the Partnership hereunder, may be
advanced by the Partnership prior to the final disposition of such claim, upon
receipt of an undertaking by or on behalf of such General Partner or other
person to repay the advanced amount of such expenses unless it is determined
ultimately that such General Partner or other person is entitled to
indemnification by the Partnership under this paragraph (c).
Any indemnification hereunder shall be made only to the extent of the
Partnership's assets, and no Partner shall be personally liable on such
indemnification; provided, however, that nothing contained in this paragraph (c)
shall be deemed to excuse any General Partner from liability to the other
General Partner with respect to any claim described herein, where such General
Partner would otherwise be so liable in the absence of the indemnification
contained in this paragraph (c).
(d) Failure to Take Action. Except in the event of any act for
which they would not be entitled to indemnification under paragraph (c) above,
the General Partners and their Affiliates, shareholders, directors, partners,
officers, agents and other employees will not be liable to any of the Limited
Partners for failure to take any action on behalf of the Partnership (including,
but not limited to, any action which may prevent the foreclosure of all or any
portion of the assets of the Partnership) due to the Partnership's lack of
sufficient funds for the payment of its debts, provided the General Partners
give the Limited Partners prior notice thereof, so that the Limited Partners
may, but shall not be obligated to, contribute such funds if they then desire
that such action be taken. Moreover, in the event that after such notice is
given funds are not contributed to the Partnership by the Limited Partners, the
General Partners shall have the power, but shall not be obligated, to (1) sell
all or any portion of the assets of the Partnership in order to raise such
funds, or (2) cause the dissolution of the Partnership or the abandonment of all
or any portion of its assets, or both.
(e) Tax Matters Partner. For the purpose of Code Section
6223(a), Northland Communications Corporation, the Managing General Partner, is
hereby designated as "Tax Matters Partner" ("TMP"). In the event that at any
time the TMP determines that it cannot act as the TMP, it shall notify all
Partners and unless another General Partner is designated by the General
Partners as the TMP a meeting shall be called pursuant to the provisions of
paragraph (g) of Article 20 herein for the purpose of the Limited Partners
appointing a Partner as the new TMP. The TMP, if notified by
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the Internal Revenue Service of a "final partnership administrative adjustment"
("FPAA"), shall inform the Limited Partners and provide them with a copy of such
notice within fifteen (15) days of its receipt. Within ninety (90) days after
the day on which such FPAA notice is received by the TMP, the TMP shall notify
the Limited Partners of the position that the TMP is taking in connection with
such notice or that it is taking no position. The General Partners shall not be
liable to the Partnership or the Limited Partners for any act performed or
omitted to be performed by the TMP in connection with its position as TMP with
respect to the federal income tax consequences of Partnership transactions,
unless the TMP was grossly negligent or failed to act in good faith with respect
to such tax matters.
12. General Partners' Duties, Management Fees and Partnership Expenses.
(a) Acquisition Fee. Northland shall receive an acquisition fee
equal to 6.5 degrees of the Capital Contributions from Limited Partners pursuant
to the offering described in paragraph (d) of Article 8 herein as compensation
for investigating the acquisition of the Systems and for initial management
services rendered by the executive officers of the Managing General Partner to
the Partnership. Such fee shall be paid when and as such Capital Contributions
are released to the Partnership, and is in addition to the management fee
payable pursuant to paragraph (b) below and reimbursable amounts payable
pursuant to paragraph (d) below.
(b) Managing General Partner's Duties and Management Fees. The
Managing General Partner shall be responsible for the overall management of the
Partnership, including:
(i) Determination and implementation of Partnership
policies;
(ii) Review of Partnership budget, surveys, cash flow and
working capital requirements;
(iii) Review and approval of Partnership reports and financial
statements, including those filed with regulatory
agencies and including those prepared and distributed
pursuant to paragraph (f) of Article 16 and paragraphs
(b) through (g) of Article 18; and
(iv) Supervision of professionals and others employed by the
Partnership in connection with the above.
For the services of the executive officers of the Managing General
Partner in connection with such supervision and management, the Managing General
Partner shall also receive a management fee equal to 6 degrees'o of the gross
revenues of the
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Partnership, not including revenues from the sale or refinancing of the Systems
or any portion thereof. Such fee shall be calculated and paid monthly. This fee
is in addition to reimbursable amounts payable pursuant to paragraph (d) below.
Ed,
(c) Administrative General Partner's Duties and Management Fees. The
Administrative General Partner shall have responsibility for overall
administration of the Partnership in all respects and in all matters, and shall
make administrative decisions. In return for the compensation described below,
the Administrative General Partner shall actively engage in ongoing consultation
with and shall provide assistance to the Managing General Partner regarding
operations of the Partnership, including, but not limited to, acquisition of
properties, financing, analysis of System demographics and System planning. In
addition, the Administrative General Partner shall have responsibility to
perform, or cause to be performed, the following services:
(i) Establishment of books of account, record and payment
procedures, including individual Capital Accounts of the
Partners;
(ii) Provision of bookkeeping and other related services for
the Partnership;
(iii) Disbursement of the original Capital Contributions of
the Partners for the purposes set forth in this
Agreement;
(iv) Disbursement of all receipts and the making of all
necessary payments and expenditures in accordance with
the terms of this Agreement;
(v) Making of all reports to the Limited Partners required
by this Agreement or by law;
(vi) Admission of an assignee of a Limited Partner's interest
as a Substitute Limited Partner, without the consent of
any Limited Partner; and
(vii) To the extent that funds of the Partnership are, in the
Managing General Partner's judgment, not required for
the conduct of the Partnership's business, the temporary
investment of the excess funds in the manner set forth
in paragraph (h) of Article 8.
For its services in connection with such administration, the
Administrative General Partner shall receive an administrative fee equal to 1
degree- of the Capital
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Contributions from Limited Partners pursuant to the offering of Units described
in paragraph (d) of Article 8, payable when and as the Limited Partners' Capital
Contributions are released to the Partnership. This fee is in addition to
reimbursable amounts payable pursuant to paragraph (d) below.
(d) Partnership Expenses; Reimbursement of Expenses Incurred on
Behalf of the Partnership. The Partnership shall pay or reimburse the General
Partners and their Affiliates for expenses of every kind incurred, including
expenses involved in the acquisition of the Systems. Such expenses to be paid or
reimbursed by the Partnership include, but are not limited to: (i) all costs of
personnel employed by the Partnership, and all personnel employed by the
Managing General Partner and its Affiliates who perform accounting, marketing
and engineering services for the Partnership, for which personnel the
Partnership will reimburse the Managing General Partner and its Affiliates for
salaries and other employment costs of such personnel; (ii) all costs of
borrowed money, taxes, insurance, and assessments against Partnership assets or
applicable to the Partnership or its assets; (iii) legal, appraisal, audit,
accounting, brokerage and other fees; (iv) printing, engraving and other
expenses and taxes incurred in connection with the transfer, issuance,
registration and recording of documents evidencing ownership of an interest in
the Partnership or in connection with the business of the Partnership; (v) costs
for goods and materials, whether purchased by the Partnership directly or by the
General Partners or their Affiliates, on behalf of the Systems or the
Partnership; (vi) expenses of revising, amending, converting, modifying or
terminating the Partnership; (vii) expenses in connection with distributions
made by the Partnership to, and communications and bookkeeping work necessary in
maintaining relations with, Limited Partners, including the cost of printing and
mailing to such persons reports of meetings of the Partnership, and of
preparation of proxy statements and solicitations of proxies in connection
therewith; (viii) expenses in connection with preparing and mailing reports
required to be furnished to Limited Partners for investor, tax reporting or
other purposes, or other reports which the Managing General Partner deems to be
in the best interest of the Partnership; (ix) costs of any accounting,
statistical or bookkeeping equipment necessary for the maintenance of the books
and records of the Partnership; (x) the cost of preparation and dissemination of
the informational material and documentation relating to the Partnership; (xi)
costs of any computer services or equipment or services of personnel used for or
by the Partnership; (xii) expenses in connection with the disposition,
replacement, alteration, repair, remodeling, refurbishment, leasing,
refinancing, operation and expansion of the Systems and of maintenance of the
Systems; (xiii) costs of any litigation in which the Partnership is involved, as
well as costs of any examination, investigation, or other proceeding conducted
by any regulatory agency in connection with the Partnership, including legal and
accounting
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fees incurred in connection therewith; and (xiv) expenses of professionals
employed by the Partnership in connection with any of the foregoing, including
attorneys, accountants, computer specialists, engineers, brokers and appraisers.
With respect to Offering and Organization Costs, such reimbursement shall not
exceed 3.5 degrees,O of the Capital Contributions from Limited Partners; to the
extent Offering and Organization Costs exceed 3.5 degreesO of the aggregate
Capital Contributions from Limited Partners, the Managing General Partner shall
be responsible for the difference.
In addition, the Partnership will reimburse the Managing General Partner
and its Affiliates for all ordinary and necessary expenses incurred on the
Partnership's behalf, including expenses listed above which are advanced by the
Managing General Partner or its Affiliates, which shall not include charges for
overhead (except for centralized billing if applicable], bookkeeping, telephone
and postage, copy and computer charges, which shall be reimbursed at the lower
of competitive price or cost, including allocation for overhead). All charges
for expenses and fees, whether charged by the Managing General Partner, its
Affiliates or any other party, will be billed directly to the Partnership.
13. Limited Partners.
(a) Rights and Obligations of the Limited Partners. No Limited
Partner shall be personally liable for any debts, liabilities or obligations of
the Partnership beyond the amount of his or her Capital Contribution plus his or
her share of undistributed income and the amount of any distribution (including
the return of any Capita] Contribution) made to him or her that must be returned
to the Partnership pursuant to the Washington Uniform Limited Partnership Act or
other applicable state law, nor shall he or she be obligated to restore the
capital of the Partnership or repay to the Partnership any distribution made to
such person as a Limited Partner except as maybe required by law. No Limited
Partner, as such, shall take part in the control of the Partnership's business
or transact any business for the Partnership.
(b) Names and Addresses of Limited Partners. The General
Partners shall keep at the principal place of business of the Partnership a list
containing the name, address and interest of each Limited Partner. Within thirty
(30) days after the admission of any Limited Partner or the receipt by the
Partnership of a written notice of change of address or transfer of interest
(pursuant to Article 14) from any Limited Partner, the General Partners shall
cause such list to be corrected to reflect such admission, transfer or change of
address. Within fifteen (15) days after receiving a written request therefor
from any Limited Partner or his or her representative, the Partnership shall
send a copy of such list to such Limited Partner; provided, however, that the
Partnership may charge for such copy its cost of reproducing the same. Any
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Limited Partner or his or her representative shall have the right to inspect and
copy (at his or her own cost) at the Partnership's principal place of business
the names, addresses and interests of *he Limited Partners.
(c) General Partner as Limited Partner. A General Partner, or
any Affiliate of a General Partner, may at any time invest in or acquire Limited
Partner interest in the Partnership and thereby acquire the same rights and
obligations as other Limited Partners.
14. Transfer of Limited Partner Units.
(a) Assignment of Limited Partner Units. Following payment in
full of cash for his or her Units, a Limited Partner shall have the right to
assign any or all of the Units held by such Limited Partner, and the Partnership
shall recognize any such assignment, subject to the following conditions:
(i) In the event an assignor makes an assignment of less
than all of his or her interest in the Partnership,
then, after such assignment, neither the assignor nor
the assignee shall hold less than one full Unit except
for assignments by gift, inheritance, intra-family
assignments and family dissolutions;
(ii) Such assignment shall not violate any applicable federal
or state securities law or regulation, including,
without limitation, any restriction imposed thereby with
respect to the financial suitability of, or minimum
purchase requirements by, any transferee for
consideration;
(iii) Such assignment is made by written instrument of
assignment, executed by the assignor, the terms of which
do not contravene any of the terms of this Agreement;
(iv) Notice of such assignment, including an executed copy of
such instrument of assignment, the name; address and
taxpayer identification number of the assignee and the
number of Units assigned, has been delivered to the
Partnership.
(v) Such assignment does not jeopardize the status of the
Partnership for federal income tax purposes no cause a
termination of the Partnership for federal income tax
purposes as determined under Section 708 of the Code;
and
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(vi) The assignee of such interest in the Partnership is not
a tax-exempt entity, as such term is defined in Section
168(j)(4) of the Code, and is not a pass-thru entity, as
defined in Section 267(e)(2) of the Code, in which a
tax-exempt entity holds an interest, unless the original
subscriber for such Unit was a tax-exempt entity,
provided, however, that in no event will tax-exempt
entities own in the aggregate more than 20 degrees of
the Partnership Units.
An assignment of Units satisfying the conditions specified in this
paragraph (a) shall, subject to the provisions of paragraph (d) below, entitle
the assignee to receive all Cash Distributions and allocations of Net Income and
Net Losses made with respect to the assigned Units after the "Acceptance Date,"
as defined in paragraph (c) below, but shall not entitle such assignee to any of
the other rights and privileges of a Limited Partner hereunder unless such
assignee becomes a Substitute Limited Partner in accordance with paragraph (h)
below. In the event the Partnership or its counsel determines that an assignment
does not satisfy the conditions specified in this paragraph (a), the General
Partners shall promptly notify the assignor of such determination; provided,
however, nothing contained in this paragraph (a) shall obligate the General
Partners or their counsel to make any independent examination or investigation
to determine whether such conditions have been satisfied.
(b) Transfers of Limited Partner Units by Operation of Law. Upon
any transfer of Units by operation of law (including, without limitation,
transfers at death, whether testamentary or otherwise), either the transferee or
transferor (or the transferor's personal representative) shall promptly give the
Partnership written notice of such transfer, stating by what means it occurred.
The Partnership shall recognize any such transfer of which it receives such
notice, provided such transfer also satisfies the condition set forth in clause
(ii) of paragraph (a) above. A transferee of Units satisfying the conditions
specified in this paragraph (b) shall, in accordance with paragraph (d) below,
be entitled to receive all Cash Distributions and all allocations of Net Income
and Net Losses made with respect to the transferred Units after the Acceptance
Date for such transfer, but shall not be entitled to any of the other rights and
privileges of a Limited Partner hereunder unless such transferee becomes a
Substitute Limited Partner in accordance with paragraph (h) below.
(c) Acceptance Date for Assignments and Other Transfers. The
Acceptance Date" for any assignment or other transfer of Units satisfying the
conditions set forth in paragraph (a) or (b) above, and paragraph (d) below, of
this Article shall mean the first day of the calendar month succeeding the month
in which the Partnership receives written notice of such assignment or other
transfer (in accordance with the
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provisions of paragraph (a) or (b) above). If an assignment does not comply with
paragraph (a) above because such assignment would cause a termination of the
Partnership for federal income tax purposes under Section 708 of the Code, then
such assignment shall be deferred until the day after the last day of the next
ensuing calendar month during which such acceptance would not risk such a
termination for tax purposes. If, at any time, more than one such assignment or
other transfer is so deferred, the deferred assignments and transfers shall
subsequently be recognized (to the extent all of them cannot be recognized in
the same calendar month) in the same order as the Partnership received written
notice thereof. Whenever the Partnership determines that it will not recognize
an assignment or other transfer of Units for the reasons set forth in this-
paragraph (c), the General Partners shall promptly give written notice thereof
to all of the Limited Partners.
(d) Rights and Obligations of Assignees or Transferees. Any
assignee or transferee of a Limited Partner interest hereunder shall be bound by
the provisions of this Agreement. Prior to recognizing any assignment of a
Limited Partner's interest that has been transferred in accordance with this
Article, the General Partners, at their sole discretion, may require the
transferring Limited Partner to execute and acknowledge a written instrument of
assignment in form and substance satisfactory to the General Partners, may
require an opinion of counsel satisfactory to the General Partners that such
transfer will not be in violation of the various securities laws or otherwise
adversely affect the Partnership or the Limited Partners, and may require the
assignee to execute an amendment to the Agreement and to assume all obligations
of the assigning Limited Partner. Any assignee who is not an existing Partner at
the time of an assignment in accordance with paragraph (a) or (b) of this
Article shall be entitled to the allocations and distributions attributable to
the interest assigned to it and to transfer and assign such interest in
accordance with the terms of this Agreement; provided, however, such assignee
shall not be entitled to the other rights of a Limited Partner unless and until
it becomes a Substitute Limited Partner in accordance with paragraph (h) below.
Notwithstanding the above, the Partnership and the General Partners shall incur
no liability for allocations and distributions made in good faith to the
transferring Limited Partner until the written instrument of assignment has been
received by the Partnership and recorded on its books and the Acceptance Date of
the assignment has passed. In the event of any transfer which shall result in
multiple ownership of the transferring Limited Partner's aggregate interest, the
General Partners may require one or more trustees or nominees to be designated
to represent the entire interest for the purpose of receiving all notices which
may be given and all payments which may be made under this Agreement and
exercising all rights which such transferees have pursuant to this Agreement.
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(e) Assignees Not Limited Partners. No assignee of a Limited
Partner s interest is entitled to become a Substitute Limited Partner, except as
set forth in paragraph (h) below.
(f) Continuation of Obligations After Transfer. No transfer of
an interest by a Limited Partner, including a transfer of less than all its
rights hereunder or the transfer of all its rights hereunder to more than one
party, shall relieve such Limited Partner of his or her obligations hereunder
arising prior to such transfer, or unless the transferee(s) become(s) a
Substitute Limited Partner(s) pursuant to paragraph (h) below, arising
subsequent to such transfer.
(g) Termination of Rights Upon Transfer. At the time of a
transfer of a Limited Partner's interest in accordance with this Article, all
the rights possessed as a Limited Partner in connection with the transferred
interest, which rights otherwise would be held either by the transferor or the
transferee, shall terminate unless the transferee is admitted to the Partnership
as a Substitute Limited Partner pursuant to the provisions of paragraph (h)
below, except that such transferee shall be entitled to receive the economic
rights described in paragraph (e) above.
(h) Admission of Substitute Limited Partners. An assignee or
transferee of Units recognized under this Article may become a Substitute
Limited Partner in place of his or her assignor or transferor, to the extent of
the Units assigned or transferred, only if:
(i) The written and executed instrument of assignment
delivered to the Partnership with respect to such
assignment sets forth the intention of the assignor that
the assignee become a Substitute Limited Partner in
his-or her place, to the extent of the Units assigned;
(ii) The assignee or transferee of such Units executes,
acknowledges and delivers to the Partnership a written
agreement to become a party to and be bound by the
provisions of this Agreement, in a form satisfactory to
the General Partners' as well as such other instruments
as the General Partners may deem necessary or
appropriate with respect to the admission of such
assignee or transferee as a Substitute Limited Partner;
(iii) Such assignee or transferee tenders to the Partnership a
transfer fee, in an amount determined by the General
Partners in their sole discretion sufficient to cover
all reasonable expenses incurred by
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the Partnership in connection with admission of a
Substitute Limited Partner; and
(iv) The Managing General Partner gives its written consent
to the admission of such assignee or transferee as a
Substitute Limited Partner, which consent may be given
or arbitrarily withheld in the sole discretion of the
Managing General Partner (except that, without limiting
the foregoing, the Managing General Partner shall not
consent to any such admission which, in its opinion,
would jeopardize the status of the Partnership as a
partnership for federal income tax purposes or would
cause a termination of the Partnership within the
meaning of Section 708(b) of the Code).
It is expressly understood that the Managing General Partner's absolute
discretion to consent or to refuse to consent to the admission of an assignee or
transferee of Units as a Substitute Limited Partner is granted to the Managing
General Partner for the benefit of the Limited Partners in order to negate the
corporate characteristic of free transferability of interests and that exercise
of such discretion is not subject to any standard, including, without
limitation, any standard based on lack of arbitrariness, consistency,
reasonableness, fairness or the best interests of any assignor/transferor or
assignee/transferee of Units. No consent of any of the Limited Partners shall be
required to effect the admission of such an assignee or transferee as a
Substitute Limited Partner except (in the case of an assignment) the consent of
the Limited Partner making such assignment (which shall be evidenced as provided
in clause (i) of paragraph (h) above). The admission date for any Substitute
Limited Partner shall be the last day of the calendar quarter in which the
Managing General Partner gives written consent to the admission of such
Substitute Limited Partner, and on or within 30 days after such admission date
the Managing General Partner shall cause the Agreement to be amended and, as so
amended, filed to reflect the admission of such Substitute Limited Partner.
(i) Allocations of Cash Distributions, Net Income and Net
Losses between Transferors and Transferees. Any
assignment or transfer shall be deemed to be effective
as of the first day of the calendar month succeeding the
month in which all of the requirements of this Article
are met. Distributions to Limited Partners allocable to
any month shall be paid, with respect to any Unit, to
the person shown on the Partnership's books as holding
such Unit on the first day of such month. Net Income and
Net Losses for any period of the Partnership during
which any Unit is assigned or otherwise transferred
shall be allocated between the
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assignor/transferor and assignee/transferee of such Unit
in proportion to the number of days during such period
that each was recognized as the holder of such Unit,
except that extraordinary, nonrecurring items shall be
allocated entirely to the Partners recognized as holding
the interest as of the date such extraordinary event
occurs. The Partnership shall not have any obligation to
make payment of any Cash Distributions or allocation of
any Net Income or Net Losses to any assignee or other
transferee of Units until and unless such transfer is
recognized by the Partnership in accordance with the
provisions of paragraph (a) or (b) and paragraph (d)
above.
(j) Redemptions. Upon the written request of a Limited Partner,
the Partnership may, at the sole discretion of the Managing General Partner,
redeem all or a portion of the Units held by such Limited Partner at a
redemption price equal to the original issuance price, i.e., $500 per Unit.
15. Allocation of Net Income and Net Losses and Cash Distributions.
(a) Allocation of Net Income and Net Losses from Operations.
(i) For all purposes of this Agreement, Net Income and Net
Losses shall be calculated utilizing the method of
accounting and depreciation utilized by the Partnership
for federal income tax purposes. Except as specifically
provided in paragraphs (d), (e), (f), (g), (h) and (i)
of this Article 15 and paragraph (c) of Article 16, Net
Income and Net Losses from operations shall be allocated
as follows:
(1) First, the General Partners shall be allocated 1.
and the Limited Partners shall be allocated 99,0 of Partnership Net Income, Net
Losses, other Noncash Reductions, other Noncash Additions and credits until such
time as the Limited Partners have received aggregate Cash Distributions in an
amount equal to 100 degreeso of their aggregate Capital Contributions; and
(2) Thereafter, the General Partners shall be allocated
25%, and the Limited Partners shall be allocated 75 degrees`o of Partnership Net
Income, Net Losses, other Noncash Reductions, other Noncash Additions and
credits from operations.
(ii) As between the General Partners, they shall share in the
1 degrees~o allocation pursuant to clause (1) above in
the following ratio:
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the-entire 1 degrees,o to the Managing General Partner.
Subject to paragraph (c) of Article 17, the General
Partners shall share in the 25 degrees'o allocation
pursuant to clause (2) above in the following ratio:
one-fifth, or 5 degrees.0, to the Administrative General
Partner and four-fifths, or 20 degrees,o, to the
Managing General Partner.
(b) Allocations and Election for Tax Purposes. With respect to
Partnership tax years beginning on or after January 1, 1988, Net Income, Net
Losses, other Noncash Reductions, other Noncash Additions and credits for any
year shall be prorated among the Partners on a daily basis, based upon the
number of days in such Partnership tax year that each Partner has been
recognized as such by the Managing General Partner, except that all
extraordinary, nonrecurring items shall be allocated entirely to the Partners
recognized as holding the interests as of the date such extraordinary event
occurs.
With respect to the Partnership tax years ending on December 31, 1986
and December 31, 198;, each Partner's varying interest in the Partnership's Net
Income, Net Losses, other Noncash Reductions, other Noncash Additions and
credits for each year shall be determined by an interim closing of the
Partnership books as of each date that any new Partners are recognized as
Partners by the Managing General Partner during the year. Partners who are
admitted on or before the last day of any calendar month in 1986 and 1987 shall
be recognized as Partners by the Managing General Partner as of the first day of
such month.
All allocations set forth in this Agreement of Net Income, Net Losses
and other items shall govern the reporting of such by the Partnership for
federal income tax purposes. The Partnership shall also be permitted to prepare
financial statements in accordance with generally accepted accounting
principles. For purposes of such financial statements, the Managing General
Partner may provide for such allocation of income and losses as it deems
appropriate and shall not be bound by the tax allocations set forth herein,
except that such financial statements shall not materially distort the financial
interests in and ownership of the Partnership.
Except as set forth in paragraphs (d), (e), (I), (g), (h) and (i) of
this Article and paragraph (c) of Article 16, all items of special tax
significance, whether or not entering into taxable income, including but not
limited to gains, losses and tax credits, shall be allocated in accordance with
the Net Income percentages then in effect under paragraph (a) above.
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No election shall be made by the Partnership, the General Partners or
any Limited Partner for the Partnership to be excluded from the application of
the provisions of Subchapter ~ of the Code.
In the event of the transfer of an interest in the Partnership or upon
the death of an individual party hereto, or in the event of the distribution of
property to any party hereto, the Partnership, if it is deemed by the Managing
General Partner to be in the best interest of a majority of the Limited Partners
or if the Managing General Partner in its sole discretion otherwise determines
to do so, may file an election, in accordance with applicable Treasury
regulations, to cause the basis of the Partnership assets to be adjusted for
federal income tax purposes as provided in Sections 734 and-743 of the Code.
(c) Cash Distributions. The Managing General Partner will
determine at least annually the amount of Cash Available for distribution, if
any, after payment of all Partnership expenses, current debt service and the
establishment of such reserves as it reasonably deems to be appropriate. Subject
to paragraph (c) of Article 16, Cash Available for Distribution will be paid to
the Limited Partners and the General Partners in accordance with the allocation
of Net Losses then in effect, as set forth in paragraph (a) above, without
regard to paragraphs (d), (e), (f), (g), (h) and (i) of this Article.
Notwithstanding anything in this Agreement to the contrary, prior to the General
Partners receiving Cash Distributions for any year, the Limited Partners must
receive Cash Distributions equal to at least 50 degrees,0 of the Limited
Partners' allocable share of the Net Income for such year, based on projections
by the Managing General Partner of the Net Income of the Partnership for such
year. If Cash Distributions would be made to the General Partners except for the
limitation in the preceding sentence, such deferred Cash Distributions shall be
made to the General Partners as soon as possible in subsequent years from the
Cash Available for Distribution for those years (subject to the 50 degrees~
limitation for such years) or from the distribution of assets upon liquidation.
This payment of the deferred Cash Distributions shall be in addition to Cash
Distributions otherwise payable to the General Partners in such subsequent years
or the amount of assets which would otherwise be distributed to the General
Partners upon liquidation.
(d) Installment Sales. In the event of a sale of all or any
portion of the Partnership assets where payment of a portion of the sales price
is deferred and the Partnership uses the installment sale method to report such
gain, the Capital Accounts of the Partners shall be fully adjusted upon closing
of the sale in accordance with paragraph (a) of this Article or paragraph (c) of
Article 16, as applicable, as though the full sales price had been received by
the Partnership in cash at closing. Upon ultimate receipt of such deferred sales
proceeds, gain shall be allocated among the
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Partners in proportion to the amount of the excess, if any, of the gain credited
to each Partner's Capital Account at the time of the sale over the amount of
gain recognized for federal income tax purposes at the time of such sale, but
such allocation of gain upon receipt of proceeds shall not increase (again) the
Partners' Capital Accounts. Interest income earned or accrued by the Partnership
on an installment obligation subsequent to the closing of an installment sale
shall be allocated among the Partners in proportion to their relative positive
Capital Account balances after adjustment of such accounts in accordance with
this paragraph (d) and as reduced, from time to time, for Cash Distributions
made by the Partnership to the Partners.
(e) Recapture Amounts. Notwithstanding anything to the contrary,
in the case of ordinary income upon disposition of Partnership assets resulting
from the application of Section 1245 or 1250 of the Code, for purposes of
paragraph (a) of this Article and paragraph (c) of Article 16, such ordinary
income shall be allocated as followers:
(i) first, to each of the Partners proportionately in an
amount equal to the excess, if any, of the cumulative
Net Losses allocated to such Partner pursuant to this
Article over the cumulative Net Income allocated to such
Partner pursuant to this Article; and
(ii) thereafter, 75 degreesO to the Limited Partners and 25
degrees- to the General Partners.
(f) Negative Capital Account Limitation. No Partner shall be
allocated Net Losses or other Noncash Reductions if such allocation would cause
a deficit balance in such Partner's Capital Account unless the Capital Account
balances of all other Partners are equal to zero. Capital Account balances for
the purposes of this paragraph shall be treated as having been reduced for (i)
allocations of losses and deductions which are reasonably expected to be made as
of the end of the taxable year to such Partner pursuant to Code Section
704(e)(2), Code Section 706(d) and Treas. Reg. Sec. 1.751-l(b)(2)(ii), and (ii)
for distributions which at the end of the taxable year are reasonably expected
to be made to such Partner to the extent that said distributions exceed
offsetting increases to such Partner's Capital Account that are reasonably
expected to occur during (or prior to) the taxable years in which such
distributions are reasonably expected to be made. Net Losses and other Noncash
Reductions which are subject to the limitation of this paragraph shall be
reallocated among the Partners with positive Capital Account balances until such
time as all Partners have zero balances in their Capital Accounts and,
thereafter, Net Losses and other Noncash Reductions will be allocated among the
Partners pursuant to paragraph (a) of this Article to the extent such
allocations are permitted under paragraph (g) of
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this Article. For purposes of this paragraph and paragraph (h) of this Article,
each Partner shall be treated as having already contributed any amount for which
such Partner has a mandatory contribution obligation (including the amount of
any Capital Account deficit such Partner is obligated to restore upon
liquidation) provided that such contribution must be made in all events within
90 days of liquidation of the Partnership ("Mandatory Obligation").
(g) Cumulative Loss Allocations.
(i) Notwithstanding anything contained in this Article to
the contrary, cumulative allocations of Net Losses to
any Limited Partner shall not exceed the cumulative sum
of the following amounts determined as of the end of
each taxable year of the Partnership: (a) the amount of
such Limited Partner's Capital Contribution determined
pursuant to Article 8 plus the amount of such Limited
Partner's uncontributed Mandatory Obligation less the
amount of any cash or property distributed to such
Limited Partner; and (b) such Limited Partner's
cumulative share of Net Income or other Noncash
Allocations. To the extent the foregoing limitation
results in non-allocation to a Limited Partner of
Partnership Net Losses which would otherwise be
allocated to him, such Net Losses shall be allocated pro
rata to other Limited Partners to the extent each such
other Limited Partner may be allocated further Net
Losses under the foregoing limitation, and any remaining
Net Losses for the taxable year in question shall be
allocated to the General Partners.
(ii) To the extent the foregoing limitation in clause (i)
immediately above results in a non-allocation to the
Limited Partners of Partnership Net Losses and in an
allocation of such Net Losses to the General Partners
("Reallocated Limited Partners' Losses"), the General
Partners shall be allocated, in subsequent taxable
years, all Partnership Net Income until such time as
they have been allocated Net Income in an amount equal
to the Reallocated Limited Partners' Losses plus the Net
Income the General Partners would have otherwise been
allocated notwithstanding this clause (ii).
(iii) Notwithstanding the limitation in clause (i) above, the
Managing General Partner may elect to have Net Losses
continue to be allocated 99- to the Limited Partners and
1 degrees.o to the General
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Partners, provided that the Managing General Partner
obtains an opinion from tax counsel that such an
allocation is a reasonable interpretation of the
requirements of Section 704(b) of the Code and Treasury
Regulations promulgated thereunder, provided that if Net
Losses otherwise subject to the limitation of clause (i)
above are subsequently disallowed and reallocated to the
General Partners; the General Partners shall then be
allocated all future Partnership Net Income until such
time as they have been allocated additional future Net
Income equal to such disallowed and reallocated Net
Losses.
(h) Qualified Income Offset. Notwithstanding anything contained
in this Article to the contrary, there shall be reallocated to each Limited
Partner with a negative balance in his or her Capital Account (determined after
the allocation of income, gain and loss under this Article for such year) each
item of Partnership gross income (unreduced by any deductions) and gain until
such time as the deficit in his or her Capital Account is eliminated. In the
event that for any taxable year Partnership gross income or gain is less than
the deficit balances of all the Limited Partners, such gross income or gain
shall be allocated in proportion to the relative deficit balances of the
respective Limited Partners.
(i) Modifications to Partnership Allocations. It is the intent
of p the Partners that each Partner's distributive share of income, gain, loss,
deduction, or credit (or items thereof) shall be determined and allocated in
accordance with this Article and Article 16 to the fullest extent permitted by
Section 704(b) of the Code. In order to preserve and protect the determinations
and allocations provided for in this Article and Article 16, the Managing
General Partner shall be, and hereby is, authorized and directed, upon receipt
of an opinion of counsel, to allocate income, gain, loss, deduction, or credit
(or items thereof) arising in any year different from the manner otherwise
provided for in this Article and Article 16 if, and to the extent that,
allocating income, gain, loss, deduction, or credit (or items thereof) in the
manner provided for in this Article and Article 16 would cause the determination
and allocation of each Partner's distributive share of income, gain, loss,
deduction, or credit (or items thereof) not to be permitted by Section 704(b) of
the Code and Treasury Regulations promulgated thereunder ("Treasury
Regulations"). Any allocation made pursuant to this paragraph (i) (including all
three clauses thereof) shall be deemed to be a complete substitute for any
allocation otherwise provided for in this Article and Article 16 and no
amendment of this Agreement or approval of any Partner shall be required.
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16. Dissolution and Winding Up of the Partnership.
(a) Dissolution. The Partnership shall be dissolved at the
expiration of the term of the Partnership as set forth in Article 7 unless
sooner terminated upon any of the events as hereinafter set forth:
(i) A Majority Vote of the Limited Partners to dissolve and
wind up; or
(ii) The adjudication of bankruptcy, incompetency, removal,
withdrawal (which withdrawal shall take effect sixty
(60) days after written notice thereof is given to all
other Partners), or termination of the existence of a
General Partner, unless (a) at the time there is at
least one other General Partner who consents to carry on
the business, or (b) within ninety (90) days after the
occurrence of any such event all the Limited Partners
agree in writing to continue the business of the
Partnership and to the appointment of a substitute
General Partner. In the event of removal or withdrawal
of the Administrative General Partner, the Managing
General Partner may, in its sole discretion, elect a
substitute Administrative General Partner without the
consent of the Limited Partners.
Subject to paragraph (c) of Article 17, a General Partner may not assign
its interest as a General Partner in the Partnership without the consent of a
majority in interest of the Limited Partners; provided, however nothing herein
shall prohibit a General Partner from substituting another corporation or entity
as a General Partner and assigning its interest in the Partnership to such other
corporation or entity in connection with an acquisition by or merger with such
corporation or entity so long as such corporation or entity assumes all the
obligations of such General Partner with regard to the Partnership; provided,
further, nothing herein shall prohibit a General Partner from pledging or
otherwise assigning its interest (but not its right to manage the Partnership)
as collateral for any loan;
(iii) The Partnership becomes insolvent or bankrupt;
(iv) The disposition, sale or abandonment of all or
substantially all of the assets of the Partnership other
than in the ordinary course of business; or
(v) The occurrence of any event that makes it unlawful for
the business of the Partnership to be continued.
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(b) Winding Up. Upon the occurrence of an event causing the
termination and/or dissolution of the Partnership, the General Partners shall
wind up the business and affairs of the Partnership. In the event there is no
remaining General Partner because of bankruptcy, incompetency, withdrawal,
removal, resignation or termination of the existence of both General Partners,
the Limited Partners shall elect, by [majority Vote of the Limited Partners, a
trustee to wind up the business and affairs of the Partnership and shall
determine such trustee's compensation.
(c) Allocation of Gain and Loss. Upon sale or other disposition
of the Partnership's assets other than in the ordinary course of business,
including by reason of dissolution, involuntary conversion or condemnation, the
gain or loss of the Partnership attributable to such disposition shall be
determined and loss shall be allocated pro rata to those Partners having
positive Capital Account balances in proportion to and to the extent of such
positive balances, and thereafter to the General Partners, and gain shall be
-allocated as follows:
(i) First, to those Partners having negative Capital Account
balances in proportion to such negative balances until
such negative balances are eliminated and the balances
are restored to zero. In determining the size of the
negative balance in a Partner's Capital Account and the
amount of the gain that needs to be allocated to restore
said account to zero, distributions of sale proceeds
resulting from the transaction that produced the gain
and any allocations made pursuant to the remaining
provisions of this paragraph (c) shall be disregarded;
(ii) Second, 99% to the Limited Partners and 1% to the
General Partners until such time as the Limited
Partners' aggregate Capital Account balances equal the
excess, if any, of their aggregate Capital Contribution
over the sum of the aggregate Cash Distributions made by
the Partnership to the Limited Partners prior to the
sale or other disposition (such excess, if any, shall be
referred to as the "Limited Partners' Unreturned Capital
Contributions");
(iii) Third, to the General Partners until such time as the
General Partners' aggregate Capital Account balances
equal the sum of 1.01~ of the Limited Partners'
Unreturned Capital Contributions plus one-third (1/3) of
the excess, if any, of the Limited Partners' aggregate
Capital Account balances over the Limited Partners'
Unreturned Capital Contributions;
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(iv) Finally, the balance of the remaining portion of gain
shall be allocated among the General Partners and
Limited Partners in accordance with the Net Income
allocation percentages set forth in clause (a)(i)(2) of
Article 15.
(d) Distribution of Assets Upon Liquidation and Winding Up of
the Partnership. Upon the sale of all or substantially all of the Partnership's
assets and/or the dissolution and winding up of the Partnership, the cash and
unsold assets of the Partnership, if any, shall be distributed in the following
order of priority (after the allocations of gains and losses to the Partners'
Capital Accounts are made pursuant to paragraph (c) of this Article):
(i) First, to payment of all loans and obligations of the
Partnership, including loans made by a General Partner
and any Affiliates of the General Partners and any
deferred management fees not previously paid;
(ii) Second, to the setting up of any reserves which the
Managing General Partner in its sole discretion deems
reasonably necessary for any contingent liabilities or
obligations of the Partnership or of the General
Partners arising out of or in connection with the
Partnership. Such reserves shall be placed in escrow by
the Managing General Partner to be held for the purpose
of disbursing such reserves in payment of any such
contingencies, and, at the expiration of such period as
the Managing General Partner in its sole discretion
deems advisable, distributing the remaining balance in
the manner hereinafter provided;
(iii) Third, to the Partners pro rate in the amount of their
positive Capital Account balances after such balances
have been fully adjusted in accordance with paragraph
(c) of this Article and Article 15; and
(iv) Finally, the balance, if any, to the Partners in
proportion to the net Income allocation percentages as
set forth in clause (a)(i)(2) of Article 15.
(e) Deficit Capital Accounts at Liquidation. It is understood
sod agreed that one purpose of the provisions of Articles 15 and 16 is to ensure
that none of the Partners has a negative Capital Account balance after
liquidation and to ensure that all allocations under Article 15 will be
respected by the Internal Revenue Service. The Partners and the Partnership do
not intend nor expect that any Partner will have a
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negative Capital Account balance after liquidation, and the provisions of this
Agreement shall be construed and interpreted to give effect to such intention.
However, except as provided below, no Partner shall have any obligation upon
dissolution of the Partnership or at any other time to restore a negative
Capital Account balance other than to contribute any amounts required under
Article 8 that remain uncontributed. Notwithstanding the foregoing sentence,
upon dissolution of the Partnership the General Partners shall be obligated to
make a Capital Contribution to the Partnership equal to the lesser of (i) the
negative aggregate balances in the General Partners' Capital Accounts after such
accounts have been fully adjusted for all Partnership items pursuant to Article
15 and paragraph (c) of this Article, and (ii) the excess of 1.01% of the total
Capital Contributions made by all Partners to the Partnership over the total of
all Capital Contributions made to date by the General Partners.
(f) Responsibility of the General Partners or Trustee in
Liquidating and Winding Up the Partnership. Upon dissolution and winding up of
the Partnership, the General Partners or trustee, as the case may be, shall have
a certified public accountant complete a review of the books and prepare an
unaudited statement which shall be furnished to all Partners. The Limited
Partners shall look solely to the assets of the Partnership and not to the
General Partners or the trustee for the return of any portion of their capital.
17. Limited Partners' Removal of a General Partner.
(a) Election to Remove.
(i) Limited Partners holding 10 degreeso of the Units of the
Partnership may request, in writing to the General
Partners, a vote for the purpose of removing a General
Partner and/or canceling any contract for services with
it or its Affiliates, or for adding a new General
Partner(s).
(ii) Within 10 days of the General Partners' receipt of such
request, the General Partners shall furnish the Limited
Partners with a written ballot to vote on whether to
take such action. The ballot will require that it be
received by the General Partners within 30 days after
the date of mailing as specified in the ballot in order
to be valid and counted; and
(iii) The affirmative Majority Vote of the Limited Partners to
take such action, including Units held by Limited
Partners who do not vote or whose ballots were invalid,
shall be necessary to remove a
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General Partner and/or to cancel any contract for
services with it or its Affiliates, or to add a new
General Partner(s).
(b) General Partners' Interest Upon Removal.
(i) In the event a General Partner is removed pursuant to
this Article, it shall be relieved of any and all
liabilities as permitted under the Washington Uniform
Limited Partnership Act.
(ii) Upon removal, the General Partner shall be entitled to
the fair market value of its interest at the time of
removal as determined by an independent appraiser. The
fair market value shall include prospective values under
Article 15 and paragraphs (c) and (d) of Article 16, to
the extent appropriate. The independent appraiser shall
be mutually agreed upon by the removed Genera} Partner
and a Majority Vote of the Limited Partners or a
representative thereof elected by a Majority Vote of the
Limited Partners. In the event the Partners cannot
within 15 days of such removal agree on an appraiser,
then the valuation of the removed General Partner's
interest shall be submitted to arbitration in accordance
with paragraph (j) of Article 20; and
(iii) Upon removal, the removed General Partner shall be paid
the value of its interest, as determined in subparagraph
(b)(ii) above, in cash or by the issuance of a
promissory note bearing interest at 12% per annum to be
paid in five equal annual installments beginning with
the end of the first fiscal year during which such
removal occurs.
(c) Withdrawal of Administrative General Partner.
Notwithstanding anything else in this Agreement to the contrary, in the event
(a) John S. Simmers withdraws as a joint venture partner of FN Equities Joint
Venture and is not replaced by Miles Z. Gordon or another individual or entity
satisfactory to the Managing General Partner in its sole discretion, or (b) John
S. Simmers and Miles Z. Gordon no longer serve as directors of FN Equities,
Inc., then, at the request of the Managing General Partner: (i) FN Equities
Joint Venture shall immediately withdraw without compensation as Administrative
General Partner of the Partnership, and shall no longer have any rights or
interest in the Partnership; (ii) all compensation, all allocations of Net
Income, Net Losses, other Noncash Reductions, other Noncash Additions, credits,
net "sins and net losses, and all Cash Available for Distribution and other
distributions to which the Administrative General Partner would otherwise be
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entitled (including but not limited to all amounts allocable pursuant to
subparagraph (a)(ii) of Article 15) (collectively, "FNEJV Compensation") shall
be allocated and distributed to the Managing General Partner from the date the
Managing General Partner requested that the Administrative General Partner
withdraw; and (iii) the Nonaging General Partner shall assume all duties,
responsibilities and authority previously granted to the Administrative General
Partner; provided, however, that the Managing General Partner may, in its sole
discretion, grant all or any portion of the FNEJV Compensation to any individual
or entity, including but not limited to Messrs. Simmers or Gordon or FN Equities
Joint Venture, in return for which such individual or entity shall render
administrative services to the Partnership.
18. Records and Reports.
(a) Books and Records. The books and records of the Partnership
shall be maintained in accordance with the method determined by the General
Partners in their sole discretion to be in the best interests of the
Partnership.
(b) Quarterly Reports. The Limited Partners will receive
quarterly reports for the first two years of Partnership operations. Such
reports shall set forth all fees received by the General Partners and their
Affiliates during the quarter period.
(c) Semi-Annual Reports. The Limited Partners will receive, in
addition to the quarterly reports indicated above, within sixty (60) days after
the Partnership's first six-month period of operations and each six-month period
following the end of the Partnership's fiscal year, an unaudited balance sheet,
statement of income and cash flow statement covering such period.
(d) Annual Report. Within one hundred twenty (120) days after
the end of the Partnership's fiscal year, the General Partners shall prepare and
cause to be distributed to each Limited Partner an audited statement of the
Partnership's operations for such year, including a balance sheet as of the end
of the fiscal year and statements of income, partners' equity and changes in
financial position, a cash flow statement for such year and a report of the
activities of the Partnership during such year. Said statements will be audited
either according to generally accepted accounting principles and will be
accompanied by an auditor's report containing an opinion of independent
certified public accountants.
(e) Additional Reports. The General Partners may distribute to
Limited Partners such additional reports as they believe, in their sole
discretion, are appropriate.
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(f) Tax Information. Within 75 days after the end of the
Partnership s fiscal year, the General Partners shall furnish each Limited
Partner such information as is necessary for the proper preparation of the
Limited Partner's federal income tax returns.
(g) Filings With Regulatory Authorities. All reports required by
regulatory authorities shall be filed within a reasonable time period, including
such of the above reports as are required pursuant to the rules and regulations
of any applicable state securities authority.
19. Amendment of the Certificate and Agreement of Limited Partnership.
(a) Amendments by General Partners Without Consent of Limited
Partners. The General Partners may amend this Agreement, without the consent of
any of the Limited Partners, to (i) admit any Limited Partner, Substitute
Limited Partner or additional Limited Partner in accordance with the provisions
of Article 8 or 14, (ii) change the name and/or principal place of business of
the Partnership, or (iii) cure any ambiguity, or correct or supplement any
provision hereof which may be inconsistent with any other provision hereof, or
to make amendments with respect to any matter or question arising under this
Agreement so long as such additional provision is not inconsistent herewith;
provided, however, that no amendment shall be adopted pursuant to this Article
unless the adoption thereof (i) is for the benefit of or not adverse to the
interests of the Limited Partners, (ii) does not alter, adversely to the Limited
Partners or any of them, the allocations of Cash Distributions, Net Income or
Net Losses among the Limited Partners or between the Limited Partners and the
General Partners, and (iii) does not affect the limited liability of the Limited
Partners or the status of the Partnership as a partnership for federal income
tax purposes.
(b) Amendment by Majority Vote of the Limited Partners Without
Consent of the General Partners. The Limited Partners may amend this Agreement
pursuant to a Majority Vote of the Limited Partners without the consent of the
General Partners, except that the Limited Partners may not so amend:
(i) Any provision of this Agreement that affects the rights
of or payments, allocations, compensation and
reimbursements to the General Partners without the
consent of the General Partners; and
(ii) Any provision of this Agreement so as to convert a
Limited Partner's interest into a General Partner's
interest or otherwise modify the limited liability of
Limited Partners without the consent of each Limited
Partner adversely affected thereby;
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provided, further, that this paragraph (b) may be
amended only by the consent of all of the Partners.
(c) Amendments by General Partners With a Majority Vote of the
Limited Partners. In addition to any amendment otherwise authorized herein, this
Agreement may be amended by the General Partners with the consent, pursuant to a
Majority Vote, of the Limited Partners; provided, however, that this Agreement
may not be amended so as to convert a Limited Partner's interest into a General
Partner's interest or otherwise modify the limited liability of a Limited
Partner without the consent of each Limited Partner adversely affected thereby;
provided further that this paragraph (c) may be amended only by the consent of
all of the Partners.
(d) Execution and Recording of Amendments. Any amendment to this
Agreement adopted in accordance with the provisions of this Article or in
accordance with any other provisions of this Agreement shall be executed by the
Managing General Partner for itself and as attorney-in-fact for the other
Partners pursuant to the power of attorney contained in paragraph (f) of Article
20 (except that any such amendment requiring the consent of a Limited Partner
under paragraph (b) or (c) above, other than the consent of a Limited Partner to
the admission of an assignee of any of his or her Units as a Substitute Limited
Partner, shall be executed by such Limited Partner personally, or by the
Managing General Partner as attorney-in-fact for such Limited Partner under a
power of attorney given expressly with respect to such amendment). After the
execution of such amendment, the General Partners shall prepare and record or
file any certificate or other document which may be required to be recorded or
filed with respect to such amendment; either under the Washington Uniform
Limited Partnership Act or under the law of any other applicable jurisdiction.
20. Miscellaneous Provisions.
(a) Notices. All notices or statements required to be given
under this Agreement by any party to any other party shall be in writing, sent
by telegram or certified mail and, if to the Limited Partners, addressed as
shown opposite the signature on the Signature Page and Power of Attorney to the
Subscription Agreement; if to the General Partners, addressed as follows:
Managing General Partner:
Northland Communications Corporation
3500 One Union Square Building
Seattle, Washington 98101
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Administrative General Partner:
EN Equities Joint Venture
3858 Carson Street, Suite 300
Torrance, California 99503
Notices shall be given and any applicable time shall run from the date
such notice is placed in the mails or delivered to the telegraph company as to
any notice given by a General Partner, and when received as to any notice given
by any other party.
Any notice to a party other than the General Partners, including a
notice requiring concurrence or nonconcurrence, shall be effective, and any
failure to respond binding, irrespective of whether or not such notice is
actually received, and irrespective of any disability or death on the part of
the notice, whether or not known to the party giving such notice.
The address of any party hereto may be changed by written notice to the
Limited Partners in the event of a change of address by the General Partners, or
to the General Partners in the event of change of address by a Limited Partner;
provided, that in the event of a transfer of interest hereunder, no notice to
any such transferee shall be required, nor shall such transferee have any rights
hereunder, until notice thereof shall have been given to the General Partners.
Any transfer of interests hereunder shall not increase the duty to give notice,
and in the event of a transfer of less than all of a party's interest hereunder
or the transfer of interest hereunder to more than one party, notice to any
owner of any portion of such transferred interests shall be notice to all owners
thereof.
(b) Applicable Law. Notwithstanding the place where this
Agreement may be executed by any of the parties hereto, the parties expressly
agree that all the terms and provisions hereof shall be construed under the
internal laws of the State of Washington and that the Washington Uniform Limited
Partnership Act as now adopted or as may be hereafter amended shall govern the
partnership aspects of this Agreement.
(c) Captions. Headings used herein are for reference purposes
only and do not affect the meaning or interpretation of this Agreement.
(d) Execution in Counterparts. This Agreement may be executed in
any number of counterparts with the same effect as if the parties hereto had all
signed the same document, and all of such counterparts shall constitute one and
the same document.
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(e) Successors in Interest. Subject to the restrictions against
assignment as herein contained, this Agreement shall inure to the benefit of and
shall be binding upon successors in interest, personal representatives, estates,
heirs, or assignees hereto.
(f) Power of Attorney. Each Partner, including the
Administrative General Partner, hereby makes, constitutes and appoints the
Managing General Partner, with full power of substitution and resubstitution,
his or her true and lawful attorney-in-fact, for him or her and in his or her
name, place and stead and for his or her use and benefit, to sign, acknowledge,
file and record: (a) this Agreement, as well as amendments thereto, under the
laws of the State of Washington or the laws of any other state in which such
Agreement or amendment is required to be filed; (b) any other instrument or
document which may be required to be filed by the Partnership under the laws of
any state or of any governmental agency, or which the General Partners deem it
advisable to file; (c) any instruments or documents which may be required to
effect the continuation of the Partnership, or the dissolution and termination
of the Partnership, provided such continuation or dissolution and termination
are in accordance with the terms of this Agreement; (d) any instrument or
documents relating to the acquisition of Partnership properties, including, but
not limited to, purchase and sale agreements and loan documents relating to the
financing of the acquisition of Partnership properties; (e) any instruments or
documents relating to operating, management or agency agreements; (f) contracts,
instruments, agreements or other documents with utilities, franchise or similar
operating authorities; and (g) all agreements or other instruments required or
deemed beneficial to implement the power granted to the General Partners under
this Agreement.
Each of the Partners, including the Administrative General Partner, does
hereby further agree, whenever requested to do so, personally to sign, swear or
affirm under oath, acknowledge and deliver any such instrument or document
provided for under this paragraph (I), and to sign, swear or affirm under oath,
acknowledge and deliver whatever further documents or instruments may be
required by the Managing General Partner.
The power of attorney granted hereunder to the Managing General Partner:
(i) Is a special power of appointment coupled with an
interest, is irrevocable, and shall (to the extent
permitted by applicable law) survive the death or
disability of the Partner;
(ii) Shall survive the delivery of an assignment by a Limited
Partner of all or any portion of his or her Units;
except where the
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<PAGE> 162
assignee thereof has been approved by the Managing
General Partner for admission to the Partnership as a
Substitute Limited Partner, the power of attorney shall
survive the delivery of such assignment for the sole
purpose of enabling the Managing General Partner to
execute, acknowledge and file any instrument necessary
to effect such substitution; and
(iii) May be exercised by the Managing General Partner for
each Partner by a facsimile signature or by listing all
of the Partners executing any instrument with a single
signature as attorney-in-fact for all of them.
(g) Meetings. At any time, or from time to time, Limited
Partners owning ten percent (10%) or more of the Units may require, by written
notice to the General Partners specifying in general terms the subjects to be
considered, the General Partners to call, or the General Partners may on their
own motion call, a special meeting of the Limited Partners; and the General
Partners, within ten (10) days after any such notice is received, shall give
notice of such special meeting to all Limited Partners whose addresses are on
record with the Partnership, including in such notice a copy of the notice
requiring the call. Meetings may be held within or without the state of
Washington and not sooner than five nor more than twenty days after the giving
of such notice, and votes at such meetings may be accomplished either in person
or by proxy.
(h) Gender and Headings. The use of any gender herein shall be
deemed to be or include the other and the use of the singular herein shall be
deemed to be or include the plural (and vice versa) wherever appropriate.
(i) Arbitration. Any controversy between the parties hereto
arising out of this Agreement shall be submitted to arbitration before any
arbitrator or arbitrators chosen in accordance with the rules of the American
Arbitration Association. Such arbitration shall take place in Seattle,
Washington unless the parties mutually agree otherwise.
(j) No Third Party Beneficiaries. Unless explicitly stated to
the contrary herein, there shall be no third party beneficiaries to this
Agreement.
21. Addresses. The addresses of the General Partners, the Original
Limited Partner and the additional Limited Partners are as follows:
Managing General Partner Original Limited Partner:
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Northland Communications Corporation Richard I. Clark
3500 One Union Square Building 3500 One Union Square Building
Seattle, Washington 98101 Seattle, Washington 98101
Administrative General Partner: Limited Partners:
FN Equities Joint Venture (Set forth on attached Schedule A)
3858 Carson Street, Suite 300
Torrance, California 90503
DATED as of the 3rd day of November, 1986.
Managing General Partner:
Managing General Partner NORTHLAND COMMUNICATIONS CORPORATION
By:
-------------------------------------
John S Whetzell, President
Administrative General Partner: FN EQUITIES JOINT VENTURE
By: FN Equities, Inc., General Partner
-------------------------------------
By:
----------------------------------
Its Executive Vice President
Original Limited Partner,
----------------------------------------
hereby withdrawing: Richard I. Clark
NORTHLAND
COMMUNICATIONS
Limited Partners (as set By: CORPORATION,
forth on the attached as attorney-in-fact
Schedule A):
By:
-------------------------------------
John S. Whetzell, President
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EXHIBIT C
PROPOSED AMENDMENT NO. 1 TO THE AMENDED AND RESTATED AGREEMENT OF LIMITED
PARTNERSHIP OF NORTHLAND CABLE PROPERTIES SIX LIMITED PARTNERSHIP
This amendment to the Amended and Restated Agreement of Limited
Partnership (the "Amendment") of Northland Cable Properties Six Limited
Partnership, a Washington limited partnership ("NCP-Six"), are entered into by
and between Northland Communications Corporation, a Washington corporation
("Northland"), as the managing general partner of NCP-Six, and a majority in
interest of all of the limited partners of NCP-Six. The parties agree as
follows:
1. Amendment. The Amended and Restated Agreement of Limited Partnership
of Northland Cable Properties Six Limited Partnership, dated November 3, 1986
(the "Agreement"), is hereby amended by replacing Article 7 in its entirety with
the following new Article 7:
"7. Term of Partnership. The Partnership commenced as of the
date of filing and recording the original certificate of limited
partnership of the Partnership and shall continue until the date of the
first of the following events:
(a) December 31, 2007; or
(b) Dissolution and provided in Article 16 of this Agreement."
2. Effect of Amendment. Except as expressly amended by this Amendment,
the Agreement shall remain in full force and effect.
DATED this ___ day of __________________, 2001.
NORTHLAND COMMUNICATIONS CORPORATION, as both
managing general partner of Northland Cable
Properties Six Limited Partnership ("NCP-Six"),
and as attorney-in-fact for a majority in
interest of the limited partners of NCP-Six.
By:
---------------------------------------------
John S. Whetzell, President
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EXHIBIT D
PROPOSED AMENDMENT NO. 2 TO THE AMENDED AND RESTATED AGREEMENT OF LIMITED
PARTNERSHIP OF NORTHLAND CABLE PROPERTIES SIX LIMITED PARTNERSHIP
This amendment to the Amended and Restated Agreement of Limited
Partnership (the "Amendment") of Northland Cable Properties Six Limited
Partnership, a Washington limited partnership ("NCP-Six"), are entered into by
and between Northland Communications Corporation, a Washington corporation
("Northland"), as the managing general partner of NCP-Six, and a majority in
interest of all of the limited partners of NCP-Six. The parties agree as
follows:
1. Amendment. The Amended and Restated Agreement of Limited Partnership
of Northland Cable Properties Six Limited Partnership, dated November 3, 1986
(the "Agreement"), is hereby amended by adding a new Article 22 as follows:
"22. Sale and Distribution to Northland Communications
Corporation.
"(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 (collectively, the "Assets"), that are attributable
to the Limited Partners' collective interest in the Partnership,
and (ii) distribute in-kind to Northland the undivided portion
of the Assets that is attributable to the general partner's
interest in the Partnership. The terms and conditions of the
Northland Agreement shall be substantially as described in the
proxy statement of the Partnership dated April 15, 2001 (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
partner to sell or otherwise dispose of the Assets to
unaffiliated third parties in accordance with Article 11.
"(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' collective interest in the Partnership shall be
allocated solely to the Limited Partners in accordance with
paragraph 16(c) of this Agreement. Distributions on and
following the Closing Date shall be made in accordance with
paragraph 16(d) of this Agreement, except that any liquidating
distributions to the 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 general
partner's interest in the Partnership, and any liquidating
distributions to the Limited Partners shall be monetary and
shall include the net proceeds from the sale to Northland. The
promissory note to be paid by Northland as part of the purchase
price for the Assets shall be distributed to a liquidating trust
as set forth in the Proxy Statement. All other allocations of
income, gain or loss and distributions of cash shall be made to
all the Partners in accordance with this Agreement.
"(c) Reports. The general partner shall not be obligated
to furnish quarterly, semi-annual or annual reports pursuant to
paragraphs 18(b), (c) or (d) of this Agreement for the year in
which such liquidation occurs."
2. Amendment. Paragraph 16(f) of the Agreement is further amended, to be
consistent with new Article 22 above, to read in its entirety as follows
(changes marked):
"(f) Responsibility of the General Partner or Trustee in
Liquidating and Winding Up the Partnership. The Limited Partners
shall look solely to the assets of the Partnership and not to
the General Partner or the trustee, as the case may be, for the
return of any portion of their capital.
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Notwithstanding anything else in this Agreement to the contrary,
except as provided in and in accordance with Article 22 below, no assets
of the Partnership will be distributed in kind to the Partners in
liquidation unless a liquidating trust or similar vehicle is used in
connection with such distribution."
3. Authorization of General Partner. The general partner is authorized
to take all other and further action deemed by it necessary or appropriate to
effect the foregoing, including but not limited to the creation of a liquidating
trust for purposes of collecting note payments, taking all other actions
generally described in the Proxy Statement, and carrying on other appropriate
business following dissolution of NCP-Six.
4. Effect of Amendment. Except as expressly amended by this Amendment,
the Agreement shall remain in full force and effect.
DATED this ___ day of __________________, 2001.
NORTHLAND COMMUNICATIONS CORPORATION, as both
managing general partner of Northland Cable
Properties Six Limited Partnership ("NCP-Six"),
and as attorney-in-fact for a majority in
interest of the limited partners of NCP-Six.
By:
---------------------------------------------
John S. Whetzell, President
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EXHIBIT E
ADELPHIA TRANSACTION
ASSET PURCHASE AGREEMENT
[To Be Provided]
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EXHIBIT F
PROPOSED TRANSACTION
ASSET PURCHASE AGREEMENT
ASSET PURCHASE AGREEMENT
THIS ASSET PURCHASE AGREEMENT is dated ____________________, 2000, by
and between and Northland Cable Properties Six Limited Partnership, a Washington
limited partnership ("Seller"), and Northland Communications Corporation, a
Washington corporation, or its affiliates or assigns ("BUYER").
RECITALS:
A. Seller owns and operates cable television systems in the following
communities: (a) Starkville, Maben, Philadelphia, Kosciusko, Carthage, Forest
and Raleigh, Mississippi; (b) Barnwell, Allendale and Bamberg, South Carolina;
and (c) Highlands, North Carolina (collectively referred to as the "SYSTEMS");
B. Seller desires to sell, and Buyer wishes to buy, substantially all of
Seller's assets used in the operation of the Systems and the cable television
business related thereto for the price and on the terms and conditions set forth
in this Agreement.
AGREEMENTS:
In consideration of the above recitals and the covenants and agreements
contained herein, Buyer and Seller agree as follows:
1. DEFINED TERMS
The following terms shall have the following meanings in this Agreement
and additional terms shall have the meanings as defined elsewhere in this
Agreement:
1.1 "ACCOUNTS RECEIVABLE" means the rights of Seller to payment for
services provided for and billed by Seller (including, without limitation, those
billed to subscribers of the Systems and those for services and advertising time
provided by Seller) and unpaid prior to the Closing Date as reflected on the
billing records of Seller relating to the Systems.
1.2 "AGREEMENT" means this Asset Purchase Agreement.
1.3 "ASSETS" means all the tangible and intangible assets owned by
Seller and used solely in connection with the conduct of the business or
operations of the Systems, including, without limitation, those specified in
detail in Section 2.1 but excluding those specified in Section 2.2.
1.4 "CLOSING" means the consummation of the transactions contemplated by
this Agreement in accordance with the provisions of Section 7.
1.5 "CLOSING DATE" means the date of the Closing specified in Section 7.
1.6 "COMPENSATION ARRANGEMENT" means any written plan or compensation
arrangement other than an Employee Plan or a Multi-employer Plan that provides
to employees of Seller employed at the Systems any compensation or other
benefits, whether deferred or not, in excess of base salary or wages and
excluding overtime pay, including, but not limited to, any bonus or incentive
plan, deferred compensation arrangement, stock purchase plan, severance pay plan
and any other perquisites and employee fringe benefit plan.
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1.7 "CONSENTS" means the consents, permits or approvals of governmental
authorities and other third parties.
1.8 "CONTRACTS" means all pole attachment and conduit agreements,
railway crossing agreements, leases, easements, rights of way and similar
interests in Real Property, retransmission consent agreements, subscription
agreements with customers for the cable services provided by the Systems,
miscellaneous service agreements, agreements involving material non-monetary
obligations, agreements entered into by Seller in the ordinary course of
business of the Systems between the date hereof and the Closing Date, and other
agreements, written or oral (including any amendments and other modifications
thereto), to which Seller is a party and that relate to the Assets or the
business or operations of the Systems.
1.9 "DISTRIBUTED ASSETS" means the undivided portion of the Assets
attributable to the interest of the managing general partner of Seller pursuant
to and in accordance with the limited partnership agreement of Seller, as
amended.
1.10 "EMPLOYEE PLAN" means any written pension, retirement,
profit-sharing, deferred compensation, vacation, severance, bonus, incentive,
medical, vision, dental, disability, life insurance or any other employee
benefit plan as defined in Section 3(3) of the Employee Retirement Income
Security Act of 1974, as amended, and the regulations thereunder, (other than a
Multi-employer Plan) to which Seller contributes or which Seller sponsors or
maintains or by which Seller otherwise is bound, that provides benefits to
employees of Seller employed at the Systems.
1.11 "FCC" means the Federal Communications Commission, or its successor
agency.
1.12 "FRANCHISES" means all municipal and county franchises, and
franchise applications (if any), granted to Seller by any Franchising
Authorities, including all amendments thereto and modifications thereof.
1.13 "FRANCHISING AUTHORITIES" means all governmental authorities, which
have issued cable franchises relating to the operation of the Systems or before
which are pending any franchise applications filed by Seller relating to the
operation of the Systems.
1.14 "MATERIAL ADVERSE EFFECT" means a material adverse effect on the
operations, assets or financial condition of the Systems, taken as a whole,
other than (a) matters affecting the cable television industry generally
(including, without limitation, legislative, regulatory or litigation matters),
(b) matters relating to or arising from local or national economic conditions
(including, without limitation, financial and capital markets) and (c) any
changes resulting from or relating to the taking of any action contemplated by
this Agreement.
1.15 "MULTI-EMPLOYER PLAN" means a plan, as defined in ERISA Section
3(37) or Section 4001(a)(3), to which Seller or any trade or business which
would be considered a single employer with Seller under Section 4001(b)(1) of
ERISA contributed, contributes or is required to contribute that provides
benefits to employees of Seller employed at the Systems.
1.16 "PERMITTED ENCUMBRANCES" means any of the following liens or
encumbrances: (a) landlord's liens and liens for current taxes, assessments and
governmental charges not yet due or being contested in good faith by appropriate
proceedings; (b) statutory liens or other encumbrances that are minor or
technical defects in title that do not in the aggregate materially affect the
value, marketability or utility of the Assets as presently utilized; (c) such
liens, liabilities or encumbrances as are Assumed Liabilities; (d) leased
interests in property leased to others; (e) restrictions set forth in, or rights
granted to Franchising Authorities as set forth in, the Franchises or applicable
laws relating thereto; (f) zoning, building or similar restrictions, easements,
rights-of-way, reservations of rights, conditions or other restrictions or
encumbrances relating to or affecting the Real Property, that do not materially
interfere with the use of such Real Property in the operation of the Systems as
presently conducted; (g) as to Real Property, all matters of record as of the
date hereof other than mortgages; and (h) any other liens or encumbrances that
relate to liabilities and obligations that are to be discharged in full at
Closing or that will be removed prior to or at Closing.
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1.17 "PERSONAL PROPERTY" means all of the machinery, equipment, tools,
vehicles, furniture, leasehold improvements, office equipment, plant, inventory,
spare parts, supplies and other tangible and intangible personal property,
including, without limitation, the Franchises, the Contracts and the Accounts
Receivable, that are owned or leased by Seller and used, useful or held for use
as of the date hereof solely in the conduct of the business or operations of the
Systems, plus such additions thereto and deletions therefrom arising in the
ordinary course of business and as permitted by this Agreement between the date
hereof and the Closing Date.
1.18 "PURCHASED ASSETS" means the undivided portion of the Assets
attributable to the collective interest of the limited partners and the
administrative general partner of Seller pursuant to and in accordance with the
limited partnership agreement of Seller, as amended.
1.19 "REAL PROPERTY" means all of the real property interests of Seller,
including, without limitation, fee interests in real estate (together with the
buildings and other improvements located thereon), leasehold interests in real
estate, easements, licenses, rights to access, rights-of-way and other real
property interests that are (a) leased by Seller and used as of the date hereof
solely in the business or operations of the Systems, or (b) owned by Seller and
used as of the date hereof solely in the business or operations of the Systems,
plus such additions thereto and deletions therefrom arising in the ordinary
course of business and as permitted by this Agreement between the date hereof
and the Closing Date.
2. SALE AND PURCHASE OF ASSETS
2.1 AGREEMENT TO SELL AND PURCHASE. Subject to the terms and conditions
set forth in this Agreement, on the Closing Date Seller hereby agrees to (i)
sell, transfer and deliver to Buyer, and Buyer agrees to purchase from Seller,
all of the Purchased Assets, and (ii) make an in-kind distribution to Buyer of
all of the Distributed Assets. The Assets shall be, on the Closing Date, free
and clear of any claims, liabilities, mortgages, liens, pledges, conditions,
charges or encumbrances of any nature whatsoever except for Permitted
Encumbrances, which Assets include the following:
2.1.1 the Personal Property;
2.1.2 the Real Property;
2.1.3 the Franchises;
2.1.4 the Contracts;
2.1.5 all of Seller's proprietary information, technical
information and data, machinery and equipment warranties, maps, computer discs
and tapes, plans, diagrams, blueprints and schematics, including filings with
the Franchising Authorities and the FCC relating solely to the Systems (other
than the materials described in Section 2.2 hereof);
2.1.6 all payments and sums deposited or advanced by Seller to a
landlord, utility, governmental agency or any other party as a security deposit
or in exchange for initiation of a service;
2.1.7 subject to Section 2.2, all books and records relating to
the business or operations of the Systems, customer records and all records
required by the Franchising Authorities to be kept, subject to the right of
Seller to have such books and records made available to Seller for a period of
three years from the Closing Date; and
2.1.8 the going concern value and any of Seller's other
intangible assets, if any, with respect to the Systems.
2.2 EXCLUDED ASSETS. The Assets shall exclude the following assets
("EXCLUDED ASSETS"):
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2.2.1 Seller's cash on hand as of the Closing Date and all other
cash in any of Seller's bank or savings accounts, including, without limitation,
customer advance payments and deposits; any and all bonds, surety instruments,
insurance policies and all rights and claims thereunder, letters of credit or
other similar items and any cash surrender value in regard thereto, and any
stocks, bonds, certificates of deposit and similar investments;
2.2.2 Any books and records that Seller is required by law to
retain and any correspondence, memoranda, books of account, tax reports and
returns and the like related to the Systems other than those described in
Section 2.1.7, subject to the right of Buyer to have access to and to copy for a
reasonable period, not to exceed three years from the Closing Date, and Seller's
partnership books and records and other books and records related to internal
partnership matters and financial relationships with Seller's lenders and
affiliates;
2.2.3 Any claims, rights and interest in and to any refunds of
federal, state or local franchise, income or other taxes or fees of any nature
whatsoever for periods prior to the Closing Date including, without limitation,
fees paid to the U.S. Copyright Office or any causes of action relating to such
refunds;
2.2.4 Except as specifically set forth herein, any Employee Plan,
Compensation Arrangement or Multi-employer Plan;
2.2.5 All rights to receive fees or services from any affiliate
of Seller;
2.2.6 Any contracts, agreements or other arrangements between
Seller and any affiliate of Seller;
2.2.7 All choices in action of Seller whether or not relating to
the Systems; and
2.2.8 The Accounts Receivable.
2.3 PURCHASE PRICE.
2.3.1 The purchase price for the Purchased Assets ("PURCHASE
PRICE") shall be (i) $62,250,000, (ii) as adjusted pursuant to Section 2.4
below, and (iii) reduced by an amount equal to the portion of the Assets
represented by the Distributed Assets.
2.3.2 The Purchase Price shall be paid by Buyer to Seller at the
Closing as follows:
(a) By a promissory note in the principal amount of
$9,875,000, to be paid in two equal annual installments from the Closing Date
and bearing interest at an annual interest rate of 6.5%; and
(b) Subject to the principal amount of the promissory note
described in Section 2.3.2(a), adjustments and prorations set forth in Section
2.4 below, and the reductions set forth in Section 2.3.1(iii) above, by wire
transfer of the balance of the Purchase Price in immediately available funds to
Seller.
2.3.3 All Purchase Price proceeds shall be distributable to the
limited partners of Seller pursuant to and in accordance with the limited
partnership agreement of Seller, as amended. Buyer shall not be entitled to
receive any payments described in Section 2.3.2.
2.4 ADJUSTMENTS AND PRORATIONS.
2.4.1 All income, expenses and other liabilities arising from the
Systems up until midnight on the day prior to the Closing Date, including
franchise fees, pole and other rental charges payable with respect to cable
television service, utility charges, real and personal property taxes and
assessments levied against the Assets, salesperson advances, property and
equipment rentals, applicable copyright or other fees, sales and service
charges, taxes (except for taxes arising from the transfer of the Assets
hereunder), and similar prepaid and deferred items, shall be prorated between
Buyer and Seller in accordance with the principle that Seller shall receive the
benefit of
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all income and shall be responsible for all expenses, costs and liabilities
allocable to the conduct of the business or operations of the Systems for the
period prior to the Closing Date, and Buyer shall receive the benefit of all
income and shall be responsible for all expenses, costs and obligations
allocable to the conduct of the business or operations of the Systems on the
Closing Date and for the period thereafter. All such pro rations shall be
determined in accordance with generally accepted accounting principles.
2.4.2 The Purchase Price shall be increased by an amount equal to
100% of the face amount of all payments and sums deposited or advanced by Seller
to a landlord, utility, governmental agency or any other party as a security
deposit or in exchange for initiation of a service.
2.4.3 The Purchase Price shall be reduced by an amount equal to
(a) any customer advance payments (i.e., customer payments received by Seller
prior to the Closing but relating to service to be provided by Buyer after the
Closing) and deposits (including any interest owing thereon), and (b) any other
advance payments (i.e., advertising payments received by Seller prior to the
Closing but relating to service to be provided by Buyer after the Closing).
2.4.4 At least ten business days prior to the Closing, Seller
will prepare a report with respect to the Systems (the "PRELIMINARY REPORT"),
showing in detail the preliminary determination of the adjustments referred to
in this Section 2.4, calculated in accordance with such Section as of the
Closing Date (or as of any other date(s) agreed to by the parties) together with
any documents substantiating the determination of the adjustments to the
Purchase Price proposed in the Preliminary Report. The adjustment shown in the
Preliminary Report, as adjusted by agreement of the parties, will be reflected
as an adjustment to the Purchase Price payable at the Closing.
2.4.5 Within 90 days after the Closing Date, Buyer shall prepare
a report with respect to the Systems (the "FINAL REPORT"), showing in detail the
final determination of any adjustments which were not calculated as of the
Closing Date and containing any corrections to the Preliminary Report, together
with any documents substantiating the final calculation of the adjustments
proposed in the Final Report. If Seller shall conclude that the Final Report
does not accurately reflect the adjustments and prorations to be made to the
Purchase Price in accordance with this Section 2.4, Seller shall, within 30 days
after its receipt of the Final Report, provide to Buyer its written statement of
any discrepancies believed to exist. Buyer and Seller shall use good faith
efforts to jointly resolve the discrepancies within 15 days of Buyer's receipt
of Seller's written statement of discrepancies, which resolution, if achieved,
shall be binding upon all parties to this Agreement and not subject to dispute
or judicial review. If Buyer and Seller cannot resolve the discrepancies to
their mutual satisfaction within such 15-day period, Buyer and Seller shall,
within the following 10 days, jointly designate a national independent public
accounting firm to be retained to review the Final Report together with Seller's
discrepancy statement and any other relevant documents. Such firm shall report
its conclusions as to adjustments pursuant to this Section 2.4 which shall be
conclusive on all parties to this Agreement and not subject to dispute or
judicial review. If, after adjustment as appropriate with respect to the amount
of the aforesaid adjustments paid or credited at the Closing, Buyer or Seller is
determined to owe an amount to the other, the appropriate party shall pay such
amount thereof to the other, within three days after receipt of such
determination. The cost of retaining such independent public accounting firm
shall be borne by Buyer; provided, however, that if such independent public
accounting firm concludes that the Final Report as proposed by Buyer is accurate
and that the discrepancies noted by Seller are inaccurate, then Seller shall
bear the cost of retaining such independent public accounting firm.
2.5 ASSUMPTION OF LIABILITIES AND OBLIGATIONS. As of the Closing Date
and subject to applicable pro rations and adjustments set forth in Section 2.4,
Buyer shall assume and pay, discharge and perform the following (collectively,
the "ASSUMED LIABILITIES"): (a) all obligations and liabilities of Seller under
the Franchises and the Contracts; (b) all obligations and liabilities of Seller
to all customers and advertisers of the Systems for any advance payments or
deposits; and (c) all obligations and liabilities arising out of events
occurring on or after the Closing Date related to Buyer's ownership of the
Assets or its conduct of the business or operations of the Systems. All other
obligations and liabilities of Seller shall remain and be the obligations and
liabilities solely of Seller.
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3. REPRESENTATIONS AND WARRANTIES OF SELLER
Seller represents and warrants to Buyer as of the date of this Agreement
and as of the Closing Date, as follows:
3.1 ORGANIZATION, STANDING AND AUTHORITY. Seller is a limited
partnership duly organized and validly existing under the laws of the State of
Washington, and is qualified to conduct business in each jurisdiction in which
the property owned, leased or operated by it requires it to be so qualified,
except where the failure to so qualify would not have a Material Adverse Effect.
Seller has the requisite partnership power and authority (a) to own, lease and
use the Assets as presently owned, leased and used by it, and (b) to conduct the
business and operations of the Systems as presently conducted by it.
3.2 AUTHORIZATION AND BINDING OBLIGATION. Seller has the partnership
power and authority to execute and deliver this Agreement and to carry out and
perform all of its other obligations under the terms of this Agreement. Except
for the approval of a majority in interest of the limited partners of Seller,
all partnership action by Seller necessary for the authorization, execution,
delivery and performance by it of this Agreement has been taken. This Agreement
has been duly executed and delivered by Seller and this Agreement constitutes
the valid and legally binding obligation of Seller, enforceable against it in
accordance with its terms, except (a) as rights to indemnity, if any, thereunder
may be limited by federal or state securities laws or the public policies
embodied therein, (b) as enforceability may be limited by bankruptcy,
insolvency, reorganization, moratorium or similar laws from time to time in
effect affecting the enforcement of creditors' rights generally, and (c) as the
remedy of specific performance and injunctive and other forms of equitable
relief may be subject to equitable defenses and to the discretion of the court
before which any proceeding therefor may be brought.
3.3 ABSENCE OF CONFLICTING AGREEMENTS. Subject to obtaining the Consents
described in Section 3.4 and approval of a majority in interest of the limited
partners of Seller, the execution, delivery and performance of this Agreement by
Seller will not: (a) violate the certificate of limited partnership and limited
partnership agreement, as amended, of Seller; (b) violate any law, judgment,
order, ordinance, injunction, decree, rule or regulation of any court or
governmental instrumentality applicable to Seller with respect to the Assets; or
(c) conflict with, constitute grounds for termination of, result in a breach of,
constitute a default under, accelerate or permit the acceleration of any
performance required by the terms of, any Contract or Franchise, excluding from
the foregoing clauses (b) and (c) such violations, conflicts, terminations,
breaches and defaults, which in the aggregate would not have a Material Adverse
Effect, and such conflicts, terminations, breaches and defaults which would
occur as a result of the specific legal or regulatory status of Buyer.
3.4 CONSENTS. Except for (a) the Consents of Franchising Authorities
that are required by the Franchises prior to Closing, (b) the Consents of
landlords of leased headend or office sites required prior to Closing, (c) the
Consents of the FCC, other than any FCC consent to any business radio license or
any microwave transmit or receive license that Seller reasonably expects can be
obtained within 120 days after the Closing and so long as temporary
authorization is available to Buyer under FCC rules with respect thereto, and
(d) Consents which if not obtained would not have a Material Adverse Effect, no
consent, approval, permit or authorization of, or declaration to or filing with
any governmental or regulatory authority, or any other third party is required
to consummate this Agreement and the transactions contemplated hereby.
4. REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer represents and warrants to Seller as of the date of this Agreement
and as of the Closing Date, as follows:
4.1 ORGANIZATION, STANDING AND AUTHORITY. Buyer is a corporation, duly
organized and validly existing under the laws of the State of Washington and is
qualified to conduct business as a foreign corporation in each jurisdiction in
which the property owned, leased or operated by it requires it to be so
qualified, except where the failure to so qualify would not have a Material
Adverse Effect. Buyer has the requisite power and authority to
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execute and deliver this Agreement and to perform and comply with all of the
terms, covenants and conditions to be performed and complied with by Buyer
hereunder.
4.2 AUTHORIZATION AND BINDING OBLIGATION. Buyer has the corporate power
and authority to execute and deliver this Agreement and to carry out and perform
all of its other obligations under the terms of this Agreement. All corporate
action by Buyer necessary for the authorization, execution, delivery and
performance by Buyer of this Agreement has been taken. This Agreement has been
duly executed and delivered by Buyer and this Agreement constitutes the valid
and legally binding obligation of Buyer, enforceable against it in accordance
with its terms, except (a) as rights to indemnity, if any, thereunder may be
limited by federal or state securities laws or the public policies embodied
therein, (b) as enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium or similar laws from time to time in effect affecting
the enforcement of creditors' rights generally, and (c) as the remedy of
specific performance and injunctive and other forms of equitable relief may be
subject to equitable defenses and to the discretion of the court before which
any proceeding therefor may be brought.
4.3 ABSENCE OF CONFLICTING AGREEMENTS. Subject to obtaining the Consents
listed in Section 3.4, the execution, delivery and performance of this Agreement
by Buyer will not: (a) require the consent, approval, permit or authorization
of, or declaration to or filing with any governmental or regulatory authority,
or any other third party, except where if not obtained would not have a Material
Adverse Effect; (b) violate the governing documents of Buyer; (c) violate any
material law, judgment, order, ordinance, injunction, decree, rule or regulation
of any court or governmental instrumentality; or (d) conflict with, constitute
grounds for termination of, result in a breach of, constitute a default under,
or accelerate or permit the acceleration of any performance required by the
terms of, any material agreement, instrument, license or permit to which Buyer
is a party or by which Buyer may be bound, such that Buyer could not perform
hereunder and acquire or operate the Assets.
4.4 BUYER QUALIFICATION. Buyer knows of no reason why it cannot become
the franchisee pursuant to the Franchises, and to its knowledge has the
requisite qualifications to own and operate the Systems.
4.5 AVAILABILITY OF FUNDS. Buyer will have available on the Closing Date
sufficient unrestricted funds to enable it to consummate the transactions
contemplated hereby.
5. COVENANTS OF THE PARTIES
5.1 CONSENTS. Following the execution hereof, Seller shall make such
applications to the Franchising Authorities and other third parties for the
Consents, and shall otherwise use its commercially reasonable efforts to obtain
the Consents as expeditiously as possible. In no event shall Seller be required,
as a condition of obtaining such Consents, to expend any monies on, before or
after the Closing Date (other than expenses typically incurred in connection
with the efforts to obtain such Consents), or to offer or grant any
accommodations or concessions adverse to Seller or to engage in litigation or
other adversarial proceedings. Buyer shall use its commercially reasonable
efforts to promptly assist Seller and shall take such prompt and affirmative
actions as may reasonably be necessary in obtaining such Consents and shall
cooperate with Seller in the preparation, filing and prosecution of such
applications as may reasonably be necessary, including, without limitation,
making management and other personnel of Buyer available to assist in obtaining
such Consents. The parties agree to use commercially reasonable efforts to
obtain consents to the transfer of the Franchises. Seller shall not agree to any
materially adverse change in any Franchise as a condition to obtaining any
authorization, consent, order or approval necessary for the transfer of such
Franchise unless Buyer shall otherwise consent; provided, however, that Buyer,
and not Seller, shall bear the cost and expense of any conditions imposed by
Franchising Authorities on Franchise transfers to which Buyer has consented.
Buyer acknowledges that Franchising Authorities and third parties to Contracts
may impose bond, letter of credit, indemnity and insurance requirements and may
modify or impose penalty provisions and other similar provisions to the
appropriate Franchise or Contract as a condition to giving their consent to
assignment or transfer thereof. Notwithstanding anything to the contrary
contained in this Section 5.1, Buyer shall be obligated to accept any such
conditions as long as the requirements are reasonable and customary in the
industry for similarly situated cable system operators in terms of size and
financial and operating qualifications. Buyer agrees that it shall not, without
the prior written consent of Seller (which may be withheld at Seller's sole
discretion), seek amendments or
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modifications to Franchises or Contracts. Buyer shall, at Seller's request,
promptly furnish Seller with copies of such documents and information with
respect to Buyer, including financial information and information relating to
the cable and other operations of Buyer and any of its affiliated or related
companies, as Seller may reasonably request in connection with the obtaining of
any of the Consents or as may be reasonably requested by any person in
connection with any Consent. Notwithstanding anything to the contrary contained
in this Section 5.1, Seller's obligations hereunder with respect to pursuing any
Consent shall be fully satisfied with respect to: (a) the transfer of pole
attachment or conduit contracts, if Buyer has executed a new contract with the
respective pole company or if such pole company has indicated in writing that it
is willing to execute a new contract with Buyer; and (b) the transfer of
railroad crossing permits or contracts, if Buyer has executed a new permit or
contract with the respective railroad company or if such railroad company has
indicated in writing that it is willing to execute a new permit or contract with
Buyer.
5.2 TAXES, FEES AND EXPENSES. Buyer shall pay all sales, use, transfer,
purchase taxes and fees, filing fees, recordation fees and application fees, if
any, arising out of the transactions contemplated herein. Each party shall pay
its own expenses incurred in connection with the authorization, preparation,
execution and performance of this Agreement, including all fees and expenses of
counsel, accountants, agents and other representatives.
5.3 BROKERS. Each of Buyer and Seller represents and warrants that
neither it nor any person or entity acting on its behalf has incurred any
liability for any finders' or brokers' fees or commissions in connection with
the transaction contemplated by this Agreement, except that Seller has retained
Daniels & Associates, L.P., whose fees shall be paid by Seller. Buyer agrees to
defend, indemnify and hold harmless Seller against any fee, commission, loss or
expense arising out of any claim by any broker or finder employed or alleged to
have been employed by Buyer.
5.4 RISK OF LOSS. The risk of loss, damage or destruction to the Systems
from fire, theft or other casualty or cause shall be borne by Seller at all
times up to completion of the Closing. It is expressly understood and agreed
that in the event of any material loss or damage to any material portion of the
Assets from fire, casualty or other cause prior to the Closing, Seller shall
promptly notify Buyer of same in writing. Such notice shall report the loss or
damage incurred, the cause thereof, if known, and any insurance coverage related
thereto.
5.5 BONDS, LETTERS OF CREDIT, ETC. Buyer shall take all reasonably
necessary steps, and execute and deliver all reasonably necessary documents, to
insure that on the Closing Date Buyer has delivered such bonds, letters of
credit, indemnity agreements and similar instruments in such amounts and in
favor of such Franchising Authorities and other third parties requiring the same
in connection with the Franchises and the Contracts.
5.6 ACCOUNTS RECEIVABLE. Buyer shall have the sole right and obligation
to collect, on behalf of Seller, outstanding Accounts Receivable after Closing.
Buyer shall remit to Seller in cash all amounts collected by Buyer in
satisfaction of Accounts Receivable on and up to 90 days after the Closing Date.
All Accounts Receivable that remain outstanding 90 days after the Closing Date
shall be automatically assigned from Seller to Buyer without further action, and
all amounts collected by Buyer in satisfaction of Accounts Receivable more than
90 days after the Closing Date shall be retained by Buyer. Buyer shall use
reasonable efforts to collect the Accounts Receivable on behalf of Seller. Buyer
shall be entitled to compromise, discount or otherwise make concessions to
account debtors as Buyer may reasonably determine in order to collect the
Accounts Receivable. Seller shall reimburse Buyer for any costs Buyer incurs to
collect Accounts Receivable, which costs shall be offset against the remittances
to be made by Buyer to Seller.
6. CONDITIONS PRECEDENT TO OBLIGATIONS OF BUYER AND SELLER TO CLOSE
6.1 CONDITIONS PRECEDENT TO OBLIGATIONS OF BUYER TO CLOSE. The
obligations of Buyer to consummate the transactions contemplated by this
Agreement to occur at the Closing shall be subject to the satisfaction, on or
before the Closing Date, of each and every one of the following conditions, all
or any of which may be waived in writing, in whole or in part, by Buyer for
purposes of consummating such transactions:
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6.1.1 Representations and Warranties. All representations and
warranties of Seller contained in this Agreement shall be true and complete in
all material respects at and as of the Closing Date as though such
representations and warranties were made at and as of such time except to the
extent changes are permitted or contemplated pursuant to this Agreement.
6.1.2 Covenants and Conditions. Seller shall have in all material
respects performed and complied with all material covenants, agreements and
conditions required by this Agreement to be performed or complied with by it
prior to or on the Closing Date.
6.1.3 No Injunction, Etc. No action, suit or other proceeding
shall have been instituted, threatened or proposed before any court,
governmental agency or legislative body to enjoin, restrain, prohibit or obtain
substantial damages in respect of, or which is related to, or arising out of,
this Agreement or the consummation of the transactions contemplated hereby which
if successful would have a Material Adverse Effect.
6.1.4 Consents. Each of the following Consents shall have been
duly obtained and delivered to Buyer: (a) the Consents of the Franchising
Authorities; and (b) the Consents of the FCC, except for any FCC consent to any
business radio license or any microwave transmit or receive license that Seller
reasonably expects can be obtained within 120 days after the Closing and so long
as a temporary authorization is available to Buyer under FCC rules with respect
thereto.
6.1.5 Deliveries. Seller shall have made or stand willing and
able to make all the deliveries to Buyer set forth in Section 7.2.
6.1.6 Material Adverse Change. Between the date of this Agreement
and the Closing Date, there shall have been no material adverse change in the
financial condition of the Systems, taken as a whole, other than matters
affecting the cable television industry generally (including, without
limitation, legislative, regulatory or litigation matters) and matters relating
to or arising from local or national economic conditions (including financial
and capital markets).
6.2 CONDITIONS PRECEDENT TO OBLIGATIONS OF SELLER TO CLOSE. The
obligations of Seller to consummate the transactions contemplated by this
Agreement to occur at the Closing shall be subject to the satisfaction, on or
before the Closing Date, of each and every one of the following conditions, all
or any of which may be waived in writing, in whole or in part, by Seller for
purposes of consummating such transactions:
6.2.1 Representations and Warranties. All representations and
warranties of Buyer contained in this Agreement shall be true and complete in
all material respects at and as of the Closing Date as though such
representations and warranties were made at and as of such time except to the
extent changes are permitted or contemplated pursuant to this Agreement.
6.2.2 Covenants and Conditions. Buyer shall have in all material
respects performed and complied with all material covenants, agreements and
conditions required by this Agreement to be performed or complied with by it
prior to or on the Closing Date.
6.2.3 No Injunction, Etc. No action, suit or other proceeding
shall have been instituted, threatened or proposed before any court,
governmental agency or legislative body to enjoin, restrain, prohibit or obtain
substantial damages in respect of, or which is related to, or arising out of,
this Agreement or the consummation of the transactions contemplated hereby.
6.2.4 Limited Partner Approvals. A majority in interest of the
limited partners of Seller shall have consented to the transactions contemplated
by this Agreement in accordance with the terms of Seller's partnership agreement
and applicable securities laws.
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6.2.5 Deliveries. Buyer shall have made or stand willing and able
to make all the deliveries set forth in Section 7.3.
7. CLOSING AND CLOSING DELIVERIES
7.1 CLOSING. If practicable, the Closing will be held on the last
business day of the calendar month during which the conditions set forth in
Sections 6.1.5 and 6.2.5 hereof shall have been satisfied; provided, however,
that if the Closing is not held on the last business day of the calendar month
during which such conditions shall have been satisfied, the Closing shall be
held on the last business day of the next succeeding calendar month, or on such
other date as Buyer and Seller may mutually agree ("CLOSING DATE"). The Closing
shall be held at 10:00 a.m. local time at the Seller's offices at 1201 Third
Ave., Suite 3600, Seattle, WA 98101, or will be conducted by mail or at such
other place and time as the parties may agree. Notwithstanding the foregoing,
the parties agree that the Closing shall be deemed effective as of 12:01 a.m. on
the Closing Date, and all references herein that relate to the date and time of
the Closing, including provisions dealing with adjustments to the Purchase
Price, shall refer to such effective date and time.
7.2 DELIVERIES BY SELLER. Prior to or on the Closing Date, Seller shall
deliver to Buyer the following, in form and substance reasonably satisfactory to
Buyer and its counsel:
7.2.1 Transfer Documents. A duly executed bill of sale, limited
or special (but not general) warranty deeds (subject to all matters of record),
motor vehicle titles, assignments and other transfer documents which shall be
sufficient to vest good title to the Assets in the name of Buyer or its
permitted assignees, free and clear of any claims, liabilities, mortgages,
liens, pledges, conditions, charges or encumbrances of any nature whatsoever
except for Permitted Encumbrances; and
7.2.2 Consents. The original of each Consent required by Section
6.1.4;
7.3 DELIVERIES BY BUYER. Prior to or on the Closing Date, Buyer shall
deliver to Seller the following, in form and substance reasonably satisfactory
to Seller and its counsel:
7.3.1 Purchase Price. The Purchase Price, subject to any
adjustments and reductions in accordance with Section 2.3 and Section 2.4; and
7.3.2 Assumption Agreements. A duly executed assignment and
assumption agreement pursuant to which Buyer shall assume and undertake to
perform the Assumed Liabilities.
8. TERMINATION
8.1 METHOD OF TERMINATION. This Agreement constitutes the binding and
irrevocable agreement of the parties to consummate the transactions contemplated
hereby, subject to and in accordance with the terms hereof, the consideration
for which is (a) the covenants, representations, warranties and agreements set
forth in this Agreement; and (b) the expenditures and obligations incurred and
to be incurred by Buyer on the one hand, and by Seller, on the other hand, in
respect of this Agreement, and this Agreement may be terminated or abandoned
only as follows:
8.1.1 By the mutual consent of Seller and Buyer, or by either
Seller or Buyer in the event of the notification by the Federal Trade Commission
or the Department of Justice of the intent of either agency to seek to enjoin
the transactions contemplated by this Agreement or if any condition to the
Closing set forth in Section 6.1.3 or 6.2.3 is not fulfilled and the failure of
such condition is not a result of a breach of warranty or nonfulfillment of any
covenant or agreement by Buyer or Seller contained in this Agreement;
8.1.2 By Buyer, if any of the conditions set forth in Section 6.1
hereof to which the obligations of Buyer are subject (other than the conditions
set forth in Section 6.1.3) have not been fulfilled or waived, and provided that
the failure to fulfill such condition is not a result of a breach of warranty or
nonfulfillment of any covenant or agreement by Buyer contained in this
Agreement; or
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8.1.3 By Seller, if any of the conditions set forth in Section
6.2 hereof to which the obligations of Seller are subject (other than the
conditions set forth in Section 6.2.3) have not been fulfilled or waived, and
provided that the failure to fulfill such condition is not a result of a breach
of warranty or nonfulfillment of any covenant or agreement by Seller contained
in this Agreement.
8.2 RIGHTS UPON TERMINATION.
8.2.1 In the event of a termination of this Agreement pursuant to
Section 8.1.1 hereof, each party shall pay the costs and expenses incurred by it
in connection with this Agreement, and no party (or any of its officers,
directors, partners, employees, agents, representatives or stockholders) shall
be liable to any other party for any cost, expense, damage or loss of
anticipated profits hereunder.
8.2.2 In the event of a termination of this Agreement pursuant to
Section 8.1.2 hereof, if Seller is in material breach of this Agreement, Buyer
shall have the right to seek all remedies available to it as provided hereunder
or at law or equity, including the remedy of specific performance. In the event
of any action to enforce this Agreement, Seller hereby waives the defense that
there is an adequate remedy at law.
8.2.3 In the event of a termination of this Agreement pursuant to
Section 8.1.3 hereof, if Buyer is in material breach of this Agreement by Buyer,
Seller shall have the right to seek all remedies available to it as provided
hereunder or at law or equity, including the remedy of specific performance. In
the event of any action to enforce this Agreement, Buyer hereby waives the
defense that there is an adequate remedy at law.
9. SURVIVAL OF REPRESENTATIONS AND WARRANTIES AND INDEMNIFICATION
9.1 REPRESENTATIONS AND WARRANTIES. All representations, warranties,
covenants and agreements contained in this Agreement or in documents or
instruments delivered pursuant hereto shall be deemed continuing
representations, warranties, covenants and agreements, and shall survive the
Closing Date for a period ending on the one-year anniversary of the Closing
Date.
9.2 INDEMNIFICATION BY BUYER. Buyer shall defend, indemnify and hold
Seller harmless against and with respect to, and shall reimburse Seller for:
9.2.1 Any and all losses, liabilities or damages resulting from
any untrue representation, breach of warranty or nonfulfillment of any covenant
by Buyer contained herein;
9.2.2 Any and all of the Assumed Liabilities;
9.2.3 Any and all losses, liabilities or damages resulting from
Buyer's operation or ownership of the Systems or Assets on and after the Closing
Date; and
9.2.4 Any and all actions, suits, proceedings, claims, demands,
assessments, judgments, costs and expenses, including, without limitation,
reasonable legal fees and expenses, incident to any of the foregoing or incurred
in investigating or attempting to avoid the same or to oppose the imposition
thereof, or in enforcing this indemnity.
9.3 PROCEDURE FOR INDEMNIFICATION. The procedure for indemnification
shall be as follows:
9.3.1 The party claiming indemnification ("CLAIMANT") shall
promptly give notice to the party from whom indemnification is claimed
("INDEMNIFYING PARTY") of any claim, whether between the parties or brought by a
third party, specifying (a) the factual basis for such claim and (b) the
estimated amount of the claim. If the claim relates to an action, suit or
proceeding filed by a third party against Claimant, such notice shall be given
by Claimant within ten business days after written notice of such action, suit
or proceeding was given to Claimant; provided that failure to give such notice
within such ten-day period shall not bar or otherwise prejudice Claimant's
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rights to indemnification with respect to such third-party action, suit or
proceeding unless any defense, claim, counterclaim or cross-claim of the
Indemnifying Party is prejudiced thereby.
9.3.2 Following receipt of notice from the Claimant of a claim,
the Indemnifying Party shall have 30 days to make such investigation of the
claim as the Indemnifying Party deems necessary or desirable. For the purposes
of such investigation, the Claimant agrees to make available to the Indemnifying
Party and/or its authorized representative(s) the information relied upon by the
Claimant to substantiate the claim. If the Claimant and the Indemnifying Party
agree at or prior to the expiration of said 30-day period (or any mutually
agreed upon extension thereof) to the validity and amount of such claim, the
Indemnifying Party shall immediately pay to the Claimant the full amount of the
claim subject to the terms and in accordance with the procedures set forth
herein. If the Claimant and the Indemnifying Party do not agree within said
period (or any mutually agreed upon extension thereof), the Claimant may seek
appropriate legal remedy.
9.3.3 With respect to any claim by a third party as to which the
Claimant is entitled to indemnification hereunder, the Indemnifying Party shall
have the right at its own expense, to participate in or assume control of the
defense of such claim, and the Claimant shall cooperate fully with the
Indemnifying Party. If the Indemnifying Party elects to assume control of the
defense of any third-party claim, the Claimant shall have the right to
participate in the defense of such claim at its own expense. If the Indemnifying
Party does not elect to assume control or otherwise participate in the defense
of any third party claim, it shall be bound by the results obtained by the
Claimant with respect to such claim, and the Indemnifying Party shall be
responsible and shall promptly reimburse Claimant for all associated costs, fees
and expenses.
9.3.4 If a claim, whether between the parties or by a third
party, requires immediate action, the parties will make every effort to reach a
decision with respect thereto as expeditiously as possible.
9.4 EXCLUSIVE REMEDY. After the Closing Date, the sole and exclusive
remedy of any party for any misrepresentation or any breach of a warranty or
covenant set forth in or made pursuant to this Agreement shall be a claim for
indemnification under and pursuant to this Article 9.
10. MISCELLANEOUS
10.1 BENEFIT AND BINDING EFFECT. Seller may not assign this Agreement
without the prior written consent of the Buyer. Buyer may its rights and
obligations under this Agreement to any of its affiliates or assigns upon notice
to Seller. This Agreement shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and permitted assigns.
10.2 BULK TRANSFER. Buyer acknowledges that Seller has not and will not
file any transfer notice or otherwise complied with applicable bulk transfer
laws, and the parties agree to waive compliance with same.
10.3 GOVERNING LAW. This Agreement shall be governed, construed and
enforced in accordance with the laws of the State of Washington, without regard
to the conflicts of law principles of such state. The parties agree that this
Section 10.3 serves as a material inducement for Seller to enter into this
Agreement.
10.4 GENDER AND NUMBER. Words used herein, regardless of the gender and
number specifically used, shall be deemed and construed to include any other
gender, masculine, feminine or neuter, and any other number, singular or plural,
as the context requires.
10.5 ENTIRE AGREEMENT. This Agreement, and all documents and
certificates to be delivered by the parties pursuant hereto collectively
represent the entire understanding and agreement between Buyer and Seller with
respect to the subject matter hereof. This Agreement supersedes all prior
negotiations between Buyer and Seller with respect to the transactions
contemplated hereby, and all letters of intent and other writings relating to
such negotiations, and cannot be amended, supplemented or modified except by an
agreement in writing which makes specific reference to this Agreement or an
agreement delivered pursuant hereto, as the case may be, and which is signed by
the party against which enforcement of any such amendment, supplement or
modification is sought.
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10.6 FURTHER ASSURANCES. Each party covenants that at any time, and from
time to time, after the Closing Date, it will execute such additional
instruments and take such actions as may be reasonably requested by the other
parties to confirm or perfect or otherwise to carry out the intent and purposes
of this Agreement.
10.7 WAIVER OF COMPLIANCE; CONSENTS. Except as otherwise provided in
this Agreement, any failure of any of the parties to comply with any obligation,
representation, warranty, covenant, agreement or condition herein may be waived
by the party entitled to the benefits thereof, but such waiver or failure to
insist upon strict compliance with such obligation, representation, warranty,
covenant, agreement or condition shall not operate as a waiver of, or estoppel
with respect to, any subsequent or other failure.
10.8 SEVERABILITY. If any provision of this Agreement or the application
thereof to any person or circumstance shall be invalid or unenforceable to any
extent, the remainder of this Agreement and the application of such provision to
other persons or circumstances shall not be affected thereby and shall be
enforced to the greatest extent permitted by law; provided, however, that the
economic and legal substance of the transactions contemplated by this Agreement
is not affected in any manner that is materially adverse to any party affected
by such invalidity or unenforceability.
10.9 COUNTERPARTS. This Agreement may be signed in any number of
counterparts with the same effect as if the signature on each such counterpart
were upon the same instrument, and a facsimile transmission shall be deemed to
be an original signature.
10.10 NO THIRD-PARTY BENEFICIARIES. This Agreement constitutes an
agreement solely among the parties hereto, and, except as otherwise provided
herein, is not intended to and will not confer any rights, remedies, obligations
or liabilities, legal or equitable on any person other than the parties hereto
and their respective successors or assigns, or otherwise constitute any person a
third party beneficiary under or by reason of this Agreement.
10.11 TAX CONSEQUENCES. No party to this Agreement makes any
representation or warranty, express or implied, with respect to the tax
implications of any aspect of this Agreement on any other party to this
Agreement, and all parties expressly disclaim any such representation or
warranty with respect to any tax consequences arising under this Agreement. Each
party has relied solely on its own tax advisors with respect to the tax
implications of this Agreement.
10.12 CONSTRUCTION. This Agreement has been negotiated by Buyer and
Seller and their respective legal counsel, and legal or equitable principles
that might require the construction of this Agreement or any provision of this
Agreement against the party drafting this Agreement shall not apply in any
construction or interpretation of this Agreement.
10.13 TIME OF THE ESSENCE. Time is of the essence under this Agreement.
If the last day permitted for the giving of any notice or the performance of any
act required or permitted under this Agreement falls on a day that is not a
business day, the time for the giving of such notice or the performance of such
act will be extended to the next succeeding business day.
10.14 CURE. For all purposes under this Agreement, the existence or
occurrence of any event or circumstance that constitutes a breach of a
representation or warranty or the nonfulfillment of any pre-Closing covenant or
agreement of Buyer or Seller contained in this Agreement on the date such
representation or warranty is made or the fulfillment of such pre-Closing
covenant or agreement is due, shall not constitute a breach of such
representation or warranty or the nonfulfillment of such pre-Closing covenant or
agreement if such event or circumstance is cured on or prior to the Closing
Date.
10.15 COVENANT NOT TO SUE AND NONRECOURSE TO PARTNERS.
10.15.1 Buyer agrees that notwithstanding any other provision in
this Agreement, any agreement, instrument, certificate or document entered into
pursuant to or in connection with this Agreement or the transactions
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contemplated herein or therein (each a "TRANSACTION DOCUMENT") and any rule of
law or equity to the contrary, to the fullest extent permitted by law, Seller's
obligations and liabilities under all Transaction Documents and in connection
with the transactions contemplated therein shall be nonrecourse to all general
and limited partners of Seller. As used herein, the term "nonrecourse" means
that the obligations and liabilities are limited in recourse solely to the
assets of Seller (for those purposes, any capital contribution obligations of
the general and limited partners of Seller or any negative capital account
balances of such partners shall not be deemed to be assets of Seller) and are
not guaranteed directly or indirectly by, or the primary obligations of, any
general or limited partner of Seller, and neither Seller nor any general or
limited partner or any incorporator, stockholder, officer, director, partner,
employee or agent of Seller or of any general or limited partner of any
successor partnership, either directly or indirectly, shall be personally liable
in any respect for any obligation or liability of Seller under any Transaction
Document or any transaction contemplated therein.
10.15.2. Buyer hereby covenants for itself, its successors and
assigns that it, its successors and assigns will not make, bring, claim,
commence, prosecute, maintain, cause or permit any action to be brought,
commenced, prosecuted, maintained, either at law or equity, in any court of the
United States or any state thereof against any general or limited partner of
Seller or any incorporator, stockholder, officer, director, partner, employee or
agent of Sellers or of any general or limited partner of Seller for (i) the
payment of any amount or the performance of any obligation under any Transaction
Document or (ii) the satisfaction of any liability arising in connection with
any such payment or obligation or otherwise, including without limitation,
liability arising in law for tort (including, without limitation, for active and
passive negligence, negligent misrepresentation and fraud), equity (including,
without limitation, for indemnification and contribution) and contract
(including, without limitation, monetary damages for the breach of
representation or warranty or performance of any of the covenants or obligations
contained in any Transaction Document or with the transactions contemplated
herein or therein).
10.16 HEADINGS. The headings herein are included for ease of reference
only and shall not control or affect the meaning or construction of the
provisions of this Agreement.
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EXECUTED as of the date first above written.
BUYER:
NORTHLAND COMMUNICATIONS CORPORATION
By:
---------------------------------------
Name Printed:
-----------------------------
Title: Vice President
------------------------------------
SELLER:
NORTHLAND CABLE PROPERTIES SIX LIMITED
PARTNERSHIP
By: Northland Communications Corporation,
Managing General Partner
By:
---------------------------------------
Name Printed:
-----------------------------
Title: Vice President
------------------------------------
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EXHIBIT G
PROPOSED TRANSACTION
PROMISSORY NOTE
PROMISSORY NOTE
$__________ _____________, 200__
Seattle, Washington
FOR VALUE RECEIVED, NORTHLAND COMMUNICATIONS CORPORATION, or any
affiliated entity to which it may assign its rights and obligations (the
"Maker"), promises to pay to NORTHLAND CABLE PROPERTIES SIX LIMITED PARTNERSHIP,
a Washington limited partnership ("NCP-Six"), upon the terms and conditions
stated herein, the principal sum of Nine Million Eight Hundred Seventy-Five
Thousand Dollars ($9,875,000), 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-Six may designate in writing. 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 Asset Purchase
Agreement between the Maker and NCP-Six dated as of ______________, 200_ (the
"Agreement"). The Maker may be entitled to the right of offset, as provided in
the Agreement and that certain Proxy Statement dated _____________, 200_, 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 and one-half percent (6-1/2%). 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-Six 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 and in the event that, notwithstanding the
foregoing, NCP-Six 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
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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 NCP-Six 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.
MAKER: [___________________________________]
By:
---------------------------------------
Its:
--------------------------------------
By:
---------------------------------------
Its:
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EXHIBIT H
DANIELS' APPRAISAL
NORTHLAND CABLE PROPERTIES SIX LIMITED PARTNERSHIP
APPRAISAL ANALYSIS SUMMARY
INTRODUCTION
Northland Cable Properties Six Limited Partnership (the "Partnership") is a
Washington limited partnership consisting of two general partners (the "General
Partners") and approximately 1,865 limited partners. Northland Communications
Corporation ("Northland"), a Washington corporation, is the Managing General
Partner of the Partnership. The Partnership was formed on January 22, 1986 and
began operations in 1986 with the acquisition of the cable television systems
serving the communities surrounding Starkville, Maben and Mathiston,
Mississippi, six additional communities in central Mississippi and the community
of and areas surrounding Highlands, North Carolina. As the result of subsequent
acquisitions made between July 1988 and January 1998 as well as sales of certain
systems, the Partnership currently owns and operates seven cable television
system groups ("System Operating Groups"), comprised of twelve headends, serving
numerous communities in Mississippi, South Carolina and North Carolina (referred
to in the aggregate as the "Systems"). As of March 31, 1999, the Systems passed
an estimated 50,060 homes and served approximately 32,963 equivalent basic
subscribers ("EBUs").
Based on information provided by Northland for the three month period ended
March 31, 1999, annualized run-rate revenue and operating cash flow for the
Systems are estimated to be approximately $14.3 million and $6.7 million,
respectively. This equates to average monthly revenue per EBU of $36.07 and
average annual cash flow per EBU of $203.15.
A summary of the Partnership's System Operating Groups is presented in the
following table.
<TABLE>
<CAPTION>
3/31/99 Estimated Est. Annualized
System Miles of Plant/ Est. Estimated 3/31/99 3/31/99 Annualized Run-Rate
Operating Number of Homes/ Homes EBUs/ Pay Units/ Run-Rate Cash Flow/
Group Headends Mile Passed Penetration Penetration Revenue Margin
--------- --------------- ------ --------- ------------ ------------ ---------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Starkville, MS 194.5/2 57 11,085 8,097 / 73.0% 2,930 / 36.2% $ 3,680,744 $1,895,951 / 51.5%
Philadelphia, MS 170/1 26 4,395 3,851 / 87.6% 1,450 / 37.7% 1,617,933 731,306 / 45.2%
Kosciusko, MS 125.8/2 43 5,440 4,350 / 80.0% 1,371 / 31.5% 1,854,490 952,651 / 51.4%
Forest, MS 154/2 24 3,735 3,222 / 86.3% 1,442 / 44.8% 1,390,976 689,646 / 49.6%
Subtotal, MS 644.3/7 38 24,655 19,520 / 79.2% 7,193 / 36.9% 8,544,143 4,269,554 / 50.0%
Highlands, NC 128/1 33 4,190 2,584 / 61.7% 482 / 18.7% 1,036,879 459,752 / 44.3%
Barnwell, SC 308.5/3 39 12,125 5,941 / 49.0% 4,301 / 72.4% 2,694,265 1,079,592 / 40.1%
Bennettsville, SC 145/1 63 9,090 4,918 / 54.1% 3,628 / 73.8% 1,993,654 887,575 / 44.5%
Subtotal, SC 453.5/4 47 21,215 10,859 / 51.2% 7,929 / 73.0% 4,687,919 1,967,167 / 42.0%
Total All
Systems 1,225.8/12 41 50,060 32,963 / 65.8% 15,604 / 47.3% $14,268,941 $6,696,473 / 46.9%
</TABLE>
Daniels was retained by Northland to appraise the fair market value of the
assets of the Partnership as of July 1, 1999 (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
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the engagement, the process used, an overview of the Systems by System Operating
Group, the valuation methodology, the assumptions relied upon and an explanation
of the values derived.
PROCESS
Daniels prepared an independent appraisal analysis to determine the fair market
value of the 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").
The appraisal process included discussions with the Partnership's management,
due diligence visits to substantially all of the Systems by Daniels' personnel,
research of demographic information concerning the various communities served by
the Partnership and analyses of historical and forecasted financial and
operating information, as well as Daniels' general knowledge about the cable
television industry. From such due diligence, summaries of the relevant
operating, technical, financial and demographic characteristics were prepared
for each of the seven System Operating Groups. 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
seven System Operating Groups, incorporating the critical elements of operating
revenues and expenses as well as capital expenditure requirements. These
financial forecasts then formed the basis for determining a discounted cash flow
value for each System Operating Group, a standard valuation methodology used
within the cable television industry (the "DCF" valuation methodology). The
combined values of the Systems, by System Operating Group, 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 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 comprised of seven System Operating Groups, four of which are
located in Mississippi, two of which are located in South Carolina and one of
which is located in North Carolina. The largest System Operating Group is
Starkville, Mississippi with 8,097 EBUs as of March 31, 1999. The smallest
System Operating Group is Highlands, North Carolina with 2,584 EBUs as of the
same period. As of March 31, 1999, the System Operating Groups had EBU
penetration rates ranging from 49.0% to 87.6%, and a weighted average EBU
penetration level of 65.8%. Subscriber growth rates for the Systems have been
essentially flat to modest for the past several years.
In the seven System Operating Groups, there are a total of 12 headends and 1,226
plant miles, of which approximately 89% is aerial and 11% is underground. Based
on information provided by Northland, approximately 10% of the plant miles are
at 300 MHz; 42% are at 330 MHz; 1% are at 400 MHz; 36% are at 450 MHz; and 11%
are at 550 MHz. According to Northland, none of the Systems are currently
addressable, and pay-per-view service is offered on an event-only basis.
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TECHNICAL SUMMARY
MILES OF PLANT AT VARIOUS BANDWIDTHS AS OF MARCH 31, 1999
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------------
SYSTEM OPERATING 300 MHZ 330 MHZ 400 MHZ 450 MHZ 550 MHZ TOTAL
MILES MILES MILES MILES MILES MILES
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Starkville, MS 194.5 194.5
---------------------------------------------------------------------------------------------------------------------------------
Philadelphia, MS 51 119 170
---------------------------------------------------------------------------------------------------------------------------------
Kosciusko, MS 125.8 125.8
---------------------------------------------------------------------------------------------------------------------------------
Forest, MS 17 137 154
---------------------------------------------------------------------------------------------------------------------------------
Subtotal, MS 17 382.5 244.8 644.3
---------------------------------------------------------------------------------------------------------------------------------
Highlands, NC 128 128
---------------------------------------------------------------------------------------------------------------------------------
Barnwell, SC 111.2 197.3 308.5
---------------------------------------------------------------------------------------------------------------------------------
Bennettsville, SC 6 139 145
---------------------------------------------------------------------------------------------------------------------------------
Subtotal, SC 111.2 6 197.3 139 453.5
---------------------------------------------------------------------------------------------------------------------------------
TOTAL ALL SYSTEMS 128.2 510.5 6 442.1 139 1,225.8
---------------------------------------------------------------------------------------------------------------------------------
Percent of Total 10.5% 41.6% 0.5% 36.1% 11.3% 100.0%
---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The reality of competition from DBS, SMATV 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
substantially all of the Systems to a bandwidth of at least 450 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.
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.
Selected subscribers in the Starkville System Operating Group have the option of
receiving service from Wireless One, a 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. Additionally, selected homes in
the community of Sapphire Valley in the Highlands system have been overbuilt by
a small operator. 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 115,000 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.
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As of March 31, 1999, six 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.
STARKVILLE, MISSISSIPPI
The Starkville, Mississippi System Operating Group is the largest of the seven
System Operating Groups with subscribers located in Oktibbeha County,
Mississippi, which is approximately 125 miles northeast of Jackson, Mississippi.
The City of Starkville serves as the County Seat and is the home of Mississippi
State University, which has an enrollment of approximately 12,000 students and
features a leading, nationally recognized veterinary medicine program. The
University is the largest employer in Starkville. Also located in Starkville is
the Mississippi Research and Technology Park, a long-range economic development
project initiated through the joint efforts of the City of Starkville, Oktibbeha
County, Mississippi State University and local businesses.
As noted previously, the Starkville system faces limited competition from
Wireless One, a MMDS operator. Additionally, the City of Starkville has formed
an exploratory committee to assess the feasibility of building a cable system.
In consideration of the fact that the City also owns the local power company,
there is at least a potential threat that the City will move forward with a
hardwire overbuild of the Starkville system with a bundled telecommunications
strategy. Additionally, there is a small independent cable operator who has
overbuilt approximately 12 homes in a low density area of Oktibbeha County.
As of March 31, 1999, the Starkville System Operating Group passed 11,085
estimated homes and served 8,097 equivalent basic subscribers, for a penetration
rate of 73.0%. This penetration rate is the fourth highest of the seven System
Operating Groups. There are currently five franchises covering this group, with
franchise expiration dates ranging from November 7, 2005 to June 30, 2010. The
Starkville System Operating Group accounts for approximately 25% of the
Partnership's equivalent basic units.
The Starkville System Operating Group is comprised of two systems, each with one
headend, located in Starkville and Maben, Mississippi. The Starkville System
Operating Group was acquired in 1986 and has approximately 195 miles of plant,
97% of which is aerial. Currently, 100% of the plant is capable of passing 330
MHz. Within a period of two years, the Partnership will complete its rebuild of
the Starkville system to 550 MHz and the Maben system to 400 MHz. The financial
forecasts prepared by Daniels take into account such capital projects, among
others.
The Starkville system offers three levels of non-premium service: Economy Basic
service, consisting of 11 primarily broadcast and local origination channels,
for $14.00; Standard Basic service, consisting of the 11 Economy Basic channels
plus an additional 21 satellite channels, for $25.95; and Specialty Tier
service, consisting of the 32 Standard Basic channels plus an additional eight
satellite channels, for $34.45. The Maben system offers 29 channels of Standard
Basic service for $25.50. Both systems offer HBO and Showtime, while the
Starkville system also offers Cinemax and The Disney Channel. The last rate
increase was implemented on August 1, 1998.
BARNWELL, SOUTH CAROLINA
The Barnwell System Operating Group was acquired by the Partnership in January
1998. Barnwell is the second largest System Operating Group, passing 12,125
estimated homes in the communities of Barnwell, Allendale and Bamberg, South
Carolina and serving 5,941 equivalent basic subscribers as of March 31, 1999.
The areas served by the Barnwell System Operating Group are located in Southern
South Carolina, approximately 60 miles south of Columbia, South Carolina. The
economy is based primarily on manufacturing and agricultural activities. The
largest employer in the area is the Savannah River Site nuclear plant. Other
major employers that employ in excess of 500 people include Sara Lee, Ducane
Heating Corporation and Dixie Narco, a soft drink vending machine manufacturer.
The overall penetration rate in this System Operating Group is 49.0%. The
Barnwell System Operating Group is covered by 12 franchises which expire between
January 8, 2000 and July 16, 2012. The Barnwell System Operating Group accounts
for approximately 18% of the Partnership's equivalent basic subscribers.
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The Barnwell System Operating Group is comprised of three systems, each with one
headend, located in Barnwell, Allendale and Bamberg, South Carolina. The
Barnwell System Operating Group includes 309 miles of plant, of which
approximately 84% is aerial. Approximately 64% of the plant is capable of
passing 450 MHz, and approximately 36% can pass 300 MHz. Over the next two
years, the Partnership will complete its rebuild of the entire System Operating
Group to 450 MHz. The financial forecasts prepared by Daniels take into account
such capital projects, among others.
The Barnwell system offers two levels of non-premium service: Economy Basic
service, consisting of 13 primarily broadcast and local origination channels,
for $10.26; and Standard Basic service, consisting of the 13 Economy Basic
channels plus an additional 15 satellite channels, for $29.65. Both the
Allendale and Bamberg systems offer Economy Basic service, comprised of 12
channels, for $10.40; and Standard Basic service, comprised of 12 Economy Basic
channels plus an additional 24 channels, for $30.58. The Barnwell system offers
HBO, The Disney Channel, Showtime and The Movie Channel. The Allendale and
Bamberg systems offer the four aforementioned premium channels plus Cinemax. The
last rate increase was implemented on March 1, 1998.
BENNETTSVILLE, SOUTH CAROLINA
The Bennettsville System Operating Group was acquired by the Partnership in
January 1998. The city of Bennettsville is located approximately 100 miles
northeast of Columbia, South Carolina and is the county seat of Marlboro County.
The economy is based primarily on manufacturing and agricultural activities,
with the three largest employers being Mohawk Carpet, United Technologies
Automotive and Williamette Industries. As of March 31, 1999, the Bennettsville
System Operating Group passed 9,090 estimated homes and served 4,918 equivalent
basic subscribers, for a penetration rate of 54.1%. The Bennettsville System
Operating Group represents a single headend located in Bennettsville, South
Carolina, and covers five franchised areas. The five franchises covering this
System Operating Group expire between June 10, 2006 and August 30, 2007. The
Bennettsville System Operating Group accounts for approximately 15% of the
Partnership's equivalent basic subscribers.
The Bennettsville System Operating Group includes 145 miles of plant, of which
approximately 81% is aerial. Approximately 96% of the plant is capable of
passing 550 MHz and approximately 4% can pass 400 MHz. By the end of 2000, the
Partnership is planning to upgrade the small portion of the system that is
currently not capable of passing 550 MHz. The financial forecasts prepared by
Daniels take into account this capital project, among others.
The Bennettsville system offers three levels of non-premium service: Economy
Basic service, consisting of 11 primarily broadcast and local origination
channels, for $7.57; Standard Basic service, consisting of the 11 Economy Basic
channels plus an additional 18 satellite channels, for $19.10; and Super Basic
service, consisting of the 29 Standard Basic channels plus an additional 19
satellite channels, for $26.67. The Bennettsville system offers HBO, Cinemax,
The Disney Channel, Showtime, The Movie Channel and Encore. The last rate
increase was effective May 1, 1998. Service rates at Bennettsville are lower
than the average rates charged by the Systems due to the aggressive pricing
strategy effected by the system's prior owner in response to entry into the
market by an overbuilder, who has subsequently ceased operating in the market.
Northland indicates that significant rate adjustments will be implemented over
the next few years to get the Bennettsville system more in line with average
rates charged by the Systems.
KOSCIUSKO, MISSISSIPPI
Kosciusko is the fourth largest of the seven System Operating Groups, consisting
of two systems, each with one headend, located in Kosciusko and Carthage,
Mississippi, approximately 70 miles northeast of Jackson, Mississippi. The local
economy is based primarily on manufacturing and agricultural activities with
three of the largest employers being Choctaw Maid Farms, Inc., Choctaw
Manufacturing Enterprise and Interstate Industries, Inc. The Kosciusko System
passes 5,440 estimated homes and serves 4,350 equivalent basic subscribers as of
March 31, 1999, for a penetration rate of 80.0%. There are three franchise
agreements covering the Kosciusko System Operating Group, expiring between March
13, 2003 and April 4, 2010. The Kosciusko System Operating Group accounts for
approximately 13% of the Partnership's equivalent basic subscribers.
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The Kosciusko System Operating Group consists of 126 miles of plant, of which
approximately 94% is aerial. Both the Kosciusko and Carthage plants are capable
of passing 450 MHz. The Partnership currently has no plans for a rebuild of the
systems.
The Kosciusko and Carthage systems offer three levels of non-premium service:
Economy Basic service, consisting of 12 primarily broadcast and local
origination channels, for $15.00; Standard Basic service, consisting of the 12
Economy Basic channels plus an additional 19 satellite channels, (18 for
Carthage), for $25.95 in Kosciusko and $25.50 in Carthage; and Specialty Tier
service, consisting of the 31 Standard Basic channels (30 for Carthage) plus an
additional 10 satellite channels, for $34.45 in Kosciusko and $34.00 in
Carthage. Both Systems offer HBO, Cinemax, The Disney Channel and Showtime. The
last rate increase was implemented on August 1, 1998.
PHILADELPHIA, MISSISSIPPI
The Philadelphia System Operating Group serves communities in central
Mississippi through a single headend located in Philadelphia, Mississippi. The
city of Philadelphia is located approximately 80 miles northeast of Jackson,
Mississippi and is the County Seat. Philadelphia's economy is based primarily on
manufacturing with the largest employer being U.S. Electrical Motors.
Additionally, the gaming industry, highlighted by the Silver Star Casino and
Hotel (500+ rooms), owned by the Choctaw Indian Reservation, has added growth to
the local economy. As of March 31, 1999, the Philadelphia System Operating Group
passed 4,395 estimated homes and served 3,851 equivalent basic subscribers, for
a penetration rate of 87.6%. This penetration rate is the highest of the seven
System Operating Groups. The Philadelphia System Operating Group includes a
single headend located in Philadelphia, Mississippi, and has four franchise
agreements expiring between March 20, 2009 and June 3, 2017. The Philadelphia
System Operating Group accounts for approximately 12% of the Partnership's
equivalent basic subscribers, resulting largely from the Silver Star Casino
Hotel.
The Philadelphia System Operating Group includes 170 miles of plant, of which
approximately 96% is aerial. Approximately 70% of the plant is capable of
passing 450 MHz and approximately 30% can pass 330 MHz. Over the next two years,
the Partnership is planning to complete a rebuild of the entire system to 450
MHz. The financial forecasts prepared by Daniels take into account this capital
project, among others.
The Philadelphia system offers three levels of non-premium service: Economy
Basic service, consisting of 12 primarily broadcast and local origination
channels, for $15.00; Standard Basic service, consisting of the 12 Economy Basic
channels plus an additional 16 satellite channels, for $25.50; and Specialty
Tier service, consisting of the 28 Standard Basic channels plus an additional 10
satellite channels, for $34.75. The Philadelphia system offers HBO, Cinemax,
Showtime, Starz and Encore. The last rate increase was implemented on August 1,
1998 for all services and the Specialty Tier service rate was increased again on
May 1, 1999.
FOREST, MISSISSIPPI
The Forest, Mississippi System Operating Group serves communities in central
Mississippi. The local economy is primarily based on agricultural and
manufacturing activities. One of the largest industries in the area is poultry.
Nearly two million birds are dressed per week in Forest, which ranks as the
second-largest producer of broilers in the nation. As of March 31, 1999, the
Forest System Operating Group passed 3,735 estimated homes and served 3,222
equivalent basic subscribers for a penetration rate of 86.3%. This penetration
rate is the second highest of the seven System Operating Groups. There are
currently four franchises covering this System Operating Group, with franchise
expiration dates ranging from February 20, 2003 to October 17, 2010. The Forest
System Operating Group accounts for approximately 10% of the Partnership's
equivalent basic subscribers.
The Forest System Operating Group includes two systems, each with one headend,
located in Forest and Raleigh, Mississippi. The Forest System Operating Group
includes 154 miles of plant, 95% of which is aerial. Currently, 89% of the plant
is capable of passing 330 MHz and 11% is capable of passing 300 MHz. Over the
next two years, the Partnership is planning to rebuild the Forest system to 550
MHz. The small Raleigh system currently has no
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plans for further upgrade. The financial forecasts prepared by Daniels take into
account such capital projects, among others.
The Forest system offers three levels of non-premium service: Economy Basic
service, consisting of 13 primarily broadcast and local origination channels,
for $15.00; Standard Basic service, consisting of the 13 Economy Basic channels
plus an additional 17 satellite channels, for $25.95; and Specialty Tier
service, consisting of the 30 Standard Basic channels plus an additional eight
satellite channels, for $33.90. The Raleigh system offers 25 channels of
Standard Basic service for $23.95. The Forest system offers HBO, Cinemax,
Showtime, Encore and Starz, while the Raleigh system offers only HBO. The last
rate increase was implemented on August 1, 1998.
HIGHLANDS, NORTH CAROLINA
The Highlands System Operating Group is the smallest of the seven System
Operating Groups and serves the community of and areas surrounding Highlands,
North Carolina. The city of Highlands is located on a plateau of the Blue Ridge
Mountains where Georgia, North Carolina and South Carolina meet. The Highlands
region has long been a vacation destination for affluent families from many
Southern cities. The area is encircled by 200,000 acres of the End National
Forest. One of the main attractions of Highlands is the area's exclusive golf
clubs. As of March 31, 1999, the Highlands System Operating Group passed 4,190
estimated homes and served 2,584 equivalent basic subscribers, for a penetration
rate of 61.7%. The Highlands System Operating Group includes a single headend
located in Highlands, North Carolina, and has four franchise agreements expiring
between October 3, 1999 and June 2, 2013. The Highlands System Operating Group
accounts for approximately 8% of the Partnership's equivalent basic subscribers.
In keeping with the fluctuating occupancy of the area's homes throughout the
year, the system experiences seasonality in its subscriber base.
The Highlands System Operating Group includes 128 miles of plant, of which
approximately 78% is aerial. Currently, 100% of the plant is capable of passing
330 MHz. Over the next two years, the Partnership is planning to rebuild the
system to 450 MHz. The financial forecasts prepared by Daniels take into account
this capital project, among others.
The Highlands system offers two levels of non-premium service: Economy Basic
service, consisting of 17 primarily broadcast and local origination channels,
for $17.50; and Standard Basic service, consisting of the 17 Economy Basic
channels plus an additional 19 satellite channels, for $33.20. The Highlands
system offers HBO, Cinemax, The Disney Channel and Encore. The last rate
increase was effective February 1, 1999.
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 seven System
Operating Groups: (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.
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 seven System Operating Groups, which provides for
detailed forecasts of revenue and operating expenses. 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 seven System Operating Groups
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.
H-7
<PAGE> 192
The revenue forecasts for each of the seven 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 seven 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 did not include telephony or commercial data services
revenue, expenses or capital costs in its forecasts. Daniels did, however,
include residential data services revenue and expenses in its forecast where
warranted.
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 the cable television industry that are capable of consummating an
acquisition similar in size to the acquisition of the Systems. The weighted
average cost of 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 weighed 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 industry, many lending institutions often use the
prime rate as a benchmark for determining loan interest rates. Some borrowers
pay interest rates above the prime rate, while others are able to borrow at more
favorable rates below the prime rate. Daniels, therefore, has assumed that the
prime rate is a fair benchmark, within a margin of 25 to 50 basis points, 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. The
cost of equity was determined by sampling the current estimated private market
cost of equity for cable television investments and blending that with equity
return objectives of large publicly traded companies in this industry. Such
equity returns are those which would be required by experienced private equity
investors and publicly traded companies in cable television investments with
characteristics similar to those of the Systems. The weighted average cost of
capital Daniels derived for each of the discounted cash flow analyses was
13.50%. 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% 7.5%
Equity 40.0% 22.5%
Estimated Weighted Average Cost of Capital 100.0% 13.5%
</TABLE>
The combined aggregate fair market value of the Systems derived from this
analysis is $73.3 million, which is equal to 10.9x estimated annualized run-rate
cash flow and $2,200 per equivalent basic subscriber.(1)
<TABLE>
<CAPTION>
DISCOUNTED CASH FLOW MULTIPLE OF ANNUALIZED
VALUATION RUN-RATE CASH FLOW(1) VALUE PER EBU(1)
-------------------- ---------------------- ----------------
<S> <C> <C>
$73,300,000 10.9x $2,200
</TABLE>
(1) Annualized run-rate cash flow for the three months ended 3/31/99 and EBUs
as of 3/31/99 have been adjusted for seasonality of the Highlands system.
The adjusted annualized run-rate cash flow for the Systems is estimated to
be $6.7 million and the adjusted EBU for the Systems is estimated to be
33,313.
H-8
<PAGE> 193
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 of similar size, markets and technical condition as the
Systems to selected operating statistics of the Systems. 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' annualized operating cash flow for
the quarter ended March 31, 1999 will be used as a comparable statistic to the
annualized statistics reported in the comparable group of transactions.
COMPARABLE CABLE TELEVISION SYSTEM SALES
<TABLE>
<CAPTION>
Aggregate Value/ Close
System Buyer Seller Subs. Value (SM) Sub. Value/CF Date
------ ----- ------ ---- ---------- ------ -------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Riverside Co., CA Century Act 5 19,000 33.0 $1,737 9.2x Contract
Various, SD Mediacom Zylstra 14,300 21.5 1,500 9.4 Contract
Nitro, WV & Various TX Fanch Harmon 18,300 50.0 2,732 14.0 Jun-99
Various, MI Millennium Horizon 43,000 112.0 2,605 11.2 May-99
Buffalo, MN Bresnan Jones 14,550 27.0 1,856 9.8 Mar-99
CA-based MSO USA Media WestStar 45,000 84.0 1,867 9.0 Mar-99
Comm.
Livingston County, MI Fanch Multi- 16,000 42.0 2,625 10.0 Feb-99
Cablevision
Various, LA, TX Star Cable Illini 12,000 18.0 1,500 10.9 Feb-99
Cablevision
Hotsprings, Deadwood, TCl Duhamel 16,400 28.3 1,726 9.0 Feb-99
Blackhawk, SD Cable Frc.
Hanover, PA Susquehanna Hanover 16,700 33.4 2,000 11.5 Jan-99
Cable
Various, MI Bresnan Omega 25,900 40.0 1,545 9.0 Jan-99
Various, GA Jones Bresnan 24,000 $50.0 2,083 10.0 Dec-98
Communications
Payson, AZ NPG Cable / AZ Mark Twain 12,350 21.6 1,750 9.2 Sep-98
Various, TX, OK, KS, MO Classic CableOne 28,000 44.0 1,600 9.0 Aug-98
Communications
Total / Average 21,821 $604.8 $1,940 10.0x
</TABLE>
The comparable private market transactions analysis yields a cash flow multiple
range of 9.0x to 14.0x cash flow, with a weighted average of 10.0x cash flow.
Value per subscriber ranges from $1,500 to $2,732, with a weighted average of
$1,940 per subscriber.
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.
H-9
<PAGE> 194
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
$73,300,000, representing 10.9x estimated annualized run-rate operating cash
flow and value per equivalent basic subscriber of $2,200.
THE CASH FLOW MULTIPLE IS SLIGHTLY HIGHER THAN THE WEIGHTED AVERAGE MULTIPLE BUT
WELL WITHIN THE RANGE OF MULTIPLES DERIVED FROM THE COMPARABLE PRIVATE MARKET
TRANSACTIONS ANALYSIS, AND EQUAL TO THE MULTIPLE DERIVED FROM THE DCF ANALYSIS.
THE VALUE PER EQUIVALENT BASIC SUBSCRIBER IS ALSO ABOVE THE WEIGHTED AVERAGE
VALUE BUT WELL WITHIN THE RANGE OF VALUES DERIVED FROM THE COMPARABLE PRIVATE
MARKET TRANSACTIONS ANALYSIS, AND EQUAL TO THE VALUE PER SUBSCRIBER DERIVED FROM
THE DCF ANALYSIS. IT IS WORTH NOTING THAT DANIELS IS CURRENTLY ACTING AS AN
ADVISOR ON SEVERAL COMPARABLE, NON-PUBLIC TRANSACTIONS WITH IMPLIED VALUATION
STATISTICS THAT SUPPORT OUR ANALYSIS OF VALUE OF THE SYSTEMS.
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.
H-10
<PAGE> 195
EXHIBIT I
COMMUNICATIONS EQUITY ASSOCIATES APPRAISAL
July 1, 1999
Northland Cable Properties Six Limited Partnership
1201 Third Avenue, Suite 3600
Seattle, WA 98101
Communications Equity Associates, Inc. ("CEA") is pleased to submit the
results of our valuation analysis of the assets of the cable television systems
(the "Cable Systems") owned by Northland Cable Properties Six Limited
Partnership ("NCP-Six" or the "Partnership") as of the date of this report. It
is our understanding that the values determined by this analysis will be used in
connection with the anticipated dissolution and liquidation of the Partnership.
We hereby express our opinion of the fair market value of the assets of
the Cable Systems, free and clear of all liens, liabilities and encumbrances.
"Fair Market Value" is defined as the price which could be negotiated in an
arm's length free market transaction between a willing seller and a willing
buyer, neither of whom is under undue pressure of compulsion to complete the
transaction. We hereby express no opinion as to the fairness of any transaction
involving the Cable Systems.
Based on the analysis detailed in this report and subject to the limiting
conditions listed in this report, it is the opinion of Communications Equity
Associates that, as of the date of this report the fair market value of the
assets of the Cable Systems is $74,600,000.
This valuation is intended solely for your use for the purpose stated
above, and is not intended for general publication or circulation. Since these
value conclusions are the result of certain specific assumptions, and since
these assumptions may not be relevant for other purposes, these values should
not be used for any other purpose.
In performing this analysis, CEA relied substantially on financial and
operational information provided by management of the Partnership and by Cable
System personnel. CEA did not independently verify this information and can
therefore accept no responsibility as to its accuracy.
The fee CEA has been paid for the valuation services performed is in no
way contingent upon the results of CEA's analysis. CEA is independent of both
Northland and NCP-Six, and neither CEA nor any of its employees involved in this
valuation have a financial interest in Northland nor any of its affiliated
companies, in NCP-Six, nor in the Cable Systems. To the best of CEA's knowledge
and belief, all statements contained in this report are true and correct, and no
important information has been knowingly withheld. This valuation has been
prepared to conform with the Uniform Standards of Professional Appraisal
Practice as promulgated by the American Society of Appraisers.
Respectfully submitted,
/s/ Communications Equity Associates, Inc.
Communications Equity Associates, Inc.
I-1
<PAGE> 196
LIMITING CONDITIONS
1. CEA offers no opinions on either the potential effect of current or future
FCC regulations on the cash flow of the Cable Systems, or on the
Partnership's strategy in dealing with these regulations. The value
conclusions derived herein were based on the assumption that the current
rates of the Cable Systems are in compliance with current FCC regulations,
and that no future refund liability is associated with the Cable Systems.
2. This valuation is based on CEA's assessment of market conditions as of the
date of this report, and assumes that market, regulatory and other
conditions remain static. Changes in the economy as well as additional
rule-making by the FCC could have a material effect on the values herein
derived.
3. CEA cannot guarantee that a buyer could be found for the Cable Systems at
the value herein determined, or at any rational price.
4. As part of this analysis, CEA relied substantially on historical and
projected financial and operational information provided by management of
the Partnership. CEA did not independently verify this information and can
therefore accept no responsibility as to its accuracy.
5. CEA hereby expresses no opinion as to the fairness of any transactions
involving the Cable Systems or the shares of the Partnership.
6. CEA specifically prohibits the use of these value conclusions in all
matters related to the solvency of the Partnership. Since we have not
undertaken an analysis of the debt of the Partnership, we can make no
representations as to whether the fair salable value of the Partnership's
assets exceeds the Partnership's debt, whether the Partnership will be
able to meet its debt obligations as they come due, or whether the
Partnership is reasonably capitalized.
7. CEA did not conduct a detailed technical evaluation of the Cable Systems,
but instead relied on information provided by management of the
Partnership and Cable Systems' employees in assessing the technical
condition of the Cable Systems.
8. CEA has assumed that the Cable Systems, as currently operated, are in
material compliance with all franchise, regulatory, and FCC requirements.
CEA did not independently verify compliance with these requirements.
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<PAGE> 197
TABLE OF CONTENTS
<TABLE>
<S> <C>
SECTION
1. OVERVIEW OF ANALYSIS
- BACKGROUND AND DESCRIPTION OF ANALYSIS................................................1
- DEFINITION OF FAIR MARKET VALUE.......................................................1
- DESCRIPTION OF VALUATION METHODOLOGY..................................................1
2. CABLE SYSTEMS OVERVIEW
- STARKVILLE, MS........................................................................3
- PHILADELPHIA, MS......................................................................3
- KOSCIUSKO, MS.........................................................................4
- FOREST, MS............................................................................4
- HIGHLANDS, NC.........................................................................4
- BARNWELL, SC..........................................................................5
- BENNETTSVILLE, SC.....................................................................5
- FINANCIAL SUMMARY.....................................................................6
3. VALUATION
- DISCOUNTED CASH FLOW APPROACH.........................................................7
- MARKET APPROACH.......................................................................7
- VALUE CONCLUSION......................................................................8
- CABLE SYSTEM STATISTIC................................................................9
</TABLE>
I-3
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1. OVERVIEW OF ANALYSIS
- BACKGROUND AND DESCRIPTION OF ANALYSIS
- DEFINITION OF FAIR MARKET VALUE
- DESCRIPTION OF VALUATION METHODOLOGY
I-4
<PAGE> 199
OVERVIEW OF ANALYSIS
BACKGROUND AND DESCRIPTION OF ANALYSIS
Communications Equity Associates ("CEA") has been retained by Northland
Cable Properties Six Limited Partnership ("NCP-Six" or the "Partnership") to
determine the fair market value of the assets of the cable television systems
(the "Cable Systems") owned by the Partnership as of the date of this report. It
is CEA's understanding that the values determined by this analysis will be used
in connection with the anticipated dissolution and liquidation of the
Partnership.
As part of this analysis, CEA requested and obtained from Partnership
management detailed historical and projected financial and operating information
pertaining to the Cable Systems. Additionally, CEA visited and toured
significant portions of the cable service area and had discussions regarding the
operations of the Cable Systems with Partnership management and employees. CEA
has not conducted a technical analysis of the cable plant, and has therefore
relied on assertions made by Cable Systems' management regarding the technical
performance of the cable plant.
DEFINITION OF FAIR MARKET VALUE
For the purpose of this appraisal, "Fair Market Value" is defined as the
price which could be negotiated in an arm's length free market transaction
between a willing seller and a willing buyer, neither of whom is under undue
pressure of compulsion to complete the transaction.
DESCRIPTION OF VALUATION METHODOLOGY
CEA used the discounted cash flow approach and the market approach in
determining the fair market value of the assets of the Cable Systems. In the
discounted cash flow approach, the value of an asset is determined by
calculating the total present value of the future cash flows generated by the
asset. In the case of the assets of cable television systems, the value is
usually calculated as the present value of the free cash flow (operating cash
flow less capital expenditures) of the system, using a weighted average cost of
debt and equity capital as the discount rate, with a terminal value at the end
of the projection period calculated based on a multiple of the operating cash
flow of the cable system. In the market approach, the value of an asset is
determined based on a comparison with market transactions involving comparable
assets. In order to facilitate this comparison, the respective purchase prices
of the comparable assets are expressed as ratios based on a relevant operating
statistic, typically earnings or cash flow. In the case of cable television
systems, the purchase price of a system is usually expressed as a multiple of
the operating cash flow of the system. The appropriate multiple is then applied
to the operating cash flow of the subject system in order to determine its
value.
I-5
<PAGE> 200
2. CABLE SYSTEMS OVERVIEW
- STARKVILLE, MS
- PHILADELPHIA, MS
- KOSCIUSKO, MS
- FOREST, MS
- HIGHLANDS, NC
- BARNWELL, SC
- BENNETTSVILLE, SC
- FINANCIAL SUMMARY
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<PAGE> 201
DESCRIPTION OF CABLE SYSTEMS
The Partnership owns Cable Systems that serve certain areas of Mississippi
and the Carolinas. In Mississippi, the Partnership owns cable systems that serve
the operating regions of Starkville, Philadelphia, Kosciusko and Forest, as well
as several nearby smaller towns. In the Carolinas, the Partnership's operating
areas serve Highlands, NC; Barnwell, SC and nearby areas, and Bennettsville, SC.
Relevant statistics for each of these system groups as of March 31, 1999 are
displayed in the system statistics table attached to this report.
STARKVILLE, MS
The Starkville, MS operating group consists of two cable systems that
serve the towns of Starkville and Maben, MS. At March 31, 1999, the Starkville
group passed an estimated 11,085 homes with approximately 195 miles of plant,
for an overall estimated home density of 57 homes per mile. At that time, the
group served 8,097 basic subscribers from two headends, for a basic penetration
of 73.0%.
The Starkville area is home to Mississippi State University, and the area
benefits from the school's economic impact. Home growth in the Starkville area
has been steady as the growth of the university has led to the need for new
housing for students, teachers and support staff, as well as new roads and other
community growth. In Starkville, the cable system competes in certain areas with
Wireless One, an MMDS operator, and has also seen competition from DBS.
Both the Starkville and the Maben cable systems operate at 330 MHz. The
Starkville system offers 44 channels, while the Maben system offers 31 channels.
The systems are not addressable and do not offer pay-per-view services. The
Partnership plans to upgrade both systems to a minimum of 550 MHz and 400 MHz,
respectively during the next two years.
PHILADELPHIA, MS
The Philadelphia, MS cable system is served from one headend. At March 31,
1999, the Philadelphia system passed an estimated 4,395 homes with approximately
170 miles of plant, for an overall estimated home density of 26 homes per mile.
At that time the cable system served 3,851 basic subscribers, for a basic
penetration of 87.6%.
While the city of Philadelphia is growing moderately, the cable service
area includes the nearby Choctaw Indian reservation, which is experiencing
significant home growth. The area benefits economically from the Silver Star
Casino, which is located on the reservation.
The Philadelphia system currently operates at 330 MHz, but the Partnership
is in the process of upgrading the system to 450 MHz, with about 70% of the
upgrade complete at this time, and the rest to be done within the next few
years. The Philadelphia system currently offers 43 channels of programming, with
no pay-per-view.
KOSCIUSKO, MS
The Kosciusko, MS operating group consists of two cable systems that serve
the towns of Kosciusko and Carthage, MS. At March 31, 1999, the Kosciusko group
passed an estimated 5,440 homes with approximately 126 miles of plant, for an
overall estimated home density of 43 homes per mile. At that time, the group
served 4,350 basic subscribers from two headends, for a basic penetration of
80.0%.
Both the Kosciusko and the Carthage cable systems operate at 450 MHz, and
the systems offer 45 and 44 channels of programming, respectively. The Kosciusko
system is designed at 550 MHz, while the Carthage system is designed at 450 MHz.
Neither system is addressable.
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FOREST, MS
The Forest, MS operating group currently consists of two cable systems
that serve the towns of Forest and Raleigh, MS. At March 31, 1999, the Forest
group passed an estimated 3,735 homes with approximately 154 miles of plant, for
an overall estimated home density of 24 homes per mile. At that time, the group
served 3,222 basic subscribers from two headends, for a basic penetration of
86.3%.
Forest is located east of Jackson, MS along interstate 20. The area's
economy includes several large poultry processing plants. Forest and Raleigh are
the county seats of Scott County and Smith County, respectively. The Forest
system also serves the town of Morton, MS.
The Forest and the Raleigh systems operate at 330 MHz and 300 MHz,
respectively. The Forest system offers 43 channels of programming, while the
Raleigh system offers just 25 channels. Neither system is addressable. The
Partnership plans to rebuild the Forest system in the near future to a 550 MHz
design, with activation at 450 MHz. The smaller Raleigh system currently has no
plans for further upgrade.
HIGHLANDS, NC
The Highlands, NC cable system is served from a single headend. At March
31, 1999, the Highlands system passed an estimated 4,190 homes with
approximately 128 miles of plant, for an overall estimated home density of 33
homes per mile. At that time, the system served 2,584 basic subscribers for a
basic penetration of 61.7%.
Highlands is a resort area located in western North Carolina near the
Georgia state line. The system operates at 330 MHz and offers 40 channels of
programming. The Partnership plans to rebuild the Highlands system to 450 MHz,
with the rebuild slated for completion by late in the year 2000.
BARNWELL, SC
The Barnwell, SC operating group includes three cable systems that serve
the towns of Barnwell, Allendale and Bamberg, SC. At March 31, 1999, the
Barnwell operating group passed an estimated 12,125 homes with approximately 309
miles of plant, for an overall estimated home density of 39 homes per mile. At
that time, the group served 5,941 basic subscribers from three headends, for a
basic penetration of 49.0%.
The Barnwell group was purchased by the Partnership in 1998. The towns
served by the group are not growing and some show signs of economic decline. The
service area is located near the Savannah River in Barnwell, Allendale and
Bamberg Counties, with the systems three main towns being the county seats of
those counties.
The cable plant in Allendale and Bamberg has been rebuilt to 450 MHz, with
550 MHz spacing. The Barnwell plant is in the process of being rebuilt, with
about 25 percent of the plant at 450 MHz, and the remainder at 300 MHz. The
Barnwell rebuild is planned to continue through 2001. The Barnwell system
currently offers 32 channels of programming, while the Bamberg and Allendale
systems currently offer 41 channels each.
BENNETTSVILLE, SC
The Bennettsville, SC cable system is served from one headend. At March
31, 1999, the Bennettsville system passed an estimated 9,090 homes, with
approximately 145 miles of plant, for an overall estimated home density of 63
homes per mile. At that time the cable system served 4,918 basic subscribers,
for a basic penetration of 54.1%.
Bennettsville is located in northeastern South Carolina near the North
Carolina state line. It is the county seat of Marlboro County and the only town
of its size in the county. The area has experienced economic difficulty lately,
with an unemployment rate in the high teens and a declining downtown area.
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<PAGE> 203
The Bennettsville system is in the process of being rebuilt to 550 MHz,
with about 96% of the rebuild completed at this time. The system offers 54
channels of programming.
FINANCIAL SUMMARY
For the three months ended March 31, 1999, the Cable Systems generated
combined annualized revenue of $14,363,656, or $36.31 per basic subscriber. The
Cable Systems for the same period had combined annualized operating cash flow of
$6,731,196, resulting in a 47% operating cash flow margin.
I-9
<PAGE> 204
3. VALUATION
- DISCOUNTED CASH FLOW APPROACH
- MARKET APPROACH
- VALUE CONCLUSION
- CABLE SYSTEM STATISTICS
I-10
<PAGE> 205
VALUATION
DISCOUNTED CASH FLOW APPROACH
Financial projections, including all assumptions regarding operations and
future capital expenditures were prepared by CEA based on historical and
projected financial and operational information provided by the Partnership.
The discount rate used in this analysis was derived using a weighted
average cost of capital. Based on CEA's recent experience in the cable system
transaction market, it is CEA's opinion that equity investors in cable systems
would likely require a 25 percent return in order to justify the equity
investment. Additionally, based on CEA's recent experience in raising debt
financing for cable operators, a lender would likely charge an interest rate of
approximately 8 percent and would likely be willing to lend up to 60 percent of
asset value at that rate. Thus, the likely typical weighted average cost of
capital that a buyer would experience in purchasing the assets of the subject
Cable Systems can be calculated as follows:
<TABLE>
<S> <C> <C>
60 percent debt at a rate of 8% = .60 X 8% = 4.8%
40 percent equity at a rate of 25% = .40 X 25% = 10.0%
Weighted Average Cost of Capital = 14.8%
</TABLE>
The terminal value of the Cable Systems was calculated by multiplying the
free cash flow of the Cable Systems in the final year of the projection period
by an appropriate cash flow multiple.
The application of the discounted cash flow approach resulted in a total
present value indication for the Cable Systems of $74,600,000. This value is
equivalent to 11.1 times running rate operating cash flow for the Cable Systems,
or $2,263 per basic subscriber.
MARKET APPROACH
In the first six months of 1999, prices paid for cable television systems
increased dramatically over past prices, as the consolidation of the industry
accelerated rapidly. In recent years, prices paid for cable television systems
have generally ranged from 8 to 12 times operating cash flow. During 1999, this
cash flow multiple range increased and widened to a level of 11 to 19 times cash
flow.
Many of the transactions announced during this time period were very large
transactions involving target companies with over 1 million subscribers. The
increase in prices was attributable to, among other things, the advent of
Internet service, the desire of top players in the industry to increase their
size quickly, and the recent increase in cable public stock values, which gave
these large players an inexpensive currency with which to buy.
With the larger buyers focused on increased size and the smaller potential
buyers unable to pay higher prices, there have been fewer transactions involving
cable systems of comparable size and markets to the subject Cable Systems, and
as a result, the prices paid in such transactions have not increased as
dramatically as the prices paid for the very large cable operators.
The table below highlights several transactions involving systems of
similar size and markets to the subject Cable Systems. In these transactions,
the prices paid range from 9.2 to 12.7 times operating cash flow, with a
weighted average of 10.8 and a median of 11.3. Prices per subscriber range from
$1,500 to $2,755 with a weighted average of $2,313 and a median of $2,134.
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<TABLE>
<CAPTION>
Price CF Value/
Date System Seller Buyer (mil) Subs Multiple Sub
---- ------ ------ ----- ----- ---- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
May 99 NC, SC, MS, OK, GA Genesis Benchmark $128 51,000 12.1 $2,510
Feb 99 CA, NM, CO, ND, etc. Scott Cable Interlink 165 77,000 9.2 $2,134
Feb 99 Various LA, TX Illini Cablevision Star Cable 18 12,000 10.9 $1,500
Feb 99 MI, IN Michiana Cable Ohio Cablevision 11 6,000 11.3 $1,909
Jan 99 Various PA Raystay Lenfest 92 33,000 12.7 $2,755
Wt. Average 10.8 $2,313
Median 11.3 $2,134
</TABLE>
Based on these transactions, as well as on CEA's current experience in the
cable system transaction market, it is CEA's opinion that a cash flow multiple
of 11.0 is appropriate in valuing the Cable Systems. Applying this multiple to
the Cable Systems' annualized operating cash flow of S6,731,196 yields a value
indication from the market approach of $74,043,156. This value, which is
equivalent to $2,246 per subscriber, correlates well with the results of the
discounted cash flow approach.
VALUE CONCLUSION
CEA used the discounted cash flow approach and the market approach to
determine the fair market value of the assets of the Cable Systems. Based on
this analysis and Subject to the limiting conditions listed in this report, it
is the opinion of Communications Equity Associates that, as of the date of this
report the fair market value of the assets of the Cable Systems is $74,600,000.
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NCP SIX CABLE SYSTEM STATISTICS
AS OF MARCH 31, 1999
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------
STARKVILLE PHILADELPHIA KOSCIUSKO FOREST
MS MS MS MS
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
HOMES PASSED 11,085 4,395 5,440 3,735
------------------------------------------------------------------------------------------------------------
BASIC SUBSCRIBERS 8,097 3,851 4,350 3,222
------------------------------------------------------------------------------------------------------------
Basic Pen % 73.0% 87.6% 80.0% 86.3%
------------------------------------------------------------------------------------------------------------
PAY UNITS 2,930 1,450 1,371 1,442
------------------------------------------------------------------------------------------------------------
Pay Pen % 36.2% 37.7% 31.5% 44.8%
------------------------------------------------------------------------------------------------------------
MILES OF PLANT 194.5 170 125.8 154
------------------------------------------------------------------------------------------------------------
Home/Mile Density 57 26 43 24
------------------------------------------------------------------------------------------------------------
HEADENDS 2 1 2 2
------------------------------------------------------------------------------------------------------------
PLANT CAPACITY:
Headend 1 330 MHz 450 MHz - 70% 450 MHz 330 MHz
330 MHz - 30%
------------------------------------------------------------------------------------------------------------
Headend 2 330 MHz 450 MHz 300 MHz
------------------------------------------------------------------------------------------------------------
Headend 3
------------------------------------------------------------------------------------------------------------
1ST Q ANNUALIZED
------------------------------------------------------------------------------------------------------------
REVENUE $ 3,645,756 $ 1,633,004 $ 1,848,480 $ 1,414,784
------------------------------------------------------------------------------------------------------------
Rev/Sub/Mo $ 37.51 $ 35.54 $ 35.46 $36.59
------------------------------------------------------------------------------------------------------------
OCF (PRE CAP.) $ 1,753,776 $ 681,828 $ 885,716 $ 723,800
Margin 48.1% 41.8% 47.9% 51.2%
------------------------------------------------------------------------------------------------------------
Annual OCF/Sub $ 217 $178 $204 $225
------------------------------------------------------------------------------------------------------------
OCF (AFTER CAPITALIZATION)
Margin
------------------------------------------------------------------------------------------------------------
Annual OCF/Sub
------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------
HIGHLANDS BARNWELL BENNETTSVILLE
NC SC SC TOTAL
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
HOMES PASSED 4,190 12,125 9,090 50,060
----------------------------------------------------------------------------------------------------------
BASIC SUBSCRIBERS 2,584 5,941 4,918 32,963
----------------------------------------------------------------------------------------------------------
Basic Pen % 61.7% 49.0% 54.1% 65.8%
----------------------------------------------------------------------------------------------------------
PAY UNITS 482 4,301 3,628 15,604
----------------------------------------------------------------------------------------------------------
Pay Pen % 18.7% 72.4% 73.8% 47.3%
----------------------------------------------------------------------------------------------------------
MILES OF PLANT 128 308.5 145 1,226
----------------------------------------------------------------------------------------------------------
Home/Mile Density 33 39 63 41
----------------------------------------------------------------------------------------------------------
HEADENDS 1 3 1 12
----------------------------------------------------------------------------------------------------------
PLANT CAPACITY:
Headend 1 330 MHz 300 MHz - 75% 550 MHz - 96%
450 MHz - 35% 440 MHz - 4%
----------------------------------------------------------------------------------------------------------
Headend 2 450 MHz
----------------------------------------------------------------------------------------------------------
Headend 3 450 MHz
----------------------------------------------------------------------------------------------------------
1ST Q ANNUALIZED
----------------------------------------------------------------------------------------------------------
REVENUE $ 1,036,216 $ 2,706,144 $2,079.272 $14,363,656
----------------------------------------------------------------------------------------------------------
Rev/Sub/Mo $32.86 $38.67 $35.59 $36.31
----------------------------------------------------------------------------------------------------------
OCF (PRE CAP.) $ 423,652 $ 990,764 $ 853,812 $ 6,313,348
Margin 40.9% 36.6% 41.1% 44.04%
----------------------------------------------------------------------------------------------------------
Annual OCF/Sub $161 $170 $175 $192
----------------------------------------------------------------------------------------------------------
OCF (AFTER CAPITALIZATION) 6,731,196
Margin 47%
----------------------------------------------------------------------------------------------------------
Annual OCF/Sub $ 205
----------------------------------------------------------------------------------------------------------
</TABLE>
I-13
<PAGE> 208
EXHIBIT J
FAIRNESS OPINION OF HOULIHAN LOKEY HOWARD & ZUKIN
REGARDING THE ADELPHIA TRANSACTION
[TO BE PROVIDED]
J-1
<PAGE> 209
EXHIBIT K
FAIRNESS OPINION OF HOULIHAN LOKEY HOWARD & ZUKIN
REGARDING THE PROPOSED TRANSACTION
[TO BE PROVIDED]
K-1
