<PAGE>
(Rule 14a-101)
INFORMATION REQUIRED IN DISCLOSURE STATEMENT
SCHEDULE 14A INFORMATION
Disclosure 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 or disclosure statement
Definitive proxy or disclosure statement
Definitive additional materials
Soliciting material pursuant to Rule 14a-11(c) or Rule 14a-12
CENCOM CABLE INCOME PARTNERS II, L.P.
------------------------------------------------
(Name of Registrant as Specified in Its Charter)
CENCOM CABLE INCOME PARTNERS II, L.P.
------------------------------------------------
(Name of Person(s) Filing Disclosure Statement)
Payment of filing fee (Check the appropriate box):
X $125 per Exchange Act Rule 0-11(c)(1)(ii), 14a-6(i)(1),
14a-6(i)(2) or Item 22(a)(2) of Schedule 14A.
$500 per each party to the controversy pursuant to Exchange
Act Rule 14a-6(i)(3).
Fee computed on table below per Exchange Act Rules 14a-6(i)(4)
and 0-11.
(1) Title of each class of securities to which transaction
applies:
UNITS OF LIMITED PARTNERSHIP INTEREST (which have
been registered under the Exchange Act), $1,000 PER
UNIT
(2) Aggregate number of securities to which transaction applies:
90,915 UNITS OF LIMITED PARTNERSHIP INTEREST
(3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11: N/A
(4) Proposed maximum aggregate value of transaction: $36,700,000
X 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: $125.00
(2) Form, schedule or registration
statement no.: Schedule 14A
(3) Filing Party: Cencom Cable Income
Partners II, L.P.
(4) Date filed: July 5, 1996
<PAGE>
CENCOM CABLE INCOME PARTNERS II, L.P.
12444 Powerscourt Drive, Suite 400
St. Louis, Missouri 63131-3660
[________], 1996
To the Limited Partners:
We are pleased to report that the Partnership has commenced liquidating
its assets by contracting to sell its Anderson County, South Carolina cable
system. In addition, as part of the Partnership's liquidation, Cencom Cable
Income Partners, L.P. ("CPLP"), a limited partnership in which the Partnership
has a majority limited partnership interest, has commenced liquidating its
assets by contracting to sell its Abbeville, South Carolina and Sanford and
Lincolnton, North Carolina cable systems. These four cable systems will be sold
to affiliates of the General Partner, and the attached written Disclosure
Statement provides additional information on the entire transaction involving
affiliates. In addition, the Partnership is negotiating to sell two clusters
within the Partnership's Southeast Texas cable systems, each to a different
unaffiliated third party. Upon consummation of the various asset sales for which
purchasers have been identified, and after the Partnership's and CPLP's
anticipated repayments of outstanding debt and the Partnership's anticipated
renegotiation of its bank credit facility, unitholders can expect to receive a
distribution of approximately $233 per unit. The General Partner believes the
sales, combined with a renegotiation of its bank credit facility, will also
enable the Partnership to make quarterly distributions from ongoing operations
after the sales. The proceeds of future asset sales will be used to further
reduce indebtedness and should enable the Partnership to make additional special
distributions to unitholders.
As you are probably aware, the Partnership's term expired on December
31, 1995, as provided in the Partnership Agreement. Because of the Partnership's
resulting need to liquidate all of its assets, including its investment in CPLP,
and because of the additional requirement by CPLP's senior bank lenders that
CPLP repay its outstanding debt, both the Partnership and CPLP began the process
of liquidation. In doing so they obtained two independent appraisals for their
respective cable television systems, and conducted competitive auctions to
attract a larger number of potential purchasers. In the auctions, the
Partnership and CPLP each received at least one offer for each system being
sold, but no bids were received with respect to all of the Partnership's or
CPLP's systems as a whole and certain bids were deemed inadequate by the General
Partner. The auctions did result in multiple bid rounds, with the final bid
exceeding the appraised value for the Partnership's Anderson County cable system
and for CPLP's Sanford, Lincolnton and Abbeville cable systems. The bids for
these four systems were submitted to the Partnership by affiliates of the
General Partner and sale agreements have been executed. In addition, bids
submitted with respect to two clusters within the Southeast Texas cable systems
have been accepted by the Partnership. The General Partner and the general
partner of CPLP intend to continue to seek buyers at fair prices for the
Partnership's and CPLP's remaining assets in order to complete the liquidation
of the Partnership and CPLP as quickly as possible, at which time the General
Partner will terminate the Partnership and distribute any remaining cash. Until
the Partnership is able to sell all of its assets and liquidate its investment
in CPLP, however, the General Partner will continue to operate the Partnership's
remaining systems.
For the four systems proposed to be sold to affiliates, the following
table sets forth the highest appraised value, the purchase price offered, and
the purchase price per subscriber for each such system:
<PAGE>
<TABLE>
<CAPTION>
==============================================================================================
Purchase
Price per Partnership
Highest Subscriber that owns
Location of System Appraised Value Purchase Price (average) the System
- - - ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Anderson County, South Carolina $36,000,000 $36,700,000 $1,782 CCIP II
Abbeville, South Carolina 4,100,000 4,200,000 1,615 CPLP
Sanford, North Carolina 20,700,000 20,750,000 1,634 CPLP
Lincolnton, North Carolina 27,200,000 27,500,000 1,884 CPLP
==============================================================================================
</TABLE>
The purchase price in each of the proposed sales has been offered by an
affiliate of the General Partner, and, as shown above, each such offer exceeds
the highest appraised value and is also the highest amount bid for the relevant
system in the auctions. Under the Partnership Agreement, the General Partner or
one of its affiliates may purchase assets from the Partnership only if it
obtains the advance approval of the limited partners to the proposed
transaction. Although the CPLP Partnership Agreement does not require your
approval for a sale of assets of CPLP to the General Partner, the Partnership or
any of their affiliates, the General Partner has decided to afford the limited
partners the additional protection of this right. Therefore, the acceptance by
the Partnership and CPLP of bids submitted by affiliates of the General Partner
has prompted the delivery of this information package to you.
Approval of the proposed sale transaction requires the affirmative vote
of the holders of a majority of the Partnership's limited partnership units. THE
GENERAL PARTNER RECOMMENDS THAT HOLDERS OF LIMITED PARTNERSHIP UNITS VOTE IN
FAVOR OF THE PROPOSED SALE TRANSACTION.
The Partnership's investment in CPLP was made in accordance with the
terms of its Partnership Agreement covering investments. Because this investment
was an affiliate transaction, it was not negotiated on an arm's-length basis
and, consequently, did not include certain protective provisions, such as
requiring the consent of the Partnership (in its capacity as a limited partner
of CPLP) to certain asset sales by CPLP. However, the General Partner, by
requiring CPLP to obtain appraisals and conduct an auction for the sale of its
systems, and by giving the limited partners the right to approve the sale of
three of CPLP's systems, is affording the limited partners the same protections
with respect to CPLP to which they are entitled with respect to the Partnership.
If the sale transaction is not approved and consummated, the Partnership and
CPLP would again be required to seek interested potential purchasers in the
marketplace. However, there can be no assurance that the prices which could be
obtained in a subsequent sale or sales would equal at least the purchase prices
currently being offered for each of the systems.
The General Partner's recommendation that holders of limited
partnership units vote in favor of the proposed sale transaction is based on its
belief that the proposed purchase prices are fair, from a financial point of
view, to the Partnership and to the limited partners and that the proposed sales
of the Anderson County and Abbeville, South Carolina cable systems and the
Sanford and Lincolnton, North Carolina cable systems are in the best interests
of the Partnership and the limited partners. In reaching this conclusion, the
General Partner considered several factors, including: (i) the auction process,
which generated several rounds of competing bids from unaffiliated potential
purchasers and is generally recognized as a strong indicator of the actual
market value of assets, (ii) the proposed sale prices, which exceed the
appraised values determined by independent appraisers, (iii) the fact that sales
to the affiliate purchasers will not occur without the approval of limited
partners holding a majority of the limited
-2-
<PAGE>
partnership units and (iv) the retention of outside counsel to monitor
compliance by the Partnership with the appraisal process and other requirements
of the Partnership Agreement and compliance by CPLP with the similar procedures
established for its sale transaction.
If you hold limited partnership units, please fill in the appropriate
blanks, sign and date the enclosed consent form and return it in the envelope
provided for that purpose as promptly as possible, but, in any event, not later
than 10:00 a.m. on [_______________], 1996 (or such later date as the General
Partner shall determine).
If you abstain from voting your abstention will be treated as a vote
against the proposed sale transaction. Properly signed but unmarked consent
forms will be treated as votes in favor of the proposed sale transaction.
Sincerely,
Cencom Properties II, Inc., the General Partner
Howard Wood, President
-3-
<PAGE>
1996 CONSENT FORM
CENCOM CABLE INCOME PARTNERS II, L.P.
FOR DELIVERY BY OR BEFORE 10:00 A.M. ON [_____________], 1996
THIS VOTE IS SOLICITED ON BEHALF OF
THE PARTNERSHIP BY THE GENERAL PARTNER
The undersigned Limited Partner hereby: acknowledges receipt of the letter of
the General Partner of Cencom Cable Income Partners II, L.P. (the
"Partnership"), the Notice of Written Vote of the Limited Partners of the
Partnership and the accompanying Disclosure Statement, all dated [___________],
1996 (the "Disclosure Materials"); acknowledges that the undersigned Limited
Partner has reviewed the Disclosure Materials; and hereby
APPROVES the Transaction |_|
ABSTAINS from Voting on the Transaction |_|
DISAPPROVES the Transaction |_|
<PAGE>
Please sign exactly as name appears below. When Limited Partner interests are
held by joint tenants, both should sign. When signing as attorney, executor,
administrator, trustee or guardian please give full title as such. If a
corporation, the president or other authorized person should sign in the full
corporate name. If a partnership, any authorized person should sign in the full
partnership name.
IF THIS CONSENT FORM IS EXECUTED AND RETURNED AND NO VOTE IS INDICATED
HEREON, THE UNDERSIGNED LIMITED PARTNER WILL BE DEEMED TO HAVE VOTED
TO APPROVE THE TRANSACTION.
DATED: __________________________, 1996
_______________________________________
(Signature)
_______________________________________
(Signature if held jointly)
PLEASE PROMPTLY MARK, SIGN, DATE AND RETURN THIS CONSENT FORM
IN THE ENCLOSED ENVELOPE.
<PAGE>
CENCOM CABLE INCOME PARTNERS II, L.P.
NOTICE OF WRITTEN VOTE OF THE LIMITED PARTNERS
TO BE RECEIVED BY
[___________], 1996
NOTICE IS HEREBY GIVEN that a vote of the limited partners (the "Limited
Partners") of Cencom Cable Income Partners II, L.P. (the "Partnership") is being
conducted through the mails on behalf of the Partnership by Cencom Properties
II, Inc., the general partner of the Partnership (the "General Partner"). The
purpose of this vote is to obtain the approval of the limited partners of the
sale of four cable systems to affiliates of the General Partner (the "Purchasing
Affiliates"). The transaction has two components: (i) the proposed sale (the
"Partnership Transaction") of one of the Partnership's three cable television
systems and (ii) the proposed sale (the "CPLP Transaction") by Cencom Partners,
L.P. ("CPLP"), a limited partnership in which the Partnership has a majority
limited partnership interest, of three of its four cable television systems, in
both cases as part of the liquidation of the Partnership's assets. The
Partnership Transaction and the CPLP Transaction are referred to collectively as
the "Transaction." The Transaction is expected to be consummated in late
November 1996 following the receipt of required limited partner and regulatory
approvals, as more fully described in the attached Disclosure Statement.
The Partnership's term expired on December 31, 1995 in accordance with its
Amended and Restated Agreement of Limited Partnership dated as of August 18,
1987 (the "Partnership Agreement"). Because of the Partnership's resulting need
to liquidate all of its assets, including its investment in CPLP, and because of
the additional requirement by CPLP's senior bank lenders that CPLP repay its
outstanding debt, both the Partnership and CPLP began the process of
liquidation. The General Partner and the general partner of CPLP commenced the
Appraisal Processes (as defined in the Disclosure Statement) in April 1995. In
October 1995, they instituted a procedure to solicit bids for the Partnership's
and CPLP's cable television systems. Bids have been accepted for the cable
systems proposed to be sold in the Transaction. The General Partner and the
general partner of CPLP intend to continue to seek buyers at fair prices for the
Partnership's and CPLP's remaining assets in order to complete the liquidation
of the Partnership and CPLP as quickly as possible. After all of the
Partnership's assets are sold or liquidated, including through the liquidation
of CPLP through the sale of all CPLP systems, the Partnership will repay the
balance of its outstanding obligations, distribute to the partners (including
the General Partner) all remaining cash as expeditiously as possible (subject to
a holdback for contingencies) and terminate the Partnership.
The following table sets forth the highest appraised value, the purchase
price and the purchase price per subscriber for each of the cable television
systems proposed to be sold in the Transaction:
<TABLE>
<CAPTION>
- - - -----------------------------------------------------------------------------------------------------------------------
Purchase Price Per
Highest Appraised Subscriber at Partnership That
Name of System Value Purchase Price 6/30/96 Owns the System
- - - -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Anderson County $36,000,000 $36,700,000 $1,782 CCIP II
Abbeville 4,100,000 4,200,000 1,615 CPLP
Sanford 20,700,000 20,750,000 1,634 CPLP
Lincolnton 27,200,000 27,500,000 1,884 CPLP
- - - -----------------------------------------------------------------------------------------------------------------------
</TABLE>
In each of the proposed sales, the purchase price exceeds the appraised
values determined pursuant to appraisals made as of March 31, 1996 by
independent appraisal firms selected
<PAGE>
pursuant to the Partnership Agreement. Furthermore, the purchase price offered
by the Purchasing Affiliates in each of the proposed sales is the highest amount
bid for the relevant system pursuant to an auction process initiated by the
Partnership's and CPLP's respective general partner. If the Transaction is not
approved and consummated, the Partnership and CPLP would again be required to
seek interested potential purchasers in the marketplace. However, there can be
no assurance that the prices which could be obtained in a subsequent sale or
sales would at least equal the purchase prices being offered by the Purchasing
Affiliates for each of the systems pursuant to the Transaction.
Assuming the approval and consummation of the Transaction, the Partnership
intends to use the proceeds of the Partnership Transaction (net of related
expenses) to repay a portion of the Partnership's outstanding senior
indebtedness ($38,900,000 as of June 30, 1996) and to pay certain Partnership
expenses and certain accrued but unpaid management fees. CPLP intends to use the
net proceeds of the CPLP Transaction, first, to pay down its outstanding
indebtedness (including repayment of its senior bank credit facility), expenses
and other obligations (including accrued and unpaid management fees owing to its
general partner) and, thereafter, to distribute any remaining proceeds in
accordance with its partnership agreement. It is currently anticipated that
approximately $13,420,000 will be available for distribution to the Limited
Partners from the Partnership Transaction and approximately $7,727,000 will be
available for distribution to the Partnership (based on its limited partnership
interest in CPLP) out of the proceeds of the CPLP Transaction. With these
available proceeds the Partnership expects to make a distribution of
approximately $233 per limited partnership unit (each $1,000 unit being an "LP
Unit") to the Limited Partners. This distribution does not include any amounts
that might be distributed to the Limited Partners out of the proceeds of the
liquidation of the remaining assets. If the General Partner's negotiations with
its bank lenders are more favorable than anticipated, a greater amount of
proceeds may ultimately be available for distribution by the Partnership.
However, if the negotiations are less favorable than anticipated, the
Partnership may be required to use the entire net proceeds of the Partnership
Transaction to pay down indebtedness. See the attached Disclosure Statement for
additional information regarding the use of liquidation proceeds.
The Partnership Agreement expressly contemplates a sale of assets of the
Partnership to the General Partner or its affiliates. The Partnership Agreement
also requires adherence to certain procedures to protect the interests of the
Limited Partners in a sale of Partnership assets to an affiliated purchaser,
including obtaining the approval of the sale by Limited Partners holding a
majority of the Partnership's LP Units. The General Partner is complying with
all such required procedures and will obtain for the Limited Partners a legal
opinion from independent counsel documenting such compliance. The General
Partner also has undertaken certain additional actions to ensure the fairness of
the Transaction to the Limited Partners. Although CPLP's Partnership Agreement
expressly contemplates a sale of assets of CPLP to Cencom Properties, Inc., the
general partner of CPLP, the Partnership or any of their affiliates, the General
Partner is nevertheless soliciting the approval of the Limited Partners to the
CPLP Transaction. Because the Partnership's investment in CPLP was an affiliate
transaction, it was not negotiated on an arm's-length basis and, consequently,
did not include certain protective provisions, such as requiring the consent of
the Partnership (in its capacity as a limited partner of CPLP) to certain asset
sales by CPLP. However, the General Partner, by requiring CPLP to obtain
appraisals and conduct an auction for the sale of CPLP's systems, and by giving
the Limited Partners the right to approve the sale of three of CPLP's systems to
the Purchasing Affiliates, is affording the Limited Partners the same
protections with respect to the CPLP Transaction as to which they are entitled
with respect to the Partnership Transaction.
Only Limited Partners of record at the close of business on July 31, 1996,
are entitled to notice of, and to participate in, this vote.
2
<PAGE>
It is very important that all Limited Partners entitled to participate in
the voting do so. The Partnership's ability to complete the Transaction and,
thereafter, to repay certain of its indebtedness and make distributions to its
partners is dependent upon the approval of the Transaction by the holders of a
majority of the 90,915 LP Units outstanding.
The General Partner urges you to vote in favor of the Transaction and to
return the enclosed consent form as promptly as possible, but in any event not
later than 10:00 a.m. on [______], 1996 (or such later date as the General
Partner shall determine). Abstentions will be treated as votes against the
Transaction. Properly signed but unmarked consent forms will be treated as votes
in favor of the Transaction. If you wish to withdraw your vote, you may do so by
written notice, or by execution of a subsequently dated consent form, in either
case received by the Partnership, in care of Cencom Properties II, Inc., 12444
Powerscourt Drive, Suite 400, St. Louis, Missouri 63131, at any time prior to
10:00 a.m. on [______], 1996 (or such later date as the General Partner shall
determine). Limited Partners are not entitled to appraisal rights in connection
with the Transaction.
YOUR ATTENTION IS DIRECTED TO THE ACCOMPANYING DISCLOSURE STATEMENT, WHICH
CONTAINS FURTHER INFORMATION WITH RESPECT TO THE TRANSACTION.
CENCOM CABLE INCOME PARTNERS II,
L.P.
BY ITS GENERAL PARTNER,
CENCOM PROPERTIES II, INC.
Barry L. Babcock, Secretary
ST. LOUIS, MISSOURI
___________________, 1996
3
<PAGE>
TABLE OF CONTENTS
Page
----
INTRODUCTION............................................................... I-1
SPECIAL FACTORS............................................................ 1
Timing of the Transaction................................................. 1
Relevant Provisions....................................................... 3
The Appraisal Processes; Summary of Appraisals............................ 5
The Auction Processes..................................................... 13
Costs of the Transaction.................................................. 17
Certain Effects of the Transaction........................................ 17
Recommendation of the General Partner; Fairness of the Transaction........ 20
MATERIAL TERMS OF THE TRANSACTION.......................................... 22
Prices ................................................................ 22
The Purchase Agreements................................................... 22
Conditions to Closing..................................................... 23
Antitrust Approvals....................................................... 24
Indemnification........................................................... 24
FEDERAL INCOME TAX CONSEQUENCES............................................ 26
General ................................................................ 26
Federal ................................................................ 26
SELECTED HISTORICAL FINANCIAL DATA......................................... 28
SELECTED UNAUDITED PRO FORMA FINANCIAL
INFORMATION -- THE PARTNERSHIP............................................ 35
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS.......................... 38
SELECTED UNAUDITED PRO FORMA FINANCIAL INFORMATION -- CPLP................. 40
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS.......................... 43
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS....................................... 45
The Partnership -- Results of Operations.................................. 45
Liquidity and Capital Resources........................................... 48
CPLP -- Results of Operations............................................. 49
Liquidity and Capital Resources........................................... 52
BUSINESS OF THE PARTNERSHIP AND CPLP....................................... 54
The Cable Television Industry............................................. 54
Certain Regulatory and Legislative Developments........................... 54
Description of Systems; Property Relating to Systems...................... 55
(i)
<PAGE>
Page
----
Marketing, Programming and Rates.......................................... 59
Management Agreement...................................................... 60
Franchises................................................................ 60
Competition............................................................... 61
Regulation and Legislation................................................ 62
Employees ................................................................ 71
Other Matters............................................................. 71
CERTAIN INFORMATION ABOUT THE PARTNERSHIP,
THE GENERAL PARTNER AND CERTAIN AFFILIATES................................ 72
General Information....................................................... 72
The LP Units.............................................................. 72
Principal LP Unitholders.................................................. 73
Certain Rights with Respect to the LP Units............................... 74
Distributions Per LP Unit Since Partnership Inception..................... 74
Certain Affiliate Transactions............................................ 74
PLAN OF SOLICITATION....................................................... 76
Voting Rights and Vote Required........................................... 76
Revocability.............................................................. 76
No Appraisal Rights for Dissenters........................................ 76
Solicitation.............................................................. 77
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.................................... 77
AVAILABLE INFORMATION...................................................... 77
INDEX TO FINANCIAL STATEMENTS.............................................. F-1
EXHIBITS AND SCHEDULE
Exhibit A-1 -- APPRAISALS OF THE PARTNERSHIP SYSTEMS
Exhibit A-2 -- APPRAISALS OF THE CPLP SYSTEMS
Exhibit B -- FORM OF LEGAL OPINIONS OF HUSCH & EPPENBERGER
Exhibit C -- PURCHASE AGREEMENTS AND ASSIGNMENT AGREEMENT
Schedule 1 -- EXECUTIVE OFFICERS, DIRECTORS AND CERTAIN
AFFILIATES OF THE GENERAL PARTNER
(ii)
<PAGE>
CENCOM CABLE INCOME PARTNERS II, L.P.
12444 Powerscourt Drive, Suite 400
St. Louis, Missouri 63131-3660
(314) 965-0555
--------------------
DISCLOSURE STATEMENT
--------------------
WRITTEN VOTE OF THE LIMITED PARTNERS TO BE
RECEIVED BY [_______], 1996
INTRODUCTION
This Disclosure Statement and related consent materials are being
mailed to the limited partners (the "Limited Partners") of Cencom Cable Income
Partners II, L.P. (the "Partnership") on or about [______], 1996 in connection
with the solicitation by Cencom Properties II, Inc., the general partner of the
Partnership (the "General Partner"), of written consents of the Limited Partners
to (i) the proposed sale (the "Partnership Transaction") by the Partnership of
one of its three cable television systems (the "Partnership Systems"), which
system serves various communities located in and around Anderson County, South
Carolina (the "Anderson County System") and (ii) the proposed sale (the "CPLP
Transaction" and, together with the Partnership Transaction, the "Transaction")
by Cencom Partners, L.P. ("CPLP"), a Delaware limited partnership in which the
Partnership has a majority limited partnership interest, of three of its four
cable television systems (the "CPLP Systems"), which three systems serve
respectively the various communities located in and around Abbeville, South
Carolina (the "Abbeville System"), Sanford, North Carolina (the "Sanford
System") and Lincolnton, North Carolina (the "Lincolnton System," and together
with the Abbeville System and the Sanford System, the "Three CPLP Systems"). The
proposed purchaser of the Anderson County System, the Abbeville System and the
Lincolnton System is Charter Communications II, L.P., a Delaware limited
partnership and an affiliate of the General Partner ("CC II"). The proposed
purchaser of the Sanford System is Charter Communications, L.P., a Delaware
limited partnership and an affiliate of the General Partner ("CC I," and
together with CC II, the "Purchasing Affiliates"). This solicitation is being
conducted by the General Partner on behalf of the Partnership. In accordance
with its Amended and Restated Agreement of Limited Partnership dated as of
August 18, 1987 (the "Partnership Agreement"), the Partnership's term expired on
December 31, 1995. Because of the Partnership's resulting need to liquidate all
of its assets, including its investment in CPLP, and because of the additional
requirement by CPLP's senior bank lenders that CPLP repay its outstanding debt,
both the Partnership and CPLP began the process of liquidation. In doing so they
each obtained two independent appraisals for their respective cable television
systems and conducted competitive auctions to attract a larger number of
potential purchasers.
- - - --------------------------------------------------------------------------------
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION (THE "COMMISSION") NOR HAS THE COMMISSION PASSED UPON THE
FAIRNESS OR MERITS OF SUCH TRANSACTION NOR UPON THE ACCURACY OR ADEQUACY OF THE
INFORMATION CONTAINED IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS
UNLAWFUL.
I-1
<PAGE>
The following table sets forth certain terms of the Partnership
Transaction, which are described more fully below:
Partnership Transaction
<TABLE>
<CAPTION>
- - - ---------------------------------------------------------------------------------------------------------------------------
Purchase Price
Highest Appraised Per Subscriber Partnership That Proposed
Name of System Value Purchase Price at 6/30/96 Owns The System Purchaser
- - - ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Anderson County $36,000,000 $36,700,000 $1,782 CCIP II CC II
- - - ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The proposed purchase price for the Anderson County System is
$36,700,000 (the "Anderson County System Purchase Price"), payable in cash. The
Anderson County System Purchase Price is the price that was bid by the General
Partner on behalf of CC II after multiple rounds of bidding, and it represents
the highest amount bid for the Anderson County System by all prospective
purchasers pursuant to an auction process initiated in April 1995 by the General
Partner (the "Partnership Auction Process"); the Anderson County System Purchase
Price exceeds by $218,000 the next highest bid submitted with respect to the
Anderson County System. Additionally, the Anderson County System Purchase Price
exceeds the appraised values (as more fully described below, the "Anderson
County System Appraised Values") of the Anderson County System determined by two
independent appraisal firms pursuant to the appraisal process required by the
Partnership Agreement (the "Partnership Appraisal Process"). See "SPECIAL
FACTORS -- The Appraisal Processes; Summary of Appraisals" and "SPECIAL FACTORS
- - - -- The Partnership Auction Processes."
Substantially concurrently with the sale by the Partnership of the
Anderson County System, CPLP is selling three of its four cable television
systems. See "SPECIAL FACTORS -Timing of the Transaction." The following table
sets forth certain terms of the CPLP Transaction, which are described more fully
below:
CPLP Transaction
<TABLE>
<CAPTION>
- - - ---------------------------------------------------------------------------------------------------------------------------
Purchase Price Partnership That
Highest Appraised Per Subscriber Owns The Proposed
Name of System Value Purchase Price at 6/30/96 System Purchaser
- - - ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Abbeville $ 4,100,000 $ 4,200,000 $1,615 CPLP CC II
Sanford 20,700,000 20,750,000 1,634 CPLP CC I
Lincolnton 27,200,000 27,500,000 1,884 CPLP CC II
- - - ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The proposed purchase price for the Three CPLP Systems will be
$52,450,000 (the "Three CPLP Systems Purchase Price"), payable in cash. The
Three CPLP Systems Purchase Price is the sum of the prices that were offered for
each of the Abbeville System (the "Abbeville System Purchase Price"), the
Sanford System (the "Sanford System Purchase Price") and the Lincolnton System
(the "Lincolnton System Purchase Price") by the General Partner on behalf of the
Purchasing Affiliates. Each of these prices reflects the highest amounts offered
for the relevant CPLP System by all bidders in the auction process initiated in
April 1995 by the general partner of CPLP (the "CPLP Auction Process"), however,
in the case of the Lincolnton System, neither the General Partner nor the
Purchasing Affiliates participated in the CPLP Auction Process, but instead CC
II "stepped into the shoes" of an unaffiliated third party bidder who had
offered the highest amount for the Lincolnton System, but whose bid letter
expired. The purchase price for the Three CPLP Systems exceeds by $1,125,000 the
next highest bids submitted with respect to the Three CPLP Systems. Each of the
Abbeville System Purchase Price, the Sanford System Purchase Price and the
Lincolnton System Purchase Price exceeds the appraised values of the respective
system as determined by two independent appraisal firms pursuant to the
appraisal process (the "CPLP Appraisal Process").
I-2
<PAGE>
Assuming approval and consummation of the Transaction, the Partnership
intends to use the proceeds of the Partnership Transaction (net of related
expenses) to repay a portion of the Partnership's senior indebtedness
outstanding and to pay certain Partnership expenses and certain accrued but
unpaid management fees. In connection with the repayment of a portion of the
Partnership's senior indebtedness, the General Partner will seek to renegotiate
the Partnership's bank credit agreement. The General Partner currently
anticipates that it will be required to pay down approximately $21,000,000 of
the Partnership's outstanding senior indebtedness ($38,900,000 at June 30,
1996). With the remaining net proceeds of approximately $15,291,000, the
Partnership expects to use approximately $1,871,000 to pay certain of the
Partnership's expenses and accrued but unpaid management fees.
CPLP intends to use the net proceeds of the CPLP Transaction to repay
its entire outstanding indebtedness under its senior bank credit facility of
approximately $34,957,500 as of June 30, 1996. With the remaining net proceeds
of approximately $17,020,500, CPLP expects to use approximately $2,545,000 to
pay certain of CPLP's expenses and accrued but unpaid management fees and,
thereafter, to distribute any remaining proceeds in accordance with the terms of
its Amended and Restated Agreement of Limited Partnership dated as of June 29,
1990 (the "CPLP Partnership Agreement"). CPLP's special limited partner (Charter
Communications, Inc., an affiliate of the General Partner) is entitled to
receive a preferred return in the amount of $5,280,300 prior to the distribution
of the remaining proceeds to CPLP's other limited partners, including the
Partnership, as more fully described below. It is currently anticipated that
approximately $7,727,000 will be available for distribution to the Partnership
based on its 84.03% limited partnership interest in CPLP (the "CPLP
Distribution").
As a result of the Partnership Transaction and the CPLP Distribution
and assuming the Partnership's successful renegotiation of its credit facilities
on the terms described herein, the Partnership expects to make a distribution to
the Limited Partners of the aggregate remaining proceeds of the Transaction
(including the CPLP Distribution) equal to approximately $21,147,000 in the
aggregate, or $233 for each $1,000 unit of limited partnership interest held by
the Limited Partners (each, an "LP Unit"). This distribution to the Limited
Partners of the remaining net proceeds from the Transaction, if any, is expected
to occur as soon as practicable after November 30, 1996 (or such later date as
the Transaction closes) and will represent a "catch-up" payment on the aggregate
return of 11% (less prior distributions), accruing from the issuance date of the
LP Units through the payment date, payable to each Limited Partner under the
Partnership Agreement. Additional distributions of liquidation proceeds are
expected to be made by the Partnership at a later date as additional Partnership
assets are sold or liquidated.
Although the General Partner believes the distribution estimates are
based on reasonable, good faith calculations, there can be no assurance that
actual distributions following the conclusion of the Transaction will be made in
the amounts set forth in the preceding paragraph, if at all. If the General
Partner's negotiations with its bank lenders are more favorable than
anticipated, a greater aggregate amount may be available for distribution by the
Partnership. However, if the negotiations are less favorable than anticipated,
the Partnership may be required to use up to the entire net proceeds of the
Partnership Transaction and certain of the proceeds from the CPLP Transaction to
pay down indebtedness. Furthermore, the Partnership will not be able to make any
of the estimated distributions unless the Transaction is approved and
consummated. If the Transaction is not approved, then the General Partner and
the general partner of CPLP would be obligated to seek alternative buyers for
the four systems, which could delay their sale. If market conditions at such
later date were to result in a lower sale price, there would be less proceeds
available for distribution to the Limited Partners. There can be no assurance
that the prices which could be obtained in a subsequent sale or sales would be
equal to or greater than the purchase price being offered by the Purchasing
Affiliates for each of the cable systems proposed to be sold in the Transaction.
See "SPECIAL FACTORS -- Recommendation of the
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General Partner; Fairness of the Transaction." Therefore, it is very important
that all Limited Partners entitled to participate in the voting do so.
In addition to the Anderson County System, the Partnership has cable
television systems located throughout Southeast Texas (the "Southeast Texas
Systems") and Northeast Missouri (the "Northeast Missouri Systems"). As a result
of the Partnership Auction Process, in addition to the Anderson County System,
the General Partner has accepted bids and is negotiating final agreements to
sell two clusters within the Southeast Texas Systems: the first serving the
communities of Cleveland, Jasper and Woodville, Texas (the "Jasper Cluster");
and the second serving the communities of Marlin, Madisonville and Buffalo,
Texas (the "Marlin Cluster"). The accepted bids relate to Partnership assets
which affect approximately 68% of the Partnership's basic subscribers as of June
30, 1996. With respect to CPLP, the accepted bids relate to assets affecting
approximately 83% of the CPLP systems' basic subscribers. Negotiations for the
sale of the remaining CPLP System (the "LaGrange System") had been conducted
with a purchaser unaffiliated with the Partnership, CPLP and the General
Partner, however such negotiations have terminated.
It is the General Partner's intention to sell the Partnership's
remaining assets as expeditiously as possible, subject to the receipt of offers
to purchase such assets at prices the General Partner deems reflective of their
fair market value. After the remaining Partnership assets, including the
Partnership's investment in CPLP, have been sold or liquidated for cash, the
General Partner will repay the balance of the Partnership's outstanding
obligations, expenses and other liabilities and distribute any remaining cash
(subject to a holdback for contingencies) to the partners of the Partnership,
including the General Partner, at which time the Partnership's existence will
terminate. Upon its termination, the Partnership will cease to be a public
entity and will no longer file reports required by the Securities Exchange Act
of 1934, as amended (the "Exchange Act").
Because the Anderson County System is being sold to an affiliate of
the General Partner, the Partnership Agreement requires as a condition to the
consummation of the Partnership Transaction the approval (the "Consent") by the
affirmative vote of the Limited Partners holding a majority of the 90,915 LP
Units outstanding. The sales of the Jasper Cluster and the Marlin Cluster to
unaffiliated third parties does not require Consent.
In addition to seeking the approval of the Limited Partners for the
sale of the Anderson County System to CC II, and although not required by the
CPLP Partnership Agreement or the Partnership Agreement, the General Partner is
also seeking the approval of the Limited Partners to the CPLP Transaction.
Because the Partnership's investment in CPLP was an affiliate transaction, it
was not negotiated on an arm's-length basis and, consequently, did not include
certain protective provisions, such as requiring the consent of the Partnership
(in its capacity as a limited partner of CPLP) to certain asset sales by CPLP.
However, the General Partner, by requiring CPLP to obtain appraisals and conduct
an auction, and by giving the Limited Partners the right to approve the sales of
the Three CPLP Systems to the Purchasing Affiliates, is affording the Limited
Partners the same protections with respect to the CPLP Transaction as to which
they are entitled with respect to the Partnership Transaction.
The General Partner believes the Transaction to be fair to and in the
best interests of the Partnership, CPLP and the Limited Partners and, based on
the results of the Partnership Auction Process and the CPLP Auction Process
(collectively, the "Auction Processes") and the Partnership Appraisal Process
and the CPLP Appraisal Process (collectively, the "Appraisal Processes"), and
its knowledge of the cable television industry, the General Partner believes
that each of the Anderson County System Purchase Price and the Three CPLP
Systems Purchase Price is fair, from a financial point of view, to the
Partnership and to CPLP, respectively. As a result, the General Partner
recommends that you vote in favor of the Transaction. You should note, however,
that because the proposed purchasers in the
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Transaction are affiliates of the General Partner, the General Partner's
recommendation with respect to the Transaction is subject to a direct conflict
of interest.
THIS DISCLOSURE STATEMENT CONTAINS ADDITIONAL INFORMATION WITH RESPECT
TO THE TRANSACTION. ACCORDINGLY, LIMITED PARTNERS ARE URGED TO REVIEW CAREFULLY
THIS DISCLOSURE STATEMENT. PLEASE RETURN YOUR CONSENT FORMS IN THE ENVELOPE
PROVIDED NO LATER THAN 10:00 A.M. ON [______], 1996 (OR SUCH LATER DATE AS THE
GENERAL PARTNER SHALL DETERMINE). ABSTENTIONS WILL BE TREATED AS VOTES AGAINST
THE TRANSACTION. PROPERLY SIGNED BUT UNMARKED CONSENT FORMS WILL BE TREATED AS
VOTES IN FAVOR OF THE TRANSACTION. IF YOU WISH TO WITHDRAW YOUR VOTE, YOU MAY DO
SO BY WRITTEN NOTICE, OR BY EXECUTION OF A SUBSEQUENTLY DATED CONSENT FORM, IN
EITHER CASE RECEIVED BY THE PARTNERSHIP, IN CARE OF CENCOM PROPERTIES II, INC.,
12444 POWERSCOURT DRIVE, SUITE 400, ST. LOUIS, MISSOURI 63131, AT ANY TIME PRIOR
TO 10:00 A.M. ON [______], 1996 (OR SUCH LATER DATE AS THE GENERAL PARTNER SHALL
DETERMINE). LIMITED PARTNERS ARE NOT ENTITLED TO APPRAISAL RIGHTS IN CONNECTION
WITH THE TRANSACTION.
No persons have been authorized to give any information or to make any
representation other than the representations contained in this Disclosure
Statement in connection with the solicitation of votes made hereby and, if given
or made, such information or representation must not be relied upon as having
been authorized by the Partnership, CPLP, the General Partner or any other
person.
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SPECIAL FACTORS
Background
The Partnership was formed in August 1987 to acquire, develop,
operate, invest in and ultimately sell cable television systems serving
communities in the United States, its territories and possessions. The primary
business activities engaged in by the Partnership are the ownership and
operation of cable television systems located in South Carolina, Texas and
Missouri, which it acquired from unaffiliated parties in a series of
transactions between the date of the Partnership's inception and October 1989
for an aggregate purchase price of $72,035,000. In furtherance of its purpose to
invest in cable systems, the Partnership in 1990 invested an aggregate of
$25,000,000 to acquire a limited partnership interest in CPLP.
CPLP is a Delaware limited partnership which was formed in January
1990 with an initial equity investment by the Partnership of approximately
$4,000,000, and a subsequent equity investment in June 1990 of $21,000,000.
Based on its limited partner ownership interest in CPLP, the Partnership is
allocated 84.03% of the net income or losses of CPLP. Other investors in CPLP
include CPLP's general partner, Cencom Partners, Inc. ("CPI") which has a 1.5%
general partner interest in CPLP, and Charter Communications, Inc., an affiliate
of the Partnership ("Charter"), which indirectly owns CPI. Charter owns all of
CPLP's special limited partnership units and all limited partnership units not
held by the Partnership or CPI (13.2% of the limited partnership units). As a
special limited partner, Charter is entitled to receive a preferred return in an
amount equal to $5,280,300(1), calculated based on terms in the CPLP Partnership
Agreement, prior to any other distributions of proceeds to the remaining limited
partners (including the Partnership). As a 13.2% limited partner of CPLP,
Charter is entitled to receive 13.2% of all distributions to CPLP's limited
partners, after the distribution on account of its general limited partnership
units. See "-- Certain Effects of the Transaction." The CPLP Systems are located
in South Carolina, North Carolina and Texas.
Timing of the Transaction
Partnership Transaction
The Partnership Agreement provides for the expiration of the
Partnership on December 31, 1995 (the "Partnership Expiration Date"). Pursuant
to the Partnership Agreement, the General Partner is required to commence a
liquidation of the Partnership's assets no later than the Partnership Expiration
Date. In light of the Partnership's impending expiration, in April 1995 the
General Partner commenced the Partnership Appraisal Process with respect to all
of the Partnership Systems in an effort to arrive at a reliable benchmark
valuation of the Partnership Systems, thereby enabling it to make informed
decisions with respect to the merits of bids subsequently submitted to it by
prospective purchasers of the various Partnership Systems. To continue the
liquidation of the Partnership, the General Partner initiated the Partnership
Auction Process in October 1995 to attract a wide range of potential purchasers
of the Partnership Systems and obtain the maximum available return for the
Partnership. See "-- Relevant Provisions" and "-- The Appraisal Processes;
Summary of Appraisals."
The General Partner did not seek to sell the Partnership Systems in
advance of the Partnership Expiration Date in part because of substantial
uncertainties and adverse circumstances in the regulatory and economic
environment affecting the cable television industry. Although the Partnership
- - - --------
(1) Assumes the Transaction was consummated on June 30, 1996. Amount will
increase by 18% per annum, compounded quarterly, until the redemption date.
<PAGE>
Agreement permits the liquidation of the Partnership's assets to have commenced
as early as the end of 1992, regulatory uncertainty surrounding the enactment in
October 1992 of the Cable Television Consumer Protection and Competition Act of
1992 (as amended, the "1992 Cable Act") caused market prices for cable
television systems (which are typically calculated on a multiple of cash flow
basis or on a per subscriber basis) to be depressed throughout the cable
television industry until 1995. For a more detailed discussion of the 1992
re-regulation of the cable television industry and for recent significant
changes in legislation and the Federal Communications Commission ("FCC") rules
affecting cable television operators, see "BUSINESS OF THE PARTNERSHIP AND CPLP
- - - -Regulation and Legislation."
Notwithstanding the changing regulatory environment and increasingly
competitive market conditions, due to the expiration of its term on December 31,
1995, the Partnership is now required to liquidate its assets as expeditiously
as possible. Although the Partnership received bids for all of the Partnership
Systems in the Partnership Auction Process, the General Partner believes that
certain bids submitted were too low when compared to the relative portion of the
entire appraised value of the assets to be fair, from a financial point of view,
to the Limited Partners. Based on the fact that, although solicited as part of
the Partnership Auction Process, no bids were submitted for all or substantially
all of the Partnership's assets as a whole, the General Partner does not believe
that it is likely to find a single buyer who would be willing to purchase all or
substantially all of the Partnership Systems and the Partnership's other assets
in the near future. As a result of the Partnership Auction Process, the General
Partner accepted bids for the Anderson County System, the Jasper Cluster and the
Marlin Cluster, which bids it believed and continues to believe to be fair, and
rejected non-cash bids and other cash bids which were considered inadequate when
comparing the relative value of the systems as to which such bids were submitted
to the appraisal value of all of the Partnership Systems as a group. Based on
the foregoing, the General Partner has determined that the remaining Partnership
assets, including the Northeast Missouri Systems and the remaining clusters
within the Southeast Texas Systems should not be sold at this time, but instead
should continue to be operated during the liquidation period while the General
Partner continues to seek suitable and attractive purchasers for the remaining
Partnership assets. There can be no assurance, however, that the General Partner
will find a buyer or buyers who are willing to purchase the Northeast Missouri
Systems and the remaining clusters within the Southeast Texas Systems at prices
equal to or greater than those already submitted to the Partnership pursuant to
the Partnership Auction Process.
With respect to the Anderson County System, the General Partner has
concluded, based on the proposed Anderson County System Purchase Price, the
results of the Partnership Auction Process, and certain other factors discussed
herein, that a sale of the Anderson County System to CC II is in the best
interests of the Partnership and the Limited Partners at this time. See "-- The
Partnership Appraisal Process" and "-- The Partnership Auction Process."
Assuming that Consent to the Transaction is obtained, the Partnership
Transaction is anticipated to close in late November 1996, after the expected
receipt of all required regulatory approvals. See "MATERIAL TERMS OF THE
TRANSACTION -- Conditions to Closing."
CPLP Transaction
Substantially concurrently with the Partnership Transaction, CPLP is
liquidating its assets through sales of the CPLP Systems. Although CPLP's term
does not expire until June 30, 2001, the liquidation must now be effected (i) to
satisfy the requirement of CPLP's senior bank lenders that CPLP permanently
repay its obligations owing under that certain Credit Facility dated as of June
29, 1990, as amended, among CPLP, and a syndicate of banks led by
Toronto-Dominion Bank (the "CPLP Credit Facility") by December 31, 1996 and (ii)
to facilitate the liquidation of the Partnership, which necessitates the
liquidation of all of the Partnership's assets, including its ownership interest
in CPLP.
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To commence the process of liquidation of CPLP, CPI, as general
partner of CPLP, initiated an appraisal of the CPLP Systems. The CPLP Appraisal
Process was conducted in a manner and with a purpose substantially similar to
that of the Partnership Appraisal Process. Following the CPLP Appraisal Process,
CPI initiated the CPLP Auction Process, which also followed substantially
similar procedures as were implemented in the Partnership Auction Process. See
"-- Relevant Provisions," "-- The Appraisal Processes; Summary of Appraisals"
and "-- The Auction Processes."
Although the Purchasing Affiliates are currently proposing to purchase
the Three CPLP Systems, only the Abbeville System and the Sanford System were
actually bid upon by CPI on behalf of the Purchasing Affiliates. For the
Lincolnton System, the highest bid was initially submitted by a proposed
purchaser unaffiliated with the General Partner, CPLP and the Partnership (the
"Proposed Purchaser"). After CPLP's acceptance of the Proposed Purchaser's bid,
the Proposed Purchaser and CPI, by the terms stated in the Proposed Purchaser's
bid letter (the "Letter of Intent"), had 30 days in which to enter into a
Purchase Agreement for the sale of the Lincolnton System. However, the 30-day
period elapsed without execution of a Purchase Agreement, the Letter of Intent
expired, and the parties, by mutual agreement, determined not to pursue further
negotiations. Upon the expiration of the Letter of Intent, CC I expressed its
willingness to acquire the Lincolnton System at the price previously offered by
the Proposed Purchaser. CC I then entered into a Purchase Agreement which it
subsequently assigned to CC II. Although CC II will match the price offered by
the Proposed Purchaser, it will not impose various conditions to closing which
would have been required of CPLP in a sale of the Lincolnton System to the
Proposed Purchaser. The purchase price offered by CC II with respect to the
Lincolnton System exceeds by 3.8% such system's appraised value (the "Lincolnton
Appraised Value").
The remaining CPLP System, the LaGrange System, which serves
communities located in and around LaGrange, Texas, has received bids which were
considered inadequate based on the relative portion of the appraised value of
all of the CPLP Systems, and no negotiations are underway at this time.
Based on the results of the CPLP Appraisal Process and the CPLP
Auction Process, as well as its general knowledge of the cable television
industry, CPI has concluded that a sale of the Three CPLP Systems to the
Purchasing Affiliates is in the best interests of CPLP and its partners
(including the Partnership) at this time.
Assuming the Consent to the Transaction is obtained, the CPLP
Transaction is anticipated to close in late November, 1996, after the expected
receipt of all required regulatory approvals.
Relevant Provisions
Partnership Agreement
Section 8.2 of the Partnership Agreement gives the General Partner the
"full right and unlimited discretion to determine the time, manner and terms of
any sale or sales of the Partnership's assets pursuant to . . . [its]
liquidation, having due regard to the activity and condition of the relevant
markets and general financial and economic conditions." The Partnership
Agreement expressly contemplates and permits a sale of some or all of the
Partnership's assets to the General Partner or its affiliates. The Partnership
Agreement also states that any sale to an unaffiliated third party shall be
subject to a right of the General Partner to bid on such property and that the
highest bid shall be considered by the Partnership. In addition to these
enabling provisions, the Partnership Agreement contains other provisions
designed specifically to protect the interests of the Limited Partners in
connection with any sale to the General Partner or its affiliates. For example,
the Partnership
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Agreement provides that the purchase price in any sale to the General Partner or
its affiliates may not be less than the appraised value of such assets
determined pursuant to the Partnership Appraisal Process. The consummation of
any such affiliate transaction is also subject to the Consent of the Limited
Partners. Consent to a given action is obtained through the affirmative vote or
written approval of Limited Partners who together hold a majority of the
outstanding LP Units of the Partnership.
Section 4.9 of the Partnership Agreement requires an independent
appraisal in connection with (i) a contemplated sale of all or substantially all
of the assets of the Partnership to either an unaffiliated third party or to the
General Partner or an affiliate of the General Partner or (ii) a sale of any
Partnership assets to the General Partner or an affiliate of the General
Partner. The Partnership Appraisal Process requires, among other things, that
two independent nationally recognized experts in the cable television field each
conduct an appraisal of the asset being sold, in this case the Anderson County
System, and act jointly to determine the fair market value of such assets; if
they are unable to agree on the value, a third appraiser is to be selected and
such third appraiser determines the value (within the values established by the
first two appraisers). One appraiser is to be appointed by the General Partner
and the other is to be appointed by the American Arbitration Association (the
"AAA"). The Partnership Agreement requires that the appraisers' valuation of the
Partnership Systems be made on a "going concern" basis, without discount imputed
for brokers' fees. Any appraisal must be conducted in conformity with standard
appraisal techniques, applying market factors then relevant. For detailed
information regarding the Partnership Appraisal Process, see "-- The Appraisal
Processes; Summary of Appraisals."
Although the Partnership Agreement does not require that an auction be
conducted in connection with a sale of Partnership assets, the General Partner,
after consulting with the independent appraisers, concluded that an auction
would attract higher bids for the Partnership Systems.
CPLP Partnership Agreement
Section 7.04 of the CPLP Partnership Agreement provides that CPI may
cause CPLP to transact business with CPI or any of its affiliates for goods or
services reasonably required in the conduct of CPLP's business, provided that
any such transaction shall be effected only if the transaction is on terms that,
when taken as a whole, are substantially as favorable to CPLP as those then
reasonably obtainable from unaffiliated persons in an arm's-length transaction.
Section 7.08(B) of the CPLP Partnership Agreement provides that CPI
will consider selling the CPLP Systems at any time it believes a sale to be in
the best interests of CPLP. The CPLP Partnership Agreement expressly
contemplates and permits a sale of some or all of CPLP's assets to CPI or its
affiliates or to unaffiliated third parties, at any time CPI believes such a
sale is in the best interests of the Partnership. Additionally, any sale of one
or more of the CPLP Systems to an unaffiliated third party shall be subject,
first, to the right of the Partnership (as CPLP's initial limited partner) to
purchase such systems for the same price and upon the same terms as proposed by
the unaffiliated third party and, second, to the right of CPI to purchase such
systems at the price proposed by the unaffiliated third party less any
applicable broker's fee.
The CPLP Partnership Agreement does not require an appraisal in
connection with a sale of CPLP's assets, except in the event that CPI had
intended to buy all of the assets of CPLP prior to January 1, 1995 in connection
with the "buy option" granted to it as general partner of CPLP. In that event,
the terms of the CPLP Partnership Agreement would have required the appraisal to
be conducted by one independent nationally recognized appraiser with experience
in the cable industry selected by CPI. The appraiser would had to have valued
CPLP's assets on a going concern basis exclusive of any discount imputed due to
the illiquidity of the respective limited partner's interests or any broker's
fee,
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and the valuation would had to have been made in conformity with standard
appraisal techniques in use at the time, applying the market factors then
relevant.
As with the Partnership Agreement, the CPLP Partnership Agreement,
does not require that an auction be conducted in connection with a sale of
CPLP's assets. However, CPI, after consulting with the independent appraisers,
concluded that an auction would attract higher bids for the CPLP Systems.
The Appraisal Processes; Summary of Appraisals
Partnership Appraisal Process
The Partnership Appraisal Process is required by the Partnership
Agreement in the event of a sale of any assets of the Partnership to the General
Partner or an affiliate of the General Partner in order (i) to ensure that the
purchase price paid in any such transaction is arrived at on an arm's-length
basis since the appraised value serves as the minimum price that can be offered
by the General Partner or any such affiliate and (ii) to protect against any
appearance of impropriety which may arise because the transaction involves the
General Partner or an affiliate. The Partnership Appraisal Process is also
required in the event that all or substantially all of the Partnership's assets
are to be sold to a third party. The General Partner initiated the Partnership
Appraisal Process in April 1995 in contemplation of the possibility that the
Partnership Appraisal Process would ultimately be required. Information
regarding the appraisals was not disseminated to unaffiliated third parties
during the Partnership Auction Process, although the appraisals did serve as a
guide to the General Partner in evaluating the fairness of the bids submitted
pursuant to the Partnership Auction Process. See "--The Partnership Auction
Process." In connection with the Transaction, the General Partner has complied
with the Partnership Agreement requirement that the Anderson County System
Purchase Price shall exceed the appraised value of the Anderson County System
determined in accordance with the Partnership Appraisal Process.
In accordance with the terms of the Partnership Agreement, Daniels &
Associates, L.P. ("Daniels") and Western Cablesystems, Inc. ("Western") were
appointed by the General Partner and the AAA, respectively, to conduct an
independent appraisal of the Partnership Systems as a group. Based on interviews
with management, analyses of audited and interim unaudited financial information
and consideration of market factors, and in compliance with the requirements
described below, the appraisers independently valued all of the Partnership's
assets. Thereafter, in accordance with the relevant provisions of the
Partnership Agreement, Daniels and Western met, compared their respective
valuations of the Partnership Systems and the manner in which such valuations
had been calculated, and jointly determined an appraised value of the
Partnership Systems in the aggregate, including the Anderson County System, as
of March 31, 1995, in the amount of $73,850,000 (the "Initial Partnership
Appraisal").
The instructions and limitations set forth by the General Partner to
the appraisers in connection with the Initial Partnership Appraisal included the
following requirements: (i) that the Partnership's assets be appraised at fair
market value on a going concern basis without any discount imposed for brokers'
fees, in conformity with standard appraisal techniques applying the market
factors then relevant, as specified in the Partnership Agreement, (ii) that a
due diligence review be conducted with respect to each of the Partnership
Systems, including on-site inspections, (iii) that an analysis of current
economic and industry conditions and an analysis of the capabilities of the
tangible and intangible assets of the Partnership to sustain the projected cash
flows be conducted, (iv) that the two appraisers selected pursuant to the
Partnership Appraisal Process work with each other to attempt to determine
jointly the value of the Partnership's assets and agree on a fair market value
within 20 days of commencement of their deliberations, and (v) that each
appraisal report contain a letter of transmittal, a
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<PAGE>
description of the assets appraised and the appraisal procedures utilized, a
description of the assumptions and limiting conditions factored into the
appraisals, the appraiser's conclusions of value and a signed certification.
While the appraisers were aware that they ultimately would have to attempt to
agree on a valuation of the Partnership Systems, they did not discuss with one
another the assumptions or methodologies they intended to use in appraising the
Partnership's assets prior to conducting their respective appraisals, and the
General Partner does not believe the requirement that the appraisers jointly
agree on an appraisal had any material impact on their respective appraisals.
The General Partner requested Daniels and Western to update their
appraisals in regard to the Anderson County System after the Partnership Auction
Process culminated in the General Partner having submitted the highest bid for
the Anderson County System. However, because the highest bids with respect to
the Northeast Missouri Systems and the Jasper Cluster had not been submitted by
affiliates of the Partnership, updated appraisals were not requested for those
systems. See "-- Relevant Provisions" and "-- The Partnership Auction Process."
The General Partner instructed the appraisers to give due consideration to the
same factors they had analyzed in conducting the Initial Partnership Appraisal
when updating the Initial Partnership Appraisal, except that the analysis was to
be limited to the Anderson County System. Thereafter, Daniels and Western
separately updated their original appraisals of the Anderson County System and
reached the Anderson County System Appraised Values, as of March 31, 1996, of
$36,000,000 and $35,900,000, respectively (the "Bring-Down Partnership
Appraisal"). In the case of the Bring-Down Partnership Appraisal, the General
Partner did not require the appraisers to agree jointly on one appraised value
for the Anderson County System in light of the fact that, in conducting the
Bring-Down Partnership Appraisal, both appraisers had independently arrived at
values which were lower than the Anderson County System Purchase Price. Although
both appraisers were aware of the bids which had been submitted with respect to
the Anderson County System, neither appraiser relied on such bids in determining
values for the Bring-Down Partnership Appraisal. With the Anderson County System
Purchase Price exceeding the two Anderson County System Appraised Values by
$700,000 and $800,000 respectively, the Partnership Transaction satisfies the
Partnership Agreement requirement that the Anderson County System Purchase Price
equal or exceed the appraised value.
The full texts of the Daniels and Western appraisals with respect to
the Partnership Systems are set forth in Exhibit A-1 and should be read by the
Limited Partners in their entirety. The summaries set forth below do not purport
to be a complete description of the analyses performed by Daniels or Western in
rendering their respective appraisals. An appraisal is a complex analytical
process which is not necessarily susceptible to partial analysis or summary
description. Notwithstanding the two appraisers' use of standard appraisal
methods, there can be no assurance that a different appraisal procedure or
different appraisers using similar methods and analyzing similar data would not
generate a higher (or lower) valuation of the Partnership Systems, including the
Anderson County System.
It should be noted that neither the appraisals performed by Daniels
nor the appraisals performed by Western constitute an opinion as to the fairness
of the Transaction.
1. Daniels & Associates, L.P.
Daniels was chosen by the General Partner to appraise the Partnership
Systems due to its broad experience in the cable television industry, including
the sale of entities and assets relating to such industry. Daniels is a full
service investment banking firm with substantial knowledge of the cable
television market. Since its inception in 1958, Daniels has participated in
hundreds of media transactions. During the period from 1988 to 1995, Daniels
provided investment banking and advisory services, including appraisal services,
in approximately 352 cable television transactions with a combined transaction
value of over $16.6 billion. Daniels employs professionals having a combined
total of approximately 170 years of cable television industry experience. In
addition to its appraisal of the
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Partnership Systems and the Anderson County System for the compensation
specified below, Daniels was retained by the General Partner to conduct the
Partnership Auction Process, which included preparing a bid package summarizing
the Partnership Systems, identifying potential interested parties and
coordinating the various bids which were submitted during the Partnership
Auction Process. See "--The Auction Processes." In addition to its engagements
to appraise the fair market value of the Partnership Systems and the CPLP
Systems and to conduct the Auction Processes, as more fully described herein,
Daniels has previously been engaged by an affiliate of the General Partner to
conduct appraisals of Cencom Cable Income Partners, L.P. ("CCIP"), an affiliate
of the Partnership, for compensation totalling approximately $325,000. Also, the
Partnership plans to continue to retain Daniels to broker sales of the remaining
Partnership Systems and, in the event the Transaction is not approved or
consummated, to broker sales of the four systems to be sold in the Transaction.
Summary of Materials Considered. In connection with both the Initial
Partnership Appraisal and the Bring-Down Partnership Appraisal, Daniels
reviewed, among other things, current financial and operating information
provided by the Partnership and demographic information concerning the various
communities served by the Partnership Systems. Daniels also conducted
discussions with the Partnership's management, analyzed historical financial and
operating information (including but not limited to the amount of capital
expenditures which the Partnership Systems will require in the next several
years) and prepared forecasts of financial and operating results based on such
historical information. In conducting the Initial Partnership Appraisal, Daniels
also made due diligence visits to each of the Partnership Systems and reviewed
the impact of the 1992 Cable Act and the anticipated effects of the
Telecommunications Act on each Partnership System's current and forecasted
financial performance.
Summary of Appraisals. Daniels appraised the Partnership Systems on a
going concern basis, in accordance with two standard appraisal techniques,
utilizing (i) a ten-year discounted cash flow analysis and (ii) an analysis of
relevant market multiples derived from comparable private market cable
transactions. Its valuation assumed the Partnership Systems have been and will
be operated as efficiently as comparable cable systems, and that the franchises
and leases of assets used in the operation of the Partnership Systems will be
renewed indefinitely without material changes, other than rebuild requirements.
In its discounted cash flow analysis, Daniels prepared detailed
operating and financial (including 10-year revenue, cash flow and capital
expenditures) forecasts on an operating group basis, incorporating the critical
elements of operating revenues (e.g., homes passed, subscriber penetration
levels, rates and non-subscriber based income sources) and expenses (e.g.,
assumed rates of inflation, adjusted for each Partnership System's respective
characteristics and circumstances, costs of construction of new plant,
maintenance, upgrades/rebuilds and replacement of equipment and vehicles).
Daniels forecast a residual value based on growth of the Partnership Systems'
tenth-year cash flow into perpetuity, discounted back to the present at the same
rate as the discount rate applied to the forecasted cash flow.
The discount rate used by Daniels was based on the approximate
weighted average cost of capital (the investment return required to satisfy all
of an entity's debt and equity investors). Such rate was determined by Daniels
based on information relating to comparable private equity investments in and
debt financings of properties similar to the Partnership Systems.
Residual value multiples were determined assuming cash flow growth
into perpetuity equal to approximately 50% of the average cash flow growth rate
over the final two years of the forecast period.
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Daniels undertook an analysis of comparable private market sales in
the past two years of similar and similarly situated cable television systems to
correlate its findings using the discounted cash flow appraisal method with the
realities of the marketplace. For purposes of its analysis, Daniels divided the
Partnership Systems into two groups, consisting of mid-size and small
Partnership Systems. In its Initial Partnership Appraisal, Daniels reviewed 16
comparable transactions for the sale of mid-size and small cable television
systems. Using the average of market multiples of operating cash flow and price
per subscriber derived from sales of comparable systems, Daniels applied such
multiples to the Partnership Systems. In conducting its Bring-Down Partnership
Appraisal, Daniels reviewed six transactions involving systems it deemed
comparable in size, markets and technical condition to the Anderson County
System in particular. The cable property sales used by Daniels as a basis for
comparison with the Partnership Systems are described more fully in Daniels'
appraisals, copies of which are included in Exhibit A-1.
As a result of its analyses in the Initial Partnership Appraisal,
Daniels determined an estimated fair market value of all of the cable operating
assets of the Partnership as of March 31, 1995 for 44,232 subscribers, and
calculated a weighted average of $1,670 per subscriber. In its appraisal report,
Daniels indicates that it believes the valuation, expressed as a multiple of the
annualized operating cash flow for the three-month period ended March 31, 1995,
is not inconsistent with multiples derived in transactions involving large
groups of subscribers.
The Bring-Down Partnership Appraisal was substantially similar in
method to the Initial Partnership Appraisal, although it related only to the
Anderson County System. After conducting analyses involving both a discounted
cash flow analysis and a comparison of comparable transactions for its
Bring-Down Partnership Appraisal, Daniels determined an estimated gross fair
market value of the Anderson County System as of March 31, 1996 of $36,000,000,
and calculated a value of $1,725 per subscriber.
Appraisal Costs. Daniels was paid $100,000 for the Initial Partnership
Appraisal and $5,000 for the Bring-Down Partnership Appraisal. In the event the
Partnership Transaction is consummated, the Partnership will be reimbursed by CC
II in the amount of $54,700, constituting 49.7% of Daniels' fees related to the
Initial Partnership Appraisal, plus all of its fees related to the Bring-Down
Partnership Appraisal, as contemplated in the Partnership Agreement. These
amounts represent that portion of the appraisal fees allocable to Daniels'
appraisal of the Anderson County System. The fees paid to Daniels were not
contingent upon the conclusions reached by it in its appraisals of the
Partnership Systems.
2. Western Cablesystems, Inc.
Since 1979, R. Michael Kruger, the owner and President of Western, has
appraised hundreds of cable television systems for a variety of clients,
including multiple system operators and independent operators. Western has been
directly involved in all aspects of systems operations and finance, including
acquisitions and sales. From 1974 to 1979 Mr. Kruger held various operating
positions at American Television & Communications, Inc., a subsidiary of Time,
Inc. and one of the industry's largest operators.
Summary of Materials Considered. In conducting both the Initial
Partnership Appraisal and the Bring-Down Partnership Appraisal, Western reviewed
audited and unaudited financial statements, as well as other data provided by
management. In addition, during the Initial Partnership Appraisal, Western
interviewed various Partnership management personnel at length to obtain
additional data as to subscriber history, technical data, demographics, and
local economic information, among other things, and visited the Partnership
Systems and representative portions of the general market area.
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Western did not visit the Anderson County System a second time in conducting the
Bring-Down Partnership Appraisal. However, it did review updated financial and
operating information provided by the Partnership with respect to the Anderson
County System.
Summary of Appraisals. Western appraised the Partnership's assets at
their fair market value on a going concern basis employing conventional
valuation techniques, utilizing both a market and an income (i.e., "discounted
cash flow") approach to arrive at values for the Partnership Systems,
reconciling the values resulting from such analyses to yield a final value.
In conducting a market analysis, Western evaluated the Partnership
Systems with respect to general operations, marketability, system construction,
opportunity for new revenues, demographics and competition, and took into
account differences between the Partnership and the industry generally. The
comparison of the Partnership Systems to similar properties that have recently
been sold in the market is an accepted appraisal methodology used to correlate
statistical indices with actual market results.
Western utilized information regarding number of subscribers and
per-subscriber values as such information was supplied by brokers or detailed in
announcements in the trade press and recent issues of the Cable TV Investor
Newsletter to determine appropriate market multiples to be applied to the
Partnership's cash flow for each Partnership System. In determining the market
multiples based on the guideline companies, Western also took into account a
number of variables, including size and location of the Partnership Systems.
Western's "income" approach was based on forecasts of net revenues and
expenses for the Partnership Systems over a projected ten-year period, using the
earnings history of the Partnership to forecast its expected performance.
Western then calculated the terminal value based on the resale value of the
Partnership Systems in year 10. The terminal value was then discounted to
present value using an average cost of capital discount rate. The discounted
cash flow and discounted terminal values were added to arrive at the estimate of
potential value for the Partnership Systems.
In reconciling the two values resulting from its application of the
two appraisal methodologies, Western gave considerably more weight to the values
generated by its discounted cash flow income analysis because such method
considers a broader range of factors that represent various sources of value
(both present and future). Western first calculated the value of the Partnership
Systems using discounted cash flow. It then calculated each of the Partnership
Systems' values using direct estimates of the multiples and per-subscriber
values it had selected.
In conducting the Bring-Down Partnership Appraisal, Western performed
substantially similar analyses, but with respect to the Anderson County System
only, and relied on updated financial and operating information provided by the
Partnership. Western concluded the estimated gross fair market value for the
Anderson County System as of March 31, 1996 to be $35,900,000.
Appraisal Costs. Western was paid $11,770 for the Initial Partnership
Appraisal and $3,000 for the Bring-Down Partnership Appraisal. In the event the
Partnership Transaction is consummated, the Partnership will be reimbursed by CC
II in the amount of $8,800, constituting 49.7% of Western's fees related to the
Initial Partnership Appraisal, plus all of its fees related to the Bring-Down
Partnership Appraisal, as contemplated by the Partnership Agreement. These
amounts represent that portion of the appraisal fees allocable to Western's
appraisal of the Anderson County System. Fees paid to Western were not
contingent upon the conclusion reached by it in its appraisal of the Partnership
Systems.
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CPLP Appraisal Process
Appraisals of the CPLP Systems were also commenced in April 1995 as a
means to determine the fair market value of each CPLP System in contemplation of
the sale of all or substantially all of the CPLP Systems. As described in "--
Relevant Provisions" above, the CPLP Partnership Agreement does not require an
appraisal of the CPLP Systems in connection with their sale except in the event
the purchaser is the general partner of CPLP and is buying the CPLP Systems
pursuant to its "buy-option," in which case only one nationally recognized cable
industry appraiser is required to conduct an appraisal on behalf of CPLP.
Nevertheless, two independent appraisals of the CPLP Systems were conducted in a
substantially similar manner to the appraisals conducted pursuant to the
Partnership Appraisal Process, as described above. The CPLP Appraisal Process
therefore exceeded the appraisal requirements set forth in the CPLP Partnership
Agreement.
Daniels and Western, the appraisers who conducted the Partnership
Appraisal Process, were similarly chosen to conduct the CPLP Appraisal Process.
Based on interviews with management, analysis of audited and interim unaudited
financial information and consideration of market factors, and in compliance
with the requirements described below, the appraisers independently reached a
valuation for all of CPLP's assets. Thereafter, Daniels and Western met,
compared their respective valuations of the CPLP Systems and the manner in which
such valuations had been calculated, and jointly determined an appraisal value
of the CPLP Systems in the aggregate, including the Three CPLP Systems (the
"Initial CPLP Appraisal").
The instructions and limitations set forth by CPI to the appraisers in
connection with the CPLP Appraisal Process were the same as those given to the
appraisers by the General Partner pursuant to the Partnership Appraisal Process.
See "-- Partnership Appraisal Process," above. While the appraisers were aware
that they would have to attempt ultimately to agree jointly on a valuation of
the CPLP Systems, they did not discuss with one another the assumptions or
methodologies they intended to use in appraising CPLP's assets prior to
conducting their respective appraisals, and CPI does not believe that the
objective of the appraisers to agree jointly on an appraisal, as instructed by
CPI, had any material impact on their respective appraisals.
CPI requested Daniels and Western to update their appraisals in regard
to each of the Three CPLP Systems after the CPLP Auction Process culminated in
the highest bids for each of the Three CPLP Systems being offered by an
affiliate of CPI. However, the highest bid with respect to the LaGrange System
had not been submitted by an affiliate of CPLP and, therefore an updated
appraisal was not requested for that system. See "-- The Auction Processes." CPI
instructed the appraisers to give due consideration to the same factors they had
analyzed in the Initial CPLP Appraisal when updating the Initial CPLP Appraisal,
except that the analysis was to be limited to the Three CPLP Systems. See "--
Relevant Provisions." Thereafter, Daniels and Western separately updated their
original appraisals of the Sanford System, the Abbeville System and the
Lincolnton System and reached the Abbeville System appraised values of
$4,100,000 and $3,950,000, respectively (the "Abbeville System Appraised
Values"), the Sanford System appraised value of $20,700,000 from each appraiser
(the "Sanford System Appraised Values") and the Lincolnton System appraised
values of $27,200,000 and $26,500,000, respectively (the "Lincolnton System
Appraised Values"), in each case as of March 31, 1996 (collectively, the
"Bring-Down CPLP Appraisals"). In the case of the Bring-Down CPLP Appraisals,
the General Partner did not require the appraisers to agree jointly on one
appraised value for each of the Three CPLP Systems in light of the fact that, in
conducting the Bring-Down CPLP Appraisals, both appraisers had independently
arrived at values which were lower than the respective purchase price for each
of such systems. Although both appraisers were aware of the bids which had been
submitted with respect to each of the Three CPLP Systems, neither appraiser
relied on such bids in determining values for the Bring-Down CPLP Appraisals.
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The full texts of the Daniels and Western appraisals with respect to
the CPLP Systems are set forth in Exhibit A-2 and should be read by the Limited
Partners in their entirety. The summaries set forth below do not purport to be a
complete description of the analyses performed by Daniels or Western in
rendering their respective appraisals. An appraisal is a complex analytical
process which is not necessarily susceptible to partial analysis or summary
description. Notwithstanding the two appraisers' use of standard appraisal
methods, there can be no assurance that a different appraisal procedure or
different appraisers using similar methods and analyzing similar data would not
generate a higher (or lower) valuation of the CPLP Systems, including the Three
CPLP Systems.
1. Daniels & Associates, L.P.
Daniels was chosen by CPI to appraise the CPLP Systems due to its
broad experience in the cable television industry, including the sale of
entities and assets relating to such industry and its familiarity with the CPLP
Systems. In March 1990, Daniels had represented the owners of the Abbeville,
South Carolina System in the sale of such system to CPLP. See "-- Partnership
Appraisal Process" for additional information regarding Daniels' background
qualifications and business relationship with affiliates of CPLP. In addition to
having conducted the appraisals, CPLP plans to continue to retain Daniels to
broker a sale of the LaGrange System and, in the event that the Transaction is
not approved or the CPLP Transaction is not consummated, to broker the sale of
each of the Three CPLP Systems.
Summary of Materials Considered. In connection with both the Initial
CPLP Appraisal and the Bring-Down CPLP Appraisals, Daniels reviewed, among other
things, current financial and operating information provided by CPLP and
demographic information concerning the various communities served by the CPLP
Systems. Daniels also conducted discussions with CPLP management, analyzed
historical financial and operating information (including but not limited to the
amount of capital expenditures which the CPLP Systems will require in the next
several years), and prepared forecasts of financial and operating results based
on such historical information. In conducting the Initial CPLP Appraisal,
Daniels made due diligence visits to each of the CPLP Systems and reviewed the
impact of the 1992 Cable Act and the anticipated effects of the
Telecommunications Act on each CPLP System's current and forecasted financial
performance.
Summary of Appraisals. Daniels appraised the CPLP Systems on a going
concern basis, in accordance with two standard appraisal techniques, utilizing
(i) a ten-year discounted cash flow analysis and (ii) an analysis of relevant
market multiples derived from comparable private market cable transactions. Its
valuation assumed the CPLP Systems have been and will be operated as efficiently
as comparable cable systems, and that the franchises and leases of assets used
in the operation of the CPLP Systems will be renewed indefinitely without
material changes, other than rebuild requirements.
In its discounted cash flow analysis, Daniels prepared detailed
operating and financial (including 10-year revenue, cash flow and capital
expenditures) forecasts on an operating group basis, incorporating the critical
elements of operating revenues (e.g., homes passed, subscriber penetration
levels, rates and non-subscriber based income sources) and expenses (e.g.,
assumed rates of inflation, adjusted for each CPLP System's respective
characteristics and circumstances, costs of construction of new plant,
maintenance, upgrades/rebuilds and replacement of equipment and vehicles).
Daniels forecast a residual value based on growth of the CPLP Systems'
tenth-year cash flow into perpetuity, discounted back to the present at the same
rate as the discount rate applied to the forecasted cash flow.
The discount rate used by Daniels was based on the approximate
weighted average cost of capital (the investment return required to satisfy all
of an entity's debt and equity investors). Such
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rate was determined by Daniels based on information relating to comparable
private equity investments in and debt financings of properties similar to the
CPLP Systems.
Residual value multiples were determined assuming cash flow growth
into perpetuity equal to approximately 50% of the average cash flow growth rate
over the final two years of the forecast period.
Daniels undertook an analysis of comparable private market sales in
the past two years of similar and similarly situated cable television systems to
correlate its findings using the discounted cash flow appraisal method with the
realities of the marketplace. For purposes of its analysis, Daniels divided the
CPLP Systems into two groups, consisting of mid-size and small CPLP Systems. In
its Initial CPLP Appraisal, Daniels reviewed 16 comparable transactions for the
sale of mid-size and small cable television systems. Using the average of market
multiples of operating cash flow and price per subscriber derived from sales of
comparable systems, Daniels applied such multiples to the CPLP Systems. In
conducting each of its Bring-Down CPLP Appraisals, Daniels reviewed six or seven
transactions for systems it deemed comparable in size, markets and technical
condition to the system being reviewed. The cable property sales used by Daniels
as a basis for comparison with the CPLP Systems and each of the Three CPLP
Systems are described more fully in Daniels' appraisals, copies of which are
included in Exhibit A-2.
As a result of its analyses in the Initial CPLP Appraisal, Daniels
determined an estimated fair market value of all of the cable operating assets
of CPLP as of March 31, 1995 for 35,655 subscribers, and calculated a weighted
average of $1,708 per subscriber. In its appraisal report, Daniels indicates
that it believes the valuation, expressed as a multiple of the annualized
operating cash flow for the three-month period ending March 31, 1995, is not
inconsistent with multiples derived in transactions involving large groups of
subscribers.
The Bring-Down CPLP Appraisals were substantially similar in method to
the Initial CPLP Appraisal, although they each related to one of the Three CPLP
Systems only. After conducting analyses involving both a discounted cash flow
analysis and a comparison of comparable transactions for its Bring-Down CPLP
Appraisals, Daniels determined an estimated aggregate gross fair market value of
the Abbeville System, Sanford System and Lincolnton System as of March 31, 1996
to be $4,100,000, $20,700,000 and $27,200,000, respectively and calculated a
respective value per subscriber of $1,563, $1,600 and $1,848, respectively.
Appraisal Costs. Daniels was paid a total fee of $100,000 for the
Initial CPLP Appraisal and $15,000 for all of the Bring-Down CPLP Appraisals.
None of the fees paid to Daniels were contingent upon the conclusions reached by
Daniels as to the value of the CPLP Systems.
2. Western Cablesystems, Inc.
Western was the appraiser appointed by the AAA to review the CPLP
Systems. For summary background information about Western, see "-- Partnership
Appraisal Process," above.
Summary of Materials Considered. In conducting both the Initial CPLP
Appraisal and the Bring-Down CPLP Appraisals, Western reviewed audited and
unaudited financial statements, as well as other data provided by management. In
addition, during the Initial CPLP Appraisal, Western interviewed various CPLP
management personnel at length to obtain additional data as to subscriber
history, technical data, demographics, and local economic information, among
other things, and visited the CPLP Systems and representative portions of the
general market area. Western did not visit the Three CPLP Systems a second time
in conducting the Bring-Down CPLP Appraisals, however, it did
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review updated financial and operating information provided by CPLP with respect
to each of the Three CPLP Systems.
Summary of Appraisals. Western appraised CPLP's assets at the fair
market value on a going concern basis employing conventional valuation
techniques, utilizing both a market and an income (i.e., "discounted cash flow")
approach to arrive at values for the CPLP Systems, reconciling the values
resulting from such analyses to yield a final value.
In conducting a market analysis, Western evaluated the CPLP Systems
with respect to general operations, marketability, system construction,
opportunity for new revenues, demographics and competition, and took into
account differences between CPLP and the "guideline" companies. The comparison
of the CPLP Systems to similar properties that have recently been sold in the
market is an accepted appraisal methodology used to correlate statistical
indices with actual market results.
Western utilized information regarding number of subscribers and
per-subscriber values as such information was supplied by brokers or detailed in
announcements in the trade press and recent issues of the Cable TV Investor
Newsletter to determine appropriate market multiples to be applied to CPLP's
cash flow for each CPLP System. In determining the market multiples based on the
guideline companies, Western also took into account a number of variables,
including size and location of the CPLP Systems.
Western's "income" approach was based on forecasts of net revenues and
expenses for the CPLP Systems over a projected ten-year period, using the
earnings history of CPLP to forecast its expected performance. Western then
calculated the terminal value based on the resale value of the CPLP Systems in
year 10. The terminal value was then discounted to a present value using an
average cost of capital discount rate. The discounted cash flow and discounted
terminal values were added to arrive at the estimate of potential value of the
CPLP Systems.
In reconciling the two values resulting from its application of the
two appraisal methodologies, Western gave considerably more weight to the values
generated by its discounted cash flow income analysis because such method
considers a broader range of factors that represent various sources of value
(both present and future). Western first calculated the value of the CPLP
Systems using discounted cash flow. It then calculated each CPLP System's value
using direct estimates of the multiples and per-subscriber values it had
selected.
In conducting the Bring-Down CPLP Appraisals, Western performed
substantially similar analyses with respect to each of the Three CPLP Systems,
instead of all of the CPLP Systems, and relied on updated financial and
operating information provided by CPLP. Western concluded the estimated fair
market value for the Abbeville System, the Sanford System and the Lincolnton
System as of March 31, 1996 to be $3,950,000, $20,700,000 and $26,500,000,
respectively.
Appraisal Costs. Western was paid $16,000 for the Initial CPLP
Appraisal and $12,000 for the Bring-Down CPLP Appraisals. Fees paid to Western
were not contingent upon the conclusion reached by it in its appraisal of the
CPLP Systems.
The Auction Processes
Partnership Auction Process
The Partnership Auction Process was commenced in October 1995 upon the
determination by the General Partner that an auction process, although not
required by the Partnership
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Agreement, would provide a successful and expeditious method for attracting
potential purchasers and liquidating the Partnership Systems at prices it
expected to be reflective of the Partnership Systems' fair market value. The
Partnership Agreement grants the General Partner full discretion in effecting a
liquidation of the Partnership after taking into account the condition of the
relevant markets and general financial and economic conditions.
The General Partner hired Daniels, one of the appraisers in the
Partnership Appraisal Process, to conduct the Partnership Auction Process on
behalf of the Partnership based on Daniels' experience as a broker, its
expertise in soliciting bids and conducting auctions, its familiarity with the
Partnership Systems and its knowledge of the cable television industry in the
Partnership Systems' geographic area. Daniels was instructed by the General
Partner to set up a competitive, open bid process so that the General Partner's
right to bid would not be or be viewed as a right of final bid, thereby acting
to chill bidding by unaffiliated third parties. See "-- Relevant Provisions."
Daniels commenced the Partnership Auction Process by identifying
approximately seventy potential purchasers for the Partnership Systems based on
several factors, including its general knowledge of the industry, information as
to other cable system operators in the geographic areas serviced by the
Partnership Systems and information regarding other cable system operators
interested in expanding their operations in or into the areas served by the
Partnership Systems through additional system acquisitions. Daniels then
prepared and distributed a Confidential Memorandum (the "Confidential
Memorandum") to the prospective purchasers, which included summary statistical,
descriptive and other financial information regarding the Partnership Systems.
Instructions outlining rules governing procedures for participation in the
Partnership Auction Process were forwarded to prospective purchases who had
received the Confidential Memorandum. These instructions provided that all third
party bids be submitted to Daniels by a final bid date chosen by it. Within 48
hours after the final bid date, the General Partner (or one of its affiliates)
could then bid, so long as such bid exceeded the highest third party bid by at
least 0.5%. Subsequently, the highest third party bidder would be notified that
it had placed the highest third party bid and, if applicable, that the General
Partner (or one of its affiliates) had submitted a topping bid. Following such
notification of a topping bid being placed by the General Partner (or one of its
affiliates), the third party bidder could then submit a topping bid within 48
hours. This process was intended to continue until one of the bidders either
declared its intention to exit the bidding process or failed to respond to the
last bid with a topping bid within the 48-hour time limit.
As is customary in auctions, the appraised value of the Partnership
Systems was not included in the Confidential Memorandum, nor was such
information otherwise disseminated to the prospective third party purchasers.
However, such information was used by the General Partner in evaluating the
merit of bids made with respect to certain of the Partnership Systems pursuant
to the Partnership Auction Process. The General Partner was required to bid at
or higher than the appraised value due to the Partnership Agreement provisions
that prohibit a sale of assets to the General Partner or its affiliates for less
than their appraised value.
As a result of Daniels' solicitation, two competing bids were received
in regard to the Anderson County System from the General Partner and another
interested prospective purchaser during the initial round of bidding.
Thereafter, the two prospective purchasers entered into a topping bid process in
which four additional bids were submitted, which bids ranged in price from
$35,501,000 to $36,700,000, with the highest bid being submitted by the General
Partner. After the last bid was submitted by the General Partner for
$36,700,000, the competing bidder informed Daniels that it was not in its best
interests to continue bidding and that it would not be revising its previous
offer. Daniels closed the Partnership Auction Process with respect to the
Anderson County System after no bids higher
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than the Anderson County System Purchase Price were submitted with respect to
the Anderson County System during the 48-hour counter-bid period.
The Partnership Auction Process resulted in an Anderson County System
Purchase Price of $36,700,000 for the Anderson County System after three rounds
of bidding; the Anderson County System Purchase Price exceeds by $218,000 the
next highest bid received by Daniels for the Anderson County System.
Additionally, the Anderson County System Purchase Price exceeds the appraised
values of $35,900,000 and $36,000,000 determined pursuant to the Bring-Down
Partnership Appraisal as of March 31, 1996.
Except with respect to the Jasper Cluster and the Marlin Cluster,
other bids submitted to date with respect to the remaining Partnership Systems
are viewed by the General Partner to be inadequate when comparing the relative
value of the systems as to which such bids were submitted to the appraisal value
of all of the Partnership Systems as a group. Accordingly, except with respect
to the Jasper Cluster and the Marlin Cluster, these bids have not been accepted
by the General Partner. Although the General Partner intends to liquidate the
Partnership as expeditiously as possible, based on the bids submitted during the
Partnership Auction Process, the General Partner does not believe a sale or
sales of the remaining Partnership Systems at this time would be in the best
interests of the Partnership or the Limited Partners. The General Partner is
also not interested in buying the remaining Partnership Systems at this time as
such purchases do not fit its strategic objectives. The General Partner intends
to continue to operate the Partnership while it actively seeks purchasers for
the remaining Partnership Systems, including by having Daniels continue to
conduct the Partnership Auction Process.
CPLP Auction Process
The CPLP Auction Process was commenced simultaneously with the
commencement of the Partnership Auction Process and was similarly conducted by
Daniels. Daniels also conducted the CPLP Auction Process in a substantially
similar manner as it had conducted the Partnership Auction Process, including
disseminating Confidential Memoranda and following similar procedures with
respect to bids submitted for the CPLP Systems. For further details regarding
the process of bidding and counterbidding, see "-- Partnership Auction Process,"
above.
As a result of Daniels' solicitation, three rounds of bids were
submitted with respect to the Sanford System by two prospective purchasers. The
bids ranged from $19,000,000 to $20,750,000, with the highest bid ultimately
being submitted by CPI on behalf of CP I. Four competing bids, one of which was
later withdrawn, were initially received in regard to the Lincolnton System from
four interested prospective purchasers. The Proposed Purchasers then submitted a
second bid to top the original bidding round. This second bid was the highest
bid received, and the bids ranged in price from $20,000,000 to $27,500,000.
Although a Letter of Intent submitted by the Proposed Purchaser at the highest
bid price for the Lincolnton System was executed, that Letter of Intent expired,
and the parties, by mutual agreement, decided not to continue with negotiations.
At that time, CC I "stepped into the shoes" of the Proposed Purchaser and
entered into a purchase agreement for the sale of the Lincolnton System, which
purchase agreement it subsequently assigned to CC II. Three rounds of bids were
submitted by two prospective purchasers with respect to the Abbeville System,
ranging in price from $4,000,000 to $4,200,000. Finally, two bids were initially
received from two prospective purchasers with respect to the LaGrange System,
one of which was based on a multiple of cash flow and the other for $7,815,000.
A third bid for a fixed amount, $9,000,000, was then submitted by the proposed
purchaser to replace the prior bid based on a multiple of cash flow. At this
time, further negotiations are ongoing with respect to the LaGrange System. See
"BUSINESS OF THE PARTNERSHIP AND CPLP -- Description of Systems; Property
Relating to Systems" for additional information regarding the CPLP Systems.
15
<PAGE>
The CPLP Auction Process resulted in the Abbeville System Purchase
Price which exceeds by $79,500 the next highest bid received by Daniels for the
Abbeville System and exceeds by $100,000 the higher of the two Abbeville System
Appraised Values, and the Sanford System Purchase Price, which exceeds by
$145,000 the second highest bid received by Daniels for the Sanford System and
exceeds by $50,000 the higher of the two Sanford System Appraised Values. The
Lincolnton System Purchase Price exceeds by $300,000 the higher of the two
Lincolnton System Appraised Values.
16
<PAGE>
Costs of the Transaction
The following table sets forth the estimated expenses incurred or to
be incurred in connection with the Transaction. These estimated expenses reflect
only those fees and expenses related to the sale of the Anderson County System,
the Lincolnton System, the Sanford System and the Abbeville System.
Legal fees and expenses ........................ $ 500,000*
Accounting fees and expenses ................... 120,000*
Appraisal fees and expenses .................... 206,500
Brokerage fees and expenses .................... 615,000
Solicitation and other fees and expenses ....... 20,000
Printing and mailing costs ..................... 125,000
-----------
SUBTOTAL ....................................... $ 1,586,500
===========
Less fees and expenses to be reimbursed by CC II
if the Partnership Transaction is approved and
consummated
Appraisal fees and expenses .................... (206,500)
-----------
TOTAL $ 1,380,000
===========
* Includes fees for preparation of this Disclosure Statement.
All of the above expenses incurred in connection with the Transaction
will be paid by the Partnership except, if the Partnership Transaction is
consummated, for the appraisal fees and expenses attributable to the sale of the
Anderson County System. In accordance with the terms of the Partnership
Agreement relating to a purchase of assets by the General Partner or one or more
of its affiliates, appraisal costs attributable to the assets being sold to the
General Partner or its affiliate will be borne by the General Partner or such
affiliate in the event the sale is consummated.
Certain Effects of the Transaction
Use of Proceeds of the Partnership Transaction. The net proceeds from
the Partnership Transaction (after payment of expenses relating to such
transaction) will be used, first, to repay a portion of the Partnership's
outstanding senior indebtedness ($38,900,000 as of June 30, 1996) and to pay
certain Partnership expenses and certain accrued but unpaid management fees and,
thereafter, to pay a catch-up distribution to the Limited Partners in accordance
with the terms of the Partnership Agreement, as more fully set forth below. It
is currently anticipated that the Partnership will be required to repay
approximately $21,000,000 of its senior indebtedness and it is estimated that,
thereafter, the aggregate net cash proceeds from the Partnership Transaction
which will be available for distribution by the Partnership to the Limited
Partners will be approximately $15,291,000 (or approximately $148 per LP Unit)
before transaction expenses and deferred management expenses. However, such
distribution may be greater or smaller depending on whether the General
Partner's negotiations with its bank lenders are more or less favorable than
currently anticipated.
The partners may be subject to federal income tax on the income or
gain (if any) resulting from the Partnership Transaction. See "SELECTED
UNAUDITED PRO FORMA FINANCIAL INFORMATION" and "FEDERAL INCOME TAX CONSEQUENCES"
below.
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<PAGE>
Assuming the Consent to the Transaction is obtained, the Partnership
expects to complete the Partnership Transaction and make the catch-up
distributions to the Limited Partners as soon as practicable after November 30,
1996, following the expected receipt of required regulatory approvals. The
distributions will represent a "catch-up" payment on the aggregate return of 11%
(less prior distributions), accruing from the issuance date of the LP Units
through the payment date, payable to each Limited Partner under the Partnership
Agreement. Provided that the Partnership's Credit Agreement (as defined below)
is renegotiated on favorable terms, then regular quarterly distributions to the
Limited Partners should recommence from available cash flow from operations. If
any subsequent net proceeds result from the continued liquidation of the
Partnership, distributions are expected to be made as such proceeds become
available.
The following table sets forth the estimated net proceeds of the
Partnership Transaction and the Partnership's anticipated use of the proceeds
thereof. There can be no assurance, however, that the actual proceeds available
to be applied to the items below will not differ from these estimated amounts:
<TABLE>
<S> <C>
Contract Sales Price of the Anderson County System ....................... $ 36,700,000
Less: Estimated working capital adjustment as of
June 30, 1996 ................................................. $ (409,000)
Estimated repayment of debt ..................................... $(21,000,000)
Estimated transaction expenses (estimated through consummation of
the Partnership Transaction) .................................. $ (1,380,000)
Estimated payment of deferred management fees, net
of note receivable from General Partner ....................... $ (491,000)
------------
Estimated Net Proceeds Available for Distribution to the Partners from the
Sale of the Anderson County System ...................................... $ 13,420,000
============
</TABLE>
Use of Proceeds of the CPLP Transaction. The net proceeds from the
CPLP Transaction (after payment of expenses related to such transaction) will be
used, first, to repay the CPLP Credit Facility and other CPLP debts and expenses
and, thereafter, to make distributions to CPLP's partners.
<TABLE>
<S> <C>
Contract Transaction Price of the Three CPLP Systems ..................... $ 52,450,000
Less: Estimated working capital adjustment as of June 30,
1996 .......................................................... $ (472,000)
Estimated repayment of debt ..................................... $(34,957,500)
Estimated payment of deferred management fees ................... $ (2,545,000)
------------
Estimated Net Proceeds Available for Distribution to the
Partners from the Sale of the Three CPLP Systems........................ $ 14,475,500
============
Special Limited Partner's Share-- Charter.............................. $ 5,280,300
Limited Partners' Share:
CCIP II...................................................... $ 7,727,000
Charter...................................................... $ 1,329,100
General Partner's Share................................................ $ 139,100
</TABLE>
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<PAGE>
Use of Proceeds of the Transaction. The net proceeds from the
Transaction after payment of expenses related to the Transaction and various
other distributions (as set forth above) will be used to make distributions to
the Limited Partners. Any distribution to the Limited Partners of the net
proceeds is expected to occur as soon as possible after November 30, 1996 (or
such later date as the Transaction closes) following required receipt of
expected regulatory approvals.
<TABLE>
<S> <C>
Estimated Net Proceeds Available for
Distribution to the Partnership from the CPLP
Transaction............................................................. $ 7,727,000
Estimated Net Proceeds Available for
Distribution to the Partners from the Partnership
Transaction ............................................................ $ 13,420,000
Estimated Aggregate Net Proceeds Available for
Distribution to the Partners from the
Transaction ............................................................ $ 21,147,000(2)
Approximate 11% Limited Partners' Preferred Return.................... $ 21,147,000(3)
Limited Partners' Share per LP Unit................................ $ 233
General Partner's Share............................................... $ 0
</TABLE>
A detailed discussion of the anticipated financial consequences of the
Transaction is set forth below under the caption "SELECTED UNAUDITED PRO FORMA
FINANCIAL INFORMATION." All Limited Partners should review carefully the
selected unaudited pro forma financial statements and notes thereto.
Effects of the Transaction. If the Transaction is approved and the
Partnership Transaction is consummated, the Partnership will have sold
Partnership Systems representing approximately 45% of its basic subscribers and
CPLP will have sold CPLP Systems representing approximately 83% of its basic
subscribers. Additionally, the Limited Partners will have no ownership interest
in the future operations of the Anderson County System or the Three CPLP
Systems.
Failure to Consummate the Transaction. If the Partnership Transaction
is not consummated (either due to the failure to obtain the Consent to the
Transaction or because other conditions to closing the Partnership Transaction
are not satisfied), it is currently the General Partner's intention to continue
operating the Anderson County System while seeking an alternative buyer or
buyers, either for the entire Anderson County System, or for individual clusters
of the Anderson County System or together with other Partnership Systems. There
can be no assurance that the General Partner will be able to arrange for any
such alternative sale of the Anderson County System on terms which are as
favorable as, or more favorable than, those offered by CC II for the Anderson
County System, or on terms which are otherwise acceptable to the Partnership.
Any sale to a third party will be, in accordance with the Partnership Agreement,
subject to a right of the General Partner to submit a bid in respect of such
property. See "-- Relevant Provisions."
Similarly, if the CPLP Transaction is not consummated (either due to
failure to obtain the Consent to the Transaction or because other conditions to
closing the CPLP Transaction are not satisfied), CPI will continue to operate
the Three CPLP Systems and the LaGrange System while seeking an alternative
buyer or buyers. As with the Anderson County System, no assurances can be made
that CPI will be able to arrange for an alternative sale of the Three
- - - --------
(2) If negotiations with its bank lenders are less favorable than currently
anticipated the estimated distributions from the Transaction would be reduced.
If the Partnership were required to repay all of its Senior Indebtedness, the
estimated distributions from the Transaction would be reduced to $3,247,000.
(3) Includes $406,818 to be paid to Charter as a Limited Partner holding 1,746
LP Units.
19
<PAGE>
CPLP Systems (individually or together) on terms which are as, or
more favorable than, those offered by the Purchasing Affiliates for the Three
CPLP Systems. Any sale to a third party will be, in accordance with the CPLP
Partnership Agreement, subject to a right of first refusal by the Partnership
and, thereafter, if such right is not exercised, subject to a right of first
refusal by CPI.
Recommendation of the General Partner; Fairness of the Transaction
The General Partner recommends that the Limited Partners vote to
approve the Transaction based on its belief that the Transaction is fair and in
the best interests of the Partnership, CPLP and the Limited Partners. However,
because the proposed purchasers of the Anderson County System and the Three CPLP
Systems are affiliates of the General Partner and CPI, the General Partner's
recommendation with respect to the Transaction is subject to a direct conflict
of interest. The General Partner would indirectly benefit if the Partnership's
and CPLP's assets were sold to the Purchasing Affiliates at the lowest possible
price. Notwithstanding this conflict of interest, upon their investment in the
Partnership, the partners expressly agreed that the Partnership assets may be
sold to affiliates of the General Partner. Furthermore, the CPLP Partnership
Agreement expressly contemplates a sale of CPLP's assets to the Partnership, CPI
or their affiliates.
The General Partner believes, based on there having been a competitive
auction and independent appraisals, and its knowledge of and experience in the
cable television industry, that the Anderson County System Purchase Price and
the Three CPLP Systems Purchase Price are fair, from a financial point of view,
to the Partnership and the Limited Partners. The General Partner also believes
that the Transaction is fair to and in the best interests of the Partnership and
the Limited Partners based on its consideration of the following factors, all of
which it believes support its determination:
(i) the Auction Processes, including the receipt of several rounds of competing
bids from unaffiliated potential purchasers, is a reliable indicator of fair
market value (see "-- The Auction Processes");
(ii) the purchase price for each of the systems proposed to be sold
exceeds each such system's respective appraised values, as determined pursuant
to the Appraisal Processes;
(iii) the Transaction will not occur absent the Consent of Limited
Partners holding a majority of the LP Units (less than .02% of which are owned
by affiliates of the General Partner);
(iv) the Transaction is being conducted in accordance with the terms
of the Partnership Agreement, which includes a specified appraisal process; in
addition, special outside counsel has been hired on behalf of the Limited
Partners to monitor compliance with the Partnership Agreement;
(v) an affiliate sale was contemplated by the partners upon their
investment in the Partnership, and potential conflicts inherent in such a sale
were disclosed to the Limited Partners prior to their initial investment in the
Partnership;
(vi) the expiration of the Partnership's term on December 31, 1995,
and the requirement that the Partnership's assets be liquidated upon such
expiration (see "-- Timing of the Transaction"); and
(vii) the requirement by CPLP's senior bank lenders that the CPLP
Credit Facility be repaid in accordance with its terms and the necessity to
liquidate CPLP's assets to fulfill such requirement. See "-- Timing of the
Transaction."
20
<PAGE>
The General Partner did not rely on "liquidation value" in making its
determination of fairness, as liquidation value is customarily determined on the
premise that business operations will not be continued. Liquidation value was
not considered relevant for purposes of determining (and accordingly was not
considered in determining) the appraised values of any of the Anderson County
System or the Three CPLP Systems, particularly in light of the Partnership
Agreement's requirement that Partnership assets be valued on a "going concern"
basis for purposes of a sale to the General Partner or any of its affiliates and
the CPLP Partnership Agreement's requirement that the CPLP Systems be valued on
a "going concern" basis when conducting any appraisal thereof. There can be no
assurance that the liquidation value of any of the Anderson County System, the
Abbeville System, the Sanford System or the Lincolnton System would have been
less than the Anderson County System Appraised Values, the Abbeville System
Appraised Values, the Sanford System Appraised Values or the Lincolnton System
Appraised Values, respectively. The book value of the Anderson County System and
the Three CPLP Systems is also not relevant for valuation purposes in light of
the valuation requirements set forth in the Partnership Agreement or the CPLP
Partnership Agreement.
The General Partner also did not consider historical or current market
prices for the LP Units or the CPLP limited partnership units ("CPLP Units") in
assessing the fairness of the Transaction. Although there is no established
trading market for the LP Units, a small secondary market for such securities
does exist; no market exists for the CPLP Units. The General Partner does not
have access to reliable information about current or historical secondary market
prices for such securities. The General Partner believes that any sales of LP
Units or CPLP Units in such secondary markets are effected at significantly
discounted prices, however, due to the relative illiquidity of these interests.
The General Partner also believes that even if information were available with
respect to secondary market trading, due to deep discounting, trading prices
might not be indicative of the actual value of the Anderson County System.
The General Partner believes that an additional procedure followed by
the Partnership and CPLP reinforces the fairness of the Transaction. Despite the
fact that neither the Partnership Agreement nor the CPLP Partnership Agreement
required it to do so, both the General Partner and CPI retained Husch &
Eppenberger to act as special outside legal counsel on behalf of the Limited
Partners in connection with the Transaction. Husch & Eppenberger has
approximately 135 attorneys in four offices across the midwest United States, is
expert in handling sophisticated commercial matters, and has substantial
experience with limited partnerships and the cable television industry. The
General Partner retained Husch & Eppenberger in order to ensure that the
Partnership Appraisal Process and the Transaction would be fair to the Limited
Partners and to protect the rights of the Limited Partners in connection with
the Transaction. Husch & Eppenberger was instructed to oversee compliance by the
Partnership and the General Partner with the terms and provisions of the
Partnership Agreement relating to the Partnership's liquidation process, the
Transaction and the Partnership Appraisal Process. Husch & Eppenberger also
assisted the AAA in its selection of the second appraiser, reviewed the General
Partner's compliance with the terms of the Partnership Agreement relating to the
rights of the Limited Partners and monitored and participated in the preparation
of this Disclosure Statement (including by reviewing relevant documents and
participating in telephone conferences relating to the Disclosure Statement). As
a condition to the closing of the Partnership Transaction or any of the sales of
the CPLP Systems pursuant to the CPLP Transaction, Husch & Eppenberger will
provide: (i) an opinion that the Partnership Appraisal Process and the
Partnership's solicitation of Consent have each been completed and that the
Partnership Transaction complies with the Partnership Agreement and (ii) an
opinion that the CPLP Appraisal Process has been completed and that the CPLP
Transaction satisfies the CPLP Partnership Agreement. A form of each such
opinion is attached to this Disclosure Statement as Exhibit B. The fees of Husch
& Eppenberger (totalling approximately $75,000) will be paid by the Partnership.
Husch & Eppenberger has previously been engaged by an affiliate of the General
Partner to give a
21
<PAGE>
similar opinion with respect to the liquidation of CCIP, for compensation
totalling approximately $65,000.
In addition to its determination that the terms of the Transaction and
the prices offered in such sales are fair, the General Partner considered a
number of other factors in deciding to recommend that the Limited Partners
approve the Transaction. Among these is the fact that sales to the Purchasing
Affiliates will enable a higher percentage of sale proceeds of the Transaction
to be initially available for distribution to the Limited Partners because the
affiliate purchasers will not require a special indemnification holdback. As
evidenced by the terms of the Asset Purchase Agreements governing the proposed
sales to be made in the Transaction, copies of which Asset Purchase Agreements
(along with a copy of the assignment of the Lincolnton System Purchase Agreement
from CC I to CC II) are attached as Exhibit C to this Disclosure Statement (the
"Purchase Agreements"), neither the Partnership nor CPLP is required to make
representations and warranties regarding the Anderson County System's or the
Three CPLP Systems' assets and operations because the General Partner and CPI
currently manage such systems, and therefore have extensive knowledge as to such
assets and the operation thereof. Consequently, neither the Partnership nor CPLP
will need to hold in reserve any portion of the purchase price paid for the
Anderson County System or the Three CPLP Systems to fund indemnification
obligations for breaches or inaccuracies in any such representations and
warranties.
In light of the foregoing and the recent expiration of the
Partnership's term, the General Partner believes the Partnership Transaction
would comply with the Partnership Agreement and, following receipt of the
Consent, can be completed on an expedited basis. Furthermore, in light of the
foregoing and the requirement by CPLP's bank lenders that CPLP liquidate its
assets, the General Partner believes the CPLP Transaction to be in the best
interests of the Partnership, CPLP and the Limited Partners at this time. Based
on its consideration of the foregoing factors and the considerations and
circumstances described hereunder and under "-- The Appraisal Processes; Summary
of Appraisals," on May 30, 1996, the Board of Directors of the General Partner
approved the Partnership Transaction unanimously, and the Board of Directors of
CPI approved the CPLP Transaction unanimously. Accordingly, the General Partner
recommends that the Limited Partners vote to approve the Transaction.
MATERIAL TERMS OF THE TRANSACTION
Prices
Pursuant to the terms of the Partnership Agreement, the aggregate
purchase price in the Partnership Transaction must not be less than the Anderson
County System Appraised Values (i.e., $35,900,000 and $36,000,000). The Anderson
County System Purchase Price is $36,700,000, exceeding the higher of the two
Anderson County System Appraised Values by $700,000. The Three CPLP Systems
Purchase Price is $52,450,000, exceeding the aggregate values determined
pursuant to the Bring-Down CPLP Appraisals (i.e., $51,150,000 and $52,000,000).
The Purchase Agreements
Purchase Agreements for the Anderson County System, the Lincolnton
System and the Sanford System were entered into as of May 30, 1996, and a
Purchase Agreement for the Abbeville System was entered into as of April 26,
1996. Each of the Purchase Agreements contains representations by the
Partnership or CPLP, as the case may be, relating to the organization and
standing of the Partnership or CPLP, the power and authority of the Partnership
or CPLP to effect the sale or sales thereunder and the due authorization and
enforceability of each of the Purchase Agreements by and
22
<PAGE>
against the Partnership or CPLP, respectively. No other representations have
been or will be made by or on behalf of the Partnership or CPLP in connection
with the Transaction, nor will any proceeds of sale be reserved by the General
Partner in connection therewith. Copies of the Anderson County System Purchase
Agreement and each of the Three CPLP Systems' Purchase Agreements have been
attached as Exhibit C to this Disclosure Statement.
The Purchasing Affiliates intend to seek financing for their purchases
of the Anderson County System and the Three CPLP Systems, and the Purchase
Agreements include a financing contingency as a condition to its purchase
obligations. The Purchasing Affiliates intend to borrow the Anderson County
System Purchase Price and the Three CPLP Systems Purchase Price to consummate
the acquisition of the Anderson County System and the Three CPLP Systems by
increasing their existing bank credit facilities. The Purchasing Affiliates have
held preliminary discussions with their principal lenders regarding the proposed
terms of their loans, but no definitive commitments or final term sheets have
been agreed upon at this time. The Purchasing Affiliates do not expect to have
any difficulty obtaining the required financing. In this regard, it should be
noted that in the last three years the Purchasing Affiliates and their
affiliates have financed and completed the acquisition of cable television
systems valued at approximately $1.5 billion in the aggregate.
Whereas all of the Purchase Agreements contain a financing
contingency, only the Anderson County System's Purchase Agreement has a Consent
contingency, which would prevent the Partnership Transaction from going forward
in the event the Consent of the Limited Partners to the Partnership Transaction
is not obtained.
The Purchase Agreements also include provisions requiring the
Partnership or CPLP, as the case may be, to indemnify the Purchasing Affiliates
against any and all claims, damages, losses, costs, expenses (including
reasonable legal, accounting and experts' fees and other fees and expenses
incurred in the investigation or defense of any of the following, and any
interest and penalties), obligations and liabilities incurred or suffered, as a
result of, arising in connection with or relating to any and all claims of third
parties (including the claims of Limited Partners) against, relating to or
pertaining to the Partnership and the Anderson County System or CPLP and the
respective CPLP Systems, as the case may be, which arise in connection with or
relate to the Partnership Transaction or any of the sales effected pursuant to
the CPLP Transaction, and/or the authority of the Partnership or CPLP, as the
case may be, to enter into and consummate such transactions and/or the propriety
of such transactions. Other indemnity obligations of the Partnership and CPLP
are described under "-- Indemnification" below.
The Transaction will be effected pursuant to the Purchase Agreements
and one or more bills of sale and assignment and assumption agreements. The
Purchase Agreements contain the terms described above as well as the conditions
described under "-- Conditions to Closing" below.
Conditions to Closing
Consummation of the Partnership Transaction and the sale of each of
the Three CPLP Systems are subject to certain conditions, including without
limitation, the following material conditions: (i) obtaining regulatory
approvals and approvals from local franchising authorities, where required; (ii)
obtaining the Consent of the Limited Partners; (iii) absence of material pending
or threatened litigation with respect to the Anderson County System or the
Partnership Transaction, or any of the Three CPLP Systems or the CPLP
Transaction, respectively; and (iv) receipt of required financing. The
consummation of the Partnership Transaction or any of sales of the Three CPLP
Systems are not contingent upon one another.
23
<PAGE>
The waiting period under the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, as amended (the "HSR Act") in respect of the Transaction has
already expired. Some of the approvals required under subparagraph (i) above
have already been obtained and others will be requested immediately following
approval of the Transaction by the Limited Partners. Third party approvals are
expected to be obtained approximately 120 days after Consent is obtained. It is
expected that the sales contemplated by the Purchase Agreements will close
promptly after obtaining Consent. See "-- Regulatory Approvals" below.
Antitrust Approvals
Under the HSR Act and the rules promulgated thereunder by the Federal
Trade Commission (the "FTC"), the Partnership Transaction and the CPLP
Transaction may not be consummated until notification has been given and certain
information has been furnished to the FTC and the Antitrust Division of the
Department of Justice (the "Antitrust Division") regarding such Transaction.
Pursuant to the HSR Act, the required notification and report forms were filed
with the FTC and the Antitrust Division. Early termination of the statutory
thirty-day waiting period was granted on August 7, 1996.
At any time before or after the consummation of the Partnership
Transaction or the CPLP Transaction, and notwithstanding the early termination
of the waiting period under the HSR Act in respect of the Transaction, state
antitrust and other governmental authorities may take such action under the
antitrust laws as they deem necessary or desirable in the public interest. Such
action might include seeking to enjoin the consummation of either or both of the
Partnership Transaction or the CPLP Transaction or requiring the divestiture by
the Purchasing Affiliates of all or part of the assets acquired. Private parties
may also seek to take legal action under the antitrust laws under certain
circumstances.
Indemnification
The Partnership Agreement provides that each of the General Partner
and each affiliate of the General Partner which performed services on behalf of
the Partnership is entitled to be indemnified for any liability or loss incurred
by it in connection with the business of the Partnership if such party acted in
good faith and in a manner it reasonably believed to be in the best interests of
the Partnership, provided the relevant party's conduct did not constitute
negligence or misconduct. The Partnership Agreement further provides that no
party shall be denied indemnification merely because such party had an interest
in the transaction with respect to which the indemnification claim arises, so
long as the applicable transaction was otherwise permitted by the terms of the
Partnership Agreement. The CPLP Partnership Agreement provides that each of CPI
and its affiliates and their respective partners, officers, directors, employees
and agents, shall be indemnified and held harmless by CPLP from and against any
and all claims, demands, liabilities, costs, damages and causes of action of any
nature whatsoever arising out of or incidental to CPI's management of CPLP's
affairs, except where CPI has committed fraud, gross negligence or wilful
misconduct. If a claim is made against the General Partner or any of its
affiliates in connection with such party's actions on behalf of the Partnership
with respect to the Partnership Transaction, the General Partner expects that
it, as well as its affiliates, will seek to be indemnified by the Partnership or
CPLP with respect to such claim. As a result of these indemnification rights, a
Limited Partner's remedy with respect to claims against the General Partner or
its affiliates relating to their respective involvement in the Partnership
Transaction could be more limited than the remedy which would be available
absent the existence of these rights in the Partnership Agreement. A successful
claim for indemnification by the Partnership would reduce the amount of
Partnership cash (including the CPLP Distribution) available for distributions
to the Limited Partners by the amount paid to satisfy such claim, including the
Partnership's costs.
24
<PAGE>
25
<PAGE>
FEDERAL INCOME TAX CONSEQUENCES
General
The purpose of the following discussion is to inform the Limited
Partners of certain material federal income tax consequences to the Partnership
and to its partners arising from the Partnership Transaction and the CPLP
Transaction and anticipated payment of a catch-up distribution, which will be
funded with a portion of the net proceeds from the Transaction. The tax
information included herein was prepared from tax data compiled by the General
Partner in its role as the Partnership's tax administrator and by CPI in its
role as CPLP's tax administrator, and, such tax information is not based upon
the advice or formal opinion of counsel. The tax discussion that follows is
merely intended to inform the Limited Partners of factual information and should
not be considered tax advice. In this regard, the specific tax calculations set
forth below describe the federal income tax consequences arising from the
Partnership Transaction and the CPLP Transaction and an anticipated catch-up
distribution with respect to an investor who purchased LP Units at the time of
the initial offering of such LP Units by the Partnership (an "Original Limited
Partner"). Accordingly, the Limited Partners are urged to consult with their
personal tax advisors for advice regarding the federal and other tax
consequences to each of them of the consummation of the Partnership Transaction
and the CPLP Transaction and related distributions and regarding the application
of the information set forth herein to their individual circumstances.
Federal
Through the end of the taxable year in which the Transaction is
consummated, the Limited Partners will have been allocated certain net tax
losses as a result of their investment in the Partnership. The ability to
utilize these net losses may have been limited by the passive activity
limitations of Section 469 of the Internal Revenue Code of 1986, as amended (the
"Code"). Insofar as these net losses have not previously been utilized, in
general, Limited Partners may reduce gain from the sale of the Anderson County
System, to the extent described below.
The Transaction will result in a gain for federal income tax purposes,
which gain is expected to be recognized for federal income tax purposes upon the
satisfaction of certain contractual conditions to the consummation of the
Transaction, which the General Partner believes will not occur until late 1996.
The portion of such gain that is allocable to the Limited Partners will be
approximately $551 per LP Unit. The General Partner estimates this entire gain
will be treated as ordinary income, resulting from the recapture of previously
claimed depreciation and amortization under Code Section 1245. The aggregate
gain per LP Unit may be reduced by the passive activity loss carry forward of
approximately $857 per LP Unit (to the extent previously allocated losses were
not previously utilized by an Original Limited Partner). Therefore the net gain
will be reduced to zero if passive activity losses have not previously been
utilized by an Original Limited Partner.
For federal income tax purposes, upon the consummation of the
Transaction and the payment of a portion of the Partnership's indebtedness, each
Limited Partner will be treated as being released from its allocable share of
the Partnership's nonrecourse liabilities so satisfied (estimated to be $615 per
LP Unit) and as receiving a deemed distribution equal to such amount. Each
Limited Partner will have to calculate its respective capital gain, if any,
realized upon the receipt of (i) the estimated $233 per LP Unit cash
distribution from the Partnership upon the consummation of the Transaction, and
(ii) the estimated $231 per LP Unit deemed distribution from the Partnership
upon the payment of a portion of the Partnership's nonrecourse liabilities. In
order to make such determination, a Limited Partner must calculate its tax basis
in its LP Units as of the end of the taxable year in which such distributions
occur. Each Limited Partner's tax basis in its LP Units is determined by
increasing its
26
<PAGE>
initial capital contributions (or purchase price, if its LP Units were acquired
from another Limited Partner) by interest income, ordinary income and Code
Section 1231 gain reported on all Schedules K-1 (including the Schedule K-1 for
the taxable year in which such distributions occur), and by the Limited
Partner's deemed assumption of its allocable share of the Partnership's
nonrecourse liabilities (estimated to be $829 per LP Unit), and then by reducing
this amount by the charitable contributions, ordinary loss and Code Section 1231
loss reported on all Schedules K-1 (including the Schedule K-1 for the taxable
year in which such distributions occur). All cash distributions made prior to
the cash distribution received from the Partnership upon the consummation of the
Transaction would further reduce a Limited Partner's tax basis. A Limited
Partner will realize a capital gain equal to the excess, if any, of (i) the
aggregate amount of the cash and deemed distributions received by any Limited
Partner upon the consummation of the Transaction and payment of a portion of the
Partnership's nonrecourse liabilities, respectively, over (ii) such Limited
Partner's tax basis in its LP Units. Original Limited Partners should not
realize any capital gain as a result of these distributions.
A Limited Partner who is a non-resident alien individual, foreign
corporation or other foreign person (each, a "foreign person") is subject to a
withholding tax on such person's share of the gain realized on the Transaction.
The withholding rates are 39.6% for partners other than corporate partners and
35% for corporate partners. Amounts withheld will be remitted to the Internal
Revenue Service and the foreign person will receive a credit on such person's
U.S. tax return for the amount of the tax withheld by the Partnership. The tax
withheld will be treated as a distribution to the Limited Partner.
Tax-exempt entities (such as individual retirement accounts or Keogh
plans) may be subject to tax on the Transaction to the extent that income
arising from the sale constitutes "unrelated business taxable income." To the
extent that ordinary income (including Code Section 1245 gain) and Section 1231
gain exceed cumulative net losses, the tax-exempt entity may create "unrelated
business taxable income" and be subject to tax at regular income tax rates.
Certain assumptions underlying the estimated distributions per LP Unit
and relating to the potential federal tax consequences of the Transaction are
illustrated in the following tables:
PER LP
UNIT
--------
ESTIMATED TAX BASIS PER LP UNIT (PRE TRANSACTION)
Initial Capital Contribution ................................... $ 1000
Estimated Allocable Share of Partnership Nonrecourse ........... $ 829
Liabilities
Cash Distributions (through December 31, 1995) ................. $ (395)
Estimated Net Losses (through December 31, 1995) ............... $ (857)
-------
Estimated Tax Basis Per LP Unit Prior To Transaction
$ 577
ESTIMATED TAX BASIS PER LP UNIT (POST TRANSACTION)
Estimated Tax Basis Per LP Unit ................................ $ 577
Estimated Section 1245 Gain .................................... $ 551
Estimated Section 1231 Gain .................................... $ 0
-------
Estimated Tax Basis Per LP Unit Before Distributions
$ 1,128
Cash Distributions ............................................. $ (233)
Deemed Distribution ............................................ $ (615)
-------
Estimated Tax Basis Per LP Unit After Distributions ............ $ 280
=======
27
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
The following tables set forth selected financial and statistical data
relating to the Partnership's and CPLP's financial condition since 1991 and to
the four cable systems proposed to be sold in the Transaction since 1993. Such
data is qualified in its entirety by, and should be read in conjunction with,
the unaudited pro forma financial information, information relating to
distributions to the Limited Partners and the limited partners of CPLP since the
inception of each of the Partnership and CPLP and the detailed information and
financial statements included or referenced elsewhere herein. All of the
unaudited financial information contained herein has been prepared in accordance
with generally accepted accounting principles and in the opinion of the General
Partner and CPI contains all adjustments (consisting of normal recurring
adjustments) necessary for a fair presentation thereof. See "SELECTED UNAUDITED
PRO FORMA FINANCIAL INFORMATION" and "CERTAIN INFORMATION ABOUT THE PARTNERSHIP,
THE GENERAL PARTNER AND CERTAIN AFFILIATES."
28
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
THE PARTNERSHIP
<TABLE>
<CAPTION>
UNAUDITED
----------------------------------------------------------------------------
As of and for the Six Months As of and for the Year Ended
Ended June 30, December 31,
---------------------------------- ------------------------------------
1996 1995 1995 1994
-------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Statement of Operations Data:
Service Revenues.................................... $8,911,886 $8,458,852 $17,046,419 $16,257,928
Net loss............................................ (685,994) (1,968,699) (2,292,563) (5,256,210)
Net loss per LP Unit................................ (7.47) (21.44) (24.96) (57.24)
Cash distributions per LP Unit...................... -- -- -- --
Balance Sheet Data:
Total assets........................................ 23,060,934 28,830,570 24,960,260 30,517,928
Long-term obligations, including current maturities. 38,900,000 42,800,000 40,400,000 44,700,000
Partners' (deficit) capital......................... (21,066,848) (19,191,812) (20,380,854) (18,088,291)
Miscellaneous Data:
Ratio of earnings to fixed
charges 1/.......................................... -- -- -- --
Book value per LP Unit.............................. ($226.89) ($211.10) ($224.17) ($198.96)
<CAPTION>
UNAUDITED
--------------------------------------------------------------
As of and for the Year Ended
December 31,
--------------------------------------------------------------
1993 1992 1991
---------------- ---------------- -----------------
<S> <C> <C> <C>
Statement of Operations Data:
Service Revenues.................................... $16,124,256 $15,079,748 $13,420,451
Net loss............................................ (8,653,943) (13,837,235) (17,083,426)
Net loss per LP Unit................................ (94.24) (150.68) (186.03)
Cash distributions per LP Unit...................... 60.00 67.50 87.50
Balance Sheet Data:
Total assets........................................ 34,825,726 45,280,200 60,543,940
Long-term obligations, including current maturities. 44,700,000 41,600,000 37,500,000
Partners' (deficit) capital......................... (12,832,081) 1,276,762 21,250,759
Miscellaneous Data:
Ratio of earnings to fixed
charges (1).......................................... -- -- --
Book value per LP Unit.............................. ($141.14) $14.04 $233.74
</TABLE>
- - - ----------
(1)Ratio of earnings to fixed charges is calculated using income from
operations including interest income; fixed charges include interest
expense and amortization expense for debt issuance costs. Earnings for
the three months ended June 30, 1996 and 1995 and for the years ended
December 31, 1995, 1994, 1993, 1992 and 1991 were insufficient to
cover the fixed charges by $685,994, $1,968,699, $2,292,563,
$5,256,210, $8,653,943, $13,837,235 and $17,083,426, respectively. As
a result of such insufficiency, these ratios are not presented above.
29
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
ANDERSON COUNTY SYSTEM
<TABLE>
<CAPTION>
UNAUDITED
----------------------------------------
As of and for the Six Months Ended
June 30,
----------------------------------------
1996 1995
------------------- -------------------
<S> <C> <C>
Statement of Operations Data:
Service Revenues...................................... $4,078,858 $3,834,247
Operating Expenses.................................... 4,133,833 4,545,891
Net loss.............................................. (671,375) (1,445,792)
Balance Sheet Data:
Property, Plant and Equipment, net.................... 14,267,521 16,325,971
Franchise Costs....................................... 488,165 932,100
Total Assets.......................................... 14,919,149 17,040,189
Current Liabilities................................... 561,752 852,890
<CAPTION>
UNAUDITED
------------------------------------------------------------------
As of and for the Year Ended
December 31,
------------------------------------------------------------------
1995 1994 1993
------------------- ------------------- --------------------
<S> <C> <C> <C>
Statement of Operations Data:
Service Revenues...................................... $7,771,085 $7,232,403 $7,089,098
Operating Expenses.................................... 8,350,509 6,976,828 9,225,826
Net loss.............................................. (2,077,508) (4,178,294) (3,098,843)
Balance Sheet Data:
Property, Plant and Equipment, net.................... 15,326,732 16,587,211 18,262,158
Franchise Costs....................................... 589,500 1,274,701 2,929,374
Total Assets.......................................... 16,071,968 17,963,744 22,145,821
Current Liabilities................................... 758,219 648,798 544,644
</TABLE>
30
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
CPLP
<TABLE>
<CAPTION>
UNAUDITED
--------------------------------------------------------------------------
As of and for the Six Months Ended As of and for the Year
June 30, Ended December 31,
------------------------------------------------ -----------------------
1996 1995 1995
----------------------- --------------------- --------------------
<S> <C> <C> <C>
Statement of Operations Data:
Service Revenues....................... $6,726,575 $6,365,887 $ 12,855,563
Net loss............................... (2,029,866) (3,699,467) (5,835,749)
Net loss per limited partnership
unit................................. (6,823.26) (12,435.51) (19,616.48)
Cash distributions per limited
partnership unit....................... -- -- --
Balance Sheet Data:
Total assets........................... 26,205,012 31,052,413 28,483,270
Long-term obligations, including
current maturities..................... 34,957,500 36,142,500 34,957,500
Partners' (deficit) capital............ (13,144,270) (8,978,123) (11,114,404)
Miscellaneous Data:
Ratio of earnings to fixed charges(1)... - - -
Book value per limited
partnership unit..................... ($44,860.99) ($30,642.06) ($37,933.12)
<CAPTION>
UNAUDITED
---------------------------------------------------------------------------------------
As of and for the Year Ended
December 31,
---------------------------------------------------------------------------------------
1994 1993 1992 1991
--------------------- --------------------- ------------------- ----------------
<S> <C> <C> <C> <C>
Statement of Operations Data:
Service Revenues....................... $12,075,857 $12,228,270 $11,800,374 $10,707,193
Net loss............................... (7,425,112) (6,176,748) (7,907,985) (9,855,014)
Net loss per limited partnership
unit................................. (24,959.02) (20,762.73) (26,581.46) (33,126.98)
Cash distributions per limited
partnership unit....................... -- -- -- --
Balance Sheet Data:
Total assets........................... 35,168,232 43,550,905 50,248,864 59,520,975
Long-term obligations, including
current maturities..................... 37,339,350 38,710,000 39,900,000 40,700,000
Partners' (deficit) capital............ (5,278,655) 2,146,457 8,323,205 16,231,190
Miscellaneous Data:
Ratio of earnings to fixed charges(1)... - - - -
Book value per limited
partnership unit..................... ($18,015.89) $7,325.79 $28,406.84 $55,396.55
</TABLE>
- - - ----------
(1)Ratio of earnings to fixed charges is calculated using income from operations
including interest income; fixed charges include interest expense and
amortization expense for debt issuance costs. Earnings for the six months
ended June 30, 1996 and 1995 and for the years ended December 31, 1995, 1994,
1993, 1992 and 1991 were insufficient to cover the fixed charges by
$2,029,866, $3,699,467, $5,835,749, $7,425,112, $6,176,748, $7,907,985, and
$9,855,014, respectively. As a result of such insufficiency, these ratios are
not presented above.
31
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
SANFORD SYSTEM
<TABLE>
<CAPTION>
UNAUDITED
-----------------------------------
As of and for the Six Months Ended
June 30,
-----------------------------------
1996 1995
------------- --------------
<S> <C> <C>
Statement of Operations Data:
Service Revenues...................................... $2,359,376 $2,236,640
Operating Expenses.................................... 2,781,098 3,029,770
Net loss.............................................. (893,003) (1,306,649)
Balance Sheet Data:
Property, Plant and Equipment, net.................... 5,606,191 5,911,111
Franchise Costs....................................... 1,056,102 1,952,936
Total assets.......................................... 6,831,371 8,939,299
Current Liabilities................................... 205,543 213,981
<CAPTION>
UNAUDITED
-----------------------------------------------
As of and for the Years Ended
December 31,
-----------------------------------------------
1995 1994 1993
------------ ---------- ------------
<S> <C> <C> <C>
Statement of Operations Data:
Service Revenues...................................... $4,552,708 $4,253,573 $4,286,214
Operating Expenses.................................... 5,569,269 5,837,254 5,592,163
Net loss.............................................. (3,034,382) (2,564,425) (2,022,824)
Balance Sheet Data:
Property, Plant and Equipment, net.................... 5,864,763 6,008,398 5,920,818
Franchise Costs....................................... 1,519,620 2,613,911 3,935,860
Total assets.......................................... 8,206,703 13,996,169 12,312,814
Current Liabilities................................... 455,793 356,294 375,839
</TABLE>
32
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
ABBEVILLE SYSTEM
<TABLE>
<CAPTION>
UNAUDITED
------------------------------------------------------------------------
As of and for the Six
Months Ended As of and for the Year Ended
June 30, December 31,
-------------------------- ------------------------------------------
1996 1995 1995 1994 1993
---------- ----------- ---------- ----------- ------------
Statement of Operations Data:
<S> <C> <C> <C> <C> <C>
Service Revenues ................. $ 481,698 $ 440,976 $ 883,902 $ 805,296 $ 830,168
Operating Expenses ............... 467,647 513,230 943,015 1,019,791 1,017,252
Net loss ......................... (80,205) (174,958) (265,569) (410,081) (334,828)
Balance Sheet Data:
Property, Plant and Equipment, net 1,174,860 1,242,488 1,246,810 1,326,052 1,499,210
Franchise Costs .................. 569,339 737,567 653,452 821,680 989,912
Total assets ..................... 1,766,466 1,977,781 3,072,795 3,046,425 2,594,680
Current Liabilities .............. 70,471 54,851 98,497 70,053 52,514
</TABLE>
33
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
LINCOLNTON SYSTEM
<TABLE>
<CAPTION>
UNAUDITED
------------------------------------------------------------------------------
As of and for the Six
Months Ended As of and for the Year Ended
June 30, December 31,
----------------------------- ---------------------------------------------
1996 1995 1995 1994 1993
------------ ----------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Service Revenues ................. $ 2,726,510 $ 2,585,934 $ 5,222,042 $ 4,851,865 $ 4,897,670
Operating Expenses ............... 3,599,407 3,862,277 7,072,148 7,555,293 7,260,055
Net loss ......................... (1,411,504) (1,863,222) (2,976,293) (3,791,984) (3,177,624)
Balance Sheet Data:
Property, Plant and Equipment, net 8,301,591 9,089,820 8,757,956 9,715,606 10,162,120
Franchise Costs .................. 3,846,250 4,890,824 4,389,131 5,642,720 7,146,511
Total assets ..................... 12,923,397 15,463,197 14,230,203 20,977,174 20,769,099
Current Liabilities .............. 219,899 252,812 322,486 360,592 528,655
</TABLE>
34
<PAGE>
SELECTED UNAUDITED PRO FORMA FINANCIAL
INFORMATION -- THE PARTNERSHIP
The Partnership Transaction
The following unaudited pro forma balance sheet assumes a sale of the
Anderson County System as of June 30, 1996. The unaudited pro forma statements
of operations assume the sale of the Anderson County System as of the beginning
of the period presented. Final results may differ from such amounts. The
unaudited pro forma balance sheet and statements of operations should be read in
conjunction with the notes thereto.
CENCOM CABLE INCOME PARTNERS II, L.P.
UNAUDITED PRO FORMA BALANCE SHEET
June 30, 1996
<TABLE>
<CAPTION>
AS PRO FORMA PRO FORMA
REPORTED ADJUSTMENTS BALANCE
--------------- --------------- -----------
ASSETS
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 761,940 $ 21,147,000(a) $ 21,908,940
Accounts receivable, net 211,333 (128,962)(b) 82,371
Prepaid expenses and other 249,430 (34,501)(b) 214,929
------------ ------------ ------------
Total current assets 1,222,703 20,983,537 22,206,240
------------ ------------ ------------
INVESTMENT IN UNCONSOLIDATED LIMITED -- 10,773,468(c)
PARTNERSHIP (7,727,000)(d)
3,046,468
PROPERTY AND EQUIPMENT, net 20,979,780 (14,267,521)(b) 6,712,259
FRANCHISE COSTS, net 858,451 (488,165)(b) 370,286
------------ ------------ ------------
Total assets $ 23,060,934 $ 9,274,319 $ 32,335,253
============ ============ ============
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
CURRENT LIABILITIES:
Current maturities of long-term debt $ 38,900,000 $(21,000,000)(e) $ 17,900,000
Accounts payable and accrued expenses 2,011,456 (572,693)(b) 1,438,763
Accrued distributions -- 21,147,000(f) 21,147,000
Payables to General Partner and affiliate 3,189,973 (950,167)(g) 2,239,806
------------ ------------ ------------
Total current liabilities 44,101,429 (1,375,860) 42,725,569
------------ ------------ ------------
DEFERRED REVENUE 26,353 -- 26,353
------------ ------------ ------------
PARTNERS' CAPITAL (DEFICIT):
General Partner (2,820,762) 2,820,762(h) --
Limited Partners (17,786,919) 17,743,782(h) (10,416,669)
10,773,468
(21,147,000)
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Note receivable from General Partner (459,167) 459,167(g) --
------------ ------------ ------------
Total partners' capital (deficit) (21,066,848) 10,650,179 (10,416,669)
------------ ------------ ------------
Total liabilities and partners' capital (deficit) $ 23,060,934 $ 9,274,319 $ 32,335,253
============ ============ ============
</TABLE>
The accompanying notes to unaudited pro forma
financial statements are an integral part of
this unaudited pro forma balance sheet.
36
<PAGE>
CENCOM CABLE INCOME PARTNERS II, L.P.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS FOR THE YEAR ENDED
DECEMBER 31, 1995
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
AS REPORTED ADJUSTMENTS BALANCE
------------ --------------- ------------
<S> <C> <C> <C>
Service Revenues $ 17,046,419 $ (7,771,085)(i) $ 9,275,334
------------ ------------ ------------
Operating Expenses:
Operating, general and 9,804,576 (4,517,918)(j) 5,286,658
administrative
Depreciation and amortization 6,204,807 (3,832,591)(j) 2,372,216
------------ ------------ ------------
Income from operations 1,037,036 579,424 1,616,460
Other Income (Expense):
Interest income 117,613 (53,526)(k) 64,087
Interest expense (3,447,212) 1,677,165(l) (1,770,047)
Gain on sale -- 18,838,087(m) 18,838,087
Equity in earnings of unconsolidated
limited partnership -- 11,317,336(n) 11,317,336
------------ ------------ ------------
Net income (loss) $ (2,292,563) $ 32,358,486 $ 30,065,923
============ ============ ============
</TABLE>
The accompanying notes to unaudited pro forma
financial statements are an integral part
of this unaudited pro forma statement.
CENCOM CABLE INCOME PARTNERS II, L.P.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
AS REPORTED ADJUSTMENTS BALANCE
------------ --------------- -------------
<S> <C> <C> <C>
Service Revenues $ 8,911,886 $ (4,078,858)(i) $ 4,833,028
------------ ------------ ------------
Operating Expenses:
Operating, general and
administrative 5,295,760 (2,379,367)(j) 2,916,393
Depreciation and amortization 2,852,503 (1,754,466)(j) 1,098,037
------------ ------------ ------------
8,148,263 (4,133,833) 4,014,430
------------ ------------ ------------
Income from operations 763,623 54,975 818,598
Other Income (Expense):
Interest income 22,091 (9,278)(k) 12,813
Interest expense (1,471,708) 769,760(l) (701,948)
Gain on sale -- 20,783,768(m) 20,783,768
Equity in earnings of unconsolidated limited
partnership -- 10,218,635(n) 10,218,635
------------ ------------ ------------
Net income (loss) $ (685,994) $ 31,817,860 $ 31,131,866
============ ============ ============
</TABLE>
The accompanying notes to unaudited pro
forma financial statements are an
integral part of this unaudited pro
forma statement.
37
<PAGE>
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
The unaudited pro forma financial statements present the sale of the
Anderson County System to an entity affiliated with the General Partner and the
resulting estimated proceeds expected to be received by the Partnership. The
aggregate purchase price for the Anderson County System is anticipated to be
$36,700,000 in cash. The "as reported" amounts were taken from the Partnership's
previously filed Form 10-Q and Form 10-K Reports filed with the Securities and
Exchange Commission.
The unaudited pro forma balance sheet assumes the Partnership had sold
the Anderson County System as of June 30, 1996. The unaudited pro forma
statements of operations for the year ended December 31, 1995 and for the six
months ended June 30, 1996, assume that the Partnership had sold the Anderson
County System as of January 1, 1995 and January 1, 1996, respectively.
The proceeds for distribution to the partners recognized from the sale
of the Anderson County System were estimated as of March 31, 1996 and have been
computed as follows:
<TABLE>
<CAPTION>
<S> <C>
Contract Sales Price of the Anderson County System ............................ $ 36,700,000
Less: Estimated working adjustments as of March 31, 1996 ................. (409,000)
Estimated sale transaction expenses ................................. (1,380,000)
Estimated repayment of debt ......................................... (21,000,000)
Estimated payment of deferred management fee,
net of note receivable from General Partner ....................... (491,000)
------------
Subtotal ............................................................ $ 13,420,000
Estimated net proceeds available for distribution from the Partnership
Transaction ................................................................... $ 13,420,000
CPLP Distribution to the Partnership .......................................... 7,727,000
------------
Total distributions available to the Partners ....................... $ 21,147,000
============
DISTRIBUTIONS TO PARTNERS:
Limited Partners' Share
Approximate 11% Preferred Return .............................................. $ 21,147,000
General Partner's Share ....................................................... $ 0
Sale transaction expenses and debt repayment amount were all estimated through
June 30, 1996.
The following table sets forth the estimated amounts that would have
been received by the General Partner and its affiliates from the Partnership if
the Transaction had been consummated on June 30, 1996 (amounts in thousands):
Estimated payment of deferred management fees as of June 30,1996
. ............................................................................. $ 950,167
Less: General Partner Note ................................................... $ (459,167)
Share of Partnership Distributions ............................................ $ 0
------------
TOTAL ............................................................... $ 491,000
============
</TABLE>
38
<PAGE>
For purposes of determining the pro forma effect of the sale of the
Anderson County System on the Partnership's unaudited balance sheet, the
following adjustments have been made as of June 30, 1996:
(a) Cash and cash equivalents
<TABLE>
<CAPTION>
<S> <C>
a. Proceeds from the sale of Anderson County System $ 36,700,000
b. Working capital adjustment (409,000)
c. Payment of long-term debt (21,000,000)
d. Payment of deferred management fees (491,000)
e. Payment of transaction costs (1,380,000)
f. CPLP Distribution 7,727,000
-------------
$ 21,147,000
</TABLE>
(b) Reflects the disposition of assets and liabilities of the
Anderson County System as of June 30, 1996.
(c) Represents the estimated gain allocated to the Partnership
as a result of the CPLP Transaction, net of unrecorded
losses (under the equity method) of approximately $12.7
million.
(d) Represents the estimated distribution from CPLP as a result
of the CPLP Transaction.
(e) Reflects estimated payment on the outstanding indebtedness
under the Credit Agreement.
(f) Represents estimated distributions to be made to the Limited
Partners.
(g) Reflects payment of deferred management fees to the General
Partner, net of the note receivable from the General
Partner.
(h) Reflects the allocation of the gain on the sale of the
Anderson County System's net assets, as of June 30, 1996.
For purposes of determining the pro forma effect of the sale of the
Anderson County System, the pro forma adjustments described below have been made
to the historical unaudited statements of operations of the Partnership for the
periods indicated as if the transactions had occurred as of the beginning of the
year presented:
(i) Elimination of historical revenues of the Anderson County
System.
(j) Elimination of operating expenses of the Anderson County
System. The allocation of general and administrative
expenses and deferred debt costs were based on the ratio of
the Anderson County System's subscribers to the
Partnership's total subscribers.
(k) Reflects the reduction of interest income due to the
elimination of the cash flows from the Anderson County
System. The reduction to interest was estimated based on the
ratio of the Anderson County System's subscribers to the
Partnership's total subscribers.
39
<PAGE>
(l) Reflects an elimination of interest expense assuming the
sale of the Anderson County System would result in a
reduction to borrowings under the Credit Agreement.
Reduction of interest expense was calculated based on the
ratio of the estimated payment of debt ($21 million) to the
Partnership's weighted average debt outstanding for the
period to total interest expense for the period.
(m) Reflects the excess sale price over the book value of the
Anderson County System's net assets, as of the beginning of
the year presented.
(n) Represents the estimated gain allocated to the Partnership
as a result of the CPLP Transaction, net of unrecorded
losses (under the equity method) as of the beginning of the
year presented.
40
<PAGE>
SELECTED UNAUDITED PRO FORMA FINANCIAL INFORMATION -- CPLP
The CPLP Transaction
The following unaudited pro forma balance sheet assumes a sale of the
Three CPLP Systems as of June 30, 1996. The unaudited pro forma statements of
operations assume the sale of the Three CPLP Systems as of the beginning of the
period presented. Final results may differ from such amounts. The unaudited pro
forma balance sheet and statements of operations should be read in conjunction
with the notes thereto.
CENCOM PARTNERS, L.P.
UNAUDITED PRO FORMA BALANCE SHEET
June 30, 1996
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
AS REPORTED ADJUSTMENTS BALANCE
------------ ---------------- ------------
ASSETS
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 956,635 $ 14,475,500(a) $ 15,432,135
Accounts receivable, net 151,655 (126,208)(b) 25,447
Prepaid expenses and other 114,046 (71,794)(b) 42,252
------------ ------------ ------------
Total current assets 1,222,336 14,277,498 15,499,834
------------ ------------ ------------
PROPERTY AND EQUIPMENT, net 17,082,990 (15,082,642)(b) 2,000,348
FRANCHISE COSTS, net 6,304,131 (5,471,691)(b) 832,440
OTHER ASSETS 1,595,555 (650,702)(b) 944,853
------------ ------------ ------------
Total assets $ 26,205,012 $ (6,927,537) $ 19,277,475
============ ============ ============
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
CURRENT LIABILITIES:
Current maturities of long-term debt $ 34,957,500 $(34,957,500)(c) $--
Accounts payable and accrued expenses 1,627,521 (530,805)(b) 1,096,716
Accrued distributions -- 14,475,500(d) 14,475,500
Payables to CPI and affiliate 2,578,545 (2,545,000)(e) 33,545
------------ ------------ ------------
Total current liabilities 39,163,566 (23,557,805) 15,605,761
------------ ------------ ------------
DEFERRED REVENUE 185,716 (139,234) 46,482
------------ ------------ ------------
PARTNERS' CAPITAL (DEFICIT):
General Partner (227,702) 421,634(f) 54,832
(139,100)(d)
Limited Partners (14,916,568) 27,543,068(f) 3,570,400
(9,056,100)(d)
Special Limited Partner 2,000,000 3,280,300(f) --
(5,280,300)(d)
------------ ------------ ------------
Total partners' capital (deficit) (13,144,270) 16,769,502 3,625,232
------------ ------------ ------------
Total liabilities and partners' capital (deficit) $ 26,205,012 $ (6,927,537) $ 19,277,475
============ ============ ============
</TABLE>
The accompanying notes to unaudited pro forma financial statements
are an integral part of this unaudited pro forma balance sheet.
41
<PAGE>
CENCOM PARTNERS, L.P. UNAUDITED PRO FORMA
STATEMENT OF OPERATIONS FOR THE YEAR ENDED
DECEMBER 31, 1995
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
AS REPORTED ADJUSTMENTS BALANCE
------------ --------------- ------------
<S> <C> <C> <C>
Service Revenues $ 12,855,563 $(10,628,652)(g) $ 2,226,911
Operating Expenses:
Operating, general and administrative 7,294,706 (5,985,133)(h) 1,309,573
Depreciation and amortization 8,581,137 (7,607,463)(h) 973,674
------------ ------------ ------------
15,875,843 (13,592,596) 2,283,247
------------ ------------ ------------
Income from operations (3,020,280) 2,963,944 (56,336)
Other Income (Expense):
Interest income 29,469 (21,770)(i) 7,699
Interest expense (2,844,938) 2,729,271(j) (115,667)
Gain on sale -- 22,801,974(k) 22,801,974
------------ ------------ ------------
Net income (loss) $ (5,835,749) $ 28,473,419 $ 22,637,670
============ ============ ============
</TABLE>
The accompanying notes to unaudited pro
forma financial statements are an
integral part of this unaudited pro
forma statement.
CENCOM PARTNERS, L.P. UNAUDITED PRO FORMA
STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED
JUNE 30, 1996
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
AS REPORTED ADJUSTMENTS BALANCE
------------ --------------- ------------
<S> <C> <C> <C>
Service Revenues $ 6,726,575 $ (5,567,584)(g) $ 1,158,991
Operating Expenses:
Operating, general and administrative 3,752,480 (3,092,173)(h) 660,307
Depreciation and amortization 3,655,969 (3,755,979)(h) (100,010)
------------ ------------ ------------
7,408,449 (6,848,152) 560,297
------------ ------------ ------------
Income from operations (681,874) 1,280,568 598,694
Other Income (Expense):
Interest income 11,997 (9,838)(i) 2,159
Interest expense (1,358,514) 1,358,514(j) --
Gain on Sale -- 28,111,061(k) 28,111,061
------------ ------------ ------------
Net income (loss) $ (2,028,391) $ 30,740,305 $ 28,711,914
============ ============ ============
</TABLE>
The accompanying notes to unaudited pro forma financial statements
are an integral part of this unaudited pro forma statement.
42
<PAGE>
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
The unaudited pro forma financial statements present the sale of the
Three CPLP Systems to an entity affiliated with the General Partner and the
resulting estimated proceeds expected to be received by CPLP. The aggregate
purchase price for the Three CPLP Systems is anticipated to be $52,450,000 in
cash. The "as reported" amounts were taken from CPLP's audited financial
statements and unaudited interim financial statements.
The unaudited pro forma balance sheet assumes CPLP had sold the Three
CPLP Systems as of June 30, 1996. The unaudited pro forma statements of
operations for the year ended December 31, 1995 and for the six months ended
June 30, 1996, assume that CPLP had sold the Three CPLP Systems as of January 1,
1995 and January 1, 1996, respectively.
The proceeds for distribution to the partners recognized from the sale
of the Three CPLP Systems were estimated as of June 30, 1996 and have been
computed as follows:
Contract Sales Price of the Three CPLP Systems $ 52,450,000
Less: Working capital adjustments as of June 30, 1996 (472,000)
Estimated payment of deferred management fees (2,545,000)
Estimated repayment of debt (34,957,500)
------------
Estimated net proceeds available for distribution by CPLP $ 14,475,500
============
DISTRIBUTION TO THE PARTNERS:
Limited Partners' Shares:
Special Limited Partner's Share* $ 5,280,300
Partnership $ 7,727,000
Other Limited Partner* 1,329,100
General Partner's Share $ 139,100
- - - ----------
* Units owned by Charter.
For purposes of determining the pro forma effect of the sale of the
Three CPLP Systems on CPLP's unaudited balance sheet, the following adjustments
have been made as of June 30, 1996:
<TABLE>
<CAPTION>
<S> <C>
(a) Cash and cash equivalents
a. Proceeds from the sale of the Three CPLP Systems $52,450,000
b. Working capital adjustment (472,000)
c. Payment of long-term debt (34,957,500)
d. Payment of deferred management fees (2,545,000)
-----------
$14,475,500
===========
</TABLE>
(b) Reflects the disposition of assets and liabilities
of the Three CPLP Systems as of June 30, 1996.
(c) Reflects estimated payment on the outstanding
indebtedness under the CPLP Credit Facility.
(d) Represents estimated distributions to be made to
the partners.
(e) Reflects payment of deferred management fees to
the General Partner.
43
<PAGE>
(f) Reflects the allocation of the gain on the sale of
the Three CPLP Systems' net assets, as of June 30,
1996.
For purposes of determining the pro forma effect of the sale of the
Three CPLP Systems, the pro forma adjustments described below have been made to
the historical unaudited statement of operations of CPLP for the periods
indicated as if the transactions had occurred as of the beginning of the year
presented:
(g) Elimination of historical revenues of the Three
CPLP Systems.
(h) Elimination of operating expenses of the Three
CPLP Systems. The allocation of general and
administrative expenses and deferred debt costs
were based on the ratio of the Three CPLP Systems'
subscribers to CPLP's total subscribers.
(i) Reflects the reduction of interest income due to
the elimination of the cash flows from the Three
CPLP Systems. The reduction to interest was
estimated based on the ratio of the Three CPLP
Systems' subscribers to CPLP's total subscribers.
(j) Reflects an elimination of interest expense
assuming the sale of the Three CPLP Systems would
result in a reduction to borrowings under the CPLP
Credit Facility. Reduction of interest expenses
was calculated based on the ratio of the estimated
payment of debt to CPLP's weighted average debt
outstanding for the period to total interest
expense for the period.
(k) Reflects the excess sale price over the book value
of the Three CPLP Systems' net assets, as of the
beginning of the year presented.
44
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The Partnership
Results of Operations
General Information
The following table sets forth certain items as a percentage of total
revenues for the periods indicated:
<TABLE>
<CAPTION>
Unaudited
------------------------------------------------
For the Six Months For the Year
Ended June 30, Ended December 31,
------------------ ---------------------------
1996 1995 1995 1994 1993
------ ------- ------- ------ -------
<S> <C> <C> <C> <C> <C>
Service Revenues:
Basic Services 74.5% 73.3% 73.9% 73.3% 76.7%
Premium Services 12.7 13.4 13.3 13.9 12.9
Other 12.8 13.3 12.8 12.8 10.4
----- ----- ----- ----- -----
100.0 100.0 100.0 100.0 100.0
Operating Expenses:
Operating, General and Administrative 59.4 56.8 57.5 58.8 54.4
Depreciation and Amortization 32.0 45.8 36.4 52.9 54.8
----- ----- ----- ----- -----
91.4 102.6 93.9 111.7 109.2
Income (Loss) from Operations 8.6 (2.6) 6.1 (11.7) (9.2)
----- ----- ----- ----- -----
Interest Income (Expense):
Interest Income 0.2 0.2 0.7 0.3 0.1
Interest Expense (16.5) (20.9) (20.2) (19.4) (13.2)
Equity in loss of unconsolidated limited
partnership -- -- -- (1.5) (31.4)
----- ----- ----- ----- -----
(16.3) (20.7) (19.5) (20.6) (44.5)
----- ----- ----- ----- -----
Net Loss (7.7)% (23.3)% (13.4)% (32.3)% (53.7)%
===== ===== ===== ===== =====
</TABLE>
Operating results of the Partnership's investment in CPLP are not
consolidated, as the Partnership owns only limited partnership units in CPLP and
does not exercise significant influence over CPLP's operations. The
Partnership's investment in CPLP is accounted for under the equity method and
losses in excess of its investment are not recorded.
Comparison of Six Months Ended June 30, 1996 and Six Months Ended June 30, 1995
Revenues. The Partnership earns substantially all of its revenues from
monthly subscription fees for basic service tier, expanded basic service tier,
premium channels, equipment rental and ancillary services provided by its
Partnership Systems. Service revenues increased by 5.4% to $8,911,886 for the
six months ended June 30, 1996, when compared to the similar period of 1995.
These increases in 1996 are primarily due to an increase in subscribers for the
basic service tier of cable service offered by the Partnership Systems.
45
<PAGE>
Basic subscribers at June 30, 1996 increased by 2.5% over June 30,
1995. This reflects management's marketing efforts to add new customers and
retain existing customers, as well as improved customer service. It also
reflects an industry-wide increase in cable subscribers as a result of increased
advertising during 1995 by wireless and direct broadcast service providers;
these broad-based marketing campaigns appear to have enhanced overall consumer
awareness and desire for alternative programming options, with a "spill-over"
benefit for cable providers. In addition, a limited amount of new-build
construction increased the coverage of the Partnership Systems.
In addition, revenue increases through June 30, 1996 reflect minimal
retail and ancillary rate increases implemented in certain franchise areas. Rate
increases have been limited because federal rate regulation implemented in 1993
and 1994 rolled back cable rates up to 17% and authorized only limited rate
increases for the pass-through of certain external costs.
Premium service subscriptions decreased 1.0% from June 30, 1995 to
June 30, 1996. The ratio of premium service subscriptions per basic subscriber
decreased from 45.1% at June 30, 1995 to 43.6% at June 30, 1996. This overall
decrease may reflect the fact that there is an increasing variety of programming
on the basic service tier. Given this change at the basic level, the Partnership
anticipates that premium services may continue to decline relative to basic
services over the next few years. As a result, the Partnership has begun to
offer premium services to subscribers in a packaged format, providing
subscribers with a discount from the combined retail rates of these packaged
services in an effort to maintain premium subscription levels and attract
additional subscriptions.
Operating Expenses. Operating, general and administrative expenses
increased by $284,541 or 5.9% during the six months ended June 30, 1996 when
compared to the similar period of 1995. The majority of this increase,
approximately $198,000, related to increases in license fees paid for
programming. In addition, there were increases in wages, bad debt and franchise
fees between the comparable quarters.
Liquidation costs for the six month period ended June 30, 1996, were
$209,198, related primarily to professional fees for preparation of this
Disclosure Statement.
Depreciation and amortization decreased by 26.4% from $3,877,720 for
the six months ended June 30, 1995, to $2,852,503 for the same period in 1996.
Although the Partnership had increased depreciation as a result of capital
expenditures made to the Partnership Systems, this was offset by a significant
decrease in amortization because of the completion of amortization periods for
the Anderson County System franchises.
Other Income and Expenses. Interest expense decreased by 16.9% from
$1,770,327 to $1,471,708 for the six month period ending June 30, 1996, when
compared to the similar period of 1995. This decrease was primarily due to the
decrease in the average outstanding debt balance between the comparable periods
and a decrease in the effective weighted average interest rates between the
comparable periods.
Net Loss. Net loss was reduced by 65.2% from $(1,968,699) to
$(685,994) for the six month period ended June 30, 1996, when compared to the
similar period of 1995. In 1996, decreases in interest expense and in
amortization expense were significant factors versus the prior year.
Comparison of Years Ended December 31, 1995, 1994 and 1993
Revenues. In September 1993, when federal rate regulation affecting
the basic and expanded basic service tiers was implemented, rates were rolled
back 10% throughout the Partnership
46
<PAGE>
Systems, which offset rate increases implemented earlier in 1993. In 1994,
additional rate reductions of up to 7% were required for some local franchises.
These rate reductions significantly impacted the Partnership Systems' actual
revenues as well as the potential to increase revenues. Limited rate increases
are permitted to pass-through to subscribers certain external costs (such as
copyright, programming and franchise fees). Notwithstanding that, the average
revenue per subscriber was reduced for basic services during the 1992 to 1994
period and the Partnership Systems were able to increase revenues on an overall
basis by increasing the subscriber base, as well as by increasing revenues from
unregulated services such as premium cable services, advertising and other
ancillary revenues.
Partnership revenues increased 0.8% from $16,124,256 in 1993 to
$16,257,928 in 1994, and by an additional 4.8% to $17,046,419 in 1995. During
this period, the Partnership increased revenues by increasing the number of its
basic subscribers by 5.9% from December 31, 1993 to December 31, 1994, and by an
additional 3.5% from December 31, 1994 to December 31, 1995; subscribers
increased as a result of new-build and re-build construction and enhanced
marketing efforts. The subscribership increase reflects management's efforts to
increase the number of subscribers through improved customer service. It also
reflects an industry-wide increase in cable subscribers as a result of increased
advertising commenced in the latter part of 1994 by wireless and direct
broadcast service providers; these broad-based marketing campaigns appear to
have enhanced overall customer awareness and desire for alternative programming
options, with a "spill-over" benefit for cable providers.
The ratio of premium service subscriptions per basic subscriber
fluctuated from .46 at December 31, 1993, to .45 at December 31, 1994, to .46 at
December 31, 1995. The Partnership anticipates that the ratio of subscriptions
for premium services to subscriptions for basic services may not increase
substantially over the next few years. The Partnership has begun to offer
premium services to subscribers in a packaged format, providing subscribers with
a discount from the combined retail rates of these packaged services. However,
premium subscription services will still remain an important revenue source of
the Partnership.
Operating Expenses. Operating, general and administrative expenses, as
a percentage of revenue, increased by 9.1% from $8,771,519 in 1993 to $9,566,754
in 1994, and by an additional 2.5% to $9,804,576 in 1995. As a percentage of
annual revenue, these expenses increased from 54.4% to 57.5% during the
1993-1995 time period. The Partnership was able to control certain operating
costs to offset the larger increases in certain other categories, as discussed
below. In addition, operating expenses included liquidation costs of
approximately $99,000 in 1995, related to initiating the process to sell the
assets of the Partnership.
The Partnership's operating expenses were affected by substantial
industry-wide increases in programming expenses. Programming expenses were
approximately $2,589,000 in 1993; such expenses increased by 8.1% to $2,799,000
in 1994 and by an additional 11.1% to $3,110,000 in 1995. The Partnership's
increased subscriber base also contributed to the overall increase in
programming expenses, since programming costs are determined on a per subscriber
basis.
The Partnership Systems' copyright fees for the carriage of distant
signals increased during the subject periods. Applicable FCC regulations
required the Partnership Systems to add local channels on the basic cable
service tier, which resulted in certain channels regularly carried by the
Partnership Systems on the basic cable service tier being moved to the expanded
basic cable service tier. Inclusion of additional revenues associated with the
expanded basic cable service tier resulted in increased copyright fee payments.
The Partnership also launched additional channels during the subject
period, with related programming costs and costs associated with channel line-up
changes, as the Partnership sought to
47
<PAGE>
improve the Partnership Systems' basic product line as well as increase their
subscriber base. Channel line-up changes, whether resulting from FCC mandated
local "must carry" regulations (as discussed below) or voluntary changes, also
involve indirect costs such as marketing and customer mailings. Increased
compliance costs related to the 1992 Cable Act and pertinent FCC regulations
were reflected in operating expenses.
Depreciation and amortization, both in terms of actual amounts and as
a percent of revenues, decreased during the 1993 - 1995 period. The decrease is
primarily the result of the completion of amortization for certain franchises
and deferred costs.
Other Income and Expenses. Interest expense increased by approximately
$294,000 in 1995 due to higher interest rates offset somewhat by a partial
paydown of the debt balance; the weighted average interest rate and outstanding
borrowings for 1995 and 1994 were 8.0% and 6.7% and $43,163,000 and $44,700,000,
respectively. Interest expense increased by approximately $1,016,000 in 1994
versus 1993 as a result of higher effective interest rates. The weighted average
interest rates from 1994 and 1993 were 6.7% and 5.0%, respectively.
The allocation to the Partnership of its proportionate share of the
net loss of CPLP for the years ended December 31, 1994 and 1993 is represented
by Equity in loss of unconsolidated limited partnership. Allocated losses from
CPLP in excess of the Partnership's investment in CPLP are not recorded. During
1995 and 1994, the unrecorded losses in excess of investment were $4,903,780 and
$5,995,690, respectively.
Liquidity and Capital Resources
The Partnership's initial capital resources have included the
aggregate of approximately $81,574,000 (net of related expenses) raised through
the sale of LP Units and approximately $918,000 in General Partner contributions
of cash and notes. These sources of capital were used to fund the purchase of
the Partnership Systems and have since been supplemented with borrowings to
finance capital expenditures.
The Partnership maintains a secured revolving line of credit agreement
(the "Credit Agreement") with a syndicate of banks, for which The Toronto
Dominion Bank is the agent. Such Credit Agreement bears interest at a rate
selected by the Partnership equal to the Eurodollar rate, The Toronto Dominion
Bank's prime rate, or the certificate of deposit rate, as the case may be, plus
a spread, and has a maturity date of December 31, 1996. The Credit Agreement
allows borrowings up to $65 million. While the Partnership's cash flow from
operations has been used to fund a portion of capital expenditures, in prior
periods the Partnership from time to time incurred debt to cover the balance of
capital expenditures. Outstanding indebtedness of the Partnership under the
Credit Agreement at December 31, 1995 and March 31, 1996, was $40,400,000.
The Partnership made capital expenditures of approximately $3,001,000,
$1,913,000 and $2,579,000 during 1995, 1994 and 1993, respectively, in
connection with the improvement and upgrading of the Partnership Systems. The
Partnership anticipates that capital expenditures for such purposes during 1996
will approximate $2,400,000; through June 30, 1996, approximately $1,007,000 of
capital expenditures have been made.
Pursuant to the terms of the Partnership Agreement, the Partnership is
required to distribute all cash available for distribution to the Partners
within 60 days after the end of each calendar quarter and, with respect to
certain available refinancing proceeds and certain available sales proceeds, as
soon as possible following completion of the relevant transaction. Limited
Partners received cash
48
<PAGE>
distributions during 1993 in the amount of $5,454,900. However, the Partnership
suspended further distributions to Limited Partners in the fourth quarter of
1993 to provide greater financial flexibility in meeting its debt covenants and
in making capital expenditures necessary to maintain the Partnership's assets.
No distributions were made in 1994 or 1995 to the Limited Partners.
Distributions in arrears will be distributed in accordance with the Partnership
Agreement. If the Transaction is approved and the Anderson County System is sold
and the Credit Agreement is renegotiated, the General Partner anticipates that
it will be able to recommence quarterly distributions to Limited Partners,
although there is no assurance that these events will occur and/or that
sufficient proceeds will remain for distribution to the Limited Partners after
the Partnership's anticipated payments of debt and expenses.
The Partnership's investment in CPLP represents approximately 25% of
the Partnership's total investment in cable systems. The Partnership's
investment is passive in nature as evidenced by its position in CPLP as a
limited partner. The financial statement losses recorded by the Partnership for
its allocated share of the total losses of CPLP do not represent current or
future cash outlays and, as such, should not impact the operating results or
operating cash flows generated by the Partnership's owned cable systems.
The Partnership accounts for its investments in CPLP on the equity
method as it does not retain management control of CPLP. Therefore, allocated
losses from CPLP in excess of the Partnership's investment are not recorded. The
balance of investment in unconsolidated limited partnership was reduced to zero
during 1994 through the recognition of the Partnership's allocated share of the
net loss of CPLP up to the amount of the remaining investment.
CPLP
Results of Operations
General Information
The following table sets forth certain items as a percentage of total
revenues for the periods indicated:
<TABLE>
<CAPTION>
Unaudited
------------------------------------------
For the Six
Months Ended For the Year Ended
June 30, December 31,
---------------- ------------------------
1996 1995 1995 1994 1993
------ ------- ------ ------ -------
<S> <C> <C> <C> <C> <C>
Service Revenues:
Basic Services ...................... 74.0% 72.9% 73.3% 73.7% 76.8%
Premium Services .................... 13.3 14.5 14.2 14.6 13.0
Other ............................... 12.7 12.6 12.5 11.7 10.2
----- ----- ----- ----- -----
100.0 100.0 100.0 100.0 100.0
Operating Expenses:
Operating, General and Administrative 55.8 54.8 56.6 55.5 52.2
Depreciation and Amortization ....... 54.3 80.3 66.7 86.2 81.6
----- ----- ----- ----- -----
110.1 135.1 123.3 141.7 133.8
Income (Loss) from Operations .................. (10.1) (35.1) (23.3) (41.7) (33.8)
----- ----- ----- ----- -----
Interest Income (Expense):
Interest Income ..................... 0.1 0.1 -- -- --
Interest Expense .................... (20.2) (23.1) (22.1) (19.8) (16.7)
----- ----- ----- ----- -----
(20.1) (23.0) (22.1) (19.8) (16.7)
----- ----- ----- ----- -----
Net Loss ....................................... (30.2)% (58.1)% (45.4)% 61.5% 50.5%
===== ===== ===== ===== =====
</TABLE>
49
<PAGE>
Comparison of Six Months Ended June 30, 1996 and Six Months Ended June
30, 1995.
Revenues. CPLP earns substantially all of its revenues from monthly
subscription fees for basic service tier, expanded basic service tier, premium
channels, equipment rental and ancillary services provided by the CPLP Systems.
Service revenues increased by 5.7% to $6,726,575 for the six months ended June
30, 1996, when compared to the similar period of 1995. These increases in 1996
are primarily due to an increase in subscribers for the basic service tier of
cable service offered by the CPLP Systems.
Basic subscribers at June 30, 1996 increased by 2.0% over June 30,
1995. This increase reflects management's marketing efforts to add new customers
and retain existing customers, as well as to improve customer service. It also
reflects an industry-wide increase in cable subscribers as a result of increased
advertising by wireless and direct broadcast service providers; these
broad-based marketing campaigns appear to have enhanced overall consumer
awareness and desire for alternative programming options, with a "spill-over"
benefit for cable providers.
In addition, revenue increases through June 30, 1996 reflect minimal
retail and ancillary rate increases implemented in certain franchise areas. Rate
increases have been limited because federal rate regulation implemented in 1993
and 1994 rolled back cable rates up to 17% and authorized only limited rate
increases for the pass-through of certain external costs.
Premium service subscriptions decreased 1.2% from June 30, 1995 to
June 30, 1996. The ratio of premium service subscriptions per basic subscriber
decreased from 45.2% at June 30, 1995 to 43.8% at June 30, 1996. This overall
decrease may reflect the fact that there is an increasing variety of programming
on the basic service tier. Given this change at the basic level, CPLP
anticipates that premium service subscriptions may continue to decline relative
to basic service subscriptions over the next few years. As a result, CPLP has
begun to offer premium services to subscribers in a packaged format, providing
subscribers with a discount from the combined retail rates of these packaged
services in an effort to maintain premium subscription levels and attract
additional subscriptions.
Operating Expenses. Operating, general and administrative expenses
increased by approximately $266,000 or 7.6% during the six months ended June 30,
1996 when compared to the similar period of 1995. This increase is due primarily
to an increase in programming expenses attributable to increased subscribers as
well as the increase related to offering additional channels. In addition, there
were increases in wages, property insurance and franchise fees in 1996 compared
to the similar period in 1995.
Depreciation and amortization decreased by 39.8% from $5,110,000 for
the six months ended June 30, 1995, to $3,656,000 for the same period in 1996.
The decrease is the result of completing the amortization period of certain
intangible assets during 1995.
Other Income and Expenses. Interest expense decreased by 7.8% from
approximately $1,473,600 during the first six months of 1995 to approximately
$1,358,500 for the first six months of 1996. This decrease was primarily due to
the decrease in the average outstanding debt balance between the comparable
period and a decrease in the effective weighted average interest rates between
the comparable period.
Net Loss. Net loss was reduced by 45.1% from $(3,699,000) to
$(2,030,000) for the first six months of 1996. The decreases in interest expense
and in amortization expense during the first six months of 1996 were significant
factors in the reduction.
50
<PAGE>
Comparison of Years Ended December 31, 1995, 1994 and 1993
Revenues. In September 1993, when federal rate regulation affecting
the basic and expanded basic service tiers was implemented, rates were rolled
back 10% throughout the CPLP Systems, which offset rate increases implemented
earlier in 1993. In 1994, additional rate reductions of up to 7% were required
for some local franchises. These rate reductions significantly impacted the CPLP
Systems' actual revenues as well as the potential to increase revenues. Limited
rate increases are permitted to pass-through to subscribers certain external
costs (such as copyright, programming and franchise fees). Notwithstanding that,
the average revenue per subscriber was reduced for basic services during the
1992 to 1994 period and CPLP was able to increase revenues on an overall basis
by increasing the subscriber base, as well as by increasing revenues from
unregulated services such as premium cable services, advertising and other
ancillary revenues.
CPLP revenues decreased 1.3% from approximately $12,228,000 in 1993 to
approximately $12,076,000 in 1994. Revenues then increased by 6.5% to
$12,856,000 in 1995. During this period, CPLP increased revenues by increasing
the number of its basic subscribers by 4.2% from December 31, 1993 to December
31, 1994, and by an additional 2.3% from December 31, 1994 to December 31, 1995;
subscribers increased as a result of new-build and re-build construction and
enhanced marketing efforts. The subscribership increase reflects management's
efforts to increase the number of subscribers through improved customer service.
It also reflects an industry-wide increase in cable subscribers as a result of
increased advertising commenced in the latter part of 1994 by wireless and
direct broadcast service providers; these broad-based marketing campaigns appear
to have enhanced overall customer awareness and desire for alternative
programming options, with a "spill-over" benefit for cable providers.
The ratio of premium service subscriptions per basic subscriber
fluctuated from 43% at December 31, 1993, to 45% at December 31, 1994, to 44% at
December 31, 1995. CPLP anticipates that the ratio of subscriptions for premium
services to subscriptions for basic services may not increase substantially over
the next few years. CPLP has begun to offer premium services to subscribers in a
packaged format, providing subscribers with a discount from the combined retail
rates of these packaged services. However, premium subscription services will
still remain an important revenue source for CPLP.
Operating Expenses. Operating, general and administrative expenses,
as a percentage of revenue, increased by 4.8% from approximately $6,402,000 in
1993 to approximately $6,710,000 in 1994, and by an additional 8.7% to
approximately $7,295,000 in 1995. As a percentage of annual revenue, these
expenses increased from 52.4% to 56.7% during the 1993-1995 time period. CPLP
was able to control certain operating costs to offset the larger increases in
certain other categories, as discussed below. In addition, operating expenses
included liquidation costs of approximately $116,000 in 1995, related to
initiating the process to sell the assets of CPLP.
CPLP's operating expenses were affected by substantial industry-wide
increases in programming expenses. Programming expenses were approximately
$2,067,000 in 1993; such expenses increased by 6.8% to $2,207,000 in 1994 and by
an additional 17.4% to $2,591,000 in 1995. CPLP's increased subscriber base also
contributed to the overall increase in programming expenses, since programming
costs are determined on a per subscriber basis.
The CPLP Systems' copyright fees for the carriage of distant signals
increased during the subject periods. Applicable FCC regulations required the
CPLP Systems to add local channels on the basic cable service tier, which
resulted in certain channels regularly carried by the CPLP Systems on the basic
cable service tier being moved to the expanded basic cable service tier.
Inclusion of additional
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revenues associated with the expanded basic cable service tier resulted in
increased copyright fee payments.
CPLP also launched additional channels during the subject period, with
related programming costs and costs associated with channel line-up changes, as
CPLP sought to improve the CPLP Systems' basic product line as well as increase
their subscriber base. Channel line-up changes, whether resulting from FCC
mandated local "must carry" regulations (as discussed below) or voluntary
changes, also involve indirect costs such as marketing and customer mailings.
Increased compliance costs related to the 1992 Cable Act and pertinent FCC
regulations were reflected in operating expenses.
Depreciation and amortization, both in terms of actual amounts and as
a percentage of revenues, increased in 1994 to 86.2% of revenues from 81.6% in
1993, and then decreased in 1995 to only 66.7% of revenues. The decrease is
primarily the result of the completion of amortization for certain franchises
and deferred costs.
Other Income and Expenses. Interest expense increased by approximately
$449,000 in 1995 due to higher interest rates offset somewhat by a partial
paydown of the debt balance; the weighted average interest rate and outstanding
borrowings for 1995 and 1994 were 7.8% and 6.1% and $36,439,000 and $38,062,000,
respectively. Interest expense increased by approximately $351,000 in 1994
versus 1993 as a result of higher effective interest rates. The weighted average
interest rates from 1994 and 1993 were 6.1% and 5.2%, respectively.
Liquidity and Capital Resources
CPLP's initial capital resources have included the aggregate of
approximately $29,300,000 in limited partner contributions, $450,000 in general
partner contributions and $2,000,000 in special limited partner contributions.
Included in the limited partner contributions is $25,000,000 contributed by the
Partnership which represents an ownership of approximately 84%. These sources of
capital were used to fund the purchase of the CPLP Systems and have since been
supplemented with borrowings to finance capital expenditures.
The CPLP Credit Facility bears interest as a rate selected by CPLP
equal to the Eurodollar rate, the Toronto Dominion Bank's prime rate, or the
certificate of deposit rate, as the case may be, plus a spread, and has a
maturity date of December 31, 1996. The Credit Facility allows borrowings up to
$48 million. While CPLP's cash flow from operations has been used to fund a
portion of capital expenditures, CPLP incurred debt to cover the balance of
capital expenditures from time to time in prior periods. Outstanding
indebtedness of CPLP under the CPLP Credit Facility at December 31, 1995 and
June 30, 1996, was $34,957,500.
CPLP made capital expenditures of approximately $1,974,000, $2,450,000
and $2,294,000 during 1995, 1994 and 1993, respectively, in connection with the
improvement and upgrading of the CPLP Systems. CPLP anticipates that capital
expenditures for such purposes during 1996 will approximate $2,173,000; through
June 30, 1996, approximately $795,000 of capital expenditures have been made.
Historically, CPLP has made no distributions to its limited partners
or special limited partners in order to provide greater financial flexibility in
meeting its debt covenants and in making capital expenditures necessary to
maintain CPLP's assets. In conjunction with the Transaction, CPLP intends to
repay all outstanding debt and will make a distribution to the special limited
partners equal to the sum of their unrecovered preference amount and their
preference return. The funds from the sale remaining after repayment of debt and
distributions to the special limited partners as well as the excess
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funds available from future operations will be distributed in accordance with
the CPLP Partnership Agreement.
53
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BUSINESS OF THE PARTNERSHIP AND CPLP
The Cable Television Industry
Cable television was introduced in the early 1950s to provide
television signals to small or rural towns with little or no available off-air
television signals and to communities with reception difficulties caused by
terrain problems. The cable television industry has since added non-broadcast
programming and increased channel capacity to these "classic system" subscribers
and has also expanded service to more densely populated areas and to those
communities in which off-air reception is not a problem. In addition, most cable
television systems offer a variety of channels and programming. See "--
Marketing, Programming and Rates."
In recent years, cable operators have been building more sophisticated
systems with greater channel capacity, thereby increasing the potential number
of programming offerings available to subscribers and, consequently, increasing
the potential revenue available per subscriber. Present day state-of-the-art
cable television systems are capable of providing 36 to 108 channels of
programming.
A cable television system consists of two principal operating
components: one or more signal origination points called "headends" and a signal
distribution system. It may also include program origination facilities. Each
headend includes a tower, antennae or other receiving equipment at a location
favorable for receiving broadcast signals and one or more earth stations that
receive signals transmitted by satellite. The headend facility also houses the
electronic equipment which amplifies, modifies and modulates the signals,
preparing them for passage over the system's network of cables.
The signal distribution system consists of amplifiers and trunk lines
which originate at the headend and carry the signal to various parts of the
system, smaller distribution cables and distribution amplifiers which carry the
signal to the immediate vicinity of the subscriber and drop lines which carry
the signal into the subscriber's home. In the past several years, many cable
operators have utilized fiber optic (in place of, or in combination with,
coaxial) technology to transmit signals through the primary trunk lines.
Certain Regulatory and Legislative Developments
The cable television industry is subject to extensive regulation by
federal, local and, in some instances, state government agencies. The Cable
Television Consumer Protection and Competition Act of 1992 (the "1992 Cable
Act") significantly expanded the scope of cable television regulation on an
industry-wide basis by imposing rate regulation, requirements related to the
carriage of local broadcast stations, customer service obligations and other
requirements. Under the FCC's initial rate regulations pursuant to the 1992
Cable Act, regulated cable systems (i.e., those systems not subject to effective
competition) were required to apply a benchmark formula to determine their
maximum permitted rates. Those systems whose rates were above the benchmark on
September 30, 1992, were required to reduce their rates to the benchmark or by
10%, whichever was less. Under revised rate regulations adopted in February
1994, regulated cable systems were required to set their rates so that regulated
revenues per subscriber did not exceed September 30, 1992 levels, reduced by 17%
(taking into account the previous 10% reduction).
On June 15, 1995, the FCC released new rules to reduce the substantive
and procedural burdens of rate regulation applicable to small cable systems
(i.e., cable systems servicing 15,000 or fewer subscribers that are owned by a
cable company which served, in the aggregate, 400,000 or fewer subscribers at
the time such rules went into effect). Cable companies falling outside of this
definition may petition the FCC for small company treatment if they can
demonstrate similar circumstances. The
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FCC's new small cable systems rules amended the FCC's previous definitions of
small cable entities to encompass a broader range of cable systems that are
eligible for special rate and administrative treatment. Specifically, the new
rules create a new cost-of-service approach for the purpose of determining the
rate applicable to a small cable system. The new approach involves a
five-element calculation based on a system's costs. The Partnership and CPLP
both applied to the appropriate regulatory authorities for small cable system
rate relief with regard to all of their systems. See "-- Regulation and
Legislation." Such systems' status as "small cable systems" could be challenged
by other parties and could be denied by the FCC. With regard to most of the
systems for which small system applications were filed, the time period in which
a challenge could be filed has passed. However, regarding CCIP II's systems in
Jasper and Angelton, Texas, the FCC has issued an order which denies those
systems small system status. The Partnership plans to appeal this order. The
order did not require any reduction in rates or rate refunds. However, because
of the FCC's ruling, the Partnership will be unable to take advantage of the
special regulatory benefits accruing to small systems with regard to the Jasper
and Angelton, Texas systems, including a presumption of reasonability of certain
rates. Therefore, for the Jasper and Angelton, Texas systems, the Partnership
may be required to justify its rates under the general rate processes applicable
to cable operators, which may be less favorable. At this time, however, the
Partnership is unable to determine whether the order will have any material
impact on the rates the partnership can charge subscribers in these particular
franchise areas.
On February 1, 1996, Congress passed the Telecommunications Act of
1996 (the "Telecommunications Act," and, together with the 1992 Cable Act, the
"Cable Acts"). The Telecommunications Act was signed into law by the President
on February 8, 1996, and substantially amends the Communications Act of 1934
(the "Communications Act") (including the re-regulation of subscriber rates
under the 1992 Cable Act). The Telecommunications Act alters federal, state and
local laws and regulations pertaining to cable television, telecommunications
and other services. See "-- Regulation and Legislation."
Certain provisions of the Telecommunications Act could materially
affect the growth and operation of the cable television industry and the cable
services provided by the Partnership. Although the new legislation is expected
to substantially lessen regulatory burdens, the cable television industry may be
subject to additional competition as a result thereof. There are numerous
rulemakings which have been, and which will be undertaken by the FCC which will
interpret and implement the Telecommunications Act's provisions. In addition,
certain provisions of the Telecommunications Act (such as the deregulation of
cable programming rates) are not immediately effective. In addition, the
legality of certain of the Telecommunications Act's provisions have been, and
are likely to continue to be, judicially challenged. The Partnership is unable
at this time to predict the outcome of such rulemaking or litigation or the
substantive effect (financial or otherwise) of the new legislation and the
rulemakings on the Partnership. Likewise, CPLP is unable at this time to predict
the outcome of such rulemakings or litigations or the substantive effect
(financial or otherwise) of the new legislation and the rulemakings on CPLP.
Description of Systems; Property Relating to Systems
Partnership Systems
Commencing in December 1987, the Partnership acquired the Partnership
Systems in a series of transactions. These acquisitions were financed through a
combination of the proceeds of the sale of LP Units, bank loans and, in certain
cases, seller financing. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- Liquidity and Capital Resources."
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The Anderson County System serves communities located in and around
Pelzer, West Pelzer, Williamston, Travelers Rest, Keowee Key and the Town of
Salem and portions of the counties of Anderson, Greenville, Pickens and Oconee,
all in South Carolina. The Northeast Missouri Systems serve communities located
in and around Canton, Center, Frankford, Labelle, LaGrange, Lewistown, New
London and Wayland, Missouri, and the Southeast Texas Systems serve communities
located in and around Agua Dulce, Angelton, Bailey's Prairie, Belleville,
Buffalo, Cleveland, Hempstead, Danbury, Driscoll, Jasper, Kingsville,
Madisonville, Marlin, North Cleveland, Sealy and Woodville, Texas. The Jasper
Cluster is a part of the Southeast Texas Systems which serves the communities of
Cleveland, Jasper and Woodville, Texas. The Marlin Cluster is a part of the
Southeast Texas Systems which serves the communities of Marlin, Madisonville and
Buffalo, Texas.
The following table sets forth a summary of subscriber data (rounded
to the nearest hundred) of the Partnership Systems as of the dates indicated:
<TABLE>
<CAPTION>
June 30, December 31,
------------------------------- -----------------------------------------------
1996 1995 1995 1994 1993
-------------- -------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
Basic Subscribers:
Southeast Texas Systems............................ 22,400 22,100 22,200 21,800 20,300
Northeast Missouri Systems......................... 2,100 2,100 2,100 2,100 2,200
Anderson County System ............................ 20,700 19,900 20,200 19,100 18,100
-------------- -------------- ------------- ------------- --------------
45,200 44,100 44,500 43,000 40,600
============== ============== ============= ============= ==============
Premium Subscriptions:
Southeast Texas Systems............................ 7,900 7,900 8,400 7,900 8,700
Northeast Missouri Systems ........................ 900 1,000 1,000 1,100 1,100
Anderson County System............................. 10,900 11,000 11,100 10,400 8,800
-------------- -------------- ------------- ------------- --------------
19,700 19,900 20,500 19,400 18,600
============== ============== ============= ============= ==============
</TABLE>
A brief description of the Partnership Systems follows.
The Southeast Texas Systems, including the Jasper Cluster and the
Marlin Cluster. The Southeast Texas Systems provide cable television service to
17 communities located in eastern and southern Texas. As of June 30, 1996, the
Southeast Texas Systems consisted of 13 headend sites and approximately 720
miles of activated distribution plant passing approximately 45,000 homes and
serving approximately 22,400 basic subscribers, subscribing for approximately
7,900 premium service units. At June 30, 1996, the Partnership employed 39
full-time equivalent persons in connection with the Southeast Texas Systems. The
largest communities served by the Southeast Texas Systems as of June 30, 1996
were Kingsville and Angelton, Texas, which accounted for approximately 25% and
19%, respectively, of the basic subscribers served by the Southeast Texas
Systems. As of June 30, 1996, the Jasper Cluster and the Marlin Cluster
accounted for approximately 30% and 16%, respectively, of the basic subscribers
served by the Southeast Texas Systems. The original acquisition price of the
Southeast Texas Systems was $35,375,000.
The Northeast Missouri Systems. The Northeast Missouri Systems provide
cable television service to eight communities located in the northeastern
section of Missouri. As of June 30, 1996, the Northeast Missouri Systems
consisted of seven headend sites and approximately 70 miles of activated
distribution plant passing approximately 4,000 homes and serving approximately
2,100 basic subscribers, subscribing for approximately 900 premium service
units. At June 30, 1996, the Partnership employed two full-time equivalent
persons in connection with the Northeast Missouri Systems. The largest headend
serves Canton and LaGrange, Missouri. As of June 30, 1996, Canton
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and LaGrange subscribers accounted for approximately 47% of the subscribers
served by the Northeast Missouri Systems. The original acquisition price of the
Northeast Missouri Systems was $3,060,000.
The Anderson County System. The Anderson County System provides cable
television service to 11 communities located in South Carolina. As of June 30,
1996, the Anderson County System consisted of four headends and approximately
1,100 miles of activated distribution plant passing approximately 28,400 homes
and serving customers subscribing to approximately 20,700 basic and 10,900
premium subscriptions. At June 30, 1996, the Partnership employed 28 full-time
equivalent persons in connection with the operation of the Anderson County
System. The largest communities served by the Anderson County System are
unincorporated Anderson and Greenville Counties, which accounted for
approximately 47% and 24%, respectively, of the basic subscribers served by the
Anderson County System. The original acquisition price of the Anderson County
System was $33,600,000.
CPLP Systems
Commencing in March 1990, CPLP acquired the CPLP Systems in a series
of transactions. These acquisitions were financed through two investments by the
Partnership, in March and June 1990 totaling approximately $25,000,000 in
equity.
The Abbeville System serves communities located in and around
Abbeville and Abbeville County, South Carolina. The Lincolnton System serves
communities located in and around Lincolnton, Vale and Taylorsville, North
Carolina, and the Sanford System serves communities located in and around
Sanford, Siler City, Whispering Pines and Troy, North Carolina. The LaGrange
System serves communities located in and around LaGrange, Schulenberg,
Hallettsville, Weimar and Giddings, Texas.
The following table sets forth a summary of subscriber data (rounded
to the nearest hundred) of the CPLP Systems as of the dates indicated:
June 30, December 31,
--------------- -------------------------
1996 1995 1995 1994 1993
------ ------ ------- ------ -------
Basic Subscribers:
Abbeville System . 2,500 2,500 2,500 2,500 2,400
Lincolnton Systems 14,700 14,200 14,300 14,000 13,300
Sanford Systems .. 12,700 12,600 12,600 12,200 11,700
LaGrange System .. 6,200 6,100 6,200 6,100 6,000
------ ------ ------ ------ ------
36,100 35,400 35,600 34,800 33,400
====== ====== ====== ====== ======
Premium Subscriptions:
Abbeville System . 900 900 900 800 700
Lincolnton Systems 6,500 6,500 6,300 6,500 5,800
Sanford System ... 5,900 6,200 5,700 5,800 5,000
LaGrange System .. 2,500 2,400 2,600 2,500 2,700
------ ------ ------ ------ ------
15,800 16,000 15,500 15,600 14,200
====== ====== ====== ====== ======
A brief description of each of the CPLP Systems follows.
The Abbeville System. The Abbeville System provides cable television
service to one community located in South Carolina. As of June 30, 1996, the
Abbeville System consisted of one headend site and approximately 100 miles of
activated distribution plant passing approximately 3,700
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<PAGE>
homes and serving approximately 2,500 basic subscribers, subscribing for
approximately 900 premium service units. At June 30, 1996, the Partnership
employed five full-time equivalent persons in connection with the Abbeville
System. The largest community served by the Abbeville System as of June 30, 1996
was Abbeville, South Carolina, which accounted for approximately 100% of the
basic subscribers served by the Abbeville System. The original acquisition price
of the Abbeville System was $4,000,000.
The Lincolnton System. The Lincolnton System provides cable television
service to four communities located in North Carolina. As of June 30, 1996, the
Lincolnton System consisted of three headend sites and approximately 600 miles
of activated distribution plant passing approximately 28,600 homes and serving
approximately 14,700 basic subscribers, subscribing for approximately 6,500
premium service units. At June 30, 1996, the Partnership employed 18 full-time
equivalent persons in connection with the Lincolnton System. The largest
community served by the Lincolnton System as of June 30, 1996 was Lincolnton,
North Carolina, which accounted for approximately 70% of the basic subscribers
served by the Lincolnton System. The original acquisition price of the
Lincolnton System was $21,406,000.
The Sanford System. The Sanford System provides cable television
service to eight communities located in North Carolina. As of June 30, 1996, the
Sanford System consisted of four headend sites and approximately 400 miles of
activated distribution plant passing approximately 21,500 homes and serving
approximately 12,700 basic subscribers, subscribing for approximately 5,900
premium service units. At June 30, 1996, the Partnership employed 14 full-time
equivalent persons in connection with the Sanford System. The largest community
served by the Sanford System as of June 30, 1996 was Sanford, North Carolina,
which accounted for approximately 73% of the basic subscribers served by the
Sanford System. The original acquisition price of the Sanford System was
$33,148,500.
The LaGrange System. The LaGrange System provides cable television
service to five communities located in Southeast Texas. As of June 30, 1996, the
LaGrange System consisted of five headend sites and approximately 300 miles of
activated distribution plant passing approximately 9,800 homes and serving
approximately 6,200 basic subscribers, subscribing for approximately 2,500
premium service units. At June 30, 1996, the Partnership employed ten full-time
equivalent persons in connection with the LaGrange System. The largest community
served by the LaGrange System as of June 30, 1996 was LaGrange, Texas, which
accounted for approximately 79% of the basic subscribers served by the LaGrange
System. The original acquisition price of the LaGrange System was $12,643,000.
Properties
Principal physical assets of the Partnership and CPLP consist of,
among other things, the components of each of the cable television systems,
which include a central receiving apparatus, distribution cables and a local
business office. The receiving apparatus is comprised of a tower and antennae
for reception of over-the-air broadcast television signals and one or more earth
stations for reception of satellite signals. Located near these receiving
devices is a building that houses associated electronic gear and processing
equipment. Each of the Partnership and CPLP owns the receiving and distribution
equipment of each Partnership System or CPLP System, as the case may be, and
owns or leases small parcels of real property for the receiving sites.
Cable is either buried in trenches or is attached to utility poles
pursuant to license agreements with the owners of the poles. The Partnership and
CPLP own or lease the local business office of each system from which it
dispatches service employees, monitors the technical quality of the system,
handles customer service and billing inquiries and administers marketing
programs. Certain of the office facilities include studios for program
production.
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The General Partner believes that the Partnership's and CPLP's
properties are generally in good condition and fully utilized. The Partnership
Systems currently operate at between 220 and 330 megahertz, with the Anderson
County System operating at between 300 and 330 megahertz, whereas the General
Partner believes the standard in the cable television industry to be 450
megahertz. All of the CPLP Systems, including the Three CPLP Systems, currently
operate at between 290 and 385 megahertz. The physical components of the systems
also require maintenance and periodic upgrades to keep pace with technological
advances and to comply with the requirements of certain franchising authorities.
For a discussion of historical and planned 1996 capital expenditures, see
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Financial Condition" and "-- Liquidity and Capital Resources."
Marketing, Programming and Rates
Both the Partnership's and CPLP's marketing programs are based upon
offering various packages of cable services designed to appeal to different
market segments. The General Partner and CPI perform and utilize market research
on selected Partnership Systems and CPLP Systems, respectively, compare the data
to national research and tailor a marketing program for each individual market.
Each of the General Partner and CPI utilizes a coordinated array of marketing
techniques to attract and retain subscribers, including door-to-door
solicitation, telemarketing, media advertising and direct mail solicitations.
The Partnership and CPLP regularly implement marketing efforts instituted by the
General Partner and CPI, respectively, in order to gain new subscribers and
increase basic and premium penetration in the communities served by the systems.
Although services vary from system to system because of differences in
channel capacity, viewer interests and community demographics, each of the
individual Partnership Systems and CPLP Systems offers a "basic service tier,"
consisting of local television channels (network and independent stations)
available over-the-air, local public channels and governmental and leased access
channels. Each individual system also offers an expanded basic service tier of
television stations relayed from distant cities, specialized programming
delivered via satellite and various alpha-numeric channels providing information
on news, time, weather and the stock market. In addition to these services, the
systems typically provide one or more premium services purchased from
independent suppliers and combined in different formats to appeal to the various
segments of the viewing audience, such as Home Box Office, Cinemax, Showtime,
The Movie Channel and the Disney Channel. A "premium service unit" is a single
premium service for which a subscriber must pay an additional monthly fee in
order to receive the service. Subscribers may subscribe for one or more premium
service units. The systems also receive revenues from the sale or monthly use of
certain equipment (e.g., converters, wireless remote control devices, etc.) and
from cable programming guides, with some systems offering enhanced audio
services. Certain of the systems also generate revenues from the sale of
advertising spots on one or more channels, from the distribution and sale of
pay-per-view movies and events, and from commissions resulting from subscribers
participating in home shopping.
Rates to subscribers vary from market to market and in accordance with
the type of service selected. At June 30, 1996, the Partnership Systems' monthly
basic fees ranged from $8.23 to $15.13 for the basic service tier and $11.75 to
$19.95 for the expanded basic service tier. The Anderson County System's monthly
basic fees ranged from $8.24 to $9.89 for the basic service tier and $15.01 to
$16.27 for the expanded basic service tier. The monthly basic fees for CPLP's
cable television systems ranged from $6.54 to $11.06 for the basic service tier
and $14.50 to $16.76 for the expanded basic tier. The Abbeville System's monthly
basic fees were $8.19 for the basic tier and $16.76 for the expanded basic tier.
The Sanford System's monthly basic fees were $8.95 for the basic tier and $14.50
for the expanded basic tier. The Lincolnton System's monthly basic fees ranged
from $6.54 to $7.78 for the basic tier and from $15.18 to $16.40 for the
expanded basic tier. These rates reflect reductions effected
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<PAGE>
in response to the implementation of the 1992 Cable Act, which became effective
in 1993. See "-- Regulation and Legislation." A one-time installation fee, which
may be partially waived during certain promotional periods, is charged to new
subscribers. The practices of the Partnership and CPLP regarding rates are
consistent with the current practices in the industry. See "-- Regulation and
Legislation" for a discussion of rate-setting.
Management Agreement
Prior to July 15, 1994, the Partnership Systems were managed by Cencom
Cable Associates, Inc. (now known as Cencom Cable Entertainment, Inc. and
referred to herein as "CCA") pursuant to a Management Agreement dated as of
December 8, 1987 (the "Management Agreement"). CCA's rights and obligations
under the Management Agreement were assumed by the General Partner pursuant to
an Assignment and Assumption Agreement dated as of July 15, 1994 between CCA and
the General Partner. Consequently, the General Partner has the exclusive right,
authorization, and responsibility to manage the Partnership Systems.
Under the Management Agreement, the General Partner is to receive a
management fee equal to five percent of the gross operating revenues of the
Partnership for its services. Such fee is to be paid quarterly in arrears after
the Partnership pays or provides for quarterly distributions to the Limited
Partners. However, commencing in 1989, the Management Agreement subordinated 50%
of the management fee payment to certain quarterly distributions to the Limited
Partners. Unpaid management fees accrue without interest. The Partnership's
management fees for fiscal years 1995, 1994 and 1993 were approximately
$852,300, $812,900 and $811,200, respectively, in accordance with the Management
Agreement. Deferred management fees are recorded in the Partnership's balance
sheet in the caption "Payables to General Partner and affiliate." See "Audited
Financial Statements" and "Unaudited Financial Statements."
Pursuant to its terms, the Management Agreement was to expire on the
earlier of December 31, 1995, or upon the dissolution of the Partnership. The
General Partner has agreed, pursuant to a First Amendment to Management
Agreement dated as of December 31, 1995, to extend the term of the Management
Agreement through the winding-up of the Partnership's business and affairs. See
"CERTAIN INFORMATION ABOUT THE PARTNERSHIP, THE GENERAL PARTNER AND CERTAIN
AFFILIATES -- Certain Affiliate Transactions."
Franchises
The Partnership Systems and the CPLP Systems operate pursuant to an
aggregate of 36 and 21 non-exclusive franchises, permits or similar
authorizations, respectively, issued by governmental authorities. Franchises or
permits are awarded by a governmental authority and generally are not
transferable absent the consent of the governmental authority. Most of the
franchises pursuant to which the Partnership Systems and the CPLP Systems
operate may be terminated prior to their stated expiration by the granting
authority, after due process, following a breach of a material provision.
Currently, nine of the Partnership's 36 franchises, serving approximately 23% of
the Partnership's subscribers in the aggregate, and nine of CPLP's 21
franchises, serving approximately 42.9% of CPLP's subscribers in the aggregate,
are within a three-year window period for renewal. Of the Anderson County
System's 11 franchises, five are due to expire before August 2005 and two are
currently undergoing renewal. Of the Three CPLP Systems' 16 franchises, all are
due to expire before August 2005 and four are currently undergoing renewal.
Under the terms of most of the franchises, a franchise fee of up to five percent
(5%) of the gross revenues derived by a cable system from the provision of cable
television services (the maximum amount that may be charged by a franchising
authority under the 1992 Cable Act) is payable to the franchising authority.
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Competition
Cable television companies generally operate under non-exclusive
franchises granted by local authorities that are subject to renewal and
renegotiation from time to time. The 1992 Cable Act prohibits franchising
authorities from granting exclusive cable television franchises and from
unreasonably refusing to award additional competitive franchises. Cable system
operators may therefore experience competition from other operators building a
system in an existing franchise area (i.e., an "overbuild"). The 1992 Cable Act
also permits municipal authorities to operate cable television systems in their
communities without franchises. There are virtually no overbuilds in the areas
in which the Partnership Systems or CPLP Systems are located, although other
cable operators may operate systems in the vicinity of the Partnership Systems
or CPLP Systems. Cable system operators also compete for the right to construct
systems in new housing developments adjoining or otherwise located in proximity
to such operator's existing systems. The Partnership and CPLP believe that the
selection of a cable operator to construct a system in a new housing development
(which may be located near the cable systems of several different operators) is
typically based upon an evaluation by the real estate developer of the
programming and pricing offered by the different cable operators conducting
business in proximity to such housing development.
Cable television systems also face competition from alternative
methods of receiving and distributing television signals and from other sources
of home entertainment. Within the home video programming market, the Partnership
competes primarily with other cable franchise holders and with home satellite
and wireless cable providers, and, when existing franchises become available for
renewal (or new franchises become available in the southeastern region of the
United States), with other cable franchise holders. The Partnership believes
that direct broadcast satellite ("DBS"), a service by which packages of
television programming are transmitted to individual homes which are serviced by
a single satellite dish, is currently the most significant competitive threat to
the Partnership Systems. The Partnership does not expect DBS to become a more
significant threat to the Partnership in the foreseeable future because of
certain disadvantages associated with DBS technology (e.g., high upfront capital
costs, lack of local programming and topographical limitations which limit
reception in hilly areas).
Cable television systems also compete with wireless program
distribution services such as multichannel multipoint distribution service
("MMDS"), which uses low power microwave frequencies to transmit video
programming over-the-air to customers. The FCC has amended its regulations to
enable MMDS systems to compete more effectively with cable systems by making
available additional channels to the MMDS industry and by refining the
procedures by which MMDS licenses are granted. The FCC also recently ruled that
wireless cable operators may increase their channel capacity and service
offerings through digital compression techniques. Such increased capacity and
offerings may make wireless cable a more significant competitor in the video
programming industry. The 1992 Cable Act generally prohibits a cable operator
from holding an FCC MMDS license in its franchised cable service area. However,
the Telecommunications Act allows such common ownership if the cable operator is
subject to "effective competition." Although the Partnership and CPLP face some
actual or potential competition from MMDS operators, such competition is not yet
significant. Additionally, the FCC recently allocated frequencies in the 28 GHz
band for a new multichannel wireless video service similar to MMDS. The
Partnership is unable to predict the economic viability of wireless video
services, such as MMDS, or whether such services will present a competitive
threat to the Partnership or CPLP.
Additional forms of competition for cable systems are master antenna
television ("MATV") and satellite master antenna television system ("SMATV").
These systems are essentially small, closed cable systems which operate within
specific hotels, apartment or condominium complexes
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and individual residences. Due to the widespread availability of earth stations,
such private cable television systems can offer both improved reception of local
television stations and many of the same satellite-delivered program services
which are offered by franchised cable television systems. MATV and SMATV systems
currently benefit from operating advantages not available to franchised cable
television systems, including fewer regulatory burdens and no requirement to
service low density or economically depressed communities. The
Telecommunications Act, which to some extent deregulates or lessens the
regulatory burden on the cable industry, may reduce some of the advantages of
MATV and SMATV systems. However, since MATV and SMATV systems generally do not
fall within the Cable Acts' definition of a "cable system," notwithstanding the
enactment of such legislation, they could still be exempt from other
requirements of the Cable Acts which were not amended. Furthermore, the
Telecommunications Act broadens an exemption from regulation as a "cable
system," which may exempt additional MATV and SMATV systems from regulation
under the Cable Acts.
In addition, the Telecommunications Act authorizes local exchange
carriers ("LECs") to provide a wide variety of video services competitive with
services provided by cable systems and to provide cable services directly to
customers in the telephone companies' service areas, with some regulatory
safeguards. See " -- Regulation and Legislation." Some video programming
services provided by telephone companies (e.g., "open video systems") do not
require local franchises. Further, certain of the Regional Bell Operating
Companies ("RBOCs") have already entered the cable television business outside
their service areas. The General Partner believes that telephone companies will
generally focus their efforts on cable acquisitions in larger metropolitan
areas, although there can be no assurance that this will be the case.
The Telecommunications Act also authorizes registered utility holding
companies and their subsidiaries to provide video programming services,
notwithstanding the applicability of the Public Utility Holding Company Act. See
"-- Regulation and Legislation."
Other new technologies may become competitive with non-entertainment
services that cable television systems can offer. Advances in communications
technology as well as changes in the marketplace and the regulatory and
legislative environment are constantly occurring. The General Partner cannot
predict the effect that ongoing or future developments might have on the cable
television industry generally or the Partnership or CPLP specifically.
Regulation and Legislation
The cable television industry is subject to extensive regulation at
the federal, local and, in some instances, state levels. In addition, recent
legislative and regulatory changes and additional regulatory proposals under
consideration may materially affect the cable television industry. The Cable
Acts, both of which amended the Communications Act, establish a national policy
to guide the development and regulation of cable television systems. The
Communications Act was recently substantially amended by the Telecommunications
Act, which alters federal, state and local laws pertaining to cable television,
telecommunications and other services. Principal responsibility for implementing
the policies of the Cable Acts is allocated between the FCC and state or local
franchising authorities.
Cable Acts and FCC Regulation
The Cable Acts and the FCC's implementing rules establish, among other
things, (i) rate regulations, (ii) "anti-buy through" provisions, (iii) "must
carry" and "retransmission consent" requirements, (iv) rules for franchise
renewals and transfer and (v) other regulations covering a variety of
operational areas.
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The 1992 Cable Act and the FCC's rules implementing the 1992 Cable Act
generally have increased the administrative and operational expenses of cable
television systems and have resulted in additional regulatory oversight by the
FCC and local franchise authorities. The Partnership is not able to predict the
ultimate effect of the 1992 Cable Act or the ultimate outcome of various FCC
rulemaking proceedings or the litigation challenging various aspects of the 1992
Cable Act and the FCC's regulations implementing the 1992 Cable Act.
Rate Regulation. The Cable Acts and FCC regulations have imposed rate
requirements for basic services and equipment. Under the 1992 Cable Act, a local
franchising authority in a community not subject to "effective competition" (as
defined in the 1992 Cable Act) generally is authorized to regulate basic cable
service rates after certifying to the FCC that, among other things, it will
adopt and administer rate regulations consistent with FCC rules, and in a manner
that will provide a reasonable opportunity to consider the views of interested
parties. The Telecommunications Act expands the definition of "effective
competition" to include any franchise area where a local exchange carrier (or
its affiliate) (or any multichannel video programming distributor using the
facilities of such carrier or its affiliate) provides video programming services
to subscribers by any means, other than through DBS. The local exchange carrier
must provide "comparable" programming services in the franchise area. In
regulating the basic service rates, certified local franchise authorities have
the authority to order a rate refund of previously paid rates determined to be
in excess of the maximum permitted reasonable rates.
For a defined class of "small cable operators," the Telecommunications
Act immediately eliminates regulation of cable programming rates. To qualify as
a "small cable operator," the operator must serve in the aggregate fewer than
one percent of all U.S. subscribers and have affiliate gross revenues not
exceeding $250,000,000 and serve 50,000 or fewer subscribers in any franchise
area. Rate regulation of the basic service tier remains subject to regulation by
local franchising authorities under the Telecommunications Act, except under
specific circumstances for certain small cable operators. Rates for the basic
service tier of small cable operators are deregulated if the system offered only
a single tier of services as of December 31, 1994. See " -- Small Cable Systems"
below.
Under the 1992 Cable Act, rates for cable programming services not
carried on the basic service tier ("non-basic services") could be regulated by
the FCC upon the filing of a complaint by franchise authorities or subscribers
that indicates the cable operator's rates for these services are unreasonable.
Three rate complaints have been filed with the FCC with respect to certain of
the Partnership's and CPLP's cable programming service tiers, one of which has
been filed with respect to the Anderson County System. The General Partner does
not believe that these rate complaints, even if decided against the Partnership,
will have a material adverse effect on the Partnership. The Telecommunications
Act eliminates regulation of the cable programming service tier (non-basic
programming) as of March 31, 1999. In the interim, rate regulation of the cable
programming tier can only be triggered by a franchising authority complaint to
the FCC. A franchising authority complaint must be based on more than one
subscriber complaint, which must be filed within 90 days after a rate increase.
If the FCC determines that the Partnership's cable programming service tier
rates are unreasonable, the FCC has the authority to order the Partnership to
reduce cable programming service tier rates and to refund to customers any
overcharges occurring from the filing date of the rate complaint at the FCC.
While management believes that the Partnership has complied in all material
respects with the rate provisions of the 1992 Cable Act, in jurisdictions that
have not yet chosen to certify, refunds covering a one-year period on basic
service may be ordered upon future certification if the Partnership or CPLP is
unable to justify its rates through a benchmark or cost-of-service filing or
small system cost-of-service filing pursuant to FCC rules. The General Partner
is unable to estimate at this time the amount of refunds that may be payable by
the Partnership in the event any of the Partnership Systems' rates are
successfully challenged by franchising authorities or found to be unreasonable
by the FCC, although it does not believe that the amount of any such refunds
would have a material adverse effect on
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the Partnership. Notwithstanding mandated rate reductions, cable operators
currently may adjust their regulated rates to reflect inflation and what the FCC
has deemed to be external costs (such as increases in franchise fees).
In November 1994, the FCC adopted the so-called "going-forward rules"
which, among other things, allow cable operators to raise rates over the next
three years by adding channels to the expanded basic service tier. Under the
revised rules, cable operators were allowed to take a per channel mark-up of up
to 20 cents for each channel added to the expanded basic service tier, with an
aggregate cap of $1.20 per subscriber per month. Accordingly, the Partnership
was permitted to adjust rates on January 1, 1995 for channel additions occurring
after May 14, 1994. In addition to rate adjustments permitted for additional
channels, the "going-forward rules" allow cable operators to recover an
additional amount of 30 cents in the aggregate per subscriber per month for
license fees associated with adding new channels through 1996. The license fee
cap applies through December 31, 1996. (During the third year, license fees are
subject to the general rate rules.) Thus, absent a change to these rules or a
change in the regulatory environment in the interim, through 1996 the allowable
rate increases for channel adjustments and license fees could total up to $1.50
per subscriber per month. Under the "going-forward rules," in 1997, cable
operators may make an additional flat fee increase of 20 cents per channel per
month for channels added during that year, provided that the rate increases made
by cable operators over the three-year period (exclusive of license fees) do not
exceed $1.40 in the aggregate. For channels added after May 14, 1994, operators
electing to take advantage of the 20 cents per channel adjustment may not take a
7.5% mark-up on programming cost increases that are otherwise currently
permissible under the rate rules. The "going-forward rules" are scheduled to
expire on December 31, 1997.
The "going-forward rules" also allow cable operators to place channels
that were not offered on the cable system prior to October 1, 1994 on a new
separate unregulated service tier as long as the regulated basic and expanded
basic service tiers remain intact. Cable operators may offer the same new
channels simultaneously on both an expanded basic service tier and a new
unregulated service tier, and may at any time move them to the new tier. Thus,
operators may build up a following for new channels by putting them in the
expanded basic service tier before moving them to the new unregulated service
tier. Channels that were in the basic service tier or the expanded basic service
tier prior to September 30, 1994 may not be moved to the new tier, nor may such
channels be dropped from the basic or expanded basic service tiers and then
added to a new tier within the two-year period after the date upon which any
such channel is dropped.
In September 1995, the FCC developed an abbreviated cost-of-service
form that permits cable operators to recover the costs of significant upgrades
that provide benefits to subscribers of regulated cable services. Cable
operators seeking to raise rates to cover the costs of an upgrade would submit
only the costs of the upgrade instead of all current costs. In December 1995,
the FCC revised its cost-of-service rules. At this time, the Partnership is
unable to predict the effect of these revised rules on its or CPLP's business.
In another action in September 1995, the FCC established a new
optional rate adjustment methodology that encourages operators to limit their
rate increases to once per year to reflect inflation and changes in external
costs and in the number of channels. The rules permit cable operators to
"project reasonable" changes in their costs for the 12 months following the rate
change (in an effort to eliminate delays in recovering costs). The order also
allows operators to recover increases in additional types of franchise
requirement costs. Permitted pass-through increases include increases in the
costs of providing institutional networks, video services, data services to or
from governmental and educational institutions, and certain other cost
increases. The Partnership is unable to predict the effect of these new rate
rules on its or CPLP's business.
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In November 1995, the FCC proposed to provide cable operators with the
option of establishing uniform rates for similar service packages offered in
multiple franchise areas located in the same region. Under the FCC's current
rules, cable operators subject to rate regulation must establish rates on a
franchise-specific basis. The proposed rules could lower cable operators'
marketing costs and may also allow operators to better respond to competition
from alternative providers. The Partnership is unable to predict whether these
proposed rules will ultimately be promulgated by the FCC and, if they are
promulgated, what their effect on the Partnership or CPLP will be.
In July 1996, the FCC proposed to give operators more flexibility with
respect to the relative pricing of different tiers of service. Under this
proposal, once an operator has set rates in accordance with existing
regulations, the operator could decrease its basic service tier ("BST") rate and
then take a corresponding increase in its cable programming service tier
("CPST") rate to offset the lost revenue on the BST. In this proceeding, the FCC
has also asked parties to comment on whether it should place a limit on the
amount of any CPST rate increase or otherwise limit the amount by which the BST
and CPST rate may be adjusted.
The FCC expects that this proposal would give operators rate the
structure flexibility enjoyed by alternative providers of video services who
are, or soon will be, attempting to compete with cable operators but who are not
subject to the rate regulation imposed by statute on cable operators. The
Partnership is unable to predict whether these proposed rules will ultimately be
promulgated by the FCC and, if they are promulgated, what their effect on the
Partnership or CPLP will be.
The uniform rate requirements in the 1992 Cable Act which require that
cable operators charge uniform rates through their franchise area are relaxed by
the Telecommunications Act. Specifically, the Telecommunications Act clarifies
that the uniform rate provision does not apply where a cable operator faces
"effective competition." In addition, bulk discounts to multiple dwelling units
are exempted from the uniform rate requirements. However, complaints concerning
"predatory" pricing (including with respect to bulk discounts to multiple
dwelling units) may be made to the FCC. The Telecommunications Act also permits
cable operators to aggregate, on a franchise system, regional or company level,
its equipment costs in broad categories. The Telecommunications Act should
facilitate the rationalization of equipment rates across jurisdictional
boundaries. However, these cost-aggregation rules do not apply to the limited
equipment used by subscribers who only receive basic programming.
"Anti-Buy Through" Provisions. The 1992 Cable Act and corresponding
FCC regulations have established requirements for customers to be able to
purchase video programming on a per channel or per program basis without having
to subscribe to any tier of service (other than the basic service tier), subject
to available technology. The available technology exception sunsets on October
5, 2002. Although most of the Partnership's subscribers are served by systems
that offer addressable technology, most of the Partnership's subscribers do not
currently have the requisite equipment in their home to utilize such technology.
As a result, most of the Partnership Systems are currently exempt from complying
with the requirements of the 1992 Cable Act. The Partnership cannot predict the
extent to which this provision of the 1992 Cable Act and the corresponding FCC
rules may cause customers to discontinue optional non-basic service tiers in
favor of the less expensive basic cable service.
"Must Carry" Requirements/"Retransmission Consents." Under the 1992
Cable Act, cable television operators are subject to mandatory broadcast signal
carriage requirements that allow local commercial and non-commercial educational
television broadcast stations to elect to require a cable system to carry the
station, subject to certain exceptions, or, in the case of commercial stations,
to negotiate for "retransmission consent" to carry the station. In addition,
there are requirements for cable systems to obtain retransmission consent for
all "distant" commercial television stations (except for
commercial/satellite-delivered independent "superstations" such as WTBS),
commercial radio stations
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and certain low power television stations carried by such systems after October
6, 1993. The validity of mandatory signal carriage requirements is being
litigated in the United States Supreme Court, which is scheduled to hear
arguments on the must carry rule in October 1996; however, the carriage
requirements will remain in effect pending the outcome of such proceedings. As a
result of the mandatory carriage rules, the Partnership Systems and CPLP Systems
have been required to carry television broadcast stations that otherwise would
not have been carried, thereby causing displacement of possibly more attractive
programming. The retransmission consent rules have resulted in the deletion of
certain local and distant television broadcast stations which the Partnership
Systems and CPLP Systems were carrying. To the extent retransmission consent
fees were paid for the continued carriage of certain television stations, such
costs were not recoverable. Any future amounts paid in exchange for
retransmission consent, however, may be passed along to subscribers as
additional programming costs.
Franchise Matters. The 1984 Cable Act contains franchise renewal
procedures designed to protect against arbitrary denials of renewal. The 1992
Cable Act made several changes to the renewal process that could make it easier
for a franchising authority to deny renewal. Moreover, even if a franchise is
renewed, a franchising authority may seek to impose new and more onerous
requirements, including requiring significant upgrades in facilities and
services or increased franchise fees. If a franchising authority's consent is
required for the purchase or sale of a cable television system, the franchising
authority may also seek to impose new and more onerous requirements as a
condition to the transfer. The acceptance of these new requirements, however,
may not be made a condition of the transfer. Historically, franchises have been
renewed for cable operators that have provided satisfactory services and have
complied with the terms of their franchises. Although the General Partner
believes that the Partnership has generally met the terms of its franchise
agreements and has provided quality levels of service, and anticipates that the
Partnership's future franchise renewal prospects generally will be favorable,
there can be no assurance that any such franchises will be renewed or, if
renewed, that the franchising authority will not impose more onerous
requirements on the Partnership than previously existed. Similarly, the
Partnership has been advised by CPI that CPI believes that CPLP has generally
met the terms of its franchise agreements and has provided quality levels of
service, and anticipates that CPLP's future franchise renewal prospects
generally will be favorable, there can be no assurance that any such franchises
will be renewed or, if renewed, that the franchising authority will not impose
more onerous requirements on CPLP than previously existed. See "-- Franchises"
for information regarding the status of the Partnership Systems' and CPLP
Systems' franchises.
Other FCC Regulations. The Partnership and CPLP are subject to a
variety of other FCC rules, covering such diverse areas as equal employment
opportunity, programming, maintenance of records and public inspection of files,
technical standards, leased access and customer service. The FCC has 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 often used in connection with cable
operations. Although the General Partner believes the Partnership is in
compliance in all material respects with all applicable FCC requirements, and
the Partnership has been advised by CPI that CPI believes CPLP is in compliance
in all material respects with all applicable FCC requirements, there can be no
assurance that the FCC would not find a violation and impose sanctions that
could adversely affect the Partnership's or CPLP's operations.
Small Cable Systems. The FCC has implemented rules to reduce the
substantive and procedural burdens of rate regulation applicable to small cable
systems (i.e., cable systems serving 15,000 or fewer subscribers that are owned
by or affiliated with a cable company which served, in the aggregate, 400,000 or
fewer subscribers at the time such rules went into effect). Cable companies
falling outside of this definition may petition the FCC for small company
treatment if they can demonstrate similar circumstances. The FCC's small cable
systems rules amended the FCC's previous
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definitions of small cable entities to encompass a broader range of cable
systems that are eligible for special rate and administrative treatment. In
addition, these new rules made available to this expanded category a new
regulatory scheme which the FCC expects to provide both rate relief and reduced
administrative burdens. Specifically, the new rules created a new
cost-of-service approach involving a five-element calculation based on a
system's costs. The calculation will produce a per channel rate for regulated
services that will be presumed reasonable if it is no higher than $1.24 per
channel. If the formula generates a higher rate, the operator may still charge
that rate if not challenged by the franchising authority, or if, upon being
challenged, it meets its burden of proving that the rate is reasonable. Under
these new rules, the regulatory benefits accruing to such small cable systems
remain effective even if such small cable systems are later acquired by cable
companies which serve in excess of 400,000 subscribers. The Partnership and CPLP
both applied to the appropriate regulatory authorities for small cable system
rate relief with regard to all of their systems. Such systems' status as small
cable systems could be challenged by other parties and could be denied by the
FCC. With regard to most of the systems for which small system applications were
filed, the time period in which a challenge could be filed has passed. However,
regarding CCIP II's systems in Jasper and Angelton, Texas, the FCC has issued an
order which denies those systems small system status. The Partnership plans to
appeal this order. The order did not require any reduction in rates or rate
refunds. However, because of the FCC's ruling, the Partnership will be unable to
take advantage of the special regulatory benefits accruing to small systems with
regard to the Jasper and Angelton, Texas systems, including a presumption of
reasonability of certain rates. Therefore, for the Jasper and Angelton, Texas
systems, the Partnership may be required to justify its rates under the general
rate processes applicable to cable operators, which may be less favorable. At
this time, however, the Partnership is unable to determine whether the order
will have any material impact on the rates the partnership can charge
subscribers in these particular franchise areas.
Recent Telecommunications Legislation
On February 1, 1996, Congress passed the Telecommunications Act. The
Telecommunications Act was signed into law by President Clinton on February 8,
1996, and substantially amends the Communications Act (including the
re-regulation of subscriber rates under the 1992 Cable Act). The
Telecommunications Act alters federal, state and local laws and regulations
pertaining to cable television, telecommunications, and other services. In
addition to the amendments previously discussed in this section, the legislation
also allows additional competition in video programming by telephone companies,
and makes other revisions to the Communications Act and the 1984 and 1992 Cable
Acts.
Telephone Partnership Provision of Video Programming. Under the
Telecommunications Act, telephone companies can compete directly with cable
operators in the provision of video programming. The new legislation recognizes
several multiple entry options for telephone companies to provide competitive
video programming, including over their telephone facilities, through either
common carrier transport or an "open video system," by radio communication, or
as a regular cable system. LECs, including RBOCs, will be allowed to compete
with cable operators both inside and outside the LECs' telephone service areas.
The Telecommunications Act repeals the statutory ban on telephone company
provision of video programming services in the telephone company's service
areas. The FCC's video dialtone regulations have also been repealed. Pursuant to
the authority granted to the FCC in the Telecommunications Act, the FCC ordered
that all video dialtone operators must, in order to continue to offer services,
elect one of the four permissible options for telephone companies by November 6,
1996 (as discussed more fully below). Video dialtone operators can apply for
extensions based upon "good cause."
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In particular, if a telephone company provides video via radio
communications, it will be regulated under Title III of the Communications Act
(the general sections governing use of the airwaves), rather than cable
regulation under Title VI. If a telephone company provides common carriage
transport of video programming, it will be subject to the requirements of Title
II of the Communications Act (the general common carrier provisions), rather
than Title VI cable regulation. Telephone companies providing video programming
through any other means (other than as an "open video system," as described
below) will be regulated under Title VI cable regulation.
The Telecommunications Act replaces the FCC's video dialtone rules
with an "open video system" plan by which telephone companies can provide video
programming service in their telephone service area. Telephone companies that
comply with the FCC's open video system regulations (which must be prescribed
within six months from enactment) will be subject to a relaxed regulatory
scheme. The open video system requirements are in lieu of Title II common
carrier regulation.
The FCC was directed and has prescribed rules that prohibit open video
systems from discriminating among video programming providers with regard to
carriage, and that ensure that open video system rates, terms and conditions for
service are reasonable and non-discriminatory. Pursuant to the
Telecommunications Act, the FCC has also adopted regulations prohibiting an open
video system operator and its affiliates from occupying more than one-third of
the system's activated channels when demand for channels exceeds supply. The
Telecommunications Act also mandates other open video system regulations,
including channel sharing and sports exclusivity. Open video systems will be
subject to the authority of local governments to manage public rights-of-way.
Local franchising authorities may require open video system operators to pay
franchise-type fees, which may not exceed the rate at which franchise fees are
imposed on any cable operator in the corresponding franchise area. The FCC
adopted most of the required open video system rules in June 1996.
Buyouts. The Telecommunications Act generally prohibits buyouts of
cable systems (which includes any ownership interest exceeding 10%) by LECs
within the LECs' telephone service area, cable operator buyouts of LEC systems
within the cable operator's franchise area, and joint ventures between cable
operators and LECs in the same markets. There are certain statutory exceptions,
including a rural exemption which permits buyouts where the purchased system
serves an area with fewer than 35,000 inhabitants outside an urban area. Also,
the FCC may grant waivers of the buyout provisions in cases where (1) the cable
operator or LEC would be subject to undue economic distress; (2) the cable
television system or facilities would not be economically viable; or (3) the
anticompetitive effects of the proposed transaction are clearly outweighed by
the effect of the transaction in meeting community needs. The relevant local
franchising authority must approve any such waiver.
Public Utility Competition. The Telecommunications Act also authorizes
another potential competitor, registered utility holding companies and their
subsidiaries, to provide video programming services, notwithstanding the Public
Utility Holding Company Act. Utilities must establish separate subsidiaries for
this purpose and must apply to the FCC for operating authority. Several such
utilities have been granted broad authority by the FCC to engage in activities
which could include video programming.
Cross-Ownership; Reduced Regulations. The Telecommunications Act makes
several other changes to relax ownership restrictions and regulation of cable
systems. It repeals the 1992 Cable Act's three-year holding requirement
pertaining to sales of cable systems. The broadcast/cable cross-ownership
restrictions are eliminated, although the FCC's regulations prohibiting
broadcast/cable common ownership currently remain. The SMATV cable
cross-ownership and the MMDS cable cross-ownership restrictions have been
eliminated for cable operators subject to effective competition.
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The Telecommunications Act amends the definition of "cable system" so
that a broader class of entities (including some entities which may compete with
the Partnership or CPLP) providing video programming will be exempt from
regulation as cable systems under the Communications Act.
Pole Attachments. The Telecommunications Act also alters the scheme
pertaining to pole attachment rates (rates charged by telephone and utility
companies for delivery of cable services). The current method for determining
rates will continue for five years. The FCC recently adopted an Order to
implement the Telecommunications Act's pole attachment provisions. CPLP is
unable to predict the impact of this Order or of the FCC's new pole attachment
regulations on its business. Any increases pursuant to this new formula may not
begin for five years, and will be phased in over years five through ten in equal
increments. However, this new FCC formula does not apply in states which certify
that they regulate pole rates.
Miscellaneous Requirements and Provisions. The Telecommunications Act
also imposes other miscellaneous requirements on cable operators, including an
obligation to fully scramble or block at no charge the audio and video portion
of any channel not specifically subscribed to by a household. In addition,
sexually explicit programming must be scrambled or blocked. If the cable
operator is unable to scramble or block its signal completely, it must restrict
transmission to those hours of the day when children are unlikely to view the
programming, as determined by the FCC. A federal court has temporarily stayed
enforcement of this provision pending further consideration of a constitutional
challenge. If the provision is held to be constitutional, it could increase
operating expenses for operators of cable television systems, including the
Partnership, and provide a competitive advantage to less regulated providers of
video programming services. The Telecommunications Act also directs the FCC to
adopt regulations to ensure, with certain exceptions, that video programming is
fully accessible through closed captioning. The FCC recently released a report
to Congress on the level at which video programming is closed captioned. The FCC
will be engaged in another proceeding to establish regulations to implement
closed captioning requirements.
Although the new legislation may substantially lessen regulatory
burdens, the cable television industry may be subject to additional competition
as a result thereof. There are numerous rulemakings which have been, and which
will be undertaken by the FCC which will interpret and implement the provisions
of the Telecommunications Act. In addition, certain provisions of the Act (such
as the deregulation of cable programming rates) are not immediately effective.
Further, certain provisions of the Telecommunications Act have been, and are
likely to continue to be subject to legal challenges. Certain provisions of the
Telecommunications Act could materially affect the Partnership's ability to sell
the Partnership Systems, however the Partnership is unable at this time to
predict the outcome of such rulemakings or litigation or the substantive effect
(financial or otherwise) of the new legislation and the rulemakings on the
Partnership. Similarly, certain provisions of the Telecommunications Act could
materially affect CPLP's ability to sell the CPLP Systems, however, CPLP is
unable at this time to predict the outcome of such rulemakings or litigation or
the substantive effect (financial or otherwise) of the new legislation and the
rulemakings on CPLP.
FCC Implementation. The FCC is presently, and will be, engaged in
numerous proceedings to implement various provisions of the Telecommunications
Act. Recently, the FCC adopted cable television equipment cost aggregation rules
and adopted open video system rules. In addition to the proceedings previously
discussed herein, the FCC has recently initiated a proceeding to implement most
of the Cable Act reform provisions of the Telecommunications Act.
In this proceeding, the FCC has set forth certain interim rules to
govern while the FCC completes its implementation of the Telecommunications Act.
Among other things, the FCC is requiring on an interim basis that for a LEC to
be deemed to be offering "comparable" programming, such
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programming must include the signals of local broadcasters. Cable systems that
meet all of the relevant criteria in the new effective competition test are
exempt from rate regulation as of February 8, 1996 (the date the
Telecommunications Act was signed into law by President Clinton). Cable systems
may file a petition with the FCC at any time for a determination of effective
competition.
The FCC has also established interim rules governing the filing of
rate complaints by local franchising authorities. Local franchising authorities
may file rate complaints with the FCC when the local franchising authorities
receive more than one subscriber complaint concerning an operator's rate
increase. If the local franchising authority receives more than one subscriber
complaint within the 90-day period and decides to file its own complaint with
the FCC, it must do so within 180 days after the rate increase became effective.
Before filing a complaint with the FCC, the local franchising authority must
first provide the cable operator written notice of its intent to do so and must
give the operator a minimum of 30 days to file with the local franchising
authority the relevant FCC forms used to justify a rate increase. The local
franchising authority must then forward its complaint and the operator's
response to the FCC within the 180 day deadline. The FCC must issue a final
order within 90 days after it receives a local franchising authority complaint.
For interim purposes, the FCC has established that an operator serving
fewer than 617,000 subscribers is a "small cable operator" if its annual
revenues, when combined with the total annual revenues of all of its affiliates,
do not exceed $250 million in the aggregate. For interim purposes, "affiliate"
will be defined as a 20% or greater equity interest.
In addition to the interim rules discussed above and other
miscellaneous interim rules, the FCC is also engaged in a rulemaking proceeding
to create and implement final rules relating to the cable reform provisions of
the Telecommunications Act. Among other issues, the FCC is considering whether
to establish a LEC market share that must be satisfied before a LEC will be
deemed to constitute "effective competition" to an incumbent cable operator
(which would free the cable operator from rate regulation). Neither the
Partnership nor CPLP can predict the outcome of this FCC proceeding or what its
ultimate effect will be.
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 broadcast signals. The nature and amount of future copyright payments
for broadcast signal carriage cannot be predicted. The possible simplification,
modification or elimination of the compulsory copyright license is the subject
of continuing legislative review. The elimination or substantial modification of
the cable compulsory license could adversely affect the ability of the
Partnership or CPLP to obtain suitable programming and could substantially
increase the cost of programming that remained available for distribution to the
customers of the Partnership and CPLP. The General Partner cannot predict the
result of such legislative activity or the effect of such activity on the
Partnership's or CPLP's condition (financial or otherwise). See " -- Regulation
and Legislation."
State and Local Regulation
Cable television systems generally are operated pursuant to
non-exclusive franchises, permits or licenses granted by a municipality or other
state or local government entity. Franchises generally are granted for fixed
terms and in many cases are terminable if the franchisee fails to comply with
material provisions of its franchise agreement. The terms and conditions of
franchises vary materially from jurisdiction to jurisdiction. A number of states
subject cable television systems to the
70
<PAGE>
jurisdiction of centralized state governmental agencies, some of which impose
regulation of a character similar to that imposed on a public utility. Attempts
in other states to regulate cable television systems are continuing and can be
expected to increase. The Partnership cannot predict whether any of the states
in which the Partnership currently operates will engage in such regulation in
the future. State and local franchising jurisdiction is not unlimited, however,
and must be exercised consistently with federal law. The 1992 Cable Act
immunizes franchising authorities from monetary damage awards arising from
regulation of cable television systems or decisions made on franchise grants,
renewals, transfers and amendments.
Employees
As of June 30, 1996, the Partnership employed a total of approximately
69 full-time equivalent employees in the operation of the Partnership Systems,
28 of which were employed in connection with the Anderson County System. None of
the employees of the Anderson County System are represented by a union. The
Partnership has never experienced a work stoppage. The Partnership believes its
employee relations are generally good.
As of June 30, 1996, CPLP employed a total of approximately 37
full-time equivalent employees in the operation of the CPLP Systems. None of the
employees of the Three CPLP Systems are represented by a union. CPLP has never
experienced a work stoppage. CPLP believes its employee relations are generally
good.
Other Matters
The Partnership and CPLP own, operate and invest in cable television
systems and do not engage in any other identifiable industry segments. Neither
the Partnership nor CPLP believes that changes of a seasonal nature are material
to the cable television business. Neither the Partnership nor CPLP has expended
material amounts during the last two fiscal years on research and development
activities. As the Partnership and CPLP are service-related organizations,
little or no raw materials are utilized by them. The necessary hardware, coaxial
cable and electronics required for construction of new cable plant are available
from a variety of vendors and are generally available in ample supply. There is
no one customer or affiliated group of customers to whom sales are made in
amounts which exceed ten percent (10%) of either of the Partnership's or CPLP's
revenues. Neither the Partnership nor CPLP believes it is affected by inflation
except to the extent that the economy in general is so affected.
CERTAIN INFORMATION ABOUT THE PARTNERSHIP,
THE GENERAL PARTNER AND CERTAIN AFFILIATES
General Information
The Partnership. The Partnership is a Delaware limited partnership
that was formed in August 1987 for the purpose of engaging in the ownership and
operation of, and investment in, existing cable television systems in the United
States. The General Partner is a Delaware corporation that was incorporated on
August 13, 1987. The primary business activities engaged in by the Partnership
are the ownership and operation of cable television systems. The primary
business activities engaged in by the General Partner are its service as the
general partner of the Partnership and its management of the Partnership
Systems. The principal executive offices of the General Partner and the
Partnership are located at 12444 Powerscourt Drive, Suite 400, St. Louis,
Missouri 63131 and their telephone number is (314) 965-0555.
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<PAGE>
The General Partner and the Purchasing Affiliates are privately held
entities and are not subject to the reporting requirements of the Exchange Act.
The sole stockholder of the General Partner is CC II Holdings, Inc. ("CC II
Holdings"), which was incorporated in Delaware on June 29, 1994. CC II Holdings
is a wholly-owned subsidiary of Charter Communications, Inc. ("Charter").
Charter, a Delaware corporation, was incorporated on September 17, 1992. The
principal executive offices and telephone number of CC II Holdings and Charter
are the same as those of the Partnership.
The Partnership has no directors or executive officers. The name,
present principal occupation or employment, the principal business and address
of such employment, and any material occupation or employment for the past five
years of each of the directors and executive officers of the General Partner are
set forth on Schedule 1 to this Disclosure Statement. Each individual named on
Schedule 1 is a United States citizen.
CC II. CC II is a Delaware limited partnership that was formed in June
1994. CC II's general partner is CCP II, Inc. ("CCP II"), a Delaware
corporation, whose principal business is serving as the general partner of CC
II. CCP II's principal executive offices are at the same location as those of
the Partnership.
The only business activities engaged in by the Purchasing Affiliates
are the acquisition, ownership and operation of cable television systems and
other cable television assets. The executive business offices of the Purchasing
Affiliates are located at 12444 Powerscourt Drive, Suite 400, St. Louis,
Missouri 63131-3660, and the telephone number is (314) 965-0555.
CC II owns other cable television systems in South Carolina. Like many
cable television operators, the Purchasing Affiliates and their affiliates
attempt whenever possible (i) to increase the number of subscribers in the cable
television systems they own and to purchase additional systems to add new
subscribers, in order to obtain lower per subscriber programming rates (i.e.,
volume discounts) from providers of cable television programming, and (ii) to
"cluster" cable television systems together, in order to achieve economies of
scale in operating such systems. The acquisition of the Anderson County System,
the Abbeville System and the Lincolnton System by CC II is expected to assist CC
II in achieving greater economies of scale in the operation of its cable
television systems.
The Purchasing Affiliates have no directors or executive officers. The
name, present principal occupation or employment, the principal business and
address of such employment, and any material occupation or employment for the
past five years of each of the directors and executive officers of CCP II are
set forth on Schedule 1 to this Disclosure Statement. Each individual named on
Schedule 1 is a United States citizen.
The LP Units
The Partnership files periodic reports, certain proxy and disclosure
statements and other information with the Commission relating to its business,
financial condition and other matters required to be filed by companies whose
securities are registered under Section 12(g) of the Exchange Act. Reports and
other information filed by the Partnership can be inspected and copied (at
prescribed rates) at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and at
the following regional offices: 7 World Trade Center, 13th Floor, New York, New
York 10007 and 500 W. Madison Street, Suite 1400, Chicago, Illinois 60661-2511.
The Partnership will cease to file Exchange Act reports upon the liquidation of
the Partnership.
72
<PAGE>
The Partnership has only one class of LP Units and no Limited Partner
has a right of priority over any other Limited Partner. There is currently no
established trading market for the LP Units.
Principal LP Unitholders
As of September 1, 1996, there were no beneficial owners of more than
five percent (5%) of the Partnership's outstanding LP Units, and none of the
directors or executive officers of the General Partner owned any LP Units.
As of September 1, 1996, the directors and executive officers of the
General Partner held a 53.3% interest in the outstanding common shares of
Charter through their ownership of Charter Communications Group, a Missouri
limited partnership. The General Partner is a wholly-owned subsidiary of CC II
Holdings, which is a wholly-owned subsidiary of Charter.
Certain Rights with Respect to the LP Units
Except as disclosed in this Disclosure Statement, or in Schedule 1
hereto: (i) neither the General Partner nor any affiliate thereof (including CC
II and the persons or entities listed in "-- General Information") owns or has
the right to acquire, and to the best of the General Partner's knowledge, no
associate or majority-owned subsidiary of the General Partner, any affiliate
thereof nor any pension, profit-sharing or similar plan of the General Partner,
or any of the persons listed on Schedule 1 hereto, beneficially owns or has a
right to acquire, any LP Units; (ii) none of the persons or entities referred to
in (i) above has effected any transaction in voting the LP Units during the past
60 days; (iii) neither the Partnership nor any of its affiliates, nor CC II, has
purchased any LP Units since January 1, 1993; (iv) neither the General Partner
nor, to the best of the General Partner's knowledge, any of the persons listed
in Schedule 1 hereto, nor CC II, has any contract, arrangement, understanding or
relationship with any other person with respect to any securities of the
Partnership, including but not limited to, any contract, arrangement or
understanding concerning the transfer or voting thereof, joint ventures, loan or
option arrangements, puts or calls, guaranties of loans, guaranties against
loss, or the giving or withholding of proxies, consents or authorizations; (v)
since January 1, 1993, there have been no transactions between the Partnership,
on the one hand, and the General Partner or to the best of the General Partner's
knowledge, any of its executive officers, directors or affiliates, on the other
hand, that would require reporting under the rules and regulations of the
Commission; (vi) since January 1, 1993, there have been no contacts,
negotiations or transactions between the General Partner or to the best of the
General Partner's knowledge, any of its affiliates or the persons listed on
Schedule 1 hereto, on the one hand, and the Partnership, on the other hand,
concerning a merger or consolidation or an acquisition, a tender offer for or
another acquisition of securities of the Partnership or a sale or another
transfer of a material amount of the assets of the Partnership; and (vii) since
January 1, 1993, there have been no contacts or negotiations between any
affiliates of the Partnership or between the Partnership or any of its
affiliates, on the one hand, and any person who is not affiliated with the
Partnership and who would have a direct interest in such matters, on the other
hand, concerning a merger or consolidation with or into the Partnership, an
election of directors of the General Partner, or a sale or another transfer of a
material amount of the assets of the Partnership. In addition, neither the
Partnership, the General Partner nor any of their affiliates has any material
legal proceedings pending.
In August 1996, Charter Communications, Inc. received a letter from
Gale Island LLC ("Gale"), a third party unaffiliated with the Partnership, the
General Partner or any of their affiliates, offering to purchase up to 4.9% of
the total outstanding limited partnership interests in the Partnership for a
cash price of $250 per LP Unit less the amount of any distribution received from
the Partnership on or after August 30, 1996, with the purchaser to pay the
transfer fee of $150 per transfer. (The amount of the transfer fee is $150
regardless of the number of LP Units transferred.) The offer expires by its
terms on September 30, 1996. The General Partner has forwarded to all Limited
Partners a statement (the "Tender
73
<PAGE>
Offer Statement") expressing no opinion with respect to the tender offer and
providing, in accordance with applicable securities laws and regulations,
certain information bearing upon Gale's tender offer, including notice of the
impending distribution of this Disclosure Statement to the Limited Partners and
the possibility that if the Transaction is consummated and if the remaining
Partnership assets can be sold for an amount which approximates, in the
aggregate, the appraised value of those assets, the amount of the total
distribution from liquidation of the Partnership to the Limited Partners will
exceed $450 per LP Unit. There can be no assurance that any such remaining
assets can be sold for an amount at least equal to their appraised value.
In September 1996, the Limited Partners received a letter from Madison
Partnership Liquidity Investors V, LLC, a third party unaffiliated with the
Partnership, the General Partner or any of their affiliates, offering to
purchase up to 4.9% of the total outstanding limited partnership interests in
the Partnership for a cash price of $200 per LP Unit less the amount of any
distribution received from the Partnership on or after September 5, 1996. The
letter makes no reference to the Partnership transfer fee. The offer expires
by its terms on October 18, 1996. The General Partner is in the process of
preparing a statement for distribution to the Limited Partners which will be
substantially identical to the Tender Offer Statement.
Distributions Per LP Unit Since Partnership Inception
The following table sets forth the total distributions per LP Unit
made by the Partnership since its inception:
Distributions
Year ($ per LP Unit)
---- ---------------
1987 --
1988 32.50
1989 69.50
1990 77.50
1991 87.50
1992 67.50
1993 60.00
1994 --
1995 --
1996 --
-------
Total $394.50
=======
Distributions to the Limited Partners were suspended in the fourth
quarter of 1993. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS -- Liquidity and Capital Resources." If the
Partnership Transaction is consummated and the Credit Agreement is successfully
renegotiated, regular quarterly distributions should recommence from funds
available for distribution, if any.
Certain Affiliate Transactions
The Partnership may be subject to various conflicts of interest
arising out of the relationships among it, the General Partner, Charter, their
respective affiliates, officers and directors (such persons shall hereinafter be
collectively referred to as the "Affiliates").
74
<PAGE>
On July 15, 1994, in connection with certain transactions contemplated
by the Stock Purchase Agreement dated July 1, 1994 among Charter, a group of
other purchasers and Hallmark Cards, Incorporated (which indirectly owned all of
the issued and outstanding stock of CCA), CC II Holdings acquired all of the
outstanding capital stock of the General Partner. The interest of CCA in the
Management Agreement was transferred to the General Partner in connection with
such acquisition. See "BUSINESS OF THE PARTNERSHIP AND CPLP -- Management
Agreement."
Affiliates have engaged and, in the future, will engage in other
business activities related to the cable television industry that may be in
competition with the business of the Partnership. Such activities may include
the acquisition of cable television systems. The Affiliates have no obligation
to offer to the Partnership the opportunity to participate in any other
transactions in which they participate.
The General Partner, pursuant to a First Amendment to Management
Agreement dated as of December 31, 1995, has extended the Management Agreement.
The officers and directors of the General Partner manage the Partnership Systems
as well as other cable television systems currently owned or later acquired by
certain of its Affiliates. Conflicts of interest may arise in managing the
operations of more than one entity with respect to the allocation of the General
Partner's and its Affiliates' time, personnel, and other resources among the
Partnership. The General Partner will resolve such conflicts in a manner deemed
in its reasonable judgment to be fair and appropriate.
CPLP has entered into definitive agreements to sell two of its cable
television systems to CC II pursuant to an Amended and Restated Asset Purchase
Agreement dated as of April 26, 1996 and an Amended and Restated Asset Purchase
Agreement dated as of May 30, 1996 and another of its cable television systems
to CC I pursuant to an Amended and Restated Asset Purchase Agreement dated as of
May 30, 1996.
During January 1995, Charter acquired 1,746 LP Units as part of a
negotiated transaction for a sale of securities and assets.
As a result of approval and consummation of the Transaction as
described herein, CPI and its affiliates will receive the following:
CC I: Management fees from CPLP.......................... $ 491,000
CC I: general partner interest in CPLP................... $ 139,100
CC II: Management fees from the Partnership.............. $ 2,545,000
CC II: General Partner interest in CCIP II (1.5%)........ $ 139,100
Charter: limited partner interest in CPLP*............... $ 1,329,100
Charter: special limited partner interest in CPLP*....... $ 5,280,300
Charter: limited partner interest in the Partnership*.... $ 406,818
- - - ----------
* See "Special Factors -- Certain Effects of the Transaction -- Use of Proceeds
of the CPLP Transaction."
75
<PAGE>
PLAN OF SOLICITATION
Voting Rights and Vote Required
The General Partner has fixed the close of business on July 31, 1996
as the record date for the determination of Limited Partners entitled to notice
of and to vote with respect to the Transaction (the "Record Date"). On the
Record Date 90,915 LP Units, owned by approximately 8,759 Limited Partners, were
outstanding and entitled to vote with respect to the Transaction. The
affirmative vote of the Limited Partners whose combined capital contributions
represent a majority of total capital contributions is required to approve the
Transaction described in this Disclosure Statement.
Each Limited Partner is entitled to one vote for each LP Unit held.
The General Partner holds no LP Units and is not otherwise entitled to vote with
respect to the Transaction. Other employees and nonexecutive officers of the
General Partner (owning an additional 5 LP Units in the aggregate) intend to
vote in favor of the Transaction in accordance with the General Partner's
recommendation. Charter, the parent of the General Partner, owns approximately
1,746 LP Units, or .02% of the outstanding LP Units, and has indicated an
intention to vote its LP Units in favor of the Transaction.
Properly executed and duly returned consent forms will be counted as
votes for or against the Transaction, in accordance with the instructions
thereon. If no instructions are indicated with respect to the Transaction on a
properly signed consent form, the consent form will be voted in favor of the
Transaction. Abstentions will be counted as votes against the Transaction.
Revocability
The vote contained on any properly executed consent form may be
revoked at any time before 10:00 A.M. on [______], 1996 or such later date as
the General Partner shall determine by giving notice of such revocation to the
General Partner in writing addressed to the Partnership at its address set forth
above. If given in writing, such notice should be mailed or delivered in time to
be received by the Partnership prior to 10:00 A.M. on [______], 1996 or such
later date as the General Partner shall determine. A vote may also be revoked by
execution of a subsequently dated consent form, provided the Partnership
receives such subsequently dated consent form prior to 10:00 A.M. on [______],
1996 or such later date as the General Partner shall determine.
No Appraisal Rights for Dissenters
If the Consent of the Limited Partners to the Transaction is obtained,
such approval will bind all Limited Partners, including those who vote against
approving, or who abstain from voting with respect to, the Transaction. The
Partnership Agreement and the Delaware Revised Uniform Limited Partnership Act,
under which the Partnership is governed, do not give rights of appraisal or
similar rights to Limited Partners who dissent from the vote of the majority in
approving or disapproving the Transaction. Similarly, the General Partner will
not grant appraisal or dissenters' rights to Limited Partners who vote against
or abstain from voting on the Transaction. Accordingly, dissenting Limited
Partners do not have the right to have their interest in the Partnership
appraised nor do they have the right to have the value of those interests
returned to them because they disapprove of the action of a majority of the
Limited Partners. If the Limited Partners' Consent is obtained and the
Transaction is consummated, each Limited Partner will receive its pro rata share
(based on the number of LP Units held) of the net proceeds distributed to the
Limited Partners whether or not such Limited Partner votes in favor of or
against the Transaction.
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<PAGE>
Solicitation
Votes may be solicited by mail, personal interview, telephone,
telecopier and telegram by officers and other employees of the General Partner
or any of its affiliates who will not be specifically compensated for such
services, but who will be reimbursed by the Partnership for their out-of-pocket
expenses. The Partnership will request banks, brokers and other custodians,
nominees and fiduciaries to forward solicitation materials to the beneficial
owners of the outstanding LP Units that such banks, brokers, custodians,
nominees and fiduciaries own of record. The Partnership will reimburse such
custodians, nominees and fiduciaries for reasonable out-of-pocket expenses
incurred by them in connection with such activities. The Partnership intends to
retain an outside solicitation firm to assist in the solicitation of votes, but
has not yet done so. The Partnership anticipates that the fees of any such firm
will be approximately $20,000, including reimbursement of solicitation,
tabulation and other out-of-pocket expenses. The Partnership will bear all costs
of solicitation.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
On August 22, 1994, the Partnership filed a Form 8-K with the
Commission for the purpose of informing the Commission of a change in the
Partnership's independent public accountants. On August 22, 1994, the Board of
Directors of the General Partner approved the engagement of Arthur Andersen LLP
as the Partnership's principal auditors subsequent to their retention by the
General Partner. The Partnership decided to dismiss KPMG Peat Marwick LLP, the
Partnership's prior auditors, and to retain Arthur Andersen LLP for the
convenience of having the same auditors as its General Partner. There were no
disagreements (either on the Partnership's or the General Partner's part) with
KPMG Peat Marwick LLP prior to August 22, 1994, with respect to any matter of
accounting principles or practices, financial statement disclosure, or audit
scope or procedures and the auditors' reports from KPMG Peat Marwick LLP
contained no adverse opinion relating to the Partnership's (or to the General
Partner's) financial statements.
AVAILABLE INFORMATION
The Partnership's Annual Report on 10-K for the fiscal year ended
December 31, 1995 and the Partnership's unaudited Quarterly Reports on Form 10-Q
for the fiscal quarters ended March 31, 1996 and June 30, 1996, along with the
Partnership's reports on Form 8-K relating to events dated July 15, 1994 and
August 22, 1994, are hereby incorporated by reference herein. Copies of such
reports are available to each Limited Partner without charge upon written
request to: Ms. Carol Wolf, Investor Relations Department, Cencom Properties II,
Inc., 12444 Powerscourt Drive, Suite 400, St. Louis, Missouri 63131-3660.
Additional copies of the appraisals issued by Daniels and Western and of the
draft Purchase Agreement also are available to each Limited Partner without
charge upon written request to Ms. Wolf. Financial statements for prior years
and periods have previously been distributed to Limited Partners on an ongoing
basis. All documents filed by the Partnership pursuant to Sections 13(a), 13(c),
14 or 15(d) of the Exchange Act following the date of this Disclosure Statement
and prior to the date upon which written consents must be received by the
Partnership (and copies of which are delivered to the Limited Partners) shall be
deemed to be incorporated by reference herein. Any Limited Partner seeking
additional information regarding financial statements and the matters described
in this Disclosure Statement should contact Ms. Wolf at the General Partner's
address and telephone number set forth above.
77
<PAGE>
A Rule 13e-3 Transaction Statement containing certain additional
information with respect to the transactions described herein is being filed by
the Partnership and CC II with the Commission simultaneously with the filing of
this Disclosure Statement.
78
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
CENCOM CABLE INCOME PARTNERS II, L.P. - ANDERSON COUNTY SYSTEM:
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS.............................. F-2
BALANCE SHEETS AT JUNE 30, 1996 (UNAUDITED) AND DECEMBER 31, 1995..... F-3
STATEMENTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1996
AND 1995 (UNAUDITED), AND FOR THE YEAR ENDED DECEMBER 31, 1995........ F-4
STATEMENTS OF SYSTEM'S EQUITY FOR THE SIX MONTHS ENDED JUNE 30,
1996 (UNAUDITED) AND FOR THE YEAR ENDED DECEMBER 31, 1995............. F-5
STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 1996
AND 1995 (UNAUDITED), AND FOR THE YEAR ENDED DECEMBER 31, 1995........ F-6
NOTES TO FINANCIAL STATEMENTS......................................... F-7
CENCOM PARTNERS, L.P. - SANFORD COUNTY SYSTEM:
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS............................. F-15
BALANCE SHEETS AT JUNE 30, 1996 (UNAUDITED) AND DECEMBER 31, 1995.... F-16
STATEMENTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1996
AND 1995 (UNAUDITED), AND FOR THE YEAR ENDED DECEMBER 31, 1995....... F-17
STATEMENTS OF SYSTEM'S EQUITY FOR THE SIX MONTHS ENDED JUNE 30,
1996 (UNAUDITED) AND FOR THE YEAR ENDED DECEMBER 31, 1995............ F-18
STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 1996
AND 1995 (UNAUDITED), AND FOR THE YEAR ENDED DECEMBER 31, 1995....... F-19
NOTES TO FINANCIAL STATEMENTS........................................ F-20
CENCOM PARTNERS, L.P. - LINCOLNTON COUNTY SYSTEM:
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS............................. F-28
BALANCE SHEETS AT JUNE 30, 1996 (UNAUDITED) AND DECEMBER 31, 1995.... F-29
STATEMENTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1996
AND 1995 (UNAUDITED), AND FOR THE YEAR ENDED DECEMBER 31, 1995....... F-30
STATEMENTS OF SYSTEM'S EQUITY FOR THE SIX MONTHS ENDED JUNE 30,
1996 (UNAUDITED) AND FOR THE YEAR ENDED DECEMBER 31, 1995............ F-31
STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 1996
AND 1995 (UNAUDITED), AND FOR THE YEAR ENDED DECEMBER 31, 1995....... F-32
NOTES TO FINANCIAL STATEMENTS........................................ F-33
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Cencom Cable Income Partners II, L.P.:
We have audited the accompanying balance sheet of Cencom Cable Income Partners
II, L.P. - Anderson County System (as defined in Note 1) as of December 31,
1995, and the related statements of operations, System's equity and cash flows
for the year then ended. These financial statements are the responsibility of
the System's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the 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 audit provides 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 Cencom Cable Income Partners
II, L.P. - Anderson County System as of December 31, 1995, and the results of
its operations and its cash flows for the year then ended, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
St. Louis, Missouri,
February 21, 1996
F-2
<PAGE>
CENCOM CABLE INCOME PARTNERS II, L.P. -
ANDERSON COUNTY SYSTEM
BALANCE SHEETS
June 30, December 31,
1996 1995
----------- ------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash $ -- $ --
Accounts receivable, net of allowance for doubtful
accounts of $9,672 and $15,368, respectively 128,962 123,399
Prepaid expenses and other 34,501 32,337
----------- -----------
Total current assets 163,463 155,736
PROPERTY, PLANT AND EQUIPMENT 14,267,521 15,326,732
FRANCHISE COSTS, net of accumulated amortization
of $9,367,585 and $9,266,250, respectively 488,165 589,500
----------- -----------
$14,919,149 $16,071,968
=========== ===========
LIABILITIES AND SYSTEM'S EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 570,418 $ 755,819
Subscriber deposits and prepayments 2,275 2,400
----------- -----------
Total current liabilities 572,693 758,219
----------- -----------
COMMITMENTS AND CONTINGENCIES
SYSTEM'S EQUITY 14,346,456 15,313,749
----------- -----------
$14,919,149 $16,071,968
=========== ===========
The accompanying notes are an integral part of these balance sheets.
F-3
<PAGE>
CENCOM CABLE INCOME PARTNERS II, L.P. -
ANDERSON COUNTY SYSTEM
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended
June 30 Year Ended
-------------------------- December 31,
1996 1995 1995
----------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
SERVICE REVENUES $ 4,078,858 $ 3,834,247 $ 7,771,085
----------- ----------- -----------
OPERATING EXPENSES:
Operating, general and administrative 2,182,985 2,085,525 4,129,365
Depreciation and amortization 1,754,466 2,268,771 3,832,591
Management fee - related party 203,943 191,711 388,553
----------- ----------- -----------
4,141,394 4,546,007 8,350,509
----------- ----------- -----------
Loss from operations (62,536) (711,760) (579,424)
----------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest expense (618,117) (743,489) (1,551,310)
Interest income 9,278 9,457 53,226
----------- ----------- -----------
(608,839) (734,032) (1,498,084)
----------- ----------- -----------
Net loss $ (671,375) $(1,445,792) $(2,077,508)
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
CENCOM CABLE INCOME PARTNERS II, L.P. -
ANDERSON COUNTY SYSTEM
STATEMENTS OF SYSTEM'S EQUITY
System's
Equity
------------
BALANCE, December 31, 1994 $ 17,312,705
Net activity with Parent 78,552
Net loss (2,077,508)
------------
BALANCE, December 31, 1995 15,313,749
Net activity with Parent (unaudited) (295,918)
Net loss (unaudited) (671,375)
------------
BALANCE, June 30, 1996 (unaudited) $ 14,346,456
============
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
CENCOM CABLE INCOME PARTNERS II, L.P. -
ANDERSON COUNTY SYSTEM
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
June 30 Year Ended
-------------------------- December 31,
1996 1995 1995
----------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (671,375) $(1,445,792) $(2,077,508)
Adjustments to reconcile net loss to net cash provided by
operating activities-
Depreciation and amortization 1,754,466 2,268,771 3,832,591
Changes in assets and liabilities-
Accounts receivable, net (5,563) (10,579) (7,979)
Prepaid expenses and other (2,163) (7,431) (48,167)
Accounts payable and accrued expenses (185,401) 204,098 109,544
Subscriber deposits and prepayments (125) (5) (122)
----------- ----------- -----------
Net cash provided by operating activities 889,839 1,009,062 1,808,359
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (569,697) (1,284,487) (1,861,230)
Other (24,224) (44,961) (25,681)
----------- ----------- -----------
Net cash used in investing activities (593,921) (1,329,448) (1,886,911)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in capital account with Parent (295,918) 320,386 78,552
----------- ----------- -----------
Net cash provided by financing activities (295,918) 320,386 78,552
----------- ----------- -----------
CASH, beginning and end of period $ -- $ -- $ --
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
CENCOM CABLE INCOME PARTNERS II, L.P. -
ANDERSON COUNTY SYSTEM
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Organization and Basis of Presentation
The financial statements include the accounts of the Anderson County cable
television system which is owned and operated by Cencom Cable Income Partners
II, L.P. (CCIP II). Cencom Properties II, Inc. (Cencom Properties II) is the
General Partner of CCIP II. These financial statements include the historical
assets, liabilities and operations of the Anderson County cable television
system, which provides service to communities in and around Anderson County,
South Carolina, and is referred to herein as the System.
Pursuant to the terms of the CCIP II Partnership Agreement, CCIP II's term
expired on December 31, 1995. Accordingly, Cencom Properties II began
dissolution during 1995 and has accepted bids for sale of certain CCIP II
assets, including those of the System. The highest bid for the System's assets
was submitted by Charter Communications II, L.P., an affiliate of Cencom
Properties II, for $36,700,000, subject to certain working capital adjustments.
In accordance with the terms of the CCIP II Partnership Agreement, the sale of
assets to an affiliate of Cencom Properties II must be approved by a majority of
outstanding Limited Partner interests and is subject to an appraisal process,
which requires that two independent appraisers jointly determine the appraised
value. Cencom Properties II has retained two independent appraisers to satisfy
this requirement and is preparing a disclosure statement for distribution to the
Limited Partners which will describe the various transactions and request
consent for the proposed sale. An asset purchase agreement will be signed
subsequent to Limited Partners' approval. The acquisition of the System is
expected to be consummated in 1997.
All intersystem balances and transactions have been eliminated for presentation
in the combined financial statements.
As of December 31, 1995, the System passed approximately 28,200 homes and
serviced approximately 20,200 basic subscribers in approximately 11 franchise
areas. The System comprises approximately 45% of the total CCIP II subscribers
at December 31, 1995.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
The accompanying balance sheet as of June 30, 1996, the related statements of
operations and cash flows for the six months ended June 30, 1996 and 1995, and
the related statement of System's equity for the six months ended June 30, 1996,
are unaudited. In the opinion of management, these statements have been prepared
on the same basis as the audited financial statements and include all
adjustments necessary (consisting only of normal recurring adjustments) for the
fair presentation of financial position, results of operations and cash flows.
The results of operations for the six months ended June 30, 1996 and 1995, are
not necessarily indicative of the results that may be expected for an entire
year.
F-7
<PAGE>
Property, Plant and Equipment
Property, plant and equipment is recorded at cost, including all direct and
certain indirect costs associated with the construction of cable transmission
and distribution facilities, and the cost of new customer installation. The
costs of disconnecting a customer are charged to expense in the period incurred.
Expenditures for repairs and maintenance are charged to expense as incurred, and
equipment replacement costs and betterments are capitalized.
Depreciation is provided using the composite method on a straight-line basis
over the estimated useful lives of assets as follows:
Trunk and distribution systems 10 years
Subscriber installations 10 years
Converters 3-5 years
Buildings and headends 9-20 years
Vehicles and equipment 4-8 years
Office equipment 5-10 years
Franchise Costs
Franchise costs are being amortized using the straight-line method over the term
of the individual franchises.
During 1995, the System's management adopted Statement of Financial Accounting
Standards (SFAS) No. 121 entitled, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of." In accordance with SFAS No.
121, the System's management periodically reviews the carrying value of its
long-lived assets, identifiable intangibles and franchise costs in relation to
historical financial results, current business conditions and trends (including
the impact of existing legislation and regulation) to identify potential
situations in which the carrying value of such assets may not be recoverable. If
a review indicates that the carrying value of such assets may not be
recoverable, the carrying value of such assets in excess of their fair value
will be recorded as a reduction of the assets' cost as if a permanent impairment
has occurred. The adoption of SFAS No. 121 did not impact the financial
statements of the System.
Service Revenues
Cable service revenues are recognized when the related services are provided.
Installation revenues are recognized to the extent of direct selling costs
incurred. The remainder, if any, is deferred and amortized to income over the
average estimated period that customers are expected to remain connected to the
cable television system.
Franchise fees collected from cable subscribers and paid to local franchises are
reported as revenues.
Operating, General and Administrative Expenses
Included in operating, general and administrative expenses is the allocation of
certain expenses incurred by the holding company of CCIP II on behalf of the
System. These expenses were allocated to the System based on the ratio of total
System's subscribers to total CCIP II subscribers. Management considers this
allocation method to be reasonable for the operations of the System. Expense
allocated to the System totaled $101,012 during 1995.
F-8
<PAGE>
Intercompany Interest Expense
Interest expense allocated to the System has been determined by applying the
ratio of total System's subscribers to total CCIP II subscribers at year-end to
total CCIP II interest expense for the year. Management considers this
allocation method to be reasonable for the operations of the System. CCIP II
makes disbursements on behalf of the System for interest expense. CCIP II
maintains a loan agreement with a consortium of banks for borrowings up to
$65,000,000, secured by all of CCIP II's assets, including the System's assets.
At December 31, 1995, CCIP II had borrowings of $50,000,000 related to this debt
agreement. The weighted average borrowings for CCIP II during 1995 was
$43,163,000. The borrowings pertaining to the System are reflected within
System's Equity. At December 31, 1995, the interest rate was 7.38% and 9.0% for
LIBOR and prime, respectively, and during 1995, interest rates ranged from 6.38%
to 7.38% and 8.5% to 9% for LIBOR and prime, respectively. The weighted average
interest rate of CCIP II for 1995 was 7.99%.
Income Taxes
Income taxes are the responsibility of the partners of CCIP II and as such are
not provided for in the accompanying financial statements.
Cash Management and System's Equity Account
The cash management function for the System is performed by the holding company
of CCIP II. Excess cash funds are transferred to the holding company of CCIP II
using the System's equity account. In addition, the holding company of CCIP II
makes disbursements on behalf of the System for certain items such as payroll,
payroll taxes, employee benefits and other costs and incurs debt borrowings for
the System. Such amounts are transferred to the System through the System's
equity account and are recognized in the appropriate expense categories in the
accompanying statement of operations.
2. PREPAID EXPENSES AND OTHER:
Prepaid expenses and other consist of the following:
June 30, December 31,
1996 1995
-------- ------------
(Unaudited)
Prepaid programming $29,908 $21,568
Other prepaid expenses and current assets 4,593 10,769
------- -------
$34,501 $32,337
======= =======
F-9
<PAGE>
3. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consists of the following:
June 30, December 31,
1996 1995
------------- ------------
(Unaudited)
Trunk and distribution systems $ 22,317,617 $ 22,195,466
Subscriber installations 5,090,750 4,855,121
Converters 1,643,338 1,485,483
Land, buildings and headends 2,177,761 2,150,225
Vehicles and equipment 739,585 432,593
Office equipment 182,458 462,923
------------ ------------
32,151,509 31,581,811
Less- Accumulated depreciation (17,883,988) (16,255,079)
------------ ------------
$ 14,267,521 $ 15,326,732
============ ============
4. ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
Accounts payable and accrued expenses consist of the following:
June 30, December 31,
1996 1995
-------- ------------
(Unaudited)
Accounts payable $ -- $ 36,530
Accrued salaries and related benefits 48,528 89,462
Accrued franchise fees 160,884 156,595
Accrued property tax 215,752 357,158
Other 145,254 116,074
-------- --------
$570,418 $755,819
======== ========
5. SYSTEM'S EQUITY:
As of December 31, 1995, CCIP II had recorded in its capital account an
accumulated deficit of approximately $20,381,000, represented by earnings net of
partner distributions.
6. RELATED-PARTY TRANSACTIONS:
During 1994, Cencom Cable Associates, Inc., a former affiliated entity, assigned
management services under contract with CCIP II to Cencom Properties II. The
management service contract provides for the payment of fees equal to 5% of the
System's gross service revenues. Expenses recognized by the System under this
contract were $388,553 during 1995. Management believes these charges are
indicative of the expense which would have been incurred as a stand-alone
entity.
F-10
<PAGE>
7. COMMITMENT AND CONTINGENCIES:
Leases
The System leases certain facilities and equipment under noncancelable operating
leases. Rent expense incurred under leases during 1995 was approximately $9,000.
Approximate future minimum lease payments are as follows:
1996 $1,400
1997 and thereafter --
The System rents utility poles in its operations. Generally, pole rental
agreements are short term, but the System's management anticipates that such
rentals will continue to recur. Rent expense incurred for pole attachments
during 1995 was approximately $112,000.
Insurance Coverage
The System currently does not have and does not in the near term anticipate
having property and casualty insurance on its underground distribution plant.
Due to large claims incurred by the property and casualty insurance industry,
the pricing of insurance coverage has become inflated to the point where, in the
judgment of the System's management, the insurance coverage is cost prohibitive.
Management believes its experience and policy with such insurance coverage is
consistent with general industry practices. Management will continue to monitor
the insurance markets to attempt to obtain coverage for the System's
distribution plant at reasonable rates.
Litigation
The System is a party to lawsuits which are generally incidental to its
business. In the opinion of management, after consulting with legal counsel, the
outcome of these lawsuits will not have a material adverse effect on the
System's financial position and results of operations.
8. REGULATION IN THE CABLE INDUSTRY:
The cable television industry is subject to extensive regulation at the federal,
local and, in some instances, state levels. In addition, recent legislative and
regulatory changes and additional regulatory proposals under consideration may
materially affect the cable television industry.
1992 Cable Act and FCC Regulation
Congress enacted the Cable Television Consumer Protection and Competition Act of
1992 (the "1992 Cable Act"), which became effective on December 4, 1992. This
legislation has caused significant changes to the regulatory environment in
which the cable television industry operates. The 1992 Cable Act generally
allows for a greater degree of regulation of the cable television industry.
Under the 1992 Cable Act's definition of effective competition, nearly all cable
systems in the United States are subject to rate regulation of basic cable
services.
The 1992 Cable Act and the Federal Communications Commission's (FCC) rules
implementing the 1992 Cable Act have generally increased the administrative and
operational expenses of cable television systems and have resulted in additional
regulatory oversight by the FCC and local franchise authorities. Management is
unable to predict the ultimate effect of the 1992 Cable Act or the ultimate
outcome of various FCC rule-making proceedings or the litigation challenging
various aspects of the 1992 Cable Act and the FCC's regulations implementing the
1992 Cable Act.
F-11
<PAGE>
The 1992 Cable Act and FCC regulations have imposed rate requirements for basic
services and equipment, including rate roll-backs. Under the 1992 Cable Act, a
local franchising authority in a community not subject to "effective
competition" generally is authorized to regulate basic cable rates after
certifying to the FCC that, among other things, it will adopt and administer
rate regulation consistent with FCC rules, and in a manner that will provide a
reasonable opportunity to consider the views of interested parties. The
Telecommunications Act of 1996 (the "Telecommunications Act"), passed by
Congress on February 1, 1996, and signed into law by the President on February
8, 1996, broadens the definition of "effective competition" to include any
franchise area where a local exchange carrier (or its affiliate) provides video
programming services to subscribers by any means, other than through Direct
Broadcast Satellite. Upon certification, the franchising authority obtains the
right to approve the basic rates charged by the cable system operator. In
regulating the basic service rates, certified local franchise authorities have
the authority to order a rate refund of previously paid rates determined to be
in excess of the maximum permitted reasonable rates.
Rate regulation of the basic service tier remains subject to regulation by local
franchising authorities under the Telecommunications Act, except in certain
circumstances for "small cable operators." For a defined class of "small cable
operators," the Telecommunications Act immediately eliminates regulation of
cable programming rates. Rates for basic tier of "small cable operators" are
deregulated if the system offered a single tier of services as of December 31,
1994.
Under the 1992 Cable Act, rates for cable programming services not carried on
the basic tier (non-basic services) could be regulated by the FCC upon the
filing of a complaint by franchise authorities or subscribers that indicates the
cable operator's rates for these services are unreasonable. Rate complaints have
been filed with the FCC with respect to certain of the System's cable
programming services; none of such complaints have been resolved by the FCC as
of the date of the financial statements. The Telecommunications Act eliminates
regulation of non-basic programming as of March 31, 1999. In the interim, rate
regulation of the non-basic programming tier can only be triggered by a
franchising authority complaint to the FCC. If the FCC determines that the
System's non-basic programming service tier rates are unreasonable, the FCC has
the authority to order the System to reduce non-basic programming service tier
rates and to refund to customers any overcharges occurring from the filing date
of the rate complaint with the FCC.
Under the FCC's initial rate regulations pursuant to the 1992 Cable Act,
regulated cable systems were required to apply a benchmark formula to determine
their maximum permitted rates. Those systems whose rates were above the
benchmark on September 30, 1992, were required to reduce their rates to the
benchmark or by 10%, whichever was less. Under revised rate regulations adopted
February 1994, regulated cable systems were required to set their rates so that
regulated revenues per subscriber did not exceed September 30, 1992, levels,
reduced by 17% (taking into account the previous 10% reduction).
Notwithstanding mandated rate regulations, cable operators currently may adjust
their regulated rates to reflect inflation and what the FCC has deemed to be
external costs (such as increases in franchise fees).
In September 1995, the FCC developed an abbreviated cost-of-service form that
permits cable operators to recover costs of significant upgrades that provide
benefits to subscribers of regulated cable services. Cable operators seeking to
raise rates to cover costs of an upgrade would submit only the costs of the
upgrade instead of all current costs. In December 1995, the FCC revised its
cost-of-service rules. At this time, the System's management is unable to
predict the effect of these revised rules on the System's financial position or
results of operations.
F-12
<PAGE>
In another action in September 1995, the FCC established a new optional rate
adjustment methodology that encourages operators to limit their rate increases
to once a year to reflect inflation and changes in external costs and the number
of channels. The rules permit cable operators to "project reasonably" changes in
their costs for the 12 months following the rate change (in an effort to
eliminate delays in recovering costs). The order allows operators to recover
increases in additional types of franchise-requirement costs. Permitted
pass-through increases include increases in the cost of providing institutional
networks, video services, data services to or from governmental and educational
institutions, and certain other cost increases. The System's management is
unable to predict the effect of these new rules on the System's business.
In November 1995, the FCC proposed to provide cable operators with the option of
establishing uniform rates for similar service packages offered in multiple
franchise areas located in the same region. Under the FCC's current rules, cable
operators subject to rate regulation must establish rates on a
franchise-specific basis. The proposed rules could lower cable operators'
marketing costs and may also allow operators to better respond to competition
from alternative providers. The System's management is unable to predict if
these proposed rules will ultimately be promulgated by the FCC, and if they are
promulgated, their effect on the System's financial position and results of
operations.
While management believes that the System has complied in all material respects
with the rate provisions of the 1992 Cable Act, in jurisdictions that have not
yet chosen to certify, refunds covering a one-year period on basic services may
be ordered upon future certification if the System is unable to justify its
rates through a benchmark or cost-of-service filing or small system
cost-of-service filing pursuant to FCC rules. Management is unable to estimate
at this time the amount of refunds, if any, that may be payable by the System in
the event certain of its rates are successfully challenged by franchising
authorities or found to be unreasonable by the FCC. Management does not believe
that the amount of any such refunds would have a material adverse effect on the
financial position or results of operations of the System.
"Must Carry" Requirements/"Retransmission Consents"
Under the 1992 Cable Act, cable television operators are subject to mandatory
signal carriage requirements that allow local commercial and non-commercial
television broadcast stations to elect to require a cable system to carry the
station, subject to certain exceptions, or, in the case of commercial stations,
to negotiate for "retransmission consent" to carry the station. In addition,
there are requirements for cable systems to obtain retransmission consent for
all "distant" commercial television stations, commercial radio stations and
certain low power television stations carried by such system after October 6,
1993. As a result of the mandatory system carriage rules, the System has been
required to carry television broadcast stations that otherwise would not have
been carried, thereby causing displacement of possibly more attractive
programming.
Franchise Matters
The 1992 Cable Act modified the franchise renewal process to make it easier for
a franchising authority to deny renewal. Historically, franchises have been
renewed for cable operators that have provided satisfactory services and have
complied with the terms of the franchise agreement. Although management believes
that the System has generally met the terms of its franchise agreements and has
provided quality levels of service, and anticipates the System's future
franchise renewal prospects generally will be favorable, there can be no
assurance that any such franchises will be renewed or, if renewed, that the
franchising authorities will not impose more onerous requirements on the System
than previously existed.
Recent Telecommunications Legislation
The Telecommunications Act alters federal, state and local laws and regulations
pertaining to cable television, telecommunications and other services. Under the
Telecommunications Act, telephone companies can compete directly with cable
operators in the provision of video programming. This new legislation recognizes
several multiple entry options for telephone companies to provide competitive
video programming.
F-13
<PAGE>
The Telecommunications Act eliminates broadcast/cable cross-ownership
restrictions, but leaves in place FCC regulations prohibiting local
cross-ownership between television stations and cable systems.
Certain provisions of the Telecommunications Act could materially affect the
growth and operation of the cable television industry and the cable services
provided by the System. Although the new legislation may substantially lessen
regulatory burdens, the cable television industry may be subject to additional
competition as a result thereof. There are numerous rule makings to be
undertaken by the FCC which will interpret and implement the Telecommunications
Act's provisions. In addition, certain provisions of the Telecommunications Act
(such as the deregulation of cable programming rates) are not immediately
effective. Further, certain of the Telecommunications Act's provisions have been
and are likely to be subject to judicial challenges. The System's management is
unable at this time to predict the outcome of such rule-makings or litigation or
the substantive effect of the new legislation and the rule-makings on the
financial position and results of operations of the System.
9. NET LOSS FOR INCOME TAX PURPOSES:
The following reconciliation summarizes the differences between CCIP II's net
loss for financial reporting purposes and net loss for federal income tax
purposes for the year ended December 31, 1995:
<TABLE>
<S> <C>
Net loss for financial reporting purposes $(2,292,563)
Depreciation differences between financial reporting and tax reporting 751,650
Equity in loss of unconsolidated Limited Partnership differences between
financial reporting and tax reporting (3,417,920)
Differences in expenses recorded for financial reporting and for tax purposes (364,558)
Revenue reported for tax reporting and deferred for financial reporting 27,904
Other 45,361
-----------
Net loss for federal income tax purposes $(5,250,126)
===========
Net loss per Limited Partnership unit for federal income tax purposes $ (57.17)
===========
</TABLE>
The following summarizes the significant temporary differences between CCIP II's
financial reporting basis and federal income tax reporting basis as of December
31, 1995:
Assets:
Accounts receivable $ 31,463
Accrued expenses 657,002
Deferred revenue 27,904
------------
$ 716,369
============
Liabilities:
Property, plant and equipment $(13,979,613)
Investment in unconsolidated Limited Partnership (8,864,469)
------------
$(22,844,082)
============
As discussed in Note 1, the System comprises approximately 45% of CCIP II's
total basic subscribers.
F-14
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Cencom Partners, L.P.:
We have audited the accompanying balance sheet of Cencom Partners, L.P. -
Sanford System (as defined in Note 1) as of December 31, 1995, and the related
statements of operations, System's equity and cash flows for the year then
ended. These financial statements are the responsibility of the System's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the 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 audit provides 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 Cencom Partners, L.P. - Sanford
System as of December 31, 1995, and the results of its operations and its cash
flows for the year then ended, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
St. Louis, Missouri,
March 29, 1996
F-15
<PAGE>
CENCOM PARTNERS, L.P. -
SANFORD SYSTEM
BALANCE SHEETS
June 30, December 31,
1996 1995
---------- ------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash $ -- $ --
Accounts receivable, net of allowance for doubtful
accounts of $9,094 and $11,821, respectively 50,078 56,288
Prepaid expenses and other 40,829 23,041
---------- ----------
Total current assets 90,907 79,329
PROPERTY, PLANT AND EQUIPMENT 5,606,191 5,864,762
FRANCHISE COSTS, net of accumulated amortization of
$7,506,577 and $7,043,059, respectively 1,056,102 1,519,620
SUBSCRIBER LISTS, net of accumulated amortization of
$3,058,365 and $2,607,860, respectively 292,487 742,992
---------- ----------
$7,045,687 $8,206,703
========== ==========
LIABILITIES AND SYSTEM'S EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 182,643 $ 431,713
Subscriber deposits and prepayments 22,900 24,080
---------- ----------
Total current liabilities 205,543 455,793
---------- ----------
DEFERRED REVENUE 92,955 98,423
COMMITMENTS AND CONTINGENCIES
SYSTEM'S EQUITY 6,747,189 7,652,487
---------- ----------
$7,045,687 $8,206,703
========== ==========
The accompanying notes are an integral part of these balance sheets.
F-16
<PAGE>
CENCOM PARTNERS, L.P. -
SANFORD SYSTEM
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended
June 30 Year Ended
-------------------------- December 31,
1996 1995 1995
----------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
SERVICE REVENUES $ 2,359,376 $ 2,236,640 $ 4,522,708
----------- ----------- -----------
OPERATING EXPENSES:
Operating, general and administrative 1,186,530 1,116,332 2,350,396
Depreciation and amortization 1,476,599 1,801,606 2,992,737
Management fee - related party 117,969 111,832 226,136
----------- ----------- -----------
2,781,098 3,029,770 5,569,269
----------- ----------- -----------
Loss from operations (421,722) (793,130) (1,046,561)
----------- ----------- -----------
INTEREST INCOME (EXPENSE):
Interest expense (475,480) (515,746) (995,728)
Interest income 4,199 2,227 7,907
----------- ----------- -----------
(471,281) (513,519) (987,821)
----------- ----------- -----------
Net loss $ (893,003) $(1,306,649) $(2,034,382)
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-17
<PAGE>
CENCOM PARTNERS, L.P. -
SANFORD SYSTEM
STATEMENTS OF SYSTEM'S EQUITY
System's
Equity
-----------
BALANCE, December 31, 1994 $ 9,834,930
Net activity with Parent (148,061)
Net loss (2,034,382)
-----------
BALANCE, December 31, 1995 7,652,487
Net activity with Parent (unaudited) (12,295)
Net loss (unaudited) (893,003)
-----------
BALANCE, June 30, 1996 (unaudited) $ 6,747,189
===========
The accompanying notes are an integral part of these statements.
F-18
<PAGE>
CENCOM PARTNERS, L.P. -
SANFORD SYSTEM
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
June 30 Year Ended
-------------------------- December 31,
1996 1995 1995
----------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (893,003) $(1,306,649) $(2,034,382)
Adjustments to reconcile net loss to net cash provided by
operating activities-
Depreciation and amortization 1,476,599 1,801,606 2,992,737
Changes in assets and liabilities-
Accounts receivable, net 6,210 31,763 60,951
Prepaid expenses and other (17,789) 11,395 (1,051)
Accounts payable and accrued expenses (249,069) (118,177) 102,278
Subscriber deposits and prepayments (1,180) (24,136) (2,780)
Deferred revenue (5,468) 103,891 98,423
----------- ----------- -----------
Net cash provided by operating activities 316,300 499,693 1,216,176
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (298,883) (454,742) (941,415)
Other (5,122) (138,097) (126,700)
----------- ----------- -----------
Net cash used in investing activities (304,005) (592,839) (1,068,115)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in capital account with Parent (12,295) 93,146 (148,061)
----------- ----------- -----------
Net cash provided by (used in) financing activities
(12,295) 93,146 (148,061)
----------- ----------- -----------
CASH, beginning and end of period $ -- $ -- $ --
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-19
<PAGE>
CENCOM PARTNERS, L.P. -
SANFORD SYSTEM
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Organization and Basis of Presentation
The financial statements include the accounts of the Sanford cable television
system which is owned and operated by Cencom Partners, L.P. (CPLP). Cencom
Partners, Inc. (Cencom Partners) is the General Partner of CPLP. These financial
statements include the historical assets, liabilities and operations of the
Sanford cable television systems, which provides service to communities in and
around Sanford, North Carolina, and is referred to herein as the "System."
Cencom Partners is an indirect wholly owned subsidiary of Charter
Communications, Inc. (Charter). Cencom Cable Income Partners II, L.P. (CCIP II),
an affiliate, owns 84.03% of the Limited Partner units of CPLP.
Subsequent to year-end, CPLP entered into an Asset Purchase Agreement to sell
the assets of the System to Charter Communications L.P. (an affiliated entity)
for a purchase price of $20,750,000, subject to certain working capital
adjustments. The closing date shall be on August 30, 1996, or on any such date
mutually agreed upon by the parties. The asset sale is being effected to satisfy
the requirements by CPLP's senior bank lenders that the credit facility be
repaid in accordance with its terms. CPLP's asset disposition was also commenced
to facilitate the liquidation of CCIP II which requires the liquidation of all
of CCIP II's assets, including its entire ownership interest in CPLP.
All intersystem balances and transactions have been eliminated for presentation
in the financial statements.
As of December 31, 1995, the System passed approximately 21,500 homes and
serviced approximately 13,500 basic subscribers in approximately eight franchise
areas. The System comprises approximately 35% of the total CPLP subscribers at
December 31, 1995.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
The accompanying balance sheet as of June 30, 1996, the related statements of
operations and cash flows for the six months ended June 30, 1996 and 1995, and
the related statement of System's equity for the six months ended June 30, 1996,
are unaudited. In the opinion of management, these statements have been prepared
on the same basis as the audited financial statements and include all
adjustments necessary (consisting only of normal recurring adjustments) for the
fair presentation of financial position, results of operations and cash flows.
The results of operations for the six months ended June 30, 1996 and 1995, are
not necessarily indicative of the results that may be expected for an entire
year.
Property, Plant and Equipment
Property, plant and equipment is recorded at cost, including all direct and
certain indirect costs associated with the construction of cable transmission
and distribution facilities, and the cost of new customer installation. The
costs of disconnecting a customer are charged to expense in the period incurred.
Expenditures for repairs and maintenance are charged to expense as incurred, and
equipment replacement costs and betterments are capitalized.
F-20
<PAGE>
Depreciation is provided using the composite method on a straight-line basis
over the estimated useful lives of the related assets as follows:
Trunk and distribution systems 10 years
Subscriber installations 10 years
Converters 3-5 years
Buildings and headends 9-20 years
Vehicles and equipment 4-8 years
Office equipment 5-10 years
Franchise Costs and Subscriber Lists
Franchise costs are being amortized using the straight-line method over the term
of the individual franchises. Subscriber lists are being amortized using the
straight-line method over seven years. The non-compete agreement was being
amortized using the straight-line method over the term of the covenant which was
five years. The non-compete agreement was fully amortized as of December 31,
1995.
During 1995, the System's management adopted Statement of Financial Accounting
Standards (SFAS) No. 121 entitled, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of." In accordance with SFAS No.
121, the System's management periodically reviews the carrying value of its
long-lived assets, identifiable intangibles and franchise costs in relation to
historical financial results, current business conditions and trends (including
the impact of existing legislation and regulation) to identify potential
situations in which the carrying value of such assets may not be recoverable. If
a review indicates that the carrying value of such assets may not be
recoverable, the carrying value of such assets in excess of their fair value
will be recorded as a reduction of the assets' cost as if a permanent impairment
has occurred. The adoption of SFAS No. 121 did not impact the financial
statements of the System.
Service Revenues
Cable service revenues are recognized when the related services are provided.
Installation revenues are recognized to the extent of direct selling costs
incurred. The remainder, if any, is deferred and amortized to income over the
average estimated period that customers are expected to remain connected to the
cable television system.
Franchise fees collected from cable subscribers and paid to local franchises are
reported as revenues.
Operating, General and Administrative Expenses
Included in operating, general and administrative expenses is the allocation of
certain expenses incurred by the holding company of CPLP on behalf of the
System. These expenses were allocated to the System based on the ratio of total
System's subscribers to total CPLP subscribers. Management considers this
allocation method to be reasonable for the operations of the System. Expenses
allocated to the System totaled $39,789 during 1995.
Intercompany Interest Expense
Interest expense allocated to the System has been determined by applying the
ratio of total System's subscribers to total CPLP subscribers at year-end to
total CPLP interest expense for the year. Management considers this allocation
method to be reasonable for the operations of the System. CPLP makes
disbursements on behalf of the System for interest expense. CPLP maintains a
revolving credit agreement with a consortium of banks for borrowings up to
$48,000,000, secured by all of CPLP's assets, including the System's assets. At
December 31, 1995, CPLP had borrowings of $34,957,500 related to this credit
F-21
<PAGE>
agreement. The weighted average borrowings for CPLP during 1995 were
$36,439,000. The borrowings pertaining to the System are reflected within
System's Equity. At December 31, 1995, the interest rate was 7.375% and ranged
from 7.375% to 8.175% during 1995. The weighted average interest rate of CPLP
for 1995 was 7.81%.
Income Taxes
Income taxes are the responsibility of the partners of CPLP and as such are not
provided for in the accompanying financial statements.
Cash Management and System's Equity Account
The cash management function for the System is performed by the holding company
of CPLP. Excess cash funds are transferred to the holding company of CPLP using
the System's equity account. In addition, the holding company of CPLP makes
disbursements on behalf of the System for certain items such as payroll, payroll
taxes, employee benefits and other costs and incurs debt borrowings for the
System. Such amounts are transferred to the System through the System's equity
account and are recognized in the appropriate expense categories in the
accompanying statement of operations.
2. PREPAID EXPENSES AND OTHER:
Prepaid expenses and other consist of the following:
June 30, December 31,
1996 1995
-------- ------------
(Unaudited)
Prepaid pole rental $16,245 $ --
Prepaid insurance 76 1,309
Prepaid programming 16,310 11,105
Other prepaid expenses and current assets 8,198 10,627
------- -------
$40,829 $23,041
======= =======
3. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consists of the following:
June 30, December 31,
1996 1995
------------ ------------
(Unaudited)
Trunk and distribution systems $ 6,401,856 $ 6,364,826
Subscriber installations 2,536,578 2,375,039
Converters 989,248 914,523
Land, buildings and headends 755,827 751,562
Vehicles and equipment 271,527 244,568
Office equipment 125,387 131,022
------------ ------------
11,080,423 10,781,540
Less- Accumulated depreciation (5,474,232) (4,916,778)
------------ ------------
$ 5,606,191 $ 5,864,762
============ ============
F-22
<PAGE>
4. ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
Accounts payable and accrued expenses consist of the following:
June 30, December 31,
1996 1995
-------- ------------
(Unaudited)
Accrued property tax $ 22,817 $ 33,567
Accrued pole rental -- 66,228
Accrued franchise fees 59,274 111,012
Other 100,552 220,906
-------- --------
$182,643 $431,713
======== ========
5. SYSTEM'S EQUITY:
As of December 31, 1995, CPLP had recorded in its capital account an accumulated
deficit of approximately $11,114,000, represented by earnings net of partner
distributions.
6. RELATED-PARTY TRANSACTIONS:
During 1994, Cencom Cable Associates, Inc., the parent of Cencom Holdings,
assigned management services under contract with the System to Cencom Partners.
The management service contract provides for the payment of fees equal to 5% of
the System's gross service revenues. CPLP has been allowed to defer all such
fees through December 31, 1995. Expenses recognized by the System under this
contract during 1995 were $226,136. Management believes these charges are
indicative of the expense which would have been incurred as a stand-alone
entity.
7. COMMITMENTS AND CONTINGENCIES:
Leases
The System leases certain facilities and equipment under noncancelable operating
leases. Rent expense incurred under leases during 1995 was approximately
$45,700. Approximate future minimum lease payments are as follows:
1996 $45,000
1997 17,600
1998 17,400
1999 17,400
2000 15,900
Thereafter 14,400
The System rents utility poles in its operations. Generally, pole rental
agreements are short term, but the System's management anticipates that such
rentals will continue to recur. Rent expense incurred for pole attachments
during 1995 was approximately $56,000.
Insurance Coverage
The System currently does not have and does not in the near term anticipate
having property and casualty insurance on its underground distribution plant.
Due to large claims incurred by the property and casualty insurance industry,
the pricing of insurance coverage has become inflated to the point where, in the
judgment of the System's management, the insurance coverage is cost prohibitive.
Management believes its experience and policy with such insurance coverage is
consistent with general industry practices. Management will continue to monitor
the insurance markets to attempt to obtain coverage for the System's
distribution plant at reasonable rates.
F-23
<PAGE>
Litigation
The System is a party to lawsuits which are generally incidental to its
business. In the opinion of management, after consulting with legal counsel, the
outcome of these lawsuits will not have a material adverse effect on the
System's financial position and results of operations.
8. REGULATION IN THE CABLE INDUSTRY:
The cable television industry is subject to extensive regulation at the federal,
local and, in some instances, state levels. In addition, recent legislative and
regulatory changes and additional regulatory proposals under consideration may
materially affect the cable television industry.
1992 Cable Act and FCC Regulation
Congress enacted the Cable Television Consumer Protection and Competition Act of
1992 (the "1992 Cable Act"), which became effective on December 4, 1992. This
legislation has caused significant changes to the regulatory environment in
which the cable television industry operates. The 1992 Cable Act generally
allows for a greater degree of regulation of the cable television industry.
Under the 1992 Cable Act's definition of effective competition, nearly all cable
systems in the United States are subject to rate regulation of basic cable
services.
The 1992 Cable Act and the Federal Communications Commission's (FCC) rules
implementing the 1992 Cable Act have generally increased the administrative and
operational expenses of cable television systems and have resulted in additional
regulatory oversight by the FCC and local franchise authorities. Management is
unable to predict the ultimate effect of the 1992 Cable Act or the ultimate
outcome of various FCC rule-making proceedings or the litigation challenging
various aspects of the 1992 Cable Act and the FCC's regulations implementing the
1992 Cable Act.
The 1992 Cable Act and FCC regulations have imposed rate requirements for basic
services and equipment, including rate roll-backs. Under the 1992 Cable Act, a
local franchising authority in a community not subject to "effective
competition" generally is authorized to regulate basic cable rates after
certifying to the FCC that, among other things, it will adopt and administer
rate regulation consistent with FCC rules, and in a manner that will provide a
reasonable opportunity to consider the views of interested parties. The
Telecommunications Act of 1996 (the "Telecommunications Act"), passed by
Congress on February 1, 1996, and signed into law by the President on February
8, 1996, broadens the definition of "effective competition" to include any
franchise area where a local exchange carrier (or its affiliate) provides video
programming services to subscribers by any means, other than through Direct
Broadcast Satellite. Upon certification, the franchising authority obtains the
right to approve the basic rates charged by the cable system operator. In
regulating the basic service rates, certified local franchise authorities have
the authority to order a rate refund of previously paid rates determined to be
in excess of the maximum permitted reasonable rates.
Rate regulation of the basic service tier remains subject to regulation by local
franchising authorities under the Telecommunications Act, except in certain
circumstances for "small cable operators." For a defined class of "small cable
operators," the Telecommunications Act immediately eliminates regulation of
cable programming rates. Rates for basic tier of "small cable operators" are
deregulated if the system offered a single tier of services as of December 31,
1994.
Under the 1992 Cable Act, rates for cable programming services not carried on
the basic tier (non-basic services) could be regulated by the FCC upon the
filing of a complaint by franchise authorities or subscribers that indicates the
cable operator's rates for these services are unreasonable. Rate complaints have
been filed with the FCC with respect to certain of the System's cable
programming services; none of such complaints have been resolved by the FCC as
of the date of the financial statements. The Telecommunications Act eliminates
regulation of non-basic programming as of March 31, 1999. In the interim, rate
regulation of the non-basic programming tier can only be triggered by a
franchising authority complaint to the FCC. If the FCC determines that the
System's non-basic programming service tier rates are unreasonable, the FCC has
the authority to order the System to reduce non-basic programming service tier
rates and to refund to customers any overcharges occurring from the filing date
of the rate complaint with the FCC.
F-24
<PAGE>
Under the FCC's initial rate regulations pursuant to the 1992 Cable Act,
regulated cable systems were required to apply a benchmark formula to determine
their maximum permitted rates. Those systems whose rates were above the
benchmark on September 30, 1992, were required to reduce their rates to the
benchmark or by 10%, whichever was less. Under revised rate regulations adopted
February 1994, regulated cable systems were required to set their rates so that
regulated revenues per subscriber did not exceed September 30, 1992, levels,
reduced by 17% (taking into account the previous 10% reduction).
Notwithstanding mandated rate regulations, cable operators currently may adjust
their regulated rates to reflect inflation and what the FCC has deemed to be
external costs (such as increases in franchise fees).
In September 1995, the FCC developed an abbreviated cost-of-service form that
permits cable operators to recover costs of significant upgrades that provide
benefits to subscribers of regulated cable services. Cable operators seeking to
raise rates to cover costs of an upgrade would submit only the costs of the
upgrade instead of all current costs. In December 1995, the FCC revised its
cost-of-service rules. At this time, the System's management is unable to
predict the effect of these revised rules on the System's financial position or
results of operations.
In another action in September 1995, the FCC established a new optional rate
adjustment methodology that encourages operators to limit their rate increases
to once a year to reflect inflation and changes in external costs and the number
of channels. The rules permit cable operators to "project reasonably" changes in
their costs for the 12 months following the rate change (in an effort to
eliminate delays in recovering costs). The order allows operators to recover
increases in additional types of franchise-requirement costs. Permitted
pass-through increases include increases in the cost of providing institutional
networks, video services, data services to or from governmental and educational
institutions, and certain other cost increases. The System's management is
unable to predict the effect of these new rules on the System's business.
In November 1995, the FCC proposed to provide cable operators with the option of
establishing uniform rates for similar service packages offered in multiple
franchise areas located in the same region. Under the FCC's current rules, cable
operators subject to rate regulation must establish rates on a
franchise-specific basis. The proposed rules could lower cable operator's
marketing costs and may also allow operators to better response to competition
from alternative providers. The System's management is unable to predict if
these proposed rules will ultimately be promulgated by the FCC, and if they are
promulgated, their effect on the System's financial position and results of
operations.
While management believes that the System has complied in all material respects
with the rate provisions of the 1992 Cable Act, in jurisdictions that have not
yet chosen to certify, refunds covering a one-year period on basic services may
be ordered upon future certification if the System is unable to justify its
rates through a benchmark or cost-of-service filing or small system
cost-of-service filing pursuant to FCC rules. Management is unable to estimate
at this time the amount of refunds, if any, that may be payable by the System in
the event certain of its rates are successfully challenged by franchising
authorities or found to be unreasonable by the FCC. Management does not believe
that the amount of any such refunds would have a material adverse effect on the
financial position or results of operations of the System.
"Must Carry" Requirements/"Retransmission Consents"
Under the 1992 Cable Act, cable television operators are subject to mandatory
signal carriage requirements that allow local commercial and noncommercial
television broadcast stations to elect to require a cable system to carry the
station, subject to certain exceptions, or, in the case of commercial stations,
to negotiate for "retransmission consent" to carry the station. In addition,
there are requirements for cable systems to obtain retransmission consent for
all "distant" commercial television stations, commercial radio stations and
certain low power television stations carried by such systems after October 6,
1993. As a result of the mandatory system carriage rules, the System may be
required to carry television broadcast stations that otherwise would not have
been carried, thereby causing displacement of possibly more attractive
programming.
Franchise Matters
F-25
<PAGE>
The 1992 Cable Act modified the franchise renewal process to make it easier for
a franchising authority to deny renewal. Historically, franchises have been
renewed for cable operators that have provided satisfactory services and have
complied with the terms of the franchise agreement. Although management believes
that the System has generally met the terms of its franchise agreements and has
provided quality levels of service, and anticipates the System's future
franchise renewal prospects generally will be favorable, there can be no
assurance that any such franchises will be renewed or, if renewed, that the
franchising authority will not impose more onerous requirements on the System
than previously existed.
Recent Telecommunications Legislation
The Telecommunications Act alters federal, state and local laws and regulations
pertaining to cable television, telecommunications and other services.
Under the Telecommunications Act, telephone companies can compete directly with
cable operators in the provision of video programming. This new legislation
recognizes several multiple entry options for telephone companies to provide
competitive video programming.
The Telecommunications Act eliminates broadcast/cable cross-ownership
restrictions, but leaves in place FCC regulations prohibiting local
cross-ownership between television stations and cable systems.
Certain provisions of the Telecommunications Act could materially affect the
growth and operation of the cable television industry and the cable services
provided by the System. Although the new legislation may substantially lessen
regulatory burdens, the cable television industry may be subject to additional
competition as a result thereof. There are numerous rule-makings to be
undertaken by the FCC which will interpret and implement the Telecommunications
Act's provisions. In addition, certain provisions of the Telecommunications Act
(such as the deregulation of cable programming rates) are not immediately
effective. Further, certain of the Telecommunications Act's provisions have been
and are likely to be subject to judicial challenges. The System's management is
unable at this time to predict the outcome of such rule-makings or litigation or
the substantive effect of the new legislation and the rule-makings on the
financial position and results of operations of the System.
9. NET LOSS FOR INCOME TAX PURPOSES:
The following reconciliation summarizes the differences between CPLP's net loss
for financial reporting and federal income tax purposes for the year ended
December 31, 1995:
<TABLE>
<S> <C>
Net loss for financial reporting purposes $(5,835,749)
Depreciation differences between financial reporting and tax reporting (299,122)
Amortization differences between financial reporting and tax reporting 1,857,724
Differences in expenses recorded for financial reporting and tax reporting 7,973
Revenue reported for tax reporting and deferred for financial reporting 196,640
Other 5,034
-----------
Net loss for federal income tax purposes $(4,067,500)
===========
</TABLE>
F-26
<PAGE>
The following summarizes the significant temporary differences between CPLP's
financial reporting basis and federal income tax reporting basis as of December
31, 1995:
Assets:
Accounts receivable $ 21,651
Franchise costs and other assets 10,437,405
Accrued expenses 419,932
Deferred revenue 196,640
------------
$ 11,075,628
============
Liabilities- Property, plant and equipment $ (9,748,924)
============
As discussed in Note 1, the System comprises approximately 35% of CPLP's total
basic subscribers.
F-27
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Cencom Partners, L.P.:
We have audited the accompanying balance sheet of Cencom Partners, L.P. -
Lincolnton System (as defined in Note 1) as of December 31, 1995, and the
related statements of operations, System's equity and cash flows for the year
then ended. These financial statements are the responsibility of the System's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the 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 audit provides 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 Cencom Partners, L.P. -
Lincolnton System as of December 31, 1995, and the results of its operations and
its cash flows for the year then ended, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
St. Louis, Missouri,
March 29, 1996
F-28
<PAGE>
CENCOM PARTNERS, L.P. -
LINCOLNTON SYSTEM
BALANCE SHEETS
June 30, December 31,
1996 1995
----------- ------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash $ -- $ --
Accounts receivable, net of allowance for doubtful
accounts of $8,101 and $5,298, respectively 60,162 49,874
Prepaid expenses and other 24,666 22,111
----------- -----------
Total current assets 84,828 71,985
PROPERTY, PLANT AND EQUIPMENT 8,301,591 8,757,955
FRANCHISE COSTS, net of accumulated amortization of
$8,563,529 and $8,020,648, respectively 3,846,250 4,389,131
SUBSCRIBER LISTS, net of accumulated amortization of
$4,497,584 and $3,844,673, respectively 358,221 1,011,132
----------- -----------
$12,590,890 $14,230,203
=========== ===========
LIABILITIES AND SYSTEM'S EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 232,101 $ 295,245
Subscriber deposits and prepayments 22,690 27,241
----------- -----------
Total current liabilities 254,791 322,486
----------- -----------
DEFERRED REVENUE 27,093 28,687
SYSTEM'S EQUITY 12,309,006 13,879,030
----------- -----------
$12,590,890 $14,230,203
=========== ===========
The accompanying notes are an integral part of these balance sheets.
F-29
<PAGE>
CENCOM PARTNERS, L.P. -
LINCOLNTON SYSTEM
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Six Months Ended
June 30 Year Ended
-------------------------- December 31,
1996 1995 1995
----------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
SERVICE REVENUES $ 2,726,510 $ 2,585,934 $ 5,222,042
----------- ----------- -----------
OPERATING EXPENSES:
Operating, general and administrative 1,364,447 1,293,493 2,623,219
Depreciation and amortization 2,087,255 2,439,487 4,187,826
Management fee - related party 136,402 129,297 261,103
----------- ----------- -----------
3,588,104 3,862,277 7,072,148
----------- ----------- -----------
Loss from operations (861,594) (1,276,343) (1,850,106)
----------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest expense (543,406) (589,424) (1,137,975)
Interest income 4,799 2,545 11,788
Other (11,303) -- --
----------- ----------- -----------
(549,910) (586,879) (1,126,187)
----------- ----------- -----------
Net loss $(1,411,504) $(1,863,222) $(2,976,293)
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-30
<PAGE>
CENCOM PARTNERS, L.P. -
LINCOLNTON SYSTEM
STATEMENTS OF SYSTEM'S EQUITY
System's
Equity
------------
BALANCE, December 31, 1994 $ 17,147,315
Net activity with Parent (291,992)
Net loss (2,976,293)
------------
BALANCE, December 31, 1995 13,879,030
Net activity with Parent (unaudited) (158,520)
Net loss (unaudited) (1,411,504)
------------
BALANCE, June 30, 1996 (unaudited) $ 12,309,006
============
The accompanying notes are an integral part of these statements.
F-31
<PAGE>
CENCOM PARTNERS, L.P. -
LINCOLNTON SYSTEM
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
June 30 Year Ended
-------------------------- December 31,
1996 1995 1995
----------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,411,504) $(1,863,222) $(2,976,293)
Adjustments to reconcile net loss to net cash provided by
operating activities-
Depreciation and amortization 2,087,255 2,439,487 4,187,826
Changes in assets and liabilities-
Accounts receivable, net (10,288) (17,254) 4,309
Prepaid expenses and other (2,555) 31,371 1,266
Accounts payable and accrued expenses (63,144) (80,336) (35,011)
Subscriber deposits and prepayments (4,551) (27,444) (3,095)
Deferred revenue (1,594) 30,280 28,687
----------- ----------- -----------
Net cash provided by operating activities 593,619 512,882 1,207,689
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (429,245) (251,069) (770,897)
Other (5,854) (157,825) (144,800)
----------- ----------- -----------
Net cash used in investing activities (435,099) (408,894) (915,697)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in capital account with Parent (158,520) (103,988) (291,992)
----------- ----------- -----------
Net cash provided by (used in) financing activities
(158,520) (103,988) (291,992)
----------- ----------- -----------
CASH, beginning and end of period $ -- $ -- $ --
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-32
<PAGE>
CENCOM PARTNERS, L.P. -
LINCOLNTON SYSTEM
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Organization and Basis of Presentation
The financial statements include the accounts of the Lincolnton cable television
system which is owned and operated by Cencom Partners, L.P. (CPLP). Cencom
Partners, Inc. (Cencom Partners) is the General Partner of CPLP. These financial
statements include the historical assets, liabilities and operations of the
Lincolnton cable television system, which provides service to communities in and
around Lincolnton, North Carolina, and is referred to herein as the "System."
Cencom Partners is an indirect wholly owned subsidiary of Charter
Communications, Inc. (Charter). Cencom Cable Income Partners II, L.P. (CCIP II),
an affiliate, owns 84.03% of the Limited Partner units of CPLP.
Subsequent to year-end, CPLP entered into an Asset Purchase Agreement to sell
the assets of the System to Charter Communications, L.P. (an affiliated entity)
for a purchase price of $27,500,000, subject to certain working capital
adjustments. The closing date shall be on August 30, 1996, or on any such date
mutually agreed upon by the parties. The asset sale is being effected to satisfy
the requirements by CPLP's senior bank lenders that the credit facility be
repaid in accordance with its terms. CPLP's asset disposition was also commenced
to facilitate the liquidation of CCIP II which requires the liquidation of all
of CCIP II's assets, including its entire ownership interest in CPLP.
All intersystem balances and transactions have been eliminated for presentation
in the financial statements.
As of December 31, 1995, the System passed approximately 28,500 homes and
serviced approximately 14,500 basic subscribers in approximately seven franchise
areas. The System comprises approximately 40% of the total CPLP basic
subscribers at December 31, 1995.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
The accompanying balance sheet as of June 30, 1996, the related statements of
operations and cash flows for the six months ended June 30, 1996 and 1995, and
the related statement of System's equity for the six months ended June 30, 1996,
are unaudited. In the opinion of management, these statements have been prepared
on the same basis as the audited financial statements and include all
adjustments necessary (consisting only of normal recurring adjustments) for the
fair presentation of financial position, results of operations and cash flows.
The results of operations for the six months ended June 30, 1996 and 1995, are
not necessarily indicative of the results that may be expected for an entire
year.
Property, Plant and Equipment
Property, plant and equipment is recorded at cost, including all direct and
certain indirect costs associated with the construction of cable transmission
and distribution facilities, and the cost of new customer installation. The
costs of disconnecting a customer are charged to expense in the period incurred.
Expenditures for repairs and maintenance are charged to expense as incurred, and
equipment replacement costs and betterments are capitalized.
F-33
<PAGE>
Depreciation is provided using the composite method on a straight-line basis
over the estimated useful lives of the related assets as follows:
Trunk and distribution systems 10 years
Subscriber installations 10 years
Converters 3-5 years
Buildings and headends 9-20 years
Vehicles and equipment 4-8 years
Office equipment 5-10 years
Franchise Costs and Subscriber Lists
Franchise costs are being amortized using the straight-line method over the term
of the individual franchises. Subscriber lists are being amortized using the
straight-line method over seven years. The non-compete agreement was being
amortized using the straight-line method over the term of the covenant which was
five years. The non-compete agreement was fully amortized as of December 31,
1995.
During 1995, the System's management adopted Statement of Financial Accounting
Standards (SFAS) No. 121 entitled, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of." In accordance with SFAS No.
121, the System's management periodically reviews the carrying value of its
long-lived assets, identifiable intangibles and franchise costs in relation to
historical financial results, current business conditions and trends (including
the impact of existing legislation and regulation) to identify potential
situations in which the carrying value of such assets may not be recoverable. If
a review indicates that the carrying value of such assets may not be
recoverable, the carrying value of such assets in excess of their fair value
will be recorded as a reduction of the assets' cost as if a permanent impairment
has occurred. The adoption of SFAS No. 121 did not impact the financial
statements of the System.
Service Revenues
Cable service revenues are recognized when the related services are provided.
Installation revenues are recognized to the extent of direct selling costs
incurred. The remainder, if any, is deferred and amortized to income over the
average estimated period that customers are expected to remain connected to the
cable television system.
Franchise fees collected from cable subscribers and paid to local franchises are
reported as revenues.
Operating, General and Administrative Expenses
Included in operating, general and administrative expenses is the allocation of
certain expenses incurred by the holding company of CPLP on behalf of the
System. These expenses were allocated to the System based on the ratio of total
System's basic subscribers to total CPLP basic subscribers. Management considers
this allocation method to be reasonable for the operations of the System.
Expenses allocated to the System totaled $55,461 during 1995.
Intercompany Interest Expense
Interest expense allocated to the System has been determined by applying the
ratio of total System's basic subscribers to total CPLP basic subscribers at
year-end to total CPLP interest expense for the year. Management considers this
allocation method to be reasonable for the operations of the System. CPLP makes
disbursements on behalf of the System for interest expense. CPLP maintains a
revolving credit agreement with a consortium of banks for borrowings up to
$48,000,000, secured by all of CPLP's assets,
F-34
<PAGE>
including the System's assets. At December 31, 1995, CPLP had borrowings of
$34,957,500 related to this credit agreement. The weighted average borrowings
for CPLP during 1995 were $36,439,000. The borrowings pertaining to the System
are reflected within System's Equity. At December 31, 1995, the interest rate
was 7.375% and ranged from 7.375% to 8.175% during 1995. The weighted average
interest rate of CPLP for 1995 was 7.81%.
Income Taxes
Income taxes are the responsibility of the partners of CPLP and as such are not
provided for in the accompanying financial statements.
Cash Management and System's Equity Account
The cash management function for the System is performed by the holding company
of CPLP. Excess cash funds are transferred to the holding company of CPLP using
the System's equity account. In addition, the holding company of CPLP makes
disbursements on behalf of the System for certain items such as payroll, payroll
taxes, employee benefits and other costs and incurs debt borrowings for the
System. Such amounts are transferred to the System through the System's equity
account and are recognized in the appropriate expense categories in the
accompanying statement of operations.
2. PREPAID EXPENSES AND OTHER:
Prepaid expenses and other consist of the following:
June 30, December 31,
1996 1995
------- -------
(Unaudited)
Prepaid programming $17,546 $11,640
Other prepaid expenses and current assets 7,120 10,471
------- -------
$24,666 $22,111
======= =======
3. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consists of the following:
June 30, December 31,
1996 1995
------------ ------------
(Unaudited)
Trunk and distribution systems $ 11,561,534 $ 11,375,882
Subscriber installations 3,484,489 3,332,794
Converters 1,182,471 1,095,257
Land, buildings and headends 600,025 596,426
Vehicles and equipment 379,955 378,781
Office equipment 114,612 114,701
------------ ------------
17,323,086 16,893,841
Less- Accumulated depreciation (9,021,495) (8,135,886)
------------ ------------
$ 8,301,591 $ 8,757,955
============ ============
F-35
<PAGE>
4. ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
Accounts payable and accrued expenses consist of the following:
June 30, December 31,
1996 1995
-------- --------
(Unaudited)
Accounts payable $ -- $ 28,420
Accrued salaries and related benefits 20,437 19,151
Accrued property tax 59,667 39,567
Accrued franchise fees 50,101 94,661
Accrued billing expense 16,056 15,295
Other 85,840 98,151
-------- --------
$232,101 $295,245
======== ========
5. SYSTEM'S EQUITY:
As of December 31, 1995, CPLP had recorded in its capital account an accumulated
deficit of approximately $11,114,000, represented by earnings net of partner
distributions.
6. RELATED-PARTY TRANSACTIONS:
During 1994, Cencom Cable Associates, Inc., the parent of Cencom Holdings,
assigned management services under contract with the System to Cencom Partners.
The management service contract provides for the payment of fees equal to 5% of
the System's gross service revenues. CPLP has been allowed to defer all such
fees through December 31, 1995. Expenses recognized by the System under this
contract during 1995 were $261,103. Management believes these charges are
indicative of the expense which would have been incurred as a stand-alone
entity.
7. COMMITMENTS AND CONTINGENCIES:
Leases
The System leases certain facilities and equipment under noncancelable operating
leases. Rent expense incurred under leases during 1995 was approximately
$15,000. Approximate future minimum lease payments are as follows:
1996 $12,000
1997 12,000
1998 1,500
1999 1,500
2000 1,500
Thereafter 3,000
The System rents utility poles in its operations. Generally, pole rental
agreements are short term, but the System's management anticipates that such
rentals will continue to recur. Rent expense incurred for pole attachments
during 1995 was approximately $80,000.
F-36
<PAGE>
Insurance Coverage
The System currently does not have and does not in the near term anticipate
having property and casualty insurance on its underground distribution plant.
Due to large claims incurred by the property and casualty insurance industry,
the pricing of insurance coverage has become inflated to the point where, in the
judgment of the System's management, the insurance coverage is cost prohibitive.
Management believes its experience and policy with such insurance coverage is
consistent with general industry practices. Management will continue to monitor
the insurance markets to attempt to obtain coverage for the System's
distribution plant at reasonable rates.
Litigation
The System is a party to lawsuits which are generally incidental to its
business. In the opinion of management, after consulting with legal counsel, the
outcome of these lawsuits will not have a material adverse effect on the
System's financial position and results of operations.
8. REGULATION IN THE CABLE INDUSTRY:
The cable television industry is subject to extensive regulation at the federal,
local and, in some instances, state levels. In addition, recent legislative and
regulatory changes and additional regulatory proposals under consideration may
materially affect the cable television industry.
1992 Cable Act and FCC Regulation
Congress enacted the Cable Television Consumer Protection and Competition Act of
1992 (the "1992 Cable Act"), which became effective on December 4, 1992. This
legislation has caused significant changes to the regulatory environment in
which the cable television industry operates. The 1992 Cable Act generally
allows for a greater degree of regulation of the cable television industry.
Under the 1992 Cable Act's definition of effective competition, nearly all cable
systems in the United States are subject to rate regulation of basic cable
services.
The 1992 Cable Act and the Federal Communications Commission's (FCC) rules
implementing the 1992 Cable Act have generally increased the administrative and
operational expenses of cable television systems and have resulted in additional
regulatory oversight by the FCC and local franchise authorities. Management is
unable to predict the ultimate effect of the 1992 Cable Act or the ultimate
outcome of various FCC rule-making proceedings or the litigation challenging
various aspects of the 1992 Cable Act and the FCC's regulations implementing the
1992 Cable Act.
The 1992 Cable Act and FCC regulations have imposed rate requirements for basic
services and equipment, including rate roll-backs. Under the 1992 Cable Act, a
local franchising authority in a community not subject to "effective
competition" generally is authorized to regulate basic cable rates after
certifying to the FCC that, among other things, it will adopt and administer
rate regulation consistent with FCC rules, and in a manner that will provide a
reasonable opportunity to consider the views of interested parties. The
Telecommunications Act of 1996 (the "Telecommunications Act"), passed by
Congress on February 1, 1996, and signed into law by the President on February
8, 1996, broadens the definition of "effective competition" to include any
franchise area where a local exchange carrier (or its affiliate) provides video
programming services to subscribers by any means, other than through Direct
Broadcast Satellite. Upon certification, the franchising authority obtains the
right to approve the basic rates charged by the cable system operator. In
regulating the basic service rates, certified local franchise authorities have
the authority to order a rate refund of previously paid rates determined to be
in excess of the maximum permitted reasonable rates.
F-37
<PAGE>
Rate regulation of the basic service tier remains subject to regulation by local
franchising authorities under the Telecommunications Act, except in certain
circumstances for "small cable operators." For a defined class of "small cable
operators," the Telecommunications Act immediately eliminates regulation of
cable programming rates. Rates for basic tier of "small cable operators" are
deregulated if the system offered a single tier of services as of December 31,
1994.
Under the 1992 Cable Act, rates for cable programming services not carried on
the basic tier (non-basic services) could be regulated by the FCC upon the
filing of a complaint by franchise authorities or subscribers that indicates the
cable operator's rates for these services are unreasonable. Rate complaints have
been filed with the FCC with respect to certain of the System's cable
programming services; none of such complaints have been resolved by the FCC as
of the date of the financial statements. The Telecommunications Act eliminates
regulation of non-basic programming as of March 31, 1999. In the interim, rate
regulation of the non-basic programming tier can only be triggered by a
franchising authority complaint to the FCC. If the FCC determines that the
System's non-basic programming service tier rates are unreasonable, the FCC has
the authority to order the System to reduce non-basic programming service tier
rates and to refund to customers any overcharges occurring from the filing date
of the rate complaint with the FCC.
Under the FCC's initial rate regulations pursuant to the 1992 Cable Act,
regulated cable systems were required to apply a benchmark formula to determine
their maximum permitted rates. Those systems whose rates were above the
benchmark on September 30, 1992, were required to reduce their rates to the
benchmark or by 10%, whichever was less. Under revised rate regulations adopted
February 1994, regulated cable systems were required to set their rates so that
regulated revenues per subscriber did not exceed September 30, 1992, levels,
reduced by 17% (taking into account the previous 10% reduction).
Notwithstanding mandated rate regulations, cable operators currently may adjust
their regulated rates to reflect inflation and what the FCC has deemed to be
external costs (such as increases in franchise fees).
In September 1995, the FCC developed an abbreviated cost-of-service form that
permits cable operators to recover costs of significant upgrades that provide
benefits to subscribers of regulated cable services. Cable operators seeking to
raise rates to cover costs of an upgrade would submit only the costs of the
upgrade instead of all current costs. In December 1995, the FCC revised its
cost-of-service rules. At this time, the System's management is unable to
predict the effect of these revised rules on the System's financial position or
results of operations.
In another action in September 1995, the FCC established a new optional rate
adjustment methodology that encourages operators to limit their rate increases
to once a year to reflect inflation and changes in external costs and the number
of channels. The rules permit cable operators to "project reasonably" changes in
their costs for the 12 months following the rate change (in an effort to
eliminate delays in recovering costs). The order allows operators to recover
increases in additional types of franchise-requirement costs. Permitted
pass-through increases include increases in the cost of providing institutional
networks, video services, data services to or from governmental and educational
institutions, and certain other cost increases. The System's management is
unable to predict the effect of these new rules on the System's business.
In November 1995, the FCC proposed to provide cable operators with the option of
establishing uniform rates for similar service packages offered in multiple
franchise areas located in the same region. Under the FCC's current rules, cable
operators subject to rate regulation must establish rates on a
franchise-specific basis. The proposed rules could lower cable operator's
marketing costs and may also allow operators to better response to competition
from alternative providers. The System's management is unable to predict if
these proposed rules will ultimately be promulgated by the FCC, and if they are
promulgated, their effect on the System's financial position and results of
operations.
F-38
<PAGE>
While management believes that the System has complied in all material respects
with the rate provisions of the 1992 Cable Act, in jurisdictions that have not
yet chosen to certify, refunds covering a one-year period on basic services may
be ordered upon future certification if the System is unable to justify its
rates through a benchmark or cost-of-service filing or small system
cost-of-service filing pursuant to FCC rules. Management is unable to estimate
at this time the amount of refunds, if any, that may be payable by the System in
the event certain of its rates are successfully challenged by franchising
authorities or found to be unreasonable by the FCC. Management does not believe
that the amount of any such refunds would have a material adverse effect on the
financial position or results of operations of the System.
"Must Carry" Requirements/"Retransmission Consents"
Under the 1992 Cable Act, cable television operators are subject to mandatory
signal carriage requirements that allow local commercial and noncommercial
television broadcast stations to elect to require a cable system to carry the
station, subject to certain exceptions, or, in the case of commercial stations,
to negotiate for "retransmission consent" to carry the station. In addition,
there are requirements for cable systems to obtain retransmission consent for
all "distant" commercial television stations, commercial radio stations and
certain low power television stations carried by such systems after October 6,
1993. As a result of the mandatory system carriage rules, the System may be
required to carry television broadcast stations that otherwise would not have
been carried, thereby causing displacement of possibly more attractive
programming.
Franchise Matters
The 1992 Cable Act modified the franchise renewal process to make it easier for
a franchising authority to deny renewal. Historically, franchises have been
renewed for cable operators that have provided satisfactory services and have
complied with the terms of the franchise agreement. Although management believes
that the System has generally met the terms of its franchise agreements and has
provided quality levels of service, and anticipates the System's future
franchise renewal prospects generally will be favorable, there can be no
assurance that any such franchises will be renewed or, if renewed, that the
franchising authorities will not impose more onerous requirements on the System
than previously existed.
Recent Telecommunications Legislation
The Telecommunications Act alters federal, state and local laws and regulations
pertaining to cable television, telecommunications and other services.
Under the Telecommunications Act, telephone companies can compete directly with
cable operators in the provision of video programming. This new legislation
recognizes several multiple entry options for telephone companies to provide
competitive video programming.
The Telecommunications Act eliminates broadcast/cable cross-ownership
restrictions, but leaves in place FCC regulations prohibiting local
cross-ownership between television stations and cable systems.
Certain provisions of the Telecommunications Act could materially affect the
growth and operation of the cable television industry and the cable services
provided by the System. Although the new legislation may substantially lessen
regulatory burdens, the cable television industry may be subject to additional
competition as a result thereof. There are numerous rule makings to be
undertaken by the FCC which will interpret and implement the Telecommunications
Act's provisions. In addition, certain provisions of the Telecommunications Act
(such as the deregulation of cable programming rates) are not immediately
effective. Further, certain of the Telecommunications Act's provisions have been
and are likely to be subject to judicial challenges. The System's management is
unable at this time to predict the outcome of such rule-makings or litigation or
the substantive effect of the new legislation and the rule-makings on the
financial position and results of operations of the System.
F-39
<PAGE>
9. NET LOSS FOR INCOME TAX PURPOSES:
The following reconciliation summarizes the differences between CPLP's net loss
for financial reporting and federal income tax purposes for the year ended
December 31, 1995:
<TABLE>
<S> <C>
Net loss for financial reporting purposes $(5,835,749)
Depreciation differences between financial reporting and tax reporting (299,122)
Amortization differences between financial reporting and tax reporting 1,857,724
Differences in expenses recorded for financial reporting and tax reporting 7,973
Revenue reported for tax reporting and deferred for financial reporting 196,640
Other 5,034
-----------
Net loss for federal income tax purposes $(4,067,500)
===========
</TABLE>
The following summarizes the significant temporary differences between CPLP's
financial reporting basis and federal income tax reporting basis as of December
31, 1995:
Assets:
Accounts receivable $ 21,651
Franchise costs and other assets 10,437,405
Accrued expenses 419,932
Deferred revenue 196,640
------------
$ 11,075,628
============
Liabilities- Property, plant and equipment $ (9,748,924)
============
As discussed in Note 1, the System comprises approximately 40% of CPLP's total
basic subscribers.
F-40
<PAGE>
EXHIBIT A-1
APPRAISALS OF THE PARTNERSHIP SYSTEMS
<PAGE>
CONFIDENTIAL
CENCOM CABLE INCOME PARTNERS II, L.P.
Appraisal Analysis Summary
Introduction
Daniels & Associates, L.P. ("Daniels") was retained by Cencom Cable Income
Partners II, L.P. (the "Partnership") to appraise the fair market value of the
assets of the Partnership, in accordance with the "Appraisal Process" procedures
as outlined in the letter received from the Partnership dated April 28, 1995
(the Procedures Letter"), as well as the related Amended and Restated Agreement
of Limited Partnership (the "Partnership Agreement"). The "Valuation Date" of
the appraisal of the Partnership, as was mutually agreed upon in the Procedures
Letter, was March 31 ,1995. The Partnership owns and operates cable television
systems (referred to in the aggregate as the "Systems") that, as of March 31,
1995, passed approximately 71,455 homes and served approximately 44,232
equivalent basic subscribers ("EBUs") in the following three operating groups:
<TABLE>
<CAPTION>
=========================================================================================
As of Homes Basic Equivalent Miles of Number of
March 31, 1995 Passed Subscribers/ Basic Units Plant Headends
Penetration
- - - -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Southeast Texas 39,975 22,172/55.5% 22,602 723 13
- - - -----------------------------------------------------------------------------------------
Anderson, South 27,611 19,336/70.0% 19,518 1,044 4
Carolina
- - - -----------------------------------------------------------------------------------------
Northeast Missouri 3,869 2,081/53.8% 2,112 70 7
- - - -----------------------------------------------------------------------------------------
Total 71,455 43,589/61.0% 44,232 1,837 24
=========================================================================================
</TABLE>
The appraisal was performed in conjunction with the anticipated dissolution and
liquidation of the Partnership following the planned sale of the Partnership's
assets. This report summarizes Daniels' conclusions and provides an outline of
the scope of the engagement, the process used, an overview of the Systems by
group, the valuation methodology, the assumptions relied upon, and an
explanation of the values derived.
Process
Daniels prepared an independent appraisal analysis of the Partnership assets and
was then instructed, as per the Procedures Letter and the Partnership Agreement,
to work with Western Cablesystems, Inc., the appraiser appointed by the American
Arbitration Association, to attempt to jointly determine the fair market value
of the Partnership's assets.
===============================================================================
DANIELS & ASSOCIATES
1
<PAGE>
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 the Systems have been and will continue to be operated as efficiently as
comparable cable systems, and that the franchises and leases of assets used in
the operation of the Systems will be renewed indefinitely without material
changes, other than rebuild requirements (see "The Systems" section).
The appraisal process included discussions with the Partnership's management,
due diligence visits to a majority of the Systems by Daniels' personnel,
research of demographic information concerning the various communities served,
and analyses of historical and forecasted financial and operating information,
as well as Daniels' general knowledge about the industry. In addition, the
impact of the 1992 Cable Act on each System's current and forecasted financial
performance was analyzed. From such due diligence, summaries of the relevant
operating, technical, financial and demographic characteristics of the Systems
by operating group were prepared. These critical characteristics of the Systems
were instrumental in determining respective values because they varied
significantly between the Systems.
In order to assess the fair market value of the Partnership's assets, detailed
operating and financial forecasts by operating group were prepared incorporating
the critical elements of operating revenues and expenses as well as capital
expenditure requirements. These financial forecasts then formed the basis for
determining a discounted cash flow value for each operating group, a standard
valuation methodology used within the industry. The combined values of the
Systems by operating group provides a value of the cable operating assets of the
Partnership on a discounted cash flow basis. Using the market multiple
methodology, an aggregate value for the Partnership's assets was derived by
analyzing value per subscriber and operating cash flow multiples obtained in
private market sales of comparable cable television systems, and then applying
those comparable market multiples to the Partnership Systems. The products of
these two valuation methodologies were then analyzed to determine a final
appraisal value for the Partnership's assets.
The Systems
The Systems owned by the Partnership served approximately 44,232 EBUs in three
operating groups (three states) as of the Valuation Date. The operating groups
are referred to as (i) Southeast Texas; (ii) Anderson, South Carolina; and (iii)
Northeast Missouri. The largest operating group is Southeast Texas (22,602
EBUs), and the smallest is Northeast Missouri (2,112 EBUs). As of the Valuation
Date, the Systems had basic subscriber penetration rates varying from 53.8% to
70.0% of homes passed, and a total basic penetration level of 61.0%, compared to
the national average of 62.6%.
===============================================================================
DANIELS & ASSOCIATES
2
<PAGE>
The Systems are served by a total of 24 headends with approximately 1,837 miles
of plant. The technical condition and current channel capacity of the Systems
varies widely from 220 MHz to 400 MHz. Many of the Systems require significant
amounts of capital expenditures to upgrade or rebuild the cable plant in order
to sustain existing revenue and cash flow levels and realize future financial
performance growth. For our valuation, we assumed all plant that is currently
designed to less than 450 MHz would be required to be rebuilt or upgraded to at
least a 450 MHz capacity level, and in some instances a 550 MHz level, during
the first five years of the forecast period, depending upon franchise terms and
the competitive outlook. The majority of the Systems requiring a rebuild or
upgrade are forecasted to have that occur within the first four years of the
forecast period. The one exception to this involved the Northeast Missouri
operating group which serves approximately 5.0% of the Partnership's subscribers
from less than 4% of the Systems' total plant miles. Given the current excess
channel capacity within these systems, the plant was assumed to be upgraded to a
450 MHz capacity in years four through seven of the forecast period.
Rebuilding these Systems to either a 450 MHz or 550 MHz design capacity is a
reasonable industry standard based on the current technology and operating
environment. We have estimated the cost per mile to rebuild a System to 550 MHz
at $15,000/mile and to upgrade plant to 450 MHz at $6,000/mile. These cost
estimates are reasonable representations of the costs (design, cable plant,
electronics, and labor) associated with rebuilding and/or upgrading cable
systems in the geographic regions served by the Partnership Systems. These cost
estimates, however, do not include the costs associated with upgrading and
changing out converters. In the Systems that are forecast to be rebuilt,
converters are forecast to be at least partially replaced over a two to three
year period at a cost of $125 per converter. The total estimated cost of
rebuilding/upgrading all of the Systems (excluding converter replacement) was
forecasted to be $20.8 million, of which $11.0 million was attributable to the
Anderson, South Carolina Systems and $9.4 million was for rebuilding the
Southeast Texas Systems.
Southeast Texas Systems
Southeast Texas is the largest of the operating groups in the Partnership,
passing 39,975 homes and serving 22,602 EBUs. This group of systems represents
56% of the total passings and 51% of the total EBUs of the Partnership. There
are thirteen systems within this operating group, managed from leased offices in
Jasper, Cleveland, Marlin, Angleton, Kingsville, and Madisonville. There are
five clusters of systems in this group; four clusters are located within 40 to
180 miles of Houston, and one cluster is located approximately 25 miles outside
of Corpus Christi.
There are 13 headends and 723 miles of plant serving the Southeast Texas
systems. Approximately 76% of the homes passed are served by 300/330 MHz plant,
and 22% are passed by 400 MHz plant. The remaining 2% of the plant is
===============================================================================
DANIELS & ASSOCIATES
3
<PAGE>
designed to 220 MHz capacity. The Cleveland, Angleton, Woodville, Kingsville,
and Jasper systems are addressable, with a total of approximately 5,800
addressable subscribers. As of the Appraisal Date, none of these systems were
overbuilt and management was not aware of any plans to overbuild any of the
systems. There is an MMDS operator in Corpus Christi, but thus far the system
has experienced minimal subscriber losses to this competitor.
The Partnership has franchise agreements with 13 communities in Southeast Texas,
with expiration dates ranging from January 1996 to June 2009, including recently
renewed franchise agreements with the cities of Sealy and Kingsville. Two
franchises, Jasper and Angleton, have certified to regulate basic rates.
During April and May of 1995, expanded basic rates were increased an average of
$0.71 for systems with more than 1,000 subscribers. Prior to April 1, 1995, the
weighted average basic rate in these systems was $11.24 and the weighted average
expanded basic rate was $13.02. After the rate increases, the weighted average
rate for basic and expanded basic increased to $11.26 and $13.73, respectively.
The annualized revenue and cash flow for the three-month period ended March 31,
1995 for this group of systems was $8.4 million and $4.5 million, respectively.
This equates to an average monthly revenue per EBU of $30.97 and average annual
cash flow per EBU of $198.47. This system's revenue per EBU is in line with that
of the industry's average of approximately $31.29 for the year 1994, while its
cash flow per EBU is substantially higher than the industry average of $165.21
for the year 1994, per Paul Kagan Associates, Inc. Cable TV Investor,
April 30, 1995.
The demographics and economic characteristics of the communities are very
similar. Most of the communities are average growth, lower-middle to middle
income, rural communities. Agriculture, timber, ranching, and county government
are the main economic activities within the communities served, with eight of
the thirteen communities served being county seats. The communities with the
best growth potential are Jasper, Angleton, and Kingsville. Jasper's economy is
supported by tourism and timber. Angleton is developing a stronger
manufacturing-based economy, and is developing into a suburb of Houston.
Kingsville's economy is primarily supported by the Naval Air Station and Texas
A&M University.
Anderson, South Carolina
This is the second largest group of systems, which as of March 31, 1995 passed
27,611 homes and served 19,518 EBUs. The primary communities served include
Anderson (unincorporated areas), Travelers Rest, West Pelzer, and Keowee Key.
The systems are operated out of two offices - one in West Pelzer and one in
Keowee Key. The West Pelzer office is leased and the Keowee Key office is
provided free as part of the franchise. These systems currently employ 21
people.
===============================================================================
DANIELS & ASSOCIATES
4
<PAGE>
There are four headends serving these systems - 1) West Pelzer, 2) Anderson, 3)
Travelers Rest, and 4) Keowee Key. The Anderson system serves approximately 46%
of the subscriber base, and actually serves only the unincorporated areas on the
west side of Anderson. The systems include a total of 1,044 miles of primarily
300 MHz plant, except Keowee Key, which is 330 MHz. All of the recent plant
extensions, amounting to approximately 103 miles of plant, have been built to at
least 450 MHz capacity, with spacing for 550 MHz. The West Pelzer and Anderson
systems are addressable, and currently have approximately 7,800 addressable
subscribers. Fifty miles of fiber was installed in the West Pelzer system during
the last two years to reduce amplifier cascades. The Travelers Rest headend is
leased, and the Anderson and West Pelzer headend (co-located with the West
Pelzer office) sites are owned. The Keowee Key office and land for the headend
is provided free as part of the agreement to provide service to Keowee Key.
There are ten franchises covering these systems, including two for Greenville
County which both expire in 1997. The systems' General Manager is currently
negotiating 15-year extensions and is confident they will be extended without
undue financial burden. The remaining eight franchises expire between 2001 and
2008.
None of the local franchising authorities have certified to regulate basic
rates, and the only valid tier complaint was in Williamston. Prior to April 1,
1995, the weighted average basic rate in these systems was $8.02 and the
weighted average tier rate was $14.67. The majority of these systems instituted
rate increases effective April 1, 1995, and the weighted average rate for basic
and expanded basic increased to $8.31 and $14.69, respectively.
The annualized revenue and cash flow for the three-month period ended March 31,
1995, for this group of Systems was $7.5 million and $3.5 million, respectively.
This equates to an average monthly revenue per EBU of $31.81 and average annual
cash flow per EBU of $177.73. This System's revenue and cash flow per EBU
exceeds that of the industry's averages for 1994 (noted above).
The industry in these communities is a mix of textile mills, manufacturing,
electronics and agriculture. Recently BMW opened a large new plant in
Greenville/Spartansburg that now employs several thousand people, and has had a
favorable economic impact in the communities close to Greenville. Unemployment
in the area is consistently below the national average, with many people in
these systems' service areas, particularly in Travelers Rest, commuting to
Greenville.
Northeast Missouri
The Northeast Missouri ("NEMO") systems are the smallest of the three operating
groups of systems, and as of March 31, 1995 these systems passed 3,869 homes and
served 2,112 EBUs. The eight communities served by these systems are
===============================================================================
DANIELS & ASSOCIATES
5
<PAGE>
located along the Mississippi River and are primarily rural, with agriculture
and local industry as the principal economic backbone. The larger communities
served include La Grange, Canton, and New London. The Systems are operated out
of one office located in Bowling Green and are managed by three full-time
employees.
The NEMO systems are served from 70 miles of plant with seven headends, the
largest of which is the Canton system which served 48% of the total NEMO system
passings and subscribers. Each of the seven headend sites, as well as the office
location, are leased. The Canton system, as well as the New London and La Belle
systems, are designed and operating at a 220 MHz capacity, below current
industry technical standards. The other four headends are designed and operating
at a 300 MHz capacity. None of the systems are addressable.
There are eight franchises covering these systems, of which one expires in
November of 1996, two expire in 1997, one expires in 1998, and two each in years
1999 and 2000. It is not anticipated that there will be any system rebuild or
upgrade requirements related to franchise renewals. Other than DBS/DSS service,
no other local level competitive operations exist.
None of the local franchising authorities have certified to regulate basic
service rates and no valid tier complaints were filed. Prior to April 1, 1995
the weighted average basic rate in these systems was $9.31 and the weighted
average tier rate was $15.25. Only one community was planned to experience a
basic rate increase effective April 1, 1995 and, because this impacted less than
ten subscribers, it had an insignificant effect on the weighted average basic
rate of all the systems.
The annualized revenue and cash flow for the three-month period ended March 31,
1995, for this group of systems was $678,000 and $354,000, respectively. This
equates to an average monthly revenue per EBU of $27.14 and annual cash flow per
EBU of $170.67. These systems' revenue per EBU was less than the industry's 1994
average, while the cash flow was modestly higher than average.
The communities served by these systems are middle to lower income rural
communities with below average growth potential but a stable economic
foundation. The economic base of the area is largely agricultural with some
light local industry. Several of the communities, including La Grange and New
London, also serve as bedroom communities for larger neighboring cities across
the Mississippi River in Illinois (Quincy and Hannibal) with larger, more
diverse economies.
Methodology
In order to appraise the fair market value of the assets of the Partnership,
Daniels used two valuation methodologies, (i) a discounted cash flow valuation
analysis and (ii) an analysis of market multiples realized from comparable
private market
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DANIELS & ASSOCIATES
6
<PAGE>
cable transactions. The respective aggregate fair market values of the
Partnership's assets from each valuation methodology used were then compared,
and a final value was derived.
Discounted Cash Flow
This methodology measures the present value of the Systems' forecasted net cash
flows, defined as pre-tax operating income, less capital expenditures, including
all upgrade and rebuild costs. The Systems' forecasted net cash flow is
determined through the creation of a long-range operating forecast which
provides for detailed forecasts of critical revenue and expense components. A
residual value was forecasted based on growth of the Systems' 10th year net cash
flow into perpetuity, and discounted back to the present at the same discount
rate as the forecasted net cash flow. Daniels prepared a detailed 10- year
revenue, cash flow and capital expenditure forecast for each of the System
groups to apply this discounted cash flow method.
The revenue forecasts were based upon Daniels' forecast of homes passed,
subscriber penetration levels, rates and other non-subscriber based revenue
sources. The expense forecasts were based primarily on assumed rates of
inflation over the forecast period and were adjusted for the particular growth
characteristics of each System group. The capital expenditure forecasts were
based upon costs associated with the construction of new miles of plant, plant
maintenance and rebuild requirements, replacement and upgrading of converters,
and the periodic replacement of vehicles.
To determine the appropriate discount rate for this valuation, Daniels attempted
to approximate the weighted average cost of capital using an array of entities
within the cable television industry that are capable of consummating an
acquisition similar in size to the acquisition of these Systems. The weighted
average cost of capital is an entity's required return on an investment
necessary to satisfy the expectations of all of the entity's investors, both
debt and equity. An entity will, therefore, be willing to pay a price for an
investment as high as the value that will allow it to meet its weighted average
cost of capital, or hurdle rate requirement.
The cost of the debt was arrived at by analyzing the aggregate cost of debt of a
variety of both large and small public and private cable companies to determine
an estimated average debt cost. The cost of equity was determined by sampling
the estimated private market cost of equity for cable television investments
over this time horizon and blending that with equity return objectives of large
publicly traded companies. Such equity returns are those which would be required
by experienced private equity investors and publicly traded companies in cable
television investments with similar characteristics as those of the
Partnership's Systems. The weighted average cost of capital utilized for the
discounted cash flow analyses was determined to be 13.65%. The following 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.
===============================================================================
DANIELS & ASSOCIATES
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<PAGE>
=============================================================================
Assumed Capital Structure % of Total Capital Cost of Capital
=============================================================================
Debt 60% 8.75%
- - - -----------------------------------------------------------------------------
Equity 40% 21.00%
- - - -----------------------------------------------------------------------------
Total Weighted Average 100% 13.65%
=============================================================================
The residual value multiples were determined assuming net cash flow growth into
perpetuity equal to one-half of the average cash flow growth rate of the final
two years of the forecasted period. The residual value multiples ranged from 8.9
to 10.0 times net cash flow.
Comparable Transactions
In addition to the Discounted Cash Flow Valuation methodology, Daniels also used
the Comparable Transactions methodology, which is another generally accepted
valuation methodology used to correlate the findings of the discounted cash flow
method with the realities of the private market. Under this method, the market
multiples reported in sales of cable systems of similar size, markets and
technical condition are compared to the subject Systems. In the case of cable
television system values, the most commonly used market multiples are (i) a
multiple of operating cash flow and (ii) the price per subscriber. Because
detailed financial, operating, and technical information is not generally
available regarding private cable system transactions, it is difficult to relate
specific transaction values and multiples directly to the subject Systems.
However, through an analysis of both the range and average of the market
multiples derived from a group of comparable system transactions, about which
information is available, this methodology provides a general measure of the
market multiples realized from comparable transactions, which are then applied
to the subject Systems in order to assess fair market value.
Because of the variety of System characteristics involved in this Partnership,
Daniels divided the Systems, and corresponding comparables into two groups. The
first group is mid-sized systems, and the second group is small systems,
believed to be the closest comparable types of systems to the Northeast Missouri
systems, and certain of the Southeast Texas Systems.
Mid-Size Systems
<TABLE>
<CAPTION>
No. of Price/ CF
System Buyer Seller Subscribers Price Subscriber Multiple Date
- - - ------ ----- ------ ----------- ----- ---------- -------- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Henderson, Franklin, NC Adelphia Henderson Comm. 14,100 $22,400,000 $1,589 10.2 1/95
No. Augusta, GA Jones ACT2 15,200 $27,300,000 $1,793 9.5 12/93
Gaston Cty, NC Bresnan Jones 19,900 $35,000,000 $1,759 9.2 4/94
San Bernardino, CA Marks Cablevision Chambers Video 14,000 $25,000,000 $1,786 10.5 2/94
Alabama Comcast CableSouth 29,600 $54,800,000 $1,851 9.2 5/95
Georgia Charter CableSouth 29,300 $48,500,000 $1,655 8.2 5/95
Average of Mid-Size System Comparables 20,350 $35,500,000 $1,744 9.3x --
</TABLE>
Source: Paul Kagan Associates, Inc. Cable TV Investor through June 30, 1995 and
Daniels & Associates' Data Base as of June 30, 1995
===============================================================================
DANIELS & ASSOCIATES
8
<PAGE>
Small Systems
<TABLE>
<CAPTION>
No. of Price/ CF
System Buyer Seller Subscribers Price Subscriber Multiple Date
- - - ------ ----- ------ ----------- ----- ---------- -------- ----
<S> <C> <C> <C> <C> <C> <C>
OK Based MSO Frontier Vision United Video 86,300 $120,500,000 $1,397 9.0
Various TX, OK, KS, AZ Classic & Fanch Mission Cable 79,100 $97,500,000 $1,233 7.5 *
Various KS, MO, NE, IL, IA Galaxy Douglas Cable 59,900 $65,000,000 $1,086 7.6 *
MA Based MSO Galaxy Vista Comm. 31,000 $40,500,000 $1,305 8.0 *
IA Based MSO Galaxy Vantage 30,500 $38,400,000 $1,259 7.9 12/94
Various CO, NM, MN, MO Fanch Comm. Leonard Comm. 24,700 $35,300,000 $1,428 7.9 5/95
Various AR, CO, TX Classic Cable United Video 21,900 $31,800,000 $1,454 8.2 *
Various, LA & KS Fanch Cablevision Leonard Comm. 12,100 $15,400,000 $1,273 7.5 2/95
Woodward, OK WT Acquisition Corp Time Warner 6,200 $8,900,000 $1,435 8.5 10/94
Cameron, TX Galaxy Telecom Galaxy Cablevision 3,500 $3,600,000 $1,029 8.0 4/95
Average of Small System Comparables 35,520 $45,690,000 $1,287 8.1
</TABLE>
- - - ----------
* Announced deal, closing pending
Source: Paul Kagan Associates, Inc. Cable TV Investor through June 30, 1995 and
Daniels & Associates' Data Base as of June 30, 1995
The analysis of the market multiples derived from comparable transactions led to
the conclusion that the cash flow multiples for the purpose of assessing the
fair market value of the Partnership's Southeast Texas systems should range from
8.25 - 8.75 times cash flow, a blending of the range of cash flow multiples from
the group of mid-sized system transactions and small system transactions, given
the mix of several mid-sized systems with numerous small systems, coupled with
the slower growth potential of many of the systems and capital requirements
related to plant upgrades. Daniels concluded that the Anderson systems market
multiple would range from 9.0 - 9.5 times cash flow, comparable to the average
of the cash flow multiples from the group of mid-size system transactions.
Daniels' analysis of small system market multiples for the Northeast Missouri
systems' cash flow multiple, resulted in a range of 7.5 - 8.0 times cash flow,
within the range of comparable market multiples but
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DANIELS & ASSOCIATES
9
<PAGE>
slightly below the average of the multiple for the small system comparables, due
to the particularly limited growth prospects of the communities served by these
systems.
Valuation
Based on these analyses using the above-described methodologies, the estimated
fair market value of the cable television operating assets of the Partnership,
as of March 31, 1995, is $73,850,000 for 44,232 EBUs, or a weighted average of
$1,670 per EBU.
This value equates to a multiple of 8.9 times the annualized operating cash flow
for the three-month period ended March 31, 1995. This multiple is consistent
with the range of current market multiples of 8.1 to 9.3 times cash flow for the
average of both small and mid-size system transactions and is not inconsistent
with multiples derived in transactions involving large blocks of subscribers. In
addition, the value per EBU of $1,670 is comparable to the values derived in
private market transactions from similar sized cable television properties with
like characteristics.
It should be noted that the market sometimes places a premium on the ability to
acquire a large block of subscribers in a single transaction, due to economies
of scale and the lack of opportunity to purchase large numbers of subscribers
from a single seller. Therefore, while the various Systems were appraised at the
operating group level, as per the Procedures Letter, selling the entire
Partnership to one or a limited number of buyers could generate a premium cash
flow multiple, and thus a higher price. In addition, to certain strategic
buyers, some of these individual Systems might command a premium price due to
its fit with the acquiror's other systems and future plans.
Material Relationships
Daniels currently has one other active engagement agreement with the general
partner of the Partnership and its affiliates related to an additional cable
system appraisal.
Summary
Our opinion of value expressed in this appraisal is based on financial and
operating information provided to Daniels by the Partnership, as well as
published demographic information for the service areas. While Daniels believes
such sources to be reliable and accurate, it has not independently verified any
such information. The valuation is based on information available to Daniels as
of the Valuation Date, and Daniels undertakes no responsibility for updating
this opinion to reflect changes in the value of the assets subsequent to the
Valuation Date of March 31, 1995, such as market, economic, technological,
operational, governmental, and other changes.
===============================================================================
DANIELS & ASSOCIATES
10
<PAGE>
CONFIDENTIAL
CENCOM CABLE INCOME PARTNERS II, L.P.
Anderson County, South Carolina
Appraisal Analysis Summary
Introduction
Daniels & Associates, L.P. ("Daniels") was retained by Cencom Cable Income
Partners II, L.P. ("Cencom") to appraise the fair market value of Cencom's
Anderson County, South Carolina cable television systems. The Anderson County
cable television systems serve several communities in northwest South Carolina
(referred to in the aggregate as the "Systems") that, as of March 31, 1996,
passed 28,376 homes and served 20,875 equivalent basic subscribers ("EBUs"). The
"Valuation Date" of the appraisal of the Systems was March 31, 1996.
As of March 31, 1996
<TABLE>
<CAPTION>
- - - --------------------------------------------------------------------------------------------
Miles of Plant Equivalent Annualized Cash
Systems /Number of Homes Homes Basic Units/ Pay Units/ Flow for the
Headends /Mile Passed Penetration Penetration Three M/E
3/31/96
- - - --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Anderson County, 1,117 / 4 25 28,376 20,875 / 11,274 / $3,867,424
SC 73.6% 54.0%
- - - --------------------------------------------------------------------------------------------
</TABLE>
This report summarizes Daniels' conclusions and provides an outline of the scope
of the engagement, the process used, an overview of the Systems, 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 Systems as of March 31, 1996. The Systems were appraised on a
going-concern basis, in conformance with standard appraisal techniques,
utilizing a ten-year discounted net cash flow analysis and applying relevant
market and economic factors. The appraisal assumes that the Systems have been
and will continue to be operated as efficiently as comparable cable systems, and
that the franchises and leases of assets used in the operation of the Systems
will be renewed indefinitely without material changes, other than rebuild
requirements (see "The Systems" section below).
The appraisal process included discussions with Cencom's management, research of
published demographic information concerning the various communities served, and
analyses of historical and forecasted financial and operating information, as
well as Daniels' general knowledge about the cable television industry. Daniels'
personnel did not visit the Systems as part of this appraisal; however, Daniels'
personnel did visit the Systems for a previous appraisal of the Systems which it
prepared as of
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DANIELS & ASSOCIATES
1
<PAGE>
March 31, 1995. From Daniels' due diligence, a summary of the relevant
operating, technical, financial and demographic characteristics of the Systems
was prepared. These characteristics of the Systems were instrumental in
determining value.
In order to assess the fair market value of the Systems, a detailed operating
and financial forecast was prepared incorporating the critical elements of
operating revenues and expenses as well as capital expenditure requirements.
This financial forecast then formed the basis for determining a discounted cash
flow value, a standard valuation methodology used within the industry. In
addition, using the market multiple valuation methodology, an aggregate value
for the Systems was derived by analyzing value per subscriber and operating cash
flow multiples obtained in private market sales of comparable cable television
systems, and then by applying those comparable market multiples to the Systems.
The products of these two valuation methodologies were then analyzed to
determine a final appraised value for the Systems as of March 31, 1996.
The Systems
The largest system, Anderson County, is located approximately 28 miles south of
Greenville and serves approximately 47% of the subscriber base. The second
largest system is Travelers Rest -- a bedroom community located 10 miles north
of Greenville which serves 24% of the subscribers. The third largest system,
West Pelzer, is located 15 miles south of Greenville and serves approximately
20% of the subscriber base, and the Keowee Key system, 40 miles to the northwest
of Greenville, accounts for 9% of the subscribers. As of March 31, 1996, the
Systems passed 28,376 homes and served 20,875 equivalent basic units for a
penetration rate of 73.6%. Cencom acquired the Systems in October 1989.
The Systems are served from four headends, referred to as West Pelzer, Travelers
Rest, Anderson, and Keowee Key. In total, the Systems include 1,117 miles of
plant, with all of the Systems, except Keowee Key, primarily 300 MHz plant. The
Keowee Key system is 330 MHz. Over the last three years, all new plant and
extensions have been built to 450 MHz, accounting for approximately 10.0% of the
total plant miles. During the last two years, Cencom has installed approximately
37 miles of fiber in the West Pelzer system to reduce amplifier cascades and
improve system reliability. With the installation of an additional 16 miles of
fiber, Cencom believes the West Pelzer system could be tied into the Anderson
headend. There are no hardwire overbuilds in any of the Systems, nor is there
currently an MMDS operator with service available to any of the communities
served by the Systems.
The West Pelzer headend is in the West Pelzer-owned office building. The
Travelers Rest headend site is leased, and the Anderson headend site is owned.
The Keowee Key office and headend site is provided free as part of the agreement
to provide cable service to the area. All four headends utilize primarily
Scientific Atlanta, Wegener, and General Instruments equipment. The plant
electronics are primarily Scientific Atlanta,
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DANIELS & ASSOCIATES
2
<PAGE>
and pay security is controlled with addressability in West Pelzer and Anderson,
and with positive and negative traps in Travelers Rest and Keowee Key.
There are ten franchises covering these systems, including two for Greenville
County which both expire in 1997. Cencom's state manager is currently
negotiating 15-year extensions for these two franchises and is confident that
they will be extended in a timely fashion. The remaining eight franchises expire
between October 2001 and May 2008.
All four Systems offer both a Basic and an Expanded Basic service. The rates
vary by franchise area, with Basic ranging from $7.24 to $8.89 and Expanded
Basic service from $14.20 to $15.77. Three of the eleven local franchising
authorities have certified and perfected to regulate Basic rates. The only valid
complaint filed against the Expanded Basic rate in any of the Systems was in
Williamston. Cencom believes its rates are within the allowable rates under the
FCC rate regulation rules as they existed on March 31, 1996.
The annualized revenue and cash flow for the three-month period ended March 31,
1996 for the Systems was $8.0 million and $3.9 million, respectively. This
equates to an average monthly revenue per EBU of $32.29 and average annual cash
flow per EBU of $187.13. The Systems' average monthly revenue per EBU is
slightly below that of the cable television industry's 1995 average of
approximately $33.80, and its annual cash flow per EBU is slightly above the
industry average of $182.52 for the year 1995, as reported by Paul Kagan
Associates, Inc., Cable TV Investor.
The four Systems operated out of Anderson County serve communities to the north,
south, and west of Greenville. The greater Greenville area has been one of the
nation's fastest growing areas and has developed into a prosperous regional
economic hub with a significant industrial and corporate base. With an MSA
population of approximately 850,000, the Greenville-Spartanburg area is home to
several large manufacturing companies along with many Fortune 500 corporate and
regional offices. Recently, BMW of North America opened its first U.S. auto
assembly plant in the area, employing some 2,000. Numerous suppliers to BMW have
begun to locate new manufacturing facilities and supply outlets in the area as
well. Other major employers in the area include Michelin Tire Corporation, Umbro
sportswear, Hitachi Electronic Devices, Proctor & Gamble, Amoco, 3M, and
Cincinnati Milacron. Unemployment in the area is consistently below the national
average, with many people in these Systems' service areas commuting to
Greenville for employment.
According to National Decision Systems ("NDS"), an independent demographic
service, the population of Anderson County increased 8.1% from 1990 to 1996,
and is projected to increase an additional 5.0% over the next five years. The
number of households in Anderson County increased 11.9% from 1990 to 1996 and is
forecasted by NDS to increase an additional 6.7% during the next five years.
Both the projected population and household growth are above the projected
percentages for the State of South Carolina.
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DANIELS & ASSOCIATES
3
<PAGE>
The lack of excess channel capacity, the reality of near-term competition from
alternative multi-channel video providers, and the potential to provide
ancillary telecommunications and data services suggest that a rebuild or upgrade
of all of the Systems to at least 450 MHz capacity would be prudent in the near
term, although there are no current franchise requirements to rebuild or upgrade
any of the Systems. Daniels has estimated the cost per mile to rebuild a system
to 550 MHz at $15,000/mile for aerial and $18,000/mile for underground, and to
upgrade to 450 MHz at $6,000/mile for aerial and $9,000/mile for underground.
Daniels has assumed that the Keowee Key system would be upgraded to 450 MHz and
that the other three systems would be rebuilt to 550 MHz at a total cost of
approximately $13.1 million. Daniels believes that these cost estimates are
reasonable representations of the costs (design, cable plant, electronics and
labor) associated with rebuilding and/or upgrading the Systems. These cost
estimates do not, however, include the costs associated with upgrading and
changing out converters, which Daniels has added as an additional capital
requirement in its forecast in addition to the rebuild/upgrade estimate.
Methodology
In order to appraise the fair market value of the Systems as of March 31, 1996,
Daniels used two valuation methodologies: (i) a discounted cash flow ("DCF")
valuation analysis; and (ii) an analysis of market multiples realized from
comparable private market cable transactions. The respective aggregate fair
market values of the Systems from each valuation methodology used were then
compared, and a final valuation was derived.
Discounted Cash Flow
This methodology measures the present value of the Systems' forecasted net cash
flows, defined as pre-tax operating income less capital expenditures including
all rebuild/upgrade costs. The Systems' forecasted net cash flow is determined
through the creation of a long-range operating forecast which provides for
detailed forecasts of critical revenue and expense components. A residual value
was forecasted based on growth of the Systems' net cash flow into perpetuity,
and discounted back to the present at the same discount rate as the forecasted
net cash flow. Daniels prepared a detailed 10-year revenue, cash flow and
capital expenditure forecast for the combined Systems.
The revenue forecasts were based upon Daniels' forecast of homes passed,
subscriber penetration levels and rates and non-subscriber based revenue
sources. The expense forecasts were based primarily on assumed rates of
inflation over the forecast period, and were adjusted for particular growth
characteristics. The capital expenditure forecasts were based upon costs
associated with the construction of new miles of plant, plant maintenance and
rebuild/upgrade requirements, replacement of converters, and the periodic
replacement of vehicles. Daniels believes that some of the markets served by the
Systems offer an opportunity for the Systems to provide
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DANIELS & ASSOCIATES
4
<PAGE>
ancillary telecommunications and data services; however, because the technology,
costs and revenue potential are uncertain, Daniels did not include telephony or
data services revenue, expenses or capital costs in its forecasts.
To determine the appropriate discount rate for this valuation, Daniels attempted
to approximate the weighted average cost of capital using an array of entities
within the cable television industry that are capable of consummating an
acquisition similar in size to the acquisition of these Systems. The weighted
average cost of capital is an entity's required return on an investment
necessary to satisfy the expectations of all of the entity's investors, both
debt and equity. An entity, therefore, will be willing to pay a price for an
investment as high as the value that will allow it to meet its weighted average
cost of capital or hurdle rate requirement.
The cost of debt was arrived at by analyzing the aggregate cost of debt of a
variety of both large and mid-size public and private cable companies to
determine an estimated average debt cost. The cost of equity was determined by
sampling the estimated private market cost of equity for cable television
investments as of the Valuation Date and blending that with equity return
objectives of large publicly traded companies. Such equity returns are those
which would be required by experienced private equity investors and publicly
traded companies in cable television investments with similar characteristics as
those of the Client's Systems. The weighted average cost of capital Daniels
derived for the discounted cash flow analyses was 14.0%. The following 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.
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DANIELS & ASSOCIATES
5
<PAGE>
================================================================================
Assumed Capital Structure % of Total Capital Cost of Capital
================================================================================
Debt 60.0% 8.0%
- - - --------------------------------------------------------------------------------
Equity 40.0% 23.0%
- - - --------------------------------------------------------------------------------
Total Weighted Average Cost of Capital 100% 14.0%
================================================================================
The DCF value of the Systems arrived at from this analysis was $35.0 million,
which is equal to 9.1 times the annualized operating cash flow for the
three-month period ended March 31, 1996, and $1,678 per EBU.
================================================================================
Systems Discounted Cash Multiple of Two M/E Value/EBU
Flow Valuation 3/31/96 Annualized Cash
Flow
- - - --------------------------------------------------------------------------------
Anderson County, South $35,030,096 9.1x $1,678
Carolina
================================================================================
Comparable Transactions
In addition to the DCF valuation methodology, Daniels also used the comparable
transactions methodology, which is another generally accepted valuation
methodology used to correlate and validate the findings of the DCF method with
the realities of the private market. Under this method, the market multiples
reported in sales of cable systems of similar size, markets and technical
condition are compared to the subject Systems. In the case of cable television
system values, the most commonly used market multiples are (i) a multiple of
operating cash flow and (ii) the price per subscriber. Because detailed
financial, operating and technical information is not generally available
regarding private cable system transactions, it is difficult to relate specific
transaction values and multiples directly to the subject Systems. However,
through an analysis of both the range and average of the market multiples
derived from a group of comparable system transactions, about which information
is available, this methodology provides a general measure of the market
multiples realized from comparable transactions, which are then applied to the
subject Systems in order to assess fair market value.
Comparable Sale Transactions
<TABLE>
<CAPTION>
No. of Price/ CF
System Buyer Seller Subscribers Price Subscriber Multiple Date
- - - ------ ----- ------ ----------- ----- ---------- -------- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Various Alabama Charter CableSouth 28,700 $49,000,000 $1,707 9.0 1/95
Various South Carolina Charter Masada 21,300 $36,000,000 $1,690 9.1 12/95
Kona, HI Time Warner ACT 4 16,900 $31,300,000 $1,852 9.5 7/95
Columbus, MS Post-Newsweek Columbus TV 15,700 $23,000,000 $1,465 9.5 2/96
Russellville, AR TCA Time Warner 15,000 $27,000,000 $1,800 10.0 5/95
Orangeburg, SC Jones Intercable Jones Cable Fund 12,000 $18,350,000 $1,529 8.8 8/95
Total / Average of System Comparables 109,600 $184,650,000 $1,685 9.3
</TABLE>
Source: Paul Kagan Associates, Inc. Cable TV Investor through March 31, 1996 and
Daniels & Associates' Data Base as of March 31, 1996
===============================================================================
DANIELS & ASSOCIATES
6
<PAGE>
The comparable transactions analysis yields a cash flow multiple range of 8.8 to
10.0 times cash flow and a weighted average for all of the transactions of 9.3
times cash flow. The range for the value per subscriber is between $1,465 and
$1,852 with an overall weighted average of $1,685 per subscriber.
Sales Process
Daniels was engaged by Cencom on August 17, 1995 to conduct a sales process in
order to solicit private market bids for all of the systems owned by Cencom,
including the Anderson County Systems described in this appraisal report. Under
the Procedures Letter, which was sent to all potential bidders, the General
Partner had a Bid Option Right to submit a higher bid within two business days
than the highest third-party bid received, with the condition that the General
Partner's bid had to exceed the highest bid proposal received by at least 0.5%.
If the General Partner exercised his Bid Option Right, Daniels was then required
to notify the previously highest bidder and allow him a similar bid right within
two business days. The Procedures Letter allowed for this Secondary Bid Process
to continue until the highest binding cash Proposal was received.
Daniels conducted the sales process, and on January 31, 1996 received a high bid
proposal for the Systems of $35,501,000 from Helicon Corp. ("Helicon"). Within
two business days, the General Partner submitted a higher bid, to which Helicon
then topped the General Partner's bid. This process continued until, on February
16, 1996, Helicon submitted a letter stating that they would not attempt to top
the General Partner's final bid of $36,700,000, which then became the final
purchase price for the Systems.
Material Relationships
Daniels has no ownership position in Cencom; however, from time to time Daniels
has rendered various investment banking and brokerage services to Cencom and its
General Partner for customary and reasonable compensation. In addition, at the
present time Daniels has two active engagement agreements with Cencom and its
affiliates related to the sale of this and certain other cable television
systems owned by Cencom and affiliates of Cencom. Daniels does not believe that
these prior and present relationships in any way affect its ability to fairly
and impartially render the opinion of value expressed herein.
Valuation
Based on the analyses using the above-described methodologies, the estimated
fair market value of the Systems, as of March 31, 1996, is 9.3 times the
annualized operating cash flow for the three-month period ended March 31, 1996.
This translates to a gross value of $36.0 million, and a value per EBU of
$1,725.
Our opinion of value expressed in this appraisal is based on financial and
operating information provided to Daniels by Cencom, as well as published
demographic information for the service areas. While Daniels believes such
sources to be reliable and accurate,
===============================================================================
DANIELS & ASSOCIATES
7
<PAGE>
it has not independently verified any such information. The valuation is based
on information available to Daniels as of the valuation date. Daniels undertakes
no responsibility for updating this opinion to reflect changes in the value of
the assets subsequent to the valuation date of March 31, 1996, such as market,
economic, technological, operational, governmental and other changes.
===============================================================================
DANIELS & ASSOCIATES
<PAGE>
FAIR MARKET VALUE APPRAISAL FOR
CENCOM CABLE INCOME PARTNERSHIP II, LP
MARCH 31, 1995
PREPARED BY
WESTERN CABLESYSTEMS, INC
R. MICHAEL KRUGER, PRESIDENT
CABLE TELEVISION MANAGEMENT,
CONSULTING, AND APPRAISALS
513 WILCOX, #230
CASTLE ROCK, CO 80104
303-688-4462
Cencom Cable Income Partners II LP, Page 1
<PAGE>
BACKGROUND AND LIMITING CONDITIONS
Western was asked by Cencom Properties II, Inc., as general partner
of Cencom Cable Income Partners II L.P. ("Cencom") to prepare an
analysis of the fair market value as a going concern of the cable
television system assets owned by the Partnership as of March 31,
1995. This appraisal report is being issued pursuant to the April
28, 1995 engagement letter between Cencom and Western. This report
presents key data, our analysis, and our conclusions.
The systems included in this appraisal report are Anderson County,
South Carolina, Northeast Missouri (Canton, Lagrange, MO, etc.), and
Texas (Angleton, Jasper, Kingsville, etc.)
The assets being appraised include, as an assemblage, all of the
tangible and intangible assets and personal property necessary to
operate the cable television systems as a going concern, consistent
with past practice and industry norms. The assets include the
antennas and signal receiving equipment, strand, conduit, cables,
amplifiers, passive devices, drops, converters, tools, test
equipment, subscriber records, franchises, pole attachment
agreements, easements, supplier and programming contracts, and
goodwill.
The appraisal is based principally on financial data provided by
Cencom, including Income Statements for the 12 months ended
December 31, 1994, 1993, and 1992, and 3 months ended March 31, 1995.
Management also provided the operational data presented herein, such
as current and 3 years of history on passings and subscriber counts.
The appraiser visited the systems in May, 1995. The system managers
were interviewed at length to obtain additional data including
subscriber history, technical data, demographics, and local economic
information. The appraiser toured representative portions of the
general market area.
The appraisal will be used as described in the April 28, 1995
engagement letter to determine the price at which the general partner
may offer to purchase the Assets from the owning partnership. This
appraisal report is issued for the use of the Cencom entities
involved, and their partners, employees, agents, and advisors. The
report is not intended for the use of other parties, including but
not limited to lenders for buyer or seller. The principals will
perform their own independent due diligence and economic evaluation
of the proposed transaction. The formal consent of the limited
partners is required for the transaction to be completed at the
proposed price. Western understands and agrees that the report may
be delivered to the Securities and Exchange Commission, and may be
summarized in related proxy materials.
Cencom Cable Income Partners II LP, Page 2
<PAGE>
The work herein is based in part on data provided by Cencom and
others, and we assume no responsibility for the accuracy of such
data. Western has used customary techniques and industry knowledge
available to Western in preparing this report. Western does not
warrant or represent that the appraised value is that which would
actually be obtained in an open market transaction, or that the value
would be upheld in litigation or administrative proceeding.
Accordingly, Western (including its officers, employees, and owners)
does not indemnify or hold harmless any user of this report in any
manner against any costs, losses, or damages arising out of the use
of the appraised value or other conclusions contained herein.
On October 3, 1992, the Congress adopted legislation affecting the cable
television industry generally. Detailed implementing regulations have
been issued by the FCC on a continuing basis since that date. Further
FCC rules and modifications are quite likely. In addition, legislation
is pending before Congress that would dramatically overhaul the entire
telecommunications regulatory system. In short, there is uncertainty.
The appraisal value is based on regulations and their impact as reflected in
the cable television system sale market on the appraisal date and
does not necessarily take into account any future changes. As noted
herein, Cencom has indicated that the system operations substantially
comply with present regulations. While nothing has come to our
attention to indicate that Cencom's analysis is incorrect, we have not
verified such compliance, nor does the appraisal necessarily reflect the
impact of changes which might be required by enforcement of current
regulations.
The appraiser assembled a substantial amount of information in the
course of this engagement, and the tour of each system. A brief
description of each system, and the key facts, follows.
Cencom Cable Income Partners II LP, Page 3
<PAGE>
TEXAS SYSTEM GENERAL DESCRIPTION
CCIP II owns systems serving a number of communities in eastern
Texas. The aggregate data are:
Homes Passed 39,975
Residential Basic Subs 22,172 (55%)
Commercial/Bulk EBU's 425
Total EBU's 22,597
Pay Units 7,976 (36%)
Plant Miles 724
Homes Per Mile 55
Number of headends 13
Average subs per headend 1,700
Channels in use 30-40
Plant Channel Capacity 36-54
The business is operated by a regional office, and cluster offices in
Angleton, Kingsvile, Jasper, Cleveland, Marlin, and Madisonville.
Bellville/Hempstead/Healy is operated as a cluster out of the
Lagrange office of CCP.
The relative size of each of the clusters is:
Cluster Subscribers
------- -----------
Angleton 4,199 ( 19%)
Kingsville 5,691 ( 26%)
Jasper 4,245 ( 19%)
Cleveland 2,428 ( 10%)
Marlin 1,667 ( 8%)
Madisonville 1,915 ( 9%)
Bellville 2,027 ( 9%)
Total 22,172 (100%)
Angleton is a bustling outer suburb of Houston, with a number of job
opportunities in town and in Houston. Typical industry includes
chemicals, medical equipment, electronics, etc. The area is strong,
and experiencing rapid growth. There are a number of large new
subdivisions, and new multifamily development, totalling about
100-150 units per year. Growth will increase in the future.
There is one additional small outlying headend in this area.
Cencom Cable Income Partners II LP, Page 4
<PAGE>
Kingsville is a small town south of Corpus Christi. The economy is
based on chemicals, several Naval Air Stations, some small
manufacturing and a small college. Agriculture is also a key
business, and King Ranch, the largest operating cattle operation in
the country, is just south of town. The area is experiencing some
steady growth in small subdivisions, with total growth in the range
of 20 homes/year. The local NAS is expected to expand as jobs are
transferred to it from another area NAS which is closing. The
cluster also includes two tiny agricultural towns, Agua Dulce and
Driscoll; these towns combined have about 150 customers.
Jasper is a small town in the east Texas woods, with an economy based
on several logging operations, plywood mills, and recreation. It is
a "crossroads" and regional retail/service center. It is
experiencing steady growth, and has a number of new subdivisions and
some multifamily housing. Typical long term growth would be around
100 units per year.
Cleveland is, to some extent, part of the Houston area, as it is only
about 30 minutes from Houston Intercontinental Airport. However, it
is a longer commute to major employment areas. Cleveland has some
local industry, particularly related to logging. There are a few
small new subdivisions, and there is some growth--20 homes a year.
Marlin, Madisonville, and Buffalo are primarily small rural towns,
with a bit of local industry, and an agricultural economy. There is
a new prison in the area.
Belleville/Hempstead/Healy is a cluster of 3 rural towns, with little
economic base other than some oil/gas and agriculture. Unemployment
is high. Residents commute long distances to other areas. There is
little growth.
The overall profile would be considered lower-middle blue-collar,
with some middle-upper income households, particularly in Angleton,
Kingsville, and Jasper. Retirement, unemployment, and other factors
are normal overall.
Cencom Cable Income Partners II LP, Page 5
<PAGE>
NORTHEAST MISSOURI GENERAL DESCRIPTION
The system serves eight small "river towns" located along the
Mississippi north of St. Louis. Cencom operates these systems, and
several other systems owned by related companies, out of a single
office in Bowling Green. This appraisal considers only the systems
owned by CCIP II. The aggregate data is:
Homes Passed 3,855
Residential Basic Subs 2,101 (55%)
Commercial/Bulk EBU's (52 units) 32
Total EBU's 2,132
Pay Units 1,087 (52%)
Plant Miles 70
Homes Per Mile 55
Number of headends 7
Average subs per headend 300
Channels in use (typical) 23
Plant Channel Capacity
220 Mhz (20 ch.) 70%
300 Mhz (36 ch.) 30%
Headend Passings
------- -------
Carton/Lagrange 1,847 (48%)
Center 302 ( 8%)
Frankford 203 ( 5%)
LaBelle 331 ( 9%)
Lewiston 294 ( 8%)
Ned London 615 (15%)
Wayland 263 ( 7%)
----- ------
Total 3,855 (100%)
Canton and LaGrange are served by one headend. These two towns are
located on the Mississippi. They are principally a small local
service community, with some very small manufacturing operations.
There is a small church college. Most residents commute about
20-30 miles to jobs in Quincy or Hannibal, where there are more small
operations, such as concrete products. A new prison in nearby
Frankford has boosted local employment. The other towns are all
similar, but with less local business due to their size.
All towns have a relatively dense core with a normal mix of older
homes. There are few new subdivisions, and some multifamily housing
areas. Houses sell for less than $50,000, but there are few homes on
the market. The towns are pleasant Midwestern communities.
Cencom Cable Income Partners II LP, Page 6
<PAGE>
The retired segment is higher than normal, but otherwise the
demographics would be considered lower-income blue-collar.
Periodic Mississippi flooding is a problem in some of the low
portions of LaGrange/Canton, but most of the service area here and in
the other towns (probably more than 80%) is above the flood plain.
ANDERSON COUNTY GENERAL DESCRIPTION
The system serves a portion of the "suburban ring" around Greenville,
South Carolina. (Other properties affiliated with Cencom/Charter
serve substantially all of the rest of the "ring.") The areas served
are not all contiguous, but all are within a short drive.
Homes Passed 27,611
Residential Basic Subs 19,336 (70%)
Commercial/Bulk EBU's (420 units) 183
Total EBU's 19,519
Pay Units 10,925 (56%)
Plant Miles 1,070
Homes Per Mile 26
Number of headends 4
Average subs/headend 4,879
Channels in use (typical) 42
Plant Channel Capacity 36-42
The system is served by four headends. This appraisal is being done
on the aggregate system, but the approximate breakout may be helpful:
Name Passings%
---- --------
Anderson 13%
W. Pelzer 51%
Keowee Key 9%
Travelers Rest 27%
Each of the four communities has a small local service base. The
communities have a significant industrial employment base, and
residents also commute to jobs with employers throughout the
Greenville area. In the immediate system area, there are plants
which manufacture textiles, automotive parts, appliances, tools, and
other hard goods. BMW is just opening a new vehicle assembly plant
nearby. The overall economy in South Carolina is quite strong, and
employers are all stable or growing. Unemployment is low.
There are relatively dense "small-town" areas at each of the
headends, with a normal mix of older homes. Numerous new small-lot
Cencom Cable Income Partners II LP, Page 7
<PAGE>
subdivisions are scattered throughout the surrounding areas,
particularly in West Pelzer and Anderson. Rural areas and large-lot
subdivisions fill the gaps between communities. Both Keowee and
W. Pelzer are on lakes, and have some expensive and beautiful lakefront
areas. There are some multi-family projects, but the area is mostly
single-family. New homes are typically valued at $70,000 - $150,000,
with some much higher and lower. The market is brisk, and homes sell
quickly.
Residents can be described as middle-class working family, with some
upper-income, particularly in Keowee and the lake areas. There are
few, if any, "poor" areas.
DETERMINATION OF OPERATING INCOME
Appraising the value of cable television systems involves calculation
of historic and projected operating income (commonly called
"cashflow"). Operating income is defined as direct operating
revenues less expenses, before capital expenditures, depreciation,
and management fees. The operating income considered in appraisals
is typically that which will be derived by the buyer, using his cost
structure and nominal predictable changes in operations.
First-Year Projection:
We first prepared detailed Projected-Year statements of operating
income for the systems. To do so, we reviewed the company's 1992,
1993, 1994, and 1995/Q1 historic income statements, and used them to
prepare an estimate of projected operating income for the 12 months
beginning April 1, 1995.
The Projected-Year subscriber revenues are based on the March 31,
1995 subscriber count, plus allowances for growth in passings and
penetration, and on 1995/Q1 rates, plus appropriate adjustments for
additional actual 1995 rate changes. Other revenue items were based
on consideration of past results and trends, and 1995/Ql results.
Certain Projected-Year expense items such as programming costs which
are based on subscribers or revenue have been adjusted to match the
subscriber and revenue projections shown, using prior-year unit costs
or ratios plus an allowance for increases where appropriate.
Overhead items, such as maintenance and property tax have been based
principally on 1992-94 average results, to reflect longer-term
trends. In preparing our detailed analysis, we also reviewed key
operating ratios, such as programming cost/subscriber, staffing
ratios, copyright and bad debt expense levels, etc. and compared
them to industry norms and our experience.
Ten-Year Cashflow Projections
Cencom Cable Income Partners II LP, Page 8
<PAGE>
Our principal appraisal technique involves projection of free
cashflow for 10 years; free cashflow is equal to operating income
less capital expenditures, but still before depreciation and
interest, and taxes. (Projected free cashflow is then discounted at
an appropriate cost-of-capital rate, and a terminal value is added to
get the value of the property.) We developed a projection of free
cashflow for the systems. We started with the data contained in the
first-year projection spreadsheets, and expanded it with appropriate
additional variables and assumptions.
Revenue items used are the same as for the first-year analysis.
However, they are based on forecasts for system growth in areas such
as passings, penetration, and revenue/subscriber. The small amount
of commercial revenue was converted to EBU's and for simplicity we
did our forecast using total EBU's.
Passings and penetration were increased by amounts similar to recent
gains. Basic rates were typically increased by an amount equal to
inflation, but by more in some years to allow for additional revenues
from channel additions after the systems are upgraded. Other revenue
items were increased by inflation plus system growth.
The ten-year model uses summary expense variables which were
calculated from the one-year information as follows:
Personnel: Salaries, Tax/benefit, Professional services, cost
allocations, and capitalized labor
Per-Subscriber: Office rent, Office Operation, Basic
Programming, LO Programming
Revenue-related: Franchise fee, copyright, bad debt,
marketing, and advertising sales
Premium Programming: Pay and pay-per-view
Per-Mile: Insurance, Property Tax, Pole Rent, Power, System
Maintenance
Personnel costs are based on current personnel costs, plus annual
percentage increases to reflect growth and expenses. We calculated
the amounts for the other expense categories on a per-sub or
per-mile, or percentage of revenue basis, as noted.
Cencom Cable Income Partners II LP, Page 9
<PAGE>
The per-sub and per-mile costs were increased over the 10-year period
by inflation. The percentage costs were held to the same percentage
of revenue over 10 years, on the assumption that gradual increases in
unit costs can be passed on to customers.
Capital costs were forecast for several items. New plant costs were
calculated using new plant mileage derived from passings growth and
an average per-mile cost for new plant (aerial and U/G). Drops were
calculated on the assumption that a certain percentage of existing
drops is replaced each year, and new drops are added equal to growth
plus a churn allowance. Costs for new addressable converters were
allowed based on the increase in addressable subscribers.
Each of these systems requires rebuild and upgrading in the coming
years. A substantial amount of the plant is old, and in poor repair.
All systems have a limited channel capacity which is less than the
industry "norm" of 54-78 channels. A buyer would allow for expansion
and upgrade, and we included these costs in our 10-year forecast. We
allowed for rebuild of the oldest mileage, and less-costly "retrofit"
of newer mileage to expand capacity.
DETERMINATION OF APPRAISED VALUE
General Methodology
Appraisal of income-producing property typically relies on one or
more of three main approaches.
Replacement cost, which is the cost to assemble and put the property
into operation, is not typically used in the cable television
industry for valuing a property as a whole. Cable television system
sales include a very substantial intangible value for franchise,
goodwill, and customer lists. Although these intangibles can be
valued separately, more direct approaches to overall value are easier
to use, and more appropriate.
Market value as determined by comparable transactions is a very
common approach for estimates of value. Transaction value is
typically reported on the basis of either per-subscriber cost or
operating income multiple. We consider both ratios, but place more
reliance on the income multiple.
The Income Approach is widely used in business valuation, and we use
this as our first approach. Our method involves determination of the
discounted present value of free cashflow generated over ten years,
plus an allowance for the terminal value after ten years.
Income Approach
Cencom Cable Income Partners II LP, Page 10
<PAGE>
Ten-year free cashflow was projected, as discussed previously. The
annual free cashflow was discounted using an average cost of capital.
We then calculated a terminal value based on the resale value of the
system in year 10. The terminal value was then discounted to a
present value using the same discount rate. The discounted cashflow
and discounted terminal values were added, to arrive at the estimate
of potential system value.
Market Value
The prices of cable system transactions are frequently evaluated to
determine the ratio of operating income (income before depreciation,
interest, and management fees) to purchase price; sales results are
frequently reported in the trade press. Per-subscriber values are
also widely reported. We consider principally the multiple of first
year projected operating income. To facilitate our analysis, we
compared each system to the overall market with respect to some key
factors. These included growth, demographics, competition, system
construction, opportunity for new revenues, general operations, and
marketability.
Comparable Transaction Data
We then selected an approximate appropriate multiplier for each
system from information available about other reasonably similar
transactions, and the general state of the market. The following data
has been taken from announcements in the trade press, information
from brokers, recent issues of the Cable TV Investor Newsletter,
published by Paul Kagan Associates, and our own knowledge.
System Date Subs $/Sub CF Mult
- - - ------ ---- ---- ------ -------
Single larger systems
Newport News, VA ll/94 48,000 2,542 9.0
Anaheim, CA 11/94 135,000 2,119 10.5
Ansonia, CT 6/94 32,000 2,667 11.7
Henderson, NC l/95 14,100 1,634 10.5
Cencom Cable Income Partners II LP, Page 11
<PAGE>
Small systems
Texas, near Austin 12/94 5,300 1,378 n/a
Cameron, TX 4/95 3,500 1,004 8.4
Arizona 5/95 7,800 1,600 8.2
California 2/95 1,900 1,475 7.5
Groupings of small systems
MSO-GA, FL, MS 8/94 30,000 1,217 8.3
NJ MSO 10/94 74,000 1,351 8.0
Pennsylvania MSO 11/94 69,000 1,767 8.1
Kentucky/Illinois 12/94 14,900 1,235 n/a
Adams/York PA 4/95 12,900 1,300 10.4
Rock/small western 3/95 47,000 1,787 9.7
Midwest/south 10/94 34,800 1,350 8.3
SanAngelo/Andrews TX 3/95 26,000 1,985 10.3
Major MSO transactions
US West - Wometco 1994 466,000 2,575 11.1
Cox/Times-Mirror 1994 3,000,000 1,916 12.1
Comcast/McLean 1994 550,000 2,309 10.6
Continental/Colony 1994 750,000 1,870 11.3
The foregoing data is the best available to us. However, in some
cases, it may not be accurate, and may reflect third-party estimates
of the terms rather than actual data.
These reports of transactions, and general industry commentary,
suggest that the "market" in 1995 for larger systems is generally 9
to 11, depending on location, growth, rate control, etc. Smaller
systems trade in the 7.5 to 9 range. Urban and suburban systems are
valued more highly than rural systems. Groups of systems tend to
trade at slightly higher multiples than individual systems.
We selected a multiple and per-subscriber value for each system.
Cencom Cable Income Partners II LP, Page 12
<PAGE>
Appraised Value
We calculated the value of the systems using discounted cashflow. We
then calculated system values using our direct estimates of the
multiple and per-subscriber values we selected for each system.
We used the discounted cashflow value, and the values established
using estimates of multiples and subscriber value to establish a
range of values for the systems. The totals are:
Total Discounted Cashflow Value 76,063,000
Minimum Total Value 72,800,000
Maximum Total Value 78,000,000
Daniels & Associates, the other appraiser retained for this
engagement, established similar and overlapping ranges of values for
the systems. We jointly selected the appraised value for each system
from these ranges, and established the total appraised value at
$73,850,000. The multiples and per-subscriber values implicit in
this appraised value are:
Total EBU Subscriber Count 44,281
Total Year 1 Projected Op. Income 8,826,000
Appraised Value $73,850,000
Implicit Multiple 8.36
Implicit Per-Subscriber Value $1,667
We believe the foregoing appraised value represents the fair market
value at March 31, 1995 of the assemblage of system assets as a going
concern, without any discount imputed for brokers' fees. We believe
the appraisal reflects the relevant and material general market
factors, assumptions, and limitations, all of which are presented in
this report. The appraisal was prepared using standard appraisal
techniques, and conforms to Standards 7-10 of the Uniform Standards
of Professional Appraisal Practice.
Cencom Cable Income Partners II LP, Page 13
<PAGE>
QUALIFICATIONS OF THE APPRAISER
The appraisal was prepared by R. Michael Kruger, owner and President
of Western Cablesystems, Inc. Since 1979, he has appraised hundreds
of systems for a variety of clients including major MSO's,
independent operators, and clients outside the CATV industry. Kruger
has extensive background as a CATV executive. From 1974 to 1979, he
held various operating positions at ATC, one of the industry's
largest operators. In 1979, he joined a small MSO, and until mid-
1986 was president of the 30,000 - subscriber company. There, in
addition to his operating duties, Kruger prepared CATV system
appraisals.
Kruger formed Western Cablesystems, Inc. in 1986, and is its sole
owner and principal. Western has been directly involved in all
aspects of system operations and finance, including several
acquisitions and sales, partnership formation, debt placement,
franchising, and system construction and startup. Western sold one
property in 1993, and presently operates three small cable systems.
In addition to continuing appraisal work, Kruger has performed
consulting engagements for a wide range of topics and clients,
including the economic feasibility of international cable and
restructuring of individual systems to achieve financial
improvements.
Kruger received a BS/MS in engineering from the Massachusetts
Institute of Technology in 1967/68. In 1974, he received a Masters
in Business Administration (MBA) from the Stanford University
Graduate School of Business.
Cencom Cable Income Partners II LP, Page 14
<PAGE>
FAIR MARKET VALUE APPRAISAL FOR
ANDERSON COUNTY, SOUTH CAROLINA
MARCH 31, 1996 UPDATE
PREPARED FOR
CENCOM PROPERTIES II, INC
CENCOM CABLE INCOME PARTNERS II LP
PREPARED BY
WESTERN CABLESYSTEMS, INC
R. MICHAEL KRUGER, PRESIDENT
CABLE TELEVISION MANAGEMENT,
CONSULTING, AND APPRAISALS
513 WILCOX, #230
CASTLE ROCK, CO 80104
303-688-4462
<PAGE>
Cencom Cable Income Partners II LP, Page 13
BACKGROUND AND LIMITING CONDITIONS
Western was asked by Cencom to prepare an analysis of the fair market value as a
going concern of the assets of the Anderson County, South Carolina cable
television system as of March 31, 1995. We were recently asked to update our
work and issue a new report. This appraisal report is being issued pursuant to
the April 28, 1995 and April 19, 1996 engagement letters between CencCom and
Western. This report presents key data, our analysis and assumptions, and our
conclusions.
The assets being appraised include, as an assemblage, all of the tangible and
intangible assets and personal property necessary to operate the cable
television system as a going concern, consistent with past practice and industry
norms. The assets include the antennas and signal receiving equipment, strand,
conduit, cables, amplifiers, passive devices, drops, converters, tools, test
equipment, subscriber records, franchises, pole attachment agreements,
easements, supplier and programming contracts, and goodwill. Liabilities and
financial assets such as accounts receivable are not considered.
The appraisal is based principally on financial data provided by Cencom,
including Income Statements for the 12 months ended December 31, 1995, 1994,
1993, and 1992, and 3 months ended March 31, 1996. Management also provided the
operational data presented herein, such as passings and subscriber counts. The
appraiser visited the system in May, 1995. The system manager was interviewed at
length to obtain additional data including subscriber history, technical data,
demographics, and local economic information. The appraiser toured
representative portions of the general market area. This information was
reviewed and updated in 1996 by means of a telephone interview with the manager.
The work herein is based in part on data provided by CenCom and others, and we
assume no responsibility for the accuracy of such data. Western has used
customary techniques and industry knowledge available to Western in preparing
this report. Western does not warrant or represent that the appraised value is
that which would actually be obtained in an open market transaction, or that the
value would be upheld in litigation or administrative proceeding. Accordingly,
Western (including its officers, employees, and owners) does not indemnify or
hold harmless any user of this report in any manner against any costs, losses,
or damages arising out of the use of the appraised value or other conclusions
contained herein.
Anderson Co., SC Page 2
<PAGE>
GENERAL DESCRIPTION
The system serves a portion of the "suburban ring" around Greenville, South
Carolina. (Other properties affiliated with Cencom/Charter serve substantially
all of the rest of the "ring.") The areas served are not all contiguous, but all
are within a short drive.
<TABLE>
<S> <C> <C>
Homes Passed 28,376
Residential Basic Subs 20,597 (73%)
Commercial/Bulk EBU's (420 units) 278
Total EBU's 20,875
Pay Units 11,274 (56%)
Plant Miles 1,071
Homes Per Mile 26
Number of headends 4
Average subs/headend 4,879
Channels in use (typical) 43
Plant Channel Capacity 36-43
</TABLE>
The system is served by four headends. This appraisal is being done on the
aggregate system, but the approximate breakout may be helpful:
Name Passings %
---- ----------
Anderson 13%
W. Pelzer 51%
Keowee Key 9%
Travelers Rest 27%
Each of the four communities has a small local service base. The communities
have a significant industrial employment base, and residents also commute to
jobs with employers throughout the Greenville area. In the immediate system
area, there are plants which manufacture textiles, automotive parts, appliances,
tools, and other hard goods. The new BMW vehicle assembly plant is generating a
number of small supplier businesses. The overall economy in South Carolina is
quite strong, and employers are all stable or growing. Unemployment is low.
There are relatively dense "small-town" areas at each of the headends, with a
normal mix of older homes. Numerous new small-lot subdivisions are scattered
throughout the surrounding areas, particularly in West Pelzer and Anderson.
Rural areas and large-lot subdivisions fill the gaps between communities. Both
Keowee and W. Pelzer are on lakes, and have some expensive and beautiful
lakefront areas. There are some multi-family projects, but the area is mostly
Anderson Co., SC Page 3
<PAGE>
single-family. New homes are typically valued at $70,000 - $150,000, with some
much higher and lower. The market is brisk, and homes sell quickly.
Residents can be described as middle-class working family, with some
upper-income, particularly in Keowee and the lake areas. There are few, if any,
"poor" areas.
PASSINGS GROWTH
Management was not able to provide historic data. Management estimates that in
recent years, the system has added about 1,100 new homes per year, substantially
all of which has come from subdivision construction. Growth for 1995 was lower,
at 900. First-quarter gains, annualized, were 716/year, or 2.5%. We've used
about 3% in our forecasts.
The system could add about 324 passings with 20 miles of new plant built in
existing unserved areas.
SUBSCRIBER PENETRATION
The system provided subscriber counts, and we estimated passings counts for
prior years:
<TABLE>
<CAPTION>
Passings Basic Pay Basic % Pay %
<S> <C> <C> <C> <C> <C> <C>
12/95 28,197 20,180 11,274 72 55
12/94 27,300 19,112 10,442 70 54
12/93 26,200 18,114 8,785 69 48
12/92 25,100 16,637 7,475 66 45
12/91 24,000 15,412 n/a 64 n/a
</TABLE>
The 1994 Cable Factbook reports penetrations in nearby Greenville of 73% basic
and 81% pay.
We believe basic penetration will continue to grow at a slower rate.
SUBSCRIBER RATES AND SERVICES
Each headend has slightly different lineups and rates; representative data is
summarized below.
<TABLE>
<CAPTION>
Channels Rate
<S> <C> <C> <C>
Basic 12 8.67
Tier 21 14.16-14.68
Total 33 $22.87-$23.57
Pay channels 5 8.45-11.45
Anderson Co., SC Page 4
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
Pay-per-view 3 n/a
Converters .62 - 1.63
Remote control .17
Wire maintenance .95
</TABLE>
Approximately 97% of the customers take the tier.
Basic typically includes 7 offair, a guide, two shopping, and WGN and WTBS. The
tier is all satellite services. Pay includes Cinemax, HBO, Showtime, Movie, and
Disney. Pay-per-view offerings consist of Viewers Choice, adult programming
channels, and events.
There is no fee for additional outlets. Other ancillary services offered include
guides and DMX audio (in Keowee only). There are a number of small transaction
fees, including late charges. Typical aerial installation fees are $35.
Applicable FCC and franchise fees are added as a separate charge. There are
several package discounts and promotional rates available from time to time.
Rates are reasonable, and consistent with industry practice.
The system increased basic rates in 1995, and will increase by $1.50 on May 1,
1996.
RATE REGULATION
Only one small franchisor filed for certification to regulate rates, but no
action was taken. There was one complaint to the FCC on a tier rate, that was
resolved without problem. The area involved had only 900 customers. The system
will be deregulated in the near future pursuant to the new federal regulations.
NON-SUBSCRIBER REVENUE
The company has a contract with TCI and Booth Cable (a nearby operator) pursuant
to which Booth sells advertising spots on satellite channels. The system is
"sold" as part of a larger interconnect. Charter has considered setting up its
own interconnect and sales group, which should increase cashflow from
advertising. We expect this source of revenue to grow rapidly over the next few
years.
There is no other significant revenue source (fiber rental, tower rental,
phone), existing at present or likely in the future.
Anderson Co., SC Page 5
<PAGE>
STAFF AND OPERATIONS
The system has a leased office; headends are leased and owned. Rents are
reasonable, expirations and renewals are not a concern, and there are no unique
sites that could not be replaced.
The system has a normal complement of test equipment, inventory, and vehicles,
including 2 bucket trucks. The office staff is well-equipped, and uses
centralized Cabledata billing services.
The system offers customary business-day service Monday through Saturday. Phones
are answered by a central company facility after hours, and technicians are
dispatched on outages if necessary.
Management reports about 21% annual turnover, and 24% service call volume.
Backlogs are 2-3 days on installs, and same-day on service. All are normal.
System staffing can be summarized as:
<TABLE>
<CAPTION>
Item Office Field Other
<S> <C> <C>
Number of employees 8 18 0
Subs/employee 2,609 1,159
Average wage 25,000 24,200 -
</TABLE>
MARKETING
Contract sales personnel work year-round. Some direct mail is used, along with
normal "PR" activity. Few stones are left unturned.
FRANCHISES
There are 10 separate franchises, including a county-wide franchise for
Greenville County, which was recently renewed on reasonable terms. The remaining
franchises expire in 2001-2008. The franchise relations are good.
Anderson Co., SC Page 6
<PAGE>
COMPETITION
Residents can get good reception on 5-7 signals with standard antennas from
Greenville, Spartanburg, and Asheville. This is not a reception-driven market.
There is no cable overbuild, but the company is contiguous to TCI and Telecable,
and has regular competition for new subdivisions located on the "border"
There is no MMDS.
DBS impact in the region has resulted in the loss of about 1% of the customer
base. The company is competitive on rates and services, and has the added
advantage of offair signals.
TECHNICAL PROFILE
Mileage: 884 aerial, 186 underground, 50 fiber trunk
Headend Electronics: S-A
Plant Electronics: S-A
Amplifier Cascade: 35-48
Power: Most areas standby
Trunk Cable: 750-875 P3, some 1000 and a bit of 500
Distribution Cable: Mostly 500 P3
Pay Security: Mostly addressability, 2 headends use traps
Percent of Addressable Subs: 40%
Converter Types: TOCOM, Jerrold, Pioneer, S-A
<TABLE>
<CAPTION>
Estimated Plant Build Dates:
Miles Percent
----- -------
<S> <C> <C> <C>
1970's 353 33%
1980's 492 46%
1990's 225 21%
</TABLE>
<TABLE>
<CAPTION>
Estimated Channel Capacity:
Miles Percent
----- -------
<S> <C> <C> <C>
300 Mhz 306 30%
330 Mhz 579 55%
450 Mhz 160 15%
</TABLE>
There has been no major rebuild. The plant itself is reported to be in good
condition. The plant has passed the 1994 proof tests but is not likely to pass
the 1995 C/N tests; substantial fiber is needed to reduce the cascade to pass
the test and improve reliability.
Anderson Co., SC Page 7
<PAGE>
UPGRADE REQUIREMENTS
Capacity is limited, and needs to be increased to meet competitive pressures.
There are no "big urban" systems nearby, and no indication of franchise
pressures at this time. Although about 1/2 of the plant is likely to be 10 years
old or less, there is no indication that the older plant is in poor shape.
Management indicates that an electronics drop-in with some respacing and cable
replacement, plus more fiber, would be sufficient for the nearterm.
<TABLE>
<S> <C>
Fiber Overlay
Overlash 200 miles at $6,000/mi 1,200,000
Upgrade Older plant
Rebuild 353 miles @ $12,000/mi 4,236,000
Plant needing respacing
Upgrade 176 miles @ $6,500/mi 1,144,000
Retrofit amplifiers, cleanup
356 miles @ $5,000/mile 1,780,000
Total Costs 8,360,000
</TABLE>
DETERMINATION OF OPERATING INCOME
Appraising the value of cable television systems involves calculation of
historic and projected operating income (commonly called "cashflow"). Operating
income is defined as direct operating revenues less expenses, before capital
expenditures, depreciation, and management fees. The operating income considered
in appraisals is typically that which will be derived by the buyer, using his
cost structure and nominal predictable changes in operations.
First-Year Projection:
We first prepared a detailed Projected-Year statement of operating income. To do
so, we reviewed the company's historic income statements, and used them to
prepare an estimate of projected operating income for the 12 months beginning
April 1, 1996. A projection worksheet is attached.
The Projected-Year subscriber revenues are based on the March 31, 1996
subscriber count, plus allowances for growth, and on 1996/Q1 rates, plus
appropriate adjustments for additional actual 1996 rate changes. Other revenue
items were based on consideration of past results and trends.
Anderson Co., SC Page 8
<PAGE>
Certain Projected-Year expense items such as programming costs which are based
on subscribers or revenue have been adjusted to match the subscriber and revenue
projections shown, using prior-year unit costs or ratios plus an allowance for
increases where appropriate. Overhead items, such as maintenance and property
tax have been based principally on average results, to reflect longer-term
trends. In preparing our detailed analysis, we also reviewed key operating
ratios, such as programming cost/subscriber, staffing ratios, copyright and bad
debt expense levels, etc. and compared them to industry norms and our
experience. A brief discussion of key individual items follows:
Passings: Grow more slowly than recent trends.
Penetration: Continue slow growth on both, but the system is over 70% and
penetration gains will be increasingly difficult.
Average Basic+Tier Revenue/Subscriber: Use the average for 1996/Q1, plus the
recently announced increase.
Average Pay Revenue/Unit: This has fluctuated with time; use a norm.
Ancillary Revenue: This represents income from equipment rental, guides, wire
maintenance fees, etc. The system is improving this area; use 1995 levels plus
5%.
Pay-Per-View Revenues: This is growing consistently; continue the trend from
1995.
Advertising: This will increase sharply.
Franchise Fees Billed: We used past percentages.
G&A Salary: This is growing steadily, and ratios are reasonable. Use the 1996/Q1
level plus growth and inflation.
Office Operation: This is growing steadily; use 1995 plus inflation.
Billing: We used recent per-subscriber levels plus inflation.
Bad Debt: Use average percentage.
Professional Services, Allocated Costs: Use 1996 levels.
Misc. Operating Costs: Ratios were reasonable; we used principally hitoric
averages plus inflation.
Operating Wages: Staffing levels are good, but wages are relatively high. Use
1996 plus inflation and growth.
Anderson Co., SC Page 9
<PAGE>
Basic Programming: Use the 1996/Q1 level plus increases.
Premium/PPV Programming: We used the average historic levels.
Marketing/Sales: Industry norms vary from 1% of revenue in classic systems with
little need for sales, to 4% in urban markets. This system has been around 2%
for several years, and we used 2%.
Ten-Year Cashflow Projections
Our principal appraisal technique involves projection of free cashflow for 10
years; free cashflow is equal to operating income less capital expenditures, but
still before depreciation and interest, and taxes. (Projected free cashflow is
then discounted at an appropriate cost-of-capital rate, and a terminal value is
added to get the value of the property.) Our projection for this system is shown
on the two-page spreadsheet enclosed. We started with the data contained in the
first-year projection spreadsheet, and expanded it with the variables and
assumptions shown.
Revenue items used are the same as for the first-year analysis. However, they
are based on forecasts for system growth in areas such as passings, penetration,
and revenue/subscriber. The small amount of commercial revenue was converted to
EBU's and for simplicity we did our forecast using total EBU's.
The passing growth was dropped to 3% over time as the plant grows.
Basic penetration continues to grow, but slows down as it jpasses 75%.
Competition from other forms of telecommunications will increasingly limit
cable's market share.
The number of addressable subscribers will continue to grow steadily, and we
think this system will eventually be fully addressable.
Basic rate increases are forecast to be at about inflation, but could be higher
when channels are added after rebuild.
Revenue/subscriber for areas such as ancillary services and advertising should
grow faster than inflation; this area has a good economy.
The ten-year model uses summary expense variables which were calculated from the
one-year information as follows:
Personnel: Salaries, Tax/benefit, Professional services, cost
allocations, and capitalized labor
Per-Subscriber: Office rent, Office Operation, Basic
Anderson Co., SC Page 10
<PAGE>
Programming, LO Programming
Revenue-related: Franchise fee, copyright, bad debt,
marketing, and advertising sales
Premium Programming: Pay and pay-per-view
Per-Mile: Insurance, Property Tax, Pole Rent, Power, System
Maintenance
Personnel costs are based on current personnel costs, plus annual percentage
increases to reflect growth and expenses. We calculated the amounts for the
other expense categories on a per-sub or per-mile, or percentage of revenue
basis, as noted. The per-sub and per-mile costs were increased for inflation
over the 10-year period as noted. The percentage costs were held to the same
percentage of revenue over 10 years, on the assumption that gradual increases in
unit costs can be passed on to customers.
Capital costs were forecast for several items. New plant costs were calculated
using new plant mileage derived from passings growth and an average per-mile
cost for new plant (aerial and U/G). Drops were calculated on the assumption
that a certain percentage of existing drops is replaced each year, and new drops
are added equal to growth plus a churn allowance of 5%. Costs for new
addressable converters were allowed based on the increase in addressable
subscribers. Capitalized labor is based on 1994 levels, plus inflation. The
capital costs for vehicles and miscellaneous is estimated from system size and
current vehicle count (assuming vehicles are replaced every 5 years).
We used the rebuild cost estimates developed earlier in the text, and spread
them over a reasonable period as shown in the separate line item.
DETERMINATION OF APPRAISED VALUE
General Methodology
Appraisal of income-producing property typically relies on one or more of three
main approaches.
Replacement cost, which is the cost to assemble and put the property into
operation, is not typically used in the cable television industry for valuing a
property as a whole. Cable television system sales include a very substantial
intangible value for franchise, goodwill, and customer lists. Although these
intangibles can be valued separately, more direct approaches to overall value
are easier to use, and more appropriate.
Market value as determined by comparable transactions is a very common approach
for estimates of value. Transaction value is
Anderson Co., SC Page 11
<PAGE>
typically reported on the basis of either per-subscriber cost or operating
income multiple. We consider both ratios, but place more reliance on the income
multiple.
The Income Approach is widely used in business valuation, and we use this as our
first approach. Our method involves determination of the discounted present
value of free cashflow generated over ten years, plus an allowance for the
terminal value after ten years.
Income Approach
Ten-year free cashflow was projected, as discussed previously. The annual free
cashflow was discounted using an average cost of capital calculated as shown on
the spreadsheet.
The FCC cost-of-service rules will permit a cost-of-capital rate of 11.25%, plus
further upward adjustments related to tax matters; the result is typically in
the 12% - 13% range. Small cable operators may use even higher numbers, subject
to certain overall limits. We do not believe the FCC cost-of-capital should be
used directly, but do find that the FCC values support our calculation of 12.6%.
We then added a terminal value based on the resale value of the system in year
10. The terminal value was calculated at 6 x year 10 cashflow. The industry will
increasingly feel the effects of maturity, regulation and increased competition.
Sale multiples will gradually decline as the opportunities for growth into new
lines are realized or abandoned. Non-cable businesses currently trade in the 3-6
x cashflow range. Regulated telephone companies presently trade at around 5-7 x
cashflow. Selection of 6x should reflect the industry's gradual maturity and
transformation.
The terminal value was then discounted to a present value using the same
discount rate. The discounted cashflow and discounted terminal values were
added, to arrive at the estimate of potential system value shown on the
worksheet.
Market Value
The prices of cable system transactions are frequently evaluated to determine
the ratio of operating income (income before depreciation, interest, and
management fees) to purchase price; sales results are frequently reported in the
trade press. Per-subscriber values are also widely reported. We consider
principally the multiple of first year projected operating income. To facilitate
our analysis, we compared this system to the overall market with respect to some
key factors. The analysis is subjective, and based on our personal knowledge,
but nonetheless helps to structure the process:
Anderson Co., SC Page 12
<PAGE>
Future passing and subscriber growth: This system enjoys rapid growth, and is
well above average. Growth should continue.
Demographics: Demographics are normal.
Competitive situation: There is offair competition, and a bit of pressure from
area cable operators. DBS could be a bigger factor than normal because of the
fairly good demographics and availability of offair signals. The system is, at
best, average in this area.
System Capacity/Quality: The need for rebuild is a major negative issue. The low
plant density is also a negative.
General Operations: With regard to matters such as staff, franchise problems,
etc., the system is normal.
New Revenues: The system should be able to add new revenue sources easily,
particularly if it is integrated into the planned "ring" around Greenville.
Above average.
System marketability: The system is of a very attractive size, and is in a
market with a number of qualified buyers.
Comparable Transaction Data
We then select an approximate appropriate multiplier from information available
about other reasonably similar transactions, and the general state of the
market. The following data has been taken from announcements in the trade press,
information from brokers, recent issues of the Cable TV Investor Newsletter,
published by Paul Kagan Associates, and our own knowledge.
<TABLE>
<CAPTION>
System Date Subs $/Sub CF Mult
- - - ------ ---- ---- ----- -------
<S> <C> <C> <C> <C>
SC 3/96 44,600 1,767 10.4
Columbus, MS 2/96 16,000 1,465 9.5
Arizona 12/95 8,000 1,500 7.0
VA/TN/GA 1/96 40,000 1,107 8.5
Market Avg YTD 4/96 5,300,000 2,136 10.8
</TABLE>
The foregoing data is the best available to us. However, in some cases, it may
not be accurate, and may reflect third-party estimates of the terms rather than
actual data.
These reports of transactions, and general industry commentary, suggest that the
"market" in 1995 for larger systems is generally 9 to 11, depending on location,
growth, rate control, etc. Smaller systems trade in the 7 to 9 range. Urban and
suburban systems are
Anderson Co., SC Page 13
<PAGE>
valued more highly than rural systems.
After considering all factors, we believe Anderson would be valued at
approximately 10 x cashflow and $1,750/subscriber.
Appraised Value
The multiples calculated by dividing the discounted cashflow approach by current
subscriber count and projected income are:
<TABLE>
<S> <C>
Discounted Cashflow Value $35,303,000
Current subscribers 20,875
Projected operating income 4,238,000
Resulting per-sub value 1,691
Resulting income multiple 8.33
</TABLE>
The values calculated by using the same data, and multiples selected from market
data are:
<TABLE>
<S> <C>
Value, at 10 x operating income
less $8,000,000 for rebuild 34,380,000
Value, at $1,750 per sub 36,531,000
</TABLE>
The values calculated by the three different methods are generally within a
reasonable range. In setting the range, we place substantially more reliance on
the discounted cashflow method, because it directly incorporates the key
variables which impact value. Operating income multiples reflect some of the
variables, but are more subjective. Per-subscriber values are useful as broad
indicators.
The appraised value of the Anderson system at March 31, 1996 is set at
$35,900,000. This represents the value of the assemblage of system assets as a
going concern, without any discount imputed for brokers' fees. We believe the
appraisal reflects the relevant and material general market factors,
assumptions, and limitations, all of which are presented in this report. The
appraisal was prepared using standard appraisal techniques, and conforms to
Standards 7-10 of the Uniform Standards of Professional Appraisal Practice.
Anderson Co., SC Page 14
<PAGE>
QUALIFICATIONS OF THE APPRAISER
The appraisal was prepared by R. Michael Kruger, owner and President of Western
Cablesystems, Inc. Since 1979, he has appraised hundreds of systems for a
variety of clients including major MSO's, independent operators, and clients
outside the CATV industry. Kruger has extensive background as a CATV executive.
From 1974 to 1979, he held various operating positions at ATC, one of the
industry's largest operators. In 1979, he joined a small MSO, and until mid-1986
was president of the 30,000 - subscriber company. There, in addition to his
operating duties, Kruger prepared CATV system appraisals.
Kruger formed Western Cablesystems, Inc. in 1986, and is its sole owner and
principal. Western has been directly involved in all aspects of system
operations and finance, including several acquisitions and sales, partnership
formation, debt placement, franchising, and system construction and startup.
Western sold one property in 1993, and presently operates three small cable
systems. In addition to continuing appraisal work, Kruger has performed
consulting engagements for a wide range of topics and clients, including the
economic feasibility of international cable and restructuring of individual
systems to achieve financial improvements.
Kruger received a BS/MS in engineering from the Massachusetts Institute of
Technology in 1967/68. In 1974, he received a Masters in Business Administration
(MBA) from the Stanford University Graduate School of Business.
Anderson Co., SC Page 15
<PAGE>
DISCOUNTED CASH FLOW MODEL FOR APPRAISAL OF ANDERSON COUNTY
<TABLE>
<CAPTION>
Change Curr.
Assumptions Actual Proj. Year 1 Year 2 Year 3 Year 4 Year 5
----------- ------ ------------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
Ending Passings 28,376 29,450 30,334 31,547 32,809 33,957
Passings Growth 3.00% 4.00% 4.00% 3.50%
Ending Basic EBU's 20,875 22,197 23,015 24,093 25,221 26,273
Ending Pay Units 10,925 11,538 12,021 12,644 13,299 13,920
Ending Basic EBU Pen 73.57% 75.37% 75.87% 76.37% 76.87% 77.37%
Basic Penetration Change 0.50% 0.50% 0.50% 0.50% 0.50%
Pay/Basic Penetration 0.25% 52.34% 51.98% 52.23% 52.48% 52.73% 52.98%
Average Basic EBU's 21,536 22,606 23,554 24,657 25,747
Average Pay Units 11,232 11,779 12,332 12,971 13,609
Addressable Sub % 10.00% 40.00% 40.00% 50.00% 60.00% 70.00% 80.00%
Ending Plant Miles 1,071 1,110 1,132 1,162 1,194 1,223
New Miles 40 39 22 30 32 29
New Drops 1.05 1,388 858 1,132 1,184 1,105
Rebuild Miles 450 450
Replace Drops % 5.00% 5.00% 15.00% 15.00% 15.00%
Basic Revenue/EBU $292.81 $301.59 $310.64 $326.17 $342.48
Basic Rev/EBU Increase 3.00% 3.00% 3.00% 5.00% 5.00%
Ancillary Rev/EBU 4.00% $21.26 $22.11 $23.00 $23.92 $24.87
Pay Revenue/Unit 1.50% $109.54 $111.18 $112.85 $114.54 $116.26
PPV Rev/Addr. Sub 6.00% $10.97 $11.62 $12.32 $13.06 $13.84
Late/Shop/Oth $/EBU 4.00% $4.50 $4.68 $4.87 $5.07 $5.27
Advertising Rev/EBU 5.00% $3.15 $3.31 $3.48 $3.65 $3.83
Personnel Cost Incr. % 3.00% 7.99% 5.84% 6.68% 6.70% 6.29%
Per-Sub Expense 4.50% $70.22 $73.38 $76.68 $80.13 $83.74
% of Rev. Expense % 7.81% 7.81% 7.81% 7.81% 7.81%
Pay/PPV Expense % 48.86% 48.86% 48.86% 48.86% 48.86%
Per-Mile Expense 4.00% $686 $714 $743 $772 $803
Capex per drop 2.00% $70 $71 $73 $74 $76
Capex per new mile 3.00% $18,000 $18,540 $19,096 $19,669 $20,259
Capex per rebuild mile $9,289 $9,289 #DIV/0I
Capex per new adr. sub 1.00% $100 $101 $102 $103 $104
REVENUE
Basic/Tier/Com'l 6,305,964 6,817,786 7,316,792 8,042,415 8,817,888
Ancillary 457,918 499,891 541,688 589,738 640,444
Pay 1,230,284 1,309,639 1,391,686 1,485,773 1,582,209
Pay-per-view 94,458 131,374 174,115 225,406 285,136
Installation 4.00% 176,000 183,040 190,362 197,976 205,895
Late/Other/Shop 97,000 105,891 114,745 124,923 135,664
Advertising 70,000 74,854 81,892 90,014 98,693
Franch. Fee billed 4.10% 345,697 353,526 380,054 416,827 456,145
Total Revenue 8,777,321 9,476,001 10,191,334 11,173,072 12,222,075
EXPENSES
Personnel 886,427 938,164 1,000,856 1,067,887 1,135,044
Per-Sub costs 1,558,631 1,688,762 1,847,441 2,020,944 2,200,020
Per-mile costs 762,000 808,249 863,102 921,987 981,921
Percent of Rev. costs 685,465 740,028 795,892 872,561 954,483
Pay & PPV Costs 647,211 704,016 764,982 836,007 912,303
Total Expenses 4,539,734 4,879,219 5,272,273 5,719,386 6,183,771
OPERATING INCOME 4,237,587 4,596,782 4,919,060 5,453,686 6,038,304
Operating Ratio 48.28% 48.51% 48.27% 48.81% 49.40%
<PAGE>
</TABLE>
<TABLE>
<CAPTION>
CAPITAL EXPENDITURES
<S> <C> <C> <C> <C> <C> <C> <C>
Drops 174,857 143,456 345,654 368,990 382,345
Addr. Converters 52,880 265,477 300,771 329,565 350,067
New plant 702,000 409,502 579,255 620,498 581,592
Rebuild 0 4,180,000 4,180,000
Labor capitalized 8.46% 75,000 79,377 84,682 90,353 96,035
Vehicles 5.00% 48,000 50,400 52,920 55,566 58,344
Other 3.00% 75,000 80,000 82,400 84,872 87,418
Total Capex 1,127,737 5,208,213 5,625,681 1,549,843 1,555,802
DISCOUNTED FREE CASHFLOW
Operating Income 4,237,587 4,596,782 4,919,060 5,453,686 6,038,304
Less Capital Expenditures 1,127,737 5,208,213 5,625,681 1,549,843 1,555,802
Free cashflow 3,109,851 -611,431 -706,621 3,903,843 4,482,502
<CAPTION>
Discount Rate 12.60% Discount Rate Calculation
<S> <C> <C> <C> <C>
Net Present Value of Free Cashflow 19,095,600 Proportion Rate
Equity 30.00% 20.00%
Senior Debt 60.00% 9.00%
Sub. Debt 10.00% 12.00%
Blended 12.60%
</TABLE>
<TABLE>
<S> <C> <C>
TERMINAL VALUE
Year 10 operating income 8,849,916
Multiple 6
Terminal Value 53,099,494
Discounted at 12.60% 16,207,144
POTENTIAL VALUE
NPV of Free Cashflow 19,095,600
NPV of Terminal Value 16,207,144
Total Potential Value 35,302,744
RATIOS
Current EBU's 20,875
First-year Op. Income 4,237,587
Value per EBU $1,691
Op. Income Multiple 8.33
</TABLE>
<TABLE>
<CAPTION>
Year 6 Year 7 Year 8 Year 9 Year 10
------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C>
Ending Passings 35,146 36,200 37,286 38,404 39,557
Passings Growth 3.50% 3.00% 3.00% 3.00% 3.00%
Ending Basic EBU's 27,368 28,371 29,408 30,482 31,595
Ending Pay Units 14,568 15,173 15,801 16,454 17,134
Ending Basic EBU Pen 77.87% 78.37% 78.87% 79.37% 79.87%
Basic Penetration Change 0.50% 0.50% 0.50% 0.50% 0.50%
Pay/Basic Penetration 53.23% 53.48% 53.73% 53.98% 54.23%
Average Basic EBU's 26,821 27,869 28,889 29,945 31,038
Average Pay Units 14,244 14,870 15,487 16,128 16,794
Addressable Sub % 90.00% 100.00% 100.00% 100.00% 100.00%
Ending Plant Miles 1,252 1,279 1,306 1,334 1,363
New Miles 30 26 27 28 29
New Drops 1,150 1,052 1,089 1,128 1,168
Rebuild Miles
Replace Drops % 5.00% 5.00% 5.00% 5.00% 5.00%
Basic Revenue/EBU $359.61 $377.59 $388.92 $400.58 $412.60
Basic Rev/EBU Increase 5.00% 5.00% 3.00% 3.00% 3.00%
Ancillary Rev/EBU $25.87 $26.90 $27.98 $29.10 $30.26
Pay Revenue/Unit $118.00 $119.77 $121.57 $123.39 $125.25
PPV Rev/Addr. Sub $14.67 $15.55 $16.49 $17.48 $18.53
Late/Shop/Oth $/EBU $5.48 $5.70 $5.93 $6.16 $6.41
Advertising Rev/EBU $4.02 $4.23 $4.44 $4.66 $4.89
Personnel Cost Incr. % 6.30% 5.88% 5.89% 5.90% 5.90%
Per-Sub Expense $87.50 $91.44 $95.56 $99.86 $104.35
% of Rev. Expense % 7.81% 7.81% 7.81% 7.81% 7.81%
Pay/PPV Expense % 48.86% 48.86% 48.86% 48.86% 48.86%
Per-Mile Expense $835 $869 $903 $940 $977
Capex per drop $77 $79 $80 $82 $84
Capex per new mile $20,867 $21,493 $22,138 $22,802 $23,486
Capex per rebuild mile
Capex per new adr. sub $105 $106 $107 $108 $109
REVENUE
Basic/Tier/Com'l 9,644,964 10,523,178 11,235,489 11,995,531 12,806,475
Ancillary 693,843 749,811 808,337 871,398 939,339
Pay 1,680,838 1,781,091 1,882,739 1,990,064 2,103,377
Pay-per-view 354,207 433,489 476,312 523,344 574,998
Installation 214,131 222,696 231,604 240,868 250,503
Late/Other/Shop 146,976 158,831 171,229 184,587 198,979
Advertising 107,950 117,779 128,193 139,523 151,847
Franch. Fee billed 498,112 542,720 579,149 618,031 659,534
Total Revenue 13,341,021 14,529,594 15,513,052 16,563,345 17,685,053
EXPENSES
Personnel 1,206,546 1,277,527 1,352,776 1,432,551 1,517,131
Per-Sub costs 2,394,863 2,594,262 2,810,148 3,043,878 3,296,917
Per-mile costs 1,046,014 1,110,751 1,179,707 1,253,168 1,331,438
Percent of Rev. costs 1,041,867 1,134,689 1,211,492 1,293,515 1,381,114
Pay & PPV Costs 994,234 1,081,947 1,152,529 1,227,941 1,308,537
Total Expenses 6,683,525 7,199,176 7,706,652 8,251,053 8,835,138
OPERATING INCOME 6,657,497 7,330,419 7,806,399 8,312,292 8,849,916
Operating Ratio 49.90% 50.45% 50.32% 50.18% 50.04%
CAPITAL EXPENDITURES
Drops 194,642 194,767 205,830 217,514 229,854
Addr. Converters 379,738 396,892 111,239 116,327 121,645
New plant 620,006 566,535 601,037 637,641 676,473
Rebuild
Labor capitalized 102,085 108,091 114,457 121,207 128,363
Vehicles 61,262 64,325 67,541 70,918 74,464
Other 90,041 92,742 95,524 98,390 101,342
Total Capex 1,447,774 1,423,351 1,195,629 1,261,997 1,332,141
DISCOUNTED FREE CASHFLOW
Operating Income 6,657,497 7,330,419 7,806,399 8,312,292 8,849,916
Less Capital Expenditures 1,447,774 1,423,351 1,195,629 1,261,997 1,332,141
Free cashflow 5,209,723 5,907,067 6,610,770 7,050,294 7,517,775
</TABLE>
<PAGE>
CENCOM APPRAISAL FOR Anderson CO
HISTORIC INCOME STATEMENTS AND FIRST-YEAR PROJECTION
<TABLE>
<CAPTION>
1992 Actual 1993 Actual 1994 Actual 1995 Actual 96/Q1 Projected Year
----------- ----------- ----------- ----------- ----- --------------
<S> <C> <C> <C> <C> <C> <C>
Ending Homes Passed 25,100 26,200 27,300 28,197 28,376 29,450
Ending Basic Subscribers 16,637 18,114 19,112 20,180 20,597 21,847
Ending Pay Subscribers 7,475 8,295 10,442 11,104 11,274 11,974
Ending Basic Penetration 66.28% 69.14% 70.01% 71.57% 72.59% 70.50%
Ending Pay Penetration 44.93% 45.79% 54.64% 55.02% 54.74% 57.00%
Average Basic Subs 16,024 17,376 18,613 19,646 20,389 21,222
Average Pay Units 6,787 7,885 9,369 10,773 11,189 11,624
Avg Basic+Tier Rev/Sub $ 24.84 $ 25.77 $ 22.59 $ 22.89 $ 22.86 $ 24.36
Average Pay Rev/Unit $ 10.30 $ 9.78 $ 10.09 $ 8.98 $ 8.66 $ 8.82
REVENUE
Basic,Tier Revenue 4,776,207 5,372,442 5,046,262 5,396,288 1,397,970 6,203,615
Ancillary Revenue 420,502 500,818 402,455 435,658 109,028 457,918
Commercial Basic 0 0 57,977 77,273 24,842 102,349
Premium 839,252 925,214 1,134,436 1,161,450 290,741 1,230,284
Pay-Per-View 49,084 50,465 65,413 69,813 22,490 94,458
Installation 114,687 121,587 144,378 161,319 43,391 176,000
Advertising 90,175 118,572 62,259 68,690 15,852 70,000
Shopping/Other 2,060 0 71,514 94,065 24,277 97,000
Franchise/FCC Fees Billed 0 0 289,130 306,529 79,555 345,697
Total Revenue 6,291,967 7,089,098 7,273,824 7,771,085 2,008,146 8,777,320
EXPENSES
G&A Salary 169,698 195,248 222,285 235,247 50,176 261,124
Tax/Benefit-G&A 56,634 58,583 52,197 54,556 10,115 61,103
Office Rent 8,202 6,974 7,999 8,600 2,198 9,000
Office Operation 130,566 146,288 150,113 145,970 34,439 159,165
Billing 129,893 156,699 166,113 197,304 44,923 213,918
Bad Debt/Collection 68,443 94,205 88,035 97,626 15,595 96,551
Professional Services 87,675 78,569 926 90,503 17,540 50,000
Insurance 35,303 41,213 37,766 45,736 13,553 47,000
Property Tax 215,085 221,354 343,489 207,038 66,731 265,000
Franchise/FCC/Copyright 171,610 250,046 309,580 326,573 87,669 373,036
Cost Allocation 0 0 122,369 27,804 8,573 35,000
Operating Wages, Overtime 374,732 418,775 423,889 431,514 109,102 520,000
Tax/Benefit-Op Wages 78,576 85,789 95,285 81,093 22,918 109,200
Labor Capitalized -52,052 -63,047 -74,078 -96,406 -25,493 -150,000
Pole Rent 120,773 123,711 241,746 112,179 44,178 150,000
Power 117,250 136,273 105,270 130,916 30,578 130,000
System Maint., Operation 133,365 156,002 137,808 164,460 37,347 170,000
Programming-Basic 542,710 743,654 844,212 963,107 268,955 1,176,548
Programming-Premium 365,997 432,017 515,085 552,209 150,156 590,536
Programming-PPV 30,344 31,556 41,422 44,826 12,604 56,675
Programming-LO, Other 10,750 10,200 0 13,590 3,013 14,000
Marketing/Sales 131,029 135,386 146,065 193,908 36,420 201,878
Cost of Advertising Sales 1,596 0 0 0 0 0
Total Expenses 2,928,179 3,459,495 3,977,576 4,028,353 1,041,290 4,539,734
Operating Income 3,363,788 3,629,603 3,296,248 3,742,732 966,856 4,237,587
Operating Margin 53.46% 51.20% 45.32% 48.16% 48.15% 48.28%
</TABLE>
Page 1
<PAGE>
EXHIBIT A-2
APPRAISALS OF THE CPLP SYSTEMS
A-2
<PAGE>
===============================================================================
CONFIDENTIAL
CENCOM PARTNERS, L.P.
Appraisal Analysis Summary
Introduction
Daniels & Associates, L.P. ("Daniels") was retained by Cencom Partners, L.P.
(the "Partnership") to appraise the fair market value of the assets of the
Partnership, in accordance with the "Appraisal Process" procedures as outlined
in the letter from the Partnership dated April 28, 1995 (the "Procedures
Letter"), as well as the related Amended and Restated Agreement of Limited
Partnership (the "Partnership Agreement"). The "Valuation Date" of the appraisal
of the Partnership, as was mutually agreed upon in the Procedures Letter, was
March 31, 1995. The Partnership owns and operates cable television systems
(referred to in the aggregate as the "Systems") that, as of March 31, 1995,
passed approximately 62,948 homes and served approximately 35,655 equivalent
basic subscribers ("EBUs") in the following four operating groups:
<TABLE>
<CAPTION>
================================= =============== ======================= ================ ============ ===============
As of Homes Basic Subscribers / Equivalent Miles of Number of
March 31, 1995 Passed Penetration Basic Units Plant Headends
================================= =============== ======================= ================ ============ ===============
<S> <C> <C> <C> <C> <C>
Lincolnton, North Carolina 28,540 14,199 / 49.8% 14,297 800 3
- - - --------------------------------- --------------- ----------------------- ---------------- ------------ ---------------
Sanford, North Carolina 20,759 12,300 / 59.3% 12,524 428 4
- - - --------------------------------- --------------- ----------------------- ---------------- ------------ ---------------
La Grange, Texas 9,820 6,093 / 62.0% 6,300 170 2
- - - --------------------------------- --------------- ----------------------- ---------------- ------------ ---------------
Abbeville, South Carolina 3,829 2,515 / 65.7% 2,534 81 1
- - - --------------------------------- --------------- ----------------------- ---------------- ------------ ---------------
Total 62,948 35,107 / 55.8% 35,655 1,479 10
================================= =============== ======================= ================ ============ ===============
</TABLE>
The appraisal was performed in conjunction with the anticipated dissolution and
liquidation of the Partnership following the planned sale of the Partnership's
assets. This report summarizes Daniels' conclusions and provides an outline of
the scope of the engagement, the process used, an overview of the Systems by
group, the valuation methodology, the assumptions relied upon, and an
explanation of the values derived.
Process
Daniels prepared an independent appraisal analysis of the Partnership assets and
was then instructed, as per the Procedures Letter and the Partnership Agreement,
to work with Western Cablesystems, Inc., the appraiser appointed by the American
Arbitration Association, to attempt to jointly determine the fair market value
of the Partnership's assets.
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DANIELS & ASSOCIATES
1
<PAGE>
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 the Systems have been and will continue to be operated as efficiently as
comparable cable systems, and that the franchises and leases of assets used in
the operation of the Systems will be renewed indefinitely without material
changes, other than rebuild requirements (see "The Systems" section).
The appraisal process included discussions with the Partnership's management,
due diligence visits to a majority of the Systems by Daniels' personnel,
research of demographic information concerning the various communities served,
and analyses of historical and forecasted financial and operating information,
as well as Daniels' general knowledge about the industry. In addition, the
impact of the 1992 Cable Act on each System's current and forecasted financial
performance was analyzed. From such due diligence, summaries of the relevant
operating, technical, financial and demographic characteristics of the Systems
by operating group were prepared. These critical characteristics of the Systems
were instrumental in determining respective values because they varied
significantly between the Systems.
In order to assess the fair market value of the Partnership's assets, detailed
operating and financial forecasts by operating group were prepared incorporating
the critical elements of operating revenues and expenses. These financial
forecasts then formed the basis for determining a discounted cash flow value for
each operating group, a standard valuation methodology used within the industry.
The combined values of the Systems by operating group provides a value of the
cable operating assets of the Partnership on a discounted cash flow basis. Using
the market multiple methodology, an aggregate value for the Partnership's assets
was derived by analyzing a value per subscriber and operating cash flow
multiples obtained in private market sales of comparable cable television
systems and then applying those comparable market multiples to the Partnership
Systems. The product of these two valuation methodologies were then analyzed to
determine a final appraisal value for the Partnership's assets.
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DANIELS & ASSOCIATES
2
<PAGE>
The Systems
The Systems owned by the Partnership served approximately 35,655 EBUs in four
operating groups (three states) as of the Valuation Date. The operating groups
are referred to as (i) Lincolnton, North Carolina; (ii) Sanford, North Carolina;
(iii) LaGrange, Texas; and (iv) Abbeville, South Carolina. The largest operating
group is Lincolnton, North Carolina (14,297 EBUs), and the smallest is
Abbeville, South Carolina (2,534 EBUs). As of the Valuation Date, the Systems
had basic subscriber penetration rates varying from 49.8% to 65.7% of homes
passed, and a total basic penetration level of 55.8%, compared to the national
average of approximately 62.6%.
The Systems are served by a total of 10 headends with approximately 1,479 miles
of plant. The technical condition and current channel capacity of the Systems
varies widely from 300 MHz to 450 MHz. Many of the Systems require significant
amounts of capital expenditures to upgrade or rebuild the cable plant in order
to sustain existing revenue and cash flow levels and realize future financial
performance growth. For our valuation, we assumed all plant that is currently
designed to less than 450 MHz would be required to be rebuilt or upgraded to at
least 450 MHz capacity level, and in some instances a 550 MHz level, during the
first five years of the forecast period, depending upon franchise terms and the
competitive outlook. The majority of the Systems requiring an upgrade or rebuild
are forecasted to have that occur within the first four years of the forecast
period.
Rebuilding these Systems to either a 450 MHz or 550 MHz design capacity is a
reasonable industry standard based on the current technology and operating
environment. We have estimated the cost per mile to rebuild a System to 550 MHz
at $15,000/mile and to upgrade plant to 450 MHz at $6,000/mile. These cost
estimates are reasonable representations of the costs (design, cable plant,
electronics, and labor) associated with rebuilding and/or upgrading cable
systems in the geographic regions served by the Partnership Systems. These cost
estimates, however, do not include the costs associated with upgrading and
changing out converters. In the Systems that are forecast to be rebuilt,
converters are forecast to be at least partially replaced over a two to three
year period at a cost of $125 per converter. The total estimated cost of
rebuilding/upgrading all of the Systems (excluding converter replacement) was
forecasted to be $15.8 million, the majority of which ($9.5 million) resulted
from the estimated cost of rebuilding the Lincolnton, North Carolina Systems.
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DANIELS & ASSOCIATES
3
<PAGE>
Lincolnton, North Carolina
The Lincolnton group of systems are located in two clusters. The largest
cluster, serving approximately 74% of the subscribers, is located approximately
1/2 hour northwest of Charlotte, and directly north of Gastonia. The second
cluster, which serves approximately 26% of the subscribers, is located
approximately one hour north of Lincolnton, outside of Hickory. As of March 31,
1995, the Lincolnton systems passed 28,540 homes and served 14,297 EBUs.
The Lincolnton systems are served from three headends, referred to as
Lincolnton, Vale, and Taylorsville. Lincolnton is a 330 MHz addressable system
(approximately 3,200 addressable converters) which serves approximately 70% of
the subscriber base. The Vale system is a single headend serving approximately
4.0% of the subscriber base from 450 MHz plant. This system serves subscribers
in west Lincoln County. The Taylorsville headend serves approximately 26% of the
subscriber base from a 300 MHz plant. The Lincolnton headend site is leased and
the Vale and Taylorsville headend sites are owned. Over the last two to three
years, all new plant and extensions have been built to 450 MHz.
Lincolnton, Lincolnton County, and Taylorsville have all certified and perfected
to regulate basic rates. There were no valid complaints filed against the tier
in any of the Lincolnton systems. The last rate increase was effective April 1,
1995 when the average weighted basic rate increased from $7.34 to $7.37 and the
average weighted expanded basic rate increased from $14.91 to $14.96.
The annualized revenue and cash flow for the three-month period ended March 31,
1995, for this group of Systems was $5.2 million and $2.7 million, respectively.
This equates to an average monthly revenue per EBU of $30.03 and average annual
cash flow per EBU of $187.00. This System's revenue per EBU is below that of the
industry's 1994 average of approximately $31.29, and its cash flow per EBU
exceeded the 1994 industry average of approximately $165.21, per Paul Kagan
Associates, Inc. Cable TV Investor, April 30, 1995.
There is strong growth in both Lincoln County and Alexander County. The growth
in Lincoln County is on the east side of the county, and is largely attributable
to people working in Charlotte but moving to Lincoln County because of lower
home prices and property taxes. There are several small and mid-size
developments here, ranging from middle class homes to affluent areas around the
scenic Lake Norman. Alexander County is also experiencing strong growth as it
becomes more of a bedroom community to Hickory. The economy of this area is a
very diverse mix of manufacturers, including textiles and specialty yarns,
cutting tools, pianos, pharmaceuticals, roller bearings and
- - - --------------------------------------------------------------------------------
DANIELS & ASSOCIATES
4
<PAGE>
furniture, as well as agriculture and poultry production. Some of the largest
area employers include Timken, Vermont American, Naska Pharmaceuticals, Kawai
American, Cochrane Furniture, Textilgruppe Hof and R-Anell Homes.
Sanford, North Carolina
This is the second largest group of systems, which as of March 31, 1995, passed
20,759 homes and served 12,524 EBUs. The primary communities served include
Sanford, Siler City, Whispering Pines, and Troy. The systems are managed by 19
employees out of a single leased office in Sanford.
The Sanford systems are served from four headends, referred to as Sanford, Siler
City, Troy, and Whispering Pines. The Sanford system is the largest, accounting
for approximately 70% of the homes passed, 72% of the subscribers, and 68% of
the plant miles. Currently, 39% of the Sanford system's plant is designed at 300
MHz, 30% is at 330 MHz, and 31% is at 450 MHz. The makeup of the plant for the
other three systems is 66% 330 MHz and 34% 450 MHz. Only the Sanford system is
currently addressable, with approximately 3,000 addressable converters in the
system. All four headend sites are leased.
There are eight franchises covering these systems, three of which expire in
1995, one in 1997, one in 1998, two in 1999, and one in 2004. The Sanford
franchise expires in July 1997.
Five of the eight franchising authorities have certified and perfected to
regulate basic rates. There were no valid complaints against the tier rates in
any of the systems. Prior to April 1, 1995, the weighted average basic rate in
these systems was $8.49 and the weighted average tier rate was $12.36. The
majority of the systems instituted rate changes effective April 1, 1995,
including reorganizing the channel offerings of basic and tier in Troy and Moore
County. The rate changes and tier realignment caused the post April 1, 1995,
weighted average basic rate to decline to $7.80 and the weighted average tier
rate to increase to $13.22.
The annualized revenue and cash flow for the three-month period ended March 31,
1995, for this group of systems was $4.4 million and $2.3 million, respectively.
This equates to an average monthly revenue per EBU of $29.03 and average annual
cash flow per EBU of $183.75. This system's revenue per EBU at this time was
less than that of the industry's average, however, its cash flow per EBU
exceeded the industry 1994 average (noted above).
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DANIELS & ASSOCIATES
5
<PAGE>
The Sanford economy appears stable, with a mix of light industry, textiles,
furniture, brick making, electronics and military (Fort Bragg and Pope AFB). The
majority of the community appears to be middle to lower middle class, however,
there is modest home growth in Lee County (off the Sanford headend) which is
upper middle class. Fort Bragg, located approximately 25 miles south of Sanford,
has a large economic effect on the area, is not on the base closure list, and is
instead adding troops. Siler City is a small community with a large employment
base in wood products and chicken processing, and is the retail center for much
of the surrounding area. Whispering Pines is a retirement community centered
around golfing. Troy is a lower class community with minimal industry, primarily
textiles.
LaGrange, Texas
The LaGrange, Texas operating group consists of two cable systems located within
a tightly clustered grouping approximately 95 miles west of Houston. As of March
31, 1995, these systems passed 9,820 homes and served 6,300 EBUs within the
communities of Giddings, La Grange, Weimar, Schulenburg, and Halletsville. These
systems are managed by eleven employees out of a single owned office in La
Grange.
There are two headends serving these systems - one in Giddings and one in
Schulenburg. The Giddings system passed 1,900 homes with 38 miles of 330 MHz
plant while the Schulenburg system passed 7,920 homes with 132 miles of 330 MHz
plant in the communities of La Grange, Weimar, Schulenburg, and Halletsville. A
broadband microwave feed is used to transmit programming from Schulenburg to the
other communities. There are leased headend and tower sites in Giddings, La
Grange, Schulenburg, and Halletsville. The Weimar headend and tower site is
owned. As of the Valuation Date neither of the systems were over-built and there
were no MMDS operators in the service area. A minimal number of homes are served
by DBS.
The Giddings and Schulenburg systems' current basic rates are $9.06 and $11.06,
respectively. Expanded basic is $13.60 in Giddings and $11.79 in Schulenburg.
The systems have not adjusted rates since September of 1993 when rates were
changed to comply with federal rate regulations.
The annualized revenue and cash flow for the three-month period ended March 31,
1995, for this group of systems was $2.2 million and $1.2 million, respectively.
This equates to an average monthly revenue per EBU of $28.99 and average annual
cash flow per EBU of $186.84. This system's revenue per EBU is less than that of
the industry's 1994 average, however, its cash flow per EBU exceeded the
industry average.
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DANIELS & ASSOCIATES
6
<PAGE>
These systems are operated under five franchise agreements with expiration dates
ranging from November 1995 to February 2006. The city of Weimar has certified to
regulate rates but has not taken any regulatory action. There were no complaints
issued against any of the tiers.
These communities are middle to lower-middle income rural communities with below
average growth potential. The economic base of the communities consists mostly
of small manufacturing, ranching, farming, and oil. The community of Giddings,
which has several productive oil fields, has the best economy of the communities
served. Three of the five communities are county seats, providing a stable base
of government jobs.
Abbeville, South Carolina
Abbeville is the smallest of the four operating groups owned by the Partnership.
As of March 31, 1995, the Abbeville system passed 3,829 homes and served 2,534
EBUs. The Abbeville system employs five people and is served from a single,
owned office which shares a building with the headend. There are two franchises
covering this system - one for the town and one for Abbeville County. The town
franchise expires in late 1999 and the county franchise expires in early 2000.
Abbeville is a single headend, 450 MHz system which was totally rebuilt in 1985.
There is a total of 81 miles of plant, of which only one mile is underground.
While capable of carrying 60 channels, the system is currently offering only 49
channels.
Neither the town nor the county has certified to regulate basic rates and there
have been no valid complaints against the tier. The last rate increase was
effective March 1, 1995 when the tier increased by $0.63. The current basic rate
is $6.24 and the expanded basic is $15.95.
The annualized revenue and cash flow for the three-month period ended March 31,
1995, for this system was $860,000 and $410,000, respectively. This equates to
an average monthly revenue per EBU of $28.40 and average annual cash flow per
EBU of $163.91. While this system's revenue per EBU was lower than that of the
industry's 1994 average, its cash flow per EBU was in line with the industry's
average (as noted above).
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DANIELS & ASSOCIATES
7
<PAGE>
Abbeville is a small town located approximately 60 miles directly south of
Greenville, South Carolina. The town is stable with low unemployment, and a
local economy driven primarily by the railroad (CSX), and various textile mills.
It is a very quaint town, but one which has seen minimal growth historically,
and probably will remain stable with minimal future growth. The larger area
employers include Milliken Textiles, Dirrell Cable, CSX Railway and IT Fabrics.
Some of the town's work force also commute to Greenwood, approximately 15 miles
east, for employment.
Methodology
In order to appraise the fair market value of the assets of the Partnership,
Daniels used two valuation methodologies, (i) a discounted cash flow valuation
analysis and (ii) an analysis of market multiples realized from comparable
private market cable transactions. The respective aggregate fair market values
of the Partnership from each valuation methodology used were then compared, and
a final value was derived.
Discounted Cash Flow
This methodology measures the present value of the Systems' forecasted net cash
flows, defined as pre-tax operating income, less capital expenditures, including
all upgrade and rebuild costs. The Systems' forecasted net cash flow is
determined through the creation of a long-range operating forecast which
provides for detailed forecasts of critical revenue and expense components. A
residual value was forecasted based on growth of the Systems' 10th year net cash
flow into perpetuity, and discounted back to the present at the same discount
rate as the forecasted net cash flow. Daniels prepared a detailed 10-year
revenue, cash flow and capital expenditure forecast for each of the System
groups to apply this discounted cash flow method.
The revenue forecasts were based upon Daniels' forecast of homes passed,
subscriber penetration levels, rates and other non-subscriber based revenue
sources. The expense forecasts were based primarily on assumed rates of
inflation over the forecast period and were adjusted for the particular growth
characteristics of each System group. The capital expenditure forecasts were
based upon costs associated with the construction of new miles of plant, plant
maintenance and rebuild requirements, replacement and upgrading of converters,
and the periodic replacement of vehicles.
To determine the appropriate discount rate for this valuation, Daniels attempted
to approximate the weighted average cost of capital using an array of entities
within the cable television industry that are capable of consummating an
acquisition similar in size to the acquisition of these Systems. The weighted
average cost of capital is an entity's
- - - --------------------------------------------------------------------------------
DANIELS & ASSOCIATES
8
<PAGE>
required return on an investment necessary to satisfy the expectations of all of
the entity's investors, both debt and equity. An entity will, therefore, be
willing to pay a price for an investment as high as the value that will allow it
to meet its weighted average cost of capital, or hurdle rate requirement.
The cost of the debt was arrived at by analyzing the aggregate cost of debt of a
variety of both large and small public and private cable companies to determine
an estimated average debt cost. The cost of equity was determined by sampling
the estimated private market cost of equity for cable television investments
over this time horizon and blending that with equity return objectives of large
publicly traded companies. Such equity returns are those which would be required
by experienced private equity investors and publicly traded companies in cable
television investments with similar characteristics as those of the
Partnership's Systems. The weighted average cost of capital utilized for the
discounted cash flow analyses was determined to be 13.65%. The following 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% 8.75%
- - - ----------------------------------------------- --------------------------- -------------------------------
Equity 40% 21.00%
- - - ----------------------------------------------- --------------------------- -------------------------------
Total Weighted Average 100% 13.65%
=============================================== =========================== ===============================
</TABLE>
The residual value multiples were determined assuming net cash flow growth into
perpetuity equal to one-half of the average cash flow growth rate of the final
two years of the forecasted period. The residual value multiples ranged from 8.7
to 10.2 times net cash flow.
Comparable Transactions
In addition to the Discounted Cash Flow Valuation methodology, Daniels also used
the Comparable Transactions methodology, which is another generally accepted
valuation methodology used to correlate the findings of the discounted cash flow
methodology with the realities of the private market. Under this method, the
market multiples reported in the sales of cable systems of similar size, markets
and technical condition are compared to the subject Systems. In the case of
cable television system values, the most commonly used market multiples are (i)
a multiple of operating cash flow and (ii) the price per subscriber. Because
detailed financial, operating, and technical information is not generally
available regarding private cable system transactions, it is difficult to relate
specific transaction values and multiples directly to the subject Systems.
However, through an analysis of both the range and average of the market
multiples derived from a group of comparable system transactions about which
information is available, this
- - - --------------------------------------------------------------------------------
DANIELS & ASSOCIATES
9
<PAGE>
methodology provides a general measure of the market multiples realized from
comparable transactions, which are then applied to the subject Systems in order
to assess fair market value.
Because of the variety of System characteristics involved in this Partnership,
Daniels divided the Systems, and corresponding comparables into two groups. The
first group is mid-sized systems, in which we would include Lincolnton and
Sanford, North Carolina. The second group is small systems with below average
growth potential, representative of systems similar to the La Grange, Texas and
Abbeville, South Carolina systems.
Mid-Size Systems
<TABLE>
<CAPTION>
No. of Price/ CF
System Buyer Seller Subscribers Price Subscriber Multiple Date
- - - ------ ----- ------ ----------- ----- ---------- -------- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Henderson, Franklin, NC Adelphia Henderson Comm. 14,100 $22,400,000 $1,589 10.2 1/95
No. Augusta, GA Jones ACT2 15,200 $27,300,000 $1,793 9.5 12/93
Gaston Cty, NC Bresnan Jones 19,900 $35,000,000 $1,759 9.2 4/94
San Bernardino, CA Marks Cablevision Chambers Video 14,000 $25,000,000 $1,786 10.5 2/94
Alabama Comcast CableSouth 29,600 $54,800,000 $1,851 9.2 5/95
Georgia Charter CableSouth 29,300 $48,500,000 $1,655 8.2 5/95
Average of Mid-Size
System Comparables 20,350 $35,500,000 $1,744 9.3x --
</TABLE>
Source: Paul Kagan Associates, Inc. Cable TV Investor through June 30, 1995
and Daniels & Associates' Data Base as of June 30, 1995
Small Systems
<TABLE>
<CAPTION>
No. of Price/ CF
System Buyer Seller Subscribers Price Subscriber Multiple Date
- - - ------ ----- ------ ----------- ----- ---------- -------- ----
<S> <C> <C> <C> <C> <C> <C> <C>
OK Based MSO Frontier Vision United Video 86,300 $120,500,000 $1,397 9.0
Various TX, OK, KS, AZ Classic & Fanch Mission Cable 79,100 $97,500,000 $1,233 7.5 *
Various KS, MO, NE, IL, IA Galaxy Douglas Cable 59,900 $65,000,000 $1,086 7.6 *
MA Based MSO Galaxy Vista Comm. 31,000 $40,500,000 $1,305 8.0 *
IA Based MSO Galaxy Vantage 30,500 $38,400,000 $1,259 7.9 12/94
Various CO, NM, MN, MO Fanch Comm. Leonard Comm. 24,700 $35,300,000 $1,428 7.9 5/95
Various AR, CO, TX Classic Cable United Video 21,900 $31,800,000 $1,454 8.2 *
Various, LA & KS Fanch Cablevision Leonard Comm. 12,100 $15,400,000 $1,273 7.5 2/95
Woodward, OK WT Acquisition Corp Time Warner 6,200 $8,900,000 $1,435 8.5 10/94
Cameron, TX Galaxy Telecom Galaxy Cablevision 3,500 $3,600,000 $1,029 8.0 4/95
Average of Small System
Comparables 35,520 $45,690,000 $1,287 8.1 --
</TABLE>
* Announced deal, closing pending
Source: Paul Kagan Associates, Inc. Cable TV Investor through June 30, 1995
and Daniels & Associates' Data Base as of June 30, 1995
The analysis of the market multiples derived from comparable transactions led to
the conclusion that the cash flow multiples for the purpose of assessing the
fair market value of the Partnership's Lincolnton systems should range from 9.75
- - - - 10.25 times cash flow, comparable to the upper end of the range of cash flow
multiples derived from the group of mid-sized system transactions, due to the
stronger growth characteristics of this property. It was concluded that the
Sanford systems market
- - - --------------------------------------------------------------------------------
DANIELS & ASSOCIATES
10
<PAGE>
multiple would be between the market multiple range of the average of the
small-sized system transactions and mid-sized transactions, 8.1 - 9.3 times cash
flow, at 8.5 - 9.0 times, due to the below average growth potential of the
market and the forecasted future capital expenditure requirements necessary to
upgrade the Systems. The analysis of comparable small system market multiples
led to the conclusion that the La Grange systems cash flow multiple should range
from 8.0 - 8.5 times cash flow, within the range of comparable transactions'
multiples. The market multiple for the Abbeville system was determined to be
between 8.5 and 9.0 times, at the high end of the range of comparable small
system transactions multiples of 7.5 to 9.0 times, due to the fact that it is
already built to 450 MHz technical capacity, therefore, not requiring any
significant capital for a plant upgrade in the foreseeable future.
Valuation
Based on these analyses using the above-described methodologies, the estimated
fair market value of the cable television operating assets of the Partnership,
as of March 31, 1995, is $60,900,000 for 35,655 EBUs, or a weighted average of
$1,708 per EBU.
This value equates to a multiple of 9.3 times the annualized operating cash flow
for the three-month period ended March 31, 1995. This multiple is consistent
with the range of current average market multiples of 8.1 to 9.3 times cash flow
for small and mid-size system transactions and is not inconsistent with
multiples derived in transactions involving large blocks of subscribers. In
addition, the value per EBU of $1,708 is comparable to the values derived in
private market transactions from similar sized cable television properties with
like characteristics.
It should be noted that the market sometimes places a premium on the ability to
acquire a large block of subscribers in a single transaction, due to economies
of scale and the lack of opportunity to purchase large numbers of subscribers
from a single seller. Therefore, while the various Systems were appraised at the
operating group level, as per the Procedures Letter, selling the entire
Partnership to one or a limited number of buyers could generate a premium cash
flow multiple, and thus a higher price. In addition, to certain strategic
buyers, some of these individual Systems might command a premium price due to
its fit with the acquiror's other systems and future plans.
Material Relationships
Daniels currently has one other active engagement agreement with the general
partner of the Partnership and its affiliates related to an additional cable
system appraisal.
Summary
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
- - - --------------------------------------------------------------------------------
DANIELS & ASSOCIATES
11
<PAGE>
information for the service areas. While Daniels believes such sources to be
reliable and accurate, it has not independently verified any such information.
The valuation is based on information available to Daniels as of the Valuation
Date, and Daniels undertakes no responsibility for updating this opinion to
reflect changes in the value of the assets subsequent to the Valuation Date of
March 31, 1995 such as market, economic, technological, operational,
governmental, and other changes.
- - - --------------------------------------------------------------------------------
DANIELS & ASSOCIATES
12
<PAGE>
================================================================================
CONFIDENTIAL
APPRAISAL OF
CENCOM PARTNERS, L.P.
Sanford, North Carolina Systems
as of March 31, 1996
PREPARED BY
DANIELS & ASSOCIATES, L.P.
================================================================================
DANIELS & ASSOCIATES
<PAGE>
CONFIDENTIAL
CENCOM PARTNERS, L.P.
Sanford, North Carolina
Appraisal Analysis Summary
Introduction
Daniels & Associates, L.P. ("Daniels") was retained by Cencom Partners, L.P.
("Cencom") to appraise the fair market value of Cencom's Sanford, North Carolina
cable television systems. The Sanford cable television systems serve several
communities in central North Carolina (referred to in the aggregate as the
"Systems") that, as of March 31, 1996, passed 21,461 homes and served 12,941
equivalent basic subscribers ("EBUs"). The "Valuation Date" of the appraisal of
the Systems was March 31, 1996.
As of March 31, 1996
<TABLE>
<CAPTION>
- - - ---------------------------------------------------------------------------------------------------------------------
Miles of Homes / Homes Equivalent Basic Pay Units / Annualized Cash
System Plant / Mile Passed Units / Penetration Penetration Flow for the
Number of Three M/E
Headends 3/31/96
- - - ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Sanford 339 / 1 45 15,162 9,365 / 61.8% 4,172 / 44.5% ---
- - - ---------------------------------------------------------------------------------------------------------------------
Siler City 47 / 1 65 3,065 1,704 / 55.6% 946 / 55.5% ---
- - - ---------------------------------------------------------------------------------------------------------------------
Troy 41 / 1 24 998 779 / 78.1% 423 / 54.3% ---
- - - ---------------------------------------------------------------------------------------------------------------------
Whispering Pines 59 / 1 38 2,236 1,093 / 48.9% 212 / 19.4% ---
- - - ---------------------------------------------------------------------------------------------------------------------
Total 486 / 4 44 21,461 12,941 / 60.3% 5,753 / 44.5% $2,467,868
- - - ---------------------------------------------------------------------------------------------------------------------
</TABLE>
This report summarizes Daniels' conclusions and provides an outline of the scope
of the engagement, the process used, an overview of the Systems, 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 Systems as of March 31, 1996. The Systems were appraised on a
going-concern basis, in conformance with standard appraisal techniques,
utilizing a ten-year discounted net cash flow analysis and applying relevant
market and economic factors. The appraisal assumes that the Systems have been
and will continue to be operated as efficiently as comparable cable systems, and
that the franchises and leases of assets used in the operation of the Systems
will be renewed indefinitely without material changes, other than rebuild
requirements (see "The Systems" section below).
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DANIELS & ASSOCIATES
1
<PAGE>
The appraisal process included discussions with Cencom's management, research of
published demographic information concerning the various communities served, and
analyses of historical and forecasted financial and operating information, as
well as Daniels' general knowledge about the cable television industry. Daniels'
personnel did not visit the Systems as part of this appraisal; however, Daniels'
personnel did visit the Systems for a previous appraisal of the Systems which it
prepared as of March 31, 1995. From Daniels' due diligence, a summary of the
relevant operating, technical, financial and demographic characteristics of the
Systems was prepared. These characteristics of the Systems were instrumental in
determining value.
In order to assess the fair market value of the Systems, a detailed operating
and financial forecast was prepared incorporating the critical elements of
operating revenues and expenses as well as capital expenditure requirements.
This financial forecast then formed the basis for determining a discounted cash
flow value, a standard valuation methodology used within the industry. In
addition, using the market multiple valuation methodology, an aggregate value
for the Systems was derived by analyzing value per subscriber and operating cash
flow multiples obtained in private market sales of comparable cable television
systems, and then by applying those comparable market multiples to the Systems.
The products of these two valuation methodologies were then analyzed to
determine a final appraised value for the Systems as of March 31, 1996.
The Systems
The Sanford systems are served from four headends, referred to as Sanford, Siler
City, Troy, and Whispering Pines. The Sanford system is the largest, accounting
for approximately 71% of the homes passed, 72% of the subscribers, and 70% of
the plant miles. As of March 31, 1996, the Systems passed 21,461 homes and
served 12,941 equivalent basic units, for a penetration rate of 60.3%.
The Systems are served from four headends, referred to as Sanford, Siler City,
Troy, and Whispering Pines, with a total of 486 miles of plant. Sanford, a 300
MHz addressable system (approximately 1,664 addressable subscribers), serves
approximately 72.0% of the subscribers with 339 miles of plant. The Siler City
system serves approximately 13% of the subscriber base from 47 miles of
primarily 330 MHz plant and a single headend. The Troy system, located
approximately 45 miles southwest of Sanford, is a 330 MHz system, serving
approximately 6% of the subscriber base from 41 miles of plant. The remaining 8%
of the subscribers are served from the Whispering Pines headend, a 330 MHz
system with 59 miles of plant, located 35 miles south of Sanford. Over the last
three years, all new plant and extensions have been built to 450 MHz.
================================================================================
DANIELS & ASSOCIATES
2
<PAGE>
All of the Systems' headend sites are leased. The four headends utilize
primarily Scientific Atlanta and General Instruments equipment, and the plant
electronics are primarily Scientific Atlanta. Pay security is controlled with
addressability and negative traps in the Sanford system, and negative traps in
the other three Systems.
There are eight franchises covering the Systems, with expiration dates ranging
between 1996 and 2004. The franchise for Sanford, accounting for approximately
34% of the subscriber base, expires in July 1997. Cencom believes that they have
strong relationships with all of the franchising authorities and does not
anticipate any problems with franchise renewals.
All four systems offer both a Basic and an Expanded Basic service. The Sanford
and Siler City systems offer a 13-channel Basic for rates ranging by franchise
area from $7.69 to $8.14. Troy and Whispering Pines both have 12-channel Basic
packages for $7.95 to $8.26. The Expanded Basic service ranges from 18 to 21
channels at rates from $13.69 to $14.26. While the Basic and Expanded Basic
rates differ by franchise area, the total rate for subscribers to both Basic and
Expanded Basic is $21.95 in all of the Systems. Five of the eight franchising
authorities have certified and perfected to regulate Basic rates. There have
been no valid complaints filed against the Expanded Basic rate in any of the
Systems. Cencom believes its rates are within the allowable rates under the FCC
rate regulation rules as they existed on March 31, 1996.
The annualized revenue and cash flow for the three-month period ended March 31,
1996 for the Systems was $4.7 million and $2.5 million, respectively. This
equates to an average monthly revenue per EBU of $30.25 and average annual cash
flow per EBU of $191.80. The Systems' average monthly revenue per EBU is $3.55
below that of the cable television industry's 1995 average of approximately
$33.80, while its annual cash flow per EBU is above the industry average of
$182.52 for the year 1995, as reported by Paul Kagan Associates, Inc., Cable TV
Investor.
Sanford is located near the geographic center of the state, approximately 45
miles southwest of Raleigh and 58 miles southeast of Greensboro. It's economy is
a mix of light industry, textiles, furniture manufacturing, brick making,
electronics, and military (Fort Bragg and Pope Air Force Base). Fort Bragg,
located approximately 25 miles south of Sanford also has a large economic effect
on the area and is not currently on the military base closure list. Two other
large employers in the area include Phizer Pharmaceuticals and Eaton.
According to National Decision Systems ("NDS"), an independent demographic
service, the population of Lee County, which includes Sanford as its largest
city and the county seat, increased 11.4% from 1990 to 1996, and is projected to
increase an additional 5.7% over
================================================================================
DANIELS & ASSOCIATES
3
<PAGE>
the next five years. The number of households in Lee County increased 12.9%
during the last six years, and are projected by NDS to increase an additional
5.9% during the next five years. Both the projected population and household
growth rates are below the projected growth rates for the State of North
Carolina.
The other three primary communities served by the Systems include Siler City,
Whispering Pines, and Troy. Siler City, which serves approximately 13% of the
subscribers, has a large employment base in wood products and chicken
processing, and is the retail center for much of the surrounding area. Several
new restaurants and shops are indications of the importance of this community as
a retail center. Whispering Pines is a vacation and retirement community known
for the area's premier golf courses, including the Pinehurst Country Club. Troy,
is a small, stable community whose primary economy is textiles.
The lack of excess channel capacity, the reality of near-term competition from
alternative multi-channel video providers and the potential to provide ancillary
telecommunications and data services suggest that a rebuild or upgrade of all of
the Systems to at least 450 MHz capacity would be prudent in the near term,
although there are no current franchise requirements to rebuild or upgrade any
of the Systems. Daniels has estimated the cost per mile to rebuild a system to
550 MHz at $15,000/mile for aerial and $18,000/mile for underground, and to
upgrade to 450 MHz at $6,000/mile for aerial and $9,000/mile for underground.
Daniels has assumed that the Siler City, Troy and Whispering Pines systems would
be upgraded to 450 MHz and that the Sanford systems would be rebuilt to 550 MHz
at a total cost of approximately $5.2 million. Daniels believes that these cost
estimates are reasonable representations of the costs (design, cable plant,
electronics and labor) associated with rebuilding and/or upgrading the Systems.
These cost estimates do not, however, include the costs associated with
upgrading and changing out converters, which Daniels has added as an additional
capital requirement in its forecast in addition to the rebuild/upgrade estimate.
Methodology
In order to appraise the fair market value of the Systems as of March 31, 1996,
Daniels used two valuation methodologies: (i) a discounted cash flow ("DCF")
valuation analysis; and (ii) an analysis of market multiples realized from
comparable private market cable transactions. The respective aggregate fair
market values of the Systems from each valuation methodology used were then
compared, and a final valuation was derived.
Discounted Cash Flow
This methodology measures the present value of the Systems' forecasted net cash
flows, defined as pre-tax operating income less capital expenditures including
all rebuild/upgrade
================================================================================
DANIELS & ASSOCIATES
4
<PAGE>
costs. The Systems' forecasted net cash flow is determined through the creation
of a long-range operating forecast which provides for detailed forecasts of
critical revenue and expense components. A residual value was forecasted based
on growth of the Systems' net cash flow into perpetuity, and discounted back to
the present at the same discount rate as the forecasted net cash flow. Daniels
prepared a detailed 10-year revenue, cash flow and capital expenditure forecast
for the combined Systems.
The revenue forecasts were based upon Daniels' forecast of homes passed,
subscriber penetration levels and rates and non-subscriber based revenue
sources. The expense forecasts were based primarily on assumed rates of
inflation over the forecast period, and were adjusted for particular growth
characteristics. The capital expenditure forecasts were based upon costs
associated with the construction of new miles of plant, plant maintenance and
rebuild/upgrade requirements, replacement of converters, and the periodic
replacement of vehicles. Daniels believes the markets served by the Systems
offer an opportunity for the Systems to provide ancillary telecommunications and
data services; however, because the technology, costs and revenue potential are
uncertain, Daniels did not include telephony or data services revenue, expenses
or capital costs in its forecasts.
To determine the appropriate discount rate for this valuation, Daniels attempted
to approximate the weighted average cost of capital using an array of entities
within the cable television industry that are capable of consummating an
acquisition similar in size to the acquisition of these Systems. The weighted
average cost of capital is an entity's required return on an investment
necessary to satisfy the expectations of all of the entity's investors, both
debt and equity. An entity, therefore, will be willing to pay a price for an
investment as high as the value that will allow it to meet its weighted average
cost of capital or hurdle rate requirement.
The cost of debt was arrived at by analyzing the aggregate cost of debt of a
variety of both large and mid-size public and private cable companies to
determine an estimated average debt cost. The cost of equity was determined by
sampling the estimated private market cost of equity for cable television
investments as of the Valuation Date and blending that with equity return
objectives of large publicly traded companies. Such equity returns are those
which would be required by experienced private equity investors and publicly
traded companies in cable television investments with similar characteristics as
those of the Client's Systems. The weighted average cost of capital Daniels
derived for the discounted cash flow analyses was 14.0%. The following 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.
================================================================================
Assumed Capital Structure % of Total Capital Cost of Capital
================================================================================
Debt 60.0% 8.0%
================================================================================
DANIELS & ASSOCIATES
5
<PAGE>
================================================================================
Equity 40.0% 23.0%
================================================================================
Total Weighted Average Cost of Capital 100% 14.0%
================================================================================
The DCF value of the Systems arrived at from this analysis was $20.7 million,
which is equal to 8.4 times the annualized operating cash flow for the
three-month period ended March 31, 1996, and $1,597 per EBU.
<TABLE>
<CAPTION>
========================================================================================
Systems Discounted Cash Flow Multiple of Three M/E 3/31/96 Value/EBU
Valuation Annualized Cash Flow
========================================================================================
<S> <C> <C> <C>
Sanford, North Carolina $20,669,419 8.4 $1,597
========================================================================================
</TABLE>
Comparable Transactions
In addition to the DCF valuation methodology, Daniels also used the comparable
transactions methodology, which is another generally accepted valuation
methodology used to correlate and validate the findings of the DCF method with
the realities of the private market. Under this method, the market multiples
reported in sales of cable systems of similar size, markets and technical
condition are compared to the subject Systems. In the case of cable television
system values, the most commonly used market multiples are (i) a multiple of
operating cash flow and (ii) the price per subscriber. Because detailed
financial, operating and technical information is not generally available
regarding private cable system transactions, it is difficult to relate specific
transaction values and multiples directly to the subject Systems. However,
through an analysis of both the range and average of the market multiples
derived from a group of comparable system transactions, about which information
is available, this methodology provides a general measure of the market
multiples realized from comparable transactions, which are then applied to the
subject Systems in order to assess fair market value.
Comparable Sale Transactions
<TABLE>
<CAPTION>
No. of Price/ CF
System Buyer Seller Subscribers Price Subscriber Multiple Date
- - - ------ ----- ------ ----------- ----- ---------- -------- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Columbus, MS Post-Newsweek Columbus TV 15,700 $23,000,000 $1,465 9.5 2/96
Various KS & LA Fanch Cablevision Leonard Comm. 12,100 $17,200,000 $1,421 8.4 3/95
Orangeburg, SC Jones Intercable Jones Cable Fund 12,000 $18,350,000 $1,529 8.8 8/95
Ridgecrest, CA Benchmark Mediacom 11,000 $20,800,000 $1,891 7.5 12/95
Martinsburg, WV GS Comm. Time Warner 7,500 $13,100,000 $1,740 9.0 3/96
Colton, CA TCI Colton Cablevision 7,260 $10,000,000 $1,377 8.0 7/95
Frankford, IN Marcus Nixon Newspapers 5,000 $7,000,000 $1,400 8.6 *
------ ------------ ------ ---
Total / Average of System Comparables 70,560 $109,450,000 $1,551 8.4
</TABLE>
Source: Paul Kagan Associates, Inc. Cable TV Investor through March 31, 1996 and
Daniels & Associates' Data Base as of March 31, 1996
* This transaction, while pending, has been publicly announced, and is
governed by a definitive agreement. Although there can be no assurance that
this transaction will be consummated, the inclusion of data regarding it
incorporates the most recent comparable market values.
The comparable transactions analysis yields a cash flow multiple range of 7.5 to
9.5 times cash flow and a weighted average for all of the transactions of 8.4
times cash flow. The
================================================================================
DANIELS & ASSOCIATES
6
<PAGE>
range for the value per subscriber is between $1,400 and $1,891 with an overall
weighted average of $1,551 per subscriber.
Sales Process
Daniels was engaged by Cencom on August 17, 1995 to conduct a sales process in
order to solicit private market bids for all of the systems owned by Cencom,
including the Sanford Systems described in this appraisal report. Under the
Procedures Letter, which was sent to all potential bidders, the General Partner
had a Bid Option Right to submit a higher bid within two business days than the
highest third-party bid received, with the condition that the General Partner's
bid had to exceed the highest bid proposal received by at least 0.5%. If the
General Partner exercised his Bid Option Right, Daniels was then required to
notify the previously highest bidder and allow him a similar bid right within
two business days. The Procedures Letter allowed for this Secondary Bid Process
to continue until the highest binding cash Proposal was received.
Daniels conducted the sales process, and on January 31, 1996 received a high bid
proposal for the Systems of $19,000,000 from Bay Cable Management, Inc. ("Bay
Cable"). Within two business days, the General Partner submitted a higher bid,
to which Bay Cable then topped the General Partner's bid. This process continued
until, on February 14, 1996, the General Partner submitted a bid letter for
$20,750,000 and Bay Cable informed Daniels orally that they would not top the
General Partner's bid. This final bid of $20,750,000 then became the final
purchase price for the Systems.
Material Relationships
Daniels has no ownership position in Cencom; however, from time to time Daniels
has rendered various investment banking and brokerage services to Cencom and its
General Partner for customary and reasonable compensation. In addition, at the
present time Daniels has two active engagement agreements with Cencom and its
affiliates related to the sale of this and certain other cable television
systems owned by Cencom and affiliates of Cencom. Daniels does not believe that
these prior and present relationships in any way affect its ability to fairly
and impartially render the opinion of value expressed herein.
Valuation
Based on the analyses using the above-described methodologies, the estimated
fair market value of the Systems, as of March 31, 1996, is 8.4 times the
annualized operating cash flow for the three-month period ended March 31, 1996.
This translates to a gross value of $20.7 million, and a value per EBU of
$1,600.
================================================================================
DANIELS & ASSOCIATES
7
<PAGE>
Our opinion of value expressed in this appraisal is based on financial and
operating information provided to Daniels by Cencom, as well as published
demographic information for the service areas. While Daniels believes such
sources to be reliable and accurate, it has not independently verified any such
information. The valuation is based on information available to Daniels as of
the valuation date. Daniels undertakes no responsibility for updating this
opinion to reflect changes in the value of the assets subsequent to the
valuation date of March 31, 1996, such as market, economic, technological,
operational, governmental and other changes.
================================================================================
DANIELS & ASSOCIATES
8
<PAGE>
================================================================================
DANIELS & ASSOCIATES
9
<PAGE>
================================================================================
CONFIDENTIAL
APPRAISAL OF
CENCOM PARTNERS, L.P.
Abbeville, South Carolina System
as of March 31, 1996
PREPARED BY
DANIELS & ASSOCIATES, L.P.
================================================================================
DANIELS & ASSOCIATES
<PAGE>
CONFIDENTIAL
CENCOM PARTNERS, L.P.
Abbeville, South Carolina
Appraisal Analysis Summary
Introduction
Daniels & Associates, L.P. ("Daniels") was retained by Cencom Partners, L.P.
("Cencom") to appraise the fair market value of Cencom's Abbeville, South
Carolina cable television system. The Abbeville cable television system
(referred to as the "System") serves Abbeville and Abbeville County in northwest
South Carolina. As of March 31, 1996, the System passed 3,678 homes and served
2,623 equivalent basic subscribers ("EBUs"). The "Valuation Date" of the
appraisal of the System was March 31, 1996.
As of March 31, 1996
<TABLE>
<CAPTION>
- - - --------------------------------------------------------------------------------------------------------------------
Miles of Equivalent Annualized Cash
System Plant / Homes/ Homes Basic Units / Pay Units / Flow for the Three
Number of Mile Passed Penetration Penetration M/E 3/31/96
Headends
- - - --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Abbeville, SC 85 / 1 43 3,678 2,623 / 71.3% 1,007 / 38.4% $456,048
- - - --------------------------------------------------------------------------------------------------------------------
</TABLE>
This report summarizes Daniels' conclusions and provides an outline of the scope
of the engagement, the process used, an overview of the System, 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 System as of March 31, 1996. The System was 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 System has been and
will continue to be operated as efficiently as a comparable cable System, and
that the franchises and leases of assets used in the operation of the System
will be renewed indefinitely without material changes, other than rebuild
requirements (see "The System" section below).
The appraisal process included discussions with Cencom's management, research of
published demographic information concerning the various communities served, and
analyses of historical and forecasted financial and operating information, as
well as
================================================================================
DANIELS & ASSOCIATES
1
<PAGE>
Daniels' general knowledge about the cable television industry. Daniels'
personnel did not visit the System as part of this appraisal; however, Daniels'
personnel did visit the System for a previous appraisal of the System which it
prepared as of March 31, 1995. From Daniels' due diligence, a summary of the
relevant operating, technical, financial and demographic characteristics of the
System was prepared. These characteristics of the System were instrumental in
determining value.
In order to assess the fair market value of the System, a detailed operating and
financial forecast was prepared incorporating the critical elements of operating
revenues and expenses as well as capital expenditure requirements. This
financial forecast then formed the basis for determining a discounted cash flow
value, a standard valuation methodology used within the industry. In addition,
using the market multiple valuation methodology, an aggregate value for the
System was derived by analyzing value per subscriber and operating cash flow
multiples obtained in private market sales of a comparable cable television
System, and then by applying those comparable market multiples to the System.
The products of these two valuation methodologies were then analyzed to
determine a final appraised value for the System as of March 31, 1996.
The System
As of March 31, 1996, the System passed 3,678 homes and served 2,623 equivalent
basic units. Cencom acquired the System in March 1990.
Abbeville is a single headend, 450 MHz addressable system capable of carrying 60
channels, although it is currently offering only 46 channels. The System was
totally rebuilt in 1985, and currently includes 85 miles of plant, of which only
two miles are underground. The plant utilizes Scientific Atlanta and CommScope
cable and Scientific Atlanta electronics. The headend equipment is primarily
Scientific Atlanta, and the converters are Scientific Atlanta 8550-321
addressables, Pioneer BC-4535P non-addressables, and Panasonic PC-145302
non-addressables. The headend is located in the office building, which is owned
by Cencom.
There are two franchises covering this system -- one for Abbeville and one for
Abbeville County. The Abbeville franchise expires in August 1999 and the
Abbeville County franchise expires in February 2000. Cencom believes that they
have a strong relationship with the franchising authorities.
The System offers both a Basic and an Expanded Basic service. The Basic service
includes 12 channels for $6.24, while the Expanded Basic service includes 29
more channels for an additional $16.36. Neither the town nor the county has
certified to regulate
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DANIELS & ASSOCIATES
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<PAGE>
Basic rates, and there have been no valid complaints filed against the Expanded
Basic rate.
The annualized revenue and cash flow for the three-month period ended March 31,
1996 for the System was $0.9 million and $0.5 million, respectively. This
equates to an average monthly revenue per EBU of $29.93 and average annual cash
flow per EBU of $176.56. This System's average monthly revenue per EBU is $3.87
below that of the cable television industry's 1995 average of approximately
$33.80, and its annual cash flow per EBU is $5.96 below the industry average of
$182.52 for the year 1995, as reported by Paul Kagan Associates, Inc., Cable TV
Investor.
Abbeville, located approximately 52 miles south of Greenville, is one of the
oldest and most historic towns of the South, and also serves as the county seat
of Abbeville County. According to National Decision System ("NDS"), an
independent demographic service, the population of Abbeville County increased
2.2% from 1990 to 1996, and is projected to increase an additional 0.7% over the
next five years. The number of households in Abbeville County increased by 5.7%
during the last six years, and are projected by NDS to increase an additional
0.2% during the next five years.
The history and restored charm of this town contributes to a large tourist
industry for the area. The development of nearby Lake Russell turned
already-popular hunting and fishing into an additional economic driver for the
community as well. While originally dependent upon agriculture, Abbeville County
has developed a strong industrial base over the last 30 years that now rivals
agriculture as the area's economic driver. Currently more than 30 industries
employ approximately 4,000 people in Abbeville. Some of the largest employers in
Abbeville County include Abbeville Manufacturing Company; Abbeville Shirtmakers,
Inc.; CSX Railroad; Flexible Technologies; Hydra Industries, Inc.; Milliken
Textiles; and Reelco of Abbeville, Inc.
Because the System currently has 14 channels of excess capacity, Daniels did not
assume an upgrade of the System until the year 2000. There are no current
franchise requirements to rebuild or upgrade the System. Daniels has estimated
the cost per mile to upgrade the System to 550 MHz in the year 2000 at
$7,000/mile for aerial and $10,000/mile for underground. The total estimated
cost of this upgrade in the Year 2000 is $601,000. Daniels believes that these
cost estimates are reasonable representations of the costs (design, cable plant,
electronics and labor) associated with upgrading the System. These cost
estimates do not, however, include the costs associated with upgrading and
changing out converters, which Daniels has added as an additional capital
requirement in its forecast in addition to the upgrade estimate.
Methodology
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DANIELS & ASSOCIATES
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<PAGE>
In order to appraise the fair market value of the System as of March 31, 1996,
Daniels used two valuation methodologies: (i) a discounted cash flow ("DCF")
valuation analysis; and (ii) an analysis of market multiples realized from
comparable private market cable transactions. The respective aggregate fair
market values of the System from each valuation methodology used were then
compared, and a final valuation was derived.
Discounted Cash Flow
This methodology measures the present value of the System's forecasted net cash
flows, defined as pre-tax operating income less capital expenditures including
all rebuild/upgrade costs. The System's forecasted net cash flow is determined
through the creation of a long-range operating forecast which provides for
detailed forecasts of critical revenue and expense components. A residual value
was forecasted based on growth of the System's net cash flow into perpetuity,
and discounted back to the present at the same discount rate as the forecasted
net cash flow. Daniels prepared a detailed 10-year revenue, cash flow and
capital expenditure forecast for the System.
The revenue forecasts were based upon Daniels' forecast of homes passed,
subscriber penetration levels and rates and non-subscriber based revenue
sources. The expense forecasts were based primarily on assumed rates of
inflation over the forecast period, and were adjusted for particular growth
characteristics. The capital expenditure forecasts were based upon costs
associated with the construction of new miles of plant, plant maintenance and
rebuild/upgrade requirements, replacement of converters, and the periodic
replacement of vehicles. Daniels believes the market served by the System offers
an opportunity for the System to provide ancillary telecommunications and data
services; however, because the technology, costs and revenue potential are
uncertain, Daniels did not include telephony or data services revenue, expenses
or capital costs in its forecasts.
To determine the appropriate discount rate for this valuation, Daniels attempted
to approximate the weighted average cost of capital using an array of entities
within the cable television industry that are capable of consummating an
acquisition similar in size to the acquisition of this System. The weighted
average cost of capital is an entity's required return on an investment
necessary to satisfy the expectations of all of the entity's investors, both
debt and equity. An entity, therefore, will be willing to pay a price for an
investment as high as the value that will allow it to meet its weighted average
cost of capital or hurdle rate requirement.
The cost of debt was arrived at by analyzing the aggregate cost of debt of a
variety of both large and mid-size public and private cable companies to
determine an estimated average debt cost. The cost of equity was determined by
sampling the estimated private market
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DANIELS & ASSOCIATES
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<PAGE>
cost of equity for cable television investments as of the Valuation Date and
blending that with equity return objectives of large publicly traded companies.
Such equity returns are those which would be required by experienced private
equity investors and publicly traded companies in cable television investments
with similar characteristics as those of the Client's System. The weighted
average cost of capital Daniels derived for the discounted cash flow analyses
was 14.0%. The following 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.
================================================================================
Assumed Capital Structure % of Total Capital Cost of Capital
================================================================================
Debt 60.0% 8.0%
- - - --------------------------------------------------------------------------------
Equity 40.0% 23.0%
- - - --------------------------------------------------------------------------------
Total Weighted Average Cost of Capital 100% 14.0%
================================================================================
The DCF value of the System arrived at from this analysis was $4.1 million,
which is equal to 9.0 times the annualized operating cash flow for the
three-month period ended March 31, 1996, and $1,567 per EBU.
<TABLE>
<CAPTION>
=============================================================================================
System Discounted Cash Flow Multiple of Three M/E 3/31/96 Value/EBU
Valuation Annualized Cash Flow
=============================================================================================
<S> <C> <C> <C>
Abbeville, South Carolina $4,110,093 9.0 $1,567
=============================================================================================
</TABLE>
Comparable Transactions
In addition to the DCF valuation methodology, Daniels also used the comparable
transactions methodology, which is another generally accepted valuation
methodology used to correlate and validate the findings of the DCF method with
the realities of the private market. Under this method, the market multiples
reported in sales of cable System of similar size, markets and technical
condition are compared to the subject System. In the case of cable television
system values, the most commonly used market multiples are (i) a multiple of
operating cash flow and (ii) the price per subscriber. Because detailed
financial, operating and technical information is not generally available
regarding private cable system transactions, it is difficult to relate specific
transaction values and multiples directly to the subject System. However,
through an analysis of both the range and average of the market multiples
derived from a group of comparable system transactions, about which information
is available, this methodology provides a general measure of the market
multiples realized from comparable transactions, which are then applied to the
subject System in order to assess fair market value.
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DANIELS & ASSOCIATES
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<PAGE>
Comparable Sale Transactions
<TABLE>
<CAPTION>
No. of Price/ CF
System Buyer Seller Subscribers Price Subscriber Multiple Date
- - - ------ ----- ------ ----------- ----- ---------- -------- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Frankfort, IN Marcus Nixon Newspapers 5,000 $7,000,000 $1,400 8.6 *
Pickens County, SC Genesis Charter Comm. 4,500 $8,000,000 $1,779 9.0 1/96
Berkeley, WV MidSouth Cablevision Raystay 2,800 $4,400,000 $1,571 9.0 10/95
Crosby, MN Bresnan Bye Cable 2,000 $2,900,000 $1,450 8.3 8/95
Rankin, MS York Cable Time Warner 1,650 $2,700,000 $1,612 9.1 9/95
League City, Texas TCI Cablenet Comm. 1,680 $2,200,000 $1,310 8.5 7/95
------ ----------- ------ ---
Total / Average of System Comparables 17,630 $27,200,000 $1,543 8.8
</TABLE>
Source: Paul Kagan Associates, Inc. Cable TV Investor through March 31, 1996 and
Daniels & Associates' Data Base as of March 31, 1996
* This transaction, while pending, has been publicly announced, and is
governed by a definitive agreement. Although there can be no assurance that
this transaction will be consummated, the inclusion of data regarding it
incorporates the most recent comparable market values.
The comparable transactions analysis yields a cash flow multiple range of 8.3 to
9.1 times cash flow and a weighted average for all of the transactions of 8.8
times cash flow. The range for the value per subscriber is between $1,310 and
$1,779 with an overall weighted average of $1,543 per subscriber.
Sales Process
Daniels was engaged by Cencom on August 17, 1995, to conduct a sales process in
order to solicit private market bids for all of the System owned by Cencom,
including the Abbeville System described in this appraisal report. Under the
Procedures Letter, which was sent to all potential bidders, the General Partner
had a Bid Option Right to submit a higher bid within two business days than the
highest third-party bid received, with the condition that the General Partner's
bid had to exceed the highest bid proposal received by at least 0.5%. If the
General Partner exercised his Bid Option Right, Daniels was then required to
notify the previously highest bidder and allow him a similar bid right within
two business days. The Procedures Letter allowed for this Secondary Bid Process
to continue until the highest binding cash Proposal was received.
Daniels conducted the sales process, and on January 31, 1996 received a high bid
proposal for the System of $4,000,000 from Helicon Corp. ("Helicon"). Within two
business days, the General Partner submitted a higher bid, to which Helicon then
topped the General Partner's bid. This process continued until, on February 16,
1996, Helicon submitted a letter stating that they would not attempt to top the
General Partner's final bid of $4,200,000, which then became the final purchase
price for the System.
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DANIELS & ASSOCIATES
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<PAGE>
Material Relationships
Daniels has no ownership position in Cencom; however, from time to time Daniels
has rendered various investment banking and brokerage services to Cencom and its
General Partner for customary and reasonable compensation. In addition, at the
present time Daniels has two active engagement agreements with Cencom and its
affiliates related to the sale of this and certain other cable television
systems owned by Cencom and affiliates of Cencom. Daniels does not believe that
these prior and present relationships in any way affect its ability to fairly
and impartially render the opinion of value expressed herein.
Valuation
Based on the analyses using the above-described methodologies, the estimated
fair market value of the System, as of March 31, 1996, is 9.0 times the
annualized operating cash flow for the three-month period ended March 31, 1996.
This translates to a gross value of $4.1 million, and a value per EBU of $1,563.
Our opinion of value expressed in this appraisal is based on financial and
operating information provided to Daniels by Cencom, as well as published
demographic information for the service areas. While Daniels believes such
sources to be reliable and accurate, it has not independently verified any such
information. The valuation is based on information available to Daniels as of
the valuation date. Daniels undertakes no responsibility for updating this
opinion to reflect changes in the value of the assets subsequent to the
valuation date of March 31, 1996, such as market, economic, technological,
operational, governmental and other changes.
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DANIELS & ASSOCIATES
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<PAGE>
================================================================================
CONFIDENTIAL
APPRAISAL OF
CENCOM PARTNERS, L.P.
Lincolnton, North Carolina Systems
as of March 31, 1996
PREPARED BY
DANIELS & ASSOCIATES, L.P.
================================================================================
DANIELS & ASSOCIATES
<PAGE>
CONFIDENTIAL
CENCOM PARTNERS, L.P.
Lincolnton, North Carolina
Appraisal Analysis Summary
Introduction
Daniels & Associates, L.P. ("Daniels") was retained by Cencom Partners, L.P.
("Cencom") to appraise the fair market value of Cencom's Lincolnton, North
Carolina cable television systems. The Lincolnton cable television systems serve
several communities northwest of Charlotte, North Carolina (referred to in the
aggregate as the "Systems") that, as of March 31, 1996, passed 28,447 homes and
served 14,720 equivalent basic subscribers ("EBUs"). The "Valuation Date" of the
appraisal of the Systems was March 31, 1996.
As of March 31, 1996
<TABLE>
<CAPTION>
- - - ---------------------------------------------------------------------------------------------------------------------
Miles of Equivalent Annualized Cash
Systems Plant / Homes/ Homes Basic Units / Pay Units / Flow for the Three
Number of Mile Passed Penetration Penetration M/E 3/31/96
Headends
- - - ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Lincolnton 407 / 1 49 20,089 10,243 / 51.0% 4,741 / 46.3% --
- - - ---------------------------------------------------------------------------------------------------------------------
Vale 111 / 1 10 1,133 582 / 51.4% 219 / 37.6% --
- - - ---------------------------------------------------------------------------------------------------------------------
Taylorsville 320 / 1 23 7,225 3,895 / 53.9% 1,575 / 40.4% --
- - - ---------------------------------------------------------------------------------------------------------------------
Total 838 / 3 34 28,447 14,720 / 51.7% 6,535 / 44.4% $2,775,084
- - - ---------------------------------------------------------------------------------------------------------------------
</TABLE>
This report summarizes Daniels' conclusions and provides an outline of the scope
of the engagement, the process used, an overview of the Systems, 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 Systems as of March 31, 1996. The Systems were appraised on a
going-concern basis, in conformance with standard appraisal techniques,
utilizing a ten-year discounted net cash flow analysis and applying relevant
market and economic factors. The appraisal assumes that the Systems have been
and will continue to be operated as efficiently as comparable cable systems, and
that the franchises and leases of assets used in the operation of the Systems
will be renewed indefinitely without material changes, other than rebuild
requirements (see "The Systems" section below).
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DANIELS & ASSOCIATES
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<PAGE>
The appraisal process included discussions with Cencom's management, research of
published demographic information concerning the various communities served, and
analyses of historical and forecasted financial and operating information, as
well as Daniels' general knowledge about the cable television industry. Daniels'
personnel did not visit the Systems as part of this appraisal; however, Daniels'
personnel did visit the Systems for a previous appraisal of the Systems which it
prepared as of March 31, 1995. From Daniels' due diligence, a summary of the
relevant operating, technical, financial and demographic characteristics of the
Systems was prepared. These characteristics of the Systems were instrumental in
determining value.
In order to assess the fair market value of the Systems, a detailed operating
and financial forecast was prepared incorporating the critical elements of
operating revenues and expenses as well as capital expenditure requirements.
This financial forecast then formed the basis for determining a discounted cash
flow value, a standard valuation methodology used within the industry. In
addition, using the market multiple valuation methodology, an aggregate value
for the Systems was derived by analyzing value per subscriber and operating cash
flow multiples obtained in private market sales of comparable cable television
systems, and then by applying those comparable market multiples to the Systems.
The products of these two valuation methodologies were then analyzed to
determine a final appraised value for the Systems as of March 31, 1996.
The Systems
Two of the systems, accounting for approximately 74% of the subscriber base,
serve Lincolnton and surrounding communities located approximately 30 miles
northwest of Charlotte and 17 miles directly north of Gastonia. The other system
serves Taylorsville and surrounding Alexander County, approximately 37 miles
north of Lincolnton, on the outskirts of Hickory, North Carolina. As of March
31, 1996, the Systems passed 28,447 homes and served 14,720 equivalent basic
units. Cencom acquired the Systems in June 1990.
The Systems are served from three headends, referred to as Lincolnton, Vale, and
Taylorsville. Lincolnton, a 330 MHz addressable system (approximately 2,400
addressable subscribers), serves approximately 70.0% of the subscribers with 407
miles of plant. The Vale system, built in 1989, serves approximately 4.0% of the
subscriber base in west Lincoln County from 111 miles of 450 MHz plant and a
single headend. The remaining 26.0% of the subscribers are served from the
Taylorsville headend, a 300 MHz system with 320 miles of plant. Over the last
three years, all new plant and extensions have been built to 450 MHz.
The Lincolnton headend site is leased, while the Vale and Taylorsville sites are
owned. All three headends utilize primarily Scientific Atlanta, Jerrold and
General Instruments
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DANIELS & ASSOCIATES
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<PAGE>
equipment. The plant electronics are a combination of Scientific Atlanta,
Jerrold and Magnavox. Pay security is controlled with addressability and
negative traps in the Lincolnton system, negative traps in the Vale system, and
positive and negative traps in the Taylorsville system.
There are seven franchises covering the Systems, with expiration dates ranging
between 1998 and 2000. The franchises for Lincolnton and Lincoln County,
accounting for approximately 56% of the subscriber base, do not expire until
September 2000. Cencom believes that they have strong relationships with all of
the franchising authorities.
All three systems offer both a Basic and an Expanded Basic service. The
Lincolnton and Vale systems offer identical 14 channel Basic and 23 channel
Expanded Basic packages. The rates vary by franchise area, with Basic ranging
from $7.34 to $7.78 and Expanded Basic service from $16.01 to $16.40. The
Taylorsville system offers a 12 channel Basic for $6.54 to $7.46, and a 22
channel Expanded Basic service for $15.18 to $15.55. Lincolnton, Lincoln County,
and Taylorsville have all certified and perfected to regulate Basic rates. There
have been no valid complaints filed against the Expanded Basic rate in any of
the Systems.
The annualized revenue and cash flow for the three-month period ended March 31,
1996 for the Systems was $5.4 million and $2.8 million, respectively. This
equates to an average monthly revenue per EBU of $31.04 and average annual cash
flow per EBU of $190.41. The Systems' average monthly revenue is $2.76 below
that of the cable television industry's 1995 average of approximately $33.80,
while its annual cash flow per EBU is above the industry average of $182.52 for
the year 1995, as reported by Paul Kagan Associates, Inc., Cable TV Investor.
Lincolnton and Lincoln County are located approximately 25 miles northwest of
Charlotte, the state's largest city and one of the top ten growth regions in the
United States. The economy of this area is a mix of manufacturers, including
textiles and specialty yarns, cutting tools, pharmaceuticals, roller bearings,
and furniture. In addition, there is a large agricultural (orchards and
processing) and poultry production base. Some of the largest area employers
include Timken, Vermont American, Naska Pharmaceuticals, Kawai American,
Chocrane Furniture, Textilgruppe Hof, and R-Anell Homes.
According to National Decision Systems ("NDS"), an independent demographic
service, the population of Lincoln County, for which Lincolnton serves as the
largest city and county seat, increased 17.2% from 1990 to 1996, and is
projected to increase an additional 14.3% over the next five years. The number
of households in Lincolnton County increased 22.9% during the last six years,
and are projected by NDS to increase an additional 16.0% during the next five
years. Much of the growth in Lincoln County is directly attributable to the
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DANIELS & ASSOCIATES
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<PAGE>
strong economy and growth of nearby Charlotte. As Charlotte expands, many people
are moving into Lincoln County seeking larger homes at lower prices and lower
property taxes.
The Taylorsville and Alexander County system, located on the outskirts of
Hickory, serve approximately 26% of the subscriber base, with the majority of
the subscribers in the county. This area has grown as a bedroom community to
Hickory, and because of its location between Hickory and Winston-Salem. During
the period 1990 to 1996, the population of Alexander County increased 11.1% and
the number of households grew by 14.2%. NDS projects that the population and
households in the county will increase an additional 9.0% and 9.8%,
respectively, over the next five years.
The lack of excess channel capacity, the reality of near-term competition from
alternative multi-channel video providers, and the potential to provide
ancillary telecommunications and data services suggest that a rebuild or upgrade
of all of the Systems would be prudent in the near term, although there are no
current franchise requirements to rebuild or upgrade any of the Systems. Daniels
has estimated the cost per mile to rebuild a system to 550 MHz at $15,000/mile
for aerial and $18,000/mile for underground, and to upgrade from 450 MHz to 550
MHz at $6,000/mile for aerial and $9,000/mile for underground. Daniels assumed
that the Vale system would be upgraded to 550 MHz and that the Lincolnton and
Taylorsville systems would be rebuilt to 550 MHz at a total cost of
approximately $10.9 million. Daniels believes that these cost estimates are
reasonable representations of the costs (design, cable plant, electronics and
labor) associated with rebuilding and/or upgrading the Systems. These cost
estimates do not, however, include the costs associated with upgrading and
changing out converters, which Daniels has added as an additional capital
requirement in its forecast in addition to the rebuild/upgrade estimate.
Methodology
In order to appraise the fair market value of the Systems as of March 31, 1996,
Daniels used two valuation methodologies: (i) a discounted cash flow ("DCF")
valuation analysis; and (ii) an analysis of market multiples realized from
comparable private market cable transactions. The respective aggregate fair
market values of the Systems from each valuation methodology used were then
compared, and a final valuation was derived.
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<PAGE>
Discounted Cash Flow
This methodology measures the present value of the Systems' forecasted net cash
flows, defined as pre-tax operating income less capital expenditures including
all rebuild/upgrade costs. The Systems' forecasted net cash flow is determined
through the creation of a long-range operating forecast which provides for
detailed forecasts of critical revenue and expense components. A residual value
was forecasted based on growth of the Systems' net cash flow into perpetuity,
and discounted back to the present at the same discount rate as the forecasted
net cash flow. Daniels prepared a detailed 10-year revenue, cash flow and
capital expenditure forecast for the combined Systems.
The revenue forecasts were based upon Daniels' forecast of homes passed,
subscriber penetration levels and rates and non-subscriber based revenue
sources. The expense forecasts were based primarily on assumed rates of
inflation over the forecast period, and were adjusted for particular growth
characteristics. The capital expenditure forecasts were based upon costs
associated with the construction of new miles of plant, plant maintenance and
rebuild/upgrade requirements, replacement of converters, and the periodic
replacement of vehicles. Daniels believes some of the markets served by the
Systems offer an opportunity for the Systems to provide ancillary
telecommunications and data services; however, because the technology, costs and
revenue potential are uncertain, Daniels did not include telephony or data
services revenue, expenses or capital costs in its forecasts.
To determine the appropriate discount rate for this valuation, Daniels attempted
to approximate the weighted average cost of capital using an array of entities
within the cable television industry that are capable of consummating an
acquisition similar in size to the acquisition of these Systems. The weighted
average cost of capital is an entity's required return on an investment
necessary to satisfy the expectations of all of the entity's investors, both
debt and equity. An entity, therefore, will be willing to pay a price for an
investment as high as the value that will allow it to meet its weighted average
cost of capital or hurdle rate requirement.
The cost of debt was arrived at by analyzing the aggregate cost of debt of a
variety of both large and mid-size public and private cable companies to
determine an estimated average debt cost. The cost of equity was determined by
sampling the estimated private market cost of equity for cable television
investments as of the Valuation Date and blending that with equity return
objectives of large publicly traded companies. Such equity returns are those
which would be required by experienced private equity investors and publicly
traded companies in cable television investments with similar characteristics as
those of the Client's Systems. The weighted average cost of capital Daniels
derived for the discounted cash flow analyses was 14.0%. The following are the
estimates of the costs of debt and
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DANIELS & ASSOCIATES
5
<PAGE>
equity in the capitalization structure as of the Valuation Date used to
determine the discount rate.
================================================================================
Assumed Capital Structure % of Total Capital Cost of Capital
================================================================================
Debt 60.0% 8.0%
- - - --------------------------------------------------------------------------------
Equity 40.0% 23.0%
- - - --------------------------------------------------------------------------------
Total Weighted Average Cost of Capital 100% 14.0%
================================================================================
The DCF value of the Systems arrived at from this analysis was $27.1 million,
which is equal to 9.8 times the annualized operating cash flow for the
three-month period ended March 31, 1996, and $1,841 per EBU.
<TABLE>
<CAPTION>
==========================================================================================================
Systems Discounted Cash Flow Multiple of Three M/E 3/31/96 Value/EBU
Valuation Annualized Cash Flow
==========================================================================================================
<S> <C> <C> <C>
Lincolnton, North Carolina $27,103,230 9.8 $1,841
==========================================================================================================
</TABLE>
Comparable Transactions
In addition to the DCF valuation methodology, Daniels also used the comparable
transactions methodology, which is another generally accepted valuation
methodology used to correlate and validate the findings of the DCF method with
the realities of the private market. Under this method, the market multiples
reported in sales of cable systems of similar size, markets and technical
condition are compared to the subject Systems. In the case of cable television
system values, the most commonly used market multiples are (i) a multiple of
operating cash flow and (ii) the price per subscriber. Because detailed
financial, operating and technical information is not generally available
regarding private cable system transactions, it is difficult to relate specific
transaction values and multiples directly to the subject Systems. However,
through an analysis of both the range and average of the market multiples
derived from a group of comparable system transactions, about which information
is available, this methodology provides a general measure of the market
multiples realized from comparable transactions, which are then applied to the
subject Systems in order to assess fair market value.
Comparable Sale Transactions
<TABLE>
<CAPTION>
No. of Price/ CF
System Buyer Seller Subscribers Price Subscriber Multiple Date
- - - ------ ----- ------ ----------- ----- ---------- -------- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Various North Carolina Charter Masada 21,300 $36,000,000 $1,690 9.1 12/95
Kona, HI Time Warner ACT 4 16,900 $31,300,000 $,1852 9.5 7/95
Columbus, MS Post-Newsweek Columbus TV 15,700 $23,000,000 $1,465 9.5 2/96
Russellville, AR TCA Time Warner 15,000 $27,000,000 $1,800 10.0 5/95
Orangeburg, SC Jones Intercable Jones Cable Fund 12,000 $18,350,000 $1,529 8.8 8/95
Salem, NJ Lenfest Time Warner 7,400 $14,200,000 $1,919 9.9 9/95
-------- ------------ ------ ------
Total / Average of System Comparables 88,300 $149,850,000 $1,697 9.4
</TABLE>
Source: Paul Kagan Associates, Inc. Cable TV Investor through March 31, 1996 and
Daniels & Associates' Data Base as of March 31, 1996
================================================================================
DANIELS & ASSOCIATES
6
<PAGE>
The comparable transactions analysis yields a cash flow multiple range of 8.8 to
10.0 times cash flow and a weighted average for all of the transactions of 9.4
times cash flow. The range for the value per subscriber is between $1,465 and
$1,919 with an overall weighted average of $1,697 per subscriber.
Sales Process
Daniels was engaged by Cencom on August 17, 1995 to conduct a sales process in
order to solicit private market bids for all of the systems owned by Cencom,
including the Lincolnton Systems described in this appraisal report. Under the
Procedures Letter, which was sent to all potential bidders, the General Partner
had a Bid Option Right to submit a higher bid within two business days than the
highest third-party bid received, with the condition that the General Partner's
bid had to exceed the highest bid proposal received by at least 0.5%. If the
General Partner exercised his Bid Option Right, Daniels was then required to
notify the previously highest bidder and allow him a similar bid right within
two business days. The Procedures Letter allowed for this Secondary Bid Process
to continue until the highest binding cash Proposal was received.
Daniels conducted the sales process, and on January 31, 1996 received a high bid
proposal for the Systems of $26,600,000 from G Force LLC ("G Force").
Subsequently, on February 7, 1996 G Force submitted a letter to Daniels
withdrawing its bid. The second highest bid proposal was $25,050,000 from Falcon
Cable TV ("Falcon"). Within two business days, the General Partner submitted a
higher bid, to which Falcon then topped the General Partner's bid. This process
continued until March 6, 1996, when Falcon submitted a bid letter for
$27,500,000 and the General Partner chose not to top Falcon's bid. This then
became the final purchase price for the Systems.
Material Relationships
Daniels has no ownership position in Cencom; however, from time to time Daniels
has rendered various investment banking and brokerage services to Cencom and its
General Partner for customary and reasonable compensation. In addition, at the
present time Daniels has two active engagement agreements with Cencom and its
affiliates related to
================================================================================
DANIELS & ASSOCIATES
7
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the sale of this and certain other cable television systems owned by Cencom and
affiliates of Cencom. Daniels does not believe that these prior and present
relationships in any way affect its ability to fairly and impartially render the
opinion of value expressed herein.
Valuation
Based on the analyses using the above-described methodologies, the estimated
fair market value of the Systems, as of March 31, 1996, is 9.8 times the
annualized operating cash flow for the three-month period ended March 31, 1996.
This translates to a gross value of $27.2 million, and a value per EBU of
$1,848.
Our opinion of value expressed in this appraisal is based on financial and
operating information provided to Daniels by Cencom, as well as published
demographic information for the service areas. While Daniels believes such
sources to be reliable and accurate, it has not independently verified any such
information. The valuation is based on information available to Daniels as of
the valuation date. Daniels undertakes no responsibility for updating this
opinion to reflect changes in the value of the assets subsequent to the
valuation date of March 31, 1996, such as market, economic, technological,
operational, governmental and other changes.
================================================================================
DANIELS & ASSOCIATES
<PAGE>
FAIR MARKET VALUE APPRAISAL FOR
SANFORD, NORTH CAROLINA
MARCH 31, 1995
PREPARED FOR
CENCOM PARTNERS, INC
CENCOM PARTNERS LP
PREPARED BY
WESTERN CABLESYSTEMS, INC
R. MICHAEL KRUGER, PRESIDENT
CABLE TELEVISION MANAGEMENT,
CONSULTING, AND APPRAISALS
513 WILCOX, #230
CASTLE ROCK, CO 80104
303-688-4462
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BACKGROUND AND LIMITING CONDITIONS
Western was asked by Cencom to prepare an analysis of the fair market value as a
going concern of the assets of the Sanford, North Carolina cable television
system as of March 31, 1995. This appraisal report is being issued pursuant to
the April 28, 1995 engagement letter between CencCom and Western. This report
presents key data, our analysis and assumptions, and our conclusions.
The assets being appraised include, as an assemblage, all of the tangible and
intangible assets and personal property necessary to operate the Sanford cable
television system as a going concern, consistent with past practice and industry
norms. The assets include the antennas and signal receiving equipment, strand,
conduit, cables, amplifiers, passive devices, drops, converters, tools, test
equipment, subscriber records, franchises, pole attachment agreements,
easements, supplier and programming contracts, and goodwill. Financial assets
such as accounts receivable and liabilities are not included.
The appraisal is based principally on financial data provided by Cencom,
including Income Statements for the 12 months ended December 31, 1994, 1993, and
1992, and 3 months ended March 31, 1995. Management also provided the
operational data presented herein, such as passings and subscriber counts. The
appraiser visited the system in May, 1995. The system manager was interviewed at
length to obtain additional data including subscriber history, technical data,
demographics, and local economic information. The appraiser toured
representative portions of the general market area.
The appraisal will be used as described in the April 28, 1995 engagment letter
to determine the price at which the general partner may offer to purchase the
System from the owning partnership. This appraisal report is issued for the use
of the CenCom entities involved, and their partners, employees, agents, and
advisors. The report is not intended for the use of other parties, including but
not limited to lenders for buyer or seller. The principals will perform their
own independent due diligence and economic evaluation of the proposed
transaction. The formal consent of the limited partners is required for the
transaction to be completed at the proposed price. Western understands and
agrees that the report may be delivered to the Securities and Exchange
Commission, and may be summarized in related proxy materials.
The work herein is based in part on data provided by CenCom and others, and we
assume no responsibility for the accuracy of such data. Western has used
customary techniques and industry knowledge available to Western in preparing
this report. Western does not warrant or represent that the appraised value is
that which would
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actually be obtained in an open market transaction, or that the
value would be upheld in litigation or administrative proceeding. Accordingly,
Western (including its officers, employees, and owners) does not indemnify or
hold harmless any user of this report in any manner against any costs, losses,
or damages arising out of the use of the appraised value or other conclusions
contained herein.
On October 3, 1992, the Congress adopted legislation affecting the cable
television industry generally. Detailed implementing regulations have been
issued by the FCC on a continuing basis since that date. Further FCC rules and
modifications are quite likely. In addition, legislation is pending before
Congress that would dramatically overhaul the entire telecommunications
regulatory system. In short, there is uncertainty. The appraisal value is based
on regulations and their impact as reflected in the cable television system sale
market on the appraisal date and does not necessarily take into account any
future changes. As noted herein, Cencom has indicated that the system operations
substantially comply with present regulations. While nothing has come to our
attention to indicate that Cencom's analysis is incorrect, we have not verified
such compliance, nor does the appraisal necessarily reflect the impact of
changes which might be required by enforcement of current regulations.
GENERAL DESCRIPTION
The system serves four outlying communities located southwest of Raleigh/Durham,
NC.
Homes Passed 20,759
Residential Basic Subs 12,300 (59%)
Commercial/Bulk EBU's (1,125 units) 145
Total EBU's 12,445
Pay Units 6,083 (49%)
Plant Miles 428
Homes Per Mile 48
Number of headends 4
Channels in use (typical) 40
Plant Channel Capacity 40
The system is served by four headends, but most subscribers are located in
Sanford:
Headend Subscribers
- - - --------------------------------------------------------------------------------
Sanford 8,850 (72%)
Siler City 1,600 (13%)
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Whispering Pines 985 (8%)
Troy 860 (7%)
Sanford is a fairly large industrial and agricultural community located about 45
minutes from Raleigh. Local manufactured products include brick, electrical
equipment, automotive parts, and some pharmaceuticals. A lovely gated
development just north of town, with golf courses, lakes, and more expensive new
homes, attracts a number of Raleigh commuters. Raleigh/Durham is one of the
major medical research centers in the world.
Siler City is a small industrial community about an hour from Raleigh, with
several small wood product and food processing plants. Whispering Pines, about
20 miles south of Sanford, is more dependent on the numerous golf resorts in
nearby Southern Pines. Troy, further west of Whispering Pines, is a more rural
agricultural community.
All towns have a relatively dense core with a normal mix of older homes. There
are several small new subdivisions, and some multifamily housing areas. Carolina
Trace, in Sanford (mentioned earlier) is the largest subdivision, with 3200 lots
and 670 existing homes; its build-out rate is about 25 homes/year. There are
some multi-family projects, but the area is mostly single-family. New homes are
typically valued at $70,000 - $130,000, with some much higher and lower.
Demographics cover a broad range from low-income rural to wealthy professional.
The area would be described as "typical" overall.
PASSINGS GROWTH
Since 1991, the system reports that it has added about 2,090 passings, or
640/year (about 3%). Management believes that about half this amount has come
from new homes, and the balance from short line extensions to existing homes.
This would indicate housing growth of about 1.5% per year, which appears
reasonable based on our field inspection.
Due to capital constraints, not all of the homes built in earlier years were
provided service immediately. Other areas have increased in density, and are now
feasible. The chief engineer indicated there are 5 areas to be built inside the
existing franchise, and a sixth large area for which a new franchise would be
needed (but is available.)
Homes Miles
Existing franchise 626 25
New franchise needed 636 25
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There are two small acquisition possibilities, which are not factored directly
into the numbers for this appraisal, but would be of some interest to a
potential buyer.
SUBSCRIBER PENETRATION
The system provided the following data:
Passings Basic Pay Basic % Pay %
-------------------------------------------------------------------
3/95 20,759 12,300 6,083 59% 49%
12/94 20,700 12,151 5,759 59% 47%
12/93 20,273 11,666 5,005 58% 43%
12/92 19,182 11,186 5,031 58% 45%
12/91 18,669 n/a n/a n/a n/a
The 1994 Cable Factbook reports penetrations in nearby Raleigh of 62% basic and
69% pay.
SUBSCRIBER RATES AND SERVICES
Each headend has slightly different lineups, but all have 38-40 channels in use.
Total basic rates at 4/1/95 range from $20.75 to $21.85, depending on franchise
area. Information for Sanford, which serves most of the customer base, is
summarized below.
Channels Rate
Basic 13 7.69
Tier 20 13.06
Total 33 $20.75
Pay channels 5 8.45 - 11.45
Pay-per-view 2 n/a
Converters 1.51 - 2.19
Remote control .25
Wire maintenance .95
Approximately 99% of the customers take the tier.
Basic includes 9 offair, and WGN and WTBS. The tier is all satellite services.
Pay includes Cinemax, HBO, Showtime, Movie, and Disney. Pay-per-view offerings
are Viewers Choice, an adult programming channel, and events.
There is no fee for additional outlets. Other ancillary services offered include
guides and DMX audio. There are a number of small transaction fees, including
late charges. Typical aerial installation
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fees are $35. Applicable FCC and franchise fees are added as a separate charge.
There are several package discounts and promotional rates available from time to
time. Rates are reasonable, and consistent with industry practice.
The system took small quarterly external cost adjustments on 10/94. On April 1,
1995, the company adjusted some rates to match channels carried, and took
additional cost adjustments, to the total rates shown above. The net effect was
a weighted average increase of .15 per month per customer.
RATE REGULATION
Franchisors covering 90% of the customer base are regulating rates. There have
been no tier complaints, and thus no tier regulation to date. Rates were
adjusted approximately to regulated levels in 1993, and adjusted quarterly by
allowe amounts thereafter. The company feels it is approximately at benchmarks,
and there have been no problems with the franchisors.
NON-SUBSCRIBER REVENUE
The company had been selling spot advertising in-house, but is converting to an
outside contract with Cable AdNet on May 1. This should improve cashflow
substantially in the next year or so. There is a guaranteed minimum of $5/year,
or $60,000, for the first year.
There is no other significant revenue source (fiber rental, tower rental,
phone), existing at present or likely in the future.
STAFF AND OPERATIONS
The system operates from a main office in Sanford. There are contract payment
dropoff sites in the remote towns. The office, and all headends, are leased.
Rents are reasonable, expirations and renewals are not a concern, and there are
no unique sites that could not be replaced (although relocation is always a
burden).
The system has a normal complement of test equipment, inventory, and vehicles,
but only one bucket truck. The office staff is well-equipped, and uses
centralized Cabledata billing services.
The system offers customary business-day service Monday through Friday, with
partial staffing Saturday morning. Phones are answered by a central company
facility after hours, and technicians are dispatched on outages if necessary.
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Management reports about 30% annual turnover, and 25% annual service call
volume. Backlogs are 2-3 days on installs, and same-day on service. All are
normal.
System staffing can be summarized as:
Item Office Field Other
------------------------------------------------------------------------
Number of employees 6 10 0
Subs/employee 2,000 1,200
Average wage 20,300 24,600 -
The company occasionally uses contract installers to do new installs. Wages are
reasonable for the area. Staff ratios are reasonable, especially considering the
drive time involved.
MARKETING
The system uses contractor commissioned direct salespeople on a regular basis.
Direct mail and newspaper are used from time to time.
FRANCHISES
The major Sanford and Lee County franchises expire in 1997/98, and discussions
have started; it is likely that a rebuild to 450 Mhz will be required. Three
franchises which expire in 1995 are in final stages of renewal, with no
problems. The tiny Broadway franchise expires in 1999.
COMPETITION
Most areas can receive 6-8 offair signals, with fair to good quality. There is a
local LPTV in Sanford.
There is no cable overbuild, and no contiguous operator, although Time Warner is
close to Whispering Pines and Troy. There is no cable competition for new
subdivisions.
There is no MMDS.
The company has not seen any significant loss to DBS.
TECHNICAL PROFILE
Mileage: 296 aerial, 133 underground, no fiber
Headend Electronics: S-A
Plant Electronics: S-A
Amplifier Cascade: 54 in Sanford; others 12-14
Power: About 20% standby
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Trunk Cable: 750 P3
Distribution Cable: 500 P3
Pay Security: Some addressability, some program, most traps
Percent of Addressable Subs: 17%
Converter Types: S-A
Estimated Plant Build Dates: Sanford was substantially rebuilt in 1980, and the
other 3 headends were built new in 1982. A substantial expansion was done in
1988-92, and management estimates that about half the plant in place was built
from 1988 through 1995.
Estimated Channel Capacity:
The chief engineer provided the total breakout of plant mileage by capacity. We
made a further estimated breakout by age based on the management estimate that
half the total plant was built after 1988, and adjusting for the fact that
recent construction has been weighted toward underground:
Total Post-88 Pre-88
-------------------------------------------
Aerial
300 Mhz 85 0 85
330 Mhz 118 22 96
450 Mhz 92 92 0
-----------------------------------------
Total 295 114 181
Underground
300 Mhz 29 0 29
330 Mhz 58 54 4
450 Mhz 46 46 0
-----------------------------------------
Total 133 100 33
Grand Total 428 214 214
The plant itself appears to be in good condition. The plant has passed the 1994
proof tests but is not likely to pass the 1995 C/N tests on the long cascades;
some fiber is needed to reduce the cascade to pass the test and improve
reliability.
Some fiber will be needed immediately to solve the cascade problems in Sanford.
While there is not a great deal of current competitive or franchise pressure, we
feel the plant must be upgraded in the next few years. There would probably be
some discussion about going to 550 Mhz in Sanford, but our feeling is that this
rural market would not support enough additional services to make 550 Mhz
viable, especially when a 450 Mhz upgrade can be accomplished with a drop-in
approach (About 1/2 of the plant is 5-8 years old or less, and a portion is
already at 450 Mhz.)
Sanford, NC, Page
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ESTIMATED UPGRADE COSTS
Fiber Overlay
20% x 429 Miles x $6,000/mile 516,000
Upgrade Pre-1988 300/330 Plant
Aerial, 91 mi at 12,000 1,092,000
Aerial, 90 @ 5,000 450,000
U/G, 10 mi @ 24,000 240,000
U/G, 23 mi @ 5,000 115,000
Upgrade Post-1988 300/330 Plant
Aerial, 22 @ 5,000 110,000
U/G, 54 @ 5,000 270,000
Grand Total Upgrade Cost 2,793,000
DETERMINATION OF OPERATING INCOME
Appraising the value of cable television systems involves calculation of
historic and projected operating income (commonly called "cashflow"). Operating
income is defined as direct operating revenues less expenses, before capital
expenditures, depreciation, and management fees. The operating income considered
in appraisals is typically that which will be derived by the buyer, using his
cost structure and nominal predictable changes in operations.
First-Year Projection:
We first prepared a detailed Projected-Year statement of operating income. To do
so, we reviewed the company's 1992, 1993, 1994, and 1995/Q1 historic income
statements, and used them to prepare an estimate of projected operating income
for the 12 months beginning April 1, 1995. A projection worksheet is attached.
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The Projected-Year subscriber revenues are based on the March 31, 1995
subscriber count, plus allowances for growth, and on 1995/Q1 rates, plus
appropriate adjustments for additional actual 1995 rate changes. Other revenue
items were based on consideration of past results and trends, and 1995/Q1
results.
Certain Projected-Year expense items such as programming costs which are based
on subscribers or revenue have been adjusted to match the subscriber and revenue
projections shown, using prior-year unit costs or ratios plus an allowance for
increases where appropriate. Overhead items, such as maintenance and property
tax have been based principally on 1992-94 average results, to reflect
longer-term trends. In preparing our detailed analysis, we also reviewed key
operating ratios, such as programming cost/subscriber, staffing ratios,
copyright and bad debt expense levels, etc. and compared them to industry norms
and our experience. A brief discussion of key individual items follows:
Passings: First-year growth was estimated at 1.5%, the historic estimate. We
didn't include the line extensions because of their size relative to the system,
and the time needed to do them.
Basic Penetration: We used 1.25 point gain, based on 1% in 1994, and more in
1995.
Pay Penetration: We made a small increase, based on a continuation of recent
small gains.
Average Basic+Tier Revenue/Subscriber: We used the 1994 level, plus an allowance
for the 1995 rate increase of 15(cents).
Average Pay Revenue/Unit: We used recent averages, which are very stable.
Pay-Per-View Revenues: We allowed for substantial increases on this area, given
renewed marketing efforts.
Advertising: We increased recent historic levels due to the new contract
minimums.
G&A Salary: Levels and ratios are normal; we used 1994 levels plus 3% for growth
and 3% for inflation.
Office Operation: There is a clear upward trend, which will be increased by the
new office. We used the 1995 level plus 3% for inflation/growth.
Sanford, NC, Page
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Professional Services, Allocated Costs: These two categories include allocations
of outside professional services, plus allocations of regional staffing, and
related regional expenses. There appears to have been some change in accounting
practices, and not all charges were booked for 95/Q1. We projected professional
services and allocated costs at 1994 levels. Operating Wages: Ratios and levels
are reasonable; increase 1994 by 6% for growth and inflation.
Basic Programming: Use 1995 levels plus 5%.
Premium/PPV Programming: We used the average historic levels expressed as a
percentage of revenue.
Marketing/Sales: Industry norms vary from 1% of revenue in classic systems with
little need for sales, to 4% in urban markets. This system is in the middle at
2%, and we used this level.
Our work is done independently of the system budget, but comparison to the
budget provides a satisfactory independent crosscheck:
Actual operating income, 1994 2,148,000
Our projected year 1 op. inc. 2,278,000
Budgeted 1995 op. income 2,272,000
Ten-Year Cashflow Projections
Our principal appraisal technique involves projection of free cashflow for 10
years; free cashflow is equal to operating income less capital expenditures, but
still before depreciation and interest, and taxes. (Projected free cashflow is
then discounted at an appropriate cost-of-capital rate, and a terminal value is
added to get the value of the property.) Our projection for this system is shown
on the two-page spreadsheet enclosed. We started with the data contained in the
first-year projection spreadsheet, and expanded it with the variables and
assumptions shown.
Revenue items used are the same as for the first-year analysis. However, they
are based on forecasts for system growth in areas such as passings, penetration,
and revenue/subscriber. The small amount of commercial revenue was converted to
EBU's and for simplicity we did our forecast using total EBU's.
Passings growth was continued at historic levels of 1.5%.
Penetration increases: We used historic increase rates, slowing as we approached
70%. The 70% "cap" is based on our expectation that
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other competing technologies (including existing broadcast) will capture an
increasing market share totalling about 30%.
Addressable Subs & PPV Revenue/Sub: This system will eventually be 100%
addressable, and should generate good revenue increases. However, it will take
time given the nature of the market.
Basic Rate Increases: Rate regulation and competition will normally limit
increases to 3.25%, just over inflation. However, on completion of the rebuild,
the company can add some new channels and tiers, and should be able to achieve
5% overall increases for a few years. These amounts should be consistent with
FCC rate regulations, but we do not do a specific calculation because of the
changing regulatory environment, and the equally important role of increased
competition.
The ten-year model uses summary expense variables which were calculated from the
one-year information as follows:
Personnel: Salaries, Tax/benefit, Professional services, cost allocations,
and capitalized labor
Per-Subscriber: Office rent, Office Operation, Basic Programming, LO
Programming
Revenue-related: Franchise fee, copyright, bad debt, marketing, and
advertising sales
Premium Programming: Pay and pay-per-view
Per-Mile: Insurance, Property Tax, Pole Rent, Power, System Maintenance
Personnel costs are based on current personnel costs, plus annual percentage
increases to reflect growth and expenses.
We calculated the amounts for the other expense categories on a per-sub or
per-mile, or percentage of revenue basis, as noted. The per-sub and per-mile
costs were increased over the 10-year period as noted. The percentage costs were
held to the same percentage of revenue over 10 years, on the assumption that
gradual increases in unit costs can be passed on to customers.
Capital costs were forecast for several items. New plant costs were calculated
using new plant mileage derived from passings growth at 55 new homes/mile and an
average per-mile cost for new plant (aerial and U/G). Drops were calculated on
the assumption that a certain percentage of existing drops is replaced each
year, and new drops are added equal to growth plus a churn allowance of 5%.
Costs for new addressable converters were allowed based on the increase in
addressable subscribers. Capitalized labor is based on 1994 levels, plus
inflation. The capital costs for vehicles and miscellaneous is
Sanford, NC, Page
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estimated from system size and current vehicle count (assuming vehicles are
replaced every 5 years).
We used the rebuild cost estimates developed earlier in the text, and spread
them over a reasonable period as shown in the separate line item.
DETERMINATION OF APPRAISED VALUE
General Methodology
Appraisal of income-producing property typically relies on one or more of three
main approaches.
Replacement cost, which is the cost to assemble and put the property into
operation, is not typically used in the cable television industry for valuing a
property as a whole. Cable television system sales include a very substantial
intangible value for franchise, goodwill, and customer lists. Although these
intangibles can be valued separately, more direct approaches to overall value
are easier to use, and more appropriate.
Market value as determined by comparable transactions is a very common approach
for estimates of value. Transaction value is typically reported on the basis of
either per-subscriber cost or operating income multiple. We consider both
ratios, but place more reliance on the income multiple.
The Income Approach is widely used in business valuation, and we use this as our
first approach. Our method involves determination of the discounted present
value of free cashflow generated over ten years, plus an allowance for the
terminal value after ten years.
Income Approach
Ten-year free cashflow was projected, as discussed previously. The annual free
cashflow was discounted using an average cost of capital calculated as shown on
the spreadsheet.
The FCC cost-of-service rules will permit a cost-of-capital rate of 11.25%, plus
further upward adjustments related to tax matters; the result is typically in
the 12% - 13% range. Small cable operators may use even higher numbers, subject
to certain overall limits. We do not believe the FCC cost-of-capital should be
used directly, but do find that the FCC values support our calculation of 12.6%.
We then added a terminal value based on the resale value of the system in year
10. The terminal value was calculated at 6 x year 10
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cashflow. The industry will increasingly feel the effects of maturity,
regulation and increased competition. Sale multiples will gradually decline as
the opportunities for growth into new lines are realized or abandoned. Non-cable
businesses currently trade in the 3-6 x cashflow range. Regulated telephone
companies presently trade at around 5-7 x cashflow. Selection of 6x should
reflect the industry's gradual maturity and transformation to a "normal"
telecommunications industry.
The terminal value was then discounted to a present value using the same
discount rate. The discounted cashflow and discounted terminal values were
added, to arrive at the estimate of potential system value shown on the
worksheet.
Market Value
The prices of cable system transactions are frequently evaluated to determine
the ratio of operating income (income before depreciation, interest, and
management fees) to purchase price; sales results are frequently reported in the
trade press. Per-subscriber values are also widely reported. We consider
principally the multiple of first year projected operating income. To facilitate
our analysis, we compared this system to the overall market with respect to some
key factors. The analysis is subjective, and based on our personal knowledge,
but nonetheless helps to structure the process:
Future passing and subscriber growth: The system has about average prospects.
Demographics: Demographics are normal.
Competitive situation: Competition is limited to offair signals; the system is
favorably situated in this regard.
System Capacity/Quality: The need for rebuild is a negative.
General Operations: With regard to matters such as staff, franchise problems,
etc., the system is normal.
New Revenues: The economy is good, and the main system is of reasonable size;
there should be average opportunties for new sources.
System marketability: The system is about average, and in an area with several
qualified buyers.
Comparable Transaction Data
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We then select an approximate appropriate multiplier from information available
about other reasonably similar transactions, and the general state of the
market. The following data has been taken from announcements in the trade press,
information from brokers, recent issues of the Cable TV Investor Newsletter,
published by Paul Kagan Associates, and our own knowledge.
System Date Subs $/Sub CF Mult
- - - --------------------------------------------------------------------------------
Single larger systems
Newport News, VA 11/94 48,000 2,542 9.0
Anaheim, CA 11/94 135,000 2,119 10.5
Ansonia, CT 6/94 32,000 2,667 11.7
Henderson, NC 1/95 14,100 1,634 10.5
Small systems
Near Austin, TX 12/94 5,300 1,378 n/a
Cameron, TX 4/95 3,500 1,004 8.4
Arizona 5/95 7,800 1,600 8.2
California 2/95 1,900 1,475 7.5
Groupings of small systems
MSO-GA, FL, MS 8/94 30,000 1,217 8.3
NJ MSO 10/94 74,000 1,351 8.0
Pennsylvania MSO 11/94 69,000 1,767 8.1
Kentucky/Illinois 12/94 14,900 1,235 n/a
Adams/York PA 4/95 12,900 1,300 10.4
Rock/small west 3/95 47,000 1,787 9.7
Midwest/south 10/94 34,800 1,350 8.3
Andrews TX 3/95 26,000 1,985 10.3
Major MSO transactions
US West/Wometco 1994 466,000 2,575 11.1
Cox/Times-Mirror 1994 3,000,000 1,916 12.1
Comcast/McLean 1994 550,000 2,309 10.6
Colony 1994 750,000 1,870 11.3
The foregoing data is the best available to us. However, in some cases, it may
not be accurate, and may reflect third-party estimates of the terms rather than
actual data.
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These reports of transactions, and general industry commentary, suggest that the
"market" in 1995 for larger systems is generally 9 to 11, depending on location,
growth, rate control, etc. Smaller systems trade in the 7.5 to 9 range. Urban
and suburban systems are valued more highly than rural systems. Groups of
systems tend to trade at slightly higher multiples than individual systems.
After considering all factors, we believe the system would be valued at 9 x
income, or 1,600/subscriber.
Appraised Value
The multiples calculated by dividing the discounted cashflow approach by current
subscriber count and projected income are:
Discounted Cashflow Value 20,993,000
Current subscribers 12,526
Projected operating income 2,278,000
Resulting per-sub value 1,676
Resulting income multiple 9.21
The values calculated by using the same subscriber count, and multiples selected
from market data are:
Value, at 9 x operating income 20,501,000
Value, at $1,600 per sub 19,900,000
The values calculated by the three different methods are generally within a
reasonable range, which we determined to be $20,000,000 to $21,000,000. We place
substantially more reliance on the discounted cashflow method, because it
directly incorporates the key variables which impact value. Operating income
multiples reflect some of the variables, but are more subjective. Per-subscriber
values are useful only as broad indicators.
Daniels & Associates, the other appraiser retained for this engagement,
established a similar and overlapping range of values. We jointly selected the
appraised value from these ranges, and found the appraised value to be
$20,500,000.
Sanford, NC, Page
16
<PAGE>
We believe the foregoing appraised value represents the fair market value at
March 31, 1995 of the assemblage of system assets as a going concern, without
any discount imputed for brokers' fees. We believe the appraisal reflects the
relevant and material general market factors, assumptions, and limitations, all
of which are presented in this report. The appraisal was prepared using standard
appraisal techniques, and conforms to Standards 7-10 of the Uniform Standards of
Professional Appraisal Practice.
QUALIFICATIONS OF THE APPRAISER
The appraisal was prepared by R. Michael Kruger, owner and President of Western
Cablesystems, Inc. Since 1979, he has appraised hundreds of systems for a
variety of clients including major MSO's, independent operators, and clients
outside the CATV industry. Kruger has extensive background as a CATV executive.
From 1974 to 1979, he held various operating positions at ATC, one of the
industry's largest operators. In 1979, he joined a small MSO, and until mid-1986
was president of the 30,000 - subscriber company. There, in addition to his
operating duties, Kruger prepared CATV system appraisals.
Kruger formed Western Cablesystems, Inc. in 1986, and is its sole owner and
principal. Western has been directly involved in all aspects of system
operations and finance, including several acquisitions and sales, partnership
formation, debt placement, franchising, and system construction and startup.
Western sold one property in 1993, and presently operates three small cable
systems. In addition to continuing appraisal work, Kruger has performed
consulting engagements for a wide range of topics and clients, including the
economic feasibility of international cable and restructuring of individual
systems to achieve financial improvements.
Kruger received a BS/MS in engineering from the Massachusetts Institute of
Technology in 1967/68. In 1974, he received a Masters in Business Administration
(MBA) from the Stanford University Graduate School of Business.
Sanford, NC, Page
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<PAGE>
CENCOM APPRAISAL FOR Sanford
HISTORIC INCOME STATEMENTS AND FIRST-YEAR PROJECTION
<TABLE>
<CAPTION>
1992 Actual 1993 Actual 1994 Actual 95/Q1 Projected
Year
<S> <C> <C> <C> <C> <C>
Ending Homes Passed 19182 20273 20700 20759 21070
Ending Basic 11186 11666 12151 12300 12748
Subscribers
Ending Pay Subscribers 5031 5005 5759 6083 6246
Ending Basic 58.32% 57.54% 58.70% 59.25% 60.50%
Penetration
Ending Pay Penetration 44.98% 42.90% 47.40% 49.46% 49.00%
Average Basic Subs 10914 11426 11909 12226 12524
Average Pay Units 4971 5018 5382 5921 6165
Avg Basic+Tier Rev/Sub $22.24 $23.02 $20.79 $20.67 $20.90
Average Pay Rev/Unit $10.20 $9.76 $9.88 $9.67 $9.75
REVENUE
Basic,Tier Revenue 2912886 3155700 2970315 758094 3197110
Ancillary Revenue 367258 352872 205469 51343 211432
Commercial Basic 0 0 55567 14026 56000
Premium 608243 587910 638361 171780 721267
Pay-Per-View 0 0 20824 8419 40000
Installation 61670 64960 110740 28375 120000
Advertising 128833 123017 141529 24547 148000
Shopping/Other 2089 1755 21214 10420 40000
Franchise/FCC Fees 0 0 89553 23871 99744
Billed
Total Revenue 4080979 4286214 4253572 1090875 4633552
EXPENSES
G&A Salary 95195 101656 121600 17568 128896
Tax/Benefit-G&A 27840 31545 30597 6347 38669
Office Rent 41520 41520 43320 10830 44000
Office Operation 98742 105611 128074 33489 136000
Billing 90046 87459 108375 27690 112714
Bad Debt/Collection 87935 89431 53797 5925 55603
Professional Services 31527 57669 719 14305 5000
Insurance 27650 28208 25311 8762 28000
Property Tax 41074 38232 42500 10046 40000
Franchise/FCC/Copyright 124055 143863 143333 30021 156151
Cost Allocation 0 0 77568 6536 80000
Operating Wages, 220452 208562 246242 51555 260000
Overtime
Tax/Benefit- Op Wages 42731 42930 46839 10669 52000
Labor Capitalized -47176 -40751 -61225 -10449 -50000
Pole Rent 92616 49998 52818 13343 55000
Power 38375 41860 43182 11256 45000
System Maint., 95124 105004 99441 26362 105000
Operation
Programming-Basic 348679 408711 431278 122134 526001
Programming-Premium 271230 268466 290319 75424 331783
Programming-PPV 0 0 15388 5296 24000
Programming-LO, Other 2217 2120 9573 382 7500
Marketing/Sales 99760 81107 83899 18936 92671
Cost of Advertising 62688 67943 72499 19119 81400
Sales
Total Expenses 1892280 1961144 2105447 515546 2355387
Operating Income 2188699 2325070 2148125 575329 2278166
Operating Margin 53.63% 54.25% 50.50% 52.74% 49.17%
</TABLE>
<PAGE>
DISCOUNTED CASHFLOW MODEL FOR APPRAISAL OF SANFORD
<TABLE>
<CAPTION>
Change
Assumptions Curr. Proj. Year 2 Year 3 Year 4
Actual Year 1
<S> <C> <C> <C> <C> <C>
Ending Passings 20,759 21,070 22,648 22,988 23,333
Passings Growth 7.49% 1.50% 1.50%
Ending Basic EBU's 12,526 12,971 14,226 14,726 15,239
Ending Pay Units 6,083 6,246 6,921 7,238 7,567
Ending Basic EBU Pen. 60.34% 61.56% 62.81% 64.06% 65.31%
Basic Penetration 1.25% 1.25% 1.25%
Change
Pay/Basic Penetration 0.50% 48.56% 48.15% 48.65% 49.15% 49.65%
Average Basic EBU's 12,749 13,598 14,476 14,983
Average Pay Units 6,165 6,584 7,080 7,403
Addressable Sub % 10.00% 17.00% 20.00% 30.00% 40.00% 50.00%
Ending Plant Miles 429 435 491 497 503
New Miles 55 6 56 6 6
New Drops 1.05 467 1,317 526 538
Rebuild Miles 72.5 72.5 72.5
Replace Drops % 5.00% 5.00% 15.00% 15.00%
Basic Revenue/EBU $255.18 $263.47 $272.03 $285.63
Basic Rev/EBU 3.25% 3.25% 5.00%
Increase
Ancillary Rev/EBU 4.00% $16.58 $17.25 $17.94 $18.66
Pay Revenue/Unit 1.50% $117.00 $118.76 $120.54 $122.35
PPV Rev/Addr. Sub 6.00% $15.69 $16.63 $17.63 $18.68
Late/Shop/Oth $/EBU 4.00% $3.14 $3.26 $3.39 $3.53
Advertising Rev/EBU 4.00% $11.41 $11.87 $12.34 $12.83
Personnel Cost Incr. % 3.00% 5.44% 14.28% 5.39% 5.37%
Per-Sub Expense 3.00% $64.08 $66.01 $67.99 $70.02
% of Rev. Expense % 8.33% 8.33% 8.33% 8.33%
Pay/PPV Expense % 46.74% 46.74% 46.74% 46.74%
Per-Mile Expense 3.00% $628 $647 $666 $686
Capex per drop 2.00% $70 $71 $73 $74
Capex per new mile 3.00% $18,000 $18,540 $19,096 $19,669
Capex per rebuild $9,628 $9,628 $9,628
mile
Capex per new adr. 1.00% $100 $101 $102 $103
sub
REVENUE
Basic/Tier/Com'l 3,253,110 3,582,724 3,937,907 4,279,516
Ancillary 211,432 234,546 259,671 279,510
Pay 721,267 781,860 853,405 905,686
Pay-per-view 40,000 67,839 102,068 139,973
Installation 4.00% 120,000 124,800 129,792 134,984
Late/Other/Shop 40,000 44,373 49,126 52,879
Advertising 148,000 161,363 178,649 192,298
Franch. Fee billed 2.20% 99,744 104,785 115,521 125,518
Total Revenue 4,633,553 5,102,291 5,626,139 6,110,364
EXPENSES
Personnel 509,565 582,320 613,703 646,667
Per-Sub costs 831,215 938,957 1,001,168 1,067,095
Per-mile costs 273,000 317,418 331,056 345,291
Percent of Rev. costs 385,825 424,856 468,475 508,796
Pay & PPV Costs 355,782 397,111 446,545 488,694
Total Expenses 2,355,387 2,660,662 2,860,948 3,056,542
OPERATING INCOME 2,278,166 2,441,629 2,765,191 3,053,822
Operating Ratio 49.17% 47.85% 49.15% 49.98%
<CAPTION>
Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
Ending Passings 23,683 24,038 24,398 24,764 25,136 25,513
Passings Growth 1.50% 1.50% 1.50% 1.50% 1.50% 1.50%
Ending Basic EBU's 15,704 16,180 16,667 17,103 17,548 17,938
Ending Pay Units 7,876 8,196 8,526 8,834 9,152 9,445
Ending Basic EBU Pen. 66.31% 67.31% 68.31% 69.06% 69.81% 70.31%
Basic Penetration 1.00% 1.00% 1.00% 0.75% 0.75% 0.50%
Change
Pay/Basic Penetration 50.15% 50.65% 51.15% 51.65% 52.15% 52.65%
Average Basic EBU's 15,472 15,942 16,424 16,885 17,325 17,743
Average Pay Units 7,721 8,036 8,361 8,680 8,993 9,298
Addressable Sub % 60.00% 70.00% 80.00% 90.00% 100.00% 100.00%
Ending Plant Miles 509 516 522 529 536 543
New Miles 6 6 7 7 7 7
New Drops 489 500 511 458 467 410
Rebuild Miles 72.5
Replace Drops % 15.00% 5.00% 5.00% 5.00% 5.00% 5.00%
Basic Revenue/EBU $299.92 $314.91 $330.66 $341.40 $352.50 $363.95
Basic Rev/EBU 5.00% 5.00% 5.00% 3.25% 3.25% 3.25%
Increase
Ancillary Rev/EBU $19.40 $20.18 $20.99 $21.82 $22.70 $23.61
Pay Revenue/Unit $124.18 $126.05 $127.94 $129.86 $131.80 $133.78
PPV Rev/Addr. Sub $19.81 $20.99 $22.25 $23.59 $25.00 $26.50
Late/Shop/Oth $/EBU $3.67 $3.82 $3.97 $4.13 $4.29 $4.47
Advertising Rev/EBU $13.35 $13.88 $14.44 $15.01 $15.62 $16.24
Personnel Cost Incr. % 5.16% 5.15% 5.14% 4.94% 4.94% 4.75%
Per-Sub Expense $72.13 $74.29 $76.52 $78.81 $81.18 $83.61
% of Rev. Expense % 8.33% 8.33% 8.33% 8.33% 8.33% 8.33%
Pay/PPV Expense % 46.74% 46.74% 46.74% 46.74% 46.74% 46.74%
Per-Mile Expense $707 $728 $750 $772 $796 $820
Capex per drop $76 $77 $79 $80 $82 $84
Capex per new mile $20,259 $20,867 $21,493 $22,138 $22,802 $23,486
Capex per rebuild $9,628
mile
Capex per new adr. $104 $105 $106 $107 $108 $109
sub
REVENUE
Basic/Tier/Com'l 4,640,144 5,020,372 5,430,540 5,764,491 6,107,076 6,457,659
Ancillary 300,177 321,682 344,650 368,501 393,237 418,832
Pay 958,870 1,012,908 1,069,647 1,127,133 1,185,296 1,243,954
Pay-per-view 183,856 234,286 292,390 358,466 433,206 470,275
Installation 140,383 145,998 151,838 157,912 164,228 170,797
Late/Other/Shop 56,789 60,858 65,203 69,715 74,395 79,237
Advertising 206,516 221,311 237,112 253,522 270,540 288,148
Franch. Fee billed 136,105 147,306 159,428 170,088 181,165 191,622
Total Revenue 6,622,842 7,164,722 7,750,808 8,269,828 8,809,142 9,320,524
EXPENSES
Personnel 680,031 715,047 751,796 788,964 827,934 867,287
Per-Sub costs 1,132,675 1,202,013 1,275,313 1,347,915 1,424,481 1,499,889
Per-mile costs 360,148 375,655 391,841 408,737 426,372 444,782
Percent of Rev. costs 551,468 596,589 645,391 688,609 733,516 776,098
Pay & PPV Costs 534,059 582,883 636,555 694,302 756,415 801,153
Total Expenses 3,258,382 3,472,187 3,700,897 3,928,527 4,168,719 4,389,209
OPERATING INCOME 3,364,460 3,692,534 4,049,911 4,341,301 4,640,423 4,931,315
Operating Ratio 50.80% 51.54% 52.25% 52.50% 52.68% 52.91%
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
CAPITAL EXPENDITURES
Drops 78,106 144,838 199,163 209,780
Addr. Converters 46,478 169,020 165,547 178,129
New plant 101,782 1,038,240 117,952 123,313
Rebuild 0 698,000 698,000 698,000
Labor capitalized 9.81% 50,000 57,139 60,218 63,453
Vehicles 5.00% 40,000 42,000 44,100 46,305
Other 3.00% 75,000 80,000 82,400 84,872
Total Capex 391,366 2,229,237 1,367,380 1,403,851
DISCOUNTED FREE
CASHFLOW
Operating Income 2,278,166 2,441,629 2,765,191 3,053,822
Less Capital 391,366 2,229,237 1,367,380 1,403,851
Expenditures
Free cashflow 1,886,800 212,393 1,397,811 1,649,971
CAPITAL EXPENDITURES
Drops 215,514 101,147 105,978 105,548 110,286 109,359
Addr. Converters 187,634 200,068 213,086 220,736 233,390 42,739
New plant 128,918 134,777 140,902 147,306 154,002 161,001
Rebuild 698,000
Labor capitalized 66,727 70,163 73,768 77,415 81,239 85,101
Vehicles 48,620 51,051 53,604 56,284 59,098 62,053
Other 87,418 90,041 92,742 95,524 98,390 101,342
Total Capex 1,432,831 647,247 680,080 702,814 736,405 561,594
DISCOUNTED FREE
CASHFLOW
Operating Income 3,364,460 3,692,534 4,049,911 4,341,301 4,640,423 4,931,315
Less Capital 1,432,831 647,247 680,080 702,814 736,405 561,594
Expenditures
Free cashflow 1,931,629 3,045,287 3,369,831 3,638,487 3,904,018 4,369,721
</TABLE>
Discount Rate 12.60% Discount
Rate
Calculation
Net Present Value of 11,961,929 Proportion Rate
Free Cashflow
Equity 30.00% 20.00%
Senior 60.00% 9.00%
Debt
Sub. Debt 10.00% 12.00%
Blended 12.60%
TERMINAL VALUE
Year 10 operating 4,931,315
income
Multiple 6
Terminal Value 29,587,890
Discounted at 12.60% 9,030,880
POTENTIAL VALUE
NPV of Free Cashflow 11,961,929
NPV of Terminal Value 9,030,880
Total Potential 20,992,809
Value
RATIOS
Current EBU's 12,526
First-year Op. Income 2,278,166
Value per EBU $1,676
Op. Income Multiple 9.21
<PAGE>
FAIR MARKET VALUE APPRAISAL FOR
SANFORD, NORTH CAROLINA
MARCH 31, 1996 UPDATE
PREPARED FOR
CENCOM PARTNERS, INC
CENCOM PARTNERS LP
PREPARED BY
WESTERN CABLESYSTEMS, INC
R. MICHAEL KRUGER, PRESIDENT
CABLE TELEVISION MANAGEMENT,
CONSULTING, AND APPRAISALS
513 WILCOX, #230
CASTLE ROCK, CO 80104
303-688-4462
Sanford, NC, Page
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<PAGE>
BACKGROUND AND LIMITING CONDITIONS
Western was asked by Cencom to prepare an analysis of the fair market value as a
going concern of the assets of the Sanford, North Carolina cable television
system as of March 31, 1995. We were recently asked to update our work and issue
a new report. This appraisal report is being issued pursuant to the April 28,
1995 and April 19, 1996 engagement letters between CencCom and Western. This
report presents key data, our analysis and assumptions, and our conclusions.
The assets being appraised include, as an assemblage, all of the tangible and
intangible assets and personal property necessary to operate the Sanford cable
television system as a going concern, consistent with past practice and industry
norms. The assets include the antennas and signal receiving equipment, strand,
conduit, cables, amplifiers, passive devices, drops, converters, tools, test
equipment, subscriber records, franchises, pole attachment agreements,
easements, supplier and programming contracts, and goodwill. Financial assets
such as accounts receivable and liabilities are not included.
The appraisal is based principally on financial data provided by Cencom,
including Income Statements for the 12 months ended December 31, 1995, 1994,
1993, and 1992, and 3 months ended March 31, 1996. Management also provided the
operational data presented herein, such as passings and subscriber counts. The
appraiser visited the system in May, 1995. The system manager was interviewed at
length to obtain additional data including subscriber history, technical data,
demographics, and local economic information. The appraiser toured
representative portions of the general market area. This information was
reviewed and updated in 1996 by means of a telephone interview with the manager.
The work herein is based in part on data provided by CenCom and others, and we
assume no responsibility for the accuracy of such data. Western has used
customary techniques and industry knowledge available to Western in preparing
this report. Western does not warrant or represent that the appraised value is
that which would actually be obtained in an open market transaction, or that the
value would be upheld in litigation or administrative proceeding. Accordingly,
Western (including its officers, employees, and owners) does not indemnify or
hold harmless any user of this report in any manner against any costs, losses,
or damages arising out of the use of the appraised value or other conclusions
contained herein.
Sanford, NC, Page
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<PAGE>
GENERAL DESCRIPTION
The system serves four outlying communities located southwest of Raleigh/Durham,
NC.
Homes Passed 21,461
Residential Basic Subs 12,722 (59%)
Commercial/Bulk EBU's (1,125 units) 219
Total EBU's 12,941
Pay Units 5,753 (45%)
Plant Miles 448
Homes Per Mile 48
Number of headends 4
Channels in use (typical) 42
Plant Channel Capacity 42
The system is served by four headends, but most subscribers are located in
Sanford:
Headend Subscribers
- - - --------------------------------------------------------------------------------
Sanford 8,850 (72%)
Siler City 1,600 (13%)
Whispering Pines 985 (8%)
Troy 860 (7%)
Sanford is a fairly large industrial and agricultural community located about 45
minutes from Raleigh. Local manufactured products include brick, electrical
equipment, automotive parts, and some pharmaceuticals. A lovely gated
development just north of town, with golf courses, lakes, and more expensive new
homes, attracts a number of Raleigh commuters. Raleigh/Durham is one of the
major medical research centers in the world.
Siler City is a small industrial community about an hour from Raleigh, with
several small wood product and food processing plants. Whispering Pines, about
20 miles south of Sanford, is more dependent on the numerous golf resorts in
nearby Southern Pines. Troy, further west of Whispering Pines, is a more rural
agricultural community.
All towns have a relatively dense core with a normal mix of older homes. There
are several small new subdivisions, and some multifamily housing areas. Carolina
Trace, in Sanford (mentioned earlier) is the largest subdivision, with 3200 lots
and 800 existing homes; its build-out rate is about 25 homes/year. There are
some multi-family projects, but the area is mostly single-family. New
Sanford, NC, Page
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<PAGE>
homes are typically valued at $70,000 - $130,000, with some much higher and
lower.
Demographics cover a broad range from low-income rural to wealthy professional.
The area would be described as "typical" overall.
PASSINGS GROWTH
During 1992-1995, the system reports that it has added about 2,273 passings, or
757/year (about 3.5%). Management believes that about half this amount has come
from new homes, and the balance from short line extensions to existing homes.
This would indicate housing growth of about 1.5% per year, which appears
reasonable based on our field inspection.
Due to capital constraints, not all of the homes built in earlier years were
provided service immediately. Other areas have increased in density, and are now
feasible. The chief engineer indicated there are 5 areas to be built inside the
existing franchise, with a total of about 500 homes on 25 miles of plant.
SUBSCRIBER PENETRATION
The system provided the following data:
Passings Basic Pay Basic % Pay %
---------------------------------------------------------------
12/95 21,455 12,579 5,683 59% 45%
12/94 20,700 12,151 5,759 59% 47%
12/93 20,273 11,666 5,005 58% 43%
12/92 19,182 11,186 5,031 58% 45%
12/91 18,669 n/a n/a n/a n/a
The 1994 Cable Factbook reports penetrations in nearby Raleigh of 62% basic and
69% pay. The system is doing well, with normal room for improvement and gains.
Basic should continue to grow at 1% per year.
SUBSCRIBER RATES AND SERVICES
Each headend has slightly different lineups, but all have 38-42 channels in use.
Information for Sanford, which serves most of the customer base, is summarized
below.
Channels Rate
Basic 13 7.69
Tier 20 14.26
Total 33 $21.95
Sanford, NC, Page
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<PAGE>
Pay channels 5 8.45 - 11.45
Pay-per-view 2 n/a
Converters 1.51 - 2.19
Remote control .25
Wire maintenance .95
Approximately 99% of the customers take the tier.
Sanford, NC, Page
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<PAGE>
Basic includes 9 offair, and WGN and WTBS. The tier is all satellite services.
Pay includes Cinemax, HBO, Showtime, Movie, and Disney. Pay-per-view offerings
are Viewers Choice, an adult programming channel, and events.
There is no fee for additional outlets. Other ancillary services offered include
guides and DMX audio. There are a number of small transaction fees, including
late charges. Typical aerial installation fees are $35. Applicable FCC and
franchise fees are added as a separate charge. There are several package
discounts and promotional rates available from time to time. Rates are
reasonable, and consistent with industry practice.
The system took small quarterly external cost adjustments in 1994 and 1995. The
company plans an increase of $1.50 on June 1, 1996.
RATE REGULATION
Franchisors covering 90% of the customer base are regulating rates. There have
been no tier complaints, and thus no tier regulation to date. The company feels
it is approximately at benchmarks, and there have been no problems with the
franchisors. The company will be deregulated in the near future pursuant to new
FCC regulations.
NON-SUBSCRIBER REVENUE
The company sells spot advertising by an outside contract with Cable AdNet.
There is no other significant revenue source (fiber rental, tower rental,
phone), existing at present or likely in the future.
STAFF AND OPERATIONS
The system operates from a main office in Sanford. There are contract payment
dropoff sites in the remote towns. The office, and all headends, are leased.
Rents are reasonable, expirations and renewals are not a concern, and there are
no unique sites that could not be replaced (although relocation is always a
burden).
The system has a normal complement of test equipment, inventory, and vehicles,
but only one bucket truck. The office staff is well-equipped, and uses
centralized Cabledata billing services.
The system offers customary business-day service Monday through Friday, with
partial staffing Saturday morning. Phones are answered by a central company
facility after hours, and technicians are dispatched on outages if necessary.
Sanford, NC, Page
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<PAGE>
Management reports about 30% annual turnover, and 25% annual service call
volume. Backlogs are 2-3 days on installs, and same-day on service. All are
normal.
Sanford, NC, Page
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<PAGE>
System staffing can be summarized as:
Item Office Field Other
------------------------------------------------------------------------
Number of employees 6 10 0
Subs/employee 2,100 1,300
Average wage 27,400 22,500 -
The company occasionally uses contract installers to do new installs. Wages are
reasonable for the area. Staff ratios are reasonable, especially considering the
drive time involved.
MARKETING
The system uses contractor commissioned direct salespeople on a regular basis.
Direct mail and newspaper are used from time to time.
FRANCHISES
The major Sanford and Lee County franchises expire in 1997/98, and discussions
have started. Renewal is expected, but it is likely that a rebuild to 550 Mhz
will be required. Three small franchises were recently renewed with no problems.
COMPETITION
Most areas can receive 6-8 offair signals, with fair to good quality. There is a
local LPTV in Sanford.
There is no cable overbuild, and no contiguous operator, although Time Warner is
close to Whispering Pines and Troy. There is no cable competition for new
subdivisions.
There is no MMDS.
The company believes it may have lost 300 customers (2.5%) to DBS. This would be
a significant loss, but even with a loss of this size, the company continues to
grow.
Sanford, NC, Page
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<PAGE>
TECHNICAL PROFILE
Mileage: 296 aerial, 133 underground, no fiber
Headend Electronics: S-A
Plant Electronics: S-A
Amplifier Cascade: 54 in Sanford; others 12-14
Power: About 20% standby
Trunk Cable: 750 P3
Distribution Cable: 500 P3
Pay Security: Some addressability, some program, most traps
Percent of Addressable Subs: 17%
Converter Types: S-A
Estimated Plant Build Dates: Sanford was substantially rebuilt in 1980, and the
other 3 headends were built new in 1982. A substantial expansion was done in
1988-92, and management estimates that about half the plant in place was built
from 1988 through 1995.
Estimated Channel Capacity:
The chief engineer provided the total breakout of plant mileage by capacity. We
made a further estimated breakout by age based on the management estimate that
half the total plant was built after 1988, and adjusting for the fact that
recent construction has been weighted toward underground:
Total Post-88 Pre-88
--------------------------------------------
Aerial
300 Mhz 85 0 85
330 Mhz 118 22 96
450 Mhz 92 92 0
--------------------------------------------
Total 295 114 181
Underground
300 Mhz 29 0 29
330 Mhz 58 54 4
450 Mhz 46 46 0
--------------------------------------------
Total 133 100 33
Grand Total 428 214 214
The plant itself appears to be in good condition, but fiber is needed to reduce
the cascade, which would improve reliability and reduce noise problems.
Sanford, NC, Page
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<PAGE>
The company will be required to upgrade to 550 mhz for franchise renewal. The
DBS pressure, and general industry trends, will also push the company to
complete a rebuild in the near future.
Sanford, NC, Page
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<PAGE>
ESTIMATED UPGRADE COSTS
Fiber Overlay
20% x 429 Miles x $6,000/mile 516,000
Upgrade Pre-1988 300/330 Plant
Aerial, 91 mi at 12,000 1,092,000
Aerial, 90 @ 5,000 450,000
U/G, 10 mi @ 24,000 240,000
U/G, 23 mi @ 5,000 115,000
Upgrade Post-1988 300/330 Plant
Aerial, 22 @ 5,000 110,000
U/G, 54 @ 5,000 270,000
Other work, estimate 707,000
Grand Total Upgrade Cost 3,500,000
DETERMINATION OF OPERATING INCOME
Appraising the value of cable television systems involves calculation of
historic and projected operating income (commonly called "cashflow"). Operating
income is defined as direct operating revenues less expenses, before capital
expenditures, depreciation, and management fees. The operating income considered
in appraisals is typically that which will be derived by the buyer, using his
cost structure and nominal predictable changes in operations.
First-Year Projection:
We first prepared a detailed Projected-Year statement of operating income. To do
so, we reviewed the company's historic income statements, and used them to
prepare an estimate of projected operating income for the 12 months beginning
April 1, 1996. A projection worksheet is attached.
The Projected-Year subscriber revenues are based on the March 31, 1996
subscriber count, plus allowances for growth, and on 1996/Q1 rates, plus planned
1996 increases. Other revenue items were based on consideration of past results
and trends.
Certain Projected-Year expense items such as programming costs which are based
on subscribers or revenue have been adjusted to match the subscriber and revenue
projections shown, using prior-year unit costs or ratios plus an allowance for
increases where appropriate. Overhead items, such as maintenance and property
tax have been based
Sanford, NC, Page
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<PAGE>
principally on average results, to reflect longer-term trends. In preparing our
detailed analysis, we also reviewed key operating ratios, such as programming
cost/subscriber, staffing ratios, copyright and bad debt expense levels, etc.
and compared them to industry norms and our experience. A brief discussion of
key individual items follows:
Passings: First-year growth was estimated at 1.5%, the historic estimate, plus
400 of the existing unserved homes. Thereafter, growth was estimated at 1% per
year.
Basic Penetration: We used a 1 - point gain based on recent results.
Pay Penetration: We made a small increase, based on a continuation of recent
small gains.
Average Basic+Tier Revenue/Subscriber: We used the 1996 level, plus an allowance
for the 1996 rate increase.
Average Pay Revenue/Unit: We used recent averages, which are very stable.
Pay-Per-View Revenues: We allowed for substantial increases on this area, given
renewed marketing efforts.
Advertising: We increased 1995 results, allowing for the new agent.
G&A Salary: Levels and ratios are normal; we used 1995 levels plus 3% for growth
and 3% for inflation.
Office Operation: We used the 1995 level plus 3% for inflation anbd 1.5% for
growth.
Professional Services, Allocated Costs: We made an estimate based on 1995/96
levels.
Operating Wages: Ratios and levels are reasonable; increase 1995 by 6% for
growth and inflation.
Basic Programming: Use 1996 levels plus 5%.
Premium/PPV Programming: We used the average historic levels expressed as a
percentage of revenue.
Marketing/Sales: Industry norms vary from 1% of revenue in classic systems with
little need for sales, to 4% in urban markets. This system is in the middle at
2%, and we used this level.
Ten-Year Cashflow Projections
Sanford, NC, Page
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<PAGE>
Our principal appraisal technique involves projection of free cashflow for 10
years; free cashflow is equal to operating income less capital expenditures, but
still before depreciation and interest, and taxes. (Projected free cashflow is
then discounted at an appropriate cost-of-capital rate, and a terminal value is
added to get the value of the property.) Our projection for this system is shown
on the two-page spreadsheet enclosed. We started with the data contained in the
first-year projection spreadsheet, and expanded it with the variables and
assumptions shown.
Sanford, NC, Page
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<PAGE>
Revenue items used are the same as for the first-year analysis. However, they
are based on forecasts for system growth in areas such as passings, penetration,
and revenue/subscriber. The small amount of commercial revenue was converted to
EBU's and for simplicity we did our forecast using total EBU's.
Passings growth was continued at 1%.
Penetration increases: We increased at 1%, reflecting DBS concerns.
Addressable Subs & PPV Revenue/Sub: This system will eventually be 100%
addressable, and should generate good revenue increases. However, it will take
time given the nature of the market.
Basic Rate Increases: Rate regulation and competition will normally limit
increases to 3.25%, just over inflation. However, on completion of the rebuild,
the company can add new channels and achieve 5% increases for a few years.
The ten-year model uses summary expense variables which were calculated from the
one-year information as follows:
Personnel: Salaries, Tax/benefit, Professional services, cost allocations,
and capitalized labor
Per-Subscriber: Office rent, Office Operation, Basic Programming, LO
Programming
Revenue-related: Franchise fee, copyright, bad debt, marketing, and
advertising sales
Premium Programming: Pay and pay-per-view
Per-Mile: Insurance, Property Tax, Pole Rent, Power, System Maintenance
Personnel costs ae based on current personnel costs, plus annual percentage
increases to reflect growth and expenses.
We calculated the amounts for the other expense categories on a per-sub or
per-mile, or percentage of revenue basis, as noted. The per-sub and per-mile
costs were increased over the 10-year period as noted. The percentage costs were
held to the same percentage of revenue over 10 years, on the assumption that
gradual increases in unit costs can be passed on to customers.
Capital costs were forecast for several items. New plant costs were calculated
using new plant mileage derived from passings growth at 55 new homes/mile and an
average per-mile cost for new plant (aerial and U/G). Drops were calculated on
the assumption that a certain percentage of existing drops is replaced each
year, and new drops are added equal to growth plus a churn allowance of 5%.
Costs for new addressable converters were allowed based on the increase in
Sanford, NC, Page
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<PAGE>
addressable subscribers. Capitalized labor is based on 1995 levels, plus
inflation. The capital costs for vehicles and miscellaneous is estimated from
system size and current vehicle count.
We used the rebuild cost estimates developed earlier in the text, and did the
rebuild in year 2, consistent with franchise requirements.
DETERMINATION OF APPRAISED VALUE
General Methodology
Appraisal of income-producing property typically relies on one or more of three
main approaches.
Replacement cost, which is the cost to assemble and put the property into
operation, is not typically used in the cable television industry for valuing a
property as a whole. Cable television system sales include a very substantial
intangible value for franchise, goodwill, and customer lists. Although these
intangibles can be valued separately, more direct approaches to overall value
are easier to use, and more appropriate.
Market value as determined by comparable transactions is a very common approach
for estimates of value. Transaction value is typically reported on the basis of
either per-subscriber cost or operating income multiple. We consider both
ratios, but place more reliance on the income multiple.
The Income Approach is widely used in business valuation, and we use this as our
first approach. Our method involves determination of the discounted present
value of free cashflow generated over ten years, plus an allowance for the
terminal value after ten years.
Income Approach
Ten-year free cashflow was projected, as discussed previously. The annual free
cashflow was discounted using an average cost of capital calculated as shown on
the spreadsheet.
The FCC cost-of-service rules will permit a cost-of-capital rate of 11.25%, plus
further upward adjustments related to tax matters; the result is typically in
the 12% - 13% range. Small cable operators may use even higher numbers, subject
to certain overall limits. We do not believe the FCC cost-of-capital should be
used directly, but do find that the FCC values support our calculation of 12.6%.
We then added a terminal value based on the resale value of the system in year
10. The terminal value was calculated at 5 x year 10 cashflow. The industry will
increasingly feel the effects of
Sanford, NC, Page
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<PAGE>
maturity, regulation and increased competition. Sale multiples will gradually
decline as the opportunities for growth into new lines are realized or
abandoned. Non-cable businesses currently trade in the 3-6 x cashflow range.
Regulated telephone companies presently trade at around 5-7 x cashflow.
Selection of 5x should reflect the industry's gradual maturity and the
relatively slow growth and DBS competition which this system faces.
The terminal value was then discounted to a present value using the same
discount rate. The discounted cashflow and discounted terminal values were
added, to arrive at the estimate of potential system value shown on the
worksheet.
Market Value
The prices of cable system transactions are frequently evaluated to determine
the ratio of operating income (income before depreciation, interest, and
management fees) to purchase price; sales results are frequently reported in the
trade press. Per-subscriber values are also widely reported. We consider
principally the multiple of first year projected operating income. To facilitate
our analysis, we compared this system to the overall market with respect to some
key factors. The analysis is subjective, and based on our personal knowledge,
but nonetheless helps to structure the process:
Future passing and subscriber growth: The system has about average prospects.
Demographics: Demographics are normal.
Competitive situation: Competition is limited to offair signals; the system is
favorably situated in this regard.
System Capacity/Quality: The need for rebuild is a negative.
General Operations: With regard to matters such as staff, franchise problems,
etc., the system is normal.
New Revenues: The economy is good, and the main system is of reasonable size;
there should be average opportunties for new sources.
System marketability: The system is about average, and in an area with several
qualified buyers.
Comparable Transaction Data
Sanford, NC, Page
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We then select an approximate appropriate multiplier from information available
about other reasonably similar transactions, and the general state of the
market. The following data has been taken from announcements in the trade press,
information from brokers, recent issues of the Cable TV Investor Newsletter,
published by Paul Kagan Associates, and our own knowledge.
System Date Subs $/Sub CF Mult
- - - ----------------------------------------------------------------------------
SC 3/96 44,600 1,767 10.4
Columbus, MS 2/96 16,000 1,465 9.5
Arizona 12/95 8,000 1,500 7.0
VA/TN/GA 1/96 40,000 1,107 8.5
Market Avg YTD 4/96 5,300,000 2,136 10.8
The foregoing data is the best available to us. However, in some cases, it may
not be accurate, and may reflect third-party estimates of the terms rather than
actual data.
These reports of transactions, and general industry commentary, suggest that the
"market" in 1995 for larger systems is generally 9 to 11, depending on location,
growth, rate control, etc. Smaller systems trade in the 7 to 9 range.
Urban and suburban systems are valued more highly than rural systems.
After considering all factors, we believe the system would be valued at 9 x
income, or $1,600/subscriber.
Appraised Value
The multiples calculated by dividing the discounted cashflow approach by current
subscriber count and projected income are:
Discounted Cashflow Value 20,720,000
Current subscribers 12,941
Projected operating income 2,589,000
Resulting per-sub value 1,601
Resulting income multiple 8.0
The values calculated by using the same subscriber count, and multiples selected
from market data are:
Value, at 9 x operating income
less $3,500,000 rebuild $19,801,000
Value, at $1,600 per sub $20,705,000
The values calculated by the three different methods are generally within a
reasonable range. We place more reliance on the discounted
Sanford, NC, Page
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<PAGE>
cashflow method, because it directly incorporates the key variables which impact
value. Operating income multiples reflect the variables, but are more
subjective. Per-subscriber values are useful as broad indicators.
After considering the foregoing, we set the appraised value at $20,700,000. We
believe the foregoing appraised value represents the fair market value at March
31, 1996 of the assemblage of system assets as a going concern, without any
discount imputed for brokers' fees. We believe the appraisal reflects the
relevant and material general market factors, assumptions, and limitations, all
of which are presented in this report. The appraisal was prepared using standard
appraisal techniques, and conforms to Standards 7-10 of the Uniform Standards of
Professional Appraisal Practice.
Sanford, NC, Page
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QUALIFICATIONS OF THE APPRAISER
The appraisal was prepared by R. Michael Kruger, owner and President of Western
Cablesystems, Inc. Since 1979, he has appraised hundreds of systems for a
variety of clients including major MSO's, independent operators, and clients
outside the CATV industry. Kruger has extensive background as a CATV executive.
From 1974 to 1979, he held various operating positions at ATC, one of the
industry's largest operators. In 1979, he joined a small MSO, and until mid-1986
was president of the 30,000 - subscriber company. There, in addition to his
operating duties, Kruger prepared CATV system appraisals.
Kruger formed Western Cablesystems, Inc. in 1986, and is its sole owner and
principal. Western has been directly involved in all aspects of system
operations and finance, including several acquisitions and sales, partnership
formation, debt placement, franchising, and system construction and startup.
Western sold one property in 1993, and presently operates three small cable
systems. In addition to continuing appraisal work, Kruger has performed
consulting engagements for a wide range of topics and clients, including the
economic feasibility of international cable and restructuring of individual
systems to achieve financial improvements.
Kruger received a BS/MS in engineering from the Massachusetts Institute of
Technology in 1967/68. In 1974, he received a Masters in Business Administration
(MBA) from the Stanford University Graduate School of Business.
Sanford, NC, Page
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CENCOM APPRAISAL FOR Sanford
HISTORIC INCOME STATEMENTS AND FIRST-YEAR PROJECTION
<TABLE>
<CAPTION>
1992 Actual 1993 Actual 1994 Actual 1995 Actual 96/Q1 Projected
Year
<S> <C> <C> <C> <C> <C> <C>
Ending Homes Passed 19182 20273 20700 21455 21461 22561
Ending Basic 11186 11666 12151 12579 12722 13424
Subscribers
Ending Pay Subscribers 5031 5005 5759 5683 5753 6578
Ending Basic 58.32% 57.54% 58.70% 58.63% 59.28% 59.50%
Penetration
Ending Pay Penetration 44.98% 42.90% 47.40% 45.18% 45.22% 49.00%
Average Basic Subs 10914 11426 11909 12365 12651 13073
Average Pay Units 4971 5018 5382 5721 5718 6165
Avg Basic+Tier Rev/Sub $22.24 $23.02 $20.79 $21.17 $21.54 $23.04
Average Pay Rev/Unit $10.20 $9.76 $9.88 $10.12 $9.42 $9.77
REVENUE
Basic,Tier Revenue 2912886 3155700 2970315 3140562 817345 3711411
Ancillary Revenue 367258 352872 205469 247840 68033 285600
Commercial Basic 0 0 55567 66340 18334 73000
Premium 608243 587910 638361 694581 161609 722823
Pay-Per-View 0 0 20824 64377 18803 75000
Installation 61670 64960 110740 94938 22888 100000
Advertising 128833 123017 141529 68485 22376 90000
Shopping/Other 2089 1755 21214 35180 8487 40000
Franchise/FCC Fees 0 0 89553 110405 29737 112152
Billed
Total Revenue 4080979 4286214 4253572 4522708 1167612 5209986
EXPENSES
G&A Salary 95195 101656 121600 108096 41044 114582
Tax/Benefit-G&A 27840 31545 30597 33563 6496 34375
Office Rent 41520 41520 43320 43314 10736 44000
Office Operation 98742 105611 128074 176974 37607 185823
Billing 90046 87459 108375 124319 30580 117656
Bad Debt/Collection 87935 89431 53797 89748 10287 62520
Professional Services 31527 57669 719 119 0 2000
Insurance 27650 28208 25311 36700 8705 38000
Property Tax 41074 38232 42500 39452 8751 40000
Franchise/FCC/Copyright 124055 143863 143333 114134 29687 175577
Cost Allocation 0 0 77568 16649 4350 17000
Operating Wages, 220452 208562 246242 256296 56153 271674
Overtime
Tax/Benefit- Op Wages 42731 42930 46839 43692 11624 54335
Labor Capitalized -47176 -40751 -61225 -49851 -16810 -50000
Pole Rent 92616 49998 52818 56254 18172 60000
Power 38375 41860 43182 45282 12451 50000
System Maint., 95124 105004 99441 153257 30181 165000
Operation
Programming-Basic 348679 408711 431278 519293 143705 666718
Programming-Premium 271230 268466 290319 291321 72657 332499
Programming-PPV 0 0 15388 37564 10209 45000
Programming-LO, Other 2217 2120 9573 29364 10174 40000
Marketing/Sales 99760 81107 83899 99945 13886 104200
Cost of Advertising 62688 67943 72499 36384 0 49500
Sales
Total Expenses 1892280 1961144 2105447 2301869 550645 2620456
Operating Income 2188699 2325070 2148125 2220839 616967 2589530
Operating Margin 53.63% 54.25% 50.50% 49.10% 52.84% 49.70%
</TABLE>
<PAGE>
DISCOUNTED CASHFLOW MODEL FOR APPRAISAL OF SANFORD
<TABLE>
<CAPTION>
Change
Assumptions Curr. Proj. Year 2 Year 3 Year 4
Actual Year 1
<S> <C> <C> <C> <C> <C> <C>
Ending Passings 21,461 22,561 22,787 23,014 23,245
Passings Growth 1.00% 1.00% 1.00%
Ending Basic EBU's 12,941 13,688 14,053 14,423 14,800
Ending Pay Units 5,753 6,578 6,788 7,004 7,223
Ending Basic EBU Pen. 60.30% 60.67% 61.67% 62.67% 63.67%
Basic Penetration 1.00% 1.00% 1.00% 1.00%
Change
Pay/Basic Penetration 0.25% 44.46% 48.06% 48.31% 48.56% 48.81%
Average Basic EBU's 13,315 13,870 14,238 14,612
Average Pay Units 6,166 6,683 6,896 7,113
Addressable Sub % 10.00% 17.00% 20.00% 30.00% 40.00% 50.00%
Ending Plant Miles 448 483 488 492 497
New Miles 50 35 5 5 5
New Drops 1.05 784 383 389 396
Rebuild Miles 300
Replace Drops % 5.00% 5.00% 15.00% 15.00%
Basic Revenue/EBU $284.23 $293.47 $303.01 $318.16
Basic Rev/EBU 3.25% 3.25% 5.00%
Increase
Ancillary Rev/EBU 4.00% $21.45 $22.31 $23.20 $24.13
Pay Revenue/Unit 1.50% $117.24 $119.00 $120.78 $122.59
PPV Rev/Addr. Sub 6.00% $28.16 $29.85 $31.65 $33.54
Late/Shop/Oth $/EBU 4.00% $3.00 $3.12 $3.25 $3.38
Advertising Rev/EBU 4.00% $6.58 $6.84 $7.11 $7.40
Personnel Cost Incr. % 3.00% 9.79% 4.80% 4.79% 4.77%
Per-Sub Expense 4.50% $74.09 $77.43 $80.91 $84.55
% of Rev. Expense % 8.29% 8.29% 8.29% 8.29%
Pay/PPV Expense % 47.32% 47.32% 47.32% 47.32%
Per-Mile Expense 4.00% $731 $760 $790 $822
Capex per drop 2.00% $70 $71 $73 $74
Capex per new mile 3.00% $18,000 $18,540 $19,096 $19,669
Capex per rebuild $11,667 #DIV/0! #DIV/0!
mile
Capex per new adr. 1.00% $100 $101 $102 $103
sub
REVENUE
Basic/Tier/Com'l 3,784,411 4,070,536 4,314,247 4,648,848
Ancillary 285,600 309,425 330,333 352,562
Pay 722,823 795,270 832,897 872,056
Pay-per-view 75,000 124,229 180,231 245,074
Installation 4.00% 100,000 104,000 108,160 112,486
Late/Other/Shop 40,000 43,337 46,265 49,378
Advertising 90,000 94,847 101,256 108,070
Franch. Fee billed 2.20% 112,152 115,108 122,827 132,790
Total Revenue 5,209,986 5,656,752 6,036,216 6,521,264
EXPENSES
Personnel 443,966 465,274 487,543 510,816
Per-Sub costs 1,014,197 1,088,077 1,167,033 1,251,399
Per-mile costs 353,000 370,550 388,974 408,317
Percent of Rev. costs 431,797 468,824 500,274 540,474
Pay & PPV Costs 377,499 435,071 479,373 528,582
Total Expenses 2,620,459 2,827,797 3,023,197 3,239,589
OPERATING INCOME 2,589,527 2,828,955 3,013,019 3,281,675
Operating Ratio 49.70% 50.01% 49.92% 50.32%
<CAPTION>
Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
Ending Passings 23,477 23,712 23,949 24,188 24,430 24,675
Passings Growth 1.00% 1.00% 1.00% 1.00% 1.00% 1.00%
Ending Basic EBU's 15,183 15,572 15,967 16,369 16,777 17,191
Ending Pay Units 7,448 7,678 7,913 8,153 8,398 8,648
Ending Basic EBU Pen. 64.67% 65.67% 66.67% 67.67% 68.67% 69.67%
Basic Penetration 1.00% 1.00% 1.00% 1.00% 1.00% 1.00%
Change
Pay/Basic Penetration 49.06% 49.31% 49.56% 49.81% 50.06% 50.31%
Average Basic EBU's 14,991 15,377 15,769 16,168 16,573 16,984
Average Pay Units 7,336 7,563 7,795 8,033 8,275 8,523
Addressable Sub % 60.00% 70.00% 80.00% 90.00% 100.00% 100.00%
Ending Plant Miles 501 506 511 516 520 525
New Miles 5 5 5 5 5 5
New Drops 402 408 415 422 428 435
Rebuild Miles
Replace Drops % 15.00% 5.00% 5.00% 5.00% 5.00% 5.00%
Basic Revenue/EBU $334.07 $350.77 $368.31 $380.28 $392.64 $405.40
Basic Rev/EBU 5.00% 5.00% 5.00% 3.25% 3.25% 3.25%
Increase
Ancillary Rev/EBU $25.09 $26.10 $27.14 $28.23 $29.36 $30.53
Pay Revenue/Unit $124.43 $126.30 $128.19 $130.11 $132.07 $134.05
PPV Rev/Addr. Sub $35.56 $37.69 $39.95 $42.35 $44.89 $47.58
Late/Shop/Oth $/EBU $3.51 $3.66 $3.80 $3.95 $4.11 $4.28
Advertising Rev/EBU $7.69 $8.00 $8.32 $8.65 $9.00 $9.36
Personnel Cost Incr. % 4.76% 4.75% 4.74% 4.73% 4.72% 4.70%
Per-Sub Expense $88.36 $92.33 $96.49 $100.83 $105.37 $110.11
% of Rev. Expense % 8.29% 8.29% 8.29% 8.29% 8.29% 8.29%
Pay/PPV Expense % 47.32% 47.32% 47.32% 47.32% 47.32% 47.32%
Per-Mile Expense $855 $889 $925 $962 $1,000 $1,040
Capex per drop $76 $77 $79 $80 $82 $84
Capex per new mile $20,259 $20,867 $21,493 $22,138 $22,802 $23,486
Capex per rebuild $9,628
mile
Capex per new adr. $104 $105 $106 $107 $108 $109
sub
REVENUE
Basic/Tier/Com'l 5,008,144 5,393,899 5,807,999 6,148,254 6,507,001 6,885,198
Ancillary 376,194 401,311 428,005 456,371 486,508 518,524
Pay 912,803 955,196 999,298 1,045,170 1,092,878 1,142,489
Pay-per-view 319,835 405,709 504,020 616,227 743,949 808,155
Installation 116,986 121,665 126,532 131,593 136,857 142,331
Late/Other/Shop 52,688 56,206 59,945 63,917 68,138 72,622
Advertising 115,314 123,013 131,195 139,890 149,128 158,942
Franch. Fee billed 143,566 155,225 167,837 179,191 191,354 202,614
Total Revenue 7,045,529 7,612,224 8,224,830 8,780,613 9,375,813 9,930,875
EXPENSES
Personnel 535,137 560,551 587,108 614,857 643,850 674,142
Per-Sub costs 1,341,533 1,437,815 1,540,650 1,650,469 1,767,729 1,892,919
Per-mile costs 428,625 449,945 472,328 495,828 520,500 546,402
Percent of Rev. costs 583,924 630,891 681,663 727,726 777,055 823,058
Pay & PPV Costs 583,236 643,928 711,312 786,109 869,116 922,969
Total Expenses 3,472,455 3,723,131 3,993,061 4,274,988 4,578,250 4,859,491
OPERATING INCOME 3,573,074 3,889,094 4,231,769 4,505,625 4,797,563 5,071,384
Operating Ratio 50.71% 51.09% 51.45% 51.31% 51.17% 51.07%
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
CAPITAL EXPENDITURES
Drops 102,813 77,513 185,909 194,293
Addr. Converters 53,763 149,301 158,477 168,009
New plant 630,000 83,656 87,028 90,535
Rebuild 0 3,500,000
Labor capitalized 11.26% 50,000 52,400 54,908 57,529
Vehicles 5.00% 40,000 42,000 44,100 46,305
Other 3.00% 75,000 80,000 82,400 84,872
Total Capex 951,576 3,984,870 612,822 641,543
DISCOUNTED FREE
CASHFLOW
Operating Income 2,589,527 2,828,955 3,013,019 3,281,675
Less Capital 951,576 3,984,870 612,822 641,543
Expenditures
Free cashflow 1,637,952 -1,155,915 2,400,197 2,640,132
<S> <C> <C> <C> <C> <C>
CAPITAL EXPENDITURES
Drops 203,014 91,737 95,648 99,711 103,932 108,318
Addr. Converters 177,909 188,189 198,860 209,935 221,428 45,335
New plant 94,183 97,979 101,927 106,035 110,308 114,754
Rebuild
Labor capitalized 60,268 63,130 66,121 69,246 72,511 75,923
Vehicles 48,620 51,051 53,604 56,284 59,098 62,053
Other 87,418 90,041 92,742 95,524 98,390 101,342
Total Capex 671,413 582,126 608,901 636,735 665,668 507,723
DISCOUNTED FREE
CASHFLOW
Operating Income 3,573,074 3,889,094 4,231,769 4,505,625 4,797,563 5,071,384
Less Capital 671,413 582,126 608,901 636,735 665,668 507,723
Expenditures
Free cashflow 2,901,661 3,306,967 3,622,868 3,868,890 4,131,896 4,563,660
</TABLE>
Discount Rate 12.60% Discount Rate Calculation
Net Present Value of 12,981,047 Proportion Rate
Free Cashflow
Equity 30.00% 20.00%
Senior 60.00% 9.00%
Debt
Sub. Debt 10.00% 12.00%
Blended 12.60%
TERMINAL VALUE
Year 10 operating 5,071,384
income
Multiple 5
Terminal Value 25,356,919
Discounted at 12.60% 7,739,494
POTENTIAL VALUE
NPV of Free Cashflow 12,981,047
NPV of Terminal Value 7,739,494
Total Potential 20,720,542
Value
RATIOS
Current EBU's 12,941
First-year Op. Income 2,589,527
Value per EBU $1,601
Op. Income Multiple 8.00
<PAGE>
FAIR MARKET VALUE APPRAISAL FOR
ABBEVILLE, SOUTH CAROLINA
MARCH 31, 1995
PREPARED FOR
CENCOM PARTNERS, INC
CENCOM PARTNERS LP
PREPARED BY
WESTERN CABLESYSTEMS, INC
R. MICHAEL KRUGER, PRESIDENT
CABLE TELEVISION MANAGEMENT,
CONSULTING, AND APPRAISALS
513 WILCOX, #230
CASTLE ROCK, CO 80104
303-688-4462
Abbeville, South Carolina, Page
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BACKGROUND AND LIMITING CONDITIONS
Western was asked by Cencom to prepare an analysis of the fair market value as a
going concern of the assets of the Abbeville, South Carolina cable television
system as of March 31, 1995. This appraisal report is being issued pursuant to
the April 28, 1995 engagement letter between CencCom and Western. This report
presents key data, our analysis and assumptions, and our conclusions.
The assets being appraised include, as an assemblage, all of the tangible and
intangible assets and personal property necessary to operate the Sysname cable
television system as a going concern, operating consistent with past practice
and industry norms. The assets include the antennas and signal receiving
equipment, strand, conduit, cables, amplifiers, passive devices, drops,
converters, tools, test equipment, subscriber records, franchises, pole
attachment agreements, easements, supplier and programming contracts, and
goodwill. Liabilities, and financial assets such as accounts receivable, are not
considered.
The appraisal is based principally on financial data provided by Cencom,
including Income Statements for the 12 months ended December 31, 1994, 1993, and
1992, and 3 months ended March 31, 1995. Management also provided the
operational data presented herein, such as passings and subscriber counts. The
appraiser visited the system in May, 1995. The system manager was interviewed at
length to obtain additional data including subscriber history, technical data,
demographics, and local economic information. The appraiser toured
representative portions of the general market area.
The appraisal will be used as described in the April 28, 1995 engagment letter
to determine the price at which the general partner may offer to purchase the
System from the owning partnership. This appraisal report is issued for the use
of the Cencom entities involved, and their partners, employees, agents, and
advisors. The report is not intended for the use of other parties, including but
not limited to lenders for buyer or seller. The principals will perform their
own independent due diligence and economic evaluation of the proposed
transaction. The formal consent of the limited partners is required for the
transaction to be completed at the proposed price. Western understands and
agrees that the report may be delivered to the Securities and Exchange
Commission, and may be summarized in related proxy materials.
The work herein is based in part on data provided by Cencom and others, and we
assume no responsibility for the accuracy of such data. Western has used
customary techniques and industry knowledge available to Western in preparing
this report. Western does not warrant or represent that the appraised value is
that which would
Abbeville, South Carolina, Page
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actually be obtained in an open market transaction, or that the value would be
upheld in litigation or administrative proceeding. Accordingly, Western
(including its officers, employees, and owners) does not indemnify or hold
harmless any user of this report in any manner against any costs, losses, or
damages arising out of the use of the appraised value or other conclusions
contained herein.
On October 3, 1992, the Congress adopted legislation affecting the cable
television industry generally. Detailed implementing regulations have been
issued by the FCC on a continuing basis since that date. Further FCC rules and
modifications are quite likely. In addition, legislation is pending before
Congress that would dramatically overhaul the entire telecommunications
regulatory system. In short, there is uncertainty. The appraisal value is based
on regulations and their impact as reflected in the cable television system sale
market on the appraisal date and does not necessarily take into account any
future changes. As noted herein, Cencom has indicated that the system operations
substantially comply with present regulations. While nothing has come to our
attention to indicate that Cencom's analysis is incorrect, we have not verified
such compliance, nor does the appraisal necessarily reflect the impact of
changes which might be required by enforcement of current regulations.
GENERAL DESCRIPTION
The system serves the small rural town of Abbeville, South Carolina, located
about 40 miles south of Greenville, SC.
Homes Passed 3,829
Residential Basic Subs 2,515 (66%)
Commercial/Bulk EBU's (37 units) 19
Total EBU's 2,534
Pay Units 883 (35%)
Plant Miles 80
Homes Per Mile 48
Number of headends 1
Plant Channels In Use 49
Plant Channel Capacity 60
Abbeville has a downtown retail and service base, and a number of manufacturing
plants including textiles such as carpet yarn, towels, fabric, and tire cord.
CSX Railroad is also a significant area employer. Some residents commute to
nearby Greenwood (12 miles).
Abbeville, South Carolina, Page
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The overall economy in South Carolina is quite strong; Abbeville employers are
all stable or growing slightly. Unemployment is low.
Abbeville is a lovely old town, with a number of carefully-restored homes dating
from before the Civil War, and many large homes built in recent years. There are
several subdivisions, in which a few new homes are being built. The balance of
the town is comprised of typical older small homes priced in the $60,000 -
$90,000 range.
Residents can be described as middle-class working family. There are a few
low-income areas. There is no unusual retirement segment or seasonality.
PASSINGS GROWTH
Due to work done to correct the database, complete historic data was not readily
available. Map analysis done by the chief engineer resulted in a passing count
of 3,829 for 3/31/95. Available records indicate that the count on 3/31/91 was
3,553. This would indicate growth of 276 homes over four years, or about 70
homes per year (2%). The engineer estimated that new housing growth has been
steady at about 30 homes per year, with the remainder of the earlier growth
coming from short extensions to existing areas.
We expect the area to grow at 30 new homes/year for a number of years. There are
a few feasible short line extensions possible which would add about 100 homes in
the first year. They have not been built due to a lack of capital, but would be
built by a new owner.
There are no possible acquisitions.
SUBSCRIBER PENETRATION
The system provided subscriber counts and passings for 3/95 and 3/91; we
estimated passings counts for other years:
Passings Basic Pay Basic % Pay %
-------------------------------------------------------
3/95 3,829 2,515 883 66 35
12/94 3,815 2,508 825 66 33
12/93 3,745 2,421 657 65 27
12/92 3,675 2,349 508 64 22
12/91 3,600 2,303 463 64 20
The 1994 Cable Factbook reports penetrations in nearby Greenwood of 71% basic
and 42% pay.
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There has been slow growth in basic penetration, and we expect that it will
continue to 70%. Pay penetration is growing faster, and we believe it will
increase by 1%/year up to 45%.
SUBSCRIBER RATES AND SERVICES
Channels Rate
-----------------------------
Basic 12 6.24
Tier 29 15.95
Total 41 $22.19
Pay channels 4 8.45-11.45
Pay-per-view 1 -
Converters .78 - 1.55
Remote control .13
Wire maintenance .95
Approximately 82% of the customers take the tier.
Basic includes 9 offair, 1 access, and 2 satellite. The tier has 29 satellite.
Pay services are HBO, Disney, Movie, Showtime. Pay-per-view offerings include
only special events.
There is no charge for AO's. Typical aerial installation fees are $35.
Applicable FCC and franchise fees are added as a separate charge. There are a
number of small transaction fees. There are several premium package discounts
and promotional rates. Rates are reasonable, and consistent with industry
practice.
There was no rate change in 1994. The system increased tier rates by 78(cents)in
all areas during the first quarter, to the level shown above.
RATE REGULATION
None of the franchisors has filed for certification to regulate rates, and no
such action is expected. There are no tier complaints. The local and national
political climate regarding rate regulation is favorable. We do not believe
regulation will be a factor.
NON-SUBSCRIBER REVENUE
The company has historically only sold advertising on the character generator.
The company is negotiating a contract with an independent contractor who will
sell advertising spots on satellite channels.
Abbeville, South Carolina, Page
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This is expected to start during 1995, and produce some revenue in future years,
with a contractual minimum of $1.80/sub.
There is no other significant revenue source (fiber rental, tower rental,
phone), existing at present or likely in the future.
STAFF AND OPERATIONS
The system has a small office and headend located in the center of town; it is
company-owned.
The system has a normal complement of test equipment, inventory, and three
trucks including a bucket truck. The office staff is well-equipped, and uses a
standalone billing system.
The system offers customary business-day service Monday through Friday. Phones
are answered by a service after hours, and technicians are dispatched on outages
if necessary.
Management reports about 20% annual turnover, and 24% service call volume.
Substantially all work is completed the same day.
System staffing can be summarized as:
Item Office Field Other
----------------------------------------------------------------
Number of employees 2 2 0
Subs/employee 1,666 1,250
Average wage 27,100 28,900 -
Wages are a bit higher than normal, because the staff has been with the company
for a very long time, and is capable of independent operation. Ratios are
normal.
MARKETING
There is an annual direct sales campaign using an outside contractor. The system
uses occasional direct mail and newspaper. The level is appropriate to the
situation.
FRANCHISES
The system has a city franchise which expires in 1999, and a county franchise
which expires in 2000. There are no unusual conditions. Franchise relations
are good.
Abbeville, South Carolina, Page
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COMPETITION
Residents can get good reception on 4-5 signals with standard antennas from
Greenville and Spartanburg. Due to distance and terrain, reception is likely to
be a problem from time to time.
There is no cable overbuild, and no contiguous operator. There is no MMDS.
DBS impact in the region has been minimal, and Abbeville has not felt any
impact. The company is competitive on rates and services, and has the added
advantage of offair signals.
TECHNICAL PROFILE
Mileage: 80 aerial, 1 underground, no fiber
Headend Electronics: S-A
Plant Electronics: S-A
Amplifier Cascade: 22
Power: Some areas have standby
Trunk Cable: 750 P3, some 500
Distribution Cable: Mostly 500 P3
Pay Security: Addressability on Movie, Disney, traps on HBO, Show
Percent of Addressable Subs: 7%
Converter Types: S-A addressable, conventional misc.
Estimated Plant Build Dates: Totally rebuilt in 1985, including cable and much
of the strand.
Estimated Channel Capacity: 54-channel, 450 Mhz
The plant is reported to be in good condition, with no significant or unusual
problems.
This system does not require an upgrade in the foreseeable future. There is no
nearby "big system" to create pressure. The local residents are not likely to
demand the greatly expanded options offered by DBS. The system can probably add
10-15 channels with existing equipment, and satisfy customer demands.
DETERMINATION OF OPERATING INCOME
Appraising the value of cable television systems involves calculation of
historic and projected operating income (commonly called "cashflow"). Operating
income is defined as direct operating revenues less expenses, before capital
expenditures, depreciation, and management fees. The operating income considered
in appraisals
Abbeville, South Carolina, Page
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is typically that which will be derived by the buyer, using his cost structure
and nominal predictable changes in operations.
First-Year Projection:
We first prepared a detailed Projected-Year statement of operating income. To do
so, we reviewed the company's 1992, 1993, 1994, and 1995/Q1 historic income
statements, and used them to prepare an estimate of projected operating income
for the 12 months beginning April 1, 1995. A projection worksheet is attached.
The Projected-Year subscriber revenues are based on the March 31, 1995
subscriber count, plus allowances for growth, and on 1995/Q1 rates, plus
appropriate adjustments for additional actual 1995 rate changes. Other revenue
items were based on consideration of past results and trends, and 1995/Q1
results.
Certain Projected-Year expense items such as programming costs which are based
on subscribers or revenue have been adjusted to match the subscriber and revenue
projections shown, using prior-year unit costs or ratios plus an allowance for
increases where appropriate. Overhead items, such as maintenance and property
tax have been based principally on 1992-94 average results, to reflect
longer-term trends. In preparing our detailed analysis, we also reviewed key
operating ratios, such as programming cost/subscriber, staffing ratios,
copyright and bad debt expense levels, etc. and compared them to industry norms
and our experience. A brief discussion of key individual items follows:
Passings: In the first year, we allowed for construction of postponed line
extensions, and normal growth of about 30 homes.
Basic Penetration: We continued the past trends of about 1 pt/yr.
Pay Penetration: We continued the past growth.
Average Basic+Tier Revenue/Subscriber: Average rates for 1995/Q1 include the
impact of the rate increase; use them.
Average Pay Revenue/Unit: Past rates have been remarkably steady at around
$10.76; use that level.
Pay-Per-View Revenues: This should be growing, but the amounts are not material.
Advertising: Allow a small increase, related to the new contract.
Shopping/Other: This is fluctuating; use a 94/95 average.
Abbeville, South Carolina, Page
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Franchise Fees Billed: Use the 94/95 average.
G&A Salary: Ratios are appropriate. Levels are steady. Use 1994, plus inflation.
Office Operation: Use a 3-year average due to fluctuations.
Billing: Use 1994, plus a small amount for the recent postage increases.
Professional Services, Allocated Costs: These two categories include allocations
of outside professional services, plus allocations of regional staffing, and
related regional expenses. There appears to have been some change in accounting
practices, and not all charges were booked for 95/Q1. We projected professional
services and allocated costs based on 1994 final charges.
Insurance, Property Tax, System Maintenance, Pole Rent, Power: We checked the
per-mile cost ratios, and found them to be reasonable.
Operating Wages: Ratios and wages are good; use 1994 plus inflation.
Basic Programming: Use 1994 per-sub levels, plus 5% for inflation
Premium/PPV Programming: We used the average historic levels expressed as a
percentage of revenue.
Marketing/Sales: Industry norms vary from 1% of revenue in classic systems with
little need for sales, to 4% in urban markets. This system is at 1% and fits the
norms; we used historic levels.
Our work is done independently of the system budget, but comparison to the
budget provides a satisfactory independent crosscheck:
Actual operating income, 1994 377,000
Our projected year 1 op. inc. 417,000
Budgeted 1995 op. income 395,000
Ten-Year Cashflow Projections
Our principal appraisal technique involves projection of free cashflow for 10
years; free cashflow is equal to operating income less capital expenditures, but
still before depreciation and interest, and taxes. (Projected free cashflow is
then discounted at an appropriate cost-of-capital rate, and a terminal value is
added to get the value of the property.) Our projection for this system is shown
on the two-page spreadsheet enclosed. We started with the data
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contained in the first-year projection spreadsheet, and expanded it with the
variables and assumptions shown.
Revenue items used are the same as for the first-year analysis. However, they
are based on forecasts for system growth in areas such as passings, penetration,
and revenue/subscriber. The small amount of commercial revenue was converted to
EBU's and for simplicity we did our forecast using total EBU's.
Passing growth is continued at the same level of about 30 homes/year.
Basic penetration is increased at the same rate of about .75 pt/year.
Addressable Subs & PPV Revenue/Sub: The market is probably less attractive for
PPV due to its demographics, but we have allowed for longterm increases in
addressable subs, and in revenue/sub.
Basic Rate Increases: Rate regulation and competition will normally limit
increases to just over inflation, or 3.25%. However, on completion of the
rebuild, the company can add some new channels and tiers, and should be able to
achieve 5% overall increases for a few years. These amounts should be consistent
with FCC rate regulations, but we do not do a specific calculation because of
the changing regulatory environment, and the equally important role of increased
competition.
The ten-year model uses summary expense variables which were calculated from the
one-year information as follows:
Personnel: Salaries, Tax/benefit, Professional services, cost
allocations, and capitalized labor
Per-Subscriber: Office rent, Office Operation, Basic
Programming, LO Programming
Revenue-related: Franchise fee, copyright, bad debt,
marketing, and advertising sales
Premium Programming: Pay and pay-per-view
Per-Mile: Insurance, Property Tax, Pole Rent, Power, System
Maintenance
Personnel costs are based on current personnel costs, plus annual percentage
increases to reflect growth and expenses. We calculated the amounts for the
other expense categories on a per-sub or per-mile, or percentage of revenue
basis, as noted.
The per-sub and per-mile costs were increased over the 10-year period by
inflation. The percentage costs were held to the same percentage of revenue over
10 years, on the assumption that gradual increases in unit costs can be passed
on to customers.
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Capital costs were forecast for several items. New plant costs were calculated
using new plant mileage derived from passings growth at 55 new homes/mile (or as
shown) and an average per-mile cost for new plant (aerial and U/G). Drops were
calculated on the assumption that a certain percentage of existing drops is
replaced each year, and new drops are added equal to growth plus a churn
allowance of 5%. Costs for new addressable converters were allowed based on the
increase in addressable subscribers. Capitalized labor is based on 1994 levels,
plus inflation. The capital costs for vehicles and miscellaneous is estimated
from system size and current vehicle count (assuming vehicles are replaced every
5 years).
We allowed a nominal annual amount for plant upgrades.
DETERMINATION OF APPRAISED VALUE
General Methodology
Appraisal of income-producing property typically relies on one or more of three
main approaches.
Replacement cost, which is the cost to assemble and put the property into
operation, is not typically used in the cable television industry for valuing a
property as a whole. Cable television system sales include a very substantial
intangible value for franchise, goodwill, and customer lists. Although these
intangibles can be valued separately, more direct approaches to overall value
are easier to use, and more appropriate.
Market value as determined by comparable transactions is a very common approach
for estimates of value. Transaction value is typically reported on the basis of
either per-subscriber cost or operating income multiple. We consider both
ratios, but place more reliance on the income multiple.
The Income Approach is widely used in business valuation, and we use this as our
first approach. Our method involves determination of the discounted present
value of free cashflow generated over ten years, plus an allowance for the
terminal value after ten years.
Income Approach
Ten-year free cashflow was projected, as discussed previously. The annual free
cashflow was discounted using an average cost of capital calculated as shown on
the spreadsheet.
The FCC cost-of-service rules will permit a cost-of-capital rate of 11.25%, plus
further upward adjustments related to tax matters; the
Abbeville, South Carolina, Page
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result is typically in the 12% - 13% range. Small cable operators may use even
higher numbers, subject to certain overall limits. We do not believe the FCC
cost-of-capital should be used directly, but do find that the FCC values support
our calculation of 12.6%.
We then added a terminal value based on the resale value of the system in year
10. The terminal value was calculated at 6 x year 10 cashflow. The industry will
increasingly feel the effects of maturity, regulation and increased competition.
Sale multiples will gradually decline as the opportunities for growth into new
lines are realized or abandoned. Non-cable businesses currently trade in the 3-6
x cashflow range. Regulated telephone companies presently trade at around 5-7 x
cashflow. Selection of 6x should reflect the industry's gradual maturity and
transformation to a "normal" telecommunications industry.
The terminal value was then discounted to a present value using the same
discount rate. The discounted cashflow and discounted terminal values were
added, to arrive at the estimate of potential system value shown on the
worksheet.
Market Value
The prices of cable system transactions are frequently evaluated to determine
the ratio of operating income (income before depreciation, interest, and
management fees) to purchase price; sales results are frequently reported in the
trade press. Per-subscriber values are also widely reported. We consider
principally the multiple of first year projected operating income. To facilitate
our analysis, we compared this system to the overall market with respect to some
key factors. The analysis is subjective, and based on our personal knowledge,
but nonetheless helps to structure the process:
Future passing and subscriber growth: Abbeville is limited in this area, and
below average.
Demographics: As discussed above, demographics are average.
Competitive situation: Competition is somewhat limited.
System Capacity/Quality: The system is average.
General Operations: With regard to matters such as staff, franchise problems,
etc., the system is normal.
New Revenues: New revenue opportunities are limited.
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System marketability: The system would be a bit difficult to market because of
location and size, and is thus a bit below average in this area.
Comparable Transaction Data
We then select an approximate appropriate multiplier from information available
about other reasonably similar transactions, and the general state of the
market. The following data has been taken from announcements in the trade press,
information from brokers, recent issues of the Cable TV Investor Newsletter,
published by Paul Kagan Associates, and our own knowledge.
System Date Subs $/Sub CF Mult
- - - -----------------------------------------------------------------------
Single larger systems
Newport News, VA 11/94 48,000 2,542 9.0
Anaheim, CA 11/94 135,000 2,119 10.5
Ansonia, CT 6/94 32,000 2,667 11.7
Henderson, NC 1/95 14,100 1,634 10.5
Small systems
Near Austin TX 12/94 5,300 1,378 n/a
Cameron, TX 4/95 3,500 1,004 8.4
Arizona 5/95 7,800 1,600 8.2
California 2/95 1,900 1,475 7.5
Groupings of small systems
MSO-GA, FL, MS 8/94 30,000 1,217 8.3
NJ MSO 10/94 74,000 1,351 8.0
Pennsylvania MSO 11/94 69,000 1,767 8.1
Kentucky/Illinois 12/94 14,900 1,235 n/a
Adams/York PA 4/95 12,900 1,300 10.4
Rock/small west 3/95 47,000 1,787 9.7
Midwest/south 10/94 34,800 1,350 8.3
Andrews TX 3/95 26,000 1,985 10.3
Major MSO transactions
US West/Wometco 1994 466,000 2,575 11.1
Cox/Times-Mirror 1994 3,000,000 1,916 12.1
Comcast/McLean 1994 550,000 2,309 10.6
Colony 1994 750,000 1,870 11.3
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The foregoing data is the best available to us. However, in some cases, it may
not be accurate, and may reflect third-party estimates of the terms rather than
actual data.
These reports of transactions, and general industry commentary, suggest that the
"market" in 1995 for larger systems is generally 9 to 11, depending on location,
growth, rate control, etc. Smaller systems trade in the 7.5 to 9 range. Urban
and suburban systems are valued more highly than rural systems. Groups of
systems tend to trade at slightly higher multiples than individual systems.
After considering all factors, we believe the system would be valued at
approximately 9 x operating income, or $1,500/sub.
Appraised Value
The multiples calculated by dividing the discounted cashflow approach by current
subscriber count and projected income are:
Discounted Cashflow Value 3,796,000
Current subscribers 2,546
Projected operating income 417,000
Resulting per-sub value $1,491
Resulting income multiple 9.1
The values calculated by using the same subscriber count, and multiples selected
from market data are:
Value, at 9 x operating income 3,753,000
Value, at $1,500 per sub 3,819,000
The values calculated by the three different methods are generally within a
reasonable range, which we determined to be $3,700,000 to $3,800,000. We place
substantially more reliance on the discounted cashflow method, because it
directly incorporates the key variables which impact value. Operating income
multiples reflect some of the variables, but are more subjective. Per-subscriber
values are useful only as broad indicators.
Daniels & Associates, the other appraiser retained for this engagement,
established a similar and overlapping range of values.
Abbeville, South Carolina, Page
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We jointly selected the appraised value from these ranges, and found the
appraised value to be $3,700,000.
We believe the foregoing appraised value represents the fair market value at
March 31, 1995 of the assemblage of system assets as a going concern, without
any discount imputed for brokers' fees. We believe the appraisal reflects the
relevant and material general market factors, assumptions, and limitations, all
of which are presented in this report. The appraisal was prepared using standard
appraisal techniques, and conforms to Standards 7-10 of the Uniform Standards of
Professional Appraisal Practice.
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QUALIFICATIONS OF THE APPRAISER
The appraisal was prepared by R. Michael Kruger, owner and President of Western
Cablesystems, Inc. Since 1979, he has appraised hundreds of systems for a
variety of clients including major MSO's, independent operators, and clients
outside the CATV industry. Kruger has extensive background as a CATV executive.
From 1974 to 1979, he held various operating positions at ATC, one of the
industry's largest operators. In 1979, he joined a small MSO, and until mid-1986
was president of the 30,000 - subscriber company. There, in addition to his
operating duties, Kruger prepared CATV system appraisals.
Kruger formed Western Cablesystems, Inc. in 1986, and is its sole owner and
principal. Western has been directly involved in all aspects of system
operations and finance, including several acquisitions and sales, partnership
formation, debt placement, franchising, and system construction and startup.
Western sold one property in 1993, and presently operates three small cable
systems. In addition to continuing appraisal work, Kruger has performed
consulting engagements for a wide range of topics and clients, including the
economic feasibility of international cable and restructuring of individual
systems to achieve financial improvements.
Kruger received a BS/MS in engineering from the Massachusetts Institute of
Technology in 1967/68. In 1974, he received a Masters in Business Administration
(MBA) from the Stanford University Graduate School of Business.
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CENCOM APPRAISAL FOR Abbeville
HISTORIC INCOME STATEMENTS AND FIRST-YEAR PROJECTION
1992 1993 1994 Projected
Actual Actual Actual 1Q/95 Year
Ending Homes Passed 3675 3745 3815 3829 3959
Ending Basic 2349 2421 2508 2515 2629
Subscribers
Ending Pay Subscribers 508 657 825 883 973
Ending Basic 63.92% 64.65% 65.74% 65.68% 66.41%
Penetration
Ending Pay Penetration 21.63% 27.14% 32.89% 35.11% 37.01%
Average Basic Subs 2326 2385 2465 2512 2572
Average Pay Units 485 583 741 854 928
Avg Basic+Tier Rev/Sub $22.13 $23.41 $20.45 $21.28 $21.23
Average Pay Rev/Unit $10.73 $10.14 $10.76 $9.64 $10.76
REVENUE
Basic,Tier Revenue 617577 670135 604888 160366 655243
Ancillary Revenue 71341 60324 37026 10680 45000
Commercial Basic 0 0 8519 2024 8500
Premium 62476 70903 95681 24693 119823
Pay-Per-View 3053 2657 4207 725 5000
Installation 6591 13577 18822 7425 27800
Advertising 10328 11874 6861 1694 7500
Shopping/Other 1087 698 5300 1701 6000
Franchise/FCC Fees 0 23992 6557 27121
Billed
Total Revenue 772453 830168 805296 215865 901987
EXPENSES
G&A Salary 49248 54481 54136 9204 55760
Tax/Benefit-G&A 8705 10871 12362 2101 11152
Office Rent 0 0 0 0 0
Office Operation 22253 27282 21438 8191 24000
Billing 12029 16337 11369 3409 14197
Bad Debt/Collection 9786 9402 5379 1013 9200
Professional Services 6568 12105 179 2972 12000
Insurance 4779 9154 6817 3235 8422
Property Tax 13992 41585 22775 6647 26234
Franchise/FCC/Copyright 24321 25603 24644 6742 27962
Cost Allocation 0 0 16353 1357 16000
Operating Wages, 53300 56181 57878 14290 59614
Overtime
Tax/Benefit- Op Wages 10797 11701 12913 3325 12614
Labor Capitalized -9244 -8713 -6645 -2272 -8000
Pole Rent 6812 8568 8514 2395 8500
Power 6316 6447 4559 1673 6400
System Maint., 10306 9787 13222 1615 11100
Operation
Programming-Basic 81514 103600 112232 32273 122839
Programming-Premium 27667 31392 39873 12115 51752
Programming-PPV 2099 2396 1656 362 3100
Programming-LO, Other 5155 3873 561 252 1000
Marketing/Sales 10964 9546 8424 1129 10824
Cost of Advertising 0 0 0 0 0
Sales
Total Expenses 357367 441598 428639 112028 484670
Operating Income 415086 388570 376657 103837 417317
Operating Margin 53.74% 46.81% 46.77% 48.10% 46.27%
<PAGE>
DISCOUNTED CASHFLOW MODEL FOR APPRAISAL OF ABBEVILLE
<TABLE>
<CAPTION>
Change
Assumptions Current Proj. Year 2 Year 3 Year 4
Actual Year 1
<S> <C> <C> <C> <C> <C> <C>
Ending Passings 3,829 3,959 4,089 4,120 4,151
Passings Growth 3.28% 0.75% 0.75%
Ending Basic EBU's 2,546 2,659 2,777 2,829 2,881
Ending Pay Units 883 973 1,072 1,148 1,169
Ending Basic EBU Pen. 66.49% 67.16% 67.91% 68.66% 69.41%
Basic Penetration 0.75% 0.75% 0.75%
Change
Pay/Basic Penetration 2.00% 34.68% 36.59% 38.59% 40.59% 40.59%
Average Basic EBU's 2,603 2,718 2,803 2,855
Average Pay Units 928 1,022 1,110 1,159
Addressable Sub % 10.00% 7.00% 10.00% 20.00% 30.00% 40.00%
Ending Plant Miles 81 83 86 86 87
New Miles 55 2 2 0 0
New Drops 1.05 119 124 54 55
Rebuild Miles
Replace Drops % 10.00% 10.00% 10.00% 10.00%
Basic Revenue/EBU $255.04 $263.33 $271.89 $285.48
Basic Rev/EBU 3.25% 3.25% 5.00%
Increase
Ancillary Rev/EBU 3.00% $17.29 $17.81 $18.34 $18.89
Pay Revenue/Unit 1.50% $129.12 $131.06 $133.02 $135.02
PPV Rev/Addr. Sub 4.00% $19.21 $19.98 $20.78 $21.61
Late/Shop/Oth $/EBU 4.00% $2.31 $2.40 $2.49 $2.59
Advertising Rev/EBU 4.00% $2.82 $2.93 $3.05 $3.17
Personnel Cost Incr. % 3.00% 6.68% 6.64% 4.26% 4.25%
Per-Sub Expense 3.00% $60.94 $62.77 $64.65 $66.59
% of Rev. Expense % 5.32% 5.32% 5.32% 5.32%
Pay/PPV Expense % 43.94% 43.94% 43.94% 43.94%
Per-Mile Expense 3.00% $728 $749 $772 $795
Capex per drop 2.00% $70 $71 $73 $74
Capex per new mile 3.00% $18,000 $18,540 $19,096 $19,669
Capex per rebuild
mile
Capex per new adr. 1.00% $100 $101 $102 $103
sub
REVENUE
Basic/Tier/Com'l 663,743 715,727 762,058 815,016
Ancillary 45,000 48,407 51,416 53,941
Pay 119,823 133,986 147,652 156,468
Pay-per-view 5,000 10,862 17,473 24,679
Installation 4.00% 27,800 28,912 30,068 31,271
Late/Other/Shop 6,000 6,517 6,989 7,404
Advertising 7,500 7,973 8,551 9,058
Franch. Fee billed 3.10% 27,121 28,023 30,157 32,361
Total Revenue 901,987 980,407 1,054,364 1,130,198
EXPENSES
Personnel 159,140 169,701 176,924 184,445
Per-Sub costs 162,036 174,302 182,875 191,847
Per-mile costs 60,656 64,247 66,605 69,050
Percent of Rev. costs 47,986 52,158 56,092 60,127
Pay & PPV Costs 54,852 63,652 72,562 79,603
Total Expenses 484,670 524,060 555,059 585,072
OPERATING INCOME 417,317 456,347 499,305 545,126
Operating Ratio 46.27% 46.55% 47.36% 48.23%
<CAPTION>
Year 5 Year 6 Year 7 Year 8 Year 9 Year 10
<S> <C> <C> <C> <C> <C> <C>
Ending Passings 4,182 4,213 4,245 4,276 4,309 4,341
Passings Growth 0.75% 0.75% 0.75% 0.75% 0.75% 0.75%
Ending Basic EBU's 2,934 2,988 3,042 3,097 3,152 3,208
Ending Pay Units 1,191 1,213 1,235 1,257 1,280 1,302
Ending Basic EBU Pen. 70.16% 70.91% 71.66% 72.41% 73.16% 73.91%
Basic Penetration 0.75% 0.75% 0.75% 0.75% 0.75% 0.75%
Change
Pay/Basic Penetration 40.59% 40.59% 40.59% 40.59% 40.59% 40.59%
Average Basic EBU's 2,908 2,961 3,015 3,069 3,125 3,180
Average Pay Units 1,180 1,202 1,224 1,246 1,268 1,291
Addressable Sub % 50.00% 60.00% 70.00% 70.00% 70.00% 70.00%
Ending Plant Miles 87 88 89 89 90 90
New Miles 1 1 1 1 1 1
New Drops 56 56 57 58 58 59
Rebuild Miles
Replace Drops % 10.00% 10.00% 10.00% 10.00% 10.00% 10.00%
Basic Revenue/EBU $299.76 $314.74 $324.97 $335.53 $346.44 $357.70
Basic Rev/EBU 5.00% 5.00% 3.25% 3.25% 3.25% 3.25%
Increase
Ancillary Rev/EBU $19.46 $20.05 $20.65 $21.27 $21.90 $22.56
Pay Revenue/Unit $137.04 $139.10 $141.18 $143.30 $145.45 $147.63
PPV Rev/Addr. Sub $22.48 $23.37 $24.31 $25.28 $26.29 $27.35
Late/Shop/Oth $/EBU $2.70 $2.80 $2.92 $3.03 $3.16 $3.28
Advertising Rev/EBU $3.30 $3.43 $3.57 $3.71 $3.86 $4.01
Personnel Cost Incr. 4.25% 4.24% 4.23% 4.23% 4.22% 4.22%
%
Per-Sub Expense $68.59 $70.64 $72.76 $74.95 $77.20 $79.51
% of Rev. Expense % 5.32% 5.32% 5.32% 5.32% 5.32% 5.32%
Pay/PPV Expense % 43.94% 43.94% 43.94% 43.94% 43.94% 43.94%
Per-Mile Expense $819 $843 $869 $895 $922 $949
Capex per drop $76 $77 $79 $80 $82 $84
Capex per new mile $20,259 $20,867 $21,493 $22,138 $22,802 $23,486
Capex per rebuild
mile
Capex per new adr. $104 $105 $106 $107 $108 $109
sub
REVENUE
Basic/Tier/Com'l 871,551 931,900 979,710 1,029,859 1,082,458 1,137,622
Ancillary 56,584 59,350 62,244 65,271 68,439 71,753
Pay 161,744 167,179 172,777 178,543 184,481 190,597
Pay-per-view 32,674 41,525 51,301 54,319 57,508 60,878
Installation 32,522 33,823 35,176 36,583 38,046 39,568
Late/Other/Shop 7,842 8,305 8,794 9,312 9,859 10,436
Advertising 9,594 10,161 10,760 11,392 12,061 12,768
Franch. Fee billed 34,594 36,980 39,014 40,921 42,917 45,008
Total Revenue 1,207,106 1,289,223 1,359,777 1,426,201 1,495,769 1,568,630
EXPENSES
Personnel 192,275 200,427 208,913 217,748 226,945 236,520
Per-Sub costs 201,236 211,060 221,338 232,092 243,342 255,111
Per-mile costs 71,585 74,213 76,939 79,765 82,695 85,734
Percent of Rev. costs 64,218 68,587 72,341 75,874 79,575 83,452
Pay & PPV Costs 85,435 91,713 98,469 102,328 106,339 110,507
Total Expenses 614,749 645,999 677,999 707,808 738,898 771,324
OPERATING INCOME 592,357 643,224 681,778 718,393 756,872 797,306
Operating Ratio 49.07% 49.89% 50.14% 50.37% 50.60% 50.83%
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
CAPITAL EXPENDITURES
Drops 26,919 28,673 24,556 25,485
Addr. Converters 8,768 29,239 29,911 31,301
New plant 42,545 43,822 10,648 11,050
Rebuild 3.00% 25,000 25,750 26,523 27,318
Labor capitalized 5.03% 8,000 8,531 8,894 9,272
Vehicles 5.00% 8,000 8,400 8,820 9,261
Other 3.00% 25,000 25,000 25,750 26,523
Total Capex 144,232 169,414 135,102 140,209
DISCOUNTED FREE
CASHFLOW
Operating Income 417,317 456,347 499,305 545,126
Less Capital 144,232 169,414 135,102 140,209
Expenditures
Free cashflow 273,085 286,932 364,203 404,917
<S> <C> <C> <C> <C> <C> <C>
CAPITAL EXPENDITURES
Drops 26,445 27,440 28,469 29,534 30,637 31,778
Addr. Converters 32,736 34,217 35,745 4,119 4,210 4,302
New plant 11,466 11,899 12,348 12,814 13,297 13,799
Rebuild 28,138 28,982 29,851 30,747 31,669 32,619
Labor capitalized 9,666 10,075 10,502 10,946 11,409 11,890
Vehicles 9,724 10,210 10,721 11,257 11,820 12,411
Other 27,318 28,138 28,982 29,851 30,747 31,669
Total Capex 145,494 150,961 156,618 129,269 133,788 138,468
DISCOUNTED FREE
CASHFLOW
Operating Income 592,357 643,224 681,778 718,393 756,872 797,306
Less Capital 145,494 150,961 156,618 129,269 133,788 138,468
Expenditures
Free cashflow 446,863 492,263 525,160 589,124 623,083 658,838
</TABLE>
Discount Rate 12.60% Discount
Rate
Calculation
Net Present Value of 2,336,293 Proportion Rate
Free Cashflow
Equity 30.00% 20.00%
Senior 60.00% 9.00%
Debt
Sub. Debt 10.00% 12.00%
Blended 12.60%
TERMINAL VALUE
Year 10 operating 797,306
income
Multiple 6
Terminal Value 4,783,835
Discounted at 12.60% 1,460,133
POTENTIAL VALUE
NPV of Free Cashflow 2,336,293
NPV of Terminal Value 1,460,133
Total Potential 3,796,426
Value
RATIOS
Current EBU's 2,546
First-year Op. Income 417,317
Value per EBU $1,491
Op. Income Multiple 9.10
<PAGE>
FAIR MARKET VALUE APPRAISAL FOR
ABBEVILLE, SOUTH CAROLINA
MARCH 31, 1996 UPDATE
PREPARED FOR
CENCOM PARTNERS, INC
CENCOM PARTNERS LP
PREPARED BY
WESTERN CABLESYSTEMS, INC
R. MICHAEL KRUGER, PRESIDENT
CABLE TELEVISION MANAGEMENT,
CONSULTING, AND APPRAISALS
513 WILCOX, #230
CASTLE ROCK, CO 80104
303-688-4462
Abbeville, South Carolina, Page
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BACKGROUND AND LIMITING CONDITIONS
Western was asked by Cencom to prepare an analysis of the fair market value as a
going concern of the assets of the Abbeville, South Carolina cable television
system as of March 31, 1995. We were recently asked to update our work and issue
a new report. This appraisal report is being issued pursuant to the April 28,
1995 and April 19, 1996 engagement letters between CencCom and Western. This
report presents key data, our analysis and assumptions, and our conclusions.
The assets being appraised include, as an assemblage, all of the tangible and
intangible assets and personal property necessary to operate the Abbeville cable
television system as a going concern, operating consistent with past practice
and industry norms. The assets include the antennas and signal receiving
equipment, strand, conduit, cables, amplifiers, passive devices, drops,
converters, tools, test equipment, subscriber records, franchises, pole
attachment agreements, easements, supplier and programming contracts, and
goodwill. Liabilities, and financial assets such as accounts receivable, are not
considered.
The appraisal is based principally on financial data provided by Cencom,
including Income Statements for the 12 months ended December 31, 1995, 1994,
1993, and 1992, and 3 months ended March 31, 1996. Management also provided the
operational data presented herein, such as passings and subscriber counts. The
appraiser visited the system in May, 1995. The system manager was interviewed at
length to obtain additional data including subscriber history, technical data,
demographics, and local economic information. The appraiser toured
representative portions of the general market area. This information was
reviewed and updated in 1996 by means of a telephone interview of the manager.
The work herein is based in part on data provided by Cencom and others, and we
assume no responsibility for the accuracy of such data. Western has used
customary techniques and industry knowledge available to Western in preparing
this report. Western does not warrant or represent that the appraised value is
that which would actually be obtained in an open market transaction, or that the
value would be upheld in litigation or administrative proceeding. Accordingly,
Western (including its officers, employees, and owners) does not indemnify or
hold harmless any user of this report in any manner against any costs, losses,
or damages arising out of the use of the appraised value or other conclusions
contained herein.
Abbeville, South Carolina, Page
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<PAGE>
GENERAL DESCRIPTION
The system serves the small rural town of Abbeville, South Carolina, located
about 40 miles south of Greenville, SC.
Homes Passed 3,678
Residential Basic Subs 2,588(70%)
Commercial/Bulk EBU's (37 units) 35
Total EBU's 2,623
Pay Units 1,007(35%)
Plant Miles 85
Homes Per Mile 43
Number of headends 1
Plant Channels In Use 50
Plant Channel Capacity 60
Abbeville has a downtown retail and service base, and a number of manufacturing
plants including textiles such as carpet yarn, towels, fabric, and tire cord.
CSX Railroad is also a significant area employer. Some residents commute to
nearby Greenwood (12 miles). The overall economy in South Carolina is quite
strong; Abbeville employers are all stable or growing slightly. Unemployment is
low.
Abbeville is a lovely old town, with a number of carefully-restored homes dating
from before the Civil War, and many large homes built in recent years. There are
several subdivisions, in which a few new homes are being built. The balance of
the town is comprised of typical older small homes priced in the $60,000 -
$90,000 range.
Residents can be described as middle-class working family. There are a few
low-income areas. There is no unusual retirement segment or seasonality.
PASSINGS GROWTH
Map and database information was updated in 1995. This resulted in a decline in
passing count from reports for prior years, to the number shown above.
Management estimated that new housing growth has been steady at about 20-30
homes per year.
We expect the area to grow at 30 new homes/year for a number of years. There are
a few feasible short line extensions possible which would add about 40 homes in
the first year. They have not been built
Abbeville, South Carolina, Page
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<PAGE>
due to a lack of capital, but would be built by a new owner. There are no
possible acquisitions.
SUBSCRIBER PENETRATION
The system provided subscriber counts and passings for 3/95 and 3/91; we
estimated passings counts for other years:
Passings Basic Pay Basic % Pay %
-----------------------------------------------------------
12/95 3,678 2,543 942 69 37
12/94 3,815 2,508 825 66 33
12/93 3,745 2,421 657 65 27
12/92 3,675 2,349 508 64 22
12/91 3,600 2,303 463 64 20
The 1994 Cable Factbook reports penetrations in nearby Greenwood of 71% basic
and 42% pay.
There has been slow growth in basic penetration, and we expect that it will
continue at a slower rate after the system passes 70%.
SUBSCRIBER RATES AND SERVICES
Channels Rate
---------------------------
Basic 12 7.74
Tier 29 16.76
Total 41 $24.50
Pay channels 4 8.45-11.45
Pay-per-view 1 -
Converters .78 - 1.55
Remote control .13
Wire maintenance .95
Approximately 80% of the customers take the tier.
Basic includes 9 offair, 1 access, and 2 satellite. The tier has 29 satellite.
Pay services are HBO, Disney, Movie, Showtime. Pay-per-view offerings include
only special events.
There is no charge for AO's. Typical aerial installation fees are $35.
Applicable FCC and franchise fees are added as a separate charge. There are a
number of small transaction fees. There are several premium package discounts
and promotional rates. Rates are reasonable, and consistent with industry
practice.
Abbeville, South Carolina, Page
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There was no rate change in 1994. The system increased rates in 1995, and plans
an increase of $1.90 on 4/1/96.
RATE REGULATION
None of the franchisors has filed for certification to regulate rates, and no
such action is expected. There are no tier complaints. The local and national
political climate regarding rate regulation is favorable. We do not believe
regulation will be a factor.
NON-SUBSCRIBER REVENUE
The company has historically only sold advertising on the character generator.
The company has a contract with an independent contractor who sells advertising
spots on satellite channels.
There is no other significant revenue source (fiber rental, tower rental,
phone), existing at present or likely in the future.
STAFF AND OPERATIONS
The system has a small office and headend located in the center of town; it is
company-owned.
The system has a normal complement of test equipment, inventory, and three
trucks including a bucket truck. The office staff is well-equipped, and uses a
standalone billing system.
The system offers customary business-day service Monday through Friday. Phones
are answered by a service after hours, and technicians are dispatched on outages
if necessary.
Management reports about 20% annual turnover, and 25% service call volume.
Substantially all work is completed the same day.
System staffing can be summarized as:
Item Office Field Other
----------------------------------------------------------------------
Number of FTE employees 2 2 0
Subs/employee 1,311 1,311
Average wage 22,400 30,200 --
Field wages are a bit higher than normal, because the staff has been with the
company for a very long time, and is capable of independent operation. Ratios
are normal for a small system.
Abbeville, South Carolina, Page
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<PAGE>
MARKETING
There is an annual direct sales campaign using an outside contractor. The system
uses occasional direct mail and newspaper. The level is appropriate to the
situation.
FRANCHISES
The system has a city franchise which expires in 1999, and a county franchise
which expires in 2000. There are no unusual conditions.
Franchise relations are good.
COMPETITION
Residents can get good reception on 4-5 signals with standard antennas from
Greenville and Spartanburg. Due to distance and terrain, reception is likely to
be a problem from time to time. There is no cable overbuild, and no contiguous
operator. There is no MMDS. DBS impact in the region has been minimal. The
company is competitive on rates and services, and has the added advantage of
offair signals.
TECHNICAL PROFILE
Mileage: 82 aerial, 3 underground, no fiber
Headend Electronics: S-A
Plant Electronics: S-A
Amplifier Cascade: 22
Power: Some areas have standby
Trunk Cable: 750 P3, some 500
Distribution Cable: Mostly 500 P3
Pay Security: Addressability on Movie, Disney, traps on HBO, Show
Percent of Addressable Subs: 7%
Converter Types: S-A addressable, conventional misc.
Estimated Plant Build Dates: Totally rebuilt in 1985, including cable and much
of the strand.
Estimated Channel Capacity: 60-channel, 450 Mhz
The plant is reported to be in good condition, with no significant or unusual
problems.
This system does not require an upgrade in the foreseeable future. There is no
nearby "big system" to create pressure. The local residents are not likely to
demand the greatly expanded options offered by DBS. The system can probably add
10-15 channels with existing equipment, and satisfy customer demands.
Abbeville, South Carolina, Page
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<PAGE>
DETERMINATION OF OPERATING INCOME
Appraising the value of cable television systems involves calculation of
historic and projected operating income (commonly called "cashflow"). Operating
income is defined as direct operating revenues less expenses, before capital
expenditures, depreciation, and management fees. The operating income considered
in appraisals is typically that which will be derived by the buyer, using his
cost structure and nominal predictable changes in operations.
First-Year Projection:
We first prepared a detailed Projected-Year statement of operating income. To do
so, we reviewed the company's historic income statements, and used them to
prepare an estimate of projected operating income for the 12 months beginning
April 1, 1996. A projection worksheet is attached.
The Projected-Year subscriber revenues are based on the March 31, 1996
subscriber count, plus allowances for growth, and on 1996/Q1 rates, plus
appropriate adjustments for additional actual 1996 rate changes. Other revenue
items were based on consideration of past results and trends.
Certain Projected-Year expense items such as programming costs which are based
on subscribers or revenue have been adjusted to match the subscriber and revenue
projections shown, using prior-year unit costs or ratios plus an allowance for
increases where appropriate. Overhead items, such as maintenance and property
tax have been based principally on prior average results, to reflect longer-term
trends. In preparing our detailed analysis, we also reviewed key operating
ratios, such as programming cost/subscriber, staffing ratios, copyright and bad
debt expense levels, etc. and compared them to industry norms and our
experience. A brief discussion of key individual items follows:
Passings: In the first year, we allowed for construction of postponed line
extensions, and normal growth of about 30 homes.
Basic Penetration: We reduced past trends as the system passes 70%
Pay Penetration: We continued the past growth.
Average Basic+Tier Revenue/Subscriber: Use 96/Q1 rates plus 1.90
Average Pay Revenue/Unit: Use 96/Q1
Abbeville, South Carolina, Page
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Pay-Per-View Revenues: Allow some growth
Advertising: Allow a small increase, related to the new contract.
Shopping/Other: This is fluctuating; use an average.
Franchise Fees Billed: Use the average rate
G&A Salary: Use 1995, plus inflation.
Office Operation: Use an average due to fluctuations.
Billing: Use 1995
Professional Services, Allocated Costs: Use 1995/96 levels
Insurance, Property Tax, System Maintenance, Pole Rent, Power: We checked the
per-mile cost ratios, and found them to be reasonable.
Operating Wages: Ratios and wages are good; use 1995 plus inflation.
Basic Programming: Use 1996 per-sub levels, plus inflation
Premium/PPV Programming: We used the average historic levels expressed as a
percentage of revenue.
Marketing/Sales: Industry norms vary from 1% of revenue in classic systems with
little need for sales, to 4% in urban markets. This system is at 1% and fits the
norms; we used historic levels.
Ten-Year Cashflow Projections
Our principal appraisal technique involves projection of free cashflow for 10
years; free cashflow is equal to operating income less capital expenditures, but
still before depreciation and interest, and taxes. (Projected free cashflow is
then discounted at an appropriate cost-of-capital rate, and a terminal value is
added to get the value of the property.) Our projection for this system is shown
on the two-page spreadsheet enclosed. We started with the data contained in the
first-year projection spreadsheet, and expanded it with the variables and
assumptions shown.
Revenue items used are the same as for the first-year analysis. However, they
are based on forecasts for system growth in areas such as passings, penetration,
and revenue/subscriber. The small amount of commercial revenue was converted to
EBU's and for simplicity we did our forecast using total EBU's.
Abbeville, South Carolina, Page
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<PAGE>
Passing growth is continued at the same level of about 30 homes/year.
Basic penetration is increased at the same rate of about .5 pt/year.
Addressable Subs & PPV Revenue/Sub: The market is probably less attractive for
PPV due to its demographics, but we have allowed for longterm increases in
addressable subs, and in revenue/sub.
Basic Rate Increases: Competition will limit increases to just over inflation,
or 3.25%. However, on completion of the rebuild, the company can add some new
channels and tiers, and should be able to achieve 5% overall increases for a few
years.
The ten-year model uses summary expense variables which were calculated from the
one-year information as follows:
Personnel: Salaries, Tax/benefit, Professional services, cost allocations,
and capitalized labor
Per-Subscriber: Office rent, Office Operation, Basic Programming, LO
Programming
Revenue-related: Franchise fee, copyright, bad debt, marketing, and
advertising sales
Premium Programming: Pay and pay-per-view
Per-Mile: Insurance, Property Tax, Pole Rent, Power, System Maintenance
Personnel costs ae based on current personnel costs, plus annual percentage
increases to reflect growth and expenses. We calculated the amounts for the
other expense categories on a per-sub or per-mile, or percentage of revenue
basis, as noted.
The per-sub and per-mile costs were increased over the 10-year period by
inflation. The percentage costs were held to the same percentage of revenue over
10 years, on the assumption that gradual increases in unit costs can be passed
on to customers.
Capital costs were forecast for several items. New plant costs were calculated
using new plant mileage derived from passings growth and an average per-mile
cost for new plant (aerial and U/G). Drops were calculated on the assumption
that a certain percentage of existing drops is replaced each year, and new drops
are added equal to growth plus a churn allowance of 5%. Costs for new
addressable converters were allowed based on the increase in addressable
subscribers. Capitalized labor is based on 1994 levels, plus inflation. The
capital costs for vehicles and miscellaneous is estimated from system size and
current vehicle count (assuming vehicles are replaced every 5 years).
We allowed a nominal annual amount for plant upgrades.
Abbeville, South Carolina, Page
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<PAGE>
DETERMINATION OF APPRAISED VALUE
General Methodology
Appraisal of income-producing property typically relies on one or more of three
main approaches.
Replacement cost, which is the cost to assemble and put the property into
operation, is not typically used in the cable television industry for valuing a
property as a whole. Cable television system sales include a very substantial
intangible value for franchise, goodwill, and customer lists. Although these
intangibles can be valued separately, more direct approaches to overall value
are easier to use, and more appropriate.
Market value as determined by comparable transactions is a very common approach
for estimates of value. Transaction value is typically reported on the basis of
either per-subscriber cost or operating income multiple. We consider both
ratios, but place more reliance on the income multiple.
The Income Approach is widely used in business valuation, and we use this as our
first approach. Our method involves determination of the discounted present
value of free cashflow generated over ten years, plus an allowance for the
terminal value after ten years.
Income Approach
Ten-year free cashflow was projected, as discussed previously. The annual free
cashflow was discounted using an average cost of capital calculated as shown on
the spreadsheet.
The FCC cost-of-service rules will permit a cost-of-capital rate of 11.25%, plus
further upward adjustments related to tax matters; the result is typically in
the 12% - 13% range. Small cable operators may use even higher numbers, subject
to certain overall limits. We do not believe the FCC cost-of-capital should be
used directly, but do find that the FCC values support our calculation of 12.6%.
We then added a terminal value based on the resale value of the system in year
10. The terminal value was calculated at 5 x year 10 cashflow. The industry will
increasingly feel the effects of maturity, regulation and increased competition.
Sale multiples will gradually decline as the opportunities for growth into new
lines are realized or abandoned. Non-cable businesses currently trade in the 3-6
x cashflow range. Regulated telephone companies presently trade at around 5-7 x
cashflow. Selection of 5x should reflect the
Abbeville, South Carolina, Page
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<PAGE>
industry's gradual maturity and transformation to a "normal" telecommunications
industry, and this system's small size.
The terminal value was then discounted to a present value using the same
discount rate. The discounted cashflow and discounted terminal values were
added, to arrive at the estimate of potential system value shown on the
worksheet.
Market Value
The prices of cable system transactions are frequently evaluated to determine
the ratio of operating income (income before depreciation, interest, and
management fees) to purchase price; sales results are frequently reported in the
trade press. Per-subscriber values are also widely reported. We consider
principally the multiple of first year projected operating income. To facilitate
our analysis, we compared this system to the overall market with respect to some
key factors. The analysis is subjective, and based on our personal knowledge,
but nonetheless helps to structure the process:
Future passing and subscriber growth: Abbeville is limited in this area, and
below average.
Demographics: As discussed above, demographics are average.
Competitive situation: Competition is somewhat limited.
System Capacity/Quality: The system is average.
General Operations: With regard to matters such as staff, franchise problems,
etc., the system is normal.
New Revenues: New revenue opportunities are limited.
System marketability: The system would be a bit difficult to market because of
location and size, and is thus below average.
Abbeville, South Carolina, Page
11
<PAGE>
Comparable Transaction Data
We then select an approximate appropriate multiplier from information available
about other reasonably similar transactions, and the general state of the
market. The following data has been taken from announcements in the trade press,
information from brokers, recent issues of the Cable TV Investor Newsletter,
published by Paul Kagan Associates, and our own knowledge.
System Date Subs $/Sub CF Mult
- - - ----------------------------------------------------------------------
SC 3/96 44,600 1,767 10.4
Columbus, MS 2/96 16,000 1,465 9.5
Arizona 12/95 8,000 1,500 7.0
VA/TN/GA 1/96 40,000 1,107 8.5
Market Avg YTD 4/96 5,300,000 2,136 10.8
The foregoing data is the best available to us. However, in some cases, it may
not be accurate, and may reflect third-party estimates of the terms rather than
actual data.
These reports of transactions, and general industry commentary, suggest that the
"market" in 1995 for larger systems is generally 9 to 11, depending on location,
growth, rate control, etc. Smaller systems trade in the 7 to 9 range.
Urban and suburban systems are valued more highly than rural systems.
After considering all factors, we believe Abbeville would be valued at
approximately 8 x operating income, or $1,500/sub.
Appraised Value
The multiples calculated by dividing the discounted cashflow approach by current
subscriber count and projected income are:
Discounted Cashflow Value 3,988,000
Current subscribers 2,623
Projected operating income 495,000
Resulting per-sub value $1,520
Resulting income multiple 8.05
The values calculated by using the same subscriber count, and multiples selected
from market data are:
Value, at 8 x operating income 3,960,000
Value, at $1,500 per sub 3,934,000
Abbeville, South Carolina, Page
12
<PAGE>
The values calculated by the three different methods are consistent and we set
the appraised value at $3,950,000.
QUALIFICATIONS OF THE APPRAISER
The appraisal was prepared by R. Michael Kruger, owner and President of Western
Cablesystems, Inc. Since 1979, he has appraised hundreds of systems for a
variety of clients including major MSO's, independent operators, and clients
outside the CATV industry. Kruger has extensive background as a CATV executive.
From 1974 to 1979, he held various operating positions at ATC, one of the
industry's largest operators. In 1979, he joined a small MSO, and until mid-1986
was president of the 30,000 - subscriber company. There, in addition to his
operating duties, Kruger prepared CATV system appraisals.
Kruger formed Western Cablesystems, Inc. in 1986, and is its sole owner and
principal. Western has been directly involved in all aspects of system
operations and finance, including several acquisitions and sales, partnership
formation, debt placement, franchising, and system construction and startup.
Western sold one property in 1993, and presently operates three small cable
systems. In addition to continuing appraisal work, Kruger has performed
consulting engagements for a wide range of topics and clients, including the
economic feasibility of international cable and restructuring of individual
systems to achieve financial improvements.
Kruger received a BS/MS in engineering from the Massachusetts Institute of
Technology in 1967/68. In 1974, he received a Masters in Business Administration
(MBA) from the Stanford University Graduate School of Business.
Abbeville, South Carolina, Page
13
<PAGE>
CENCOM APPRAISAL FOR Abbeville Abbeville
HISTORIC INCOME STATEMENTS AND FIRST-YEAR PROJECTION
<TABLE>
<CAPTION>
1992 1993 1994 1995
Actual Actual Actual Actual 96/Q1 Projected Year
------ ------ ------ ------ --------------------
<S> <C> <C> <C> <C> <C> <C>
Ending Homes Passed 3675 3745 3815 3678 3678 3710
Ending Basic 2349 2421 2508 2543 2623 2683
Subscribers
Ending Pay Subscribers 508 657 825 942 1007 1107
Ending Basic 63.92% 64.65% 65.74% 69.14% 71.32% 72.32%
Penetration
Ending Pay Penetration 21.63% 27.14% 32.89% 37.04% 38.39% 41.26%
Average Basic Subs 2326 2385 2465 2526 2588 2653
Average Pay Units 485 583 741 884 975 1057
Avg Basic+Tier Rev/Sub $22.13 $23.41 $20.45 $21.69 $21.79 $23.63
Average Pay Rev/Unit $10.73 $10.14 $10.76 $9.84 $9.53 $9.53
REVENUE
Basic,Tier Revenue 617577 670135 604888 657473 169213 752285
Ancillary Revenue 71341 60324 37026 44968 11093 46000
Commercial Basic 0 0 8519 8843 2316 9264
Premium 62476 70903 95681 104348 27873 120879
Pay-Per-View 3053 2657 4207 5552 2637 7500
Installation 6591 13577 18822 22875 6513 26000
Advertising 10328 11874 6861 7226 3857 9500
Shopping/Other 1087 698 5300 5823 1649 6300
Franchise/FCC Fees 0 23992 26794 6753 30310
Billed
Total Revenue 772453 830168 805296 883902 231904 1008037
EXPENSES
G&A Salary 49248 54481 54136 44747 12310 47700
Tax/Benefit-G&A 8705 10871 12362 9738 2241 10494
Office Rent 0 0 0 30 0 0
Office Operation 22253 27282 21438 27574 7661 30000
Billing 12029 16337 11369 13245 3178 14645
Bad Debt/Collection 9786 9402 5379 10886 -873 10080
Professional Services 6568 12105 179 24 0 0
Insurance 4779 9154 6817 7036 1699 7300
Property Tax 13992 41585 22775 50334 11302 48000
Franchise/FCC/Copyright 24321 25603 24644 28965 7294 33265
Cost Allocation 0 0 16353 3555 1076 4400
Operating Wages, 53300 56181 57878 60439 16824 62252
Overtime
Tax/Benefit- Op Wages 10797 11701 12913 11586 3084 13073
Labor Capitalized -9244 -8713 -6645 -28437 -8803 -35000
Pole Rent 6812 8568 8514 5017 2361 9500
Power 6316 6447 4559 6224 1585 6500
System Maint., 10306 9787 13222 10203 2245 11000
Operation
Programming-Basic 81514 103600 112232 136447 37692 162364
Programming-Premium 27667 31392 39873 47448 13598 56813
Programming-PPV 2099 2396 1656 2570 1131 4500
Programming-LO, Other 5155 3873 561 3749 1041 4000
Marketing/Sales 10964 9546 8424 10775 1245 12096
Cost of Advertising 0 0 0 0 0 0
Sales
Total Expenses 357367 441598 428639 462155 117891 512982
Operating Income 415086 388570 376657 421747 114013 495055
Operating Margin 53.74% 46.81% 46.77% 47.71% 49.16% 49.11%
</TABLE>
<PAGE>
DISCOUNTED CASHFLOW MODEL FOR APPRAISAL OF ABBEVILLE
<TABLE>
<CAPTION>
Change Current Proj.
Assumptions Actual Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8
----------- ------- ----- ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Ending Passings 3,678 3,710 3,780 3,808 3,837 3,866 3,895 3,924 3,953
Passings Growth 1.89% 0.75% 0.75% 0.75% 0.75% 0.75% 0.75%
Ending Basic EBU's 2,623 2,716 2,786 2,826 2,866 2,907 2,949 2,990 3,032
Ending Pay Units 1,007 1,107 1,143 1,166 1,183 1,200 1,217 1,234 1,251
Ending Basic EBU Pen. 71.32% 73.21% 73.71% 74.21% 74.71% 75.21% 75.71% 76.21% 76.71%
Basic Penetration 0.50% 0.50% 0.50% 0.50% 0.50% 0.50% 0.50%
Change
Pay/Basic Penetration 0.25% 38.39% 40.76% 41.01% 41.26% 41.26% 41.26% 41.26% 41.26% 41.26%
Average Basic EBU's 2,670 2,751 2,806 2,846 2,887 2,928 2,969 3,011
Average Pay Units 1,057 1,125 1,154 1,174 1,191 1,208 1,225 1,242
Addressable Sub % 10.00% 7.00% 10.00% 20.00% 30.00% 40.00% 50.00% 60.00% 70.00% 70.00%
Ending Plant Miles 85 86 87 87 88 88 89 89 90
New Miles 55 1 1 1 1 1 1 1 1
New Drops 1.05 98 74 42 42 43 43 44 44
Rebuild Miles
Replace Drops % 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00%
Basic Revenue/EBU $285.28 $294.55 $304.12 $319.33 $335.29 $352.06 $363.50 $375.32
Basic Rev/EBU 3.25% 3.25% 5.00% 5.00% 5.00% 3.25% 3.25%
Increase
Ancillary Rev/EBU 3.00% $17.23 $17.75 $18.28 $18.83 $19.39 $19.98 $20.58 $21.19
Pay Revenue/Unit 1.50% $114.36 $116.08 $117.82 $119.58 $121.38 $123.20 $125.05 $126.92
PPV Rev/Addr. Sub 4.00% $28.10 $29.22 $30.39 $31.60 $32.87 $34.18 $35.55 $36.97
Late/Shop/Oth $/EBU 4.00% $2.36 $2.45 $2.55 $2.65 $2.76 $2.87 $2.99 $3.11
Advertising Rev/EBU 4.00% $3.50 $3.64 $3.78 $3.93 $4.09 $4.26 $4.43 $4.60
Personnel Cost Incr. 3.00% 5.12% 5.03% 4.01% 4.01% 4.01% 4.01% 4.01% 4.00%
%
Per-Sub Expense 4.50% $77.69 $81.19 $84.84 $88.66 $92.65 $96.82 $101.17 $105.73
% of Rev. Expense % 5.50% 5.50% 5.50% 5.50% 5.50% 5.50% 5.50% 5.50%
Pay/PPV Expense % 47.76% 47.76% 47.76% 47.76% 47.76% 47.76% 47.76% 47.76%
Per-Mile Expense 4.00% $962 $1,000 $1,040 $1,082 $1,125 $1,170 $1,217 $1,265
Capex per drop 2.00% $70 $71 $73 $74 $76 $77 $79 $80
Capex per new mile 3.00% $18,000 $18,540 $19,096 $19,669 $20,259 $20,867 $21,493 $22,138
Capex per rebuild
mile
Capex per new adr. 1.00% $100 $101 $102 $103 $104 $105 $106 $107
sub
REVENUE
Basic/Tier/Com'l 761,549 810,327 853,401 908,895 967,954 1,030,805 1,079,394 1,130,224
Ancillary 46,000 48,828 51,299 53,594 55,989 58,489 61,098 63,820
Pay 120,879 130,560 135,993 140,431 144,571 148,826 153,200 157,696
Pay-per-view 7,500 16,077 25,581 35,981 47,442 60,050 73,893 77,935
Installation 4.00% 26,000 27,040 28,122 29,246 30,416 31,633 32,898 34,214
Late/Other/Shop 6,300 6,752 7,163 7,556 7,970 8,407 8,867 9,352
Advertising 9,500 10,008 10,616 11,199 11,813 12,460 13,142 13,861
Franch. Fee billed 3.10% 30,310 31,024 32,888 35,133 37,516 40,058 42,204 44,122
Total Revenue 1,008,038 1,080,614 1,145,063 1,222,035 1,303,672 1,390,728 1,464,696 1,531,224
EXPENSES
Personnel 102,919 108,101 112,439 116,950 121,640 126,515 131,583 136,853
Per-Sub costs 211,009 226,199 239,767 254,136 269,355 285,472 302,541 320,616
Per-mile costs 82,300 86,865 90,876 95,072 99,464 104,059 108,868 113,900
Percent of Rev. costs 55,441 59,433 62,977 67,211 71,701 76,489 80,557 84,216
Pay & PPV Costs 61,313 70,033 77,167 84,253 91,704 99,758 108,458 112,536
Total Expenses 512,982 550,630 583,226 617,622 653,863 692,293 732,007 768,120
OPERATING INCOME 495,056 529,984 561,837 604,413 649,809 698,435 732,689 763,104
Operating Ratio 49.11% 49.04% 49.07% 49.46% 49.84% 50.22% 50.02% 49.84%
<CAPTION>
Year 9 Year 10
------ -------
<S> <C> <C>
Ending Passings 3,983 4,013
Passings Growth 0.75% 0.75%
Ending Basic EBU's 3,075 3,118
Ending Pay Units 1,269 1,287
Ending Basic EBU Pen. 77.21% 77.71%
Basic Penetration 0.50% 0.50%
Change
Pay/Basic Penetration 41.26% 41.26%
Average Basic EBU's 3,054 3,097
Average Pay Units 1,260 1,278
Addressable Sub % 70.00% 70.00%
Ending Plant Miles 91 91
New Miles 1 1
New Drops 45 45
Rebuild Miles
Replace Drops % 10.00% 10.00%
Basic Revenue/EBU $387.51 $400.11
Basic Rev/EBU 3.25% 3.25%
Increase
Ancillary Rev/EBU $21.83 $22.48
Pay Revenue/Unit $128.83 $130.76
PPV Rev/Addr. Sub $38.45 $39.99
Late/Shop/Oth $/EBU $3.23 $3.36
Advertising Rev/EBU $4.79 $4.98
Personnel Cost Incr. 4.00% 4.00%
%
Per-Sub Expense $110.48 $115.46
% of Rev. Expense % 5.50% 5.50%
Pay/PPV Expense % 47.76% 47.76%
Per-Mile Expense $1,316 $1,369
Capex per drop $82 $84
Capex per new mile $22,802 $23,486
Capex per rebuild
mile
Capex per new adr. $108 $109
sub
REVENUE
Basic/Tier/Com'l 1,183,397 1,239,019
Ancillary 66,661 69,625
Pay 162,316 167,065
Pay-per-view 82,194 86,682
Installation 35,583 37,006
Late/Other/Shop 9,863 10,402
Advertising 14,619 15,417
Franch. Fee billed 46,128 48,224
Total Revenue 1,600,760 1,673,440
EXPENSES
Personnel 142,331 148,026
Per-Sub costs 339,757 360,026
Per-mile costs 119,165 124,675
Percent of Rev. costs 88,040 92,037
Pay & PPV Costs 116,776 121,188
Total Expenses 806,069 845,952
OPERATING INCOME 794,690 827,488
Operating Ratio 49.64% 49.45%
<PAGE>
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CAPITAL EXPENDITURES
Drops 25,848 25,152 23,636 24,443 25,277 26,138 27,027 27,946
Addr. Converters 8,799 28,849 29,644 30,781 31,953 33,159 34,401 3,167
New plant 10,473 23,596 9,843 10,215 10,600 11,000 11,415 11,845
Rebuild 3.00% 25,000 25,750 26,523 27,318 28,138 28,982 29,851 30,747
Labor capitalized 7.77% 8,000 8,403 8,740 9,091 9,455 9,834 10,228 10,638
Vehicles 5.00% 8,000 8,400 8,820 9,261 9,724 10,210 10,721 11,257
Other 3.00% 25,000 25,000 25,750 26,523 27,318 28,138 28,982 29,851
Total Capex 111,119 145,150 132,955 137,631 142,465 147,461 152,625 125,451
DISCOUNTED FREE
CASHFLOW
Operating Income 495,056 529,984 561,837 604,413 649,809 698,435 732,689 763,104
Less Capital 111,119 145,150 132,955 137,631 142,465 147,461 152,625 125,451
Expenditures
Free cashflow 383,937 384,835 428,882 466,782 507,344 550,975 580,064 637,653
</TABLE>
Year 9 Year 10
------ -------
CAPITAL EXPENDITURES
Drops 28,895 29,875
Addr. Converters 3,234 3,302
New plant 12,292 12,756
Rebuild 31,669 32,619
Labor capitalized 11,064 11,506
Vehicles 11,820 12,411
Other 30,747 31,669
Total Capex 129,720 134,138
DISCOUNTED FREE
CASHFLOW
Operating Income 794,690 827,488
Less Capital 129,720 134,138
Expenditures
Free cashflow 664,970 693,350
Discount Rate 12.60% Discount
Rate
Calculation
Net Present Value of 2,725,603 Proportion Rate
Free Cashflow
Equity 30.00% 20.00%
Senior 60.00% 9.00%
Debt
Sub. Debt 10.00% 12.00%
Blended 12.60%
TERMINAL VALUE
Year 10 operating 827,488
income
Multiple 5
Terminal Value 4,137,441
Discounted at 12.60% 1,262,839
POTENTIAL VALUE
NPV of Free Cashflow 2,725,603
NPV of Terminal Value 1,262,839
Total Potential 3,988,442
Value
RATIOS
Current EBU's 2,623
First-year Op. Income 495,056
Value per EBU $1,521
Op. Income Multiple 8.06
<PAGE>
FAIR MARKET VALUE APPRAISAL FOR
LINCOLNTON, NORTH CAROLINA
MARCH 31, 1995
PREPARED FOR
CENCOM PARTNERS, INC
CENCOM PARTNERS L.P.
PREPARED BY
WESTERN CABLESYSTEMS, INC
R. MICHAEL KRUGER, PRESIDENT
CABLE TELEVISION MANAGEMENT,
CONSULTING, AND APPRAISALS
513 WILCOX, #230
CASTLE ROCK, CO 80104
303-688-4462
Lincolnton, NC, Page
1
<PAGE>
BACKGROUND AND LIMITING CONDITIONS
Western was asked by Cencom to prepare an analysis of the fair market value as a
going concern of the assets of the Lincolnton, North Carolina cable television
system as of March 31, 1995. This appraisal report is being issued pursuant to
the April 28, 1995 engagement letter between CencCom and Western. This report
presents key data, our analysis and assumptions, and our conclusions.
The assets being appraised include, as an assemblage, all of the tangible and
intangible assets and personal property necessary to operate the cable
television system as a going concern, consistent with past practice and industry
norms. The assets include the antennas and signal receiving equipment, strand,
conduit, cables, amplifiers, passive devices, drops, converters, tools, test
equipment, subscriber records, franchises, pole attachment agreements,
easements, supplier and programming contracts, and goodwill. Financial assets
such as accounts receivable, and liabilities, are not included.
The appraisal is based principally on financial data provided by Cencom,
including Income Statements for the 12 months ended December 31, 1994, 1993, and
1992, and 3 months ended March 31, 1995. Management also provided the
operational data presented herein, such as passings and subscriber counts. The
appraiser visited the system in May, 1995. The system manager was interviewed at
length to obtain additional data including subscriber history, technical data,
demographics, and local economic information. The appraiser toured
representative portions of the general market area.
The appraisal will be used as described in the April 28, 1995 engagment letter
to determine the price at which the general partner may offer to purchase the
System from the owning partnership. This appraisal report is issued for the use
of the CenCom entities involved, and their partners, employees, agents, and
advisors. The report is not intended for the use of other parties, including but
not limited to lenders for buyer or seller. The principals will perform their
own independent due diligence and economic evaluation of the proposed
transaction. The formal consent of the limited partners is required for the
transaction to be completed at the proposed price. Western understands and
agrees that the report may be delivered to the Securities and Exchange
Commission, and may be summarized in related proxy materials.
The work herein is based in part on data provided by CenCom and others, and we
assume no responsibility for the accuracy of such data. Western has used
customary techniques and industry knowledge available to Western in preparing
this report. Western does not warrant or represent that the appraised value is
that which would
Lincolnton, NC, Page
2
<PAGE>
actually be obtained in an open market transaction, or that the value would be
upheld in litigation or administrative proceeding. Accordingly, Western
(including its officers, employees, and owners) does not indemnify or hold
harmless any user of this report in any manner against any costs, losses, or
damages arising out of the use of the appraised value or other conclusions
contained herein.
On October 3, 1992, the Congress adopted legislation affecting the cable
television industry generally. Detailed implementing regulations have been
issued by the FCC on a continuing basis since that date. Further FCC rules and
modifications are quite likely. In addition, legislation is pending before
Congress that would dramatically overhaul the entire telecommunications
regulatory system. In short, there is uncertainty. The appraisal value is based
on regulations and their impact as reflected in the cable television system sale
market on the appraisal date and does not necessarily take into account any
future changes. As noted herein, Cencom has indicated that the system operations
substantially comply with present regulations. While nothing has come to our
attention to indicate that Cencom's analysis is incorrect, we have not verified
such compliance, nor does the appraisal necessarily reflect the impact of
changes which might be required by enforcement of current regulations.
GENERAL DESCRIPTION
The system principally serves the community of Lincoln County, including the
city of Lincolnton. This area is located midway between Charlotte and Hickory
(about 25 miles from each.) The operations also include a separate headend
serving the town of Taylorsville, about 45 minutes north of Lincolnton.
Homes Passed 28,540
Residential Basic Subs 14,199 (50%)
Commercial/Bulk EBU's (379 units) 98
Total EBU's 14,297
Pay Units 6,566 (46%)
Plant Miles 800
Homes Per Mile 36
Number of headends 3
Channels in use (typical) 44
Plant Channel Capacity 42-44
Lincolnton, NC, Page
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<PAGE>
The system is served by three headends. This appraisal is being done on the
aggregate system, but the approximate breakout may be helpful:
Name Subscribers
--------------------------------------------------------
Lincolnton/Lincoln Co. 69%
Vale (remote area in L.C.) 4%
Taylorsville 27%
Lincoln County is a sprawling small-town/rural area. It stretches from small
farming areas on the west to an affluent Charlotte "bedroom" area on the east.
The east end is located on a beautiful lake. Lincolnton itself is a busy
community with a broad mix of retail and service. Lincoln County manufacturers
include ball bearings, tools, pharmaceuticals, textiles, and furniture. About
40% of the area residents commute to a broad range of manufacturing, finance,
and service jobs in Charlotte (30-45 minutes). The overall economy in North
Carolina is strong, and employers are all stable or growing. Unemployment is
low.
There is a relatively dense "small-town" area in Lincolnton with a normal mix of
older homes. Numerous new subdivisions are scattered throughout the surrounding
areas, particularly in the east end. Some of the subdivisions are quite large,
and include planned and gated communities. The eastern subdivisions located on
the lake include large homes valued at around $300,000. New homes in other areas
are priced around $150,000, and older homes range downward. There are some
multi-family projects, but the area is mostly single-family. New homes are
typically valued at $70,000 - $150,000, with some much higher and lower. The
market is brisk, and homes sell quickly. Demographics cover a broad range from
low-income rural to wealthy professional. The area would be described as
"typical" overall.
Taylorsville is a similar area. Local industry includes principally furniture
and components, and many residents commute to Hickory.
Demographics cover a full range from rural low-income to high-income
professional, and overall would be considered average.
PASSINGS GROWTH
Since 1991, the system reports that it has added about 1,441 passings, or
480/year (nearly 2%). Substantially all this has come from new homes, but the
system has not been able to provide service to all new areas being built due to
capital constraints. Management estimates that the actual total home growth is
presently in excess of 600 units per year. There are no barriers to new home
growth, and we expect the area to grow at this rate for a number of years.
Lincolnton, NC, Page
4
<PAGE>
There are a number of unserved subdivisions in Lincolnton, and some rural areas
in Taylorsville which may be feasible. The estimated potential is:
Homes Miles
Lincolnton 300 6
Taylorsville 1,250 50
There are no significant acquisition possibilities.
SUBSCRIBER PENETRATION
The system provided the following data:
Passings Basic Pay Basic % Pay %
---------------------------------------------------------
3/95 28,540 14,199 6,566 50% 46%
12/94 28,308 14,033 6,459 50% 46%
12/93 27,850 13,285 5,752 48% 43%
12/92 27,474 12,549 5,802 46% 46%
12/91 27,099 12,410 6,597 46% 53%
The 1994 Cable Factbook reports penetrations in nearby Charlotte of 65% basic
and 57% pay.
Because of potential errors in the passing count, basic penetration may be
slightly understated. In any event, basic penetration is growing, at about 1.3
points per year. We believe this should continue for the foreseeable future. Pay
penetration appears to be fairly stable at about 46%, but should grow slowly in
the future.
SUBSCRIBER RATES AND SERVICES
Each headend has slightly different lineups and rates; information for
Lincolnton, which serves nearly 70% of the customer base, is summarized below.
Channels Rate
Basic 14 7.34
Tier 23 15.06
Total 37 $22.40
Pay channels 5 8.45-11.45
Pay-per-view 2 n/a
Converters 1.33 - 2.19
Remote control .15
Wire maintenance .95
Lincolnton, NC, Page
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<PAGE>
Approximately 98% of the customers take the tier.
Basic includes 9 offair, and WGN and WTBS. The tier is all satellite services.
Pay includes Cinemax, HBO, Showtime, Movie, and Disney. Pay-per-view offerings
consist of Viewers Choice, adult programming channels, and events.
There is no fee for additional outlets. Other ancillary services offered include
guides and DMX audio. There are a number of small transaction fees, including
late charges. Typical aerial installation fees are $35. Applicable FCC and
franchise fees are added as a separate charge. There are several package
discounts and promotional rates available from time to time. Rates are
reasonable, and consistent with industry practice.
The system took small quarterly external cost adjustments on 10/94. On April 1,
1995, the company took additional adjustments of $0.04 to $0.29; the average is
around .10 per customer per month.
RATE REGULATION
Lincolnton, Lincoln County, and Taylorsville all certified to regulate rates.
The system then adjusted its charges in 1993. System rates are slightly above
permitted levels (management estimates about 25(cents)) but relations with the
cities are good, and there has been no effort to require strict conformance.
There have been no tier complaints. The local and national political climate
regarding rate regulation is favorable. We do not believe regulation will be a
factor, provided the system exercises normal restraint in increases.
NON-SUBSCRIBER REVENUE
The company has a contract with Catawba Cable (a nearby operator) pursuant to
which Catawba sells advertising spots on satellite channels. The system receives
an allocated portion of revenues. While the amount is not large, it appears to
be a reasonable arrangement, with little chance of major improvement.
There is no other significant revenue source (fiber rental, tower rental,
phone), existing at present or likely in the future.
STAFF AND OPERATIONS
The system rents its main office and separate headend in Lincolnton. The other
headends are owned. Rents are reasonable, expirations and
Lincolnton, NC, Page
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<PAGE>
renewals are not a concern, and there are no unique sites that could not be
replaced (although relocation is always a burden).
The system has a normal complement of test equipment, inventory, and vehicles,
including two bucket trucks. The office staff is well-equipped, and uses
centralized Cabledata billing services.
The system offers customary business-day service Monday through Friday, with
partial staffing Saturday morning. Phones are answered by a central company
facility after hours, and technicians are dispatched on outages if necessary.
Management reports about 30% annual turnover, and 50% annual service call
volume. Turnover is fairly high, but reflective of lower penetration. The
service call rate is very high, and indicates some technical concerns as
discussed below. Backlogs are 3-4 days on installs, and same-day on service. All
are normal.
System staffing can be summarized as:
Item Office Field Other
------------------------------------------------------------
Number of employees 9 11 0
Subs/employee 1,600 1,300
Average wage 16,700 24,800 -
The company also uses a varying number of contract installers to do all new
installs and some reconnects. It appears there may be some minor wage allocation
issues between office and field, but the overall average wage of $21,200 is
quite reasonable. Staff ratios are reasonable, especially considering the drive
time involved.
MARKETING
The system uses in-house commissioned direct salespeople on a regular basis, but
at present none are on the payroll. Direct mail and newspaper are used from time
to time.
FRANCHISES
The major Lincolnton and Lincoln County franchises expire in 2000. The Dallas
franchise expires in 1995; negotiations are underway, and renewal is expected,
with a rebuild to 450 mhz the only likely condition. Three franchises, including
Taylorsville, expire in 1998; renewal notice has been given by the system, but
discussions have not started.
COMPETITION
Lincolnton, NC, Page
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In the east end near Charlotte, residents can get good reception on 5-7
Charlotte signals with standard antennas. Reception in the west end can be more
limited.
There is no cable overbuild, and no contiguous operator, although Time Warner is
nearby, and a major presence. The company has the only franchise in the county,
so there is no cable competition for new subdivisions.
There is no MMDS.
The company estimates that it has lost perhaps 25 former customers to DBS.
However, because the company has not kept pace with new subdivision
construction, it has lost a number of potential customers; we saw 20-30 DBS
dishes in just two small unserved areas.
TECHNICAL PROFILE
Mileage: 639 aerial, 161 underground, no fiber
Headend Electronics: S-A
Plant Electronics: S-A
Amplifier Cascade: 35-48
Power: Most areas standby
Trunk Cable: 750-875 P3, some 1000 and a bit of 500
Distribution Cable: Mostly 500 P3
Pay Security: Mostly addressability, 2 headends use traps
Percent of Addressable Subs: 40%
Converter Types: TOCOM, Jerrold, Pioneer, S-A
Estimated Plant Build Dates:
Miles Percent
---------------------
1970's 353 33%
1980's 492 46%
1990's 225 21%
Estimated Channel Capacity:
Miles Percent
---------------------
300 Mhz 306 30%
330 Mhz 579 55%
450 Mhz 160 15%
There has been no major rebuild. The plant itself is reported to be in good
condition. The plant has passed the 1994 proof tests but is not likely to pass
the 1995 C/N tests; substantial fiber is needed to reduce the cascade to pass
the test and improve reliability.
Lincolnton, NC, Page
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Capacity is limited, and needs to be increased to meet competitive pressures.
There are no "big urban" systems nearby, and no indication of franchise
pressures at this time. An upgrade to 450 Mhz should be adequate at present.
About 1/2 of the plant is likely to be 10 years old or less, and there is no
indication from management that the older plant is in poor shape. Management
indicates that an electronics drop-in with some respacing and cable replacement,
plus more fiber, would result in 450 Mhz capacity.
UPGRADE COSTS
Fiber Overlay
20% x 800 miles x $6,000/mile $960,000
Retrofit existing 450 plant
100 miles x $3,000/mile 300,000
Retrofit existing 330 plant in good shape
500 miles x $5,000/mile 2,500,000
Rebuild old plant
200 miles x $12,000 2,400,000
Total upgrade costs $6,160,000
DETERMINATION OF OPERATING INCOME
Appraising the value of cable television systems involves calculation of
historic and projected operating income (commonly called "cashflow"). Operating
income is defined as direct operating revenues less expenses, before capital
expenditures, depreciation, and management fees. The operating income considered
in appraisals is typically that which will be derived by the buyer, using his
cost structure and nominal predictable changes in operations.
First-Year Projection:
We first prepared a detailed Projected-Year statement of operating income. To do
so, we reviewed the company's 1992, 1993, 1994, and 1995/Q1 historic income
statements, and used them to prepare an estimate of projected operating income
for the 12 months beginning April 1, 1995. A projection worksheet is attached.
The Projected-Year subscriber revenues are based on the March 31, 1995
subscriber count, plus allowances for growth, and on 1995/Q1 rates, plus
appropriate adjustments for additional actual 1995 rate
Lincolnton, NC, Page
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changes. Other revenue items were based on consideration of past results and
trends, and 1995/Q1 results.
Certain Projected-Year expense items such as programming costs which are based
on subscribers or revenue have been adjusted to match the subscriber and revenue
projections shown, using prior-year unit costs or ratios plus an allowance for
increases where appropriate. Overhead items, such as maintenance and property
tax have been based principally on 1992-94 average results, to reflect
longer-term trends. In preparing our detailed analysis, we also reviewed key
operating ratios, such as programming cost/subscriber, staffing ratios,
copyright and bad debt expense levels, etc. and compared them to industry norms
and our experience. A brief discussion of key individual items follows:
Passings: Increase by the estimate of 600 homes/year of growth. Do not add the
deferred line extensions in year 1 because of the extent and capital cost.
Basic Penetration: Increase by 1.75 points, consistent with recent experience.
Pay Penetration: Hold this flat, matching recent years.
Average Basic+Tier Revenue/Subscriber: Use the average for Q1/95 plus the 4/1
rate increase of .10.
Average Pay Revenue/Unit: Has been fluctuating; use a midpoint.
Pay-Per-View Revenues: Data is limited, but indicates growth. Use 1995 levels.
Advertising: Use the 1995 levels, plus some growth for the new contracts.
G&A Salary: Ratios are good, but wages are a bit low. Increase 1994 levels by 4%
plus 5% for growth.
Insurance: Fluctuating; use 3-year level
Bad Debt: Has been fluctuating, but appears to be declining. Use a normal level
of 1.2%,
Professional Services, Allocated Costs: These two categories include outside
professional services, plus allocations of regional staffing, and related
regional expenses. There appears to have been some change in accounting
practices, and not all charges were booked for 95/Q1. We projected professional
services and allocated costs based on 1994 final charges.
Lincolnton, NC, Page
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Operating Wages: Ratios and levels good; increase 1994 levels by 7% for
inflation and growth.
Basic Programming: The 1995 level already has increased by 9% over 1994, and
appears to reflect likely levels for the first year; use this amount of
$4.04/sub.
Premium/PPV Programming: We used the average historic level of 48.5% of revenue.
Marketing/Sales: Industry norms vary from 1% of revenue in classic systems with
little need for sales, to 4% in urban markets. This system is at about 2%, and
we used this historic level.
Our work is done independently of the system budget, but comparison to the
budget provides a satisfactory independent crosscheck:
Actual operating income, 1994 2,350,000
Our projected year 1 op. inc. 2,669,000
Budgeted 1995 op. income 2,542,000
The budget forecast a 1995 basic subscriber gain of only 400, to an end of
14,400. We forecast a gain of 736 on top of the current actual level of 14,200.
Our forecasted gain is more consistent with recent history of 800/year gains,
and we saw no indication that we should use a lower forecast.
Ten-Year Cashflow Projections
Our principal appraisal technique involves projection of free cashflow for 10
years; free cashflow is equal to operating income less capital expenditures, but
still before depreciation and interest, and taxes. (Projected free cashflow is
then discounted at an appropriate cost-of-capital rate, and a terminal value is
added to get the value of the property.) Our projection for this system is shown
on the two-page spreadsheet enclosed. We started with the data contained in the
first-year projection spreadsheet, and expanded it with the variables and
assumptions shown.
Revenue items used are the same as for the first-year analysis. However, they
are based on forecasts for system growth in areas such as passings, penetration,
and revenue/subscriber. The small amount of commercial revenue was converted to
EBU's and for simplicity we did our forecast using total EBU's.
Passings growth in the second year included normal growth of 600/year, plus the
deferred line extensions with a total of 1,550
Lincolnton, NC, Page
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passings on 56 miles of plant. In the following years, we used a growth rate of
2.5%; this is slightly higher than historic rates, reflecting our expectation of
increasing growth.
Penetration increases: The system has been growing at about 2 pt/year, and since
levels are low, this should continue for several years. In year 7, we slowed the
growth, reflecting increasing competition from other technologies.
Addressable Subs & PPV Revenue/Sub: The system is a prime candidate for
addressability; we increased the number of customers in a conservative manner,
and allowed a fairly fast 6% increase in revenue/sub, reflecting the
demographics.
Basic Rate Increases: Rate regulation and competition will normally limit
increases to a bit over inflation; we used 3.25%. However, on completion of the
rebuild, the company can add some new channels and tiers, and should be able to
achieve 5% overall increases for a few years. These amounts should be consistent
with FCC rate regulations, but we do not do a specific calculation because of
the changing regulatory environment, and the equally important role of increased
competition.
The ten-year model uses summary expense variables which were calculated from the
one-year information as follows:
Personnel: Salaries, Tax/benefit, Professional services, cost
allocations, and capitalized labor
Per-Subscriber: Office rent, Office Operation, Basic
Programming, LO Programming
Revenue-related: Franchise fee, copyright, bad debt,
marketing, and advertising sales
Premium Programming: Pay and pay-per-view
Per-Mile: Insurance, Property Tax, Pole Rent, Power, System
Maintenance
Personnel costs are based on current personnel costs, plus annual percentage
increases to reflect growth and expenses. We calculated the amounts for the
other expense categories on a per-sub or per-mile, or percentage of revenue
basis, as noted.
The per-sub and per-mile costs were increased over the 10-year period for
inflation. The percentage costs were held to the same percentage of revenue over
10 years, on the assumption that gradual increases in unit costs can be passed
on to customers.
Capital costs were forecast for several items. New plant costs were calculated
using new plant mileage derived from passings growth at 55 new homes/mile (or as
shown) and an average per-mile cost for new
Lincolnton, NC, Page
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plant (aerial and U/G). Drops were calculated on the assumption that a certain
percentage of existing drops is replaced each year, and new drops are added
equal to growth plus a churn allowance of 5%. Costs for new addressable
converters were allowed based on the increase in addressable subscribers.
Capitalized labor is based on 1994 levels, plus inflation. The capital costs for
vehicles and miscellaneous is estimated from system size and current vehicle
count (assuming vehicles are replaced every 5 years).
We used the rebuild cost estimates developed earlier in the text, and spread
them over a reasonable period as shown in the line item.
DETERMINATION OF APPRAISED VALUE
General Methodology
Appraisal of income-producing property typically relies on one or more of three
main approaches.
Replacement cost, which is the cost to assemble and put the property into
operation, is not typically used in the cable television industry for valuing a
property as a whole. Cable television system sales include a very substantial
intangible value for franchise, goodwill, and customer lists. Although these
intangibles can be valued separately, more direct approaches to overall value
are easier to use, and more appropriate.
Market value as determined by comparable transactions is a very common approach
for estimates of value. Transaction value is typically reported on the basis of
either per-subscriber cost or operating income multiple. We consider both
ratios, but place more reliance on the income multiple.
The Income Approach is widely used in business valuation, and we use this as our
first approach. Our method involves determination of the discounted present
value of free cashflow generated over ten years, plus an allowance for the
terminal value after ten years.
Income Approach
Ten-year free cashflow was projected, as discussed previously. The annual free
cashflow was discounted using an average cost of capital calculated as shown on
the spreadsheet.
The FCC cost-of-service rules will permit a cost-of-capital rate of 11.25%, plus
further upward adjustments related to tax matters; the result is typically in
the 12% - 13% range. Small cable operators
Lincolnton, NC, Page
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may use even higher numbers, subject to certain overall limits. We do not
believe the FCC cost-of-capital should be used directly, but do find that the
FCC values support our calculation of 12.6%.
We then added a terminal value based on the resale value of the system in year
10. The terminal value was calculated at 6 x year 10 cashflow. The industry will
increasingly feel the effects of maturity, regulation and increased competition.
Sale multiples will gradually decline as the opportunities for growth into new
lines are realized or abandoned. Non-cable businesses currently trade in the 3-6
x cashflow range. Regulated telephone companies presently trade at around 5-7 x
cashflow. Selection of 6x should reflect the industry's gradual maturity and
transformation to a "normal" telecommunications industry.
The terminal value was then discounted to a present value using the same
discount rate. The discounted cashflow and discounted terminal values were
added, to arrive at the estimate of potential system value shown on the
worksheet.
Market Value
The prices of cable system transactions are frequently evaluated to determine
the ratio of operating income (income before depreciation, interest, and
management fees) to purchase price; sales results are frequently reported in the
trade press. Per-subscriber values are also widely reported. We consider
principally the multiple of first year projected operating income. To facilitate
our analysis, we compared this system to the overall market with respect to some
key factors. The analysis is subjective, and based on our personal knowledge,
but nonetheless helps to structure the process:
Future passing and subscriber growth: Lincolnton will have above-average growth
rates.
Demographics: As discussed above, demographics are overall average for cable.
Competitive situation: Competition from DBS could be a problem in some areas,
and due to lack of cable service DBS has already established a foothold in the
area. There is little other direct competition, so overall the system is average
in this regard.
System Capacity/Quality: The need for rebuild/upgrade is a negative.
General Operations: With regard to matters such as staff, franchise problems,
etc., the system is normal.
Lincolnton, NC, Page
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New Revenues: The system should be able to generate more sources of new revenue
than other rural/suburban systems, because of its size and good demographics.
System marketability: The system is of a very attractive size, and is in a
market with a number of qualified buyers.
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Comparable Transaction Data
We then select an approximate appropriate multiplier from information available
about other reasonably similar transactions, and the general state of the
market. The following data has been taken from announcements in the trade press,
information from brokers, recent issues of the Cable TV Investor Newsletter,
published by Paul Kagan Associates, and our own knowledge.
System Date Subs $/Sub CF Mult
- - - --------------------------------------------------------------------------
Single larger systems
Newport News, VA 11/94 48,000 2,542 9.0
Anaheim, CA 11/94 135,000 2,119 10.5
Ansonia, CT 6/94 32,000 2,667 11.7
Henderson, NC 1/95 14,100 1,634 10.5
Small systems
Near Austin, TX 12/94 5,300 1,378 n/a
Cameron, TX 4/95 3,500 1,004 8.4
Arizona 5/95 7,800 1,600 8.2
California 2/95 1,900 1,475 7.5
Groupings of small systems
MSO-GA, FL, MS 8/94 30,000 1,217 8.3
NJ MSO 10/94 74,000 1,351 8.0
Pennsylvania MSO 11/94 69,000 1,767 8.1
Kentucky/Illinois 12/94 14,900 1,235 n/a
Adams/York PA 4/95 12,900 1,300 10.4
Rock/small west 3/95 47,000 1,787 9.7
Midwest/south 10/94 34,800 1,350 8.3
Andrews TX 3/95 26,000 1,985 10.3
Major MSO transactions
US West/Wometco 1994 466,000 2,575 11.1
Cox/Times-Mirror 1994 3,000,000 1,916 12.1
Comcast/McLean 1994 550,000 2,309 10.6
Colony 1994 750,000 1,870 11.3
The foregoing data is the best available to us. However, in some cases, it may
not be accurate, and may reflect third-party estimates of the terms rather than
actual data.
These reports of transactions, and general industry commentary, suggest that the
"market" in 1995 for larger systems is generally 9
Lincolnton, NC, Page
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to 11, depending on location, growth, rate control, etc. Smaller systems trade
in the 7.5 to 9 range. Urban and suburban systems are valued more highly than
rural systems. Groups of systems tend to trade at slightly higher multiples than
individual systems.
After considering all factors, we believe the system would be valued at 10 x
income, and about $1,800/subscriber.
Appraised Value
The multiples calculated by dividing the discounted cashflow approach by current
subscriber count and projected income are:
Discounted Cashflow Value 27,501,000
Current subscribers 14,306
Projected operating income 2,669,000
Resulting per-sub value 1,922
Resulting income multiple 10.3
The values calculated by using the same subscriber count, and multiples selected
from market data are:
Value, at 10 x operating income 26,690,000
Value, at $1,800 per sub 25,750,000
The values calculated by the three different methods are generally within a
reasonable range, which we determined to be $26,500,000 - $27,500,000. We place
substantially more reliance on the discounted cashflow method, because it
directly incorporates the key variables which impact value. Operating income
multiples reflect some of the variables, but are more subjective. Per-subscriber
values are useful only as broad indicators.
Daniels & Associates, the other appraiser retained for this engagement,
established a similar and overlapping range of values. We jointly selected the
appraised value from these ranges, and found the appraised value to be
$27,000,000.
We believe the foregoing appraised value represents the fair market value at
March 31, 1995 of the assemblage of system assets as a going concern, without
any discount imputed for brokers' fees. We believe the appraisal reflects the
relevant and material general market factors, assumptions, and limitations, all
of which are presented in this report. The appraisal was prepared using standard
appraisal techniques, and conforms to Standards 7-10 of the Uniform Standards of
Professional Appraisal Practice.
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QUALIFICATIONS OF THE APPRAISER
The appraisal was prepared by R. Michael Kruger, owner and President of Western
Cablesystems, Inc. Since 1979, he has appraised hundreds of systems for a
variety of clients including major MSO's, independent operators, and clients
outside the CATV industry. Kruger has extensive background as a CATV executive.
From 1974 to 1979, he held various operating positions at ATC, one of the
industry's largest operators. In 1979, he joined a small MSO, and until mid-1986
was president of the 30,000 - subscriber company. There, in addition to his
operating duties, Kruger prepared CATV system appraisals.
Kruger formed Western Cablesystems, Inc. in 1986, and is its sole owner and
principal. Western has been directly involved in all aspects of system
operations and finance, including several acquisitions and sales, partnership
formation, debt placement, franchising, and system construction and startup.
Western sold one property in 1993, and presently operates three small cable
systems. In addition to continuing appraisal work, Kruger has performed
consulting engagements for a wide range of topics and clients, including the
economic feasibility of international cable and restructuring of individual
systems to achieve financial improvements.
Kruger received a BS/MS in engineering from the Massachusetts Institute of
Technology in 1967/68. In 1974, he received a Masters in Business Administration
(MBA) from the Stanford University Graduate School of Business.
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CENCOM APPRAISAL FOR Lincolnton
HISTORIC INCOME STATEMENTS AND FIRST-YEAR PROJECTION
<TABLE>
<CAPTION>
1992 Actual 1993 Actual 1994 Actual 1Q/95 Projected Year
<S> <C> <C> <C> <C> <C>
Ending Homes Passed 27,474 27,850 28,308 28,540 29,000
Ending Basic
Subscribers 12,549 13,205 14,033 14,199 14,935
Ending Pay Subscribers 5,802 5,752 6,459 6,566 6,870
Ending Basic
Penetration 45.68% 47.41% 49.57% 49.75% 51.50%
Ending Pay Penetration 46.23% 43.56% 46.03% 46.24% 46.00%
Average Basic Subs 12,479 12,877 13,619 14,116 14,567
Average Pay Units 6,199 5,777 6,106 6,513 6,718
Avg Basic+Tier Rev/Sub $23.57 $24.34 $21.72 $22.11 $22.21
Average Pay Rev/Unit $9.67 $9.51 $10.02 $9.69 $9.75
REVENUE
Basic, Tier Revenue 3529584 3760717 3550402 936359 3882444
Ancillary Revenue 405091 355541 267355 73255 307671
Commercial Basic 0 0 28557 7146 29000
Premium 719182 659574 734270 189263 786021
Pay-Per-View 0 0 46184 15831 60000
Installation 65205 77053 99748 34180 125000
Advertising 60257 44785 4916 3157 15000
Shopping/Other 0 0 24945 5495 25000
Franchise/FCC Fees 0 0 95489 23505 104603
Billed
Total Revenue 4779319 4897670 4851866 1288191 5334739
EXPENSES
G&A Salary 107,657 135,193 150,910 39,555 164,492
Tax/Benefit-G&A 47,543 50,077 51,036 11,327 49,348
Office Rent 22,482 12,366 24,773 2,952 12,000
Office Operation 140,290 163,695 153,588 32,939 152,500
Billing 104,853 108,103 112,282 32,925 136,349
Bad Debt/Collection 98,414 58,371 78,310 6,574 64,017
Professional Services 35,503 72,269 7,297 16,597 7,000
Insurance 37,086 32,530 28,222 8,833 32,600
Property Tax 75,000 30,297 36,664 11,755 45,000
Franchise/FCC/Copyright 95,193 120,411 111,472 28,757 122,699
Cost Allocation 0 0 84,053 1,982 85,000
Operating Wages, 303,370 320,400 272,381 68,186 288,724
Overtime
Tax/Benefit- Op Wages 59,526 70,072 59,871 13,700 57,745
Labor Capitalized -40,606 -48,229 -52,919 -20,781 -80,000
Pole Rent 87,252 136,832 109,345 29,374 111,000
Power 83,812 80,222 85,877 21,257 87,000
System Maint., 120,645 68,741 90,271 27,239 100,000
Operation
Programming-Basic 449,288 546,932 606,518 171,196 706,217
Programming-Premium 359,468 335,596 354,810 91,717 381,220
Programming-PPV 0 0 30,832 10,524 36,000
Programming-LO, Other 0 0 0 0 0
Marketing/Sales 116,286 86,108 105,823 13,212 106,695
Cost of Advertising 0 0 0 0 0
Sales
Total Expenses 2,303,062 2,379,986 2,501,416 619,820 2,665,605
Operating Income 2,476,257 2,517,684 2,350,450 668,371 2,669,135
Operating Margin 51.81% 51.41% 48.44% 51.88% 50.03%
</TABLE>
<PAGE>
DISCOUNTED CASHFLOW MODEL FOR APPRAISAL OF LINCOLNTON
<TABLE>
<CAPTION>
Change
LINCOLNTON Assumptions Current Proj. Year 2 Year 3 Year 4 Year 5 Year 6 Year 7
Actual Year 1
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Ending Passings 28,540 29,000 31,150 31,851 32,647 33,463 34,300 35,157
Passings Growth 7.41% 2.25% 2.50% 2.50% 2.50% 2.50%
Ending Basic EBU's 14,306 15,044 16,782 17,797 18,895 20,036 21,223 22,281
Ending Pay Units 6,566 6,870 7,706 8,216 8,770 9,350 9,957 10,509
Ending Basic EBU Pen. 50.13% 51.88% 53.88% 55.88% 57.88% 59.88% 61.88% 63.38%
Basic Penetration 2.00% 2.00% 2.00% 2.00% 2.00% 1.50%
Change
Pay/Basic Penetration 0.25% 45.90% 45.67% 45.92% 46.17% 46.42% 46.67% 46.92% 47.17%
Average Basic EBU's 14,675 15,913 17,290 18,346 19,466 20,630 21,752
Average Pay Units 6,718 7,288 7,961 8,493 9,060 9,654 10,233
Addressable Sub % 10.00% 15.00% 25.00% 35.00% 45.00% 55.00% 65.00% 75.00% 85.00%
Ending Plant Miles 800 808 876 889 904 918 934 949
New Miles 55 8 68 13 14 15 15 16
New Drops 1.05 775 1,825 1,065 1,153 1,199 1,246 1,111
Rebuild Miles 200 200 200 200
Replace Drops % 5.00% 5.00% 20.00% 20.00% 25.00% 10.00% 5.00%
Basic Revenue/EBU $266.54 $275.20 $284.14 $298.35 $313.27 $328.93 $345.38
Basic Rev/EBU 3.25% 3.25% 5.00% 5.00% 5.00% 5.00%
Increase
Ancillary Rev/EBU 5.00% $20.97 $22.01 $23.11 $24.27 $25.48 $26.76 $28.10
Pay Revenue/Unit 1.50% $117.00 $118.76 $120.54 $122.35 $124.18 $126.04 $127.94
PPV Rev/Addr. Sub 6.00% $16.35 $17.34 $18.38 $19.48 $20.65 $21.89 $23.20
Late/Shop/Oth $/EBU 4.00% $1.70 $1.77 $1.84 $1.92 $1.99 $2.07 $2.16
Advertising Rev/EBU 6.00% $1.00 $1.06 $1.12 $2.00 $3.00 $4.00 $4.24
Personnel Cost Incr. 2.00% 5.10% 11.98% 5.75% 5.90% 5.84% 5.79% 5.33%
%
Per-Sub Expense 3.00% $66.94 $68.95 $71.02 $73.15 $75.34 $77.60 $79.93
% of Rev. Expense % 5.50% 5.50% 5.50% 5.50% 5.50% 5.50% 5.50%
Pay/PPV Expense % 49.32% 49.32% 49.32% 49.32% 49.32% 49.32% 49.32%
Per-Mile Expense 3.00% $465 $479 $493 $508 $523 $539 $555
Capex per drop 2.00% $70 $71 $73 $74 $76 $77 $79
Capex per new mile 3.00% $18,000 $18,540 $19,096 $19,669 $20,259 $20,867 $21,493
Capex per rebuild $7,700 $7,700 $7,700 $7,700
mile
Capex per new adr. 1.00% $100 $101 $102 $103 $104 $105 $106
sub
REVENUE
Basic/Tier/Com'l 3,911,444 4,379,310 4,912,755 5,473,525 6,097,985 6,785,851 7,512,807
Ancillary 307,671 350,311 399,644 445,261 496,060 552,017 611,153
Pay 786,021 865,490 959,604 1,039,114 1,125,116 1,216,796 1,309,186
Pay-per-view 60,000 96,553 142,969 196,541 261,239 338,627 428,937
Installation 6.00% 125,000 132,500 140,450 148,877 157,810 167,278 177,315
Late/Other/Shop 25,000 28,194 31,858 35,156 38,794 42,759 46,889
Advertising 15,000 16,819 19,370 36,692 58,397 82,520 92,230
Franch. Fee billed 2.00% 104,603 110,378 124,140 138,598 154,787 172,677 191,348
Total Revenue 5,334,739 5,979,554 6,730,790 7,513,763 8,390,188 9,358,525 10,369,864
EXPENSES
Personnel 572,309 640,892 677,743 717,720 759,650 803,634 846,446
Per-Sub costs 1,007,066 1,157,135 1,263,906 1,382,130 1,509,609 1,647,005 1,780,978
Per-mile costs 375,600 419,412 438,276 458,774 480,298 502,900 526,637
Percent of Rev. costs 293,411 328,876 370,194 413,257 461,461 514,719 570,343
Pay & PPV Costs 417,220 474,437 543,740 609,370 683,689 767,065 857,165
Total Expenses 2,665,606 3,020,751 3,293,858 3,581,252 3,894,707 4,235,324 4,581,570
OPERATING INCOME 2,669,133 2,958,802 3,436,932 3,932,512 4,495,481 5,123,200 5,788,294
Operating Ratio 50.03% 49.48% 51.06% 52.34% 53.58% 54.74% 55.82%
</TABLE>
LINCOLNTON Year 8 Year 9 Year 10
Ending Passings 36,036 36,937 37,861
Passings Growth 2.50% 2.50% 2.50%
Ending Basic EBU's 23,379 24,333 25,320
Ending Pay Units 11,085 11,598 12,132
Ending Basic EBU Pen. 64.88% 65.88% 66.88%
Basic Penetration 1.50% 1.00% 1.00%
Change
Pay/Basic Penetration 47.42% 47.67% 47.92%
Average Basic EBU's 22,830 23,856 24,826
Average Pay Units 10,797 11,342 11,865
Addressable Sub % 95.00% 100.00% 100.00%
Ending Plant Miles 965 982 998
New Miles 16 16 17
New Drops 1,152 1,002 1,036
Rebuild Miles
Replace Drops % 5.00% 5.00% 5.00%
Basic Revenue/EBU $356.60 $368.19 $380.16
Basic Rev/EBU 3.25% 3.25% 3.25%
Increase
Ancillary Rev/EBU $29.50 $30.98 $32.52
Pay Revenue/Unit $129.85 $131.80 $133.78
PPV Rev/Addr. Sub $24.59 $26.07 $27.63
Late/Shop/Oth $/EBU $2.24 $2.33 $2.42
Advertising Rev/EBU $4.49 $4.76 $5.05
Personnel Cost Incr. 5.30% 4.89% 4.88%
%
Per-Sub Expense $82.33 $84.80 $87.34
% of Rev. Expense % 5.50% 5.50% 5.50%
Pay/PPV Expense % 49.32% 49.32% 49.32%
Per-Mile Expense $571 $589 $606
Capex per drop $80 $82 $84
Capex per new mile $22,138 $22,802 $23,486
Capex per rebuild
mile
Capex per new adr. $107 $108 $109
sub
REVENUE
Basic/Tier/Com'l 8,141,308 8,783,561 9,437,928
Ancillary 673,506 738,953 807,462
Pay 1,402,073 1,494,886 1,587,332
Pay-per-view 533,342 621,834 685,956
Installation 187,954 199,231 211,185
Late/Other/Shop 51,180 55,619 60,197
Advertising 102,608 113,651 125,370
Franch. Fee billed 208,370 225,376 242,160
Total Revenue 11,300,340 12,233,111 13,157,590
EXPENSES
Personnel 891,348 934,922 980,576
Per-Sub costs 1,924,771 2,063,399 2,211,503
Per-mile costs 551,569 577,757 605,268
Percent of Rev. costs 621,519 672,822 723,668
Pay & PPV Costs 954,461 1,043,872 1,121,085
Total Expenses 4,943,668 5,292,772 5,642,100
OPERATING INCOME 6,356,672 6,940,338 7,515,490
Operating Ratio 56.25% 56.73% 57.12%
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
CAPITAL EXPENDITURES
Drops 106,897 190,236 336,811 366,351 470,369 260,344 175,393
Addr. Converters 161,510 213,394 217,772 245,574 273,840 304,144 320,748
New plant 150,545 1,260,720 243,346 284,763 300,638 317,399 335,094
Rebuild 0 1,540,000 1,540,000 1,540,000 1,540,000
Labor capitalized 13.98% 80,000 89,587 94,738 100,326 106,187 112,336 118,320
Vehicles 5.00% 50,000 52,500 55,125 57,881 60,775 63,814 67,005
Other 3.00% 75,000 80,000 82,400 84,872 87,418 90,041 92,742
Total Capex 623,952 3,426,437 2,570,192 2,679,767 2,839,228 1,148,077 1,109,301
DISCOUNTED FREE
CASHFLOW
Operating Income 2,669,133 2,958,802 3,436,932 3,932,512 4,495,481 5,123,200 5,788,294
Less Capital 623,952 3,426,437 2,570,192 2,679,767 2,839,228 1,148,077 1,109,301
Expenditures
Free cashflow 2,045,181 -467,634 866,740 1,252,744 1,656,253 3,975,123 4,678,993
</TABLE>
CAPITAL EXPENDITURES
Drops 186,659 181,926 192,598
Addr. Converters 350,677 229,868 107,939
New plant 353,775 373,498 394,321
Rebuild
Labor capitalized 124,597 130,688 137,069
Vehicles 70,355 73,873 77,566
Other 95,524 98,390 101,342
Total Capex 1,181,588 1,088,242 1,010,835
DISCOUNTED FREE
CASHFLOW
Operating Income 6,356,672 6,940,338 7,515,490
Less Capital 1,181,588 1,088,242 1,010,835
Expenditures
Free cashflow 5,175,085 5,852,096 6,504,655
Discount Rate 12.60% Discount
Rate
Calculation
Net Present Value of 13,737,462 Proportion Rate
Free Cashflow
Equity 30.00% 20.00%
Senior 60.00% 9.00%
Debt
Sub. Debt 10.00% 12.00%
Blended 12.60%
TERMINAL VALUE
Year 10 operating 7,515,490
income
Multiple 6
Terminal Value 45,092,938
Discounted at 12.60% 13,763,365
POTENTIAL VALUE
NPV of Free Cashflow 13,737,462
NPV of Terminal Value 13,763,365
Total Potential 27,500,827
Value
RATIOS
Current EBU's 14,306
First-year Op. Income 2,669,133
Value per EBU $1,922
Op. Income Multiple 10.30
<PAGE>
FAIR MARKET VALUE APPRAISAL FOR
LINCOLNTON, NORTH CAROLINA
MARCH 31, 1996 UPDATE
PREPARED FOR
CENCOM PARTNERS, INC
CENCOM PARTNERS L.P.
PREPARED BY
WESTERN CABLESYSTEMS, INC
R. MICHAEL KRUGER, PRESIDENT
CABLE TELEVISION MANAGEMENT,
CONSULTING, AND APPRAISALS
513 WILCOX, #230
CASTLE ROCK, CO 80104
303-688-4462
Lincolnton, NC, Page
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BACKGROUND AND LIMITING CONDITIONS
Western was asked by Cencom to prepare an analysis of the fair market value as a
going concern of the assets of the Lincolnton, North Carolina cable television
system as of March 31, 1995. We were recently asked to update our work and issue
a new report. This appraisal report is being issued pursuant to the April 28,
1995 and April 19, 1996 engagement letters between CencCom and Western. This
report presents key data, our analysis and assumptions, and our conclusions.
The assets being appraised include, as an assemblage, all of the tangible and
intangible assets and personal property necessary to operate the cable
television system as a going concern, consistent with past practice and industry
norms. The assets include the antennas and signal receiving equipment, strand,
conduit, cables, amplifiers, passive devices, drops, converters, tools, test
equipment, subscriber records, franchises, pole attachment agreements,
easements, supplier and programming contracts, and goodwill. Financial assets
such as accounts receivable, and liabilities, are not included.
The appraisal is based principally on financial data provided by Cencom,
including Income Statements for the 12 months ended December 31, 1995, 1994,
1993, and 1992, and 3 months ended March 31, 1996. Management also provided the
operational data presented herein, such as passings and subscriber counts. The
appraiser visited the system in May, 1995. The system manager was interviewed at
length to obtain additional data including subscriber history, technical data,
demographics, and local economic information. The appraiser toured
representative portions of the general market area. This information was
reviewed and updated in 1996 by means of a telephone interview with the manager.
The work herein is based in part on data provided by CenCom and others, and we
assume no responsibility for the accuracy of such data. Western has used
customary techniques and industry knowledge available to Western in preparing
this report. Western does not warrant or represent that the appraised value is
that which would actually be obtained in an open market transaction, or that the
value would be upheld in litigation or administrative proceeding. Accordingly,
Western (including its officers, employees, and owners) does not indemnify or
hold harmless any user of this report in any manner against any costs, losses,
or damages arising out of the use of the appraised value or other conclusions
contained herein.
Lincolnton, NC, Page
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GENERAL DESCRIPTION
The system principally serves the community of Lincoln County, including the
city of Lincolnton. This area is located midway between Charlotte and Hickory
(about 25 miles from each.) The operations also include a separate headend
serving the town of Taylorsville, about 45 minutes north of Lincolnton.
Homes Passed 28,447
Residential Basic Subs 14,592(51%)
Commercial/Bulk EBU's (379 units) 128
Total EBU's 14,720
Pay Units 6,535(46%)
Plant Miles 815
Homes Per Mile 35
Number of headends 3
Channels in use (typical) 44
Plant Channel Capacity 42-44
The system is served by three headends. This appraisal is being done on the
aggregate system, but the approximate breakout may be helpful:
Name Subscribers
----------------------------------------
Lincolnton/Lincoln Co. 69%
Vale (remote area in L.C.) 4%
Taylorsville 27%
Lincoln County is a sprawling small-town/rural area. It stretches from small
farming areas on the west to an affluent Charlotte "bedroom" area on the east.
The east end is located on a beautiful lake. Lincolnton itself is a busy
community with a broad mix of retail and service. Lincoln County manufacturers
include ball bearings, tools, pharmaceuticals, textiles, and furniture. About
40% of the area residents commute to a broad range of manufacturing, finance,
and service jobs in Charlotte (30-45 minutes). The overall economy in North
Carolina is strong, and employers are all stable or growing. Unemployment is
low.
There is a relatively dense "small-town" area in Lincolnton with a normal mix of
older homes. Numerous new subdivisions are scattered throughout the surrounding
areas, particularly in the east end. Some of the subdivisions are quite large,
and include planned and gated communities. The eastern subdivisions located on
the lake include large homes valued at around $300,000. New homes in other areas
are priced around $150,000, and older homes range downward. There are some
multi-family projects, but the area is mostly single-family.
Lincolnton, NC, Page
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<PAGE>
New homes are typically valued at $70,000 - $150,000, with some much higher and
lower. The market is brisk, and homes sell quickly. Demographics cover a broad
range from low-income rural to wealthy professional. The area would be described
as "typical" overall.
Taylorsville is a similar area. Local industry includes principally furniture
and components, and many residents commute to Hickory.
Demographics cover a full range from rural low-income to high-income
professional, and overall would be considered average.
PASSINGS GROWTH
System information on historic passings growth was not accurate. The present
number is based on 1995 audits and updates. Further complicating analysis of
housing growth is the fact that the system has not been able to provide service
to all new areas being built due to capital constraints. Management estimates
that the actual total home growth is presently about 600 units per year.
There are a number of unserved subdivisions in Lincolnton, and some rural areas
in Taylorsville which may be feasible. The estimated potential is:
Homes Miles
Lincolnton 1,000 25
Taylorsville 1,000 50
There are no significant acquisition possibilities.
SUBSCRIBER PENETRATION
The system provided the following data:
Passings Basic Pay Basic % Pay %
-----------------------------------------------------------
12/95 28,447 14,305 6,335 50% 44%
12/94 28,308 14,033 6,459 50% 46%
12/93 27,850 13,285 5,752 48% 43%
12/92 27,474 12,549 5,802 46% 46%
12/91 27,099 12,410 6,597 46% 53%
The 1994 Cable Factbook reports penetrations in nearby Charlotte of 65% basic
and 57% pay.
Because of potential errors in the passing count, past basic penetration may be
slightly understated. In any event, basic penetration is growing, at about 1
point per year. We believe the growth rate would increase with aggressive new
management; 50% is an unreasonably low level for this market. Pay penetration
appears to be fairly stable at about 46%, but should grow slowly in the future.
Lincolnton, NC, Page
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<PAGE>
SUBSCRIBER RATES AND SERVICES
Each headend has slightly different lineups and rates; information for
Lincolnton, which serves nearly 70% of the customer base, is summarized below.
Channels Rate
Basic 14 7.34
Tier 23 16.01
Total 37 $22.40
Pay channels 5 8.45 - 11.45
Pay-per-view 2 n/a
Converters 1.84 - 2.45
Remote control .23
Wire maintenance .95
Approximately 98% of the customers take the tier.
Basic includes 9 offair, and WGN and WTBS. The tier is all satellite services.
Pay includes Cinemax, HBO, Showtime, Movie, and Disney. Pay-per-view offerings
consist of Viewers Choice, adult programming channels, and events.
There is no fee for additional outlets. There are a number of small transaction
fees, including late charges. Typical aerial installation fees are $37.
Applicable FCC and franchise fees are added as a separate charge. There are
several package discounts and promotional rates available from time to time.
Rates are reasonable, and consistent with industry practice.
The system took small external cost adjustments in 1994 and 1995; an increase of
$1.95 is planned for September 1, 1996.
RATE REGULATION
Lincolnton, Lincoln County, and Taylorsville all certified to regulate rates.
Relations with the cities are good, and there has been no effort to require
strict conformance. There have been no tier complaints. This system will be
deregulated in the near future pursuant to recent new federal regulations.
Lincolnton, NC, Page
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<PAGE>
NON-SUBSCRIBER REVENUE
The company has a contract with Catawba Cable (a nearby operator) pursuant to
which Catawba sells advertising spots on satellite channels. The system receives
an allocated portion of revenues. While the amount is not large, it appears to
be a reasonable arrangement, with little chance of major improvement.
There is no other significant revenue source (fiber rental, tower rental,
phone), existing at present or likely in the future.
STAFF AND OPERATIONS
The system rents its main office and separate headend in Lincolnton. The other
headends are owned. Rents are reasonable, expirations and renewals are not a
concern, and there are no unique sites that could not be replaced (although
relocation is always a burden).
The system has a normal complement of test equipment, inventory, and vehicles,
including two bucket trucks. The office staff is well-equipped, and uses
centralized Cabledata billing services.
The system offers customary business-day service Monday through Friday, with
partial staffing Saturday morning. Phones are answered by a central company
facility after hours, and technicians are dispatched on outages if necessary.
Management reports about 23% annual turnover, and 50% annual service call
volume. Turnover is fairly high, but reflective of lower penetration. The
service call rate is very high, and indicates some technical concerns as
discussed below. Backlogs are 3-4 days on installs, and same-day on service. All
are normal.
System staffing can be summarized as:
Item Office Field Other
- - - --------------------------------------------------------------------
Number of employees 9 11 0
Subs/employee 1,635 1,338
Average wage 16,800 28,400 --
The company also uses a varying number of contract installers to do all new
installs and some reconnects. It appears there may be some minor wage allocation
issues between office and field, but the overall average wage is quite
reasonable. Staff ratios are reasonable, especially considering the drive time
involved.
Lincolnton, NC, Page
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<PAGE>
MARKETING
The system uses in-house commissioned direct salespeople on a regular basis, but
at present none are on the payroll. Direct mail and newspaper are used from time
to time.
FRANCHISES
The major Lincolnton and Lincoln County franchises expire in 2000. The Dallas
franchise was recently renewed through 2010, with a requirement for an upgrade
to 450 mhz and installation of fiber to improve picture quality. Three
franchises, including Taylorsville, expire in 1998; renewal notice has been
given by the system, but discussions have not started pending sale to a new
owner.
COMPETITION
In the east end near Charlotte, residents can get good reception on 5-7
Charlotte signals with standard antennas. Reception in the west end can be more
limited.
There is no cable overbuild, and no contiguous operator, although Time Warner is
nearby, and a major presence. The company has the only franchise in the county,
so there is no cable competition for new subdivisions.
There is no MMDS.
The company estimates that it has lost perhaps 100 customers to DBS. However,
because the company has not kept pace with new subdivision construction, it has
lost a number of potential customers; there may be at least 100 DBS dishes in
unserved areas.
TECHNICAL PROFILE
Mileage: 639 aerial, 176 underground, no fiber
Headend Electronics: S-A
Plant Electronics: S-A
Amplifier Cascade: 35-48
Power: Most areas standby
Trunk Cable: 750-875 P3, some 1000 and a bit of 500
Distribution Cable: Mostly 500 P3
Pay Security: Mostly addressability, 2 headends use traps
Percent of Addressable Subs: 40%
Converter Types: TOCOM, Jerrold, Pioneer, S-A
Lincolnton, NC, Page
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<PAGE>
Estimated Plant Build Dates:
Miles Percent
---------------
1970's 353 33%
1980's 492 46%
1990's 225 21%
Estimated Channel Capacity:
Miles Percent
---------------
300 Mhz 306 30%
330 Mhz 579 55%
450 Mhz 160 15%
There has been no major rebuild. The plant itself is reported to be in good
condition, but there are cascade problems; substantial fiber is needed to reduce
the cascade to improve reliability.
Capacity is limited, and needs to be increased to meet competitive pressures.
There are no "big urban" systems nearby, and no indication of franchise
pressures at this time. An upgrade to 450 Mhz should be adequate at present.
About 1/2 of the plant is likely to be 10 years old or less. Management
indicates that an electronics drop-in with some respacing and cable replacement,
plus more fiber, would result in 450 Mhz capacity.
UPGRADE COSTS
Fiber Overlay
20% x 800 miles x $6,000/mile $960,000
Retrofit existing 450 plant
100 miles x $3,000/mile 300,000
Retrofit existing 330 plant in good shape
500 miles x $5,000/mile 2,500,000
Rebuild old plant
200 miles x $12,000 2,400,000
Total upgrade costs $6,160,000
Lincolnton, NC, Page
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<PAGE>
DETERMINATION OF OPERATING INCOME
Appraising the value of cable television systems involves calculation of
historic and projected operating income (commonly called "cashflow"). Operating
income is defined as direct operating revenues less expenses, before capital
expenditures, depreciation, and management fees. The operating income considered
in appraisals is typically that which will be derived by the buyer, using his
cost structure and nominal predictable changes in operations.
First-Year Projection:
We first prepared a detailed Projected-Year statement of operating income. To do
so, we reviewed the company's historic income statements, and used them to
prepare an estimate of projected operating income for the 12 months beginning
April 1, 1996. A projection worksheet is attached.
The Projected-Year subscriber revenues are based on the March 31, 1996
subscriber count, plus allowances for growth, and on 1996/Q1 rates, plus
appropriate adjustments for additional actual 1996 rate changes. Other revenue
items were based on consideration of past results and trends.
Certain Projected-Year expense items such as programming costs which are based
on subscribers or revenue have been adjusted to match the subscriber and revenue
projections shown, using prior-year unit costs or ratios plus an allowance for
increases where appropriate. Overhead items, such as maintenance and property
tax have been based principally on average results, to reflect longer-term
trends. In preparing our detailed analysis, we also reviewed key operating
ratios, such as programming cost/subscriber, staffing ratios, copyright and bad
debt expense levels, etc. and compared them to industry norms and our
experience. A brief discussion of key individual items follows:
Passings: Increase by the estimate of 600 homes/year of growth. Do not add the
deferred line extensions in year 1 because of the extent and capital cost, but
do include them in year 2.
Basic Penetration: Increase by 2 points, with a decline as the system passes
60%.
Pay Penetration: Make only small gains, matching recent years.
Average Basic+Tier Revenue/Subscriber: Use the average for Q1/96 plus the 1996
increase.
Lincolnton, NC, Page
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<PAGE>
Average Pay Revenue/Unit: Has been fluctuating; use a midpoint.
Pay-Per-View Revenues: Data is limited, but indicates growth, which will
continue
Advertising: Use the 1995 levels, plus some growth for the new contracts.
G&A Salary: Ratios are good, but wages are a bit low. Increase 1995 levels by
inflation and growth.
Insurance: Fluctuating; use 3-year level
Bad Debt: Has been fluctuating, but appears to be declining. Use a normal level
of 1.2%,
Professional Services, Allocated Costs: Use 1995 levels.
Operating Wages: Ratios and levels good; increase 1995 levels for inflation and
growth.
Basic Programming: Use the 1996 level plus increases of 5%.
Premium/PPV Programming: We used the average historic level of 48.5% of revenue.
Marketing/Sales: Industry norms vary from 1% of revenue in classic systems with
little need for sales, to 4% in urban markets. This system is at about 2%, and
we used this historic level.
Ten-Year Cashflow Projections
Our principal appraisal technique involves projection of free cashflow for 10
years; free cashflow is equal to operating income less capital expenditures, but
still before depreciation and interest, and taxes. (Projected free cashflow is
then discounted at an appropriate cost-of-capital rate, and a terminal value is
added to get the value of the property.) Our projection for this system is shown
on the two-page spreadsheet enclosed. We started with the data contained in the
first-year projection spreadsheet, and expanded it with the variables and
assumptions shown.
Revenue items used are the same as for the first-year analysis. However, they
are based on forecasts for system growth in areas such as passings, penetration,
and revenue/subscriber. The small amount of commercial revenue was converted to
EBU's and for simplicity we did our forecast using total EBU's.
Lincolnton, NC, Page
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<PAGE>
Passings growth in the second year included normal growth of 600/year, plus the
deferred line extensions. In the following years, we used a growth rate of 2%,
which is about the historic level.
Penetration increases: The system has been growing at about 2 pt/year, and since
levels are low, this should continue for several years. In year 7, we slowed the
growth, reflecting increasing competition from other technologies.
Addressable Subs & PPV Revenue/Sub: The system is a prime candidate for
addressability; we increased the number of customers in a conservative manner,
and allowed a fairly fast 6% increase in revenue/sub, reflecting the
demographics.
Basic Rate Increases: Rate regulation and competition will normally limit
increases to a bit over inflation; we used 3.25%. However, on completion of the
rebuild, the company can add some new channels and tiers, and make 5% overall
increases for two years.
The ten-year model uses summary expense variables which were calculated from the
one-year information as follows:
Personnel: Salaries, Tax/benefit, Professional services, cost allocations,
and capitalized labor
Per-Subscriber: Office rent, Office Operation, Basic Programming,
LO Programming
Revenue-related: Franchise fee, copyright, bad debt, marketing, and
advertising sales
Premium Programming: Pay and pay-per-view
Per-Mile: Insurance, Property Tax, Pole Rent, Power, System Maintenance
Personnel costs ae based on current personnel costs, plus annual percentage
increases to reflect growth and expenses. We calculated the amounts for the
other expense categories on a per-sub or per-mile, or percentage of revenue
basis, as noted.
The per-sub and per-mile costs were increased over the 10-year period for
inflation. The percentage costs were held to the same percentage of revenue over
10 years, on the assumption that gradual increases in unit costs can be passed
on to customers.
Capital costs were forecast for several items. New plant costs were calculated
using new plant mileage derived from passings growth and an average per-mile
cost for new plant (aerial and U/G). Drops were calculated on the assumption
that a certain percentage of existing drops is replaced each year, and new drops
are added equal to growth plus a churn allowance of 5%. Costs for new
addressable converters were allowed based on the increase in addressable
subscribers.
Lincolnton, NC, Page
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<PAGE>
Capitalized labor is based on 1995 levels, plus inflation. The capital costs for
vehicles and miscellaneous is estimated from system size and current vehicle
count. We used the rebuild cost estimates developed earlier in the text, and
spread them over 2 years.
DETERMINATION OF APPRAISED VALUE
General Methodology
Appraisal of income-producing property typically relies on one or more of three
main approaches.
Replacement cost, which is the cost to assemble and put the property into
operation, is not typically used in the cable television industry for valuing a
property as a whole. Cable television system sales include a very substantial
intangible value for franchise, goodwill, and customer lists. Although these
intangibles can be valued separately, more direct approaches to overall value
are easier to use, and more appropriate.
Market value as determined by comparable transactions is a very common approach
for estimates of value. Transaction value is typically reported on the basis of
either per-subscriber cost or operating income multiple. We consider both
ratios, but place more reliance on the income multiple.
The Income Approach is widely used in business valuation, and we use this as our
first approach. Our method involves determination of the discounted present
value of free cashflow generated over ten years, plus an allowance for the
terminal value after ten years.
Income Approach
Ten-year free cashflow was projected, as discussed previously. The annual free
cashflow was discounted using an average cost of capital calculated as shown on
the spreadsheet.
The FCC cost-of-service rules will permit a cost-of-capital rate of 11.25%, plus
further upward adjustments related to tax matters; the result is typically in
the 12% - 13% range. Small cable operators may use even higher numbers, subject
to certain overall limits. We do not believe the FCC cost-of-capital should be
used directly, but do find that the FCC values support our calculation of 12.6%.
We then added a terminal value based on the resale value of the system in year
10. The terminal value was calculated at 5.5 x year 10 cashflow. The industry
will increasingly feel the effects of maturity, regulation and increased
competition. Sale multiples will
Lincolnton, NC, Page
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<PAGE>
gradually decline as the opportunities for growth into new lines are realized or
abandoned. Non-cable businesses currently trade in the 3-6 x cashflow range.
Regulated telephone companies presently trade at around 5-7 x cashflow.
Selection of 5.5x should reflect the industry's maturity, and the system's
location and growth outlook.
The terminal value was then discounted to a present value using the same
discount rate. The discounted cashflow and discounted terminal values were
added, to arrive at the estimate of potential system value shown on the
worksheet.
Market Value
The prices of cable system transactions are frequently evaluated to determine
the ratio of operating income (income before depreciation, interest, and
management fees) to purchase price; sales results are frequently reported in the
trade press. Per-subscriber values are also widely reported. We consider
principally the multiple of first year projected operating income. To facilitate
our analysis, we compared this system to the overall market with respect to some
key factors. The analysis is subjective, and based on our personal knowledge,
but nonetheless helps to structure the process:
Future passing and subscriber growth: Lincolnton will have above-average growth
rates.
Demographics: As discussed above, demographics are overall average for cable.
Competitive situation: Competition from DBS could be a problem in some areas,
and due to lack of cable service DBS has already established a foothold in the
area. There is little other direct competition, so overall the system is average
in this regard.
System Capacity/Quality: The need for rebuild/upgrade is a negative.
General Operations: With regard to matters such as staff, franchise problems,
etc., the system is normal.
New Revenues: The system should be able to generate more sources of new revenue
than other rural/suburban systems, because of its size and good demographics.
System marketability: The system is of a very attractive size, and is in a
market with a number of qualified buyers.
Lincolnton, NC, Page
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Comparable Transaction Data
We then select an approximate appropriate multiplier from information available
about other reasonably similar transactions, and the general state of the
market. The following data has been taken from announcements in the trade press,
information from brokers, recent issues of the Cable TV Investor Newsletter,
published by Paul Kagan Associates, and our own knowledge.
System Date Subs $/Sub CF Mult
- - - -----------------------------------------------------------
SC 3/96 44,600 1,767 10.4
Columbus, MS 2/96 16,000 1,465 9.5
Arizona 12/95 8,000 1,500 7.0
VA/TN/GA 1/96 40,000 1,107 8.5
Market Avg YTD 4/96 5,300,000 2,136 10.8
The foregoing data is the best available to us. However, in some cases, it may
not be accurate, and may reflect third-party estimates of the terms rather than
actual data.
These reports of transactions, and general industry commentary, suggest that the
"market" in 1995 for larger systems is generally 9 to 11, depending on location,
growth, rate control, etc. Smaller systems trade in the 7 to 9 range.
Urban and suburban systems are valued more highly than rural systems.
After considering all factors, we believe the system would be valued at 10 x
income, and about $1,800/subscriber.
Appraised Value
The multiples calculated by dividing the discounted cashflow approach by current
subscriber count and projected income are:
Discounted Cashflow Value 26,942,000
Current subscribers 14,720
Projected operating income 3,046,000
Resulting per-sub value 1,830
Resulting income multiple 8.8
The values calculated by using the same subscriber count, and multiples selected
from market data are:
Value, at 10 x operating income
less capex for rebuild and new build 24,110,000
Value, at $1,800 per sub 26,496,000
The values calculated by the three different methods are generally within a
reasonable range. We place more reliance on the discounted
Lincolnton, NC, Page
14
<PAGE>
cashflow method, because it directly incorporates the key variables which impact
value. Operating income multiples reflect some of the variables, but are more
subjective. Per-subscriber values are useful as broad indicators.
After reviewing the foregoing results, and considering the limits of each
method, we set the appraised value at $26,500,000.
We believe the foregoing appraised value represents the fair market value at
March 31, 1996 of the assemblage of system assets as a going concern, without
any discount imputed for brokers' fees. We believe the appraisal reflects the
relevant and material general market factors, assumptions, and limitations, all
of which are presented in this report. The appraisal was prepared using standard
appraisal techniques, and conforms to Standards 7-10 of the Uniform Standards of
Professional Appraisal Practice.
Lincolnton, NC, Page
15
<PAGE>
QUALIFICATIONS OF THE APPRAISER
The appraisal was prepared by R. Michael Kruger, owner and President of Western
Cablesystems, Inc. Since 1979, he has appraised hundreds of systems for a
variety of clients including major MSO's, independent operators, and clients
outside the CATV industry. Kruger has extensive background as a CATV executive.
From 1974 to 1979, he held various operating positions at ATC, one of the
industry's largest operators. In 1979, he joined a small MSO, and until mid-1986
was president of the 30,000 - subscriber company. There, in addition to his
operating duties, Kruger prepared CATV system appraisals.
Kruger formed Western Cablesystems, Inc. in 1986, and is its sole owner and
principal. Western has been directly involved in all aspects of system
operations and finance, including several acquisitions and sales, partnership
formation, debt placement, franchising, and system construction and startup.
Western sold one property in 1993, and presently operates three small cable
systems. In addition to continuing appraisal work, Kruger has performed
consulting engagements for a wide range of topics and clients, including the
economic feasibility of international cable and restructuring of individual
systems to achieve financial improvements.
Kruger received a BS/MS in engineering from the Massachusetts Institute of
Technology in 1967/68. In 1974, he received a Masters in Business Administration
(MBA) from the Stanford University Graduate School of Business.
Lincolnton, NC, Page
16
<PAGE>
CENCOM APPRAISAL FOR Lincolnton
HISTORIC INCOME STATEMENTS AND FIRST-YEAR PROJECTION
<TABLE>
<CAPTION>
1992 Actual 1993 Actual 1994 Actual 1995 Actual 96/Q1 Projected Year
----------- ----------- ----------- ----------- ----- --------------
<S> <C> <C> <C> <C> <C> <C>
Ending Homes Passed 27,474 27,850 28,308 28,447 28,447 29,047
Ending Basic 12,549 13,205 14,033 14,305 14,592 15,250
Subscribers
Ending Pay Subscribers 5,802 5,752 6,459 6,335 6,535 6,862
Ending Basic 45.68% 47.41% 49.57% 50.29% 51.30% 52.50%
Penetration
Ending Pay Penetration 46.23% 43.56% 46.03% 44.29% 44.78% 45.00%
Average Basic Subs 12,479 12,877 13,619 14,169 14,449 14,921
Average Pay Units 6,199 5,777 6,106 6,397 6,435 6,699
Avg Basic+Tier Rev/Sub $23.57 $24.34 $21.72 $22.40 $22.94 $24.89
Average Pay Rev/Unit $9.67 $9.51 $10.02 $9.63 $9.31 $9.31
REVENUE
Basic,Tier Revenue 3529584 3760717 3550402 3809462 994326 4456556
Ancillary Revenue 405091 355541 267355 295693 74424 312581
Commercial Basic 0 0 28557 33462 9617 38000
Premium 719182 659574 734270 739178 179813 748376
Pay-Per-View 0 0 46184 65525 21803 85000
Installation 65205 77053 99748 114148 29468 125000
Advertising 60257 44785 4916 37409 11962 45000
Shopping/Other 0 0 24945 27569 9217 30000
Franchise/FCC Fees 0 0 95489 99596 26593 116810
Billed
Total Revenue 4779319 4897670 4851866 5222042 1357223 5957323
EXPENSES
G&A Salary 107,657 135,193 150,910 149,938 37,750 161,933
Tax/Benefit-G&A 47,543 50,077 51,036 46,020 13,467 45,341
Office Rent 22,482 12,366 24,773 11,818 2,967 12,000
Office Operation 140,290 163,695 153,588 146,250 34,259 155,025
Billing 104,853 108,103 112,282 149,399 34,240 139,659
Bad Debt/Collection 98,414 58,371 78,310 61,269 9,244 77,445
Professional Services 35,503 72,269 7,297 526 0 2,000
Insurance 37,086 32,530 28,222 41,768 9,836 40,000
Property Tax 75,000 30,297 36,664 39,091 10,050 40,000
Franchise/FCC/Copyright 95,193 120,411 111,472 111,981 31,352 137,018
Cost Allocation 0 0 84,053 18,997 6,093 25,000
Operating Wages, 303,370 320,400 272,381 298,769 78,100 322,671
Overtime
Tax/Benefit-Op Wages 59,526 70,072 59,871 55,836 12,694 64,534
Labor Capitalized -40,606 -48,229 -52,919 -46,625 -10,244 -45,000
Pole Rent 87,252 136,832 109,345 79,550 28,526 114,000
Power 83,812 80,222 85,877 85,223 20,333 87,000
System Maint., 120,645 68,741 90,271 135,034 29,884 150,000
Operation
Programming-Basic 449,288 546,932 606,518 696,276 189,252 820,049
Programming-Premium 359,468 335,596 354,810 341,515 88,323 362,962
Programming-PPV 0 0 30,832 37,699 14,688 51,000
Programming-LO, Other 0 0 0 24,428 7,516 30,000
Marketing/Sales 116,286 86,108 105,823 82,996 15,059 119,146
Cost of Advertising 0 0 0 63 0
Sales
Total Expenses 2,303,062 2,379,986 2,501,416 2,567,758 663,452 2,911,785
Operating Income 2,476,257 2,517,684 2,350,450 2,654,284 693,771 3,045,538
Operating Margin 51.81% 51.41% 48.44% 50.83% 51.12% 51.12%
</TABLE>
<PAGE>
DISCOUNTED CASHFLOW MODEL FOR APPRAISAL OF LINCOLNTON
<TABLE>
<CAPTION>
Change Current Proj.
Assumptions Actual Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8
----------- ------- ------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Ending Passings 28,447 29,047 31,647 32,280 32,926 33,584 34,256 34,941 35,640
Passings Growth 8.95% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00%
Ending Basic EBU's 14,720 15,377 17,386 18,380 19,406 20,466 21,389 22,341 23,322
Ending Pay Units 6,566 6,862 7,802 8,294 8,805 9,337 9,812 10,305 10,816
Ending Basic EBU Pen. 51.75% 52.94% 54.94% 56.94% 58.94% 60.94% 62.44% 63.94% 65.44%
Basic Penetration 2.00% 2.00% 2.00% 2.00% 1.50% 1.50% 1.50%
Change
Pay/Basic Penetration 0.25% 44.61% 44.63% 44.88% 45.13% 45.38% 45.63% 45.88% 46.13% 46.38%
Average Basic EBU's 15,049 16,382 17,883 18,893 19,936 20,927 21,865 22,831
Average Pay Units 6,714 7,332 8,048 8,550 9,071 9,575 10,058 10,560
Addressable Sub % 10.00% 15.00% 25.00% 35.00% 45.00% 55.00% 65.00% 75.00% 85.00% 95.00%
Ending Plant Miles 815 900 947 959 971 982 995 1,007 1,020
New Miles 55 85 47 12 12 12 12 12 13
New Drops 1.05 690 2,110 1,043 1,077 1,113 969 999 1,030
Rebuild Miles 400 400 200 200
Replace Drops % 5.00% 5.00% 20.00% 20.00% 25.00% 10.00% 5.00% 5.00%
Basic Revenue/EBU $298.67 $308.38 $318.40 $334.32 $351.04 $362.45 $374.22 $386.39
Basic Rev/EBU 3.25% 3.25% 5.00% 5.00% 3.25% 3.25% 3.25%
Increase
Ancillary Rev/EBU 5.00% $20.77 $21.81 $22.90 $24.05 $25.25 $26.51 $27.84 $29.23
Pay Revenue/Unit 1.50% $111.46 $113.14 $114.83 $116.56 $118.30 $120.08 $121.88 $123.71
PPV Rev/Addr. Sub 6.00% $22.59 $23.95 $25.39 $26.91 $28.52 $30.24 $32.05 $33.97
Late/Shop/Oth $/EBU 4.00% $1.99 $2.07 $2.16 $2.24 $2.33 $2.43 $2.52 $2.62
Advertising Rev/EBU 6.00% $2.93 $3.10 $3.29 $2.00 $3.00 $4.00 $4.24 $4.49
Personnel Cost Incr. % 3.00% 10.45% 12.16% 6.46% 6.40% 6.35% 5.88% 5.85% 5.83%
Per-Sub Expense 4.50% $75.22 $78.61 $82.15 $85.84 $89.71 $93.74 $97.96 $102.37
% of Rev. Expense % 5.60% 5.60% 5.60% 5.60% 5.60% 5.60% 5.60% 5.60%
Pay/PPV Expense % 49.67% 49.67% 49.67% 49.67% 49.67% 49.67% 49.67% 49.67%
Per-Mile Expense 4.00% $479 $498 $518 $539 $560 $583 $606 $630
Capex per drop 2.00% $70 $71 $73 $74 $76 $77 $79 $80
Capex per new mile 3.00% $18,000 $18,540 $19,096 $19,669 $20,259 $20,867 $21,493 $22,138
Capex per rebuild $7,700 $7,700 $0 $0
mile
Capex per new adr. 1.00% $100 $101 $102 $103 $104 $105 $106 $107
sub
REVENUE
Basic/Tier/Com'l 4,494,556 5,051,749 5,693,956 6,316,222 6,998,146 7,584,940 8,182,293 8,821,717
Ancillary 312,581 357,287 409,532 454,288 503,335 554,786 608,622 667,306
Pay 748,376 829,528 924,183 996,513 1,073,192 1,149,732 1,225,919 1,306,379
Pay-per-view 85,000 137,315 204,292 279,615 369,618 474,555 595,638 736,853
Installation 6.00% 125,000 132,500 140,450 148,877 157,810 167,278 177,315 187,954
Late/Other/Shop 30,000 33,964 38,560 42,366 46,493 50,758 55,153 59,895
Advertising 45,000 50,817 58,802 37,785 59,807 83,709 92,706 102,613
Franch. Fee billed 2.00% 116,810 124,717 141,205 156,427 174,101 190,219 206,580 224,308
Total Revenue 5,957,323 6,717,876 7,610,979 8,432,094 9,382,503 10,255,977 11,144,226 12,107,025
EXPENSES
Personnel 576,479 646,578 688,373 732,453 778,946 824,723 872,981 923,851
Per-Sub costs 1,156,733 1,366,740 1,509,842 1,665,870 1,835,906 2,005,061 2,188,538 2,387,489
Per-mile costs 431,000 471,784 496,616 522,804 550,424 579,556 610,286 642,705
Percent of Rev. costs 333,609 376,200 426,213 472,196 525,418 574,333 624,075 677,991
Pay & PPV Costs 413,962 480,259 560,546 633,890 716,685 806,830 904,820 1,014,933
Total Expenses 2,911,783 3,341,560 3,681,591 4,027,213 4,407,379 4,790,503 5,200,699 5,646,969
OPERATING INCOME 3,045,540 3,376,316 3,929,388 4,404,881 4,975,124 5,465,474 5,943,527 6,460,056
Operating Ratio 51.12% 50.26% 51.63% 52.24% 53.03% 53.29% 53.33% 53.36%
</TABLE>
Year 9 Year 10
------ -------
Ending Passings 36,352 37,080
Passings Growth 2.00% 2.00%
Ending Basic EBU's 24,152 25,006
Ending Pay Units 11,261 11,721
Ending Basic EBU Pen. 66.44% 67.44%
Basic Penetration 1.00% 1.00%
Change
Pay/Basic Penetration 46.63% 46.88%
Average Basic EBU's 23,737 24,579
Average Pay Units 11,038 11,491
Addressable Sub % 100.00% 100.00%
Ending Plant Miles 1,033 1,046
New Miles 13 13
New Drops 871 897
Rebuild Miles
Replace Drops % 5.00% 5.00%
Basic Revenue/EBU $398.94 $411.91
Basic Rev/EBU 3.25% 3.25%
Increase
Ancillary Rev/EBU $30.69 $32.22
Pay Revenue/Unit $125.56 $127.45
PPV Rev/Addr. Sub $36.01 $38.17
Late/Shop/Oth $/EBU $2.73 $2.84
Advertising Rev/EBU $4.76 $5.05
Personnel Cost Incr. % 5.41% 5.41%
Per-Sub Expense $106.98 $111.79
% of Rev. Expense % 5.60% 5.60%
Pay/PPV Expense % 49.67% 49.67%
Per-Mile Expense $655 $682
Capex per drop $82 $84
Capex per new mile $22,802 $23,486
Capex per rebuild
mile
Capex per new adr. $108 $109
sub
REVENUE
Basic/Tier/Com'l 9,469,741 10,124,295
Ancillary 728,466 792,018
Pay 1,386,011 1,464,528
Pay-per-view 854,788 938,211
Installation 199,231 211,185
Late/Other/Shop 64,762 69,741
Advertising 113,085 124,121
Franch. Fee billed 241,752 258,641
Total Revenue 13,057,835 13,982,741
EXPENSES
Personnel 973,875 1,026,538
Per-Sub costs 2,583,714 2,795,432
Per-mile costs 676,907 712,993
Percent of Rev. costs 731,236 783,031
Pay & PPV Costs 1,113,069 1,193,510
Total Expenses 6,078,802 6,511,505
OPERATING INCOME 6,979,034 7,471,236
Operating Ratio 53.45% 53.43%
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CAPITAL EXPENDITURES
Drops 102,109 212,709 343,670 368,345 471,986 240,217 166,847 176,622
Addr. Converters 163,625 226,338 222,956 247,512 273,621 287,863 312,933 339,481
New plant 1,530,000 876,436 219,759 230,879 242,561 254,835 267,730 281,277
Rebuild 0 3,080,000 3,080,000
Labor capitalized 13.88% 80,000 89,728 95,528 101,645 108,097 114,450 121,147 128,206
Vehicles 5.00% 50,000 52,500 55,125 57,881 60,775 63,814 67,005 70,355
Other 3.00% 75,000 80,000 82,400 84,872 87,418 90,041 92,742 95,524
Total Capex 2,000,734 4,617,711 4,099,438 1,091,134 1,244,459 1,051,220 1,028,404 1,091,465
DISCOUNTED FREE
CASHFLOW
Operating Income 3,045,540 3,376,316 3,929,388 4,404,881 4,975,124 5,465,474 5,943,527 6,460,056
Less Capital 2,000,734 4,617,711 4,099,438 1,091,134 1,244,459 1,051,220 1,028,404 1,091,465
Expenditures
Free cashflow 1,044,806 -1,241,395 -170,050 3,313,748 3,730,665 4,414,254 4,915,123 5,368,591
</TABLE>
Year 9 Year 10
------ -------
CAPITAL EXPENDITURES
Drops 170,517 179,595
Addr. Converters 216,145 93,383
New plant 295,509 310,462
Rebuild
Labor capitalized 135,148 142,456
Vehicles 73,873 77,566
Other 98,390 101,342
Total Capex 989,582 904,804
DISCOUNTED FREE
CASHFLOW
Operating Income 6,979,034 7,471,236
Less Capital 989,582 904,804
Expenditures
Free cashflow 5,989,452 6,566,432
Discount Rate 12.60% Discount Rate Calculation
Net Present Value of 14,399,971 Proportion Rate
Free Cashflow
Equity 30.00% 20.00%
Senior 60.00% 9.00%
Debt
Sub. Debt 10.00% 12.00%
Blended 12.60%
TERMINAL VALUE
Year 10 operating 7,471,236
income
Multiple 5.5
Terminal Value 41,091,800
Discounted at 12.60% 12,542,129
POTENTIAL VALUE
NPV of Free Cashflow 14,399,971
NPV of Terminal Value 12,542,129
Total Potential Value 26,942,100
RATIOS
Current EBU's 14,720
First-year Op. Income 3,045,540
Value per EBU $1,830
Op. Income Multiple 8.85
<PAGE>
EXHIBIT B
FORM OF LEGAL OPINIONS OF HUSCH & EPPENBERGER
<PAGE>
___________, 1996
Limited Partners of Cencom Cable
Income Partners II, L.P.
c/o Cencom Properties II, Inc.
12444 Powerscourt Drive, Suite 550
St. Louis, Missouri 63131-3660
Re: Cencom Cable Income Partners II, L.P.
Ladies and Gentlemen:
We have acted as special counsel for the Limited Partners (as defined
below) of Cencom Cable Income Partners II, L.P. (the "Partnership") in
connection with (i) the selection process whereby the American Arbitration
Association has selected an appraiser, which appraiser, along with the appraiser
selected by Cencom Properties II, Inc. (the "General Partner"), valued the
assets of the Partnership, and (ii) the compliance by the General Partner with
the terms and provisions of the Partnership Agreement (as defined below) as they
relate to the rights of the Limited Partners in the dissolution process of the
Partnership, including the proposed sale by the Partnership to Charter
Communications II, L.P., a Delaware limited partnership (the "Purchasing
Affiliate"), of the Partnership's cable television system located in and around
Anderson County, South Carolina (the "System") for a price of $36,700,000 (the
"Sale"). Unless otherwise defined herein or the context otherwise requires, the
capitalized terms appearing in this letter shall have the meanings ascribed to
them in that certain Amended and Restated Agreement of Limited Partnership of
Cencom Cable Income Partners, L.P. dated as of August 18, 1987 (the "Partnership
Agreement") by and among the General Partner, Jerald L. Kent, as the Initial
Limited Partner, and those persons currently listed in the books and records of
the Partnership as Limited Partners (the "Limited Partners").
<PAGE>
Limited Partners of Cencom Cable
Income Partners II, L.P.
_________, 1996
Page 2
This Opinion Letter is governed by, and shall be interpreted in accordance
with, the Legal Opinion Accord (the "Accord") of the ABA Section of Business Law
(1991) as in effect on the date hereof. As a consequence this Opinion Letter is
subject to a number of qualifications, exceptions, definitions, limitations on
coverage, and other limitations, all as more particularly described in the
Accord, and this Opinion Letter should be read in conjunction therewith. The law
covered by the opinions expressed herein is limited to the Law of the State of
Missouri.
In connection with the foregoing, we have examined originals or copies of,
or have taken into account, the following:
(a) The Partnership Agreement;
(b) The Notice of Written Vote dated _______, 1996 and the Disclosure
Statement dated ________, 1996, each of which has been mailed to the Limited
Partners and filed with the Securities and Exchange Commission;
(c) Copies of correspondence between the General Partner (on behalf of the
Partnership) and the appraisers who participated in the Partnership Appraisal
Process pursuant to the Partnership Agreement, which copies have been
represented by the General Partner as being complete and accurate;
(d) Reports and other correspondence supplied to us by the appraisers who
participated in the Partnership Appraisal Process;
(e) The executed Asset Purchase Agreement related to the Sale dated as of
________, 1996 between the Purchasing Affiliate and the Partnership (the "Sale
Agreement");
<PAGE>
Limited Partners of Cencom Cable
Income Partners II, L.P.
_________, 1996
Page 3
(f) Certificates of an inspector of election for the Partnership concerning
the Consent; and
(g) Such other records of the Partnership, and such other documents and
records as we have deemed necessary for the purpose of this letter.
Our knowledge of the Partnership and its legal and other affairs is limited
by the scope of our engagement. We have been engaged by the Partnership only in
connection with the matters set forth in the first paragraph of this opinion,
and do not represent the Partnership or the Limited Partners with respect to any
other legal matters or issues other than those set forth in our opinion dated
as of __________ to the Limited Partners with respect to Cencom Partners, L.P.
Our engagement commenced in August of 1994, and our fees have been or will be
paid by the Partnership.
On the basis of the foregoing examinations and assumptions and in reliance
thereon, and upon consideration of applicable law, subject to the qualifications
herein stated, we are of the opinion that:
1. The General Partner has complied with the written requirements of the
Partnership Agreement as such terms and provisions relate to the rights of the
Limited Partners in connection with (i) the Partnership Appraisal Process, (ii)
the solicitation of Consent, (iii) the Sale and (iv) the Sale Agreement; and
2. Subject to (i) the limitation that we have not independently verified
the accuracy, completeness or fairness of the statements contained in the
Disclosure Statement, (ii) the limitations inherent in the information available
to us and the limited scope of our engagement, including our participation in
the Disclosure Statement preparation being limited solely to our review of the
Disclosure Statement and review of various drafts of the
<PAGE>
Limited Partners of Cencom Cable
Income Partners II, L.P.
_________, 1996
Page 4
Disclosure Statement, and comment thereon related to matters and issues within
the scope of our engagement (whether in writing or in telephone conferences with
counsel to the General Partner preparing such documentation), and (iii) the
nature and extent of our review of the Disclosure Statement being such that we
are unable to assume, and do not assume, responsibility for the accuracy,
completeness or fairness of such statements, no facts have come to our direct
and specific attention which would lead us to believe that the Disclosure
Statement, at the time it was filed with the Commission and sent to the Limited
Partners, or as of the date hereof, contained or contains any untrue statement
of a material fact or omitted or omits to state any material fact required to be
stated therein or necessary to make the statements therein not misleading.
It should be noted that we are licensed to practice law in the State of
Missouri and express no opinion as to the applicability or effect of the laws of
any other jurisdiction. In addition, we express no opinion as to any
applicability of any federal or state securities laws or compliance with any
federal or state securities laws by the General Partner or the Partnership with
respect to the Partnership Agreement, the Sale, the Sale Agreement, the
solicitation of Consent or any other matter.
This opinion is being furnished to you by us as special counsel for the
Limited Partners for the sole purpose described in the first paragraph hereof.
We consent to the disclosure and description of, and quotation from, this
opinion as set forth in the Disclosure Statement, but otherwise this opinion may
not be relied upon by any other persons other than the Limited Partners, or for
any other purpose and may not otherwise be referred to or quoted from, without
our prior express written consent. This opinion is limited to the facts as known
and disclosed to us and to the laws as such exist on the date of this opinion.
We undertake no duty to supplement or update our opinion.
<PAGE>
Limited Partners of Cencom Cable
Income Partners II, L.P.
_________, 1996
Page 5
Sincerely,
HUSCH & EPPENBERGER
By:______________________
Stan Johnston, Partner
<PAGE>
___________, 1996
Limited Partners of Cencom Cable
Income Partners II, L.P.
c/o Cencom Properties II, Inc.
12444 Powerscourt Drive, Suite 550
St. Louis, Missouri 63131-3660
Re: Liquidation of Cencom Partners, L.P.
Ladies and Gentlemen:
We have acted as special counsel for those persons currently listed as
limited partners (the "Limited Partners") of Cencom Cable Income Partners II,
L.P. (the "Partnership") in connection with: the compliance by Cencom Partners
L.P. ("CPLP") and Cencom Partners, Inc. ("CPI"), CPLP's general partner, with
the terms and provisions of the CPLP Partnership Agreement (as defined below) as
they relate to the liquidation of CPLP and indirectly to the rights of the
Limited Partners in the liquidation and dissolution of CPLP, including the
proposed sales by CPLP to (i) Charter Communications L.P., a Delaware limited
partnership ("Charter I"), of CPLP's cable television system located in Sanford,
North Carolina (the "Sanford System") for a price of $20,750,000, and (ii)
Charter Communications II, L.P., a Delaware limited partnership ("Charter II"),
of CPLP's cable television systems located in and around Abbeville, South
Carolina (the "Abbeville System") and Lincolnton, North Carolina (the
"Lincolnton System") for a price of $4,200,000 and $27,500,000, respectively
(collectively, the "Sales"). Unless otherwise defined herein or the context
otherwise requires, the capitalized terms appearing in this letter shall have
the meanings ascribed to them in that certain Amended and Restated Agreement of
Limited Partnership of Cencom Partners, L.P. dated as of June 29, 1990 (the
"CPLP Partnership Agreement") by and among CPI, the Partnership
<PAGE>
Limited Partners of Cencom Cable
Income Partners II, L.P.
_________, 1996
Page 2
and other limited partners, or (ii) the Disclosure Statement (as defined
below).
This Opinion Letter is governed by, and shall be interpreted in accordance
with, the Legal Opinion Accord (the "Accord") of the ABA Section of Business Law
(1991) as in effect on the date hereof. As a consequence this Opinion Letter is
subject to a number of qualifications, exceptions, definitions, limitations on
coverage, and other limitations, all as more particularly described in the
Accord, and this Opinion Letter should be read in conjunction therewith. The law
covered by the opinions expressed herein is limited to the Law of the State of
Missouri.
In connection with the foregoing, we have examined originals or copies of,
or have taken into account, the following:
(a) The CPLP Partnership Agreement;
(b) The Notice of Written Vote of the Limited Partners dated _______, 1996,
and the Disclosure Statement of the Partnership dated ________, 1996 (the
"Disclosure Statement"), each of which has been mailed to the Limited Partners;
(c) Copies of correspondence between CPII (on behalf of the Partnership)
and the appraisers who participated in the CPLP Appraisal Process, which copies
have been represented by CPII as being complete and accurate;
(d) Reports and other correspondence supplied to us by the appraisers who
participated in the CPLP Appraisal Process;
(e) The executed Asset Purchase Agreement related to the sale of the
Sanford System dated as of May 30, 1996 between Charter I and CPLP (the "Sanford
Sale Agreement");
<PAGE>
Limited Partners of Cencom Cable
Income Partners II, L.P.
_________, 1996
Page 3
(f) The executed Asset Purchase Agreement related to the sale of the
Abbeville System dated as of April 26, 1996 between Charter II and CPLP (the
"Abbeville Sale Agreement");
(g) The executed Asset Purchase Agreement related to the sale of the
Lincolnton System dated as of May 30, 1996 between Charter I and CPLP (the
"Lincolnton Sale Agreement");
(h) The executed Assignment and Assumption Agreement between Charter I and
Charter II related to the Lincolnton System dated as of August 8, 1996 (the
"Lincolnton Assignment"); and
(g) Such other records of the Partnership and CPLP, and such other
documents and records as we have deemed necessary for the purpose of this
letter.
Our knowledge of the Partnership and its legal and other affairs is limited
by the scope of our engagement. We have been engaged by the Partnership only in
connection with the matters set forth in the first paragraph of this opinion,
and do not represent the Partnership or the Limited Partners with respect to any
other legal matters or issues other than those set forth in our opinion dated
__________ to the Limited Partners with respect to the Partnership. Our
engagement commenced in August of 1994, and our fees have been or will be paid
by the Partnership.
On the basis of the foregoing examinations and assumptions and in reliance
thereon, and upon consideration of applicable law, subject to the qualifications
herein stated, we are of the opinion that:
1. CPLP has complied with the written requirements of the CPLP Partnership
Agreement as such terms and provisions relate to the rights of the Partnership
in connection with
<PAGE>
Limited Partners of Cencom Cable
Income Partners II, L.P.
_________, 1996
Page 4
(i) the CPLP Appraisal Process, (ii) the Sales, (iii) the Sanford Sale
Agreement, (iv) the Abbeville Sale Agreement, and (v) the Lincolnton Sale
Agreement and the Lincolnton Assignment; and
2. Subject to (i) the limitation that we have not independently verified
the accuracy, completeness or fairness of the statements contained in the
Disclosure Statement, (ii) the limitations inherent in the information available
to us and the limited scope of our engagement, including our participation in
the Disclosure Statement preparation being limited solely to our review of the
Disclosure Statement and review of various drafts of the Disclosure Statement,
and comment thereon related to matters and issues within the scope of our
engagement (whether in writing or in telephone conferences with counsel to the
General Partner preparing such documentation), and (iii) the nature and extent
of our review of the Disclosure Statement being such that we are unable to
assume, and do not assume, responsibility for the accuracy, completeness or
fairness of such statements, no facts have come to our direct and specific
attention which would lead us to believe that the Disclosure Statement, at the
time it was filed with the Commission and sent to the Limited Partners, or as of
the date hereof, contained or contains any untrue statement of a material fact
or omitted or omits to state any material fact required to be stated therein or
necessary to make the statements therein not misleading.
It should be noted that we are licensed to practice law in the State of
Missouri and express no opinion as to the applicability or effect of the laws of
any other jurisdiction. In addition, we express no opinion as to any
applicability of any federal or state securities laws or compliance with any
federal or state securities laws by CPLP or the Partnership with respect to the
CPLP Partnership Agreement, the Sales, the Sanford Sale Agreement, the
<PAGE>
Limited Partners of Cencom Cable
Income Partners II, L.P.
_________, 1996
Page 5
Abbeville Sale Agreement, the Lincolnton Sale Agreement, the Lincolnton
Assignment or any other matter.
This opinion is being furnished to you by us as special counsel for the
Limited Partners for the sole purpose described in the first paragraph hereof.
We consent to the disclosure and description of, and quotation from, this
opinion as set forth in the Disclosure Statement, but otherwise this opinion may
not be relied upon by any other persons other than the Limited Partners, or for
any other purpose and may not otherwise be referred to or quoted from, without
our prior express written consent. This opinion is limited to the facts as known
and disclosed to us and to the laws as such exist on the date of this opinion.
We undertake no duty to supplement or update our opinion.
Sincerely,
HUSCH & EPPENBERGER
By:______________________
Stan Johnston, Partner
<PAGE>
EXHIBIT C
PURCHASE AGREEMENTS AND ASSIGNMENT AGREEMENT
<PAGE>
ASSET PURCHASE AGREEMENT
between
CENCOM CABLE INCOME PARTNERS II, L.P.,
as Seller
and
CHARTER COMMUNICATIONS II, L.P.,
as Purchaser
dated as of May 30, 1996
<PAGE>
TABLE OF CONTENTS
Page
----
1. PURCHASE AND SALE OF ASSETS................................... 1
1.1 Assets to be Sold........................................... 1
1.2 Excluded Assets............................................. 2
2. CALCULATION AND PAYMENT OF PURCHASE PRICE................... 3
2.1 Payment of Purchase Price................................... 3
2.2 Assumption of Liabilities................................... 3
2.3 Purchase Price Adjustments.................................. 4
2.4 Excluded Liabilities........................................ 4
2.5 Allocation of Consideration................................. 4
2.6 Proration of Revenue........................................ 4
3. CLOSING..................................................... 4
3.1 Closing Date................................................ 4
3.2 Deliveries by Seller........................................ 5
3.3 Deliveries by Purchaser..................................... 5
4. REPRESENTATIONS AND WARRANTIES.............................. 6
4.1 Organization and Standing................................... 6
4.2 Power and Authority......................................... 6
4.3 Authorization............................................... 6
5. ADDITIONAL UNDERTAKINGS AND ACTIONS........................... 7
5.1 Consents.................................................... 7
5.2 Access to Assets............................................ 7
5.3 Operations Prior to Closing................................. 7
5.4 Antitrust Laws Compliance................................... 7
5.5 Bulk Sales.................................................. 8
6. CONDITIONS PRECEDENT TO OBLIGATIONS OF PURCHASER.............. 8
6.1 HSR Act..................................................... 8
6.2 Governmental or Legal Action................................ 8
6.3 Representations; Performance of Agreements.................. 8
6.4 Financing................................................... 9
6.5 No Material Adverse Change.................................. 9
6.6 Consents and Approvals...................................... 9
6.7 Transfer Documents.......................................... 9
6.8 Opinions of Seller's Counsel................................ 9
6.9 Discharge of Liens.......................................... 9
6.10 No Default Under Documents.................................. 9
6.11 Additional Documents and Acts............................... 10
Anderson County, SC
Purchase Agreement
Execution Version
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7. CONDITIONS PRECEDENT TO OBLIGATIONS OF SELLER................. 10
7.1 HSR Act..................................................... 10
7.2 Governmental or Legal Actions............................... 10
7.3 Representations; Performance of Agreements.................. 10
7.4 Consent and Approvals....................................... 11
7.5 Payments.................................................... 11
7.6 Assumption of Liabilities................................... 11
7.7 Additional Documents and Acts............................... 11
8. REMEDIES.................................................... 11
8.1 Costs....................................................... 11
8.2 Termination Without Liability............................... 11
8.3 Termination on Default...................................... 11
9. INDEMNIFICATION............................................... 12
9.1 Seller's Indemnity.......................................... 12
9.2 Purchaser's Indemnity....................................... 12
9.3 Procedure................................................... 13
9.4 Preservation and Access to Records.......................... 13
10. GENERAL PROVISIONS................................................ 14
10.1 Entire Agreement, Modification and Waiver................... 14
10.2 Rights of Parties........................................... 14
10.3 Assignment.................................................. 14
10.4 Construction................................................ 14
10.5 Expenses of the Parties..................................... 14
10.6 Further Assurances.......................................... 15
10.7 Counterparts................................................ 15
10.8 Headings.................................................... 15
Anderson County, SC
Purchase Agreement
Execution Version
<PAGE>
ASSET PURCHASE AGREEMENT
THIS ASSET PURCHASE AGREEMENT (this "Agreement") is made as of
this 30th day of May, 1996 by and between Charter Communications, L.P., a
limited partnership organized and existing under the laws of the State of
Delaware ("CC II" or the "Purchaser") and Cencom Cable Income Partners II, L.P.,
a limited partnership organized and existing under the laws of the State of
Delaware ("Seller").
W I T N E S S E T H:
WHEREAS, Seller is the owner and operator of a cable television
system serving communities located in and around Anderson County, South Carolina
(the "System");
WHEREAS, Seller desires to sell, and Purchaser desire to
purchase, pursuant to the terms and subject to the conditions of this Agreement,
the System together with all of the assets, property, interests, rights and
privileges of Seller, including but not limited to those utilized in the cable
television business owned and operated by Seller in Anderson County, South
Carolina (the "CATV Business").
NOW, THEREFORE, in consideration of the mutual promises,
agreements and covenants set forth herein, and for other good and valuable
consideration, the sufficiency of which is hereby acknowledged, the parties
hereto, intending legally to be bound, hereby agree as follows:
1. PURCHASE AND SALE OF ASSETS
1.1 Assets to be Sold. Subject to the terms and conditions of this
Agreement, Seller hereby agrees to sell, convey, assign, transfer and deliver to
Purchaser at the Closing (as hereinafter defined) and Purchaser hereby agrees to
acquire, for the consideration hereinafter provided, all of the assets,
properties, rights, titles and privileges of Seller of every kind, character and
description, whether tangible, intangible, real, personal or mixed, of whatever
description and wherever located, involved in, related to, owned, used or held
for use or useful in connection with the ownership, use or operation of the
System and all other assets of Seller relating to the System whether or not
required to be listed on Seller's balance sheet in
Anderson County, SC
Purchase Agreement
Execution Version
<PAGE>
accordance with generally accepted accounting principles, including, without
limitation, all additions, accessions and substitutions made prior to the
Closing as permitted pursuant to the terms of this Agreement (collectively, the
"Assets"), but excluding the Excluded Assets (defined below) and assets disposed
of by Seller between the date hereof and the Closing Date (as hereinafter
defined) on an arms' length basis in the ordinary course of business. The Assets
include, without limitation, the following:
(a) all of the real property interests of Seller relating to the
System (collectively, the "Real Property");
(b) all items of tangible personal property owned, used, held for
use or useful by Seller in the operation of the System, including, without
limitation, all equipment relating to the System (collectively, the
"Equipment"); and
(c) all the rights of Seller under any and all franchises,
licenses (including those required by the FCC), permits, authorizations,
easements, registrations, leases, variances, consents and certificates and
similar rights which authorize or are required in connection with the operation
of the System, including any applications for any of the foregoing
(collectively, the "Governmental Permits") that are obtained from or are pending
with any federal, state, county, municipal, local or foreign government and any
governmental agency, bureau, commission, authority, body, court (or other
judicial body), administrative or executive agency, legislative or
quasi-legislative body, commission, council or other agency, including any such
agency, authority or body responsible for the issuance or administration of any
Governmental Permit or whose consent is required for the sale and transfer of
the Assets (each, a "Governmental Authority") and all subscription contracts
with subscribers of Seller relating to the System, pole attachment agreements,
access agreements and all other contracts, leases, agreements or undertakings
(other than those that are included in the Excluded Assets or which constitute
Governmental Permits), written or oral, relating to the ownership, operation or
maintenance of the System and/or the Assets (the "Contracts").
1.2 Excluded Assets. Notwithstanding anything to the contrary in this
Agreement, any insurance policies and rights and claims thereunder; all rights
to tax refunds and refunds of fees of any nature, in either case relating to
Anderson County, SC
Purchase Agreement
Execution Version
-2-
<PAGE>
the period prior to the Closing Date; Seller's rights under this Agreement, and
the Purchase Price payable pursuant hereto; Seller's organizational documents
and partnership and financial records not included in Section 1.1; Seller's cash
in the bank and cash equivalents at the time of the Closing; and all assets of
Seller other than the Assets (collectively, the "Excluded Assets") are expressly
excluded from this sale, are not to be purchased or assumed by Purchaser, and do
not constitute part of the "Assets."
2. CALCULATION AND PAYMENT OF PURCHASE PRICE
2.1 Payment of Purchase Price.
(a) The purchase price to be paid by Purchaser to Seller for the
Assets shall be an amount equal to $36,700,000 (the "Purchase Price").
(b) On the Closing Date, Purchaser shall pay to Seller the
Purchase Price, by wire transfer of immediately available funds to an account
designated by Seller in writing.
2.2 Assumption of Liabilities. As additional consideration for the
Assets, Purchaser shall, from and after the Closing Date, and pursuant to an
Assignment and Assumption Agreement in a form agreed between the parties (the
"Assumption Agreement"), assume the obligations of Seller under or in connection
with all of the Assets. In addition, Purchaser shall assume (i) all obligations
relating to the Assets entered into by Seller in the ordinary course of business
between the date hereof and the Closing Date (other than any obligations, if
any, relating to the Excluded Assets), to the extent such obligations continue
after the Closing and (ii) all liabilities relating to (y) all customer advance
payments and deposits, prepaid advertising revenues and other prepaid revenues
or income received or held by Seller for services to be rendered or obligations
to be performed in connection with the System subsequent to the Closing; (z) the
performance of the Contracts from and after the Closing Date; provided, however,
that Seller shall pay all sales, use, excise and similar taxes arising out of
the transfer of the Assets. Except as otherwise provided in this Section 2.2,
Purchaser shall not assume or become liable for any other obligations,
liabilities or indebtedness of Seller.
Anderson County, SC
Purchase Agreement
Execution Version
-3-
<PAGE>
2.3 Purchase Price Adjustments.
(a) At the Closing, the Purchase Price shall be increased by an
amount equal to 99% of the face amount of accounts receivable from subscribers
of the System which, as of the Closing Date, have been outstanding for 60 days
or less. There shall be no increase to the Purchase Price for accounts
receivable from subscribers of the System which have been outstanding for more
than 60 days.
(b) Following the Closing, Purchaser and Seller shall adjust the
Purchase Price pursuant to customary working capital adjustments for
transactions of this type calculated as of the Closing Date. The difference
between the actual Purchase Price paid and the adjusted Purchase Price shall be
paid in cash by the party owing such adjustment no later than sixty (60) days
after the Closing Date.
2.4 Excluded Liabilities. Seller shall pay or otherwise satisfy all
indebtedness, liabilities or other obligations of Seller arising prior to or on
the Closing Date from the ownership or operation of any of the Assets.
2.5 Allocation of Consideration. The parties agree that the
consideration payable for the Assets, consisting of the Purchase Price and the
liabilities of Seller to be assumed by Purchaser hereunder, shall be allocated
among the Assets in accordance with Section 1060 of the Internal Revenue Code of
1986, as amended, and the regulations thereunder. The parties agree to cooperate
in the preparation, execution and filing with the Internal Revenue Service of
all information to be filed by the parties under Section 1060 and such
regulations, and to file Form 8594 (or any substitute therefor) when required by
applicable law.
2.6 Proration of Revenue. All revenue earned arising from the Assets
shall be prorated between Purchaser and Seller as of (and the Closing shall be
deemed effective as of) 11:59 p.m., New York time, on the Closing Date.
3. CLOSING
3.1 Closing Date. The closing of the transactions contemplated
hereunder (the "Closing") shall take place at the offices of Paul, Hastings,
Janofsky & Walker, 399 Park Avenue, 31st Floor, New York, New York 10022, at
10:00 A.M.
Anderson County, SC
Purchase Agreement
Execution Version
-4-
<PAGE>
New York time on August 30, 1996, or on such other date and at such other time
as the Purchaser and Seller may mutually agree (the "Closing Date"). Purchaser
shall be entitled to possession of the Assets upon the Closing.
3.2 Deliveries by Seller. At the Closing, Seller shall deliver to
Purchaser the following:
(a) One or more bills of sale and all such other general
instruments of transfer, assignment and conveyance, general warranty deeds,
certificates of title, assignments, evidences of consent or waiver, and other
instruments or documents in form and substance reasonably satisfactory to
Purchaser and its counsel as shall be necessary to evidence or perfect the sale,
assignment, transfer and conveyance of the Assets to Purchaser and effectively
vest in the Purchaser all right, title and interest in and to the Assets free
and clear of any and all liens, encumbrances and other restrictions (other than
liens and encumbrances agreed upon by the parties, such liens and encumbrances
being "Permitted Encumbrances") in accordance with the terms of this Agreement,
together with possession (or constructive possession, in the case of
intangibles) thereof.
(b) An executed Assumption Agreement.
(c) A Certificate of Non-Foreign Status which meets the
requirements of Treasury Regulation Section 1.1445-2, duly executed and
acknowledged, certifying under penalties of perjury that Seller is not a foreign
person for United States income tax purposes.
(d) Originals or true and complete copies of all books and
records, memoranda and data relating to the System; provided that Seller may
retain such duplicate copies as Seller reasonably deems appropriate.
(e) Such other documents, opinions, instruments and certificates,
in form and substance reasonably satisfactory to Purchaser, as Purchaser may
reasonably request.
3.3 Deliveries by Purchaser. At the Closing, Purchaser shall deliver to
Seller the following:
(a) The payment described in Section 2.1(b).
(b) An executed Assumption Agreement.
Anderson County, SC
Purchase Agreement
Execution Version
-5-
<PAGE>
(c) Such other documents, opinions, instruments and certificates,
in form and substance reasonably satisfactory to Seller, as Seller may
reasonably request.
4. REPRESENTATIONS AND WARRANTIES
Seller hereby represents and warrants to Purchaser, and Purchaser
hereby represents and warrants to Seller that:
4.1 Organization and Standing. Each such party is duly formed, validly
existing and in good standing as a limited partnership under the laws of the
jurisdiction of its formation. Each such party is duly qualified to do business
in each jurisdiction where the failure to so qualify would have a material
adverse affect on such party's ability to conduct its business or operations or
to consummate the transactions to be consummated by it under this Agreement and
each such party is in good standing in each jurisdiction in which it is so
qualified.
4.2 Power and Authority. Each such party has all requisite power and
authority to execute, deliver and perform this Agreement and to take any action
which it may be required to take hereunder. Seller further represents and
warrants that it has all requisite power to perform its business as now
conducted and to own its properties and assets.
4.3 Authorization. The execution, delivery and performance of this
Agreement by such party has been duly and validly authorized by all action
required to be taken with respect to such party. This Agreement has been, and on
the date of the Closing all other documents, agreements and instruments to be
executed and delivered at the Closing by such party pursuant hereto (together
with all such documents, agreements and instruments to be executed and delivered
by each other party hereto, the "Transaction Documents") will have been, duly
and validly executed by properly authorized officers or other authorized
representatives of such party. This Agreement constitutes, and on the Closing
Date all other Transaction Documents to which such party is or will be a
signatory will constitute, the valid and binding obligations of such party,
enforceable against such party in accordance with their respective terms.
Neither the execution of this Agreement or any of the Transaction Documents, nor
the consummation of the transactions contemplated herein or therein, will
violate
Anderson County, SC
Purchase Agreement
Execution Version
-6-
<PAGE>
any instrument of such party, or any agreement, permit, order, judgment, decree,
law or regulation to which such person is party or by which it is, or its assets
and properties are, bound.
5. ADDITIONAL UNDERTAKINGS AND ACTIONS
5.1 Consents.
(a) As soon as possible after the execution of this Agreement,
Seller will commence making the applications and filings required to obtain all
consents required to be obtained to effect the consummation of the transactions
contemplated hereby, including the written consents of the Limited Partners
holding a majority of units of limited partnership of the Seller (the
"Consents"). Seller will use its best efforts to obtain the Consents from the
appropriate Governmental Authorities and other persons at the earliest possible
date. Purchaser agrees that it will cooperate fully with Seller, and will do all
things reasonably necessary to assist Seller in obtaining all Consents.
5.2 Access to Assets. On and after the date of this Agreement,
Purchaser and its counsel, accountants and other representatives shall have
reasonable access, during normal business hours and upon reasonable notice, to
all properties, books, accounts, contracts, commitments, and records, documents
or other data or information of Seller relating to the System.
5.3 Operations Prior to Closing. Except as otherwise expressly
contemplated by this Agreement, at all times from and after the date hereof and
up to and including the Closing Date, Seller shall operate the System only in
the ordinary course.
5.4 Antitrust Laws Compliance. As soon as practicable after the date of
execution of this Agreement, Seller and Purchaser shall each make filings if and
as required under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended, and related acts and regulations (the "HSR Act"). Each party shall keep
the other party apprised of the status of any inquiries made of such party by
the Federal Trade Commission, the Antitrust Division of the United States
Department of Justice, or any other Governmental Authority with respect to this
Agreement or the transactions contemplated hereby. Each party shall use
reasonable
Anderson County, SC
Purchase Agreement
Execution Version
-7-
<PAGE>
efforts to obtain the earliest termination or waiver of the HSR Act waiting
period possible.
5.5 Bulk Sales. Purchaser waives compliance with provisions of the
Uniform Commercial Code relating to bulk transfer and similar laws in connection
with the sale of the Assets, subject to the indemnification provisions of
Section 9 hereof.
6. CONDITIONS PRECEDENT TO OBLIGATIONS OF PURCHASER
The obligations of Purchaser under this Agreement are subject to the
satisfaction at or prior to the Closing of each of the following conditions, any
one or more of which may be waived by Purchaser, in its sole discretion;
provided, however, that no such waiver of a condition shall constitute a waiver
by Purchaser of any of its other rights or remedies, at law or in equity, if
Seller shall be in default of any of its obligations under this Agreement.
6.1 HSR Act. All filings required under the HSR Act, if any, shall have
been made and the applicable waiting period shall have expired or been earlier
terminated without the receipt of any objection or the commencement or threat of
any litigation by a Governmental Authority of competent jurisdiction to restrain
or prevent the consummation of the transactions contemplated by this Agreement.
6.2 Governmental or Legal Action. No action, suit or proceeding shall
be pending or threatened by any Governmental Authority or other person and no
law, rule or regulation or similar requirement shall have been enacted,
promulgated or issued or deemed applicable to any of the transactions
contemplated by this Agreement by any Governmental Authority or other person
that would (a) prohibit Purchaser's ownership or operation of all or a material
portion of the System or the Assets, (b) enjoin, prevent or make illegal the
consummation of the transactions contemplated by this Agreement or (c)
challenge, set aside or modify any authorization of the transactions provided
for herein or any approvals, consents, waivers or authorizations made or
described hereunder.
6.3 Representations; Performance of Agreements. The representations and
warranties of Seller set forth in Section 4 hereof shall be true in all material
respects as of and at the Closing Date with the same effect as though
Anderson County, SC
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Execution Version
-8-
<PAGE>
such representations and warranties had been made again at and as of such time.
Seller shall have performed, satisfied and complied in all material respects
with all covenants, obligations, agreements and conditions required by this
Agreement to be performed, satisfied or complied with by Seller at or prior to
the Closing Date.
6.4 Financing. Purchaser shall have obtained such financing as it may
require in order to consummate the transactions contemplated by this Agreement.
6.5 No Material Adverse Change. There shall not have occurred, since
the date of this Agreement, a material adverse change in the business, assets,
liabilities, prospects, condition (financial or other) or number of subscribers
of the CATV Business or the System.
6.6 Consents and Approvals. Seller shall have delivered to Purchaser
evidence that all of the Consents have been obtained or given and all such
Consents shall be in form and substance reasonably satisfactory to Purchaser and
Seller.
6.7 Transfer Documents. Seller shall have delivered to Purchaser
customary bills of sale, general warranty deeds, assignments and other
instruments of transfer sufficient to convey good and marketable title to the
Assets in accordance with the terms of this Agreement, including the documents
and instruments described under Section 3.2(a). Seller shall have executed and
delivered to Purchaser the Assumption Agreement.
6.8 Opinions of Seller's Counsel. Purchaser shall have received the
opinions of counsel for Seller reasonably required by Purchaser.
6.9 Discharge of Liens. Seller shall have secured the termination,
discharge and release of all material encumbrances of any nature on the Assets.
6.10 No Default Under Documents. As of the Closing Date, Seller shall
not be in material violation or default under any statute, rule, regulation,
agreement, or other document to which Seller is a party or by which Seller is
bound in a manner which would materially adversely affect the operation of the
System, nor shall Seller have knowledge of any condition or event which, with
notice or lapse of time or both, would constitute such a violation or default.
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Execution Version
-9-
<PAGE>
6.11 Additional Documents and Acts. Seller shall have delivered or
caused to be delivered to Purchaser all such additional documents and
instruments, in form and content reasonably satisfactory to Purchaser and its
counsel, as Purchaser shall reasonably request, and shall have done all other
acts or things reasonably requested by Purchaser to evidence compliance with the
conditions set forth in this Section 6.
7. CONDITIONS PRECEDENT TO OBLIGATIONS OF SELLER
The obligations of Seller under the Agreement are subject to the
satisfaction, at or prior to the Closing, of each of the following conditions,
any one or more of which may be waived by Seller in its sole discretion;
provided, however, that no such waiver of a condition shall constitute a waiver
by Seller of any of its rights or remedies, at law or in equity, if Purchaser
shall be in default of any of its obligations under this Agreement.
7.1 HSR Act. All filings required under the HSR Act, if any, shall have
been made and the applicable waiting period shall have expired or been earlier
terminated without the receipt of any objection or the commencement or threat of
any litigation by a Governmental Authority of competent jurisdiction to restrain
or prevent the consummation of the transactions contemplated by this Agreement.
7.2 Governmental or Legal Actions. No action, suit or proceeding shall
be pending or threatened by any Governmental Authority or other person and no
law, rule, regulation or other similar requirement shall have been enacted,
promulgated or issued or deemed applicable to any of the transactions
contemplated by this Agreement by any Governmental Authority or other person
that would (a) prohibit Purchaser's ownership or operation of all or any
material portion of the System or the Assets, (b) enjoin, prevent or make
illegal the consummation of the transactions contemplated by this Agreement, or
(c) challenge, set aside or modify any authorization of the transactions
provided for herein or any approvals, consents, waivers or authorizations made
or described hereunder.
7.3 Representations; Performance of Agreements. The representations and
warranties of Purchaser set forth in Section 4 hereof shall be true in all
material respects as of and at the Closing Date with the same effect as though
Anderson County, SC
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Execution Version
-10-
<PAGE>
such representations and warranties had been made again at and as of such time.
Purchaser shall have performed, satisfied and complied in all material respects
with all covenants, obligations, agreements and conditions required by this
Agreement to be performed, satisfied or complied with by Purchaser at or prior
to the Closing Date.
7.4 Consent and Approvals. All Consents shall have been obtained or
given.
7.5 Payments. Purchaser shall have paid to Seller the Purchase Price.
7.6 Assumption of Liabilities. Purchaser shall have delivered to Seller
the Assumption Agreement.
7.7 Additional Documents and Acts. Purchaser shall have delivered or
caused to be delivered to Seller all such additional documents and instruments,
in form and content reasonably satisfactory to Seller and its counsel, as Seller
shall reasonably request, and shall have done all other acts or things
reasonably requested by Seller to evidence compliance with the conditions set
forth in this Section 7.
8. REMEDIES
8.1 Costs. If any legal action or other proceeding is brought for the
enforcement of this Agreement or any other instrument or document to be
executed, delivered or performed hereunder, or because of an alleged dispute,
breach, default or misrepresentation in connection with any of the provisions of
this Agreement or any other instrument or document to be executed, delivered or
performed hereunder, the successful or prevailing party shall be entitled to
recover reasonable attorneys' fees and other costs incurred in that action or
proceeding, in addition to any other relief to which it or they may be entitled.
8.2 Termination Without Liability. On the Closing Date, either party
may terminate this Agreement, without liability to the other, if any conditions
precedent to such party's performance shall not have been satisfied on the
Closing Date.
8.3 Termination on Default. Without limiting the provisions of Sections
8.1, 8.2 and 9 hereof, if either Seller, on the one hand, or Purchaser, on the
other hand,
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shall default in the due and timely performance of any of the covenants or
agreements under the Agreement, the other of Seller or Purchaser, as the case
may be, may, in addition to any other remedy available thereto, on the Closing
Date give notice of termination ("Termination Notice") of this Agreement. The
Termination Notice shall specify with particularity the default or defaults on
which it is based and state that this Agreement is terminated. The Termination
Notice shall be effective when given. The rights and remedies granted in this
Section 8.3 are cumulative and not exclusive of any other right or remedy
granted herein or provided by law or in equity.
9. INDEMNIFICATION
9.1 Seller's Indemnity. Seller shall indemnify and hold harmless
Purchaser and its shareholders, partners, officers, directors, employees,
controlling persons and representatives, against and in respect of any and all
claims, damages, losses, costs, expenses (including reasonable legal, accounting
and experts' fees and other fees and expenses incurred in the investigation or
defense of any of the following, and any interest and penalties), obligations
and liabilities which any such person may incur or suffer, as a result of,
arising in connection with or relating to any and all claims of third parties
(including the claims of any limited partners of the Seller) against, relating
to or pertaining to the Seller, the Assets and/or the System, which arise in
connection with or relate to the period prior to the Closing or to the
transactions contemplated hereunder and/or the authority of the Seller to enter
into and consummate such transactions and/or the propriety of such transactions.
9.2 Purchaser's Indemnity. Purchaser shall indemnify and hold harmless
Seller against and in respect of any and all claims, damages, losses, costs,
expenses (including reasonable legal, accounting and experts' fees and other
fees and expenses incurred in the investigation or defense of any of the
following, and any interest and penalties), obligations and liabilities which
Seller may incur as a result of, arising in connection with or relating to which
it may incur by reason of a material breach of any of the representations or
warranties of Purchaser set forth in this Agreement.
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9.3 Procedure. In the event that any claim shall be asserted against a
party entitled to indemnification hereunder (the "Indemnitee"), the Indemnitee
shall promptly notify the other party (the "Indemnitor") of such claim in
writing, and shall extend to the Indemnitor an opportunity to defend against
such claim at the Indemnitor's sole expense. Within 15 days of receiving any
such notice from the Indemnitee, the Indemnitor shall notify the Indemnitee as
to whether or not the Indemnitor elects to assume the defense of any such claim.
In the event the Indemnitor does not so elect to assume such defense, any costs
incurred by the Indemnitee in defending such claim shall be reimbursed to the
Indemnitee, on an as-incurred basis, pursuant to this Section 9. In the event
the Indemnitor elects to assume such defense, the Indemnitee shall, at its
option and expense, have the right to participate in any defense undertaken by
the Indemnitor with legal counsel of its own selection, provided that such legal
counsel is reasonably acceptable to Indemnitor. No settlement or compromise of
any claim that may result in indemnification liability may be made by the
Indemnitor without the prior written consent of the Indemnitee, which consent
may not be unreasonably withheld.
9.4 Preservation and Access to Records. Purchaser will preserve and
keep all books and records of Seller included in the Assets for a period of at
least five years from the Closing Date, except such records as Purchaser usually
disposes of in the ordinary course of business. During the period that such
books and records are preserved, duly authorized representatives of Seller shall
have access thereto, on reasonable prior notice to Purchaser and during regular
business hours to examine, inspect and copy, at its own expense, such books and
records, so long as such examination and inspection takes place on the premises
of Purchaser and does not unreasonably interfere with Purchaser's use thereof.
Purchaser, on the one hand, and Seller, on the other hand, agree that each of
them shall reasonably cooperate with the other of Purchaser or Seller, as
applicable, if the records relating to the System owned shall be of material
assistance to the other of Purchaser or Seller in any threatened or pending
litigation or proceeding or the preparation of tax returns.
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10. GENERAL PROVISIONS
10.1 Entire Agreement, Modification and Waiver. This Agreement
constitutes the entire agreement between the parties pertaining to the subject
matter contained in it and supersedes all prior and contemporaneous agreements,
representations and understandings of the parties. No supplement, modification
or amendment of this Agreement shall be binding unless executed in writing by
all the parties. No waiver of any of the provisions of this Agreement shall be
deemed, or shall constitute a continuing waiver. No waiver shall be binding
unless executed in writing by the party making the waiver.
10.2 Rights of Parties. Nothing in this Agreement, whether express or
implied, is intended to confer any rights or remedies under or by reason of this
Agreement upon any persons other than the parties and their respective permitted
successors and assigns, nor is anything in this Agreement intended to relieve or
discharge the obligation or liability of any third person or any party to this
Agreement, nor shall any provision give any third person any right of
subrogation or action against any party to this Agreement.
10.3 Assignment. No assignment of any rights or obligations of either
party under this Agreement may be made without the prior written consent of the
other party to this Agreement, which consent is not to be unreasonably withheld,
except that Purchaser shall have the right to assign any or all of its rights
and liabilities hereunder to any of its affiliates, provided that each such
affiliate assumes Purchaser's obligations hereunder; and further provided that
Seller shall have been promptly provided written notice of such assignment
(including the name of the assignee). Any attempted assignment of rights or
obligations in violation of this Section 10.3 shall be null and void. Reference
to any of the parties in this Agreement shall be deemed to include the
successors and assigns of such party.
10.4 Construction. The language in this Agreement shall, in all cases,
be construed as a whole according to its fair meaning and neither strictly for
nor against Seller or Purchaser.
10.5 Expenses of the Parties. Except as expressly provided herein, all
expenses incurred by or on behalf of the parties hereto in connection with the
authorization,
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preparation and consummation of this Agreement including, without limitation,
all fees and expenses of agents, representatives, counsel and accountants
employed by the parties hereto in connection with the authorization,
preparation, execution and consummation of this Agreement shall be borne solely
by the party who shall have incurred the same.
10.6 Further Assurances. Seller, at any time after the Closing Date,
will promptly execute, acknowledge and deliver any further deeds, assignments,
conveyances and other assurances, documents and instruments of transfer,
reasonably requested by Purchaser and necessary for Seller to comply with its
covenants contained herein and will take any other action consistent with the
terms of this Agreement that may reasonably be requested by Purchaser for the
purpose of assigning, transferring, granting, conveying, vesting and confirming
ownership in or to Purchaser, or reducing to Purchaser's possession, any or all
of the Assets.
10.7 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original and all of which
together shall be considered one and the same agreement.
10.8 Headings. The headings contained in this Agreement are solely for
convenience of reference and shall not affect the meaning or interpretation of
this Agreement or of any term or provision hereof.
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<PAGE>
IN WITNESS WHEREOF, the undersigned, intending to be legally
bound, have executed this Asset Purchase Agreement as of the date first written
above.
SELLER:
Cencom Cable Income Partners II, L.P.
By: Cencom Partners, Inc.,
its General Partner
By: /s/ Theodore W. Browne, II
--------------------------------
Name: Theodore W. Browne, II
Title: Executive Vice President
PURCHASER:
Charter Communications II, L.P.
By: CCP II, Inc.,
its General Partner
By: /s/ Robert C. Bailey
--------------------------------
Name: Robert C. Bailey
Title: Executive Vice President
Signature Page for Anderson County, SC Asset Purchase Agreement
Anderson County, SC
Purchase Agreement
Execution Version
<PAGE>
AMENDED AND RESTATED
ASSET PURCHASE AGREEMENT
between
CENCOM PARTNERS, L.P.,
as Seller
and
CHARTER COMMUNICATIONS, L.P.,
as Purchaser
dated as of May 30, 1996
<PAGE>
TABLE OF CONTENTS
Page
1. PURCHASE AND SALE OF ASSETS............................................ 1
1.1 Assets to be Sold............................................ 1
1.2 Excluded Assets.............................................. 2
2. CALCULATION AND PAYMENT OF PURCHASE PRICE............................ 3
2.1 Payment of Purchase Price.................................... 3
2.2 Assumption of Liabilities.................................... 3
2.3 Purchase Price .............................................. 4
2.4 Excluded Liabilities......................................... 4
2.5 Allocation of Consideration.................................. 4
2.6 Proration of Revenue......................................... 4
3. CLOSING.............................................................. 4
3.1 Closing Date................................................. 4
3.2 Deliveries by Seller......................................... 5
3.3 Deliveries by Purchaser...................................... 5
4. REPRESENTATIONS AND WARRANTIES....................................... 6
4.1 Organization and Standing.................................... 6
4.2 Power and Authority.......................................... 6
4.3 Authorization................................................ 6
5. ADDITIONAL UNDERTAKINGS AND ACTIONS.................................... 7
5.1 Consents..................................................... 7
5.2 Access to Assets............................................. 7
5.3 Operations Prior to Closing.................................. 7
5.4 Antitrust Laws Compliance.................................... 7
5.5 Bulk Sales................................................... 8
6. CONDITIONS PRECEDENT TO OBLIGATIONS OF PURCHASER..................... 8
6.1 HSR Act...................................................... 8
6.2 Governmental or Legal Action................................. 8
6.3 Representations; Performance of Agreements................... 8
6.4 Financing.................................................... 9
6.5 Consents and Approvals....................................... 9
6.6 Transfer Documents........................................... 9
6.7 Opinions of Seller's Counsel................................. 9
6.8 Discharge of Liens........................................... 9
6.9 No Default Under Documents................................... 9
6.10 Additional Documents and Acts................................ 9
7. CONDITIONS PRECEDENT TO OBLIGATIONS OF SELLER.......................... 10
7.1 HSR Act...................................................... 10
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7.2 Governmental or Legal Actions................................ 10
7.3 Representations; Performance of Agreements................... 10
7.4 Consent and Approvals........................................ 11
7.5 Payments..................................................... 11
7.6 Assumption of Liabilities.................................... 11
7.7 Additional Documents and Acts................................ 11
8. REMEDIES............................................................. 11
8.1 Costs........................................................ 11
8.2 Termination Without Liability................................ 11
8.3 Termination on Default....................................... 11
9. INDEMNIFICATION........................................................ 12
9.1 Seller's Indemnity........................................... 12
9.2 Purchaser's Indemnity........................................ 12
9.3 Procedure.................................................... 12
9.4 Preservation and Access to Records........................... 13
10. GENERAL PROVISIONS................................................... 13
10.1 Entire Agreement, Modification and Waiver.................... 13
10.2 Rights of Parties............................................ 14
10.3 Assignment................................................... 14
10.4 Construction................................................. 14
10.5 Expenses of the Parties...................................... 14
10.6 Further Assurances........................................... 14
10.7 Counterparts................................................. 15
10.8 Headings..................................................... 15
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<PAGE>
AMENDED AND RESTATED
ASSET PURCHASE AGREEMENT
THIS AMENDED AND RESTATED ASSET PURCHASE AGREEMENT (this
"Agreement") is made as of this 30th day of May, 1996 by and between Charter
Communications, L.P., a limited partnership organized and existing under the
laws of the State of Delaware ("CC I" or the "Purchaser") and Cencom Partners,
L.P., a limited partnership organized and existing under the laws of the State
of Delaware ("Seller").
W I T N E S S E T H:
WHEREAS, Seller is the owner and operator of a cable television
system serving Sanford, North Carolina (the "System");
WHEREAS, Seller desires to sell, and Purchaser desire to
purchase, pursuant to the terms and subject to the conditions of this Agreement,
the System together with all of the assets, property, interests, rights and
privileges of Seller, including but not limited to those utilized in the cable
television business owned and operated by Seller in Sanford, North Carolina (the
"CATV Business").
NOW, THEREFORE, in consideration of the mutual promises,
agreements and covenants set forth herein, and for other good and valuable
consideration, the sufficiency of which is hereby acknowledged, the parties
hereto, intending legally to be bound, hereby agree as follows:
1. PURCHASE AND SALE OF ASSETS
1.1 Assets to be Sold. Subject to the terms and conditions of this
Agreement, Seller hereby agrees to sell, convey, assign, transfer and deliver to
Purchaser at the Closing (as hereinafter defined) and Purchaser hereby agrees to
acquire, for the consideration hereinafter provided, all of the assets,
properties, rights, titles and privileges of Seller of every kind, character and
description, whether tangible, intangible, real, personal or mixed, of whatever
description and wherever located, involved in, related to, owned, used or held
for use or useful in connection with the ownership, use or operation of the
System and all other assets of Seller relating to the System whether or not
required to be listed on Seller's balance sheet in
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accordance with generally accepted accounting principles, including, without
limitation, all additions, accessions and substitutions made prior to the
Closing as permitted pursuant to the terms of this Agreement (collectively, the
"Assets"), but excluding the Excluded Assets (defined below) and assets disposed
of by Seller between the date hereof and the Closing Date on an arms' length
basis in the ordinary course of business. The Assets include, without
limitation, the following:
(a) all of the real property interests of Seller relating to the
System (collectively, the "Real Property");
(b) all items of tangible personal property owned, used, held for
use or useful by Seller in the operation of the System, including, without
limitation, all equipment relating to the System (collectively, the
"Equipment"); and
(c) all the rights of Seller under any and all franchises,
licenses (including those required by the FCC), permits, authorizations,
easements, registrations, leases, variances, consents and certificates and
similar rights which authorize or are required in connection with the operation
of the System, including any applications for any of the foregoing
(collectively, the "Governmental Permits") that are obtained from or are pending
with any federal, state, county, municipal, local or foreign government and any
governmental agency, bureau, commission, authority, body, court (or other
judicial body), administrative or executive agency, legislative or
quasi-legislative body, commission, council or other agency, including any such
agency, authority or body responsible for the issuance or administration of any
Governmental Permit or whose consent is required for the sale and transfer of
the Assets (each, a "Governmental Authority") and all subscription contracts
with subscribers of Seller relating to the System, pole attachment agreements,
access agreements and all other contracts, leases, agreements or undertakings
(other than those that are included in the Excluded Assets or which constitute
Governmental Permits), written or oral, relating to the ownership, operation or
maintenance of the System and/or the Assets (the "Contracts").
1.2 Excluded Assets. Notwithstanding anything to the contrary in this
Agreement, any insurance policies and rights and claims thereunder; all rights
to tax refunds and refunds of fees of any nature, in either case relating to
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the period prior to the Closing Date; Seller's rights under this Agreement, and
the Purchase Price payable pursuant hereto; Seller's organizational documents
and partnership and financial records not included in Section 1.1; Seller's cash
in the bank and cash equivalents at the time of the Closing; and all assets of
Seller other than the Assets (collectively, the "Excluded Assets") are expressly
excluded from this sale, are not to be purchased or assumed by Purchaser, and do
not constitute part of the "Assets."
2. CALCULATION AND PAYMENT OF PURCHASE PRICE
2.1 Payment of Purchase Price.
(a) The purchase price to be paid by Purchaser to Seller for the
Assets shall be an amount equal to $20,750,000 (the "Purchase Price").
(b) On the Closing Date, Purchaser shall pay to Seller the
Purchase Price, by wire transfer of immediately available funds to an account
designated by Seller in writing.
2.2 Assumption of Liabilities. As additional consideration for the
Assets, Purchaser shall, from and after the Closing Date, and pursuant to an
Assignment and Assumption Agreement in a form agreed between the parties (the
"Assumption Agreement"), assume the obligations of Seller under or in connection
with all of the Assets. In addition, Purchaser shall assume (i) all obligations
relating to the Assets entered into by Seller in the ordinary course of business
between the date hereof and the Closing Date (other than any obligations, if
any, relating to the Excluded Assets), to the extent such obligations continue
after the Closing and (ii) all liabilities relating to (y) all customer advance
payments and deposits, prepaid advertising revenues and other prepaid revenues
or income received or held by Seller for services to be rendered or obligations
to be performed in connection with the System subsequent to the Closing; (z) the
performance of the Contracts from and after the Closing Date; provided, however,
that Seller shall pay all sales, use, excise and similar taxes arising out of
the transfer of the Assets. Except as otherwise provided in this Section 2.2,
Purchaser shall not assume or become liable for any other obligations,
liabilities or indebtedness of Seller.
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<PAGE>
2.3 Purchase Price Adjustments.
(a) At the Closing, the Purchase Price shall be increased by an
amount equal to 99% of the face amount of accounts receivable from subscribers
of the System which, as of the Closing Date, have been outstanding for 60 days
or less. There shall be no increase to the Purchase Price for accounts
receivable from subscribers of the System which have been outstanding for more
than 60 days.
(b) Following the Closing, Purchaser and Seller shall adjust the
Purchase Price pursuant to customary working capital adjustments for
transactions of this type calculated as of the Closing Date. The difference
between the actual Purchase Price paid and the adjusted Purchase Price shall be
paid in cash by the party owing such adjustment no later than sixty (60) days
after the Closing Date.
2.4 Excluded Liabilities. Seller shall pay or otherwise satisfy all
indebtedness, liabilities or other obligations of Seller arising prior to or on
the Closing Date from the ownership or operation of any of the Assets.
2.5 Allocation of Consideration. The parties agree that the
consideration payable for the Assets, consisting of the Purchase Price and the
liabilities of Seller to be assumed by Purchaser hereunder, shall be allocated
among the Assets in accordance with Section 1060 of the Internal Revenue Code of
1986, as amended, and the regulations thereunder. The parties agree to cooperate
in the preparation, execution and filing with the Internal Revenue Service of
all information to be filed by the parties under Section 1060 and such
regulations, and to file Form 8594 (or any substitute therefor) when required by
applicable law.
2.6 Proration of Revenue. All revenue earned arising from the Assets
shall be prorated between Purchaser and Seller as of (and the Closing shall be
deemed effective as of) 11:59 p.m., New York time, on the Closing Date.
3. CLOSING
3.1 Closing Date. The closing of the transactions contemplated
hereunder (the "Closing") shall take place at the offices of Paul, Hastings,
Janofsky & Walker, 399 Park Avenue, 31st Floor, New York, New York 10022, at
10:00 A.M.
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<PAGE>
New York time on August 30, 1996, or on such other date and at such other time
as the Purchaser and Seller may mutually agree (the "Closing Date"). Purchaser
shall be entitled to possession of the Assets upon the Closing.
3.2 Deliveries by Seller. At the Closing, Seller shall deliver to
Purchaser the following:
(a) One or more bills of sale and all such other general
instruments of transfer, assignment and conveyance, general warranty deeds,
certificates of title, assignments, evidences of consent or waiver, and other
instruments or documents in form and substance reasonably satisfactory to
Purchaser and its counsel as shall be necessary to evidence or perfect the sale,
assignment, transfer and conveyance of the Assets to Purchaser and effectively
vest in the Purchaser all right, title and interest in and to the Assets free
and clear of any and all liens, encumbrances and other restrictions (other than
liens and encumbrances agreed upon by the parties, such liens and encumbrances
being "Permitted Encumbrances") in accordance with the terms of this Agreement,
together with possession (or constructive possession, in the case of
intangibles) thereof.
(b) An executed Assumption Agreement.
(c) A Certificate of Non-Foreign Status which meets the
requirements of Treasury Regulation Section 1.1445-2, duly executed and
acknowledged, certifying under penalties of perjury that Seller is not a foreign
person for United States income tax purposes.
(d) Originals or true and complete copies of all books and
records, memoranda and data relating to the System; provided that Seller may
retain such duplicate copies as Seller reasonably deems appropriate.
(e) Such other documents, opinions, instruments and certificates,
in form and substance reasonably satisfactory to Purchaser, as Purchaser may
reasonably request.
3.3 Deliveries by Purchaser. At the Closing, Purchaser shall deliver to
Seller the following:
(a) The payment described in Section 2.1(b).
(b) An executed Assumption Agreement.
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Execution Version
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<PAGE>
(c) Such other documents, opinions, instruments and certificates,
in form and substance reasonably satisfactory to Seller, as Seller may
reasonably request.
4. REPRESENTATIONS AND WARRANTIES
Seller hereby represents and warrants to Purchaser, and Purchaser
hereby represents and warrants to Seller that:
4.1 Organization and Standing. Each such party is duly formed, validly
existing and in good standing as a limited partnership under the laws of the
jurisdiction of its formation. Each such party is duly qualified to do business
in each jurisdiction where the failure to so qualify would have a material
adverse affect on such party's ability to conduct its business or operations or
to consummate the transactions to be consummated by it under this Agreement and
each such party is in good standing in each jurisdiction in which it is so
qualified.
4.2 Power and Authority. Each such party has all requisite power and
authority to execute, deliver and perform this Agreement and to take any action
which it may be required to take hereunder. Seller further represents and
warrants that it has all requisite power to perform its business as now
conducted and to own its properties and assets.
4.3 Authorization. The execution, delivery and performance of this
Agreement by such party has been duly and validly authorized by all action
required to be taken with respect to such party. This Agreement has been, and on
the date of the Closing all other documents, agreements and instruments to be
executed and delivered at the Closing by such party pursuant hereto (together
with all such documents, agreements and instruments to be executed and delivered
by each other party hereto, the "Transaction Documents") will have been, duly
and validly executed by properly authorized officers or other authorized
representatives of such party. This Agreement constitutes, and on the Closing
Date all other Transaction Documents to which such party is or will be a
signatory will constitute, the valid and binding obligations of such party,
enforceable against such party in accordance with their respective terms.
Neither the execution of this Agreement or any of the Transaction Documents, nor
the consummation of the transactions contemplated herein or therein, will
violate
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<PAGE>
any instrument of such party, or any agreement, permit, order, judgment, decree,
law or regulation to which such person is party or by which it is, or its assets
and properties are, bound.
5. ADDITIONAL UNDERTAKINGS AND ACTIONS
5.1 Consents.
(a) As soon as possible after the execution of this Agreement,
Seller will commence making the applications and filings required to obtain all
consents required to be obtained to effect the consummation of the transactions
contemplated hereby (the "Consents"). Seller will use its best efforts to obtain
the Consents from the appropriate Governmental Authorities and other persons at
the earliest possible date. Purchaser agrees that it will cooperate fully with
Seller, and will do all things reasonably necessary to assist Seller in
obtaining all Consents.
5.2 Access to Assets. On and after the date of this Agreement,
Purchaser and its counsel, accountants and other representatives shall have
reasonable access, during normal business hours and upon reasonable notice, to
all properties, books, accounts, contracts, commitments, and records, documents
or other data or information of Seller relating to the System.
5.3 Operations Prior to Closing. Except as otherwise expressly
contemplated by this Agreement, at all times from and after the date hereof and
up to and including the Closing Date, Seller shall operate the System only in
the ordinary course.
5.4 Antitrust Laws Compliance. As soon as practicable after the date of
execution of this Agreement, Seller and Purchaser shall each make filings if and
as required under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended, and related acts and regulations (the "HSR Act"). Each party shall keep
the other party apprised of the status of any inquiries made of such party by
the Federal Trade Commission, the Antitrust Division of the United States
Department of Justice, or any other Governmental Authority with respect to this
Agreement or the transactions contemplated hereby. Each party shall use
reasonable efforts to obtain the earliest termination or waiver of the HSR Act
waiting period possible.
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<PAGE>
5.5 Bulk Sales. Purchaser waives compliance with provisions of the
Uniform Commercial Code relating to bulk transfer and similar laws in connection
with the sale of the Assets, subject to the indemnification provisions of
Section 9 hereof.
6. CONDITIONS PRECEDENT TO OBLIGATIONS OF PURCHASER
The obligations of Purchaser under this Agreement are subject to the
satisfaction at or prior to the Closing of each of the following conditions, any
one or more of which may be waived by Purchaser, in its sole discretion;
provided, however, that no such waiver of a condition shall constitute a waiver
by Purchaser of any of its other rights or remedies, at law or in equity, if
Seller shall be in default of any of its obligations under this Agreement.
6.1 HSR Act. All filings required under the HSR Act, if any, shall have
been made and the applicable waiting period shall have expired or been earlier
terminated without the receipt of any objection or the commencement or threat of
any litigation by a Governmental Authority of competent jurisdiction to restrain
or prevent the consummation of the transactions contemplated by this Agreement.
6.2 Governmental or Legal Action. No action, suit or proceeding shall
be pending or threatened by any Governmental Authority or other person and no
law, rule or regulation or similar requirement shall have been enacted,
promulgated or issued or deemed applicable to any of the transactions
contemplated by this Agreement by any Governmental Authority or other person
that would (a) prohibit Purchaser's ownership or operation of all or a material
portion of the System or the Assets, (b) enjoin, prevent or make illegal the
consummation of the transactions contemplated by this Agreement or (c)
challenge, set aside or modify any authorization of the transactions provided
for herein or any approvals, consents, waivers or authorizations made or
described hereunder.
6.3 Representations; Performance of Agreements. The representations and
warranties of Seller set forth in Section 4 hereof shall be true in all material
respects as of and at the Closing Date with the same effect as though such
representations and warranties had been made again at and as of such time.
Seller shall have performed, satisfied and complied in all material respects
with all covenants,
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obligations, agreements and conditions required by this Agreement to be
performed, satisfied or complied with by Seller at or prior to the Closing Date.
6.4 Financing. Purchaser shall have obtained such financing as it may
require in order to consummate the transactions contemplated by this Agreement.
6.5 Consents and Approvals. Seller shall have delivered to Purchaser
evidence that all of the Consents have been obtained or given and all such
Consents shall be in form and substance reasonably satisfactory to Purchaser and
Seller.
6.6 Transfer Documents. Seller shall have delivered to Purchaser
customary bills of sale, general warranty deeds, assignments and other
instruments of transfer sufficient to convey good and marketable title to the
Assets in accordance with the terms of this Agreement, including the documents
and instruments described under Section 3.2(a). Seller shall have executed and
delivered to Purchaser the Assumption Agreement.
6.7 Opinions of Seller's Counsel. Purchaser shall have received the
opinions of counsel for Seller reasonably required by Purchaser.
6.8 Discharge of Liens. Seller shall have secured the termination,
discharge and release of all material encumbrances of any nature on the Assets.
6.9 No Default Under Documents. As of the Closing Date, Seller shall
not be in material violation or default under any statute, rule, regulation,
agreement, or other document to which Seller is a party or by which Seller is
bound in a manner which would materially adversely affect the operation of the
System, nor shall Seller have knowledge of any condition or event which, with
notice or lapse of time or both, would constitute such a violation or default.
6.10 Additional Documents and Acts. Seller shall have delivered or
caused to be delivered to Purchaser all such additional documents and
instruments, in form and content reasonably satisfactory to Purchaser and its
counsel, as Purchaser shall reasonably request, and shall have done all other
acts or things reasonably requested by Purchaser to evidence compliance with the
conditions set forth in this Section 6.
Sanford, NC
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Execution Version
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7. CONDITIONS PRECEDENT TO OBLIGATIONS OF SELLER
The obligations of Seller under the Agreement are subject to the
satisfaction, at or prior to the Closing, of each of the following conditions,
any one or more of which may be waived by Seller in its sole discretion;
provided, however, that no such waiver of a condition shall constitute a waiver
by Seller of any of its rights or remedies, at law or in equity, if Purchaser
shall be in default of any of its obligations under this Agreement.
7.1 HSR Act. All filings required under the HSR Act, if any, shall have
been made and the applicable waiting period shall have expired or been earlier
terminated without the receipt of any objection or the commencement or threat of
any litigation by a Governmental Authority of competent jurisdiction to restrain
or prevent the consummation of the transactions contemplated by this Agreement.
7.2 Governmental or Legal Actions. No action, suit or proceeding shall
be pending or threatened by any Governmental Authority or other person and no
law, rule, regulation or other similar requirement shall have been enacted,
promulgated or issued or deemed applicable to any of the transactions
contemplated by this Agreement by any Governmental Authority or other person
that would (a) prohibit Purchaser's ownership or operation of all or any
material portion of the System or the Assets, (b) enjoin, prevent or make
illegal the consummation of the transactions contemplated by this Agreement, or
(c) challenge, set aside or modify any authorization of the transactions
provided for herein or any approvals, consents, waivers or authorizations made
or described hereunder.
7.3 Representations; Performance of Agreements. The representations and
warranties of Purchaser set forth in Section 4 hereof shall be true in all
material respects as of and at the Closing Date with the same effect as though
such representations and warranties had been made again at and as of such time.
Purchaser shall have performed, satisfied and complied in all material respects
with all covenants, obligations, agreements and conditions required by this
Agreement to be performed, satisfied or complied with by Purchaser at or prior
to the Closing Date.
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Execution Version
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7.4 Consent and Approvals. All consents and authorizations required to
be obtained by Purchaser, shall have been obtained or given.
7.5 Payments. Purchaser shall have paid to Seller the Purchase Price.
7.6 Assumption of Liabilities. Purchaser shall have delivered to Seller
the Assumption Agreement.
7.7 Additional Documents and Acts. Purchaser shall have delivered or
caused to be delivered to Seller all such additional documents and instruments,
in form and content reasonably satisfactory to Seller and its counsel, as Seller
shall reasonably request, and shall have done all other acts or things
reasonably requested by Seller to evidence compliance with the conditions set
forth in this Section 7.
8. REMEDIES
8.1 Costs. If any legal action or other proceeding is brought for the
enforcement of this Agreement or any other instrument or document to be
executed, delivered or performed hereunder, or because of an alleged dispute,
breach, default or misrepresentation in connection with any of the provisions of
this Agreement or any other instrument or document to be executed, delivered or
performed hereunder, the successful or prevailing party shall be entitled to
recover reasonable attorneys' fees and other costs incurred in that action or
proceeding, in addition to any other relief to which it or they may be entitled.
8.2 Termination Without Liability. On the Closing Date, either party
may terminate this Agreement, without liability to the other, if any conditions
precedent to such party's performance shall not have been satisfied on the
Closing Date.
8.3 Termination on Default. Without limiting the provisions of Sections
8.1, 8.2 and 9 hereof, if either Seller, on the one hand, or Purchaser, on the
other hand, shall default in the due and timely performance of any of the
covenants or agreements under the Agreement, the other of Seller or Purchaser,
as the case may be, may, in addition to any other remedy available thereto, on
the Closing Date give notice of termination ("Termination Notice") of this
Agreement. The Termination Notice shall specify with
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particularity the default or defaults on which it is based and state that this
Agreement is terminated. The Termination Notice shall be effective when given.
The rights and remedies granted in this Section 8.3 are cumulative and not
exclusive of any other right or remedy granted herein or provided by law or in
equity.
9. INDEMNIFICATION
9.1 Seller's Indemnity. Seller shall indemnify and hold harmless
Purchaser and its shareholders, partners, officers, directors, employees,
controlling persons and representatives, against and in respect of any and all
claims, damages, losses, costs, expenses (including reasonable legal, accounting
and experts' fees and other fees and expenses incurred in the investigation or
defense of any of the following, and any interest and penalties), obligations
and liabilities which any such person may incur or suffer, as a result of,
arising in connection with or relating to any and all claims of third parties
(including the claims of any limited partners of the Seller) against, relating
to or pertaining to the Seller, the Assets and/or the System, which arise in
connection with or relate to the period prior to the Closing or to the
transactions contemplated hereunder and/or the authority of the Seller to enter
into and consummate such transactions and/or the propriety of such transactions.
9.2 Purchaser's Indemnity. Purchaser shall indemnify and hold harmless
Seller against and in respect of any and all claims, damages, losses, costs,
expenses (including reasonable legal, accounting and experts' fees and other
fees and expenses incurred in the investigation or defense of any of the
following, and any interest and penalties), obligations and liabilities which
Seller may incur as a result of, arising in connection with or relating to which
it may incur by reason of a material breach of any of the representations or
warranties of Purchaser set forth in this Agreement.
9.3 Procedure. In the event that any claim shall be asserted against a
party entitled to indemnification hereunder (the "Indemnitee"), the Indemnitee
shall promptly notify the other party (the "Indemnitor") of such claim in
writing, and shall extend to the Indemnitor an opportunity to defend against
such claim at the Indemnitor's sole expense. Within 15 days of receiving any
such notice from
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the Indemnitee, the Indemnitor shall notify the Indemnitee as to whether or not
the Indemnitor elects to assume the defense of any such claim. In the event the
Indemnitor does not so elect to assume such defense, any costs incurred by the
Indemnitee in defending such claim shall be reimbursed to the Indemnitee, on an
as-incurred basis, pursuant to this Section 9. In the event the Indemnitor
elects to assume such defense, the Indemnitee shall, at its option and expense,
have the right to participate in any defense undertaken by the Indemnitor with
legal counsel of its own selection, provided that such legal counsel is
reasonably acceptable to Indemnitor. No settlement or compromise of any claim
that may result in indemnification liability may be made by the Indemnitor
without the prior written consent of the Indemnitee, which consent may not be
unreasonably withheld.
9.4 Preservation and Access to Records. Purchaser will preserve and
keep all books and records of Seller included in the Assets for a period of at
least five years from the Closing Date, except such records as Purchaser usually
disposes of in the ordinary course of business. During the period that such
books and records are preserved, duly authorized representatives of Seller shall
have access thereto, on reasonable prior notice to Purchaser and during regular
business hours to examine, inspect and copy, at its own expense, such books and
records, so long as such examination and inspection takes place on the premises
of Purchaser and does not unreasonably interfere with Purchaser's use thereof.
Purchaser, on the one hand, and Seller, on the other hand, agree that each of
them shall reasonably cooperate with the other of Purchaser or Seller, as
applicable, if the records relating to the System owned shall be of material
assistance to the other of Purchaser or Seller in any threatened or pending
litigation or proceeding or the preparation of tax returns.
10. GENERAL PROVISIONS
10.1 Entire Agreement, Modification and Waiver. This Agreement
constitutes the entire agreement between the parties pertaining to the subject
matter contained in it and supersedes all prior and contemporaneous agreements,
representations and understandings of the parties. No supplement, modification
or amendment of this Agreement shall be binding unless executed in writing by
all the parties. No waiver of any of the provisions of this
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Agreement shall be deemed, or shall constitute a continuing waiver. No waiver
shall be binding unless executed in writing by the party making the waiver.
10.2 Rights of Parties. Nothing in this Agreement, whether express or
implied, is intended to confer any rights or remedies under or by reason of this
Agreement upon any persons other than the parties and their respective permitted
successors and assigns, nor is anything in this Agreement intended to relieve or
discharge the obligation or liability of any third person or any party to this
Agreement, nor shall any provision give any third person any right of
subrogation or action against any party to this Agreement.
10.3 Assignment. No assignment of any rights or obligations of either
party under this Agreement may be made without the prior written consent of the
other party to this Agreement, which consent is not to be unreasonably withheld,
except that Purchaser shall have the right to assign any or all of its rights
and liabilities hereunder to any of its affiliates, provided that each such
affiliate assumes Purchaser's obligations hereunder; and further provided that
Seller shall have been promptly provided written notice of such assignment
(including the name of the assignee). Any attempted assignment of rights or
obligations in violation of this Section 10.3 shall be null and void. Reference
to any of the parties in this Agreement shall be deemed to include the
successors and assigns of such party.
10.4 Construction. The language in this Agreement shall, in all cases,
be construed as a whole according to its fair meaning and neither strictly for
nor against Seller or Purchaser.
10.5 Expenses of the Parties. Except as expressly provided herein, all
expenses incurred by or on behalf of the parties hereto in connection with the
authorization, preparation and consummation of this Agreement including, without
limitation, all fees and expenses of agents, representatives, counsel and
accountants employed by the parties hereto in connection with the authorization,
preparation, execution and consummation of this Agreement shall be borne solely
by the party who shall have incurred the same.
10.6 Further Assurances. Seller, at any time after the Closing Date,
will promptly execute, acknowledge and deliver
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Execution Version
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any further deeds, assignments, conveyances and other assurances, documents and
instruments of transfer, reasonably requested by Purchaser and necessary for
Seller to comply with its covenants contained herein and will take any other
action consistent with the terms of this Agreement that may reasonably be
requested by Purchaser for the purpose of assigning, transferring, granting,
conveying, vesting and confirming ownership in or to Purchaser, or reducing to
Purchaser's possession, any or all of the Assets.
10.7 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original and all of which
together shall be considered one and the same agreement.
10.8 Headings. The headings contained in this Agreement are solely for
convenience of reference and shall not affect the meaning or interpretation of
this Agreement or of any term or provision hereof.
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Execution Version
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<PAGE>
IN WITNESS WHEREOF, the undersigned, intending to be legally
bound, have executed this Amended and Restated Asset Purchase Agreement as of
the date first written above.
SELLER:
Cencom Partners, L.P.
By: Cencom Partners, Inc.,
its General Partner
By: /s/ Theodore W. Browne, II
---------------------------------
Name: Theodore W. Browne, II
Title: Executive Vice President
PURCHASER:
Charter Communications, L.P.
By: CCP One, Inc.,
its General Partner
By: /s/ Jeffrey C. Sanders
---------------------------------
Name: Jeffrey C. Sanders
Title: Executive Vice President
Signature Page for Sanford, NC Asset Purchase Agreement
Sanford, NC
Purchase Agreement
Execution Version
<PAGE>
AMENDED AND RESTATED
ASSET PURCHASE AGREEMENT
among
CENCOM PARTNERS, L.P.,
as Seller
and
CHARTER COMMUNICATIONS II, L.P.,
as Purchaser
dated as of April 26, 1996
<PAGE>
TABLE OF CONTENTS
Page
1. PURCHASE AND SALE OF ASSETS............................................ 1
1.1 Assets to be Sold............................................ 1
1.2 Excluded Assets.............................................. 2
1.3 "AS IS" AND "WHERE IS"....................................... 3
2. CALCULATION AND PAYMENT OF PURCHASE PRICE............................ 3
2.1 Payment of Purchase Price.................................... 3
2.2 Assumption of Liabilities.................................... 3
2.3 Purchase Price Adjustments................................... 4
2.4 Excluded Liabilities......................................... 4
2.5 Allocation of Consideration.................................. 4
2.6 Provation of Revenue......................................... 5
3. CLOSING.............................................................. 5
3.1 Closing Date................................................. 5
3.2 Deliveries by Seller......................................... 5
3.3 Deliveries by Purchaser...................................... 6
4. REPRESENTATIONS AND WARRANTIES....................................... 6
4.1 Organization and Standing.................................... 6
4.2 Power and Authority.......................................... 6
4.3 Authorization................................................ 6
5. ADDITIONAL UNDERTAKINGS AND ACTIONS.................................... 7
5.1 Consents..................................................... 7
5.2 Access to Assets............................................. 7
5.3 Operations Prior to Closing.................................. 7
5.4 Antitrust Laws Compliance.................................... 8
5.5 Bulk Sales................................................... 8
6. CONDITIONS PRECEDENT TO OBLIGATIONS OF PURCHASER..................... 8
6.1 HSR Act...................................................... 8
6.2 Governmental or Legal Action................................. 8
6.3 Representations; Performance of Agreements................... 9
6.4 Financing.................................................... 9
6.5 Consents and Approvals....................................... 9
6.6 Transfer Documents........................................... 9
6.7 Opinions of Seller's Counsel................................. 9
6.8 Discharge of Liens........................................... 10
6.9 No Default Under Documents................................... 10
6.10 Additional Documents and Acts................................ 10
Abbeville, SC
Purchase Agreement
Execution Version
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7. CONDITIONS PRECEDENT TO OBLIGATIONS OF SELLER.......................... 10
7.1 HSR Act...................................................... 10
7.2 Governmental or Legal Actions................................ 10
7.3 Representations; Performance of Agreements................... 11
7.4 Consent and Approvals........................................ 11
7.5 Payments..................................................... 11
7.6 Assumption of Liabilities.................................... 11
7.7 Additional Documents and Acts................................ 11
8. REMEDIES............................................................. 12
8.1 Costs........................................................ 12
8.2 Termination Without Liability................................ 12
8.3 Termination on Default....................................... 12
9. INDEMNIFICATION........................................................ 12
9.1 Seller's Indemnity........................................... 12
9.2 Purchaser's Indemnity........................................ 13
9.3 Procedure.................................................... 13
9.4 Preservation and Access to Records........................... 14
10. MISCELLANEOUS PROVISIONS............................................. 14
10.1 Entire Agreement, Modification and Waiver.................... 14
10.2 Rights of Parties............................................ 14
10.3 Assignment................................................... 15
10.4 Construction................................................. 15
10.5 Expenses of the Parties...................................... 15
10.6 Further Assurances........................................... 15
10.7 Counterparts................................................. 15
10.8 Headings..................................................... 16
Abbeville, SC
Purchase Agreement
Execution Version
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<PAGE>
AMENDED AND RESTATED
ASSET PURCHASE AGREEMENT
THIS AMENDED AND RESTATED ASSET PURCHASE AGREEMENT (this
"Agreement") is made as of this 26th day of April, 1996 by and between Charter
Communications II, L.P., a limited partnership organized and existing under the
laws of the State of Delaware ("CC II" or the "Purchaser") and Cencom Partners,
L.P., a limited partnership organized and existing under the laws of the State
of Delaware ("Seller").
W I T N E S S E T H:
WHEREAS, Seller is the owner and operator of a cable television
system serving Abbeville, South Carolina (the "System");
WHEREAS, Seller desires to sell, and Purchaser desire to
purchase, pursuant to the terms and subject to the conditions of this Agreement,
the System together with all of the assets, property, interests, rights and
privileges of Seller, including but not limited to those utilized in the cable
television business owned and operated by Seller in Abbeville, South Carolina
(the "CATV Business").
NOW, THEREFORE, the parties hereto hereby agree as follows:
1. PURCHASE AND SALE OF ASSETS
1.1 Assets to be Sold. Subject to the terms and conditions of this
Agreement, Seller hereby agrees to sell, convey, assign, transfer and deliver to
Purchaser at the Closing (as hereinafter defined) and Purchaser hereby agrees to
acquire, for the consideration hereinafter provided, all of the assets,
properties, rights, titles and privileges of Seller of every kind, character and
description, whether tangible, intangible, real, personal or mixed, of whatever
description and wherever located, involved in, related to, owned, used or held
for use or useful in connection with the ownership, use or operation of the
System and all other assets of Seller relating to the System whether or not
required to be listed on Seller's balance sheet in accordance with generally
accepted accounting principles, including, without limitation, all additions,
accessions and
Abbeville, SC
Purchase Agreement
Execution Version
<PAGE>
substitutions made prior to the Closing as permitted pursuant to the terms of
this Agreement (collectively, the "Assets"), but excluding the Excluded Assets
(defined below) and assets disposed of by Seller between the date hereof and the
Closing Date on an arms' length basis in the ordinary course of business. The
Assets include, without limitation, the following:
(a) all of the real property interests of Seller relating to the
System (collectively, the "Real Property");
(b) all items of tangible personal property owned, used, held for
use or useful by Seller in the operation of the System, including, without
limitation, all equipment relating to the System (collectively, the
"Equipment"); and
(c) all the rights of Seller under any and all franchises,
licenses (including those required by the FCC), permits, authorizations,
easements, registrations, leases, variances, consents and certificates and
similar rights which authorize or are required in connection with the operation
of the System, including any applications for any of the foregoing
(collectively, the "Governmental Permits") that are obtained from or are pending
with any federal, state, county, municipal, local or foreign government and any
governmental agency, bureau, commission, authority, body, court (or other
judicial body), administrative or executive agency, legislative or
quasi-legislative body, commission, council or other agency, including any such
agency, authority or body responsible for the issuance or administration of any
Governmental Permit or whose consent is required for the sale and transfer of
the Assets (each, a "Governmental Authority") and all subscription contracts
with subscribers of Seller relating to the System, pole attachment agreements,
access agreements and all other contracts, leases, agreements or undertakings
(other than those that are included in the Excluded Assets or which constitute
Governmental Permits), written or oral, relating to the ownership, operation or
maintenance of the System and/or the Assets (the "Contracts").
1.2 Excluded Assets. Notwithstanding anything to the contrary in this
Agreement, any insurance policies and rights and claims thereunder; all rights
to tax refunds and refunds of fees of any nature, in either case relating to the
period prior to the Closing Date; Seller's rights under
Abbeville, SC
Purchase Agreement
Execution Version
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<PAGE>
this Agreement, and the Purchase Price payable pursuant hereto; Seller's
organizational documents and partnership and financial records not included in
Section 1.1; Seller's cash in the bank and cash equivalents at the time of the
Closing and accounts receivable; and all assets of Seller other than the Assets
(collectively, the "Excluded Assets") are expressly excluded from this sale, are
not to be purchased or assumed by Purchaser, and do not constitute part of the
"Assets."
1.3 "AS IS" AND "WHERE IS". PURCHASER SHALL ACQUIRE THE ASSETS, "AS IS"
AND "WHERE IS," EXCEPT FOR THE REPRESENTATIONS AND WARRANTIES IN ARTICLE III
HEREOF, AND ANY AND ALL OTHER REPRESENTATIONS AND WARRANTIES WITH RESPECT TO THE
ASSETS, WHETHER EXPRESS OR IMPLIED, ARE HEREBY DISCLAIMED, INCLUDING ANY
REPRESENTATIONS OR WARRANTIES AS TO MERCHANTABILITY OR FITNESS FOR ANY
PARTICULAR PURPOSE.
2. CALCULATION AND PAYMENT OF PURCHASE PRICE
2.1 Payment of Purchase Price.
(a) The purchase price to be paid by Purchaser to Seller for the
Assets shall be an amount equal to $4,200,000 (the "Purchase Price").
(b) On the Closing Date, Purchaser shall pay to Seller the
Purchase Price, by wire transfer of immediately available funds to an account
designated by Seller in writing.
2.2 Assumption of Liabilities. As additional consideration for the
Assets, Purchaser shall, from and after the Closing Date, and pursuant to an
Assignment and Assumption Agreement in a form agreed between the parties (the
"Assumption Agreement"), assume the obligations of Seller under or in connection
with all of the Assets. In addition, Purchaser shall assume (i) all obligations
relating to the Assets entered into by Seller in the ordinary course of business
between the date hereof and the Closing Date (other than any obligations, if
any, relating to the Excluded Assets), to the extent such obligations continue
after the Closing and (ii) all liabilities relating to (y) all customer advance
payments and deposits, prepaid advertising revenues and other prepaid revenues
or income
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Purchase Agreement
Execution Version
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<PAGE>
received or held by Seller for services to be rendered or obligations to be
performed in connection with the System subsequent to the Closing; (z) the
performance of the Contracts from and after the Closing Date; provided, however,
that Seller shall pay all sales, use, excise and similar taxes arising out of
the transfer of the Assets. Except as otherwise provided in this Section 2.2,
Purchaser shall not assume or become liable for any other obligations,
liabilities or indebtedness of Seller.
2.3 Purchase Price Adjustments.
(a) At the Closing, the Purchase Price shall be increased by an
amount equal to 99% of the face amount of accounts receivable from subscribers
of the System which, as of the Closing Date, have been outstanding for 60 days
or less. There shall be no increase to the Purchase Price for accounts
receivable from subscribers of the System which have been outstanding for more
than 60 days.
(b) Following the Closing, Purchaser and Seller shall adjust the
Purchase Price pursuant to customary working capital adjustments for
transactions of this type calculated as of the Closing Date. The difference
between the actual Purchase Price paid and the adjusted Purchase Price shall be
paid in cash by the party owing such adjustment no later than sixty (60) days
after the Closing Date.
2.4 Excluded Liabilities. Seller shall pay or otherwise satisfy all
indebtedness, liabilities or other obligations of Seller arising prior to or on
the Closing Date from the ownership or operation of any of the Assets.
2.5 Allocation of Consideration. The parties agree that the
consideration payable for the Assets, consisting of the Purchase Price and the
liabilities of Seller to be assumed by Purchaser hereunder, shall be allocated
among the Assets in accordance with Section 1060 of the Internal Revenue Code of
1986, as amended, and the regulations thereunder. The parties agree to cooperate
in the preparation, execution and filing with the Internal Revenue Service of
all information to be filed by the parties under Section 1060 and such
regulations, and to file Form 8594 (or any substitute therefor) when required by
applicable law.
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Purchase Agreement
Execution Version
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2.6 Provation of Revenue. All revenue earned arising from the Assets
shall be prorated between Purchaser and Seller as of (and the Closing shall be
deemed effective as of) 12:01 a.m., New York time, on the Closing Date.
3. CLOSING
3.1 Closing Date. The closing of the transactions contemplated
hereunder (the "Closing") shall take place at the offices of Paul, Hastings,
Janofsky & Walker, 399 Park Avenue, 31st Floor, New York, New York 10022, at
10:00 A.M. New York time on August 30, 1996, or on such other date and at such
other time as the Purchaser and Seller may mutually agree (the "Closing Date").
Purchaser shall be entitled to possession of the Assets upon the Closing.
3.2 Deliveries by Seller. At the Closing, Seller shall deliver to
Purchaser the following:
(a) One or more bills of sale and all such other general
instruments of transfer, assignment and conveyance, general warranty deeds,
certificates of title, assignments, evidences of consent or waiver, and other
instruments or documents in form and substance reasonably satisfactory to
Purchaser and its counsel as shall be necessary to evidence or perfect the sale,
assignment, transfer and conveyance of the Assets to Purchaser and effectively
vest in the Purchaser all right, title and interest in and to the Assets free
and clear of any and all liens, encumbrances and other restrictions (other than
liens and encumbrances agreed upon by the parties, such liens and encumbrances
being "Permitted Encumbrances") in accordance with the terms of this Agreement,
together with possession (or constructive possession, in the case of
intangibles) thereof.
(b) An executed Assumption Agreement.
(c) A Certificate of Non-Foreign Status which meets the
requirements of Treasury Regulation Section 1.1445-2, duly executed and
acknowledged, certifying under penalties of perjury that Seller is not a foreign
person for United States income tax purposes.
(d) Originals or true and complete copies of all books and
records, memoranda and data relating to the
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System; provided that Seller may retain such duplicate copies as Seller
reasonably deems appropriate.
(e) Such other documents, opinions, instruments and certificates,
in form and substance reasonably satisfactory to Purchaser, as Purchaser may
reasonably request.
3.3 Deliveries by Purchaser. At the Closing, Purchaser shall deliver to
Seller the following:
(a) The payment described in Section 2.1(b).
(b) An executed Assumption Agreement.
(c) Such other documents, opinions, instruments and certificates,
in form and substance reasonably satisfactory to Seller, as Seller may
reasonably request.
4. REPRESENTATIONS AND WARRANTIES
Seller hereby represents and warrants to Purchaser, and Purchaser
hereby represents and warrants to Seller that:
4.1 Organization and Standing. Each such party is duly formed, validly
existing and in good standing as a limited partnership under the laws of the
jurisdiction of its formation. Each such party is duly qualified to do business
in each jurisdiction where the failure to so qualify would have a material
adverse affect on such party's ability to conduct its business or operations or
to consummate the transactions to be consummated by it under this Agreement and
each such party is in good standing in each jurisdiction in which it is so
qualified.
4.2 Power and Authority. Each such party has all requisite power and
authority to execute, deliver and perform this Agreement and to take any action
which it may be required to take hereunder. Seller further represents and
warrants that it has all requisite power to perform its business as now
conducted and to own its properties and assets.
4.3 Authorization. The execution, delivery and performance of this
Agreement by such party has been duly and validly authorized by all action
required to be taken
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Execution Version
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<PAGE>
with respect to such party. This Agreement has been, and on the date of the
Closing all other documents, agreements and instruments to be executed and
delivered at the Closing by such party pursuant hereto (together with all such
documents, agreements and instruments to be executed and delivered by each other
party hereto, the "Transaction Documents") will have been, duly and validly
executed by properly authorized officers or other authorized representatives of
such party. This Agreement constitutes, and on the Closing Date all other
Transaction Documents to which such party is or will be a signatory will
constitute, the valid and binding obligations of such party, enforceable against
such party in accordance with their respective terms. Neither the execution of
this Agreement or any of the Transaction Documents, nor the consummation of the
transactions contemplated herein or therein, will violate any instrument of such
party, or any agreement, permit, order, judgment, decree, law or regulation to
which such person is party or by which it is, or its assets and properties are,
bound.
5. ADDITIONAL UNDERTAKINGS AND ACTIONS
5.1 Consents.
(a) As soon as possible after the execution of this Agreement,
Seller will commence making the applications and filings required to obtain all
consents required to be obtained to effect the consummation of the transactions
contemplated hereby (the "Consents"). Seller will use its best efforts to obtain
the Consents from the appropriate Governmental Authorities and other persons at
the earliest possible date. Purchaser agrees that it will cooperate fully with
Seller, and will do all things reasonably necessary to assist Seller in
obtaining all Consents.
5.2 Access to Assets. On and after the date of this Agreement,
Purchaser and its counsel, accountants and other representatives shall have
reasonable access, during normal business hours and upon reasonable notice, to
all properties, books, accounts, contracts, commitments, and records, documents
or other data or information of Seller relating to the System.
5.3 Operations Prior to Closing. Except as otherwise expressly
contemplated by this Agreement, at all times from
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and after the date hereof and up to and including the Closing Date, Seller shall
operate the System only in the ordinary course.
5.4 Antitrust Laws Compliance. As soon as practicable after the date of
execution of this Agreement, Seller and Purchaser shall each make filings if and
as required under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended, and related acts and regulations (the "HSR Act"). Each party shall keep
the other party apprised of the status of any inquiries made of such party by
the Federal Trade Commission, the Antitrust Division of the United States
Department of Justice, or any other Governmental Authority with respect to this
Agreement or the transactions contemplated hereby. Each party shall use
reasonable efforts to obtain the earliest termination or waiver of the HSR Act
waiting period possible.
5.5 Bulk Sales. Purchaser waives compliance with provisions of the
Uniform Commercial Code relating to bulk transfer and similar laws in connection
with the sale of the Assets, subject to the indemnification provisions of
Section 9 hereof.
6. CONDITIONS PRECEDENT TO OBLIGATIONS OF PURCHASER
The obligations of Purchaser under this Agreement are subject to the
satisfaction at or prior to the Closing of each of the following conditions, any
one or more of which may be waived by Purchaser, in its sole discretion;
provided, however, that no such waiver of a condition shall constitute a waiver
by Purchaser of any of its other rights or remedies, at law or in equity, if
Seller shall be in default of any of its obligations under this Agreement.
6.1 HSR Act. All filings required under the HSR Act, if any, shall have
been made and the applicable waiting period shall have expired or been earlier
terminated without the receipt of any objection or the commencement or threat of
any litigation by a Governmental Authority of competent jurisdiction to restrain
or prevent the consummation of the transactions contemplated by this Agreement.
6.2 Governmental or Legal Action. No action, suit or proceeding shall
be pending or threatened by any Governmental Authority or other person and no
law, rule or
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regulation or similar requirement shall have been enacted, promulgated or issued
or deemed applicable to any of the transactions contemplated by this Agreement
by any Governmental Authority or other person that would (a) prohibit
Purchaser's ownership or operation of all or a material portion of the System or
the Assets, (b) enjoin, prevent or make illegal the consummation of the
transactions contemplated by this Agreement or (c) challenge, set aside or
modify any authorization of the transactions provided for herein or any
approvals, consents, waivers or authorizations made or described hereunder.
6.3 Representations; Performance of Agreements. The representations and
warranties of Seller set forth in Section 4 hereof shall be true in all material
respects as of and at the Closing Date with the same effect as though such
representations and warranties had been made again at and as of such time.
Seller shall have performed, satisfied and complied in all material respects
with all covenants, obligations, agreements and conditions required by this
Agreement to be performed, satisfied or complied with by Seller at or prior to
the Closing Date.
6.4 Financing. Purchaser shall have obtained such financing as it may
require in order to consummate the transactions contemplated by this Agreement.
6.5 Consents and Approvals. Seller shall have delivered to Purchaser
evidence that all of the Consents have been obtained or given and all such
Consents shall be in form and substance reasonably satisfactory to Purchaser and
Seller.
6.6 Transfer Documents. Seller shall have delivered to Purchaser
customary bills of sale, general warranty deeds, assignments and other
instruments of transfer sufficient to convey good and marketable title to the
Assets in accordance with the terms of this Agreement, including the documents
and instruments described under Section 3.2(a). Seller shall have executed and
delivered to Purchaser the Assumption Agreement.
6.7 Opinions of Seller's Counsel. Purchaser shall have received the
opinions of counsel for Seller reasonably required by Purchaser.
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6.8 Discharge of Liens. Seller shall have secured the termination,
discharge and release of all material encumbrances of any nature on the Assets.
6.9 No Default Under Documents. As of the Closing Date, Seller shall
not be in material violation or default under any statute, rule, regulation,
agreement, or other document to which Seller is a party or by which Seller is
bound in a manner which would materially adversely affect the operation of the
System, nor shall Seller have knowledge of any condition or event which, with
notice or lapse of time or both, would constitute such a violation or default.
6.10 Additional Documents and Acts. Seller shall have delivered or
caused to be delivered to Purchaser all such additional documents and
instruments, in form and content reasonably satisfactory to Purchaser and its
counsel, as Purchaser shall reasonably request, and shall have done all other
acts or things reasonably requested by Purchaser to evidence compliance with the
conditions set forth in this Section 6.
7. CONDITIONS PRECEDENT TO OBLIGATIONS OF SELLER
The obligations of Seller under the Agreement are subject to the
satisfaction, at or prior to the Closing, of each of the following conditions,
any one or more of which may be waived by Seller in its sole discretion;
provided, however, that no such waiver of a condition shall constitute a waiver
by Seller of any of its rights or remedies, at law or in equity, if Purchaser
shall be in default of any of its obligations under this Agreement.
7.1 HSR Act. All filings required under the HSR Act, if any, shall have
been made and the applicable waiting period shall have expired or been earlier
terminated without the receipt of any objection or the commencement or threat of
any litigation by a Governmental Authority of competent jurisdiction to restrain
or prevent the consummation of the transactions contemplated by this Agreement.
7.2 Governmental or Legal Actions. No action, suit or proceeding shall
be pending or threatened by any Governmental Authority or other person and no
law, rule, regulation or other similar requirement shall have been enacted,
promulgated or issued or deemed applicable to any
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of the transactions contemplated by this Agreement by any Governmental Authority
or other person that would (a) prohibit Purchaser's ownership or operation of
all or any material portion of the System or the Assets, (b) enjoin, prevent or
make illegal the consummation of the transactions contemplated by this
Agreement, or (c) challenge, set aside or modify any authorization of the
transactions provided for herein or any approvals, consents, waivers or
authorizations made or described hereunder.
7.3 Representations; Performance of Agreements. The representations and
warranties of Purchaser set forth in Section 4 hereof shall be true in all
material respects as of and at the Closing Date with the same effect as though
such representations and warranties had been made again at and as of such time.
Purchaser shall have performed, satisfied and complied in all material respects
with all covenants, obligations, agreements and conditions required by this
Agreement to be performed, satisfied or complied with by Purchaser at or prior
to the Closing Date.
7.4 Consent and Approvals. All consents and authorizations required to
be obtained by Purchaser, shall have been obtained or given.
7.5 Payments. Purchaser shall have paid to Seller the Purchase Price.
7.6 Assumption of Liabilities. Purchaser shall have delivered to Seller
the Assumption Agreement.
7.7 Additional Documents and Acts. Purchaser shall have delivered or
caused to be delivered to Seller all such additional documents and instruments,
in form and content reasonably satisfactory to Seller and its counsel, as Seller
shall reasonably request, and shall have done all other acts or things
reasonably requested by Seller to evidence compliance with the conditions set
forth in this Section 7.
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8. REMEDIES
8.1 Costs. If any legal action or other proceeding is brought for the
enforcement of this Agreement or any other instrument or document to be
executed, delivered or performed hereunder, or because of an alleged dispute,
breach, default or misrepresentation in connection with any of the provisions of
this Agreement or any other instrument or document to be executed, delivered or
performed hereunder, the successful or prevailing party shall be entitled to
recover reasonable attorneys' fees and other costs incurred in that action or
proceeding, in addition to any other relief to which it or they may be entitled.
8.2 Termination Without Liability. On the Closing Date, either party
may terminate this Agreement, without liability to the other, if any conditions
precedent to such party's performance shall not have been satisfied on the
Closing Date.
8.3 Termination on Default. Without limiting the provisions of Sections
8.1, 8.2 and 9 hereof, if either Seller, on the one hand, or Purchaser, on the
other hand, shall default in the due and timely performance of any of the
covenants or agreements under the Agreement, the other of Seller or Purchaser,
as the case may be, may, in addition to any other remedy available thereto, on
the Closing Date give notice of termination ("Termination Notice") of this
Agreement. The Termination Notice shall specify with particularity the default
or defaults on which it is based and state that this Agreement is terminated.
The Termination Notice shall be effective when given. The rights and remedies
granted in this Section 8.3 are cumulative and not exclusive of any other right
or remedy granted herein or provided by law or in equity.
9. INDEMNIFICATION
9.1 Seller's Indemnity. Seller shall indemnify and hold harmless
Purchaser and its shareholders, partners, officers, directors, employees,
controlling persons and representatives, against and in respect of any and all
claims, damages, losses, costs, expenses (including reasonable legal, accounting
and experts' fees and other fees and expenses incurred in the investigation or
defense of any of the following, and any interest and penalties),
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obligations and liabilities which any such person may incur or suffer, as a
result of, arising in connection with or relating to any and all claims of third
parties (including the claims of any limited partners of the Seller) against,
relating to or pertaining to the Seller, the Assets and/or the System, which
arise in connection with or relate to the period prior to the Closing or to the
transactions contemplated hereunder and/or the authority of the Seller to enter
into and consummate such transactions and/or the propriety of such transactions.
9.2 Purchaser's Indemnity. Purchaser shall indemnify and hold harmless
Seller against and in respect of any and all claims, damages, losses, costs,
expenses (including reasonable legal, accounting and experts' fees and other
fees and expenses incurred in the investigation or defense of any of the
following, and any interest and penalties), obligations and liabilities which
Seller may incur as a result of, arising in connection with or relating to which
it may incur by reason of a material breach of any of the representations or
warranties of Purchaser set forth in this Agreement.
9.3 Procedure. In the event that any claim shall be asserted against a
party entitled to indemnification hereunder (the "Indemnitee"), the Indemnitee
shall promptly notify the other party (the "Indemnitor") of such claim in
writing, and shall extend to the Indemnitor an opportunity to defend against
such claim at the Indemnitor's sole expense. Within 15 days of receiving any
such notice from the Indemnitee, the Indemnitor shall notify the Indemnitee as
to whether or not the Indemnitor elects to assume the defense of any such claim.
In the event the Indemnitor does not so elect to assume such defense, any costs
incurred by the Indemnitee in defending such claim shall be reimbursed to the
Indemnitee, on an as-incurred basis, pursuant to this Section 9. In the event
the Indemnitor elects to assume such defense, the Indemnitee shall, at its
option and expense, have the right to participate in any defense undertaken by
the Indemnitor with legal counsel of its own selection, provided that such legal
counsel is reasonably acceptable to Indemnitor. No settlement or compromise of
any claim that may result in indemnification liability may be made by the
Indemnitor without the prior written consent of the Indemnitee, which consent
may not be unreasonably withheld.
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9.4 Preservation and Access to Records. Purchaser will preserve and
keep all books and records of Seller included in the Assets for a period of at
least five years from the Closing Date, except such records as Purchaser usually
disposes of in the ordinary course of business. During the period that such
books and records are preserved, duly authorized representatives of Seller shall
have access thereto, on reasonable prior notice to Purchaser and during regular
business hours to examine, inspect and copy, at its own expense, such books and
records, so long as such examination and inspection takes place on the premises
of Purchaser and does not unreasonably interfere with Purchaser's use thereof.
Purchaser, on the one hand, and Seller, on the other hand, agree that each of
them shall reasonably cooperate with the other of Purchaser or Seller, as
applicable, if the records relating to the System owned shall be of material
assistance to the other of Purchaser or Seller in any threatened or pending
litigation or proceeding or the preparation of tax returns.
10. MISCELLANEOUS PROVISIONS
10.1 Entire Agreement, Modification and Waiver. This Agreement
constitutes the entire agreement between the parties pertaining to the subject
matter contained in it and supersedes all prior and contemporaneous agreements,
representations and understandings of the parties. No supplement, modification
or amendment of this Agreement shall be binding unless executed in writing by
all the parties. No waiver of any of the provisions of this Agreement shall be
deemed, or shall constitute a continuing waiver. No waiver shall be binding
unless executed in writing by the party making the waiver.
10.2 Rights of Parties. Nothing in this Agreement, whether express or
implied, is intended to confer any rights or remedies under or by reason of this
Agreement upon any persons other than the parties and their respective permitted
successors and assigns, nor is anything in this Agreement intended to relieve or
discharge the obligation or liability of any third person or any party to this
Agreement, nor shall any provision give any third person any right of
subrogation or action against any party to this Agreement.
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10.3 Assignment. No assignment of any rights or obligations of either
party under this Agreement may be made without the prior written consent of the
other party to this Agreement, which consent is not to be unreasonably withheld,
except that Purchaser shall have the right to assign any or all of its rights
and liabilities hereunder to any of its affiliates, provided that each such
affiliate assumes Purchaser's obligations hereunder; and further provided that
Seller shall have been promptly provided written notice of such assignment
(including the name of the assignee). Any attempted assignment of rights or
obligations in violation of this Section 10.3 shall be null and void. Reference
to any of the parties in this Agreement shall be deemed to include the
successors and assigns of such party.
10.4 Construction. The language in this Agreement shall, in all cases,
be construed as a whole according to its fair meaning and neither strictly for
nor against Seller or Purchaser.
10.5 Expenses of the Parties. Except as expressly provided herein, all
expenses incurred by or on behalf of the parties hereto in connection with the
authorization, preparation and consummation of this Agreement including, without
limitation, all fees and expenses of agents, representatives, counsel and
accountants employed by the parties hereto in connection with the authorization,
preparation, execution and consummation of this Agreement shall be borne solely
by the party who shall have incurred the same.
10.6 Further Assurances. Seller, at any time after the Closing Date,
will promptly execute, acknowledge and deliver any further deeds, assignments,
conveyances and other assurances, documents and instruments of transfer,
reasonably requested by Purchaser and necessary for Seller to comply with its
covenants contained herein and will take any other action consistent with the
terms of this Agreement that may reasonably be requested by Purchaser for the
purpose of assigning, transferring, granting, conveying, vesting and confirming
ownership in or to Purchaser, or reducing to Purchaser's possession, any or all
of the Assets.
10.7 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an
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original and all of which together shall be considered one and the same
agreement.
10.8 Headings. The headings contained in this Agreement are solely for
convenience of reference and shall not affect the meaning or interpretation of
this Agreement or of any term or provision hereof.
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IN WITNESS WHEREOF, the undersigned, intending to be legally
bound, have executed this Amended and Restated Asset Purchase Agreement as of
the date first written above.
SELLER:
Cencom Partners, L.P.
By: Cencom Partners, Inc.,
its General Partner
By: /s/ Theodore W. Browne, II
-----------------------------------
Name: Theodore W. Browne, II
Title: Executive Vice President
PURCHASER:
Charter Communications II, L.P.
By: CCP II, Inc.,
its general partner
By: /s/ Jeffrey C. Sanders
-----------------------------------
Name: Jeffrey C. Sanders
Title: Executive Vice President
Signature Page for Stamford, NC Asset Purchase Agreement
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<PAGE>
AMENDED AND RESTATED
ASSET PURCHASE AGREEMENT
between
CENCOM PARTNERS, L.P.,
as Seller
and
CHARTER COMMUNICATIONS, L.P.,
as Purchaser
dated as of May 30, 1996
<PAGE>
TABLE OF CONTENTS
Page
1. PURCHASE AND SALE OF ASSETS............................................ 1
1.1 Assets to be Sold............................................ 1
1.2 Excluded Assets.............................................. 2
2. CALCULATION AND PAYMENT OF PURCHASE PRICE............................ 3
2.1 Payment of Purchase Price.................................... 3
2.2 Assumption of Liabilities.................................... 3
2.3 Purchase Price Adjustments................................... 4
2.4 Excluded Liabilities......................................... 4
2.5 Allocation of Consideration.................................. 4
2.6 Proration of Revenue......................................... 4
3. CLOSING.............................................................. 4
3.1 Closing Date................................................. 4
3.2 Deliveries by Seller......................................... 5
3.3 Deliveries by Purchaser...................................... 5
4. REPRESENTATIONS AND WARRANTIES....................................... 6
4.1 Organization and Standing.................................... 6
4.2 Power and Authority.......................................... 6
4.3 Authorization................................................ 6
5. ADDITIONAL UNDERTAKINGS AND ACTIONS.................................... 7
5.1 Consents..................................................... 7
5.2 Access to Assets............................................. 7
5.3 Operations Prior to Closing.................................. 7
5.4 Antitrust Laws Compliance.................................... 7
5.5 Bulk Sales................................................... 8
6. CONDITIONS PRECEDENT TO OBLIGATIONS OF PURCHASER..................... 8
6.1 HSR Act...................................................... 8
6.2 Governmental or Legal Action................................. 8
6.3 Representations; Performance of Agreements................... 8
6.4 Financing.................................................... 9
6.5 Consents and Approvals....................................... 9
6.6 Transfer Documents........................................... 9
6.7 Opinions of Seller's Counsel................................. 9
6.8 Discharge of Liens........................................... 9
6.9 No Default Under Documents................................... 9
6.10 Additional Documents and Acts................................ 9
7. CONDITIONS PRECEDENT TO OBLIGATIONS OF SELLER.......................... 10
7.1 HSR Act...................................................... 10
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7.2 Governmental or Legal Actions................................ 10
7.3 Representations; Performance of Agreements................... 10
7.4 Consent and Approvals........................................ 11
7.5 Payments..................................................... 11
7.6 Assumption of Liabilities. .................................. 11
7.7 Additional Documents and Acts................................ 11
8. REMEDIES............................................................. 11
8.1 Costs........................................................ 11
8.2 Termination Without Liability................................ 11
8.3 Termination on Default....................................... 11
9. INDEMNIFICATION........................................................ 12
9.1 Seller's Indemnity........................................... 12
9.2 Purchaser's Indemnity........................................ 12
9.3 Procedure.................................................... 12
9.4 Preservation and Access to Records........................... 13
10. GENERAL PROVISIONS................................................... 13
10.1 Entire Agreement, Modification and Waiver.................... 13
10.2 Rights of Parties............................................ 14
10.3 Assignment................................................... 14
10.4 Construction................................................. 14
10.5 Expenses of the Parties...................................... 14
10.6 Further Assurances........................................... 14
10.7 Counterparts................................................. 15
10.8 Headings..................................................... 15
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AMENDED AND RESTATED
ASSET PURCHASE AGREEMENT
THIS AMENDED AND RESTATED ASSET PURCHASE AGREEMENT (this
"Agreement") is made as of this 30th day of May, 1996 by and between Charter
Communications, L.P., a limited partnership organized and existing under the
laws of the State of Delaware ("CC I" or the "Purchaser") and Cencom Partners,
L.P., a limited partnership organized and existing under the laws of the State
of Delaware ("Seller").
W I T N E S S E T H:
WHEREAS, Seller is the owner and operator of a cable television
system serving Lincolnton, North Carolina (the "System");
WHEREAS, Seller desires to sell, and Purchaser desire to
purchase, pursuant to the terms and subject to the conditions of this Agreement,
the System together with all of the assets, property, interests, rights and
privileges of Seller, including but not limited to those utilized in the cable
television business owned and operated by Seller in Lincolnton, North Carolina
(the "CATV Business").
NOW, THEREFORE, in consideration of the mutual promises,
agreements and covenants set forth herein, and for other good and valuable
consideration, the sufficiency of which is hereby acknowledged, the parties
hereto, intending legally to be bound, hereby agree as follows:
1. PURCHASE AND SALE OF ASSETS
1.1 Assets to be Sold. Subject to the terms and conditions of this
Agreement, Seller hereby agrees to sell, convey, assign, transfer and deliver to
Purchaser at the Closing (as hereinafter defined) and Purchaser hereby agrees to
acquire, for the consideration hereinafter provided, all of the assets,
properties, rights, titles and privileges of Seller of every kind, character and
description, whether tangible, intangible, real, personal or mixed, of whatever
description and wherever located, involved in, related to, owned, used or held
for use or useful in connection with the ownership, use or operation of the
System and all other assets of Seller relating to the System whether or not
required to be listed on Seller's balance sheet in
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accordance with generally accepted accounting principles, including, without
limitation, all additions, accessions and substitutions made prior to the
Closing as permitted pursuant to the terms of this Agreement (collectively, the
"Assets"), but excluding the Excluded Assets (defined below) and assets disposed
of by Seller between the date hereof and the Closing Date on an arms' length
basis in the ordinary course of business. The Assets include, without
limitation, the following:
(a) all of the real property interests of Seller relating to the
System (collectively, the "Real Property");
(b) all items of tangible personal property owned, used, held for
use or useful by Seller in the operation of the System, including, without
limitation, all equipment relating to the System (collectively, the
"Equipment"); and
(c) all the rights of Seller under any and all franchises,
licenses (including those required by the FCC), permits, authorizations,
easements, registrations, leases, variances, consents and certificates and
similar rights which authorize or are required in connection with the operation
of the System, including any applications for any of the foregoing
(collectively, the "Governmental Permits") that are obtained from or are pending
with any federal, state, county, municipal, local or foreign government and any
governmental agency, bureau, commission, authority, body, court (or other
judicial body), administrative or executive agency, legislative or
quasi-legislative body, commission, council or other agency, including any such
agency, authority or body responsible for the issuance or administration of any
Governmental Permit or whose consent is required for the sale and transfer of
the Assets (each, a "Governmental Authority") and all subscription contracts
with subscribers of Seller relating to the System, pole attachment agreements,
access agreements and all other contracts, leases, agreements or undertakings
(other than those that are included in the Excluded Assets or which constitute
Governmental Permits), written or oral, relating to the ownership, operation or
maintenance of the System and/or the Assets (the "Contracts").
1.2 Excluded Assets. Notwithstanding anything to the contrary in this
Agreement, any insurance policies and rights and claims thereunder; all rights
to tax refunds and refunds of fees of any nature, in either case relating to
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the period prior to the Closing Date; Seller's rights under this Agreement, and
the Purchase Price payable pursuant hereto; Seller's organizational documents
and partnership and financial records not included in Section 1.1; Seller's cash
in the bank and cash equivalents at the time of the Closing; and all assets of
Seller other than the Assets (collectively, the "Excluded Assets") are expressly
excluded from this sale, are not to be purchased or assumed by Purchaser, and do
not constitute part of the "Assets."
2. CALCULATION AND PAYMENT OF PURCHASE PRICE
2.1 Payment of Purchase Price.
(a) The purchase price to be paid by Purchaser to Seller for the
Assets shall be an amount equal to $27,500,000 (the "Purchase Price").
(b) On the Closing Date, Purchaser shall pay to Seller the
Purchase Price, by wire transfer of immediately available funds to an account
designated by Seller in writing.
2.2 Assumption of Liabilities. As additional consideration for the
Assets, Purchaser shall, from and after the Closing Date, and pursuant to an
Assignment and Assumption Agreement in a form agreed between the parties (the
"Assumption Agreement"), assume the obligations of Seller under or in connection
with all of the Assets. In addition, Purchaser shall assume (i) all obligations
relating to the Assets entered into by Seller in the ordinary course of business
between the date hereof and the Closing Date (other than any obligations, if
any, relating to the Excluded Assets), to the extent such obligations continue
after the Closing and (ii) all liabilities relating to (y) all customer advance
payments and deposits, prepaid advertising revenues and other prepaid revenues
or income received or held by Seller for services to be rendered or obligations
to be performed in connection with the System subsequent to the Closing; (z) the
performance of the Contracts from and after the Closing Date; provided, however,
that Seller shall pay all sales, use, excise and similar taxes arising out of
the transfer of the Assets. Except as otherwise provided in this Section 2.2,
Purchaser shall not assume or become liable for any other obligations,
liabilities or indebtedness of Seller.
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2.3 Purchase Price Adjustments.
(a) At the Closing, the Purchase Price shall be increased by an
amount equal to 99% of the face amount of accounts receivable from subscribers
of the System which, as of the Closing Date, have been outstanding for 60 days
or less. There shall be no increase to the Purchase Price for accounts
receivable from subscribers of the System which have been outstanding for more
than 60 days.
(b) Following the Closing, Purchaser and Seller shall adjust the
Purchase Price pursuant to customary working capital adjustments for
transactions of this type calculated as of the Closing Date. The difference
between the actual Purchase Price paid and the adjusted Purchase Price shall be
paid in cash by the party owing such adjustment no later than sixty (60) days
after the Closing Date.
2.4 Excluded Liabilities. Seller shall pay or otherwise satisfy all
indebtedness, liabilities or other obligations of Seller arising prior to or on
the Closing Date from the ownership or operation of any of the Assets.
2.5 Allocation of Consideration. The parties agree that the
consideration payable for the Assets, consisting of the Purchase Price and the
liabilities of Seller to be assumed by Purchaser hereunder, shall be allocated
among the Assets in accordance with Section 1060 of the Internal Revenue Code of
1986, as amended, and the regulations thereunder. The parties agree to cooperate
in the preparation, execution and filing with the Internal Revenue Service of
all information to be filed by the parties under Section 1060 and such
regulations, and to file Form 8594 (or any substitute therefor) when required by
applicable law.
2.6 Proration of Revenue. All revenue earned arising from the Assets
shall be prorated between Purchaser and Seller as of (and the Closing shall be
deemed effective as of) 11:59 p.m., New York time, on the Closing Date.
3. CLOSING
3.1 Closing Date. The closing of the transactions contemplated
hereunder (the "Closing") shall take place at the offices of Paul, Hastings,
Janofsky & Walker, 399 Park Avenue, 31st Floor, New York, New York 10022, at
10:00 A.M.
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New York time on August 30, 1996, or on such other date and at such other time
as the Purchaser and Seller may mutually agree (the "Closing Date"). Purchaser
shall be entitled to possession of the Assets upon the Closing.
3.2 Deliveries by Seller. At the Closing, Seller shall deliver to
Purchaser the following:
(a) One or more bills of sale and all such other general
instruments of transfer, assignment and conveyance, general warranty deeds,
certificates of title, assignments, evidences of consent or waiver, and other
instruments or documents in form and substance reasonably satisfactory to
Purchaser and its counsel as shall be necessary to evidence or perfect the sale,
assignment, transfer and conveyance of the Assets to Purchaser and effectively
vest in the Purchaser all right, title and interest in and to the Assets free
and clear of any and all liens, encumbrances and other restrictions (other than
liens and encumbrances agreed upon by the parties, such liens and encumbrances
being "Permitted Encumbrances") in accordance with the terms of this Agreement,
together with possession (or constructive possession, in the case of
intangibles) thereof.
(b) An executed Assumption Agreement.
(c) A Certificate of Non-Foreign Status which meets the
requirements of Treasury Regulation Section 1.1445-2, duly executed and
acknowledged, certifying under penalties of perjury that Seller is not a foreign
person for United States income tax purposes.
(d) Originals or true and complete copies of all books and
records, memoranda and data relating to the System; provided that Seller may
retain such duplicate copies as Seller reasonably deems appropriate.
(e) Such other documents, opinions, instruments and certificates,
in form and substance reasonably satisfactory to Purchaser, as Purchaser may
reasonably request.
3.3 Deliveries by Purchaser. At the Closing, Purchaser shall deliver to
Seller the following:
(a) The payment described in Section 2.1(b).
(b) An executed Assumption Agreement.
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(c) Such other documents, opinions, instruments and certificates,
in form and substance reasonably satisfactory to Seller, as Seller may
reasonably request.
4. REPRESENTATIONS AND WARRANTIES
Seller hereby represents and warrants to Purchaser, and Purchaser
hereby represents and warrants to Seller that:
4.1 Organization and Standing. Each such party is duly formed, validly
existing and in good standing as a limited partnership under the laws of the
jurisdiction of its formation. Each such party is duly qualified to do business
in each jurisdiction where the failure to so qualify would have a material
adverse affect on such party's ability to conduct its business or operations or
to consummate the transactions to be consummated by it under this Agreement and
each such party is in good standing in each jurisdiction in which it is so
qualified.
4.2 Power and Authority. Each such party has all requisite power and
authority to execute, deliver and perform this Agreement and to take any action
which it may be required to take hereunder. Seller further represents and
warrants that it has all requisite power to perform its business as now
conducted and to own its properties and assets.
4.3 Authorization. The execution, delivery and performance of this
Agreement by such party has been duly and validly authorized by all action
required to be taken with respect to such party. This Agreement has been, and on
the date of the Closing all other documents, agreements and instruments to be
executed and delivered at the Closing by such party pursuant hereto (together
with all such documents, agreements and instruments to be executed and delivered
by each other party hereto, the "Transaction Documents") will have been, duly
and validly executed by properly authorized officers or other authorized
representatives of such party. This Agreement constitutes, and on the Closing
Date all other Transaction Documents to which such party is or will be a
signatory will constitute, the valid and binding obligations of such party,
enforceable against such party in accordance with their respective terms.
Neither the execution of this Agreement or any of the Transaction Documents, nor
the consummation of the transactions contemplated herein or therein, will
violate
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any instrument of such party, or any agreement, permit, order, judgment, decree,
law or regulation to which such person is party or by which it is, or its assets
and properties are, bound.
5. ADDITIONAL UNDERTAKINGS AND ACTIONS
5.1 Consents.
(a) As soon as possible after the execution of this Agreement,
Seller will commence making the applications and filings required to obtain all
consents required to be obtained to effect the consummation of the transactions
contemplated hereby (the "Consents"). Seller will use its best efforts to obtain
the Consents from the appropriate Governmental Authorities and other persons at
the earliest possible date. Purchaser agrees that it will cooperate fully with
Seller, and will do all things reasonably necessary to assist Seller in
obtaining all Consents.
5.2 Access to Assets. On and after the date of this Agreement,
Purchaser and its counsel, accountants and other representatives shall have
reasonable access, during normal business hours and upon reasonable notice, to
all properties, books, accounts, contracts, commitments, and records, documents
or other data or information of Seller relating to the System.
5.3 Operations Prior to Closing. Except as otherwise expressly
contemplated by this Agreement, at all times from and after the date hereof and
up to and including the Closing Date, Seller shall operate the System only in
the ordinary course.
5.4 Antitrust Laws Compliance. As soon as practicable after the date of
execution of this Agreement, Seller and Purchaser shall each make filings if and
as required under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended, and related acts and regulations (the "HSR Act"). Each party shall keep
the other party apprised of the status of any inquiries made of such party by
the Federal Trade Commission, the Antitrust Division of the United States
Department of Justice, or any other Governmental Authority with respect to this
Agreement or the transactions contemplated hereby. Each party shall use
reasonable efforts to obtain the earliest termination or waiver of the HSR Act
waiting period possible.
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5.5 Bulk Sales. Purchaser waives compliance with provisions of the
Uniform Commercial Code relating to bulk transfer and similar laws in connection
with the sale of the Assets, subject to the indemnification provisions of
Section 9 hereof.
6. CONDITIONS PRECEDENT TO OBLIGATIONS OF PURCHASER
The obligations of Purchaser under this Agreement are subject to the
satisfaction at or prior to the Closing of each of the following conditions, any
one or more of which may be waived by Purchaser, in its sole discretion;
provided, however, that no such waiver of a condition shall constitute a waiver
by Purchaser of any of its other rights or remedies, at law or in equity, if
Seller shall be in default of any of its obligations under this Agreement.
6.1 HSR Act. All filings required under the HSR Act, if any, shall have
been made and the applicable waiting period shall have expired or been earlier
terminated without the receipt of any objection or the commencement or threat of
any litigation by a Governmental Authority of competent jurisdiction to restrain
or prevent the consummation of the transactions contemplated by this Agreement.
6.2 Governmental or Legal Action. No action, suit or proceeding shall
be pending or threatened by any Governmental Authority or other person and no
law, rule or regulation or similar requirement shall have been enacted,
promulgated or issued or deemed applicable to any of the transactions
contemplated by this Agreement by any Governmental Authority or other person
that would (a) prohibit Purchaser's ownership or operation of all or a material
portion of the System or the Assets, (b) enjoin, prevent or make illegal the
consummation of the transactions contemplated by this Agreement or (c)
challenge, set aside or modify any authorization of the transactions provided
for herein or any approvals, consents, waivers or authorizations made or
described hereunder.
6.3 Representations; Performance of Agreements. The representations and
warranties of Seller set forth in Section 4 hereof shall be true in all material
respects as of and at the Closing Date with the same effect as though such
representations and warranties had been made again at and as of such time.
Seller shall have performed, satisfied and complied in all material respects
with all covenants,
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obligations, agreements and conditions required by this Agreement to be
performed, satisfied or complied with by Seller at or prior to the Closing Date.
6.4 Financing. Purchaser shall have obtained such financing as it may
require in order to consummate the transactions contemplated by this Agreement.
6.5 Consents and Approvals. Seller shall have delivered to Purchaser
evidence that all of the Consents have been obtained or given and all such
Consents shall be in form and substance reasonably satisfactory to Purchaser and
Seller.
6.6 Transfer Documents. Seller shall have delivered to Purchaser
customary bills of sale, general warranty deeds, assignments and other
instruments of transfer sufficient to convey good and marketable title to the
Assets in accordance with the terms of this Agreement, including the documents
and instruments described under Section 3.2(a). Seller shall have executed and
delivered to Purchaser the Assumption Agreement.
6.7 Opinions of Seller's Counsel. Purchaser shall have received the
opinions of counsel for Seller reasonably required by Purchaser.
6.8 Discharge of Liens. Seller shall have secured the termination,
discharge and release of all material encumbrances of any nature on the Assets.
6.9 No Default Under Documents. As of the Closing Date, Seller shall
not be in material violation or default under any statute, rule, regulation,
agreement, or other document to which Seller is a party or by which Seller is
bound in a manner which would materially adversely affect the operation of the
System, nor shall Seller have knowledge of any condition or event which, with
notice or lapse of time or both, would constitute such a violation or default.
6.10 Additional Documents and Acts. Seller shall have delivered or
caused to be delivered to Purchaser all such additional documents and
instruments, in form and content reasonably satisfactory to Purchaser and its
counsel, as Purchaser shall reasonably request, and shall have done all other
acts or things reasonably requested by Purchaser to evidence compliance with the
conditions set forth in this Section 6.
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7. CONDITIONS PRECEDENT TO OBLIGATIONS OF SELLER
The obligations of Seller under the Agreement are subject to the
satisfaction, at or prior to the Closing, of each of the following conditions,
any one or more of which may be waived by Seller in its sole discretion;
provided, however, that no such waiver of a condition shall constitute a waiver
by Seller of any of its rights or remedies, at law or in equity, if Purchaser
shall be in default of any of its obligations under this Agreement.
7.1 HSR Act. All filings required under the HSR Act, if any, shall have
been made and the applicable waiting period shall have expired or been earlier
terminated without the receipt of any objection or the commencement or threat of
any litigation by a Governmental Authority of competent jurisdiction to restrain
or prevent the consummation of the transactions contemplated by this Agreement.
7.2 Governmental or Legal Actions. No action, suit or proceeding shall
be pending or threatened by any Governmental Authority or other person and no
law, rule, regulation or other similar requirement shall have been enacted,
promulgated or issued or deemed applicable to any of the transactions
contemplated by this Agreement by any Governmental Authority or other person
that would (a) prohibit Purchaser's ownership or operation of all or any
material portion of the System or the Assets, (b) enjoin, prevent or make
illegal the consummation of the transactions contemplated by this Agreement, or
(c) challenge, set aside or modify any authorization of the transactions
provided for herein or any approvals, consents, waivers or authorizations made
or described hereunder.
7.3 Representations; Performance of Agreements. The representations and
warranties of Purchaser set forth in Section 4 hereof shall be true in all
material respects as of and at the Closing Date with the same effect as though
such representations and warranties had been made again at and as of such time.
Purchaser shall have performed, satisfied and complied in all material respects
with all covenants, obligations, agreements and conditions required by this
Agreement to be performed, satisfied or complied with by Purchaser at or prior
to the Closing Date.
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7.4 Consent and Approvals. All consents and authorizations required to
be obtained by Purchaser, shall have been obtained or given.
7.5 Payments. Purchaser shall have paid to Seller the Purchase Price.
7.6 Assumption of Liabilities. Purchaser shall have delivered to Seller
the Assumption Agreement.
7.7 Additional Documents and Acts. Purchaser shall have delivered or
caused to be delivered to Seller all such additional documents and instruments,
in form and content reasonably satisfactory to Seller and its counsel, as Seller
shall reasonably request, and shall have done all other acts or things
reasonably requested by Seller to evidence compliance with the conditions set
forth in this Section 7.
8. REMEDIES
8.1 Costs. If any legal action or other proceeding is brought for the
enforcement of this Agreement or any other instrument or document to be
executed, delivered or performed hereunder, or because of an alleged dispute,
breach, default or misrepresentation in connection with any of the provisions of
this Agreement or any other instrument or document to be executed, delivered or
performed hereunder, the successful or prevailing party shall be entitled to
recover reasonable attorneys' fees and other costs incurred in that action or
proceeding, in addition to any other relief to which it or they may be entitled.
8.2 Termination Without Liability. On the Closing Date, either party
may terminate this Agreement, without liability to the other, if any conditions
precedent to such party's performance shall not have been satisfied on the
Closing Date.
8.3 Termination on Default. Without limiting the provisions of Sections
8.1, 8.2 and 9 hereof, if either Seller, on the one hand, or Purchaser, on the
other hand, shall default in the due and timely performance of any of the
covenants or agreements under the Agreement, the other of Seller or Purchaser,
as the case may be, may, in addition to any other remedy available thereto, on
the Closing Date give notice of termination ("Termination Notice") of this
Agreement. The Termination Notice shall specify with
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particularity the default or defaults on which it is based and state that this
Agreement is terminated. The Termination Notice shall be effective when given.
The rights and remedies granted in this Section 8.3 are cumulative and not
exclusive of any other right or remedy granted herein or provided by law or in
equity.
9. INDEMNIFICATION
9.1 Seller's Indemnity. Seller shall indemnify and hold harmless
Purchaser and its shareholders, partners, officers, directors, employees,
controlling persons and representatives, against and in respect of any and all
claims, damages, losses, costs, expenses (including reasonable legal, accounting
and experts' fees and other fees and expenses incurred in the investigation or
defense of any of the following, and any interest and penalties), obligations
and liabilities which any such person may incur or suffer, as a result of,
arising in connection with or relating to any and all claims of third parties
(including the claims of any limited partners of the Seller) against, relating
to or pertaining to the Seller, the Assets and/or the System, which arise in
connection with or relate to the period prior to the Closing or to the
transactions contemplated hereunder and/or the authority of the Seller to enter
into and consummate such transactions and/or the propriety of such transactions.
9.2 Purchaser's Indemnity. Purchaser shall indemnify and hold harmless
Seller against and in respect of any and all claims, damages, losses, costs,
expenses (including reasonable legal, accounting and experts' fees and other
fees and expenses incurred in the investigation or defense of any of the
following, and any interest and penalties), obligations and liabilities which
Seller may incur as a result of, arising in connection with or relating to which
it may incur by reason of a material breach of any of the representations or
warranties of Purchaser set forth in this Agreement.
9.3 Procedure. In the event that any claim shall be asserted against a
party entitled to indemnification hereunder (the "Indemnitee"), the Indemnitee
shall promptly notify the other party (the "Indemnitor") of such claim in
writing, and shall extend to the Indemnitor an opportunity to defend against
such claim at the Indemnitor's sole expense. Within 15 days of receiving any
such notice from
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the Indemnitee, the Indemnitor shall notify the Indemnitee as to whether or not
the Indemnitor elects to assume the defense of any such claim. In the event the
Indemnitor does not so elect to assume such defense, any costs incurred by the
Indemnitee in defending such claim shall be reimbursed to the Indemnitee, on an
as-incurred basis, pursuant to this Section 9. In the event the Indemnitor
elects to assume such defense, the Indemnitee shall, at its option and expense,
have the right to participate in any defense undertaken by the Indemnitor with
legal counsel of its own selection, provided that such legal counsel is
reasonably acceptable to Indemnitor. No settlement or compromise of any claim
that may result in indemnification liability may be made by the Indemnitor
without the prior written consent of the Indemnitee, which consent may not be
unreasonably withheld.
9.4 Preservation and Access to Records. Purchaser will preserve and
keep all books and records of Seller included in the Assets for a period of at
least five years from the Closing Date, except such records as Purchaser usually
disposes of in the ordinary course of business. During the period that such
books and records are preserved, duly authorized representatives of Seller shall
have access thereto, on reasonable prior notice to Purchaser and during regular
business hours to examine, inspect and copy, at its own expense, such books and
records, so long as such examination and inspection takes place on the premises
of Purchaser and does not unreasonably interfere with Purchaser's use thereof.
Purchaser, on the one hand, and Seller, on the other hand, agree that each of
them shall reasonably cooperate with the other of Purchaser or Seller, as
applicable, if the records relating to the System owned shall be of material
assistance to the other of Purchaser or Seller in any threatened or pending
litigation or proceeding or the preparation of tax returns.
10. GENERAL PROVISIONS
10.1 Entire Agreement, Modification and Waiver. This Agreement
constitutes the entire agreement between the parties pertaining to the subject
matter contained in it and supersedes all prior and contemporaneous agreements,
representations and understandings of the parties. No supplement, modification
or amendment of this Agreement shall be binding unless executed in writing by
all the parties. No waiver of any of the provisions of this
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Agreement shall be deemed, or shall constitute a continuing waiver. No waiver
shall be binding unless executed in writing by the party making the waiver.
10.2 Rights of Parties. Nothing in this Agreement, whether express or
implied, is intended to confer any rights or remedies under or by reason of this
Agreement upon any persons other than the parties and their respective permitted
successors and assigns, nor is anything in this Agreement intended to relieve or
discharge the obligation or liability of any third person or any party to this
Agreement, nor shall any provision give any third person any right of
subrogation or action against any party to this Agreement.
10.3 Assignment. No assignment of any rights or obligations of either
party under this Agreement may be made without the prior written consent of the
other party to this Agreement, which consent is not to be unreasonably withheld,
except that Purchaser shall have the right to assign any or all of its rights
and liabilities hereunder to any of its affiliates, provided that each such
affiliate assumes Purchaser's obligations hereunder; and further provided that
Seller shall have been promptly provided written notice of such assignment
(including the name of the assignee). Any attempted assignment of rights or
obligations in violation of this Section 10.3 shall be null and void. Reference
to any of the parties in this Agreement shall be deemed to include the
successors and assigns of such party.
10.4 Construction. The language in this Agreement shall, in all cases,
be construed as a whole according to its fair meaning and neither strictly for
nor against Seller or Purchaser.
10.5 Expenses of the Parties. Except as expressly provided herein, all
expenses incurred by or on behalf of the parties hereto in connection with the
authorization, preparation and consummation of this Agreement including, without
limitation, all fees and expenses of agents, representatives, counsel and
accountants employed by the parties hereto in connection with the authorization,
preparation, execution and consummation of this Agreement shall be borne solely
by the party who shall have incurred the same.
10.6 Further Assurances. Seller, at any time after the
Closing Date, will promptly execute, acknowledge and deliver
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any further deeds, assignments, conveyances and other assurances, documents and
instruments of transfer, reasonably requested by Purchaser and necessary for
Seller to comply with its covenants contained herein and will take any other
action consistent with the terms of this Agreement that may reasonably be
requested by Purchaser for the purpose of assigning, transferring, granting,
conveying, vesting and confirming ownership in or to Purchaser, or reducing to
Purchaser's possession, any or all of the Assets.
10.7 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original and all of which
together shall be considered one and the same agreement.
10.8 Headings. The headings contained in this Agreement are solely for
convenience of reference and shall not affect the meaning or interpretation of
this Agreement or of any term or provision hereof.
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IN WITNESS WHEREOF, the undersigned, intending to be legally
bound, have executed this Amended and Restated Asset Purchase Agreement as of
the date first written above.
SELLER:
Cencom Partners, L.P.
By: Cencom Partners, Inc.,
its General Partner
By: /s/ Jeffrey C. Sanders
___________________________
Name: Jeffrey C. Sanders
Title: Senior Vice President
PURCHASER:
Charter Communications, L.P.
By: CCP One, Inc.,
its General Partner
By: /s/ Jeffrey C. Sanders
___________________________
Name: Jeffrey C. Sanders
Title:
Signature Page for Lincolnton, NC Asset Purchase Agreement
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ASSIGNMENT AND ASSUMPTION AGREEMENT
This Agreement is entered into as of 8th day of August, 1996 between
Charter Communications, L.P., a Delaware limited partnership ("Assignor") and
Charter Communications II, L.P., a Delaware limited partnership ("Assignee").
Assignor desires to assign that certain Amended and Restated Asset
Purchase Agreement, dated as of May 30, 1996 (the "Asset Purchase Agreement")
between Cencom Partners, L.P. and Assignor pursuant to the terms of this
Agreement.
Now therefore, in consideration of good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
hereby agree as follows:
1. Assignor hereby assigns all of Assignor's rights, title and interest
and obligations under the Asset Purchase Agreement.
2. Assignee hereby accepts and assumes all of Assignor's rights, title
and interest and obligations of Assignor under the Asset Purchase Agreement and
perform all the terms of the Asset Purchase Agreement on and after the date
hereof.
3. This Assignment is binding on all parties who lawfully succeed to
the rights or take the place of the Assignor or Assignee.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first above written.
ASSIGNOR:
Charter Communications, L.P.
By: CCP One, Inc.
its General Partner
By: /s/ Kent D. Kalkwarf
----------------------------
Name: Kent D. Kalkwarf
Title: Vice President
ASSIGNEE:
Charter Communications II,
L.P.
By: CCP II, Inc.
its General Partner
By: /s/ Kent D. Kalkwarf
----------------------------
Name: Kent D. Kalkwarf
Title: Vice President
<PAGE>
SCHEDULE 1
EXECUTIVE OFFICERS, DIRECTORS
AND CERTAIN AFFILIATES OF THE GENERAL PARTNER
The Partnership has no officers or directors. The General Partner
manages and controls substantially all of the Partnership's affairs and has
general responsibility and ultimate authority in all matters affecting the
Partnership's business. In addition, the General Partner is responsible for
operating and managing the Partnership's cable television systems. CC II
Holdings is the sole stockholder of the General Partner and a wholly-owned
subsidiary of Charter.
CC II Holdings and Charter have as their principal business the direct
or indirect ownership, operation and management of cable television systems. The
address of their principal executive offices (and the business address of the
individuals named below) are the same as that of the Partnership.
Set forth below is the present principal occupation or employment and
employment history of the executive officers and directors of the General
Partner, as of September 1, 1996:
Name Age Position
----------- --- --------
Howard L. Wood 57 President, Chief Executive Officer
and Director
Barry L. Babcock 49 Executive Vice President, Chief
Operating Officer, Secretary and
Director
Jerald L. Kent 39 Executive Vice President, Chief
Financial Officer and Director
Mr. Wood has been President, Chief Executive Officer and Director of
the General Partner since 1994 and holds the position of Chairman of the
Management Committee of Charter. Mr. Wood also co-founded Charter Communications
Group ("CCG") in September 1992. Prior to that time, Mr. Wood was associated
with CCA. Mr. Wood joined CCA in July 1987 as Director; at CCA he held the
positions of President, Chief Financial Officer and Director from January 1,
1989 to November 1992. Mr. Wood has been involved in the cable industry since
1976 when he assisted Robert A. Brooks in financing the building of the cable
television systems of T.C. Industries. Mr. Wood is a board member of First State
Bank and St. Louis Regional Commerce and Growth Association.
Mr. Babcock has been Executive Vice President, Chief Operating Officer
and Director of the General Partner since 1994 and holds the position of
Chairman, Secretary and General Counsel of Charter. Mr. Babcock also co-founded
CCG in 1992. Prior to that time, Mr. Babcock was associated with CCA, where he
served as the Executive Vice President from February 1986 to November 1992, and
as Chief Operating Officer from May 1986 to November 1992. Mr. Babcock served as
Vice President and Director of CCA from the Company's inception in 1982 until
1984 when he was named Senior Vice President. Mr. Babcock's responsibilities
included overseeing the operational and business aspects of all cable television
systems owned and managed by CCA. Mr. Babcock is on the Board of Directors of
Charter. He also serves on the board of Community Telecommunications
Association, is a Director of Cable in the Classroom, and serves on the board of
the St. Louis Civic Entrepreneur's Organization.
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Mr. Kent has been Executive Vice President, Chief Financial Officer
and Director of the General Partner since 1994 and holds the position of
President and Chief Financial Officer of Charter. Mr. Kent also co-founded CCG
in 1992. Prior to that time, he was associated with CCA as Executive Vice
President and Chief Financial Officer. He served at CCA as Senior Vice President
of Finance from May 1987, Senior Vice President of Acquisitions and Finance from
July 1988, and Senior Vice President and Chief Financial Officer from January
1989, and Executive Vice President and Chief Financial Officer from March 1990.
He joined CCA in 1983 as Senior Vice President of Corporate Development, to lead
CCA's acquisition program.
The directors of the general partner of CC II are the same as those of
the General Partner. The executive officers of CCP II are Barry L. Babcock -
Chairman, Jerald L. Kent - President, Howard L. Wood - Chairman of the
Management Committee.
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