<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
and a cluster within the Partnership's Southeast Texas cable systems. Upon
consummation of the various asset sales for which the General Partner has
identified purchasers, unitholders can expect to receive a distribution of
approximately $250 per unit, of which approximately $157 will be attributable to
the sale of the Anderson County system. This distribution amount is conditioned
upon the Partnership making a partial repayment of outstanding debt and
renegotiating its bank credit facility. The General Partner believes this will
enable the Partnership to make quarterly distributions out of available funds.
The proceeds of future asset sales will be used to further reduce indebtedness
and should enable the Partnership to make additional distributions to
unitholders.
As you are probably aware, the Partnership's term expired on December 31,
1995, as provided in the Partnership Agreement. In light of its impending
expiration and the resulting need to liquidate all of its assets, the
Partnership obtained two independent appraisals of the Partnership's cable
television systems, and conducted a competitive auction to attract a larger
number of potential purchasers. In the auction process, the Partnership received
several offers to purchase certain of its cable television systems. No bid was
submitted with respect to all of the systems as a whole; however, attractive
bids were submitted with respect to the Anderson County, South Carolina cable
system and a cluster within the Southeast Texas cable systems, and these bids
have been accepted by the Partnership. A third bid, covering another cluster
within the Southeast Texas cable systems is likely to be accepted by the
Partnership. The General Partner intends to continue to seek buyers at fair
prices for the Partnership's remaining assets in order to complete the
liquidation of the Partnership as quickly as possible, at which time it will
terminate the Partnership and distribute any remaining cash. Until the
Partnership is able to sell all of its assets, however, the General Partner will
continue to operate the Partnership's remaining systems.
For the system located in Anderson County, South Carolina, the auction
process generated several rounds of competitive bids, with the highest bid of
$36,700,000 being submitted by the General Partner on behalf of one of its
affiliates. The $36,700,000 bid exceeds the next highest bid submitted for the
system by $218,000, and exceeds the higher of the two appraisals by $700,000.
The acceptance of that bid by the Partnership has prompted the delivery of this
information package to you. 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.
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 General Partner's recommendation is based on its belief that the
proposed purchase price is fair, from a financial point of view, to the
Partnership and that the proposed sale
<PAGE>
of the Anderson County, South Carolina cable system is 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 potential purchasers and
is generally recognized as a strong indicator of the actual market value of
assets, (ii) the proposed sale price exceeds the appraised value determined by
independent appraisers, (iii) the sale to the affiliate purchaser will not occur
without the approval of the limited partners and (iv) the retention of outside
counsel to monitor compliance by the Partnership with the appraisal process and
other requirements of the Partnership Agreement.
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, Inc.
Howard Wood, President
<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>
(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
|_| Check box if any part of the fee is offset as provided by
Exchange Act Rule 0- 11(a)(2) and identify the filing for which
the offsetting fee was paid previously. Identify the previous
filing by registration statement number, or the form or schedule
and the date of its filing.
(1) Amount previously paid:
(2) Form, schedule or registration statement no.:
(3) Filing Party:
(4) Date filed:
<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 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 for the proposed sale (the
"Transaction") of one of the Partnership's three cable television systems (the
"Anderson County System") to an affiliate of the General Partner (the
"Purchasing Affiliate") as part of the liquidation of the Partnership's assets.
The sale 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 purchase price for the Anderson County System will be $36,700,000,
payable in cash (the "Purchase Price"). The Purchase Price represents the
highest amount bid for the Anderson County System by prospective purchasers
pursuant to a multiple-round auction process initiated by the General Partner
(the "Auction Process") and exceeds the appraised values of the Anderson County
System determined pursuant to appraisals made as of March 31, 1996 by two
independent appraisal firms selected in accordance with the terms of the
Partnership's Amended and Restated Agreement of Limited Partnership dated as of
August 18, 1987 (the "Partnership Agreement"). The Purchase Price also exceeds
by 9.2% the original acquisition price ($33,600,000) of the Anderson County
System.
Assuming the approval and consummation of the sale of the Anderson County
System, the Partnership intends to use the proceeds thereof (net of expenses
relating to the Transaction) to repay a portion of the Partnership's $40,400,000
of senior indebtedness as of March 31, 1996 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 its outstanding senior indebtedness. With the
remaining net proceeds of approximately $15,700,000, the Partnership expects to
use approximately $1,405,000 to pay certain of the Partnership's expenses and
unpaid management fees. Thereafter the Partnership expects to make a
distribution of approximately $157 per limited partnership unit (each $1,000
unit being an "LP Unit") to the limited partners. This distribution would be in
addition to any amounts that might be distributed to the limited partners out of
the proceeds of the liquidation of other assets. If the General Partner's
negotiations with its bank lenders are more favorable than anticipated, a
greater amount of proceeds may 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 Transaction to
pay down indebtedness. See the attached Disclosure Statement for additional
information regarding the use of liquidation proceeds.
The Partnership is required to effect the liquidation of the Partnership's
assets due to the expiration of the Partnership's term on December 31, 1995 in
accordance with the Partnership Agreement. The General Partner initiated the
liquidation process in April 1995 by commencing the Appraisal Process (as
defined in the Partnership Agreement). In October 1995, the General Partner
instituted a procedure to solicit bids for the Partnership's three systems
located in three states (the "Systems"). The sale of the Anderson County System
to the Purchasing Affiliate is to be effected as part of the Partnership's
overall liquidation process. The General Partner will continue to operate the
Partnership during the period required to continue actively marketing the
remaining Systems. After all of the Partnership's assets are sold, the General
Partner will repay the balance of the Partnership's 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.
<PAGE>
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 any such sale, including obtaining the approval of 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 not required
by the Partnership Agreement, as more fully described in the attached Disclosure
Statement, to ensure the fairness of the Transaction to the limited partners.
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.
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.
Theodore W. Browne, II, Secretary
ST. LOUIS, MISSOURI
_______, 1996
2
<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 the proposed sale of one of the Partnership's three cable television systems
(the "Transaction"), which system serves various communities located in and
around Anderson County, South Carolina (as more fully described in this
Disclosure Statement, the "Anderson County System"). The proposed purchaser of
the Anderson County System is Charter Communications II, L.P., a Delaware
limited partnership and an affiliate of the General Partner ("CC II" or the
"Purchasing Affiliate"). 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 is required to liquidate its assets
due to the expiration of its term on December 31, 1995.
The proposed purchase price for the Anderson County System is $36,700,000
(the "Purchase Price"), payable in cash. The Purchase Price is the price that
was bid by the General Partner on behalf of the Purchasing Affiliate 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 by the General Partner (the "Auction Process"); the Purchase
Price exceeds by $218,000 the next highest bid submitted with respect to the
Anderson County System. Additionally, the Purchase Price exceeds the appraised
values (as more fully described below, the "Appraised Values") of the Anderson
County System determined by two independent appraisal firms pursuant to the
appraisal process required by the Partnership Agreement (the "Appraisal
Process"). The Purchase Price also exceeds by 9.2% the original acquisition
price ($33,600,000) of the Anderson County System. See "SPECIAL FACTORS -- The
Appraisal Process; Summary of Appraisals" and "SPECIAL FACTORS -- The Auction
Process."
- --------------------------------------------------------------------------------
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>
Assuming the approval and consummation of the Transaction, the Partnership
intends to use the proceeds thereof (net of related expenses) to repay a portion
of the Partnership's $40,400,000 of senior indebtedness as of March 31, 1996 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 its outstanding senior
indebtedness. With the remaining net proceeds of approximately $15,700,000, the
Partnership expects to use approximately $1,405,000 to pay certain of the
Partnership's expenses and unpaid management fees. Thereafter the Partnership
expects to make a distribution to the Limited Partners equal to approximately
$14,295,000 in the aggregate, or $157 for each $1,000 unit of limited
partnership interest held by the Limited Partner (each, an "LP Unit"). This
distribution would be in addition to any amounts that might be distributed to
the Limited Partners out of the proceeds of the liquidation of other assets. 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
Transaction to pay down indebtedness. The distribution to the Limited Partners
of the remaining net proceeds from the sale of the Anderson County System, if
any, is expected to occur soon after November 30, 1996 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 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 this paragraph, if at all. Further, 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 must
seek alternative buyers for the Anderson County System, which could delay the
sale, and if market conditions at such later date result in a lower sale price,
then there will be less proceeds available for distribution to the Limited
Partners. See "SPECIAL FACTORS -- Recommendation of the General Partner;
Fairness of the Transaction." Therefore, it is very important that all Limited
Partners entitled to participate in the voting do so.
The liquidation of the Partnership was initiated in April 1995 with the
commencement of the Appraisal Process, as required by the Partnership Agreement,
and continued in October 1995 with the solicitation of bids for all of the
Partnership's cable television systems, which are located in three states,
pursuant to the Auction Process. 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" and, together with the Anderson County System and the Southeast Texas
Systems, the "Systems"). As a result of the Auction Process, the General Partner
has accepted bids with respect to the Anderson County System and a cluster
within the Southeast Texas Systems (the "Jasper Cluster"), and is considering a
bid for the purchase of another cluster within the Southeast Texas Systems. The
accepted bids relate to Partnership assets which affect approximately 60% of the
Partnership's basic subscribers as of March 31, 1996. Because the Anderson
County System is being sold to an affiliate of the General Partner, the
Partnership Agreement also requires as a condition to the consummation of the
Transaction the approval (the "Consent") by the affirmative vote of the Limited
Partners holding a majority of the 90,915 LP Units outstanding. The sale of the
Jasper Cluster, which is to an unaffiliated third party, does not require the
Consent of the Limited Partners.
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 have been sold 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
I-2
<PAGE>
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").
The General Partner believes the Transaction to be fair to and in the best
interests of the Partnership and the Limited Partners and, based on the results
of the Auction Process, the Appraisal Process and its knowledge of the cable
television industry, believes that the Purchase Price is fair, from a financial
point of view, to the Partnership. As a result, the General Partner recommends
that you vote in favor of the Transaction. You should note, however, that
because the proposed purchaser in the Transaction is an affiliate 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, the General Partner or any other person.
I-3
<PAGE>
TABLE OF CONTENTS
Page
----
INTRODUCTION ........................................................... 1
SPECIAL FACTORS ........................................................ 1
Timing of the Transaction .......................................... 1
Relevant Partnership Agreement Provisions .......................... 2
The Appraisal Process; Summary of Appraisals ....................... 3
The Auction Process ................................................ 7
Costs of the Transaction ........................................... 9
Certain Effects of the Transaction ................................. 9
Recommendation of the General Partner; Fairness of the Transaction . 11
MATERIAL TERMS OF THE TRANSACTION ...................................... 13
Price .............................................................. 13
The Purchase Agreement ............................................. 13
Conditions to Closing .............................................. 14
Anti-Trust Approvals ............................................... 14
Indemnification .................................................... 14
FEDERAL INCOME TAX CONSEQUENCES ........................................ 15
General ............................................................ 15
Federal ............................................................ 15
SELECTED HISTORICAL FINANCIAL DATA ..................................... 17
SELECTED UNAUDITED PRO FORMA FINANCIAL INFORMATION ..................... 20
CENCOM CABLE INCOME PARTNERS II, L.P.
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS .................... 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS ........................ 24
Results of Operations .............................................. 24
Liquidity and Capital Resources .................................... 27
BUSINESS OF THE PARTNERSHIP ............................................ 29
The Cable Television Industry ...................................... 29
Certain Regulatory and Legislative Developments .................... 29
Description of Systems; Property Relating to Systems ............... 30
Liquidation of Investment in Unconsolidated Limited Partnership .... 32
Marketing, Programming and Rates ................................... 33
Management Agreement ............................................... 34
Franchises ......................................................... 34
Competition ........................................................ 34
Regulation and Legislation ......................................... 36
Employees .......................................................... 43
Other Matters ...................................................... 44
(i)
<PAGE>
CERTAIN INFORMATION ABOUT THE PARTNERSHIP,
THE GENERAL PARTNER AND CERTAIN AFFILIATES ........................... 44
General Information ................................................ 44
The LP Units ....................................................... 45
Principal LP Unitholders ........................................... 45
Certain Rights with Respect to the LP Units ........................ 45
Distributions Per LP Unit Since Partnership Inception .............. 46
Certain Affiliate Transactions ..................................... 46
PLAN OF SOLICITATION ................................................... 47
Voting Rights and Vote Required .................................... 47
Revocability ....................................................... 47
No Appraisal Rights for Dissenters ................................. 48
Solicitation ....................................................... 48
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE .................................. 48
AVAILABLE INFORMATION .................................................. 49
AUDITED FINANCIAL STATEMENTS
Exhibit A -- APPRAISALS
Exhibit B -- FORM OF PURCHASE AGREEMENT
Exhibit C -- FORM OF LEGAL OPINION OF HUSCH & EPPENBERGER
Schedule 1 -- EXECUTIVE OFFICERS, DIRECTORS AND CERTAIN
AFFILIATES OF THE GENERAL PARTNER
(ii)
<PAGE>
SPECIAL FACTORS
Timing of the Transaction
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 between the date of the Partnership's
inception and October 1989 for an aggregate purchase price of $72,035,000.
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 Appraisal Process with respect to all of the Systems owned
by the Partnership in an effort to arrive at a reliable benchmark valuation of
the Systems, thereby enabling it to make informed decisions with respect to the
merits of bids subsequently submitted to it by prospective purchasers of the
Partnership's various Systems. To continue the liquidation of the Partnership,
the General Partner initiated the Auction Process in October 1995 to attract a
wider range of potential purchasers of the Systems and thereby obtain the
maximum available return for the Partnership. See "-- Relevant Partnership
Agreement Provisions" and "-- The Appraisal Process; Summary of Appraisals."
The General Partner did not seek to sell the 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 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 -- Regulation and Legislation."
Notwithstanding the changing regulatory environment and 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 Systems in the Auction Process, the
General Partner believes that certain bids submitted were too low relative to
the respective appraised values 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 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 Systems and the Partnership's other assets in the near
future. As a result of the Auction Process, the General Partner accepted bids
for the Anderson County System and the Jasper Cluster, which bids it believed
and continues to believe to be fair, and rejected other non-cash bids and cash
bids below the appraised value. The General Partner is also currently
considering a bid submitted with respect to another cluster within the Southeast
Texas Systems. 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
<PAGE>
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 Auction Process.
With respect to the Anderson County System, the General Partner has
concluded, based on the proposed Purchase Price, the results of the Auction
Process, and certain other factors discussed herein, that a sale of the Anderson
County System to the Purchasing Affiliate is in the best interests of the
Partnership and the Limited Partners at this time. See "-- The Appraisal
Process" and "-- The Auction Process." Assuming that Consent of the Limited
Partners to the Transaction is obtained, the 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."
Relevant Partnership Agreement Provisions
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 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 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 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 is to determine 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 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 requirements of the Appraisal Process, see "-- The
Appraisal Process; Summary of Appraisals."
Although the Partnership Agreement does not require that an auction be
conducted with a sale of Partnership assets, the General Partner, after
consulting with the independent appraisers, concluded that an auction would
attract more competitive bids for the Systems.
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The Appraisal Process; Summary of Appraisals
The 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 of the fact the transaction involves the
General Partner or an affiliate. The 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 Appraisal Process in April
1995 in contemplation of the possibility that the Appraisal Process would
ultimately be required. Information regarding the appraisals was not
disseminated to unaffiliated third parties during the 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 Auction Process. See "--The
Auction Process." The General Partner also used the appraisals to establish the
minimum price it or any of its affiliates could offer as purchaser of any of the
Systems. In connection with the Transaction, the General Partner has complied
with the Partnership Agreement requirement that the Purchase Price shall exceed
the appraised value of the Anderson County System determined in accordance with
the 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 Systems. 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 Systems and the manner in which such valuations had been
calculated, and jointly determined an appraised value of the Systems in the
aggregate, including the Anderson County System, as of March 31, 1995, in the
amount of $73,850,000 (the "Initial Appraisal").
The instructions and limitations set forth by the General Partner to the
appraisers in connection with the Initial 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 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 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 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 System, 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 Auction Process
culminated in the General Partner having submitted the highest bid for the
Anderson County System. See "-- Relevant Partnership Agreement Provisions" and
"-- The Auction Process." The General Partner instructed the appraisers to give
due consideration to the same factors they had analyzed in conducting the
Initial Appraisal when updating
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the Initial 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 Appraised
Values, as of March 31, 1996, for the Anderson County System of $36,000,000 and
$35,900,000, respectively (the "Bring-Down Appraisal"). In the case of the
Bring-Down 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 Appraisal, both appraisers had
independently arrived at values which were lower than the 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 Appraisal. With the Purchase Price
exceeding the two Appraised Values by $700,000 and $800,000, respectively, the
Transaction satisfies the Partnership Agreement requirement that the Purchase
Price equal or exceed the appraised value.
The full texts of the Daniels and Western appraisals are set forth in
Exhibit A 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 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.
Daniels & Associates, L.P.
Daniels was chosen by the General Partner to appraise the 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 Systems and the Anderson County System for the
compensation specified below, Daniels was retained by the General Partner to
conduct the Auction Process, which included preparing a bid package summarizing
the Systems, identifying potential interested parties and coordinating the
various bids which were submitted during the Auction Process. See "--The Auction
Process." Daniels has previously been engaged to conduct an appraisal of the
assets of Cencom Cable Income Partners, L.P., an affiliate of the Partnership.
In addition, Daniels has recently had another engagement to appraise the fair
market value of other cable systems owned by Cencom Partners, L.P. ("CPLP"), a
Delaware limited partnership in which the Partnership has a majority limited
partnership interest, for compensation equal to approximately $115,000 in the
aggregate.
Summary of Materials Considered. In connection with both the Initial
Appraisal and the Bring-Down 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
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 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
Appraisal, Daniels also made due diligence visits to each of the Systems and
reviewed the
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impact of the 1992 Cable Act and the anticipated effects of the
Telecommunications Act on each System's current and forecasted financial
performance.
Summary of Appraisals. Daniels appraised the 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 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 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 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 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 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
Systems into two groups, consisting of mid-size and small Systems. In its
Initial 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 Systems. In conducting
its Bring-Down Appraisal, Daniels reviewed six transactions 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 Systems are described more fully in Daniels' appraisals, copies of
which are included in Exhibit A.
As a result of its analyses in the Initial 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 Appraisal was substantially similar in method to the Initial
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 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.
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Appraisal Costs. Daniels was paid $100,000 for the Initial Appraisal and
$5,000 for the Bring-Down Appraisal. In the event the Transaction is
consummated, the Partnership will be reimbursed by the Purchasing Affiliate for
$54,700, constituting 49.7% of Daniels' fees related to the Initial Appraisal,
plus all of its fees related to the Bring-Down 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 Systems.
Daniels is continuing to conduct the Auction Process with respect to the
Systems, and the Partnership plans to continue to retain Daniels to broker a
sale of the other Systems and, in the event that the Transaction is not approved
or consummated, the Anderson County System.
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 Appraisal
and the Bring-Down Appraisal, Western reviewed audited and unaudited financial
statements, as well as other data provided by management. In addition, during
the Initial 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 Systems and representative portions of the general
market area. Western did not visit the Anderson County system a second time in
conducting the Bring-Down 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 Systems, reconciling the values resulting
from such analyses to yield a final value.
In conducting a market analysis, Western evaluated the 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
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 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 Systems.
Western's "income" approach was based on forecasts of net revenues and
expenses for the 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 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 Systems.
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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 Systems
using discounted cash flow. It then calculated each of the Systems' values using
direct estimates of the multiples and per-subscriber values it had selected.
In conducting the Bring-Down Appraisal, Western performed substantially
similar analyses with respect to the Anderson County System, instead of all of
the Systems, 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 Appraisal and
$3,000 for the Bring-Down Appraisal. In the event the Transaction is
consummated, the Partnership will be reimbursed by the Purchasing Affiliate for
$8,800, constituting 49.7% of Western's fees related to the Initial Appraisal,
plus all of its fees related to the Bring-Down 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 Systems.
The Auction Process
The Auction Process was commenced in October 1995 upon the determination by
the General Partner that an auction process, although not required by the
Partnership Agreement, would provide a successful and expeditious method for
attracting potential purchasers and liquidating the Systems at prices it
expected to be reflective of the 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 Appraisal
Process, to conduct the 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 Systems and its knowledge of the cable
television industry in the 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 Partnership Agreement Provisions."
Daniels commenced the Auction Process by identifying approximately seventy
potential purchasers for the 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 Systems and information
regarding other cable system operators interested in expanding their operations
in or into the areas served by the 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
Systems. Instructions outlining rules governing procedures for participation in
the 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
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affiliates), the third party bidder could then submit a topping bid within 48
hours. This process is intended to continue until one of the bidders either
declares its intention to exit the bidding process or fails 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 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 Systems pursuant to the 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, a total of six competing bids and a
letter were received from three interested prospective purchasers, including the
General Partner, in regard to the Anderson County System, 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 Auction Process with respect to the Anderson County
System after no bids higher than the Purchase Price were submitted with respect
to the Anderson County System during the 48-hour counter-bid period.
The Auction Process resulted in a Purchase Price of $36,700,000 for the
Anderson County System after three rounds of bidding; the Purchase Price exceeds
by $218,000 the next highest bid received by Daniels for the Anderson County
System. Additionally, the Purchase Price exceeds the Appraised Values of
$35,900,000 and $36,000,000 determined pursuant to the Bring Down-Appraisal as
of March 31, 1996.
Except with respect to the Jasper Cluster and another cluster within of the
Southeast Texas Systems, bids submitted to date with respect to the remaining
Systems are viewed by the General Partner to be too low relative to the fair
market values of such Systems established pursuant to the Appraisal Process.
Accordingly, except with respect to the Jasper Cluster, these bids have not been
accepted by the General Partner, however the General Partner is currently
considering a bid with respect to another cluster within the Southeast Texas
Systems. Although the General Partner intends to liquidate the Partnership as
expeditiously as possible, the General Partner does not believe a sale or sales
of the remaining Systems at this time would be in the best interests of the
Partnership or the Limited Partners. The General Partner intends to continue to
operate the Partnership while it actively seeks purchasers for the remaining
Systems.
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 legal, accounting, appraisal and brokerage fees and expenses related
to the sale of the Anderson County System:
Legal fees and expenses ....................................... $ 450,000*
Accounting fees and expenses .................................. 100,000*
Appraisal fees and expenses ................................... 63,500**
Brokerage fees and expenses ................................... 225,000
Solicitation and other fees and expenses ...................... 20,000
Printing and mailing costs .................................... 125,000
SUBTOTAL ...................................................... $ 983,500
---------
Less fees and expenses to be reimbursed by the
Purchasing Affiliate if the Transaction is approved
and consummated
Appraisal fees and expenses ................................. (63,500)
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Brokerage fees and expenses.................................. (225,000)
---------
TOTAL.......................................................... 695,000
=========
* Includes fees for preparation of this Disclosure Statement.
** Represents appraisal fees attributable to the appraisal of the Anderson
County System, including 49.7% of the aggregate appraisal fees related to
the Initial Appraisal and all of the fees related to the Bring-Down
Appraisal.
All of the above expenses incurred in connection with the Transaction will
be paid by the Partnership except, if the Transaction is consummated, for the
appraisal and brokerage 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 and brokerage 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.
Based on its experience, the General Partner believes the transaction costs
in a third party sale could be expected to be higher due to the third party's
lack of familiarity with the Anderson County System and the probability that a
third party, unlike the Purchasing Affiliate, would likely require substantial
representations and warranties and indemnification from the Partnership in the
contract governing the sale. As noted above, in concluding a third party sale of
the Systems to a non-affiliate, the Partnership would be required to pay the
entire fees of its appraisers and brokers. Additionally, the percentage of
brokerage fees payable to Daniels in a third-party sale would be slightly higher
due to the terms of the brokerage agreement between the Partnership and Daniels,
which terms were designed to encourage Daniels to procure interested third party
purchasers in a further effort to ensure fairness to the Limited Partners.
Certain Effects of the Transaction
Use of Proceeds of the Transaction. The net proceeds from the Transaction
(after payment of expenses relating to the Transaction) will be used, first, to
repay a portion of the Partnership's $40,400,000 of senior indebtedness as of
March 31, 1996, 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. It
is currently anticipated that the Partnership will be required to pay down
approximately $21,000,000 of its senior indebtedness and it is estimated that,
thereafter, the aggregate net cash proceeds from the Transaction which will be
available for distribution by the Partnership to the Limited Partners will be
approximately $14,295,000 (or approximately $157 per LP Unit). 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 Transaction. See "SELECTED UNAUDITED PRO FORMA FINANCIAL
INFORMATION" and "FEDERAL INCOME TAX CONSEQUENCES" below.
Assuming the Consent by the Limited Partners to the Transaction, the
Partnership expects to complete the Transaction and make the catch-up
distributions to the Limited Partners soon after November 30, 1996, following
Consent and the expected receipt of required regulatory approvals, 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.
Provided that the Partnership's Credit Agreement (as defined below) is
renegotiated on favorable terms, then regular quarterly distributions 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.
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The following table sets forth the estimated net proceeds of the
Transaction and the Partnership's anticipated use of the proceeds from the
Transaction. 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:
Contract Sales Price of the Anderson County System .............. $ 36,700,000
Less: Estimated working capital adjustment as of
March 31, 1996 ......................................... (219,000)
Estimated repayment of debt ............................ $(21,000,000)
Estimated transaction expenses (estimated through
consummation of the Transaction) ....................... (695,000)
Estimated payment of deferred management fees, net
of note receivable from General Partner ................ $ (491,000)
Estimated Net Proceeds Available for Distribution to the Partners $ 14,295,000
Limited Partners' Share ...................................... $ 14,295,000
Limited Partners' Share per LP Unit .................... $ 157
General Partner's Share ...................................... $ 0
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 consummated,
the Partnership will have sold Systems representing approximately 45.2% its
basic subscribers and the Limited Partners will have no ownership interest in
the future operations of the Anderson County System.
Failure to Consummate the Transaction. If the Transaction is not
consummated (either due to the fact that the Limited Partners do not approve the
Transaction or because other conditions to closing the 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
subsystems of the Anderson County System or together with other 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 the Purchasing Affiliate
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 Partnership Agreement Provisions."
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 and the Limited Partners. However, because the
proposed purchaser of the Anderson County System is an affiliate of the General
Partner, 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 assets were sold to the Purchasing Affiliate at the
lowest possible price. Despite 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.
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
10
<PAGE>
Purchase Price is fair, from a financial point of view, to the Partnership. 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 Process, including the receipt of several rounds of
competing bids from an unaffiliated potential purchaser, is a reliable indicator
of fair market value;
(ii) the Purchase Price exceeds the Appraised Values of the Anderson County
System, as determined pursuant to the Appraisal Process;
(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, and therefore includes a specified appraisal process; in
addition, special outside counsel has been hired on behalf of the Limited
Partners to monitor compliance with the appraisal process specifications;
(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 and accepted by the Limited Partners prior to their initial
investment in the Partnership; and
(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."
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, 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. There can be no assurance that the liquidation value of the
Anderson County System would have been less than the Appraised Values. The book
value of the Anderson County System is also not relevant for valuation purposes
in light of the valuation requirements of the Appraisal Process.
The General Partner also did not consider historical or current market
prices for the LP 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. 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 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 reinforces the fairness of the transaction. Despite the fact that
the Partnership Agreement did not require it to do so, the General Partner
retained Husch & Eppenberger to act as special outside legal counsel on behalf
of the Limited Partners in connection with the Transaction. Husch & Eppenberger
has over 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
Appraisal Process and the Transaction would be fair to the Limited Partners and
to protect the
11
<PAGE>
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
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 certain meetings
and telephone conferences relating to the Disclosure Statement). As a condition
to the closing of the Transaction, Husch & Eppenberger will provide independent
verification of the propriety of the Transaction by delivering an opinion that
the Appraisal Process, the Partnership's solicitation of Consent and the
Transaction have each been completed in compliance with the Partnership
Agreement. A form of such opinion is attached to this Disclosure Statement as
Exhibit C. The fees of Husch & Eppenberger (totalling approximately $50,000)
will be paid by the Partnership.
In addition to its determination that the terms of the Transaction and the
price offered in such sale 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, assuming consummation of the
Transaction, the Partnership will not be required to pay the appraisal fees or
brokerage fees attributable to the sale of the Anderson County System, which
fees might otherwise be payable in their entirety by the Partnership in a sale
to a third party. See "-- Costs of the Transaction." A sale to an affiliate of
the General Partner also saves the Partnership from having to expend potentially
significant funds in negotiating purchase agreements with one or more potential
purchasers of the Anderson County System. Furthermore, the likelihood that the
Transaction would be concluded on a more expeditious basis than could be
achieved in a sale or sales to independent third party purchasers is, the
General Partner believes, of benefit to the Limited Partners. Lengthy
negotiation periods must also typically be factored into the timing of third
party sales.
Finally, a sale to the Purchasing Affiliate will enable a higher percentage
of sale proceeds of the Transaction to be initially available for distribution
to the Limited Partners because the affiliate purchase will not require a
special indemnification holdback. As evidenced by the terms of the Asset
Purchase Agreement, which is attached as Exhibit B to this Disclosure Statement
(the "Purchase Agreement"), the Partnership is not required to make
representations and warranties regarding the Anderson County System's assets and
operations because the General Partner currently manages the Anderson County
System, and therefore has extensive knowledge as to such assets and the
operation thereof. Consequently, the Partnership will not need to hold in
reserve any portion of the purchase price paid for the Anderson County System 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 Transaction would comply with the
Partnership Agreement and can be completed in a time frame designed to limit the
risks to the Limited Partners. Based on its consideration of the foregoing
factors and the considerations and circumstances described hereunder and under
"-- The Appraisal Process; Summary of Appraisals," on May 30, 1996, the Board of
Directors of the General Partner approved the Transaction unanimously.
Accordingly, the General Partner recommends that the Limited Partners vote to
approve the Transaction.
12
<PAGE>
MATERIAL TERMS OF THE TRANSACTION
Price
Pursuant to the terms of the Partnership Agreement, the aggregate purchase
price in the Transaction must not be less than the Appraised Values (i.e.,
$35,900,000 and $36,000,000). The Purchase Price in the Transaction is
$36,700,000, exceeding the higher of the two Appraised Values by $700,000. The
Purchase Price also exceeds by 9.2% the $33,600,000 original acquisition price
of the Anderson County System.
The Purchase Agreement
The Purchase Agreement was entered into as of May 30, 1996 and contains
representations by the Partnership relating to the organization and standing of
the Partnership, the power and authority of the Partnership to effect the
Transaction and the due authorization and enforceability of the Purchase
Agreement by and against the Partnership. No other representations have been or
will be made by or on behalf of the Partnership in connection with the
Transaction, nor will any proceeds of such sale be reserved by the General
Partner in connection with such purchase. A copy of the Purchase Agreement has
been attached as Exhibit B.
The Purchasing Affiliate intends to seek financing for its purchase of the
Anderson County System, and the Purchase Agreement includes a financing
contingency as a condition to its purchase obligations. The Purchasing Affiliate
intends to borrow the Purchase Price to consummate the acquisition of the
Anderson County System by increasing its existing bank credit facility. The
Purchasing Affiliate has held preliminary discussions with its principal lenders
regarding the proposed terms of its loans, but no definitive commitment or final
term sheet has been agreed upon at this time. The Purchasing Affiliate does 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 Affiliate and its
affiliates have financed and completed the acquisition of cable television
systems valued at approximately $1.5 billion in the aggregate.
The Purchase Agreement includes provisions requiring the Partnership to
indemnify the Purchasing Affiliate 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
which arise in connection with or relate to the Transaction and/or the authority
of the Partnership to enter into and consummate and/or the propriety of such
transactions. Other indemnity obligations of the Partnership are described under
"-- Indemnification," below.
The Transaction will be effected pursuant to the Purchase Agreement and one
or more bills of sale and assignment and assumption agreements. The Purchase
Agreement contains the terms described above as well as the conditions described
under "-- Conditions to Closing" below.
Conditions to Closing
Consummation of the Transaction is subject to certain conditions, including
without limitation, the following material conditions: (i) obtaining regulatory
approvals, including termination of the applicable waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
Act"), and receipt of 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 Transaction; and (iv) receipt of required financing.
13
<PAGE>
All approvals required under subparagraph (i) above 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 Purchase Agreement will be executed
promptly after obtaining the Consent. See "-- Regulatory Approvals" below.
Anti-Trust Approvals
Under the HSR Act and the rules promulgated thereunder by the Federal Trade
Commission (the "FTC"), the 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"). Pursuant to the HSR Act, the Purchasing Affiliate and the
Partnership will file notification and report forms with the FTC and the
Antitrust Division. The General Partner will request early termination of the
waiting period required by the HSR Act on behalf of the Partnership.
At any time before or after the consummation of the Transaction, and
notwithstanding any early termination of the waiting period under the HSR Act by
the relevant regulatory authorities, 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 the Transaction or requiring the divestiture by the
Purchasing Affiliate 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. 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 Transaction, the General Partner expects that
it, as well as its affiliates, will seek to be indemnified by the Partnership
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 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
available for distributions to the Limited Partners by the amount paid to
satisfy such claim.
14
<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 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 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 Transaction and 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 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 $326 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 $231 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 $157 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 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 $444 per LP Unit), and then by reducing this amount
by the charitable contributions, ordinary loss and Code Section 1231 loss
reported on all
15
<PAGE>
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 ............. $ 444
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 ............. $ 192
ESTIMATED TAX BASIS PER LP UNIT (POST TRANSACTION)
Estimated Tax Basis Per LP Unit .................................. $ 192
Estimated Section 1245 Gain ...................................... $ 326
Estimated Section 1231 Gain ...................................... $ 0
------
Estimated Tax Basis Per LP Unit Before Distributions ............. $ 518
Cash Distributions ............................................... $ (157)
Deemed Distribution .............................................. $ (231)
------
Estimated Tax Basis Per LP Unit After Distributions .............. $ 130
======
16
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
The following table sets forth selected financial and statistical data
relating to the Partnership's financial condition since 1991. Such data is
qualified in its entirety by, and should be read in conjunction with, the
unaudited pro forma financial information, information relating to LP Unit
distributions since the Partnership's inception and the detailed information and
financial statements included or referenced elsewhere herein. See "SELECTED
UNAUDITED PRO FORMA FINANCIAL INFORMATION" and "CERTAIN INFORMATION ABOUT THE
PARTNERSHIP, THE GENERAL PARTNER AND CERTAIN AFFILIATES."
17
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
<TABLE>
<CAPTION>
As of and for the Three As of and for the Year Ended
Months Ended March 31, December 31,
------------------------ ------------------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- ---------- ---------- ----------
Statement of Operations Data: (Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Service Revenues ............... $ 4,361,221 $ 4,132,138 $ 17,046,419 $ 16,257,928 $ 16,124,256 $ 15,079,748 $ 13,420,451
Net loss ....................... (247,063) (1,103,521) (2,292,563) (5,256,210) (8,653,943) (13,837,235) (17,083,426)
Net loss per LP Unit ........... (2.69) (12.02) (24.96) (57.24) (94.24) (150.68) (186.03)
Cash distributions per LP Unit . -- -- -- -- 60.00 67.50 87.50
Balance Sheet Data:
Total assets ................... 24,667,759 28,830,570 24,960,260 30,517,928 34,825,726 45,280,200 60,543,940
Long-term obligations, including
current maturities ........... 40,400,000 42,800,000 40,400,000 44,700,000 44,700,000 41,600,000 37,500,000
Partners' (deficit) capital .... (20,627,917) (19,191,812) (20,380,854) (18,088,291) (12,832,081) 1,276,762 21,250,759
Miscellaneous Data:
Ratio of earnings to fixed
charges(1) ..................... -- -- -- -- -- -- --
Book value per LP Unit ......... $ (226.89) $ (211.10) $ (224.17) $ (198.96) $ (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 March 31, 1996 and 1995 and for the years ended December
31, 1995, 1994, 1993, 1992 and 1991 were insufficient to cover the fixed
charges by $247,063, $1,103,521, $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.
18
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
ANDERSON COUNTY SYSTEM
<TABLE>
<CAPTION>
Unaudited
----------------------------------------------------------------------------
As of and for the Three Months
Ended March 31,
------------------------------ As of and for the Year Ended December 31,
1996 1995 1995 1994 1993
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Service Revenues ........................ $ 2,008,959 1,862,514 $ 7,771,085 $ 7,232,403 $ 7,089,098
Operating Expenses ...................... 2,033,594 2,243,942 8,350,509 6,976,828 9,225,826
Net loss ................................ (337,849) (783,899) (2,077,508) (4,178,294) (3,098,843)
Balance Sheet Data:
Property, Plant and Equipment, net ...... 14,845,960 16,196,945 15,326,732 16,587,211 18,262,158
Franchise Costs ......................... 538,833 927,260 589,500 1,274,701 2,929,374
Total assets ............................ 15,572,435 17,238,146 16,071,968 17,963,744 22,145,821
Current Liabilities ..................... 406,262 670,753 758,219 648,798 544,644
</TABLE>
19
<PAGE>
SELECTED UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma balance sheet and related financial
information assumes a sale of the Anderson County System as of March 31, 1996.
Final results may differ from such amounts. The unaudited pro forma balance
sheet and related financial information should be read in conjunction with the
notes thereto.
CENCOM CABLE INCOME PARTNERS II, L.P.
UNAUDITED PRO FORMA BALANCE SHEET
March 31, 1996
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
AS REPORTED ADJUSTMENTS BALANCE
----------- ----------- -------
ASSETS
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,371,075 $ 14,295,000 (a) $ 15,666,075
Accounts receivable, net 177,472 (117,924)(b) 59,548
Prepaid expenses and other 345,153 (69,718)(b) 275,435
------------ ------------ ------------
Total current assets 1,893,700 14,107,358 16,001,058
------------ ------------ ------------
PROPERTY AND EQUIPMENT, net 21,767,659 (14,845,960)(b) 6,921,699
FRANCHISE COSTS, net 1,006,400 (538,833)(b) 467,567
------------ ------------ ------------
Total assets $ 24,667,759 $ (1,277,435) $ 23,390,324
============ ============ ============
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
CURRENT LIABILITIES:
Current maturities of long-term debt $ 40,400,000 $(21,000,000)(c) $ 19,400,000
Accounts payable and accrued expenses 1,880,162 (403,937)(b) 1,476,225
Accrued distributions -- 14,295,000 (d) 14,295,000
Payables to General Partner and affiliate 2,967,215 (950,167)(e) 2,017,048
Subscriber deposits and prepayments 21,171 (2,325)(b) 18,846
------------ ------------ ------------
Total current liabilities 45,268,548 (8,061,429) 37,207,119
------------ ------------ ------------
DEFERRED REVENUE 27,128 -- 27,128
------------ ------------ ------------
PARTNERS' CAPITAL (DEFICIT):
General Partner (2,816,373) 2,816,373 (f) --
Limited Partners (17,352,377) (14,295,000)(d) (13,843,923)
17,803,454 (f)
Note receivable from General Partner (459,167) 459,167 (e) --
------------ ------------ ------------
Total partners' capital (deficit) (20,627,917) 6,783,994 (13,843,923)
------------ ------------ ------------
Total liabilities and partners' capital (deficit) $ 24,667,759 $ (1,277,435) $(23,390,324)
============ ============ ============
</TABLE>
The accompanying notes to unaudited pro forma financial statements
are an integral part of this unaudited pro forma balance sheet.
20
<PAGE>
CENCOM CABLE INCOME PARTNERS II, L.P.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
PRO FORMA PRO FORMA
AS REPORTED ADJUSTMENTS BALANCE
----------- ----------- -------
Service Revenues $ 17,046,419 $ (7,771,085)(g) $ 9,275,334
------------ ------------ ------------
Operating Expenses:
Operating, general and 9,804,576 (4,517,918)(h) 5,286,658
administrative
Depreciation and amortization 6,204,807 (3,832,591)(h) 2,372,216
------------ ------------ ------------
Income from operations 1,037,036 579,424 1,616,460
Other Income (Expense):
Interest income 117,613 (53,526)(i) 64,087
Interest expense (3,447,212) 1,677,165 (j) (1,770,047)
Gain on sale -- 18,838,087 (k) 18,838,087
------------ ------------ ------------
Net income (loss) $ (2,292,563) $ 21,041,150 $ 18,748,587
============ ============ ============
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 QUARTER ENDED MARCH 31, 1996
PRO FORMA PRO FORMA
AS REPORTED ADJUSTMENTS BALANCE
----------- ----------- -------
Service Revenues $ 4,361,221 $(2,008,959)(g) $ 2,352,262
----------- ----------- -----------
Operating Expenses:
Operating, general and 2,523,518 (1,169,240)(h) 1,354,278
administrative
Depreciation and amortization 1,388,735 (864,354)(h) 524,381
----------- ----------- -----------
Income from operations 448,968 24,635 473,603
Other Income (Expense):
Interest income 7,385 (3,323)(i) 4,062
Interest expense (703,416) 365,637 (j) (337,779)
----------- ----------- -----------
Net income (loss) $ (247,063) $ 386,949 $ 139,886
=========== =========== ===========
The accompanying notes to unaudited pro forma financial statements are
an integral part of this unaudited pro forma statement.
21
<PAGE>
CENCOM CABLE INCOME PARTNERS II, L.P.
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 March 31, 1996. The unaudited pro forma statements
of operations assume that the Partnership had sold the Anderson County System as
of January 1, 1995.
The proceeds for distribution to the limited partners recognized from the
sale of the Anderson County System were estimated as of March 31, 1996 and have
been computed as follows:
DISTRIBUTIONS TO PARTNERS:
Contract Sales Price of the Anderson County System ............... $ 36,700,000
Less: Estimated working capital adjustments as of March 31, 1996 . (219,000)
Estimated sale transaction
expenses ............................................... (695,000)
Estimated repayment of
debt ................................................... (21,000,000)
Estimated payment of deferred
management fees, net of note
receivable from General Partner ........................ (491,000)
------------
Estimated net proceeds available for distribution by the
Partnership .................................................... $ 14,295,000
============
Limited Partners' Share
Approximate 11% Preferred Return ................................. $ 14,295,000
General Partner's Share .......................................... $ 0
============
Sale transaction expenses and debt repayment amount were all estimated
through March 31, 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 March 31, 1996
(amounts in thousands):
Estimated payment of deferred management fees as of March 31, 1996 .. $ 950,167
Less: General Partner Note ......................................... $(459,167)
Share of Partnership Distributions .................................. $ 0
---------
TOTAL ............................................................ $(491,000)
=========
22
<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 March 31, 1996:
(a) Cash and cash equivalents
a. Proceeds from the sale of Anderson County System $ 36,700,000
b. Working capital adjustment (219,000)
c. Payment of long-term debt (21,000,000)
d. Payment of deferred management fees (491,000)
e. Payment of transaction costs (695,000)
------------
$ 14,295,000
============
(b) Reflects the disposition of assets and liabilities of the Anderson
County System as of March 31, 1996.
(c) Reflects estimated payment on the outstanding indebtedness under the
Credit Agreement.
(d) Represents estimated distributions to be made to the Limited Partners.
(e) Reflects payment of deferred management fees to the General Partner,
net of the note receivable from the General Partner.
(f) Reflects the allocation of the gain on the sale of the Anderson County
System's net assets, as of March 31, 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
January 1, 1995:
(g) Elimination of historical revenues of the Anderson County System.
(h) Elimination of operating expenses of the Anderson County System, which
includes an allocation of general and administrative expenses and
deferred debt costs incurred by the Partnership on behalf 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.
(i) 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.
(j) 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.
(k) Reflects the excess sale price over the book value of the Anderson
County System's net assets, as of January 1, 1995.
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
General Information
The following table sets forth certain items as a percentage of total
revenues for the periods indicated:
<TABLE>
<CAPTION>
For the Three Months
Ended March 31, For the Year Ended December 31,
--------------------- ----------------------------------
(Unaudited)
1996 1995 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Service Revenues:
Basic Services .................... 73.7% 73.5% 73.9% 73.3% 76.7%
Premium Services .................. 13.0 13.6 13.3 13.9 12.9
Other ............................. 13.3 12.9 12.8 12.8 10.4
----- ----- ----- ----- -----
100.0 100.0 100.0 100.0 100.0
Operating Expenses:
Operating, General and
Administrative .................... 57.9 55.8 57.5 58.8 54.4
Depreciation and Amortization ..... 31.8 49.2 36.4 52.9 54.8
----- ----- ----- ----- -----
89.7 105.0 93.9 111.7 109.2
Income (Loss) from Operations ......... 10.3 (5.0) 6.1 (11.7) (9.2)
----- ----- ----- ----- -----
Interest Income (Expense):
Interest Income ................... 0.1 0.5 0.7 0.3 0.1
Interest Expense .................. (16.1) (22.2) (20.2) (19.4) (13.2)
Equity in loss of unconsolidated
limited partnership ............... -- -- -- (1.5) (31.4)
----- ----- ----- ----- -----
(16.0) (21.7) (19.5) (20.6) (44.5)
----- ----- ----- ----- -----
Net Loss .............................. (5.7)% (26.7)% (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. For a discussion of recent
developments relating to the Partnership's investment in CPLP, see "BUSINESS OF
THE PARTNERSHIP -- Liquidation of Investment in Unconsolidated Limited
Partnership."
Comparison of Three Months Ended March 31, 1996 and Three Months Ended
March 31, 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
Systems. Service revenues increased by 5.5% to $4,361,221 for the three months
ended March 31, 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 Systems.
24
<PAGE>
Basic subscribers at March 31, 1996 increased by 4.6% over March 31, 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 Systems.
In addition, revenue increases through March 31, 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 increased 2.0% from March 31, 1995 to March
31, 1996. The ratio of premium service subscriptions per basic subscriber
decreased from 46.3% at March 31, 1995 to 45.2% at March 31, 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 $217,033 or 9.4% during the three months ended March 31, 1996 when
compared to the similar period of 1995. The majority of this increase,
approximately $119,000, 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.
Depreciation and amortization decreased by 31.8% from $2,034,794 for the
three months ended March 31, 1995, to $1,388,735 for the same period in 1996.
Although the Partnership had increased depreciation as a result of capital
expenditures made to the 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 23.3% from
$916,897 during the first quarter of 1995 to $703,416 for the first quarter of
1996. This decrease was primarily due to the decrease in the average outstanding
debt balance between the comparable quarters and a decrease in the effective
weighted average interest rates between the comparable quarters.
Net Loss. Net loss was reduced by 77.6% from $(1,103,521) to $(247,063) for
the current quarter. 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 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 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
25
<PAGE>
services during the 1992 to 1994 period and the 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 Systems' copyright fees for the carriage of distant signals increased
during the subject periods. Applicable FCC regulations required the Systems to
add local channels on the basic cable service tier, which resulted in certain
channels regularly carried by the 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 improve the 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.
26
<PAGE>
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 Systems
and have since been supplemented with borrowings to finance capital
expenditures.
The Partnership has arranged for a secured revolving line of credit
agreement (the "Credit Agreement") with a consortium 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 did increase 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 Systems. The Partnership
anticipates that capital expenditures for such purposes during 1996 will
approximate $2,400,000; through March 31, 1996, approximately $479,000 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 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
27
<PAGE>
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 shares of the
net loss of CPLP up to the amount of the remaining investment.
28
<PAGE>
BUSINESS OF THE PARTNERSHIP
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 the subscriber 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 FCC's new small cable systems rules amended the FCC's
previous definitions of
29
<PAGE>
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 that involves a five-element calculation
based on a system's costs. The Partnership has applied, or is in the process of
applying, to the FCC for small cable system rate relief with regard to all of
its Systems. See "-- Regulation and Legislation."
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, challenged. 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.
Description of Systems; Property Relating to Systems
Systems
Commencing in December 1987, the Partnership acquired the 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."
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, Angleton, 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. Another cluster within the Southeast Texas Systems
as to which the General Partner is currently considering a bid serves the
communities of Marlin, Madisonville and Buffalo, Texas.
30
<PAGE>
The following table sets forth a summary of subscriber data (rounded to the
nearest hundred) of the Systems for the periods indicated:
<TABLE>
<CAPTION>
For the Three Months For the Year
Ended March 31, Ended December 31,
-------------------- ----------------------------------
1996 1995 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Basic Subscribers:
Southeast Texas Systems ............ 23,000 22,200 22,200 21,800 20,300
Northeast Missouri Systems ......... 2,000 2,100 2,100 2,100 2,200
Anderson County System ............. 20,600 19,300 20,200 19,100 18,100
------ ------ ------ ------ ------
45,600 43,600 44,500 43,000 40,600
====== ====== ====== ====== ======
Premium Subscriptions:
Southeast Texas Systems ............ 8,300 8,700 8,400 7,900 8,700
Northeast Missouri Systems ......... 1,000 1,000 1,000 1,100 1,100
Anderson County System ............. 11,300 10,500 11,100 10,400 8,800
------ ------ ------ ------ ------
20,600 20,200 20,500 19,400 18,600
====== ====== ====== ====== ======
</TABLE>
A brief description of the Systems follows:
The Southeast Texas Systems, Including the Jasper Cluster. The Southeast
Texas Systems provide cable television service to 17 communities located in
eastern and southern Texas. As of March 31, 1996, the Southeast Texas Systems
consisted of 13 headend sites and approximately 720 miles of activated
distribution plant passing approximately 44,800 homes and serving approximately
23,000 basic subscribers, subscribing for approximately 8,300 premium service
units. At March 31, 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 March 31, 1996 were Kingsville and
Angleton, Texas, which accounted for approximately 26% and 19%, respectively, of
the basic subscribers served by the Southeast Texas Systems. As of March 31,
1996, the Jasper Cluster consisted of three headend sites and approximately 240
miles of activated distribution plant passing approximately 10,500 homes and
serving approximately 6,800 basic subscribers, subscribing for approximately
2,100 premium service units. As of March 31, 1996, the Jasper Cluster accounted
for approximately 30% of the basic subscribers served by the Southeast Texas
Systems.
The Northeast Missouri Systems. The Northeast Missouri Systems provide
cable television service to eight communities located in the northeastern
section of Missouri. As of March 31, 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
2,000 basic subscribers, subscribing for approximately 1,000 premium service
units. At March 31, 1996, the Partnership employed three full-time equivalent
persons in connection with the Northeast Missouri Systems. The largest headend
serves Canton and LaGrange, Missouri. As of March 31, 1996, Canton and LaGrange
subscribers accounted for approximately 46% of the subscribers served by the
Northeast Missouri Systems.
The Anderson County System. The Anderson County System provides cable
television service to 11 communities located in South Carolina. As of March 31,
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 20,600 basic and 11,300
premium subscriptions. At March 31, 1996, the Partnership employed 25 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
31
<PAGE>
Counties, which accounted for approximately 47% and 16%, respectively, of the
basic subscribers served by the Anderson County System.
Description of CPLP Cable Television Systems
CPLP, in which the Partnership maintains an unconsolidated limited
partnership investment, owns cable television systems that serve communities in
South Carolina, North Carolina and Texas. As of March 31, 1996, CPLP's cable
television systems consisted of approximately 1,300 miles of activated
distribution plant which passed approximately 63,400 homes and served customers
subscribing to approximately 36,100 basic and 15,900 premium units. CPLP
employed 49 full-time equivalent persons at March 31, 1996.
Properties
Principal physical assets of the Partnership consist of, among other
things, the components of each of the 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. The Partnership owns
the receiving and distribution equipment of each System 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 owns or
leases 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.
The General Partner believes that the Partnership's properties are
generally in good condition and fully utilized. The 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. 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."
Liquidation of Investment in Unconsolidated Limited Partnership
In order to complete the liquidation of the Partnership, the Partnership
must also liquidate its investment in CPLP, a limited partnership in which the
Partnership has an 84.03% limited partnership interest. Although CPLP's
partnership term does not expire until June 30, 2001, CPLP is currently
liquidating its assets through sales of its four cable television systems (i) to
satisfy the requirement of CPLP's senior bank lenders that CPLP permanently
repay its obligations owing under its credit facility by December 31, 1996, and
(ii) to facilitate the liquidation of the Partnership's entire ownership
interest in CPLP. The liquidation of CPLP is being conducted pursuant to an
auction process and an appraisal process substantially similar to those
conducted with respect to the Partnership. See "SPECIAL FACTORS -- The Appraisal
Process; Summary of Appraisals" and "-- The Auction Process." The appraisals of
the CPLP systems were initially conducted as of March 31, 1995. As a result of
CPLP's auction process, CPLP's general partner was the highest bidder with
respect to three of the CPLP systems. The appraisals of those systems were then
updated as of March 31, 1996. CPLP's general partner (who is also an affiliate
of the General Partner) subsequently entered into purchase agreements for these
three CPLP systems, the purchase prices for
32
<PAGE>
which exceed each system's updated appraised value. CPLP has advised the
Partnership that prior to making distributions to its partners (including the
Partnership), CPLP will use the proceeds of any and all asset sales to pay its
outstanding indebtedness, expenses, and other liabilities. Although there can be
no assurance that after such use of proceeds any cash will be available for
distribution to CPLP's partners (including the Partnership), if any such
distributions are made to the Partnership at or around the time the net proceeds
from the Transaction become available, they will be pooled with the
Partnership's sale proceeds from the Transaction; if such proceeds are received
by the Partnership after the distribution from the Transaction, such proceeds
will be applied in a manner similar to that of the proceeds of the Transaction.
Marketing, Programming and Rates
The Partnership's marketing program is based upon offering various packages
of cable services designed to appeal to different market segments. The General
Partner performs and utilizes market research on selected Systems, compares the
data to national research and tailors a marketing program for each individual
market. The General Partner 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
regularly implements marketing efforts instituted by the General Partner 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
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. The Systems also offer 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 March 31, 1996, the Systems' monthly basic fees
ranged from $7.24 to $15.13 for the basic service tier and $12.75 to $19.95 for
the expanded basic service tier. The Anderson County System's monthly basic fees
ranged from $7.24 to $8.89 for basic service tier and $14.20 to $15.77 for the
expanded basic service tier. The monthly basic fees for CPLP's cable television
systems ranged from $6.24 to $11.06 for the basic service tier and $12.74 to
$16.40 for the expanded basic tier. These rates reflect reductions effected 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 regarding rates are consistent
with the current practices in the industry. See "-- Regulation and Legislation"
for a discussion of rate-setting.
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Management Agreement
Prior to July 15, 1994, the 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 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 Systems operate pursuant to an aggregate of 36 non-exclusive
franchises, permits or similar authorizations 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 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, 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. 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.
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 Systems
are located, although other cable operators may operate systems in the vicinity
of the Systems. Cable system operators also compete for the right to construct
systems in
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new housing developments adjoining or otherwise located in proximity to such
operator's existing systems. The Partnership believes 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 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 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 faces some actual
or potential competition from MMDS operators, such competition is not yet
significant. Additionally, the FCC recently initiated a new rulemaking
proceeding in which it proposed to allocate 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.
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 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
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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 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.
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
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"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 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 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 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 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,
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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 the Partnership'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 the
Partnership'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 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 will be.
The uniform rate requirements in the 1992 Cable Act 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.
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"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. Most of the Partnership's Systems do not have the technological capability
to offer programming in the manner required by the 1992 Cable Act and currently
are exempt from complying with the requirement. 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 and certain low power television stations carried by
such systems after October 6, 1993. The validity of mandatory signal carriage
requirements continues to be litigated in the courts; however, the carriage
requirements will remain in effect pending the outcome of such proceedings. As a
result of the mandatory carriage rules, the 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 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. See "-- Franchises" for information
regarding the status of the Systems' franchises.
Other FCC Regulations. The Partnership is 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, there can be no assurance that the FCC would
not find a violation and impose sanctions that could adversely affect the
Partnership's operations.
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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 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 believes that certain subsets of the Systems may qualify as "small
cable systems" under these new rules. The Partnership has applied, or is in the
process of applying, to the FCC for small cable system rate relief with regard
to all of the Partnership's Systems. Such subsets' status as small cable systems
may be challenged by other parties and could be denied by the FCC. As of the
date of this Disclosure Statement, the FCC has not ruled on whether any of such
Systems qualify as small cable systems, although the General Partner believes
that the failure to obtain such qualification would not be reasonably likely to
have a material adverse effect on the Partnership.
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, but such
repeal does not affect the status of any video dialtone service offered before
certain FCC regulations on "open video systems" become effective.
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.
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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 is directed to prescribe 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. The FCC must also adopt 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.
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.
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) 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 will establish a new
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<PAGE>
formula for poles used by cable operators for telecommunications services, which
could result in higher pole rental rates for cable operators. 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 is presently engaged in a
proceeding to establish regulations to implement such 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 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.
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 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
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<PAGE>
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). The Company cannot predict
the outcome of this FCC proceeding or its ultimate effect on the Company.
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 to obtain suitable programming and could substantially increase the
cost of programming that remained available for distribution to the customers of
the Partnership. The General Partner cannot predict the result of such
legislative activity or the effect of such activity on the Partnership'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 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 March 31, 1996, the Partnership employed a total of approximately 67
equivalent full-time employees in the operation of the Systems, 25 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.
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Other Matters
The Partnership owns, operates and invests in cable television systems and
does not engage in any other identifiable industry segments. The Partnership
does not believe that changes of a seasonal nature are material to the cable
television business. The Partnership has not expended material amounts during
the last two fiscal years on research and development activities. As the
Partnership is a service-related organization, little or no raw materials are
utilized by the Partnership. 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 the Partnership's revenues. The Partnership
believes it is not 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 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.
The General Partner and the Purchasing Affiliate 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.
The Purchasing Affiliate. The Purchasing Affiliate, is a Delaware limited
partnership that was formed in June 1994. The Purchasing Affiliate's general
partner is CCP II, Inc. ("CCP II"), a Delaware corporation, whose principal
business is serving as the general partner of the Purchasing Affiliate. 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 Affiliate are the
acquisition, ownership and operation of cable television systems and other cable
television assets. The executive business offices of the Purchasing Affiliate
are located at 12444 Powerscourt Drive, Suite 400, St. Louis, Missouri
63131-3660, and the telephone number is (314) 965-0555.
44
<PAGE>
The Purchasing Affiliate owns other cable television systems in South
Carolina. Like many cable television operators, the Purchasing Affiliate and its
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 by the Purchasing Affiliate is expected to assist the Purchasing
Affiliate in achieving greater economies of scale in the operation of its cable
television systems.
The Purchasing Affiliate 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 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.
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 March 31, 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 March 31, 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 the
Purchasing Affiliate 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 the Purchasing Affiliate, has purchased any LP Units
since January 1, 1993; (iv) neither the General Partner nor, to
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<PAGE>
the best of the General Partner's knowledge, any of the persons listed in
Schedule 1 hereto, nor the Purchasing Affiliate, 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 or an acquisition, a tender offer for
or another acquisition of the securities of 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.
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 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").
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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 -- 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 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 one of its cable
television systems to the Purchasing Affiliate pursuant to an Amended and
Restated Asset Purchase Agreement dated as of April 26, 1996 and two other of
its cable television systems to Charter Communications, L.P., an affiliate of
the Purchasing Affiliate, in both cases 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.
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 non-executive 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
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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 abstain from voting with respect to, the Transaction. The
Partnership Agreement and the Delaware 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
Resolution. 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.
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
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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 Report on Form 10-Q for the
fiscal quarter ended March 31, 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.
49
<PAGE>
CENCOM CABLE INCOME PARTNERS II, L.P.
AUDITED FINANCIAL STATEMENTS
Page
----
FINANCIAL STATEMENTS OF THE ANDERSON COUNTY SYSTEM:
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ............................. F-2
BALANCE SHEETS AT MARCH 31, 1996 (UNAUDITED) AND
DECEMBER 31, 1995 .................................................... F-3
STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED
MARCH 31, 1996 AND 1995 (UNAUDITED), AND FOR THE YEAR
ENDED DECEMBER 31, 1995 .............................................. F-4
STATEMENT OF SYSTEM'S EQUITY FOR THE THREE MONTHS
ENDED MARCH 31, 1996 (UNAUDITED) AND FOR THE YEAR ENDED
DECEMBER 31, 1995 .................................................... F-5
STATEMENT OF CASH FLOWS FOR THE THREE MONTHS ENDED
MARCH 31, 1996 AND 1995 (UNAUDITED), AND FOR THE YEAR
ENDED DECEMBER 31, 1995 .............................................. F-6
NOTES TO FINANCIAL STATEMENTS ........................................ F-7
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
March 31, December 31,
1996 1995
----------- -----------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash $ -- $ --
Accounts receivable, net of allowance for doubtful
accounts of $6,776 and $15,368, respectively 117,924 123,399
Prepaid expenses and other 69,718 32,337
----------- -----------
Total current assets 187,642 155,736
PROPERTY, PLANT AND EQUIPMENT 14,845,960 15,326,732
FRANCHISE COSTS, net of accumulated amortization of
$9,316,917 and $9,266,250, respectively 538,833 589,500
----------- -----------
$15,572,435 $16,071,968
=========== ===========
LIABILITIES AND SYSTEM'S EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 403,937 $ 755,819
Subscriber deposits and prepayments 2,325 2,400
----------- -----------
Total current liabilities 406,262 758,219
----------- -----------
COMMITMENTS AND CONTINGENCIES
SYSTEM'S EQUITY 15,166,173 15,313,749
----------- -----------
$15,572,435 $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
Three Months Ended
March 31 Year Ended
------------------------- December 31,
1996 1995 1995
----------- ----------- ------------
(Unaudited) (Unaudited)
SERVICE REVENUES $ 2,008,959 $ 1,862,514 $ 7,771,085
----------- ----------- -----------
OPERATING EXPENSES:
Operating, general and administrative 1,068,830 1,015,057 4,129,365
Depreciation and amortization 864,354 1,135,761 3,832,591
Management fee - related party 100,410 93,124 388,553
----------- ----------- -----------
2,033,594 2,243,942 8,350,509
----------- ----------- -----------
Loss from operations (24,635) (381,428) (579,424)
----------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest expense (316,537) (412,604) (1,551,310)
Interest income 3,323 10,133 53,226
----------- ----------- -----------
(313,214) (402,471) (1,498,084)
----------- ----------- -----------
Net loss $ (337,849) $ (783,899) $(2,077,508)
=========== =========== ===========
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) 190,273
Net loss (unaudited) (337,849)
------------
BALANCE, March 31, 1996 (unaudited) $ 15,166,173
============
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>
Three Months Ended
March 31 Year Ended
---------------------------- December 31,
1996 1995 1995
----------- ----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (337,849) $ (783,899) $(2,077,508)
Adjustments to reconcile net loss to net cash
provided by operating activities-
Depreciation and amortization 864,354 1,135,761 3,832,591
Changes in assets and liabilities-
Accounts receivable, net 5,475 2,530 (7,979)
Prepaid expenses and other (37,381) (16,881) (48,167)
Accounts payable and accrued expenses (351,882) 21,981 109,544
Subscriber deposits and prepayments (75) (25) (122)
----------- ----------- -----------
Net cash provided by operating activities 142,642 359,467 1,808,359
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (324,331) (373,797) (1,861,230)
Other (8,584) (24,257) (25,681)
----------- ----------- -----------
Net cash used in investing activities (332,915) (398,054) (1,886,911)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in capital account with Parent 190,273 38,587 78,552
----------- ----------- -----------
Net cash provided by financing activities 190,273 38,587 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 March 31, 1996, the related statements of
operations and cash flows for the three months ended March 31, 1996 and 1995,
and the related statement of System's equity for the three months ended March
31, 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 three months ended March 31, 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:
March 31, December 31,
1996 1995
--------- ------------
(Unaudited)
Prepaid programming $ 34,075 $ 21,568
Prepaid pole rental 28,579 --
Other prepaid expenses and current assets 7,064 10,769
-------- --------
$ 69,718 $ 32,337
======== ========
F-9
<PAGE>
3. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consists of the following:
March 31, December 31,
1996 1995
------------ ------------
(Unaudited)
Trunk and distribution systems $ 22,261,953 $ 22,195,466
Subscriber installations 4,944,445 4,855,121
Converters 1,634,672 1,485,483
Land, buildings and headends 2,164,947 2,150,225
Vehicles and equipment 717,329 432,593
Office equipment 182,795 462,923
------------ ------------
31,906,141 31,581,811
Less-Accumulated depreciation (17,060,181) (16,255,079)
------------ ------------
$ 14,845,960 $ 15,326,732
============ ============
4. ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
Accounts payable and accrued expenses consist of the following:
March 31, December 31,
1996 1995
------------ ------------
(Unaudited)
Accounts payable $ 13,034 $ 36,530
Accrued salaries and related benefits 27,130 89,462
Accrued franchise fees 78,881 156,595
Accrued property tax 152,848 357,158
Other 132,044 116,074
-------- --------
$403,937 $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.
F-13
<PAGE>
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 CCIP II's net
loss for financial reporting purposes and net loss for federal income tax
purposes for the year ended December 31, 1995:
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)
===========
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>
EXHIBIT A
APPRAISALS
A-1
<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 Subscribers Equivalent Miles of Number of
March 31, 1995 Passed / Penetration Basic Units Plant Headends
===================================================================================================
<S> <C> <C> <C> <C> <C>
Southeast Texas 39,975 22,172 / 55.5% 22,602 723 13
- ---------------------------------------------------------------------------------------------------
Anderson, South Carolina 27,611 19,336 / 70.0% 19,518 1,044 4
- ---------------------------------------------------------------------------------------------------
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.
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).
===========================================================================
DANIELS & ASSOCIATES
1
<PAGE>
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%
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
===========================================================================
DANIELS & ASSOCIATES
2
<PAGE>
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 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.
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<PAGE>
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.
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
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DANIELS & ASSOCIATES
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<PAGE>
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 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 cable transactions. The respective aggregate fair market values
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<PAGE>
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.
================================================================================
Assumed Capital Structure % of Total Capital Cost of Capital
================================================================================
Debt 60% 8.75%
- --------------------------------------------------------------------------------
Equity 40% 21.00%
- --------------------------------------------------------------------------------
Total Weighted Average 100% 13.65%
================================================================================
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<PAGE>
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
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DANIELS & ASSOCIATES
7
<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 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
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DANIELS & ASSOCIATES
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<PAGE>
$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.
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DANIELS & ASSOCIATES
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<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 Basic Annualized Cash
Number of Homes / Homes Units / Pay Units / Flow for the Three
Systems Headends Mile Passed Penetration Penetration M/E 3/31/96
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Anderson County, SC 1,117 / 4 25 28,376 20,875 / 73.6% 11,274 / 54.0% $3,867,424
- --------------------------------------------------------------------------------------------------------------------
</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 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.
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DANIELS & ASSOCIATES
1
<PAGE>
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, 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
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DANIELS & ASSOCIATES
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<PAGE>
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.
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
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DANIELS & ASSOCIATES
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<PAGE>
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 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.
===========================================================================
DANIELS & ASSOCIATES
4
<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.
<TABLE>
<CAPTION>
==================================================================================================
Discounted Cash Flow Multiple of Two M/E 3/31/96 Value/EBU
Systems Valuation Annualized Cash Flow
==================================================================================================
<S> <C> <C> <C>
Anderson County, South Carolina $35,030,096 9.1x $1,678
==================================================================================================
</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 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
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.
===========================================================================
DANIELS & ASSOCIATES
5
<PAGE>
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, 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
6
<PAGE>
[LOGO] WESTERN CABLESYSTEMS INC
<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 B
PURCHASE AGREEMENT
B-1
<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 ............................................. 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
<PAGE>
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
7.7 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
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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, 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
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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
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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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<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
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<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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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>
EXHIBIT C
FORM OF LEGAL OPINION OF HUSCH & EPPENBERGER
C-1
<PAGE>
[HUSCH & EPPENBERGER]
___________, 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 $36,700,000.00
(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").
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
<PAGE>
Limited Partners of Cencom Cable
Income Partners II, L.P.
_________, 1996
Page 2
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 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 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");
(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.
<PAGE>
Limited Partners of Cencom Cable
Income Partners II, L.P.
_________, 1996
Page 3
Our engagement commenced in August, 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 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 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.
<PAGE>
Limited Partners of Cencom Cable
Income Partners II, L.P.
_________, 1996
Page 4
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.
Sincerely,
HUSCH & EPPENBERGER
By:______________________
Stan Johnston, Partner
<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 July 31, 1996:
Name Age Position
--------- --------- --------------
Howard L. Wood 57 President, Chief Executive Officer
and Director
Barry L. Babcock 49 Executive Vice President, Chief
Operating Officer 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 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.
S-1
<PAGE>
Mr. Kent has been Executive Vice President, Chief Financial Officer and
Director of the General Partner since 1994 and holds the position of President
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 the Purchasing Affiliate 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, Theodore W. Browne, II - Executive Vice President,
General Counsel and Secretary and Jeffrey C. Sanders - Executive Vice President
and Chief Financial Officer.
S-2
