<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:
<TABLE>
<S> <C>
/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
</TABLE>
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 Rules 0-11(c)(1)(ii), 14a-6(i)(1), 14a-6(i)(2) or
Item 22(a)(2) of Schedule 14A.
/ / $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
UNITS OF LIMITED PARTNERSHIP INTEREST (which have been registered
under the Exchange Act), $1,000 PER UNIT
-----------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
90,915 UNITS OF LIMITED
PARTNERSHIP INTEREST
-----------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11: N/A
(4) Proposed maximum aggregate value of transaction: $36,700,000
/X/ Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the form or schedule and the date of its filing.
(1) Amount previously paid: $125.00
(2) Form, schedule or registration statement no.: Schedule 14A
(3) Filing Party: Cencom Cable Income Partners II, L.P.
(4) Date filed: July 5, 1996
<PAGE>
CENCOM CABLE INCOME PARTNERS II, L.P.
12444 POWERSCOURT DRIVE, SUITE 400
ST. LOUIS, MISSOURI 63131-3660
[ ], 1997
To the Limited Partners:
We are pleased to report that the Partnership has commenced liquidating its
assets by contracting to sell its Anderson County, South Carolina cable system.
In addition, as part of the Partnership's liquidation, Cencom Partners, L.P., a
limited partnership in which the Partnership has a majority limited partnership
interest ("CPLP"), has commenced liquidating its assets by contracting to sell
its Abbeville, South Carolina and Sanford and Lincolnton, North Carolina cable
systems. These four cable systems are expected to be sold to affiliates of the
General Partner, and the attached written Disclosure Statement provides
additional information regarding such transaction. In addition, the Partnership
expects to enter into purchase agreements to sell two clusters within the
Partnership's southeast Texas cable systems, each to a different unaffiliated
third party. Upon consummation of the various asset sales for which purchasers
have been identified, and after the Partnership's and CPLP's anticipated
reductions of outstanding debt and in the event the Partnership is able to
renegotiate its bank credit facility, it is anticipated that unitholders will
receive a distribution of approximately $314 per unit before withholdings for
state income taxes, $236 of which is attributable to the affiliate sales, with
the remaining $78 being attributed to the sales of the two clusters in southeast
Texas. An amount equal to $28 per unit of the proceeds from the sales of the
southeast Texas clusters will be held in escrow for a period of one year, after
which time such amount, or such lesser amount as is available after payment of
any contingencies or liabilities resulting from the sales of the southeast Texas
clusters, will be distributed to the unitholders. The General Partner believes
the above-referenced sales, combined with a renegotiation of the Partnership's
bank credit facility, will enable the Partnership to further reduce indebtedness
utilizing cash flow from remaining assets and should enable the Partnership to
make additional special distributions to unitholders out of the proceeds of
future asset sales. Based on an appraisal of all of the assets of the
Partnership and CPLP and on bids actually received by the General Partner and
the general partner of CPLP in January 1996, the General Partner estimates that
the amount of additional distributions which may be made to unitholders from the
future sale of the remaining assets of the Partnership and CPLP will be between
$115 and $170 per unit.
As you are probably aware, the Partnership's term expired on December 31,
1995, as provided in the Partnership Agreement. Because of the Partnership's
resulting need to liquidate all of its assets, including its investment in CPLP,
and because of the additional requirement by CPLP's senior bank lenders that
CPLP repay its outstanding debt, both the Partnership and CPLP began the process
of liquidation. In doing so they obtained two independent appraisals for their
respective cable television systems, and conducted competitive auctions to
attract a larger number of potential purchasers. In the auctions, the
Partnership and CPLP each received at least one offer for each system being
sold, but no bids were received with respect to all of the Partnership's or
CPLP's systems as a whole and certain bids were deemed inadequate by the General
Partner. The auctions did result in multiple rounds of bidding, with the final
bid exceeding the appraised value for the Partnership's Anderson County cable
system and for CPLP's Sanford, Lincolnton and Abbeville cable systems. The bids
for these four systems were submitted to the Partnership by affiliates of the
General Partner and purchase agreements have been executed. In addition, bids
submitted with respect to two clusters within the Partnership's southeast Texas
cable systems have been accepted by the Partnership and purchase agreements have
been entered into with respect to such clusters. The General Partner and the
general partner of CPLP intend to continue to seek buyers at fair prices for the
Partnership's and CPLP's remaining assets in order to complete the liquidation
of the Partnership and CPLP as quickly as possible, at which time the General
Partner will terminate the Partnership and distribute any remaining cash. Until
the Partnership is able to sell all of its assets and liquidate its investment
in CPLP, however, the general partners will continue to operate the
Partnership's and CPLP's remaining systems.
<PAGE>
For the four systems proposed to be sold to affiliates of the General
Partner, the following table sets forth the highest appraised value, the
purchase price offered, the number of subscribers and the purchase price per
subscriber for each such system, and the entity that owns the system:
<TABLE>
<CAPTION>
PURCHASE
BASIC PRICE PER PARTNERSHIP
HIGHEST SUBSCRIBERS SUBSCRIBER THAT OWNS
LOCATION OF SYSTEM APPRAISED VALUE PURCHASE PRICE AT 12/31/96 AT 12/31/96 THE SYSTEM
- -------------------------------------------------- --------------- -------------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Anderson County, South Carolina................... $ 36,000,000 $ 36,700,000 20,800 $ 1,764 CCIP II
Abbeville, South Carolina......................... 4,100,000 4,200,000 2,500 1,680 CPLP
Sanford, North Carolina........................... 20,700,000 20,750,000 12,600 1,647 CPLP
Lincolnton, North Carolina........................ 27,200,000 27,500,000 14,800 1,858 CPLP
</TABLE>
The purchase price in each of the proposed sales described in the table
above has been offered by an affiliate of the General Partner, and, as shown
above, each such offer exceeds the highest appraised value and is also the
highest amount bid for the relevant system in the auctions. Under the
Partnership Agreement, the General Partner or one of its affiliates may purchase
assets from the Partnership only if it obtains the advance approval of the
limited partners to the proposed transaction. Although the CPLP Partnership
Agreement does not require your approval for a sale of assets of CPLP to the
General Partner, the Partnership or any of their affiliates, the General Partner
has decided to afford the limited partners the additional protection of this
right. Therefore, the acceptance by the Partnership and CPLP of bids submitted
by affiliates of the General Partner has prompted the delivery of this
information package to you.
Approval of the proposed sale transaction described in the table above
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.
For the two southeast Texas clusters anticipated to be sold to unaffiliated
third parties, the following table sets forth the estimated appraised value, the
purchase price offered, the number of subscribers and the purchase price per
subscriber for each such cluster and the entity that owns the system in which
such cluster is located:
<TABLE>
<CAPTION>
PURCHASE
HIGHEST BASIC PRICE PER PARTNERSHIP
APPRAISED SUBSCRIBERS SUBSCRIBER THAT OWNS
LOCATION OF CLUSTER VALUE* PURCHASE PRICE AT 12/31/96 AT 12/31/96 THE SYSTEM
- ----------------------------------------------- ----------------- -------------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Jasper, Texas.................................. Not Calculated $ 10,000,000 6,800 $ 1,470 CCIP II
Marlin, Texas.................................. Not Calculated 5,250,000 3,500 1,500 CCIP II
</TABLE>
The Partnership's investment in CPLP was made in accordance with the terms
of its Partnership Agreement covering investments. Because this investment was
an affiliate transaction, it was not negotiated on an arm's-length basis and,
consequently, did not include certain protective provisions, such as requiring
the consent of the Partnership (in its capacity as a limited partner of CPLP) to
certain asset sales by CPLP. However, because the general partner of CPLP is
causing CPLP to obtain appraisals and conduct an auction for the sale of its
systems and the General Partner is giving the limited partners the right to
approve the sale of three of CPLP's systems, the limited partners are being
afforded the same protection with respect to the sale of assets by CPLP as that
to which they are entitled with respect to the sale of assets by the
Partnership. If the sale transaction is not approved and consummated, the
Partnership and CPLP would again be required to seek interested potential
purchasers in the marketplace. However, there can be no assurance that the
prices which could be obtained in a subsequent sale or sales would equal at
- ------------------------
* No appraisals were conducted with respect to individual cable television
systems other than those being sold to affiliates of the Partnership.
2
<PAGE>
least the purchase prices currently being offered for each of the systems. In
the event that the sale transaction is not approved, none of the $314
distribution is likely to be made, as no proceeds will be available from the
affiliate transaction, and any proceeds from the sales of the southeast Texas
clusters otherwise distributable to the limited partners may be required to be
used to reduce the Partnership's indebtedness.
The General Partner's recommendation that holders of limited partnership
units vote in favor of the proposed sale transaction is based on its belief that
the proposed purchase prices are fair, from a financial point of view, to the
Partnership and to the limited partners and that the proposed sales of the
Anderson County and Abbeville, South Carolina cable systems and the Sanford and
Lincolnton, North Carolina cable systems are in the best interests of the
Partnership and the limited partners. In reaching this conclusion, the General
Partner considered several factors, including: (i) the auction processes, which
generated several rounds of competing bids from unaffiliated potential
purchasers and is generally recognized as a strong indicator of the actual
market value of assets, (ii) the proposed sales prices, which exceed the
appraised values determined by independent appraisers, (iii) the fact that sales
to the affiliated purchasers will not occur without the approval of limited
partners holding a majority of the limited partnership units and (iv) the
retention of outside counsel to monitor compliance by the Partnership with the
appraisal process and other requirements of the Partnership Agreement and
compliance by CPLP with similar procedures established for its sale transaction.
If you hold limited partnership units, please fill in the appropriate
blanks, sign and date the enclosed consent form and return it in the envelope
provided for that purpose as promptly as possible, but, in any event, not later
than 10:00 a.m. on [ ], 1997 (or such later date as the General Partner
shall determine). The time perod for voting will be extended by the General
Partner for a period of up to 45 days in the event that a majority of the
Limited partnership units are not voted in favor of the proposed sale
transaction by [ ], 1997. Limited partners who wish to determine
whether the initial deadline has been extended may contact the Partnership's
Investor Relations Department at (313) 965-0555.
If you abstain from voting your abstention will be treated as a vote against
the proposed sale transaction. Properly signed but unmarked consent forms will
be treated as votes in favor of the proposed sale transaction.
Sincerely,
Cencom Properties II, Inc.,
the General Partner
Howard L. Wood, President
3
<PAGE>
CENCOM CABLE INCOME PARTNERS II, L.P.
NOTICE OF WRITTEN VOTE OF THE LIMITED PARTNERS
TO BE RECEIVED BY
[ ], 1997
NOTICE IS HEREBY GIVEN that a vote of the limited partners (the "Limited
Partners") of Cencom Cable Income Partners II, L.P. (the "Partnership") is being
conducted through the mails on behalf of the Partnership by Cencom Properties
II, Inc., the general partner of the Partnership (the "General Partner"). The
purpose of this vote is to obtain the approval of the limited partners of the
sale of four cable systems to affiliates of the General Partner (the "Purchasing
Affiliates"). The transaction has two components: (i) the proposed sale (the
"Partnership Transaction") of one of the Partnership's three cable television
systems and (ii) the proposed sale (the "CPLP Transaction") by Cencom Partners,
L.P., a limited partnership in which the Partnership has a majority limited
partnership interest ("CPLP"), of three of its four cable television systems, in
both cases as part of the liquidation of the Partnership's assets. The
Partnership Transaction and the CPLP Transaction are referred to collectively as
the "Transaction." The Transaction is expected to be consummated in the second
quarter of 1997 following the receipt of the required limited partner approval
and local franchise transfer approvals, as more fully described in the attached
Disclosure Statement. The Disclosure Statement also describes two other sales of
various cable television systems located in Texas (the "Texas Sales") by the
Partnership to unaffiliated third parties, which sales are expected to be
consummated at or about the same time as the Transaction and the proceeds from
which will be available to repay Partnership obligations and to make
distributions to partners. As described in the attached Disclosure Statement,
the aggregate net proceeds of the Transaction and the Texas Sales are
anticipated to be $28.6 million and are expected to result in a distribution in
the second quarter of 1997 of approximately $314 per limited partnership unit
(each, an "LP Unit") before withholdings for state income taxes. Depending on
the date a particular Limited Partner originally purchased LP Units, this
anticipated $314 per LP Unit distribution, when added to historical
distributions ranging between $312 and $395 per LP Unit, will bring the
aggregate distributions per LP Unit to between $626 and $709. In addition,
approximately $28 per LP Unit, or such lesser amount as is available after
payment of any contingencies or liabilities resulting from the Texas Sales, will
be distributed approximately one year after the consummation of the Texas Sales
from the proceeds held back with respect to such sales.
Following the consummation of the Transaction and the Texas Sales, the
Partnership and CPLP will continue to own certain cable television systems in
Texas and Missouri (the "Remaining Assets"). The General Partner estimates,
based on an appraisal of assets of the Partnership and CPLP which included (but
was not limited to) the Remaining Assets and on bids actually received in
January 1996, that the value of the Remaining Assets is approximately $28
million. Based on this estimated value, the General Partner estimates the amount
of additional distributions which may result from the future sale of the
Remaining Assets to be in the range of $115 to $170, depending on amounts
required to be held back by the General Partner as a reserve for contingencies
and liabilities. There can be no assurance that the Remaining Assets can be sold
at prices which will result in the amount of distributions described above, and
at this time, the General Partner cannot estimate the timing of any such
distributions.
The Partnership's term expired on December 31, 1995 in accordance with its
Amended and Restated Agreement of Limited Partnership dated as of August 18,
1987 (the "Partnership Agreement"). Because of the Partnership's resulting need
to liquidate all of its assets, including its investment in CPLP, and because of
the additional requirement by CPLP's senior bank lenders that CPLP repay its
outstanding debt, both the Partnership and CPLP began the process of
liquidation.
Such process was commenced soon after certain affiliates of Charter
Communications, Inc. acquired control over the general partners of the
Partnership and CPLP in mid-1994. After management was able to evaluate the
cable television systems owned by the Partnership and CPLP, the General Partner
and the general partner of CPLP commenced the Appraisal Processes (as defined in
the Disclosure Statement) in April 1995. In October 1995, they instituted a
procedure to solicit bids for the Partnership's and CPLP's cable television
systems. Bids have been accepted for the cable systems proposed to be sold in
the
<PAGE>
Transaction as well as for certain additional systems located in Texas. The
General Partner and the general partner of CPLP intend to continue to seek
buyers at fair prices for the Remaining Assets in order to complete the
liquidation of the Partnership and CPLP as quickly as possible. Until the
liquidation of the Remaining Assets is completed, the Partnership will use
available cash flow to reduce the Partnership's remaining indebtedness. After
all of the Partnership's assets are sold or liquidated, including through the
liquidation of CPLP through the sale of all of CPLP's cable television systems,
the Partnership will repay the balance of its outstanding obligations (including
certain accrued but unpaid management fees, the receipt of which the General
Partner has agreed to defer until the Partnership's outstanding indebtedness is
repaid in full), distribute to the partners (including the General Partner, in
its capacity as holder of 1,746 LP Units) all remaining cash as expeditiously as
possible (subject to a holdback for contingencies) and terminate the
Partnership.
The following table sets forth the highest appraised value, the purchase
price, the number of subscribers and the purchase price per subscriber for each
of the cable television systems proposed to be sold in the Transaction:
<TABLE>
<CAPTION>
BASIC PURCHASE PRICE PARTNERSHIP
HIGHEST SUBSCRIBERS PER SUBSCRIBER THAT OWNS
NAME OF SYSTEM APPRAISED VALUE PURCHASE PRICE AT 12/31/96 AT 12/31/96 THE SYSTEM
- -------------------------------------- --------------- -------------- ----------- --------------- -----------
<S> <C> <C> <C> <C> <C>
Anderson County....................... $36,000,000 $ 36,700,000 20,800 $ 1,764 CCIP II
Abbeville............................. 4,100,000 4,200,000 2,500 1,680 CPLP
Sanford............................... 20,700,000 20,750,000 12,600 1,647 CPLP
Lincolnton............................ 27,200,000 27,500,000 14,800 1,858 CPLP
</TABLE>
In each of the proposed sales included in the Transaction, the purchase
price exceeds the appraised values determined pursuant to appraisals made as of
March 31, 1996 (and updated as of November 30, 1996) by independent appraisal
firms selected pursuant to the Partnership Agreement. Furthermore, the purchase
price offered by the Purchasing Affiliates in each of the proposed sales
included in the Transaction is the highest amount bid for the relevant system
pursuant to the auction processes initiated by the Partnership's and CPLP's
respective general partners (the "Auction Processes"). If the Transaction is not
approved and consummated, the Partnership and CPLP would again be required to
seek interested potential purchasers in the marketplace. However, there can be
no assurance that the prices which could be obtained in a subsequent sale or
sales would at least equal the purchase prices being offered by the Purchasing
Affiliates for each of the systems pursuant to the Transaction.
The following table sets forth certain information concerning the Texas
Sales:
<TABLE>
<CAPTION>
BASIC PURCHASE PRICE PARTNERSHIP
HIGHEST SUBSCRIBERS PER SUBSCRIBER THAT OWNS
NAME OF SYSTEM APPRAISED VALUE* PURCHASE PRICE AT 12/31/96 AT 12/31/96 THE SYSTEM
- ------------------------------------ ----------------- -------------- ----------- --------------- -----------
<S> <C> <C> <C> <C> <C>
Jasper Cluster...................... Not Calculated $ 10,000,000 6,800 $ 1,470 CCIP II
Marlin Cluster...................... Not Calculated $ 5,250,000 3,500 $ 1,500 CCIP II
</TABLE>
- ------------------------
* No appraisals were conducted with respect to individual cable television
systems other than those being sold in connection with the Transaction.
See "BUSINESS OF THE PARTNERSHIP AND CPLP--Description of the Systems;
Property Relating to the Systems" in the attached Disclosure Statement for
additional information regarding the systems being sold pursuant to the Texas
Sales.
Assuming the approval and consummation of the Transaction, the Partnership
intends to use the proceeds of the Partnership Transaction (net of related
expenses) to reduce the Partnership's outstanding senior indebtedness (which
indebtedness totalled $36,700,000 as of December 31, 1996) and to pay certain
Partnership expenses. The General Partner has decided to defer receipt of
accrued management fees that
2
<PAGE>
would otherwise be payable in connection with the Transaction (approximately
$1.2 million as of December 31, 1996) until such time as the Partnership's
outstanding indebtedness is repaid in full. CPLP intends to use the net proceeds
of the CPLP Transaction, first, to pay down its outstanding indebtedness
(including repayment of its senior bank credit facility which was $34,957,500 as
of December 31, 1996), and to pay expenses and other obligations (including
accrued and unpaid management fees owing to its general partner) and,
thereafter, to distribute any remaining proceeds in accordance with its
partnership agreement. It is currently anticipated that approximately
$15,557,047 will be available before withholdings for state income taxes for
distribution to the Limited Partners out of the proceeds of the Partnership
Transaction and approximately $5,921,972 will be available for distribution to
the Partnership (based on its limited partnership interest in CPLP) out of the
proceeds of the CPLP Transaction. With these available proceeds the Partnership
expects to be able to make distributions of approximately $21,479,019 before
withholding of state income taxes, or approximately $236 per LP Unit to the
Limited Partners. The anticipated distribution of $236 does not include a
reserve for contingencies. This distribution will be augmented by additional
anticipated net proceeds of $9,603,115, or approximately $106 per LP Unit,
attributable to the Texas Sales (of which approximately $28 per LP Unit will be
held in a special holdback escrow for a period of one year following the closing
of the Texas Sales), so that the total distribution expected to be made to the
Limited Partners in the second quarter of 1997 will be approximately $314 per LP
Unit before withholdings for state income taxes. The distributions per LP Unit
actually paid to a particular Limited Partner after withholdings for state
income taxes will vary based upon the tax status of each Limited Partner. In
addition, the Limited Partners who do have state income taxes withheld may
qualify to receive a refund for all or a portion of the withholding by filing a
return with the appropriate state. See "FEDERAL AND STATE INCOME TAX
CONSEQUENCES" in the attached Disclosure Statement for additional information as
to withholdings for state income tax.
This anticipated distribution of $314 does not include any additional
amounts that may be distributed to the Limited Partners out of the proceeds of
the liquidation of the Remaining Assets. In connection with the Partnership's
reduction of its senior indebtedness, the General Partner will seek to refinance
the Partnership's bank credit agreement. If the Partnership's negotiations with
its bank lenders are more favorable than anticipated, a greater amount of
proceeds may ultimately be available for distribution by the Partnership.
However, if the negotiations are less favorable than anticipated, the
Partnership may be required to use the entire net proceeds of the Partnership
Transaction to reduce indebtedness. See the attached Disclosure Statement for
additional information regarding the use of liquidation proceeds.
The Partnership Agreement expressly contemplates the possibility of a sale
of assets of the Partnership to the General Partner or its affiliates. The
Partnership Agreement also requires adherence to certain procedures to protect
the interests of the Limited Partners in a sale of Partnership assets to an
affiliated purchaser, including obtaining the approval of the sale by Limited
Partners holding a majority of the Partnership's LP Units. The General Partner
is complying with all such required procedures and will obtain for the Limited
Partners a legal opinion from independent counsel documenting such compliance.
The General Partner also has undertaken certain additional actions to ensure the
fairness of the Transaction to the Limited Partners. Although CPLP's Partnership
Agreement expressly contemplates a sale of assets of CPLP to Cencom Properties,
Inc., the general partner of CPLP, the Partnership or any of their affiliates,
the General Partner is nevertheless soliciting the approval by the Limited
Partners of the CPLP Transaction. Because the Partnership's investment in CPLP
was an affiliate transaction, it was not negotiated on an arm's-length basis
and, consequently, did not include certain protective provisions, such as
requiring the consent of the Partnership (in its capacity as a limited partner
of CPLP) to certain asset sales by CPLP. However, because the general partner of
CPLP caused CPLP to obtain appraisals and conduct an auction for the sale of
CPLP's systems, as well as to obtain a legal opinion from independent counsel
documenting compliance by CPLP with the procedures required by the Partnership
Agreement, and the General Partner is requiring the Limited Partners to approve
the sale of three of CPLP's systems to the Purchasing Affiliates, the Limited
Partners are being afforded the same protections with respect to the CPLP
Transaction as those to which they are entitled with respect to the Partnership
Transaction.
3
<PAGE>
The General Partner believes that the Transaction is fair to the Limited
Partners. See the attached Disclosure Statement for additional disclosure with
respect to the fairness of the Transaction.
Only Limited Partners of record at the close of business on February 28,
1997, 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 ("Consent") of the Transaction by the holders of a majority of
the 90,915 LP Units outstanding.
Please note that in the event the Limited Partners do not Consent to the
Transaction, none of the anticipated $314 distribution to the Limited Partners
is likely to be made, as no proceeds will be available from the Transaction, and
any proceeds from the Texas Sales otherwise distributable to the Limited
Partners may be required to be used to reduce the Partnership's indebtedness.
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 [ ], 1997 (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 [ ], 1997 (or such later date as the General Partner shall
determine). The time period for delivery of a vote in favor of the Transaction,
or for a withdrawl thereof, will be extended by the General Partner for a period
of up to 45 days in the event Consent to the Transaction has not been obtained
by 10:00 A.M. on [ ], 1997. Limited Partners who wish to
determine whether the initial deadline has been extended may contact the
Partnership's Investor Relations Department at (314) 965-0555. Limited Partners
are not entitled to appraisal rights in connection with the Transaction.
YOUR ATTENTION IS DIRECTED TO THE ACCOMPANYING DISCLOSURE STATEMENT, WHICH
CONTAINS FURTHER INFORMATION WITH RESPECT TO THE TRANSACTION.
CENCOM CABLE INCOME PARTNERS II, L.P.
BY ITS GENERAL PARTNER,
CENCOM PROPERTIES II, INC.
Barry L. Babcock, Secretary
ST. LOUIS, MISSOURI
, 1997
4
<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 [ ], 1997
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 [ ], 1997 in connection with the
solicitation by Cencom Properties II, Inc., the general partner of the
Partnership (the "General Partner"), of written consents of the Limited Partners
to (i) the proposed sale (the "Partnership Transaction") by the Partnership of
one of its three cable television systems (the "Partnership Systems"), which
system serves various communities located in and around Anderson County, South
Carolina (the "Anderson County System") and (ii) the proposed sale (the "CPLP
Transaction" and, together with the Partnership Transaction, the "Transaction")
by Cencom Partners, L.P., a Delaware limited partnership in which the
Partnership has a majority limited partnership interest ("CPLP"), of three of
its four cable television systems (the "CPLP Systems"), which three systems
serve the various communities located in and around Abbeville, South Carolina
(the "Abbeville System"), Sanford, North Carolina (the "Sanford System"), and
Lincolnton, North Carolina (the "Lincolnton System," and together with the
Abbeville System and the Sanford System, the "Three CPLP Systems"). The proposed
purchaser of the Anderson County System, the Abbeville System and the Lincolnton
System is Charter Communications II, L.P., a Delaware limited partnership and an
affiliate of the General Partner ("CC II"). The proposed purchaser of the
Sanford System is Charter Communications, L.P., a Delaware limited partnership
and an affiliate of the General Partner ("CC I," and together with CC II, the
"Purchasing Affiliates"). In addition, although the solicitation of written
consents of the Limited Partners is not required in connection with the sales by
the Partnership of Partnership Systems to unaffiliated third parties, this
Disclosure Statement nevertheless describes two such sales (the "Texas Sales")
and the implications for the Limited Partners of the Texas Sales.
In accordance with its Amended and Restated Agreement of Limited Partnership
dated as of August 18, 1987 (the "Partnership Agreement"), the Partnership's
term expired on December 31, 1995. Because of the Partnership's resulting need
to liquidate all of its assets, including its investment in CPLP, and because of
the additional requirement by CPLP's senior bank lenders that CPLP repay its
outstanding debt prior to June 30, 1997, both the Partnership and CPLP began the
process of liquidation. In doing so they each obtained two independent
appraisals for their respective cable television systems and conducted
competitive auctions to attract a larger number of potential purchasers.
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION (THE "COMMISSION") NOR HAS THE COMMISSION PASSED UPON THE
FAIRNESS OR MERITS OF SUCH TRANSACTION NOR UPON THE ACCURACY OR ADEQUACY OF THE
INFORMATION CONTAINED IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS
UNLAWFUL.
I-1
<PAGE>
The following table sets forth certain terms of the Partnership Transaction,
which are described more fully below:
PARTNERSHIP TRANSACTION
<TABLE>
<CAPTION>
PURCHASE
PRICE PARTNERSHIP
HIGHEST BASIC PER THAT
APPRAISED SUBSCRIBERS SUBSCRIBER OWNS THE PROPOSED
NAME OF SYSTEM VALUE PURCHASE PRICE AT 12/31/96 AT 12/31/96 SYSTEM PURCHASER
- ------------------------ ------------- -------------- --------------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Anderson County......... $ 36,000,000 $ 36,700,000 20,800 $ 1,764 CCIP II CC II
</TABLE>
The proposed purchase price for the Anderson County System is $36,700,000
(the "Anderson County System Purchase Price"), payable in cash. The Anderson
County System Purchase Price is the price that was bid by the General Partner on
behalf of CC II after multiple rounds of bidding, and it represents the highest
amount bid for the Anderson County System by all prospective purchasers pursuant
to an auction process initiated in April 1995 by the General Partner (the
"Partnership Auction Process"). The Anderson County System Purchase Price
exceeds by $218,000 the next highest bid submitted with respect to the Anderson
County System. Additionally, the Anderson County System Purchase Price exceeds
the appraised values (as more fully described below, the "Anderson County System
Appraised Values") of the Anderson County System determined by two independent
appraisal firms pursuant to the appraisal process required by the Partnership
Agreement (the "Partnership Appraisal Process"). See "SPECIAL FACTORS--The
Appraisal Processes; Summary of Appraisals" and "SPECIAL FACTORS--The Auction
Processes."
Substantially concurrently with the sale by the Partnership of the Anderson
County System, CPLP is selling three of its four cable television systems. See
"SPECIAL FACTORS--Timing of the Transaction." The following table sets forth
certain terms of the CPLP Transaction, which are described more fully below:
CPLP TRANSACTION
<TABLE>
<CAPTION>
BASIC PURCHASE PRICE PARTNERSHIP
HIGHEST APPRAISED SUBSCRIBERS PER SUBSCRIBER THAT PROPOSED
NAME OF SYSTEM VALUE PURCHASE PRICE AT 12/31/96 AT 12/31/96 OWNS THE SYSTEM PURCHASER
- ------------------- ----------------- -------------- ----------- --------------- ----------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Abbeville.......... $ 4,100,000 $ 4,200,000 2,500 $ 1,680 CPLP CC II
Sanford............ 20,700,000 20,750,000 12,600 1,647 CPLP CC I
Lincolnton......... 27,200,000 27,500,000 14,800 1,858 CPLP CC II
</TABLE>
The proposed purchase price for the Three CPLP Systems will be $52,450,000
(the "Three CPLP Systems Purchase Price"), payable in cash, as to which a
refundable advance of $500,000 was previously paid by CC II. The Three CPLP
Systems Purchase Price is the sum of the prices that were offered for each of
the Abbeville System (the "Abbeville System Purchase Price"), the Sanford System
(the "Sanford System Purchase Price") and the Lincolnton System (the "Lincolnton
System Purchase Price") by the general partner of CPLP on behalf of the
Purchasing Affiliates. Each of these prices reflects the highest amounts offered
for the relevant CPLP System by all bidders in the auction process initiated in
April 1995 by the general partner of CPLP (the "CPLP Auction Process"). However,
in the case of the Lincolnton System, neither the general partner of CPLP nor
the Purchasing Affiliates participated in the CPLP Auction Process, but instead
CC II "stepped into the shoes" of an unaffiliated third-party bidder who had
offered the highest amount for the Lincolnton System, but whose bid letter
expired after 30 days pursuant to its terms because the parties were unable to
agree on the terms of an all-cash transaction (see "SPECIAL FACTORS--Timing of
the Transaction"). The purchase price for the Three CPLP Systems in the
aggregate exceeds by $1,125,000 the aggregate of the next highest bids submitted
with respect to the
I-2
<PAGE>
Three CPLP Systems. Each of the Abbeville System Purchase Price, the Sanford
System Purchase Price and the Lincolnton System Purchase Price exceeds the
appraised values of the respective system as determined by two independent
appraisal firms pursuant to the appraisal process (the "CPLP Appraisal
Process"). See "SPECIAL FACTORS--The Appraisal Processes; Summary of Appraisals"
and "SPECIAL FACTORS--The Auction Processes."
Assuming approval and consummation of the Transaction, the Partnership
intends to use the $36,700,000 proceeds of the Partnership Transaction (net of
related expenses) to reduce the Partnership's senior indebtedness outstanding
and to pay certain Partnership expenses. In connection with the reduction of the
Partnership's senior indebtedness, the General Partner will seek to refinance
the Partnership's bank credit agreement. The portion of the debt which will
remain outstanding will depend on the Partnership's ability to obtain
refinancing. The General Partner currently anticipates that it will be required
to reduce by approximately $19,800,000 the Partnership's outstanding senior
indebtedness (which indebtedness totalled $36,700,000 as of December 31, 1996).
Of the remaining net proceeds (less a customary working capital adjustment) of
approximately $16,067,047, the Partnership expects to use approximately $712,000
to pay certain of the Partnership's expenses (none of which expenses include the
General Partner's management fees, as receipt of such fees has presently been
deferred by the General Partner), and to distribute the remaining proceeds to
the Limited Partners. As to any amounts distributed to the Limited Partners, the
Partnership will also be required to withhold an amount related to certain state
income taxes. See "FEDERAL AND STATE INCOME TAX CONSEQUENCES" for further
discussion as to withholdings for state income tax.
CPLP intends to use the net proceeds of the CPLP Transaction to repay its
entire outstanding indebtedness under its senior bank credit facility of
approximately $34,957,500 as of December 31, 1996. With the remaining net
proceeds (less a customary working capital adjustment) of approximately
$16,245,616, CPLP expects to use approximately $3,694,163 to pay certain of
CPLP's expenses and accrued but unpaid management fees and, thereafter, to
distribute any remaining proceeds in accordance with the terms of its Amended
and Restated Agreement of Limited Partnership dated as of June 29, 1990 (the
"CPLP Partnership Agreement"). The $500,000 previously paid by CC II is included
as a component of working capital. As of December 31, 1996, CPLP's special
limited partner is entitled to receive a preferred return in the amount of
$5,765,303 prior to the distribution of the remaining proceeds to CPLP's other
limited partners (including the Partnership) as more fully described below. It
is currently anticipated that approximately $5,921,972 will be available for
distribution to the Partnership based on the Partnership's 84.03% limited
partnership interest in CPLP (the "CPLP Distribution"). Both the special limited
partnership distribution and the remaining 14.46% limited partnership interest
will be paid to Charter Communications, Inc., which purchased these interests in
January 1995 from an affiliate of HC Crown Corp., as more fully described in
"SPECIAL FACTORS--Background," below.
As a result of the Partnership Transaction and the CPLP Distribution, and
assuming the Partnership's successful renegotiation of its credit facilities on
the terms described herein, the Partnership expects to make a distribution to
the Limited Partners of the aggregate remaining proceeds of the Transaction
(including the CPLP Distribution) equal to approximately $21,479,019 in the
aggregate before withholdings for state income taxes, or an average of $236 for
each $1,000 unit of limited partnership interest held by the Limited Partners
(each, an "LP Unit"). This distribution of $236 is estimated based on pro forma
financial information as of December 31, 1996, and assumes a preferred return
(the "SLP Preferred Return") to be paid on the special limited partnership units
of CPLP (the "SLP Units") as of that date of $5,765,303. Each fiscal quarter
that such SLP Units remain outstanding, additional SLP Preferred Return accrues
at an annual rate of 18% on the compounded amount represented by such SLP Units
(the SLP Preferred Return for the quarter ended March 31, 1997 approximates
$260,000). This SLP Preferred Return may result in a reduction of the CPLP
Distribution, and, indirectly, a reduction of the distribution to the Limited
Partners, depending on the amount of free cash flow (net loss plus depreciation
and amortization expense, less capital expenditures) generated during the period
in question. For example, the SLP Preferred Return for the quarter ended
December 31, 1996 was approximately $250,000; however,
I-3
<PAGE>
free cash flow generated during the same period was approximately $300,000,
thereby offsetting to some extent the reductions that would otherwise result
from the SLP Preferred Return. In addition, actual distributions per LP Unit
after withholdings for state income taxes will vary based upon the tax status of
each Limited Partner. However, Limited Partners who have state income taxes
withheld may receive a refund for all or a portion of the withholding by filing
a return with the appropriate state. See "FEDERAL AND STATE INCOME TAX
CONSEQUENCES" for additional information as to specific state income tax
withholdings. This distribution will be augmented by additional anticipated net
proceeds of $9,603,115, or approximately $106 per LP Unit, attributable to the
Texas Sales (of which approximately $28 per LP Unit will be held in a special
holdback escrow for a period of one year following the closing of the Texas
Sales), so that the total distribution expected to be made to the Limited
Partners in the second quarter of 1997 will be approximately $314 per LP Unit
before withholdings for state income taxes. The distribution to the Limited
Partners of the remaining net proceeds from the Transaction and the Texas Sales
is expected to occur in the second quarter of 1997, as soon as practicable after
the Transaction and the Texas Sales close, assuming the Limited Partners approve
the Transaction (as described more fully below). The Limited 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 AND STATE INCOME TAX CONSEQUENCES," below for further discussion of the
federal and state income tax consequences of the Transaction.
Although the General Partner believes the distribution estimates are based
on reasonable, good faith calculations, there can be no assurance that actual
distributions following the conclusion of the Transaction will be made in the
amounts set forth in the preceding paragraph, if at all. If the General
Partner's negotiations with its bank lenders are more favorable than
anticipated, a greater aggregate amount may be available for distribution by the
Partnership. However, if the negotiations are less favorable than anticipated
and the Partnership is unable to obtain refinancing of its outstanding
indebtedness, the Partnership may be required to use up to the entire net
proceeds of the Partnership Transaction and certain of the proceeds from the
CPLP Transaction to pay down indebtedness. Furthermore, the Partnership will not
be able to make any of the estimated distributions unless the Transaction is
approved and consummated. If the Transaction is not approved, then the General
Partner and the general partner of CPLP would be obligated to seek alternative
buyers for the four systems, which could delay their sale. If market conditions
at such later date were to result in a lower sale price, there would be less
proceeds available for distribution to the Limited Partners. There can be no
assurance that the prices which could be obtained in a subsequent sale or sales
would be equal to or greater than the purchase price being offered by the
Purchasing Affiliates for each of the cable systems proposed to be sold in the
Transaction. Additionally, a delay in the sale of the four systems may
necessitate an extension of the Partnership's and CPLP's bank credit facilities,
which extension, if obtainable, may result in substantial fees being charged to
the Partnership and CPLP. 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.
In addition to the Anderson County System, the Partnership has cable
television systems located throughout southeast Texas (the "Southeast Texas
Systems") and northeast Missouri (the "Northeast Missouri Systems"). As a result
of the Partnership Auction Process, in addition to the Anderson County System,
the General Partner has accepted bids and negotiated final agreements to sell
two clusters within the Southeast Texas Systems: the first serves the
communities of Cleveland, Jasper and Woodville, Texas (the "Jasper Cluster");
and the second serves the communities of Marlin, Madisonville and Buffalo, Texas
(the "Marlin Cluster" and, together with the Jasper Cluster, the "Texas
Clusters"). For additional information regarding these and other bids submitted
with respect to the Southeast Texas Systems, see "-- The Auction Processes,"
below. The sales of the Texas Clusters (the "Texas Sales") are expected to be
consummated at or about the same time as the Transaction is consummated and the
distributable proceeds from the Texas Sales are expected to be combined with the
distributable proceeds from the Transaction. It is currently anticipated that
approximately $106 will be distributable to the Limited Partners from the
proceeds of the Texas Sales after payment of related sales expenses (of which
approximately $28 per LP
I-4
<PAGE>
Unit will be held back for contingencies related to the Texas Sales). This
holdback will be held in escrow for one year, after which time any remaining
amounts not used towards contingencies or liabilities will be distributed to the
Limited Partners. Hence, the total distribution anticipated to be made in the
second quarter of 1997 to the Limited Partners from the proceeds of the
Transaction and the Texas Sales is expected to amount to approximately $314 per
LP Unit (which excludes the proceeds related to the holdback).
The following table sets forth certain information concerning the Texas
Sales:
TEXAS SALES
<TABLE>
<CAPTION>
HIGHEST BASIC PURCHASE PRICE PARTNERSHIP
APPRAISED SUBSCRIBERS PER SUBSCRIBER THAT OWNS
NAME OF SYSTEM VALUE* PURCHASE PRICE AT 12/31/96 AT 12/31/96 THE SYSTEM
- ------------------------------- ----------------- -------------- ----------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
Jasper Cluster................. Not Calculated $ 10,000,000 6,800 $ 1,470 CCIP II
Marlin Cluster................. Not Calculated $ 5,250,000 3,500 $ 1,500 CCIP II
</TABLE>
See "BUSINESS OF THE PARTNERSHIP AND CPLP--Description of the Systems;
Property Relating to the Systems" in the attached Disclosure Statement for
additional information regarding the systems being sold pursuant to the Texas
Sales.
All accepted bids with respect to the Partnership Systems--the Anderson
County System and the Texas Clusters--comprise Partnership assets which affect
approximately 69% of the Partnership's basic subscribers as of December 31,
1996. With respect to CPLP, the accepted bids relate to assets affecting
approximately 83% of the CPLP systems' basic subscribers. Negotiations for the
sale of the remaining CPLP System in LaGrange, Texas (the "LaGrange System"),
had been conducted with a purchaser unaffiliated with the Partnership, CPLP and
the General Partner; however, such negotiations have terminated.
It is the General Partner's and the general partner of CPLP's intention to
sell the Partnership's and CPLP's cable television systems in Texas and Missouri
(the "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 Assets, including the Partnership's
investment in CPLP, have been sold or liquidated for cash, the General Partner
intends to repay the balance of the Partnership's outstanding obligations,
expenses and other liabilities and distribute any remaining cash (subject to a
holdback for contingencies) to the Limited Partners of the Partnership, 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"). Based on an appraisal of assets of the Partnership which included (but
was not limited to) the Remaining Assets and on bids actually received in
January 1996, the General Partner believes that the Remaining Assets have a
value of approximately $28 million, which, net of expenses related to a sale
thereof, would enable the Partnership to pay off additional debt and make an
additional distribution to the Limited Partners which the General Partner
estimates to be from $115 to $170 per LP Unit, depending on the amount which may
be required for any contingencies or liabilities related to the liquidation of
the Partnership and CPLP. However, this estimated value is not necessarily
indicative of the amounts which may actually be received for the Remaining
Assets at a future date.
Because the Anderson County System is being sold to an affiliate of the
General Partner, the Partnership Agreement requires as a condition to the
consummation of the Partnership Transaction the approval (the "Consent") by the
affirmative vote of the Limited Partners holding a majority of the 90,915 LP
Units outstanding.
- ------------------------
* No appraisals were conducted with respect to individual cable television
systems other than those being sold in connection with the Transaction.
I-5
<PAGE>
In addition to seeking the approval of the Limited Partners for the sale of
the Anderson County System to CC II, and although not required by the CPLP
Partnership Agreement or the Partnership Agreement, the General Partner is also
seeking the approval of the Limited Partners to the CPLP Transaction. Because
the Partnership's investment in CPLP was an affiliate transaction, it was not
negotiated on an arm's-length basis and, consequently, did not include certain
protective provisions, such as requiring the consent of the Partnership (in its
capacity as a limited partner of CPLP) to certain asset sales by CPLP. However,
because the general partner of CPLP caused CPLP to obtain appraisals and conduct
an auction for the sale of the CPLP Systems, as well as to obtain a legal
opinion from independent counsel documenting compliance by CPLP with the
procedures required by the Partnership Agreement, and the General Partner is
requiring the Limited Partners to approve the sales of the Three CPLP Systems to
the Purchasing Affiliates, the Limited Partners are being afforded the same
protections with respect to the CPLP Transaction as those to which they are
entitled with respect to the Partnership Transaction. The sale of the Three CPLP
Systems to the Purchasing Affiliates will not occur unless the Consent of the
Limited Partners is obtained.
In the event the Limited Partners do not Consent to the Transaction, none of
the $314 distribution to the Limited Partners is likely to be made, as no
proceeds will be available from the Transaction, and any proceeds from the Texas
Sales otherwise distributable to the Limited Partners may be required to be used
to reduce the Partnership's indebtedness.
The General Partner believes the Transaction to be fair to and in the best
interests of the Partnership, CPLP and the Limited Partners and, based on the
results of the Partnership Auction Process and the CPLP Auction Process
(collectively, the "Auction Processes") and the Partnership Appraisal Process
and the CPLP Appraisal Process (collectively, the "Appraisal Processes"), and
its knowledge of the cable television industry, the General Partner believes
that each of the Anderson County System Purchase Price and the Three CPLP
Systems Purchase Price is fair, from a financial point of view, to the
Partnership and to CPLP, respectively. As a result, the General Partner
recommends that you vote in favor of the Transaction. You should note, however,
that because the proposed purchasers in the Transaction are affiliates of the
General Partner, the General Partner's recommendation with respect to the
Transaction is subject to a direct conflict of interest.
THIS DISCLOSURE STATEMENT CONTAINS ADDITIONAL INFORMATION WITH RESPECT TO
THE TRANSACTION. ACCORDINGLY, LIMITED PARTNERS ARE URGED TO REVIEW CAREFULLY
THIS DISCLOSURE STATEMENT. PLEASE RETURN YOUR CONSENT FORMS IN THE ENVELOPE
PROVIDED NO LATER THAN 10:00 A.M. ON [ ], 1997 (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 [ ], 1997 (OR SUCH LATER DATE AS THE
GENERAL PARTNER SHALL DETERMINE). THE TIME PERIOD FOR DELIVERY OR REVOCATION OF
CONSENT FORMS WILL BE EXTENDED BY THE GENERAL PARTNER FOR A PERIOD OF UP TO 45
DAYS IN THE EVENT THAT CONSENT TO THE TRANSACTION HAS NOT BEEN OBTAINED BY 10:00
A.M. ON [ ], 1997. LIMITED PARTNERS WHO WISH TO DETERMINE WHETHER
THE INITIAL DEADLINE HAS BEEN EXTENDED MAY CONTACT THE PARTNERSHIP'S INVESTOR
RELATIONS DEPARTMENT AT (314) 965-0555. LIMITED PARTNERS ARE NOT ENTITLED TO
APPRAISAL RIGHTS IN CONNECTION WITH THE TRANSACTION.
No persons have been authorized to give any information or to make any
representation other than the representations contained in this Disclosure
Statement in connection with the solicitation of votes made hereby and, if given
or made, such information or representation must not be relied upon as having
been authorized by the Partnership, CPLP, the General Partner or any other
person.
I-6
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
INTRODUCTION............................................................................................... I-1
SPECIAL FACTORS............................................................................................ 1
Background............................................................................................... 1
Timing of the Transaction................................................................................ 2
Relevant Provisions...................................................................................... 5
The Appraisal Processes; Summary of Appraisals........................................................... 7
The Auction Processes.................................................................................... 16
Costs of the Transaction................................................................................. 18
Certain Effects of the Transaction and the Texas Sales................................................... 19
Failure to Consummate the Transaction.................................................................... 23
Recommendation of the General Partner; Fairness of the Transaction....................................... 23
MATERIAL TERMS OF THE TRANSACTION.......................................................................... 27
Prices................................................................................................... 27
The Purchase Agreements.................................................................................. 27
Conditions to Closing.................................................................................... 28
Antitrust Approvals...................................................................................... 28
Indemnification.......................................................................................... 29
FEDERAL AND STATE INCOME TAX CONSEQUENCES.................................................................. 30
General.................................................................................................. 30
Federal.................................................................................................. 30
State.................................................................................................... 31
SELECTED HISTORICAL FINANCIAL DATA......................................................................... 34
SELECTED UNAUDITED PRO FORMA FINANCIAL INFORMATION--THE PARTNERSHIP........................................ 38
NOTES TO UNAUDITED PRO FORMA FINANCIAL INFORMATION--THE PARTNERSHIP........................................ 40
SELECTED UNAUDITED PRO FORMA FINANCIAL INFORMATION--CPLP................................................... 42
NOTES TO UNAUDITED PRO FORMA FINANCIAL INFORMATION--CPLP................................................... 44
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...................... 46
Results of Operations--The Partnership................................................................... 46
Liquidity and Capital Resources--The Partnership......................................................... 48
Results of Operations--CPLP.............................................................................. 49
Liquidity and Capital Resources--CPLP.................................................................... 51
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
BUSINESS OF THE PARTNERSHIP AND CPLP....................................................................... 52
The Cable Television Industry............................................................................ 52
Certain Regulatory and Legislative Developments.......................................................... 52
Description of Systems; Property Relating to Systems..................................................... 53
Marketing, Programming and Rates......................................................................... 56
Management Agreement..................................................................................... 57
Franchises............................................................................................... 58
Competition.............................................................................................. 58
Regulation and Legislation............................................................................... 60
Employees................................................................................................ 68
Other Matters............................................................................................ 68
CERTAIN INFORMATION ABOUT THE PARTNERSHIP, CPLP, THE GENERAL PARTNER, CPI AND CERTAIN AFFILIATES........... 69
General Information...................................................................................... 69
The LP Units............................................................................................. 70
Principal Unitholders.................................................................................... 70
Certain Rights with Respect to the LP Units.............................................................. 70
Tender Offers............................................................................................ 71
Distributions Per LP Unit Since Partnership Inception.................................................... 72
Certain Affiliate Transactions........................................................................... 73
PLAN OF SOLICITATION....................................................................................... 75
Voting Rights and Vote Required.......................................................................... 75
Revocability............................................................................................. 75
No Appraisal Rights for Dissenters....................................................................... 75
Solicitation............................................................................................. 76
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE....................... 76
AVAILABLE INFORMATION...................................................................................... 76
INDEX TO FINANCIAL STATEMENTS.............................................................................. F-1
</TABLE>
EXHIBITS AND SCHEDULE
Exhibit A-1--APPRAISALS OF THE PARTNERSHIP SYSTEMS
Exhibit A-2--APPRAISALS OF THE CPLP SYSTEMS
Exhibit B--FORM OF LEGAL OPINIONS OF HUSCH & EPPENBERGER
Exhibit C--PURCHASE AGREEMENTS
Schedule 1-- EXECUTIVE OFFICERS, DIRECTORS AND CERTAIN AFFILIATES OF THE
GENERAL PARTNER
ii
<PAGE>
SPECIAL FACTORS
BACKGROUND
The Partnership was formed in August 1987 to acquire, develop, operate,
invest in and ultimately sell cable television systems serving communities in
the United States, its territories and possessions. The primary business
activities engaged in by the Partnership are the ownership and operation of
cable television systems located in South Carolina, Texas and Missouri, which
systems were acquired from unaffiliated parties in a series of transactions
between the date of the Partnership's inception and October 1989 for an
aggregate purchase price of $72,035,000. In furtherance of its purpose to invest
in cable television systems, the Partnership in 1990 invested an aggregate of
$25,000,000 to acquire a limited partnership interest in CPLP.
CPLP is a Delaware limited partnership that was formed in 1990 for the
purpose of owning and operating cable television systems, and currently operates
systems in North Carolina, South Carolina and Texas. CPLP's general partner,
Cencom Partners, Inc. ("CPI"), is an affiliate of the General Partner, as both
corporate general partners have always been directly or indirectly wholly owned
by the same entity. The ownership and senior management of the two general
partners changed in November 1991 when the original owner (Cencom Cable
Associates, Inc., or "CCA") was sold to an affiliate of HC Crown Corp.
("Crown"). Such ownership changed again in mid-1994 and early 1995, when Crown's
various partnership interests, including its interest in both general partners,
were sold to Charter Communications, Inc. ("Charter") as part of a larger
transaction (the "Crown Acquisition").
CPLP was funded in January 1990 with an initial equity investment by the
Partnership of $4,000,000, and a subsequent equity investment in June 1990 of
$21,000,000, in exchange for which the Partnership was issued an 84.03% limited
partnership interest in CPLP. The remaining 14.46% limited partnership interest
was issued 12.77% to CCA (for $3,800,000) and 1.69% to an unaffiliated
individual investor (for $500,000). A 1.51% general partner interest was issued
to CPI. In addition to the common limited partner interests, a preferred equity
interest, designated as special limited partnership units (the "SLP Units"), was
issued for $2,000,000 to the seller of the cable systems which were acquired by
CPLP in 1990, in an arm's-length negotiated transaction.
Prior to Charter's acquisition of control over the Partnership and CPLP,
Crown, through its ownership in CCA, purchased the SLP Units and the 1.69%
limited partnership interest in CPLP issued to the individual investor. As a
result, when Crown agreed to sell to Charter all of its interests in the
Partnership, CPLP, and another public limited partnership (Cencom Cable Income
Partners, L.P.), for an allocated aggregate cost of $10,000,010 as part of the
Crown Acquisition, Charter acquired ownership and control of the general
partners of both the Partnership and CPLP, the SLP Units, and 14.46% of the CPLP
limited partner interests (including those originally issued to CCA plus those
subsequently purchased by CCA from the individual investor), plus a small number
of LP Units (1,746) in the Partnership that had been acquired from time to time
by Crown from various limited partners. Charter assigned ownership of the
General Partner to its wholly owned subsidiary, CC II Holdings, Inc., a Delaware
corporation, for nominal consideration.
As the current holder of the SLP Units, Charter is entitled to receive a
preferred return (the "SLP Preferred Return") in an amount equal to $5,765,303,
calculated as of December 31, 1996 based on terms negotiated by the original
parties to the CPLP Partnership Agreement. The SLP Preferred Return currently
accrues at a rate of 18% compounded annually, and is payable prior to any other
distributions of proceeds to CPLP's other limited partners. Following payment of
the SLP Preferred Return, distribution of the remaining proceeds will be made to
CPLP's limited and general partners to the extent available, with such
distribution being split pro rata between the Partnership's 84.03% interest and
Charter's 14.46% limited partner and 1.51% general partner interests.
In connection with the proposed CPLP transaction, the Partnership's original
purchase of CPLP limited partnership units (the "CPLP Units") through
investments totalling $25,000,000 were not negotiated at arm's-length, since, at
that time, both the Partnership and CPLP were under the control of CCA. Based on
this situation and the fact that the CPLP Partnership Agreement does not contain
certain of the protections or rights for the Limited Partners that are included
in the Partnership Agreement, CPI, as general partner of CPLP, has determined to
apply to the CPLP Transaction those provisions of the
1
<PAGE>
Partnership Agreement that are more beneficial to the Limited Partners (such as
the requirement of an appraisal process and the consent of the Limited Partners
for the sale of assets to an affiliate of the General Partner). Furthermore, to
the extent that the Partnership would gain certain benefits in its capacity as a
limited partner of CPLP, such as the right to consent to the CPLP Transaction,
the General Partner has determined to effectively pass through those rights to
the Limited Partners. It is for this reason that the CPLP Transaction is
included within the Transaction that is the subject of the Consent solicitation.
A chart illustrating the relationship between the Partnership and certain of
its beneficially owned affiliates is set forth below.
[LOGO]
TIMING OF THE TRANSACTION
PARTNERSHIP TRANSACTION
The Partnership Agreement provides for the expiration of the Partnership on
December 31, 1995 (the "Partnership Expiration Date"). Pursuant to the
Partnership Agreement, the General Partner is required to commence a liquidation
of the Partnership's assets no later than the Partnership Expiration Date. After
Charter acquired an ownership interest in the Partnership and CPLP in mid-1994,
in light of the Partnership's impending expiration, it commenced the liquidation
process. In April 1995 the General Partner commenced the Partnership Appraisal
Process with respect to all of the Partnership Systems in an effort to arrive at
a reliable benchmark valuation of the Partnership Systems, thereby enabling it
to make informed decisions with respect to the merits of bids subsequently
submitted to it by prospective purchasers of the various Partnership Systems. To
continue the liquidation of the Partnership, the General Partner initiated the
Partnership Auction Process in October 1995 to attract a wide range of potential
purchasers of the Partnership Systems and obtain the maximum available return
for the Partnership. See "--Relevant Provisions" and "--The Appraisal Processes;
Summary of Appraisals."
The General Partner did not seek to sell the Partnership Systems in advance
of the Partnership Expiration Date in part because of substantial uncertainties
and adverse circumstances in the regulatory and economic environment affecting
the cable television industry. Although the Partnership Agreement permits the
liquidation of the Partnership's assets to have commenced as early as the end of
1992,
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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 reduced from the levels previously experienced throughout the cable
television industry until 1995. In particular, the re-regulation of the cable
television industry, which was implemented during Crown's management of the
Partnership's business, caused Crown to institute substantial rate roll-backs
(up to 17%) and imposed restrictions on rate increases, which had a negative
impact on cash flows realized by cable television system operators, on the
valuation of cable television systems, and on operators' ability to finance
acquisitions of capital expenditures for cable television systems. The General
Partner believes that these circumstances created sub-optimal conditions for and
restricted the growth and economic success of the Partnership's and CPLP's cable
television systems, especially in light of the fact that these conditions came
into effect relatively soon after the Partnership and CPLP acquired their
respective cable television systems. For a more detailed discussion of the 1992
re-regulation of the cable television industry and for recent significant
changes in legislation and the Federal Communications Commission ("FCC") rules
affecting cable television operators, see "BUSINESS OF THE PARTNERSHIP AND
CPLP--Regulation and Legislation."
Notwithstanding the changing regulatory environment and increasingly
competitive market conditions, due to the expiration of its term on December 31,
1995, the Partnership is now required to liquidate its assets as expeditiously
as possible. Although the Partnership received bids for all of the Partnership
Systems in the Partnership Auction Process, the General Partner believes that
certain bids submitted were too low when compared to the relative portion of the
entire appraised value of the assets to be fair, from a financial point of view,
to the Limited Partners. Based on the fact that, although solicited as part of
the Partnership Auction Process, no bids were submitted for all or substantially
all of the Partnership's assets as a whole, the General Partner does not believe
that it is likely to find a single buyer who would be willing to purchase all or
substantially all of the Partnership Systems and the Partnership's other assets
in the near future.
As a result of the Partnership Auction Process, the General Partner accepted
bids for the Anderson County System and the Texas Clusters, which bids it
believed and continues to believe to be fair, and rejected non-cash bids and
other cash bids which were considered inadequate when comparing the relative
value of the systems as to which such bids were submitted to the appraised value
of all of the Partnership Systems as a group. The two bids submitted with
respect to the Northeast Missouri Systems were each approximately one-third
below the appraised value allocated to such systems. In addition, although
several bids were received for systems in Texas, no bids were submitted with
respect to the entire Southeast Texas Systems as a whole, and no two bids were
received for the same grouping of systems. Nevertheless, bids that were
submitted were evaluated on the basis of purchase price per subscriber, and,
other than the bids submitted for the Texas Clusters, these per subscriber
purchase prices fell substantially below the per subscriber purchase prices of
all other systems being sold pursuant to the Transaction and the Texas Sales.
See "--Partnership Auction Process" for more detailed information regarding the
bids submitted with respect to the Partnership 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 purchase the Northeast Missouri
Systems and the remaining clusters within the Southeast Texas Systems at prices
equal to or greater than those already submitted to the Partnership pursuant to
the Partnership Auction Process.
With respect to the Anderson County System, the General Partner has
concluded, based on the proposed Anderson County System Purchase Price, the
results of the Partnership Auction Process, and certain other factors discussed
herein, that a sale of the Anderson County System to CC II is in the best
interests of the Partnership and the Limited Partners at this time. See
"--Partnership Appraisal Process" and "--Partnership Auction Process." Assuming
that Consent to the Transaction is obtained, the Partnership Transaction is
anticipated to close in the second quarter of 1997. See "MATERIAL TERMS OF THE
TRANSACTION--Conditions to Closing."
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CPLP TRANSACTION
Substantially concurrently with the Partnership Transaction, CPLP is
liquidating its assets through sales of the CPLP Systems. Although CPLP's term
does not expire until June 30, 2001, the liquidation must now be effected (i) to
satisfy the requirement of CPLP's senior bank lenders that CPLP permanently
repay its obligations owing under that certain Credit Facility dated as of June
29, 1990, as amended, among CPLP, and a syndicate of banks led by
Toronto-Dominion Bank (the "CPLP Credit Facility") by June 30, 1997 and (ii) to
facilitate the liquidation of the Partnership, which necessitates the
liquidation of all of the Partnership's assets, including its ownership interest
in CPLP.
In September 1995, after CPI had initiated an appraisal of the CPLP Systems,
CC II paid a refundable advance of $500,000 toward the purchase of the Abbeville
System. At that time CPI, as general partner of CPLP, had not yet decided to
conduct an auction process for, or obtain the Consent of the Limited Partners
to, a sale of the CPLP Systems. On further consideration, however, CPI and the
General Partner determined that following the same procedures as were required
with respect to the Partnership Systems would safeguard the process of
liquidation and give the Limited Partners the opportunity to participate in the
decision to sell those systems. Therefore, notwithstanding CC II's payment of an
advance, CPI decided to put all of its systems up for bid, both as a means of
attracting a wider range of purchasers and of achieving the highest possible
purchase price. The $500,000 advance previously made by CC II was used as
working capital, with the understanding that it would ultimately either be
refunded to CC II if the Abbeville System was sold to another purchaser or be
applied to CC II's purchase of the Abbeville System.
In October 1995, CPI initiated the CPLP Auction Process, which also followed
substantially similar procedures as were implemented in the Partnership Auction
Process. See "--Relevant Provisions," "--The Appraisal Processes; Summary of
Appraisals" and "--The Auction Processes." Ultimately, a multiple round bidding
process involving CC II and one unaffiliated entity resulted in the highest bid
for the Abbeville System being submitted by CC II. It is CPI's and the General
Partner's belief that the $500,000 refundable advance paid by CC II for the
Abbeville System had no chilling effect on the bidding process with respect to
such system, or in any way affected the propriety of the CPLP Auction Process.
No disclosure of the fact of such advance was made to the prospective bidders,
and CC II was required to participate on an equal footing with all other bidders
in the CPLP Auction Process in order to be eligible to purchase the Abbeville
System. For additional information regarding the bids submitted with respect to
the Abbeville System, see "--The Auction Processes--CPLP Auction Process,"
below.
Although the Purchasing Affiliates are currently proposing to purchase the
Three CPLP Systems, only the Abbeville System and the Sanford System were
actually bid upon by CPI on behalf of the Purchasing Affiliates. For the
Lincolnton System, the highest bid was initially submitted by a proposed
purchaser unaffiliated with the General Partner, CPLP and the Partnership (the
"Proposed Purchaser"). After CPLP's acceptance of the Proposed Purchaser's bid,
the Proposed Purchaser and CPI, by the terms stated in the Proposed Purchaser's
bid letter (the "Letter of Intent"), had 30 days in which to enter into a
Purchase Agreement for the sale of the Lincolnton System. However, the parties
were unable to agree on the terms of an all-cash bid and the 30-day period
elapsed without execution of a Purchase Agreement, the Letter of Intent expired,
and the parties, by mutual agreement, determined not to pursue further
negotiations. Upon the expiration of the Letter of Intent, CC I expressed its
willingness to acquire the Lincolnton System at the price previously offered by
the Proposed Purchaser. CC I then entered into a Purchase Agreement which it
subsequently assigned to CC II. Although CC II will match the price offered by
the Proposed Purchaser, it will not impose various conditions to closing which
would have been required of CPLP in a sale of the Lincolnton System to the
Proposed Purchaser. The purchase price offered by CC II with respect to the
Lincolnton System exceeds by 3.8% such system's appraised value. See "--
Partnership Auction Process." No single bids were submitted with respect to all
or substantially all of the CPLP Systems.
The remaining CPLP System, the LaGrange System, which serves communities
located in and around LaGrange, Texas, has received bids which were considered
inadequate based on the relative portion of the appraised value of all of the
CPLP Systems, and no negotiations are underway at this time. The LaGrange System
received only one bid, which bid was one-fifth below the allocated appraised
value of such system. See "--CPLP Auction Process" for more detailed information
regarding the bids submitted with respect to the CPLP Systems.
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Based on the results of the CPLP Appraisal Process and the CPLP Auction
Process, as well as its general knowledge of the cable television industry, CPI
has concluded that a sale of the Three CPLP Systems to the Purchasing Affiliates
is in the best interests of CPLP and its partners (including the Partnership) at
this time.
Assuming the Consent to the Transaction is obtained, the CPLP Transaction is
expected to close in the second quarter of 1997.
RELEVANT PROVISIONS
PARTNERSHIP AGREEMENT
During the process of liquidation, the Partnership will continue to be
governed by the terms of the Partnership Agreement. Section 8.2 of the
Partnership Agreement gives the General Partner the "full right and unlimited
discretion to determine the time, manner and terms of any sale or sales of the
Partnership's assets pursuant to . . . [its] liquidation, having due regard to
the activity and condition of the relevant markets and general financial and
economic conditions." The Partnership Agreement expressly contemplates and
permits a sale of some or all of the Partnership's assets to the General Partner
or its affiliates. The Partnership Agreement also states that any sale to an
unaffiliated third party shall be subject to a right of the General Partner to
bid on such property and that the highest bid shall be considered by the
Partnership. In addition to these enabling provisions, the Partnership Agreement
contains other provisions designed specifically to protect the interests of the
Limited Partners in connection with any sale to the General Partner or its
affiliates. For example, the Partnership Agreement provides that the purchase
price in any sale to the General Partner or its affiliates may not be less than
the appraised value of such assets determined pursuant to the Partnership
Appraisal Process. The consummation of any such affiliate transaction is also
subject to the Consent of the Limited Partners. Consent to a given action is
obtained through the affirmative vote or written approval of Limited Partners
who together hold a majority of the outstanding LP Units.
Section 4.9 of the Partnership Agreement requires an independent appraisal
in connection with (i) a contemplated sale of all or substantially all of the
assets of the Partnership to either an unaffiliated third party or to the
General Partner or an affiliate of the General Partner or (ii) a sale of any
Partnership assets to the General Partner or an affiliate of the General
Partner. The Partnership Appraisal Process requires, among other things, that
two independent nationally recognized experts in the cable television field each
conduct an appraisal of the asset being sold, in this case the Anderson County
System, and act jointly to determine the fair market value of such assets; if
they are unable to agree on the value, a third appraiser is to be selected and
such third appraiser determines the value (within the values established by the
first two appraisers). One appraiser is to be appointed by the General Partner
and the other is to be appointed by the American Arbitration Association (the
"AAA"). The Partnership Agreement requires that the appraisers' valuation of the
Partnership Systems be made on a "going concern" basis, without discount imputed
for brokers' fees. Any appraisal must be conducted in conformity with standard
appraisal techniques, applying market factors then relevant. For detailed
information regarding the Partnership Appraisal Process, see "--The Appraisal
Processes; Summary of Appraisals."
Although the Partnership Agreement does not require that an auction be
conducted in connection with a sale of Partnership assets, the General Partner,
after consulting with the independent appraisers, concluded that an auction
could attract higher bids for the Partnership Systems and would also establish
the fair market value of each system.
CPLP PARTNERSHIP AGREEMENT
Section 7.04 of the CPLP Partnership Agreement provides that CPI may cause
CPLP to transact business with CPI or any of its affiliates for goods or
services reasonably required in the conduct of CPLP's business, provided that
any such transaction shall be effected only if the transaction is on terms that,
when taken as a whole, are substantially as favorable to CPLP as those then
reasonably obtainable from unaffiliated persons in an arm's-length transaction.
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Section 7.08(B) of the CPLP Partnership Agreement provides that CPI will
consider selling the CPLP Systems at any time it believes a sale to be in the
best interests of CPLP. The CPLP Partnership Agreement expressly contemplates
and permits a sale of some or all of CPLP's assets to CPI or its affiliates or
to unaffiliated third parties, at any time CPI believes such a sale is in the
best interests of the Partnership. Additionally, any sale of one or more of the
CPLP Systems to an unaffiliated third party shall be subject, first, to the
right of the Partnership (as CPLP's initial limited partner) to purchase such
systems for the same price and upon the same terms as proposed by the
unaffiliated third party and, second, to the right of CPI to purchase such
systems at the price proposed by the unaffiliated third party less any
applicable broker's fee.
The CPLP Partnership Agreement does not require an appraisal in connection
with a sale of CPLP's assets, except in the event that CPI had intended to buy
all of the assets of CPLP prior to January 1, 1995 in connection with the "buy
option" granted to it as general partner of CPLP. In that event, the terms of
the CPLP Partnership Agreement would have required the appraisal to be conducted
by one independent nationally recognized appraiser with experience in the cable
industry selected by CPI. The appraiser would have to have valued CPLP's assets
on a going concern basis exclusive of any discount imputed due to the
illiquidity of the respective limited partner's interests or any broker's fee,
and the valuation would have to have been made in conformity with standard
appraisal techniques in use at the time, applying the market factors then
relevant.
As with the Partnership Agreement, the CPLP Partnership Agreement, does not
require that an auction be conducted in connection with a sale of CPLP's assets.
However, CPI, after consulting with the independent appraisers, concluded that
an auction could attract higher bids for the CPLP Systems and would also
establish the fair market value of each system.
THE APPRAISAL PROCESSES; SUMMARY OF APPRAISALS
PARTNERSHIP APPRAISAL PROCESS
The Partnership Appraisal Process is required by the Partnership Agreement
in the event of a sale of any assets of the Partnership to the General Partner
or an affiliate of the General Partner in order (i) to ensure that the purchase
price paid in any such transaction is arrived at on an arm's-length basis since
the appraised value serves as the minimum price that can be offered by the
General Partner or any such affiliate and (ii) to protect against any appearance
of impropriety which may arise because the transaction involves the General
Partner or an affiliate. The Partnership Appraisal Process is also required in
the event that all or substantially all of the Partnership's assets are to be
sold to a third party. The General Partner initiated the Partnership Appraisal
Process in April 1995 in contemplation of the possibility that the Partnership
Appraisal Process would ultimately be required. Information regarding the
appraisals was not disseminated to unaffiliated third parties during the
Partnership Auction Process, although the appraisals did serve as a guide to the
General Partner in evaluating the fairness of the bids submitted pursuant to the
Partnership Auction Process. See "--Partnership Auction Process." In connection
with the Transaction, the General Partner has complied with the Partnership
Agreement requirement that the Anderson County System Purchase Price shall not
be less than the appraised value of the Anderson County System determined in
accordance with the Partnership Appraisal Process.
In accordance with the terms of the Partnership Agreement, Daniels &
Associates, L.P. ("Daniels") and Western Cablesystems, Inc. ("Western") were
appointed by the General Partner and the AAA, respectively, to conduct an
independent appraisal of the Partnership Systems as a group. Based on interviews
with management, analyses of audited and interim unaudited financial information
and consideration of market factors, and in compliance with the requirements
described below, the appraisers independently valued all of the Partnership's
assets. Thereafter, in accordance with the relevant provisions of the
Partnership Agreement, Daniels and Western met, compared their respective
valuations of the Partnership Systems and the manner in which such valuations
had been calculated, and jointly determined an appraised value of the
Partnership Systems in the aggregate, including the Anderson County System, as
of March 31, 1995, in the amount of $73,850,000 (the "Initial Partnership
Appraisal").
The instructions and limitations set forth by the General Partner to the
appraisers in connection with the Initial Partnership Appraisal included the
following requirements: (i) that the Partnership's assets be
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appraised at fair market value on a going concern basis without any discount
imposed for brokers' fees, in conformity with standard appraisal techniques
applying the market factors then relevant, as specified in the Partnership
Agreement, (ii) that a due diligence review be conducted with respect to each of
the Partnership Systems, including on-site inspections, (iii) that an analysis
of current economic and industry conditions and an analysis of the capabilities
of the tangible and intangible assets of the Partnership to sustain the
projected cash flows be conducted, (iv) that the two appraisers selected
pursuant to the Partnership Appraisal Process work with each other to attempt to
determine jointly the value of the Partnership's assets and agree on a fair
market value within 20 days of commencement of their deliberations, and (v) that
each appraisal report contain a letter of transmittal, a description of the
assets appraised and the appraisal procedures utilized, a description of the
assumptions and limiting conditions factored into the appraisals, the
appraiser's conclusions of value and a signed certification. While the
appraisers were aware that they ultimately would have to attempt to agree on a
valuation of the Partnership Systems, they did not discuss with one another the
assumptions or methodologies they intended to use in appraising the
Partnership's assets prior to conducting their respective appraisals, and the
General Partner does not believe the requirement that the appraisers jointly
agree on an appraisal had any material impact on their respective appraisals.
The General Partner requested Daniels and Western to update their appraisals
in regard to the Anderson County System after the Partnership Auction Process
culminated in the General Partner having submitted the highest bid for the
Anderson County System. However, because the highest bids with respect to the
Northeast Missouri Systems and the Texas Clusters had not been submitted by
affiliates of the Partnership, updated appraisals were not requested for those
systems. See "--Relevant Provisions" and "--Partnership Auction Process." The
General Partner instructed the appraisers to give due consideration to the same
factors they had analyzed in conducting the Initial Partnership Appraisal when
updating the Initial Partnership Appraisal, except that the analysis was to be
limited to the Anderson County System. Thereafter, Daniels and Western
separately updated their original appraisals of the Anderson County System (the
"Bring-Down Partnership Appraisal") and reached the appraised values, as of
March 31, 1996, of $36,000,000 and $35,900,000, respectively (the "Anderson
County System Appraised Values"). In the case of the Bring-Down Partnership
Appraisal, the General Partner did not require the appraisers to agree jointly
on one appraised value for the Anderson County System in light of the fact that,
in conducting the Bring-Down Partnership Appraisal, both appraisers had
independently arrived at values which were lower than the Anderson County System
Purchase Price. Although both appraisers were aware of the bids which had been
submitted with respect to the Anderson County System, neither appraiser relied
on such bids in determining values for the Bring-Down Partnership Appraisal.
With the Anderson County System Purchase Price exceeding the two Anderson County
System Appraised Values by $700,000 and $800,000 respectively, the Partnership
Transaction satisfies the Partnership Agreement requirement that the Anderson
County System Purchase Price shall not be less than the appraised value of the
Anderson County System determined in accordance with the Partnership Appraisal
Process.
On January 3, 1997, Husch & Eppenberger contacted the appraisers about
updating their Bring-Down Partnership Appraisal. Husch & Eppenberger asked the
appraisers to first inform the Partnership as to whether an additional
bring-down appraisal would result in materially different valuations of the
Anderson County System. Based on both Daniels' and Western's correspondence,
dated as of January 9, 1997 and January 13, 1997, respectively, that materially
different valuations would not result, no further update of the Bring-Down
Partnership Appraisal will be conducted.
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The full texts of the Daniels and Western appraisals with respect to the
Partnership Systems are set forth in Exhibit A-1 and should be read by the
Limited Partners in their entirety. The summaries set forth below do not purport
to be a complete description of the analyses performed by Daniels or Western in
rendering their respective appraisals. An appraisal is a complex analytical
process which is not necessarily susceptible to partial analysis or summary
description. Notwithstanding the two appraisers' use of standard appraisal
methods, there can be no assurance that a different appraisal procedure or
different appraisers using similar methods and analyzing similar data would not
generate a higher (or lower) valuation of the Partnership Systems, including the
Anderson County System.
It should be noted that neither the appraisals performed by Daniels nor the
appraisals performed by Western constitute an opinion as to the fairness of the
Transaction.
1. DANIELS & ASSOCIATES, L.P.
Daniels was chosen by the General Partner to appraise the Partnership
Systems due to its broad experience in the cable television industry, including
the sale of entities and assets relating to such industry. Daniels is a full
service investment banking firm with substantial knowledge of the cable
television market. Since its inception in 1958, Daniels has participated in
hundreds of media transactions. During the period from 1988 to 1995, Daniels
provided investment banking and advisory services, including appraisal services,
in approximately 352 cable television transactions with a combined transaction
value of over $16.6 billion. Daniels employs professionals having a combined
total of approximately 170 years of cable television industry experience. In
addition to its appraisal of the Partnership Systems and the Anderson County
System for the compensation specified below, Daniels was retained by the General
Partner to conduct the Partnership Auction Process, which included preparing a
bid package summarizing the Partnership Systems, identifying potential
interested parties and coordinating the various bids which were submitted during
the Partnership Auction Process. See "--The Auction Processes." In addition to
its engagements to appraise the fair market value of the Partnership Systems and
the CPLP Systems and to conduct the Auction Processes, as more fully described
herein, Daniels has previously been engaged by an affiliate of the General
Partner to conduct appraisals of Cencom Cable Income Partners, L.P. ("CCIP"), an
affiliate of the Partnership, for compensation totalling approximately $325,000.
Also, the Partnership plans to continue to retain Daniels to broker sales of the
remaining Partnership Systems and, in the event the Transaction is not approved
or consummated, to broker sales of the four systems to be sold in the
Transaction.
SUMMARY OF MATERIALS CONSIDERED. In connection with both the Initial
Partnership Appraisal and the Bring-Down Partnership Appraisal, Daniels
reviewed, among other things, current financial and operating information
provided by the Partnership and demographic information concerning the various
communities served by the Partnership Systems. Daniels also conducted
discussions with the Partnership's management, analyzed historical financial and
operating information (including but not limited to the amount of capital
expenditures which the Partnership Systems will require in the next several
years) and prepared forecasts of financial and operating results based on such
historical information. In conducting the Initial Partnership Appraisal, Daniels
also made due diligence visits to each of the Partnership Systems and reviewed
the impact of the 1992 Cable Act and the anticipated effects of the
Telecommunications Act on each Partnership System's current and forecasted
financial performance.
SUMMARY OF APPRAISALS. Daniels appraised the Partnership Systems on a going
concern basis, in accordance with two standard appraisal techniques, utilizing
(i) a 10-year discounted cash flow analysis and (ii) an analysis of relevant
market multiples derived from comparable private market cable transactions. Its
valuation assumed the Partnership Systems have been and will be operated as
efficiently as comparable cable systems, and that the franchises and leases of
assets used in the operation of the Partnership Systems will be renewed
indefinitely without material changes, other than rebuild requirements.
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In its discounted cash flow analysis, Daniels prepared detailed operating
and financial (including 10-year revenue, cash flow and capital expenditures)
forecasts on an operating group basis, incorporating the critical elements of
operating revenues (e.g., homes passed, subscriber penetration levels, rates and
non-subscriber based income sources) and expenses (e.g., assumed rates of
inflation, adjusted for each Partnership System's respective characteristics and
circumstances, costs of construction of new plant, maintenance,
upgrades/rebuilds and replacement of equipment and vehicles and general capital
maintenance). Daniels' forecasts of operating revenues assumed growth in homes
passed, equivalent basic subscribers, expanded basic subscribers, pay units,
addressable converters, advertising, sales, pay-per-view and miscellaneous other
revenue. Appropriate subscriber rate increases were incorporated in calculating
revenue from basic, expanded basic, pay units and addressable converters, and
advertising and pay-per-view revenue was adjusted annually to coincide with
additional channel capacity from assumed upgrades or rebuilds of the Partnership
Systems. Based on these assumptions and forecasts, Daniels forecast a residual
value based on growth of the Partnership Systems' tenth-year cash flow into
perpetuity, discounted back to the present at the same rate as the discount rate
applied to the forecasted cash flow.
The discount rate used by Daniels was based on the approximate weighted
average cost of capital (the investment return required to satisfy all of an
entity's debt and equity investors). Such rate was determined by Daniels based
on information relating to comparable private equity investments in and debt
financings of properties similar to the Partnership Systems.
Residual value multiples were determined assuming cash flow growth into
perpetuity equal to approximately 50% of the average cash flow growth rate over
the final two years of the forecast period. The residual value multiples ranged
from 8.9 to 10.0 times net cash flow. In its Bring-Down Partnership Appraisal,
Daniels arrived at a discounted cash flow value of $35 million, or 9.1 times the
annualized operating cash flow for the three-month period ended March 31, 1996.
Daniels undertook an analysis of comparable private market sales in the past
two years of similar and similarly situated cable television systems to
correlate its findings using the discounted cash flow appraisal method with the
realities of the marketplace. For purposes of its analysis, Daniels divided the
Partnership Systems into two groups, consisting of mid-size and small
Partnership Systems. In its Initial Partnership Appraisal, Daniels reviewed 16
comparable transactions for the sale of mid-size and small cable television
systems. Using the average of market multiples of operating cash flow and price
per subscriber derived from sales of comparable systems, Daniels applied such
multiples to the Partnership Systems. Daniels concluded that the Southeast Texas
Systems market multiple should range from 8.25 to 8.75 times cash flow, the
Anderson County System market multiple should range from 9.0 to 9.5 times cash
flow and the Northeast Missouri Systems market multiple should range from 7.5 to
8.0 times cash flow. In conducting its Bring-Down Partnership Appraisal, Daniels
reviewed six transactions involving systems it deemed comparable in size,
markets and technical condition to the Anderson County System in particular.
Daniels concluded that the comparable transactions analysis yielded a market
multiple for the Anderson County System of 8.8 to 10.0 times cash flow and a
weighted average for all of the comparable transactions of 9.3 times cash flow.
The cable property sales used by Daniels as a basis for comparison with the
Partnership Systems are described more fully in Daniels' appraisals, copies of
which are included in Exhibit A-1.
As a result of its analyses in the Initial Partnership Appraisal, Daniels
determined an estimated fair market value of all of the cable operating assets
of the Partnership as of March 31, 1995 for 44,232 subscribers, and calculated a
weighted average of $1,670 per subscriber. In its appraisal report, Daniels
indicates that it believes the valuation, expressed as a multiple of the
annualized operating cash flow for the three-month period ended March 31, 1995,
is not inconsistent with multiples derived in transactions involving large
groups of subscribers.
The Bring-Down Partnership Appraisal was substantially similar in method to
the Initial Partnership Appraisal, although it related only to the Anderson
County System. After conducting analyses involving both a discounted cash flow
analysis and a comparison of comparable transactions for its Bring-Down
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Partnership Appraisal, Daniels determined an estimated gross fair market value
of the Anderson County System as of March 31, 1996 of $36,000,000, and
calculated a value of $1,725 per subscriber.
APPRAISAL COSTS. Daniels was paid $100,000 for the Initial Partnership
Appraisal and $5,000 for the Bring-Down Partnership Appraisal. In the event the
Partnership Transaction is consummated, the Partnership will be reimbursed by CC
II in the amount of $50,000, constituting 45.0% of Daniels' fees related to the
Initial Partnership Appraisal, plus all of its fees related to the Bring-Down
Partnership Appraisal, as contemplated in the Partnership Agreement. These
amounts represent that portion of the appraisal fees allocable to Daniels'
appraisal of the Anderson County System. The fees paid to Daniels were not
contingent upon the conclusions reached by it in its appraisals of the
Partnership Systems.
2. WESTERN CABLESYSTEMS, INC.
Since 1979, R. Michael Kruger, the owner and President of Western, has
appraised hundreds of cable television systems for a variety of clients,
including multiple system operators and independent operators. Western has been
directly involved in all aspects of systems operations and finance, including
acquisitions and sales. From 1974 to 1979, Mr. Kruger held various operating
positions at American Television & Communications, Inc., a subsidiary of Time,
Inc. and one of the industry's largest operators.
SUMMARY OF MATERIALS CONSIDERED. In conducting both the Initial Partnership
Appraisal and the Bring-Down Partnership Appraisal, Western reviewed audited and
unaudited financial statements, as well as other data provided by management. In
addition, during the Initial Partnership Appraisal, Western interviewed various
Partnership management personnel at length to obtain additional data as to
subscriber history, technical data, demographics, and local economic
information, among other things, and visited the Partnership Systems and
representative portions of the general market area. Western did not visit the
Anderson County System a second time in conducting the Bring-Down Partnership
Appraisal. However, it did review updated financial and operating information
provided by the Partnership with respect to the Anderson County System.
SUMMARY OF APPRAISALS. Western appraised the Partnership's assets at their
fair market value on a going concern basis employing conventional valuation
techniques, utilizing both a market and an income (i.e., "discounted cash flow")
approach to arrive at values for the Partnership Systems, reconciling the values
resulting from such analyses to yield a final value. Western's assumptions
included future growth in homes passed, changes in market penetration for basic
and pay subscribers (taking into account the effects of increasing competition
from DBS and other video providers), percentage increases in subscriber rates
and the effects, if any, of the regulatory climate, inflation and increases in
operating expenses (e.g., salaries, programming, vehicle operation, utilities
and other typical costs), costs to rebuild and upgrade cable plant and costs of
capital.
In conducting a market analysis, Western evaluated the Partnership Systems
with respect to general operations, marketability, system construction,
opportunity for new revenues, demographics and competition, and took into
account differences between the Partnership and the industry generally. The
comparison of the Partnership Systems to similar properties that have recently
been sold in the market is an accepted appraisal methodology used to correlate
statistical indices with actual market results.
Western utilized information regarding number of subscribers and
per-subscriber values as such information was supplied by brokers or detailed in
announcements in the trade press and recent issues of the Cable TV Investor
Newsletter to determine appropriate market multiples to be applied to the
Partnership's cash flow for each Partnership System. In determining the market
multiples based on the guideline companies, Western also took into account a
number of variables, including size and location of the Partnership Systems.
Western's market analysis resulted in a range of values for the Partnership
Systems of $72,800,000 to $78,000,000.
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Western's "income" approach was based on forecasts of net revenues and
expenses for the Partnership Systems over a projected ten-year period, using the
earnings history of the Partnership to forecast its expected performance.
Western then calculated the terminal value based on the resale value of the
Partnership Systems in year 10. The terminal value was then discounted to
present value using an average cost of capital discount rate. Western determined
the discounted cash flow value for the Partnership Systems to be $76,063,000.
In reconciling the two values resulting from its application of the two
appraisal methodologies, Western gave considerably more weight to the values
generated by its discounted cash flow income analysis because such method
considers a broader range of factors that represent various sources of value
(both present and future). Western first calculated the value of the Partnership
Systems using discounted cash flow. It then calculated each of the Partnership
Systems' values using direct estimates of the multiples and per-subscriber
values it had selected. The discounted cash flow was added to the estimates of
multiples and subscriber value to arrive at the estimate of potential value for
the Partnership Systems of $73,850,000.
In conducting the Bring-Down Partnership Appraisal, Western performed
substantially similar analyses, but with respect to the Anderson County System
only, and relied on updated financial and operating information provided by the
Partnership. Using the market approach, Western determined a range of values of
$34,380,000 to $36,531,000. Western's income approach yielded a value of
$35,303,000. Western concluded the estimated gross fair market value for the
Anderson County System as of March 31, 1996 to be $35,900,000.
APPRAISAL COSTS. Western was paid $11,770 for the Initial Partnership
Appraisal and $3,000 for the Bring-Down Partnership Appraisal. In the event the
Partnership Transaction is consummated, the Partnership will be reimbursed by CC
II in the amount of $8,300, constituting 45.0% of Western's fees related to the
Initial Partnership Appraisal, plus all of its fees related to the Bring-Down
Partnership Appraisal, as contemplated by the Partnership Agreement. These
amounts represent that portion of the appraisal fees allocable to Western's
appraisal of the Anderson County System. Fees paid to Western were not
contingent upon the conclusion reached by it in its appraisal of the Partnership
Systems.
CPLP APPRAISAL PROCESS
Appraisals of the CPLP Systems were also commenced in April 1995 as a means
to determine the fair market value of each CPLP System in contemplation of the
sale of all or substantially all of the CPLP Systems. As described in
"--Relevant Provisions" above, the CPLP Partnership Agreement does not require
an appraisal of the CPLP Systems in connection with their sale except in the
event the purchaser is the general partner of CPLP and is buying the CPLP
Systems pursuant to its "buy- option," in which case only one nationally
recognized cable industry appraiser is required to conduct an appraisal on
behalf of CPLP. Nevertheless, two independent appraisals of the CPLP Systems
were conducted in a substantially similar manner to the appraisals conducted
pursuant to the Partnership Appraisal Process, as described above. The CPLP
Appraisal Process therefore exceeded the appraisal requirements set forth in the
CPLP Partnership Agreement.
Daniels and Western, the appraisers who conducted the Partnership Appraisal
Process, were similarly chosen to conduct the CPLP Appraisal Process. Based on
interviews with management, analysis of audited and interim unaudited financial
information and consideration of market factors, and in compliance with the
requirements described below, the appraisers independently reached a valuation
for all of CPLP's assets. Thereafter, Daniels and Western met, compared their
respective valuations of the CPLP Systems and the manner in which such
valuations had been calculated, and jointly determined an appraisal value of the
CPLP Systems in the aggregate, including the Three CPLP Systems (the "Initial
CPLP Appraisal").
The instructions and limitations set forth by CPI to the appraisers in
connection with the CPLP Appraisal Process were the same as those given to the
appraisers by the General Partner pursuant to the Partnership Appraisal Process.
See "--Partnership Appraisal Process," above. While the appraisers were
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aware that they would have to attempt ultimately to agree jointly on a valuation
of the CPLP Systems, they did not discuss with one another the assumptions or
methodologies they intended to use in appraising CPLP's assets prior to
conducting their respective appraisals, and CPI does not believe that the
objective of the appraisers to agree jointly on an appraisal, as instructed by
CPI, had any material impact on their respective appraisals.
CPI requested Daniels and Western to update their appraisals in regard to
each of the Three CPLP Systems after the CPLP Auction Process culminated in the
highest bids for each of the Three CPLP Systems being offered by an affiliate of
CPI. However, the highest bid with respect to the LaGrange System had not been
submitted by an affiliate of CPLP and, therefore an updated appraisal was not
requested for that system. See "--The Auction Processes." CPI instructed the
appraisers to give due consideration to the same factors they had analyzed in
the Initial CPLP Appraisal when updating the Initial CPLP Appraisal, except that
the analysis was to be limited to the Three CPLP Systems. See "-- Relevant
Provisions." Thereafter, Daniels and Western separately updated their original
appraisals of the Sanford System, the Abbeville System and the Lincolnton System
and reached the Abbeville System appraised values of $4,100,000 and $3,950,000,
respectively (the "Abbeville System Appraised Values"), the Sanford System
appraised value of $20,700,000 from each appraiser (the "Sanford System
Appraised Values") and the Lincolnton System appraised values of $27,200,000 and
$26,500,000, respectively (the "Lincolnton System Appraised Values"), in each
case as of March 31, 1996 (collectively, the "Bring-Down CPLP Appraisals"). In
the case of the Bring-Down CPLP Appraisals, the General Partner did not require
the appraisers to agree jointly on one appraised value for each of the Three
CPLP Systems in light of the fact that, in conducting the Bring-Down CPLP
Appraisals, both appraisers had independently arrived at values which were lower
than the respective purchase price for each of such systems. Although both
appraisers were aware of the bids which had been submitted with respect to each
of the Three CPLP Systems, neither appraiser relied on such bids in determining
values for the Bring-Down CPLP Appraisals.
On January 3, 1997, Husch & Eppenberger contacted the appraisers about
updating their Bring-Down CPLP Appraisals. Husch & Eppenberger asked the
appraisers to first inform CPLP as to whether an additional bring-down appraisal
would result in materially different valuations of any of the Three CPLP
Systems. Based on both Daniels' and Western's correspondence, dated as of
January 9, 1997 and January 13, 1997, respectively, that materially different
valuations would not result, no further update of the Bring-Down CPLP Appraisals
will be conducted.
The full texts of the Daniels and Western appraisals with respect to the
CPLP Systems are set forth in Exhibit A-2 and should be read by the Limited
Partners in their entirety. The summaries set forth below do not purport to be a
complete description of the analyses performed by Daniels or Western in
rendering their respective appraisals. An appraisal is a complex analytical
process which is not necessarily susceptible to partial analysis or summary
description. Notwithstanding the two appraisers' use of standard appraisal
methods, there can be no assurance that a different appraisal procedure or
different appraisers using similar methods and analyzing similar data would not
generate a higher (or lower) valuation of the CPLP Systems, including the Three
CPLP Systems.
1. DANIELS & ASSOCIATES, L.P.
Daniels was chosen by CPI to appraise the CPLP Systems due to its broad
experience in the cable television industry, including the sale of entities and
assets relating to such industry and its familiarity with the CPLP Systems. In
March 1990, Daniels had represented the owners of the Abbeville, South Carolina
System in the sale of such system to CPLP. See "--Partnership Appraisal Process"
for additional information regarding Daniels' background qualifications and
business relationship with affiliates of CPLP. In addition to having conducted
the appraisals, CPLP plans to continue to retain Daniels to broker a sale of the
LaGrange System and, in the event that the Transaction is not approved or the
CPLP Transaction is not consummated, to broker the sale of each of the Three
CPLP Systems.
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SUMMARY OF MATERIALS CONSIDERED. In connection with both the Initial CPLP
Appraisal and the Bring-Down CPLP Appraisals, Daniels reviewed, among other
things, current financial and operating information provided by CPLP and
demographic information concerning the various communities served by the CPLP
Systems. Daniels also conducted discussions with CPLP management, analyzed
historical financial and operating information (including but not limited to the
amount of capital expenditures which the CPLP Systems will require in the next
several years), and prepared forecasts of financial and operating results based
on such historical information. In conducting the Initial CPLP Appraisal,
Daniels made due diligence visits to each of the CPLP Systems and reviewed the
impact of the 1992 Cable Act and the anticipated effects of the
Telecommunications Act on each CPLP System's current and forecasted financial
performance.
SUMMARY OF APPRAISALS. Daniels appraised the CPLP Systems on a going
concern basis, in accordance with two standard appraisal techniques, utilizing
(i) a 10-year discounted cash flow analysis and (ii) an analysis of relevant
market multiples derived from comparable private market cable transactions. Its
valuation assumed the CPLP Systems have been and will be operated as efficiently
as comparable cable systems, and that the franchises and leases of assets used
in the operation of the CPLP Systems will be renewed indefinitely without
material changes, other than rebuild requirements.
In its discounted cash flow analysis, Daniels prepared detailed operating
and financial (including 10-year revenue, cash flow and capital expenditures)
forecasts on an operating group basis, incorporating the critical elements of
operating revenues (e.g., homes passed, subscriber penetration levels, rates and
non-subscriber based income sources) and expenses (e.g., assumed rates of
inflation, adjusted for each CPLP System's respective characteristics and
circumstances, costs of construction of new plant, maintenance,
upgrades/rebuilds and replacement of equipment and vehicles and general capital
maintenance). Daniels' forecasts of operating revenues assumed growth in homes
passed, equivalent basic subscribers, expanded basic subscribers, pay units,
addressable converters, advertising, sales, pay-per-view and miscellaneous other
revenue. Appropriate subscriber rate increases were incorporated in calculating
revenue from basic, expanded basic, pay units, and addressable converters, and
advertising and pay-per-view revenue was adjusted annually to coincide with
additional channel capacity from assumed upgrades or rebuilds of the CPLP
Systems. Based on these assumptions and forecasts, Daniels forecast a residual
value based on growth of the CPLP Systems' tenth-year cash flow into perpetuity,
discounted back to the present at the same rate as the discount rate applied to
the forecasted cash flow.
The discount rate used by Daniels was based on the approximate weighted
average cost of capital (the investment return required to satisfy all of an
entity's debt and equity investors). Such rate was determined by Daniels based
on information relating to comparable private equity investments in and debt
financings of properties similar to the CPLP Systems.
Residual value multiples were determined assuming cash flow growth into
perpetuity equal to approximately 50% of the average cash flow growth rate over
the final two years of the forecast period. The residual value multiples ranged
from 8.7 to 10.2 times net cash flow. In its Bring-Down CPLP Appraisals, Daniels
arrived at discounted cash flow values of $27.1 million, $4.1 million and $20.7
million, or 9.8, 9.0 and 8.4 times the annualized operating cash flow,
respectively, for the three-month period ended March 31, 1996 for the Lincolnton
System, Abbeville System and Sanford System, respectively.
Daniels undertook an analysis of comparable private market sales in the past
two years of similar and similarly situated cable television systems to
correlate its findings using the discounted cash flow appraisal method with the
realities of the marketplace. For purposes of its analysis, Daniels divided the
CPLP Systems into two groups, consisting of mid-size and small CPLP Systems. In
its Initial CPLP Appraisal, Daniels reviewed 16 comparable transactions for the
sale of mid-size and small cable television systems. Using the average of market
multiples of operating cash flow and price per subscriber derived from sales of
comparable systems, Daniels applied such multiples to the CPLP Systems. Daniels
concluded that the Lincolnton System cash flow multiple should range from 9.75
to 10.25 times cash flow, the Sanford System
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market multiple should range from 8.5 to 9.0 times cash flow, the Abbeville
System market multiple should range from 8.5 to 9.0 times cash flow and the
LaGrange System cash flow multiple should range from 8.0 to 8.5 times cash flow.
In conducting each of its Bring-Down CPLP Appraisals, Daniels reviewed six or
seven transactions for systems it deemed comparable in size, markets and
technical condition to the system being reviewed. Daniels concluded that the
comparable transaction analysis yielded a cash flow multiple range of 8.8 to
10.0 times cash flow and a weighted average for all the transactions of 9.4
times cash flow for the Lincolnton System, 8.3 to 9.1 times cash flow and a
weighted average for all the transactions of 8.8 times cash flow for the
Abbeville System and 7.5 to 9.5 times cash flow and a weighted average for all
transactions of 8.4 times cash flow for the Sanford System, respectively. The
cable property sales used by Daniels as a basis for comparison with the CPLP
Systems and each of the Three CPLP Systems are described more fully in Daniels'
appraisals, copies of which are included in Exhibit A-2.
As a result of its analyses in the Initial CPLP Appraisal, Daniels
determined an estimated fair market value of all of the cable operating assets
of CPLP as of March 31, 1995 for 35,655 subscribers, and calculated a weighted
average of $1,708 per subscriber. In its appraisal report, Daniels indicates
that it believes the valuation, expressed as a multiple of the annualized
operating cash flow for the three-month period ending March 31, 1995, is not
inconsistent with multiples derived in transactions involving large groups of
subscribers.
The Bring-Down CPLP Appraisals were substantially similar in method to the
Initial CPLP Appraisal, although they each related to one of the Three CPLP
Systems only. After conducting analyses involving both a discounted cash flow
analysis and a comparison of comparable transactions for its Bring-Down CPLP
Appraisals, Daniels determined an estimated aggregate gross fair market value of
the Abbeville System, Sanford System and Lincolnton System as of March 31, 1996
to be $4,100,000, $20,700,000 and $27,200,000, respectively, and calculated a
respective value per subscriber of $1,563, $1,600 and $1,848, respectively.
APPRAISAL COSTS. Daniels was paid $100,000 for the Initial CPLP Appraisal
and $15,000 for all of the Bring-Down CPLP Appraisals. In the event the CPLP
Transaction is consummated, CPLP will be reimbursed by the Purchasing Affiliates
in the aggregate amount of $98,000, constituting 83.0% of Daniels' fees related
to the Initial CPLP Appraisal, plus all of its fees related to all of the
Bring-Down CPLP Appraisals. These amounts represent that portion of the
appraisal fees allocable to Daniels' appraisal of the Three CPLP Systems. The
fees paid to Daniels were not contingent upon the conclusions reached by it in
its appraisals of the CPLP Systems.
2. WESTERN CABLESYSTEMS, INC.
Western was the appraiser appointed by the AAA to review the CPLP Systems.
For summary background information about Western, see "--Partnership Appraisal
Process," above.
SUMMARY OF MATERIALS CONSIDERED. In conducting both the Initial CPLP
Appraisal and the Bring-Down CPLP Appraisals, Western reviewed audited and
unaudited financial statements, as well as other data provided by management. In
addition, during the Initial CPLP Appraisal, Western interviewed various CPLP
management personnel at length to obtain additional data as to subscriber
history, technical data, demographics, and local economic information, among
other things, and visited the CPLP Systems and representative portions of the
general market area. Western did not visit the Three CPLP Systems a second time
in conducting the Bring-Down CPLP Appraisals, however, it did review updated
financial and operating information provided by CPLP with respect to each of the
Three CPLP Systems.
SUMMARY OF APPRAISALS. Western appraised CPLP's assets at the fair market
value on a going concern basis employing conventional valuation techniques,
utilizing both a market and an income (i.e., "discounted cash flow") approach to
arrive at values for the CPLP Systems, reconciling the values resulting from
such analyses to yield a final value. Western's assumptions included future
growth in homes passed,
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changes in market penetration for basic and pay subscribers (taking into account
the effects of increasing competition from DBS and other video providers),
percentage increases in subscriber rates and the effects, if any, of the
regulatory climate, inflation and increases in operating expenses (e.g.,
salaries, programming, vehicle operation, utilities and other typical costs),
costs to rebuild and upgrade cable plant and costs of capital.
In conducting a market analysis, Western evaluated the CPLP Systems with
respect to general operations, marketability, system construction, opportunity
for new revenues, demographics and competition, and took into account
differences between CPLP and the "guideline" companies. The comparison of the
CPLP Systems to similar properties that have recently been sold in the market is
an accepted appraisal methodology used to correlate statistical indices with
actual market results.
Western utilized information regarding number of subscribers and
per-subscriber values as such information was supplied by brokers or detailed in
announcements in the trade press and recent issues of the Cable TV Investor
Newsletter to determine appropriate market multiples to be applied to CPLP's
cash flow for each CPLP System. In determining the market multiples based on the
guideline companies, Western also took into account a number of variables,
including size and location of the CPLP Systems. Western's market analysis
resulted in a range of values for the CPLP Systems of $59,700,000 to
$62,150,000.
Western's "income" approach was based on forecasts of net revenues and
expenses for the CPLP Systems over a projected 10-year period, using the
earnings history of CPLP to forecast its expected performance. Western then
calculated the terminal value based on the resale value of the CPLP Systems in
year 10. The terminal value was then discounted to a present value using an
average cost of capital discount rate. Western determined the discounted cash
flow value for the CPLP Systems to be $61,829,000.
In reconciling the two values resulting from its application of the two
appraisal methodologies, Western gave considerably more weight to the values
generated by its discounted cash flow income analysis because such method
considers a broader range of factors that represent various sources of value
(both present and future). Western first calculated the value of the CPLP
Systems using discounted cash flow. It then calculated each CPLP System's value
using direct estimates of the multiples and per-subscriber values it had
selected. The discounted cash flow and discounted terminal values were added to
arrive at the estimate of potential value of the CPLP Systems of $60,900,000.
In conducting the Bring-Down CPLP Appraisals, Western performed
substantially similar analyses with respect to each of the Three CPLP Systems,
instead of all of the CPLP Systems, and relied on updated financial and
operating information provided by CPLP. The range of values Western determined
through its market analysis were $3,934,000 to $3,960,000 for the Abbeville
System, $19,801,000 to $20,705,000 for the Sanford System and $24,110,000 to
$26,469,000 for the Lincolnton System. The income analysis resulted in values of
$3,988,000, $20,720,000 and $26,942,000 for the Abbeville System, Sanford System
and Lincolnton System, respectively. After reconciling these ranges of values,
Western concluded the estimated fair market value for the Abbeville System, the
Sanford System and the Lincolnton System as of March 31, 1996 to be $3,950,000,
$20,700,000 and $26,500,000, respectively.
APPRAISAL COSTS. Western was paid $16,000 for the Initial CPLP Appraisal
and $12,000 for all of the Bring-Down CPLP Appraisals. In the event that the
CPLP Transaction is consummated, CPLP will be reimbursed by the Purchasing
Affiliates in the amount of $25,300, constituting 83.0% of Western's fees
related to the Initial CPLP Appraisal, plus all of its fees related to all of
the Bring-Down CPLP Appraisals. These amounts represent that portion of the
appraisal fees allocable to Western's appraisal of the Three CPLP Systems. Fees
paid to Western were not contingent upon the conclusion reached by it in its
appraisal of the CPLP Systems.
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THE AUCTION PROCESSES
PARTNERSHIP AUCTION PROCESS
The Partnership Auction Process was commenced in October 1995 upon the
determination by the General Partner that an auction process, although not
required by the Partnership Agreement, would provide a successful and
expeditious method for attracting potential purchasers and liquidating the
Partnership Systems at prices it expected to be reflective of the Partnership
Systems' fair market value. The Partnership Agreement grants the General Partner
full discretion in effecting a liquidation of the Partnership after taking into
account the condition of the relevant markets and general financial and economic
conditions.
The General Partner hired Daniels, one of the appraisers in the Partnership
Appraisal Process, to conduct the Partnership Auction Process on behalf of the
Partnership based on Daniels' experience as a broker, its expertise in
soliciting bids and conducting auctions, its familiarity with the Partnership
Systems and its knowledge of the cable television industry in the Partnership
Systems' geographic area. Daniels was instructed by the General Partner to set
up a competitive, open bid process so that the General Partner's right to bid
would not be, or be viewed as, a right of final bid, thereby acting to chill
bidding by unaffiliated third parties. See "--Relevant Provisions." The General
Partner also set up a fee structure in order to encourage Daniels to locate
bidders unaffiliated with the Partnership. Specifically, Daniels would receive a
fee of 1.2% of the purchase price of a system in the event of a sale of such
system to an unaffiliated third party, but a reduced fee of only 0.6% of the
purchase price in the event the purchaser was an affiliated entity.
Daniels commenced the Partnership Auction Process by identifying
approximately seventy potential purchasers for the Partnership Systems based on
several factors, including its general knowledge of the industry, information as
to other cable system operators in the geographic areas serviced by the
Partnership Systems and information regarding other cable system operators
interested in expanding their operations in or into the areas served by the
Partnership Systems through additional system acquisitions. After having visited
the Partnership Systems, Daniels prepared and distributed a Confidential
Memorandum (the "Confidential Memorandum") to the prospective purchasers, which
included summary statistical, descriptive and other financial information
regarding the Partnership Systems. Instructions outlining rules governing
procedures for participation in the Partnership Auction Process were forwarded
to prospective purchasers who had received the Confidential Memorandum. These
instructions provided that all third-party bids be submitted to Daniels by a
final bid date chosen by it. Within 48 hours after the final bid date, the
General Partner (or one of its affiliates) could then bid, so long as such bid
exceeded the highest third party bid by at least 0.5%. Subsequently, the highest
third-party bidder would be notified that it had placed the highest third-party
bid and, if applicable, that the General Partner (or one of its affiliates) had
submitted a topping bid. Following such notification of a topping bid being
placed by the General Partner (or one of its affiliates), the third-party bidder
could then submit a topping bid within 48 hours. This process was intended to
continue until one of the bidders either declared its intention to exit the
bidding process or failed to respond to the last bid with a topping bid within
the 48-hour time limit.
As is customary in auctions, the appraised value of the Partnership Systems
was not included in the Confidential Memorandum, nor was such information
otherwise disseminated to the prospective third-party purchasers. However, such
information was used by the General Partner in evaluating the merit of bids made
with respect to certain of the Partnership Systems pursuant to the Partnership
Auction Process. The General Partner was required to bid at or higher than the
appraised value due to the Partnership Agreement provisions that prohibit a sale
of assets to the General Partner or its affiliates for less than their appraised
value.
As a result of Daniels' solicitation, an initial bid in the amount of
$35,501,000 was received in regard to the Anderson County System from an
unaffiliated party, and the General Partner submitted a counterbid of
$35,900,000. The unaffiliated party then raised its bid to $36,080,000, and the
General
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Partner submitted its counterbid of $36,300,000. A final bid of $36,482,000 was
submitted by the unaffiliated party before the General Partner submitted its
counterbid of $36,700,000, after which time no further bids in respect of the
Anderson County System were submitted. The $36,700,000 Anderson County System
Purchase Price exceeds by $218,000 the next highest bid received by Daniels for
the Anderson County System. Additionally, the Anderson County System Purchase
Price exceeds the appraised values of $35,900,000 and $36,000,000 determined
pursuant to the Bring-Down Partnership Appraisal as of March 31, 1996.
The two initial bids submitted by unaffiliated parties with respect to the
Northeast Missouri Systems were in the amounts of $1,750,000 and $1,856,800,
approximately one-third below the appraised value of such systems. With respect
to the Southeast Texas Systems, initial bids in the amounts of $9,700,000 and
$8,575,000 were submitted by unaffiliated parties for the Cleveland, Jasper and
Woodville clusters; one unaffiliated party submitted bids of (i) $10,200,000 for
the Marlin, Cleveland, Bellville, Sealy, Madisonville, Hempstead and Buffalo
clusters and (ii) $5,250,000 for the Marlin, Madisonville and Buffalo clusters;
another unaffiliated party submitted bids of (i) $7,300,000 for the Marlin,
Buffalo, Madisonville, Hempstead, Bellville and Sealy clusters and (ii)
$16,500,000 for the Kingsville, Angelton, Acqua Dulce and Driscoll clusters; and
yet another unaffiliated party submitted a bid of $10,600,000 for the entire
Southeast Texas Systems. Except with respect to the Jasper Cluster and the
Marlin Cluster, the bids submitted to date with respect to the remaining
Southeast Texas Systems are viewed by the General Partner to be inadequate when
comparing the relative value of such systems to the appraised value of all of
the Partnership Systems as a group. Accordingly, except with respect to the
Jasper Cluster and the Marlin Cluster, these bids have not been accepted by the
General Partner.
Although the General Partner intends to liquidate the Partnership as
expeditiously as possible, based on the bids submitted during the Partnership
Auction Process, the General Partner does not believe a sale or sales of the
remaining Partnership Systems at this time would be in the best interests of the
Partnership or the Limited Partners. The General Partner is also not interested
in buying the remaining Partnership Systems at this time as such purchases do
not fit its strategic objectives. The General Partner intends to continue to
operate the Partnership while it actively seeks purchasers for the remaining
Partnership Systems, including by having Daniels continue to conduct the
Partnership Auction Process.
CPLP AUCTION PROCESS
The CPLP Auction Process was commenced simultaneously with the commencement
of the Partnership Auction Process and was similarly conducted by Daniels.
Daniels also conducted the CPLP Auction Process in a substantially similar
manner as it had conducted the Partnership Auction Process, including
disseminating Confidential Memoranda and following similar procedures with
respect to bids submitted for the CPLP Systems, however Daniels' fees were
slightly different. As with the Partnership Auction Process, a fee structure was
set up in order to encourage CPLP to locate unaffiliated bidders. Specifically,
Daniels would receive a fee of 1.0% of the purchase price of a system in the
event of a sale of such system to an unaffiliated third party, but a reduced fee
of only 0.75% of the purchase price in the event the purchaser was an affiliated
entity. For further details regarding the process of bidding and counterbidding,
see "--Partnership Auction Process," above.
As a result of Daniels' solicitation, an unaffiliated party submitted bids
for the Sanford System of, initially, $19,000,000 and $19,500,000, and later
$20,605,000. CPI submitted its counterbids in the amounts of $20,500,000 and
$20,750,000 (which would be the highest and final bid), on behalf of CC I. Bids
of $20,000,000, $25,050,000, $21,250,000 and $26,600,000 were submitted with
respect to the Lincolnton System from four interested prospective purchasers.
The Proposed Purchaser then submitted a second bid to top the original bidding
round. This topping bid of $27,500,000 was the highest bid received, and,
although a Letter of Intent submitted by the Proposed Purchaser at the highest
bid price was executed for the Lincolnton System, after the parties were unable
to agree on the terms of an all-cash bid, that Letter of Intent expired, and the
parties, by mutual agreement, decided not to continue with negotiations. See "--
17
<PAGE>
Timing of the Transaction." At that time, CC I "stepped into the shoes" of the
Proposed Purchaser and entered into a purchase agreement for the sale of the
Lincolnton System, which purchase agreement it subsequently assigned to CC II.
With respect to the Abbeville System, although CC II had previously made an
advance of $500,000 towards the purchase of the Abbeville System, it was
required to participate in the competitive bidding and submit the highest bid,
or its advance would be refunded by CPLP. Three rounds of bids were submitted
for the Abbeville System by two prospective purchasers, being an unaffiliated
party and CPI, which bids were in the amounts of $4,000,000 and $4,040,000,
respectively, for the initial round, $4,060,000 and $4,100,000, respectively,
for the second round, and $4,120,500 and $4,200,000, respectively in the third
and final round, with the highest bid of $4,200,000 being submitted by CPI on
behalf of CC II. Finally, with respect to the LaGrange System, two bids were
initially received from two unaffiliated parties, one of which was based on a
multiple of cash flow and the other of which was for $7,815,000. A third bid for
a fixed amount, $9,000,000, was then submitted by one of the parties to replace
its prior bid based on a multiple of cash flow. At this time, all negotiations
with respect to the LaGrange System have terminated. See "BUSINESS OF THE
PARTNERSHIP AND CPLP--Description of Systems; Property Relating to Systems" for
additional information regarding the CPLP Systems.
The CPLP Auction Process resulted in the Abbeville System Purchase Price
which exceeds by $79,500 the next highest bid received by Daniels for the
Abbeville System and exceeds by $100,000 the higher of the two Abbeville System
Appraised Values, and the Sanford System Purchase Price, which exceeds by
$145,000 the second highest bid received by Daniels for the Sanford System and
exceeds by $50,000 the higher of the two Sanford System Appraised Values. The
Lincolnton System Purchase Price exceeds by $300,000 the higher of the two
Lincolnton System Appraised Values.
COSTS OF THE TRANSACTION
The following table sets forth the estimated expenses incurred or to be
incurred in connection with the Transaction. These estimated expenses reflect
only those fees and expenses related to the sale of the Anderson County System,
the Lincolnton System, the Sanford System and the Abbeville System.
<TABLE>
<S> <C>
Legal fees and expenses......................................... $ 500,000*
Accounting fees and expenses.................................... 250,000*
Appraisal fees and expenses..................................... 181,600
Brokerage fees and expenses..................................... 615,000
Solicitation and other fees and expenses........................ 20,000
Printing and mailing costs...................................... 125,000
---------
SUBTOTAL........................................................ $1,691,600
Less fees and expenses to be reimbursed by CC II if the
Partnership Transaction is approved and consummated: Appraisal
fees and expenses............................................. (181,600)
---------
TOTAL........................................................... $1,510,000
---------
---------
</TABLE>
- ------------------------
* Includes fees for assistance in preparation of this Disclosure Statement.
If the Transaction is consummated, all of the above expenses incurred in
connection with the Transaction will be paid by the Partnership or CPLP except
for the appraisal fees and expenses attributable to the sale of the systems to
the Purchasing Affiliates, which fees and expenses will be borne by the
Purchasing Affiliates, in accordance with the terms of the Partnership
Agreement. The Partnership Agreement provides that when the General Partner or
one or more of its affiliates purchases assets of the Partnership, appraisal
costs attributable to those assets will be borne by the General Partner or such
affiliate in the event the sale is consummated. Although the CPLP Partnership
Agreement does not have a similar provision, CPI has decided similarly to
require payment by the Purchasing Affiliates of appraisal fees and costs
incurred in connection with a sale of the Three CPLP Systems to them. The
allocation of
18
<PAGE>
appraisal fees between systems which are being sold to affiliates and other
systems was based on the percentage of total basic subscribers of each entity as
of December 31, 1995.
The costs of the Transaction will be borne by both the Partnership and CPLP
in accordance with the following allocation: the brokerage fees estimated to be
associated with the Partnership Transaction or the CPLP Transaction ($220,000
for the Partnership Transaction and $395,000 for the CPLP Transaction); all
other fees (legal, accounting, printing and solicitation) which will be
allocated based upon the percentage of basic subscribers in each entity to the
total number of basic subscribers in both the Partnership and CPLP (55% for the
Partnership and 45% for CPLP); and, in the event the Transaction is not
consummated, all appraisal costs ($58,300 for the Anderson County System and
$123,300 for the Three CPLP Systems).
CERTAIN EFFECTS OF THE TRANSACTION AND THE TEXAS SALES
USE OF PROCEEDS OF THE TRANSACTION AND THE TEXAS SALES. The net proceeds
from the Transaction and the Texas Sales (after payment of expenses relating to
such transactions and, in the case of the Texas Clusters, a holdback for
indemnification as required by the purchase agreements) will be used, first, to
repay a portion of the Partnership's and all of CPLP's outstanding senior
indebtedness and to pay certain Partnership expenses and certain of CPLP's
accrued but unpaid management fees. As of December 31, 1996, the Partnership's
outstanding senior indebtedness was $36,700,000, of which approximately
$19,800,000 will be required to be repaid in connection with the Partnership
Transaction and approximately $5.3 million will be required to be repaid in
connection with the Texas Sales, and CPLP's outstanding senior indebtedness was
$34,957,500. Thereafter, any remaining net proceeds will be distributed in
accordance with the terms of the Partnership Agreement and the CPLP Partnership
Agreement, as more fully set forth below.
It is currently estimated that the aggregate net cash proceeds which will be
available for distribution by the Partnership to the Limited Partners will be
approximately $15,557,047 (or approximately $171 per LP Unit) from the
Partnership Transaction and approximately $7,078,115 (or approximately $78 per
LP Unit) from the Texas Sales, in both cases before any state income tax
withholdings but after payment of transaction expenses and deferred management
expenses. In addition, it is currently estimated that the aggregate net cash
proceeds which will be available for distribution by CPLP to its limited
partners as a result of the CPLP Transaction will be approximately $12,812,453,
of which approximately $5,921,972 will be distributed to the Partnership in the
CPLP Distribution after payment by CPLP of certain transaction expenses.
Assuming this $5,921,972 CPLP Distribution, the Partnership will be able to make
a further distribution to the Limited Partners of approximately $65 per LP Unit.
The aggregate distribution per LP Unit to the Limited Partners as a result of
the consummation of the Transaction and the Texas Sales is currently estimated
to be approximately $314, of which $236 is conditioned upon the Consent of the
Limited Partners to the Transaction. The aggregate distribution of $314 may also
be greater or smaller depending on whether the General Partner's negotiations
with its bank lenders are more or less favorable than currently anticipated, and
the distributable amount is also subject to reduction for state income tax
withholdings, depending upon the tax status of each Limited Partner. The CPLP
Distribution of $65 is estimated based on pro forma financial information as of
December 31, 1996, and assumes the SLP Preferred Return to be paid on the SLP
Units as of that date of $5,765,303. Each fiscal quarter that such SLP Preferred
Return is not paid down, additional interest on the indebtedness currently
accrues at an annual rate of 18% on the compounded amount represented by the SLP
Units (the SLP Preferred Return for the quarter ended March 31, 1997
approximates $260,000), resulting in a reduction of the CPLP Distribution, and,
indirectly, a reduction of the $236 distribution to the Limited Partners
(approximately $2.85 per LP Unit for the quarter ended March 31, 1997). The
Limited Partners may be entitled to receive a refund for all or a portion of any
state income tax withholding which may be made, and should consult with their
personal tax advisors for advice regarding the procedures relating to refunds.
See "FEDERAL AND STATE INCOME TAX CONSEQUENCES" for further discussion as to
withholdings for state income tax.
19
<PAGE>
The Partnership Agreement contemplates that Limited Partners are to receive
an 11% preferred return on each LP Unit (the "LP Preferred Return") prior to the
return of capital on each LP Unit. The $314 per LP Unit which is expected to be
distributed to the Limited Partners as a result of the Transaction and the Texas
Sales will represent a "catch-up" payment on the LP Preferred Return, bringing
the LP Preferred Return to $62,578,121 or $21,249,952 short of the LP Preferred
Return as of December 31, 1996 of $83,828,073 (including prior distributions of
$34,020,987), accreting from the initial issuance date of the LP Units through
the payment date, payable to each Limited Partner under the Partnership
Agreement. Although additional distributions of liquidation proceeds which the
General Partner estimates to be from $115 to $170 per LP Unit may be made by the
Partnership at a later date as the Remaining Assets are sold or liquidated, it
is unlikely that any such additional distributions will cause aggregate
distributions to the Limited Partners to meet the full LP Preferred Return
specified under the Partnership Agreement. The Limited Partners have not
received, and are not expected to receive, any return of their initial capital
investment. Pursuant to the Partnership Agreement, distributions of sale
proceeds must first be applied to the LP Preferred Return, and then to a return
of such Limited Partner's initial capital investment.
Assuming the Consent to the Transaction is obtained, the Partnership expects
to make the distributions to the Limited Partners as soon as practicable
thereafter. Limited Partners' distributions may be subject to federal income tax
on the income or gain (if any) resulting from the Partnership Transaction. See
"SELECTED UNAUDITED PRO FORMA FINANCIAL INFORMATION--THE PARTNERSHIP" and
"FEDERAL AND STATE INCOME TAX CONSEQUENCES," below.
The aggregate LP Preferred Return to date differs among the Limited Partners
because LP Units were issued in six different closings which occurred during
1988 and 1989. Depending on the date a particular Limited Partner originally
purchased LP Units, this anticipated $314 per LP Unit distribution, when added
to historical distributions ranging between $312 and $395 per LP Unit, will
bring the aggregate distributions per LP Unit to between $626 and $709. The
following table sets forth the aggregate amount of distributions after
consummation of the Transaction and the Texas Sales for each group of LP Units
issued:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Closing date (date LP Units were issued).... 4/1/88 4/29/88 7/1/88 5/5/89 6/2/89 8/23/89
--------- --------- --------- --------- --------- ---------
Number of LP Units.......................... 45,438 10,023 15,671 8,843 5,046 5,894
--------- --------- --------- --------- --------- ---------
Distributions per LP Unit to date (made
through November 1993).................... $ 395 $ 389 $ 378 $ 321 $ 316 $ 312
--------- --------- --------- --------- --------- ---------
Expected distributions per LP Unit from the
Transaction and the Texas Sales, excluding
the delayed holdback...................... $ 314 $ 314 $ 314 $ 314 $ 314 $ 314
--------- --------- --------- --------- --------- ---------
Aggregate distributions, per LP Unit
excluding the delayed holdback............ $ 709 $ 703 $ 692 $ 635 $ 630 $ 626
--------- --------- --------- --------- --------- ---------
Delayed holdback............................ $ 28 $ 28 $ 28 $ 28 $ 28 $ 28
--------- --------- --------- --------- --------- ---------
Aggregate distributions per LP Unit
including delayed holdback................ $ 737 $ 731 $ 720 $ 663 $ 658 $ 654
--------- --------- --------- --------- --------- ---------
</TABLE>
In the event the Partnership's Credit Agreement (as defined below) is
renegotiated on favorable terms, additional cash flow from operations will be
available to continue to pay down indebtedness. If any subsequent net proceeds
result from the continued liquidation of the Remaining Assets, provided
sufficient indebtedness has been repaid, additional distributions are expected
to be to the Limited Partners out of the available proceeds. As of the date
hereof, although additional distributions may be made as a result of future
sales of the Remaining Assets, it is not currently estimated that the total
distributions will result in any class of LP Units achieving the LP Preferred
Return provided for in the Partnership Agreement.
20
<PAGE>
The following table sets forth the estimated net proceeds of the Transaction
and the Texas Sales, and the Partnership's and CPLP's anticipated use of their
respective proceeds thereof. There can be no assurance, however, that the actual
proceeds available to be applied to the items below will not differ from these
estimated amounts:
<TABLE>
<CAPTION>
THE THE TEXAS
PARTNERSHIP THE CPLP THE THE TEXAS SALES AND THE
TRANSACTION TRANSACTION TRANSACTION SALES TRANSACTION
------------- ------------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Contract Sales Price............... $ 36,700,000 $ 52,450,000 $ 89,150,000 $ 15,250,000 $ 104,400,000
Less:
Working capital adjustments as of
September 30, 1996
Current Assets................... 131,983 471,216 603,199 54,003 657,202
Current Liabilities and Deferred
Revenue........................ (964,936) (1,718,100) (2,683,036) (250,888) (2,933,924)
------------- ------------- ------------- ------------ -------------
Total Working Capital
Adjustment................. (832,953) (1,246,884) (2,079,837) (196,885) (2,276,722)
Estimated sales transaction
expenses......................... (712,000) (798,000) (1,510,000) (150,000) (1,660,000)
Estimated capital expenditures to
be reimbursed.................... 202,000(i) 261,000(i) 463,000 -- 463,000
Estimated payment of deferred
management fees.................. -- (h) (2,896,163) (2,896,163) -- (h) (2,896,163)
Holdback for indemnification....... -- -- -- (2,525,000 (a) (2,525,000)
Estimated repayment of debt
(d)(e)........................... (19,800,000) (34,957,500) (54,757,500) (5,300,000) (60,057,500)
------------- ------------- ------------- ------------ -------------
Total available distributions*..... $ 15,557,047 $ 12,812,453 $ 28,369,500 $ 7,078,115 $ 35,447,615
------------- ------------- ------------- ------------ -------------
------------- ------------- ------------- ------------ -------------
CPLP's special limited partners'
share of distributions*.......... -- 5,765,303(b) 5,765,303 -- 5,765,303
CPLP's other limited partners'
share of distributions*.......... -- 1,018,582(c) 1,018,582 -- 1,018,582
CPI's share of distributions*...... -- 106,596 106,596 -- 106,596
------------- ------------- ------------- ------------ -------------
Distributions available to the
Partnership*..................... $ 15,557,047 $ 5,921,972 $ 21,479,019(d) 7,078,115 $ 28,557,134(e)
------------- ------------- ------------- ------------ -------------
------------- ------------- ------------- ------------ -------------
Limited Partners' share of
distributions*................... $ 15,557,047 $ 5,921,972 $ 21,479,019(f) 7,078,115 $ 28,557,134(g)
------------- ------------- ------------- ------------ -------------
------------- ------------- ------------- ------------ -------------
Distributions per LP Unit*......... $ 171 $ 65 $ 236 $ 78 $ 314
------------- ------------- ------------- ------------ -------------
------------- ------------- ------------- ------------ -------------
General Partner's share of
distributions.................... $ -- $ -- $ -- $ -- $ --
------------- ------------- ------------- ------------ -------------
------------- ------------- ------------- ------------ -------------
Delayed distribution of holdback
for indemnification.............. -- -- -- 2,525,000 2,525,000
------------- ------------- ------------- ------------ -------------
Limited Partners' share of current
and holdback distributions*...... 15,557,047 5,921,972 21,479,019 9,603,115 31,082,134
------------- ------------- ------------- ------------ -------------
------------- ------------- ------------- ------------ -------------
Current and holdback distributions
per LP Unit*..................... $ 171 $ 65 $ 236 $ 106 $ 342
------------- ------------- ------------- ------------ -------------
------------- ------------- ------------- ------------ -------------
</TABLE>
21
<PAGE>
- ------------------------
* Amounts do not include withholdings for state income taxes.
(a) In accordance with the respective purchase agreements, the Partnership will
be required to hold back approximately $2,525,000 of the proceeds from the
Texas Sales for a period of up to one year. Once all requirements and
obligations have been met with respect to the purchase agreements,
distributions of all or a portion of the $2,525,000 will be made to the
Limited Partners.
(b) The SLP Units were originally issued in a negotiated transaction with a
seller that sold cable systems to CPLP. These units were subsequently
acquired after 1991 by CCA, a subsidiary of Crown. In 1995, Charter acquired
the SLP Units from Crown in connection with the Crown Acquisition. The
resulting calculation therefore represents the $2,000,000 initial preference
amount at 15% compounded quarterly for three years (from July 1, 1990 to
June 30, 1993) and then compounded quarterly at 18% from July 1, 1993
through September 30, 1996, in accordance with Section 2.36 of the CPLP
Partnership Agreement.
(c) The distributions from CPLP in respect of the CPLP Units owned by Charter
represents a pro rata distribution after the payment of CPLP's special
limited partners, based upon the positive capital account balances (as
defined in the CPLP Partnership Agreement) of CPLP's limited partners.
Charter owns 14.46% of the CPLP Units, which were acquired in the Crown
Acquisition. The CPLP Units were originally issued 84.03% to the
Partnership, 12.77% to CCA (which then owned the general partner of both the
Partnership and CPLP) and 1.69% to an individual investor. Subsequent to
1991, the individual investor's units were acquired by CCA, which became the
owner of all of the CPLP Units not owned by the Partnership. In 1995,
Charter acquired these LP Units in a negotiated transaction as part of the
Crown Acquisition.
(d) If negotiations with its bank lenders are less favorable than currently
anticipated the estimated distributions from the Transaction would be
reduced. If the Partnership were required to repay all of its senior
indebtedness, the estimated distributions from the Transaction would be
reduced to $4,579,019, or approximately $50 per LP Unit.
(e) If negotiations with its bank lenders are less favorable than currently
anticipated, the estimated distributions from the Transaction and the Texas
Sales would be reduced. If the Partnership were required to repay all of its
senior indebtedness, the estimated distributions from the Transaction and
the Texas Sales would be reduced to $16,957,134, or $187 per LP Unit.
(f) This distribution would bring the amount paid to the Limited Partners
towards the LP Preferred Return ($83,828,073 as of December 31, 1996) due to
them on their initial investment under the Partnership Agreement to
$55,500,006. This amount falls short of the LP Preferred Return by
approximately $28.3 million. This amount does not reflect the shortfall to
the Limited Partners of the return on their initial capital investment.
Assuming the approval and consummation of the Transaction, the aggregate
shortfall to the Limited Partners of the LP Preferred Return and their
initial capital contribution is approximately $119.2 million. See "CERTAIN
INFORMATION ABOUT THE PARTNERSHIP, CPLP, THE GENERAL PARTNER, CPI AND
CERTAIN AFFILIATES--Distributions Per LP Unit Since Partnership Inception."
This amount also includes $412,499 to be paid to Charter as a Limited
Partner holding 1,746 LP Units.
(g) This distribution would bring the amount paid to the Limited Partners
towards the LP Preferred Return ($83,828,073 as of December 31, 1996) due to
them on their initial investment under the Partnership Agreement to
$62,578,121. This amount falls short of the LP Preferred Return by
approximately $21.2 million. This amount does not reflect the shortfall to
the Limited Partners of the return on their initial capital investment.
Assuming the approval and consummation of the Transaction, the aggregate
shortfall to the Limited Partners of the LP Preferred Return and their
initial capital contribution is approximately $112.1 million. See "CERTAIN
INFORMATION ABOUT THE PARTNERSHIP, CPLP, THE GENERAL PARTNER, CPI AND
CERTAIN AFFILIATES--Distributions Per LP Unit Since Partnership Inception."
This amount also includes $548,433 to be paid to Charter as a Limited
Partner holding 1,746 LP Units.
(h) The General Partner has decided to defer receipt of management fees until
such time as the Partnership's indebtedness is repaid in full.
(i) Amounts represent capital expenditures made by the Partnership and CPLP
which CC II has agreed to reimburse if the Transaction is consummated.
EFFECTS OF THE TRANSACTION. If the Transaction is approved and the
Partnership Transaction and the Texas Sales are consummated, the Partnership
will have sold Partnership Systems representing approximately 69% of its basic
subscribers and CPLP will have sold CPLP Systems representing approximately
22
<PAGE>
83% of its basic subscribers. Additionally, the Limited Partners will have no
ownership interest in the future operations of the Anderson County System or the
Three CPLP Systems.
FAILURE TO CONSUMMATE THE TRANSACTION
If the Partnership Transaction is not consummated (either due to the failure
to obtain the Consent to the Transaction or because other conditions to closing
the Partnership Transaction are not satisfied), it is currently the General
Partner's intention to continue operating the Anderson County System while
seeking an alternative buyer or buyers, either for the entire Anderson County
System, or for individual clusters of the Anderson County System or together
with other Partnership Systems. There can be no assurance that the General
Partner will be able to arrange for any such alternative sale of the Anderson
County System on terms which are as favorable as, or more favorable than, those
offered by CC II for the Anderson County System, or on terms which are otherwise
acceptable to the Partnership. Any sale to a third party will be, in accordance
with the Partnership Agreement, subject to a right of the General Partner to
submit a bid in respect of such property. See "--Relevant Provisions."
Similarly, if the CPLP Transaction is not consummated (either due to failure
to obtain the Consent to the Transaction or because other conditions to closing
the CPLP Transaction are not satisfied), CPI will continue to operate the Three
CPLP Systems and the LaGrange System while seeking an alternative buyer or
buyers. As with the Anderson County System, no assurances can be made that CPI
will be able to arrange for an alternative sale of the Three CPLP Systems
(individually or together) on terms which are as, or more favorable than, those
offered by the Purchasing Affiliates for the Three CPLP Systems. Any sale to a
third party will be, in accordance with the CPLP Partnership Agreement, subject
to a right of first refusal by the Partnership and, thereafter, if such right is
not exercised, subject to a right of first refusal by CPI. In addition, if CC II
is not able to purchase the Abbeville System due to failure to consummate the
CPLP Transaction, the $500,000 advance previously paid by CC II with respect to
such system must be refunded to CC II.
If the Transaction is not consummated by June 30, 1997, both the
Partnership's and CPLP's credit facilities will be required to be renegotiated,
and the Partnership's and CPLP's abilities to refinance their existing
indebtedness may be impaired. In addition, any refinancing which is able to be
obtained is likely to result in substantial fees being charged to the
Partnership and CPLP (possibly in excess of $500,000), which may result in
reductions of the amounts otherwise distributable to the Limited Partners.
RECOMMENDATION OF THE GENERAL PARTNER; FAIRNESS OF THE TRANSACTION
The General Partner recommends that the Limited Partners vote to approve the
Transaction based on its belief that the Transaction is fair and in the best
interests of the Partnership, CPLP and the Limited Partners. However, because
the proposed purchasers of the Anderson County System and the Three CPLP Systems
are affiliates of the General Partner and CPI, the General Partner's
recommendation with respect to the Transaction is subject to a direct conflict
of interest. The beneficial owner of the General Partner would indirectly
benefit if the Partnership's and CPLP's assets were sold to the Purchasing
Affiliates at the lowest possible price. Notwithstanding this conflict of
interest, upon their investment in the Partnership, the partners expressly
agreed that the Partnership assets may be sold to affiliates of the General
Partner. Furthermore, the CPLP Partnership Agreement expressly contemplates a
sale of CPLP's assets to the Partnership, CPI or their affiliates.
The General Partner believes, based on there having been a competitive
auction and independent appraisals, and its knowledge of and experience in the
cable television industry, that the Anderson County System Purchase Price and
the Three CPLP Systems Purchase Price are fair, from a financial point of view,
to the Partnership and the Limited Partners. Based upon the foregoing and the
reasons enumerated below, CC II Holdings, Inc. (the parent of the General
Partner), CPLP and each of the Purchasing Affiliates believe the Transaction to
be fair and in the best interests of the Limited Partners. The General Partner
23
<PAGE>
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, which are listed in descending order of importance:
(i) the Auction Processes, including the receipt of several rounds of
competing bids from unaffiliated potential purchasers, is a reliable indicator
of fair market value (see "--The Auction Processes");
(ii) the purchase price for each of the systems proposed to be sold to a
related party in the Transaction exceeds each such system's respective appraised
values, as determined pursuant to the Appraisal Processes;
(iii) the Transaction will not occur absent the Consent of Limited Partners
holding a majority of the LP Units (less than 2.0% of which are owned by
affiliates of the General Partner);
(iv) the Transaction is being conducted in accordance with the terms of the
Partnership Agreement, which includes a specified appraisal process; in
addition, special outside counsel has been hired on behalf of the Limited
Partners to monitor compliance with the Partnership Agreement;
(v) an affiliate sale was contemplated by the partners upon their investment
in the Partnership, and potential conflicts inherent in such a sale were
disclosed to the Limited Partners prior to their initial investment in the
Partnership;
(vi) the expiration of the Partnership's term on December 31, 1995, and the
requirement that the Partnership's assets be liquidated upon such expiration
(see "--Timing of the Transaction"); and
(vii) the requirement by CPLP's senior bank lenders that the CPLP Credit
Facility be repaid in accordance with its terms and the necessity to liquidate
CPLP's assets to fulfill such requirement. See "-- Timing of the Transaction."
In addition to the above factors which are in the interests of the Limited
Partners and the Partnership, the Transaction would be beneficial to the
Purchasing Affiliates and other affiliates of the Partnership due to the
Purchasing Affiliates' and their affiliates' ownership of cable television
properties located in proximity to the systems proposed to be sold. As would be
expected in most situations involving the purchase of a cable system, there are
usually economies of scale and other benefits which will result from the
ownership and operation of multiple systems in a geographic area, or
"clustering," which enables more efficient operation by eliminating the need for
duplicative equipment and allowing the systems to share personnel and other
resources. Because the Purchasing Affiliates already own and operate other
systems in the vicinity of the systems covered by the Transaction, they are
expected to experience the benefits of clustering. As a general matter, however,
these benefits are common in the industry and not unique. Thus, these same types
of benefits are presumed to have been available to the other bidders in the
auction processes as well as for the unaffiliated purchases of the Texas
Clusters.
The General Partner did not rely on "liquidation value" in making its
determination of fairness, as liquidation value is customarily determined on the
premise that business operations will not be continued. Liquidation value was
not considered relevant for purposes of determining (and accordingly was not
considered in determining) the appraised values of any of the Anderson County
System or the Three CPLP Systems, particularly in light of the Partnership
Agreement's requirement that Partnership assets be valued on a "going concern"
basis for purposes of a sale to the General Partner or any of its affiliates and
the CPLP Partnership Agreement's requirement that the CPLP Systems be valued on
a "going concern" basis when conducting any appraisal thereof. There can be no
assurance that the liquidation value of any of the Anderson County System, the
Abbeville System, the Sanford System or the Lincolnton System would have been
less than the Anderson County System Appraised Values, the Abbeville System
Appraised Values, the Sanford System Appraised Values or the Lincolnton System
Appraised Values, respectively. The book value of property and intangibles of
the Anderson County System and the Three CPLP Systems as of March 31, 1996 (the
date of the appraisals), net of depreciation and amortization, is listed below.
24
<PAGE>
However, the General Partner believes that book value does not take into account
various factors which are important in determining fair market value for cable
systems, such as the more commonly used industry-wide standard of cash flow per
subscriber, and other factors such as the location of the systems and the
effects of any competition thereon.
For these reasons, book value should not be the only factor relied on as an
accurate indicator of value.
<TABLE>
<S> <C>
Anderson County System......................................... $15,384,793
----------
----------
Three CPLP Systems:
Sanford System............................................. $7,483,343
Lincolnton System.......................................... $13,321,331
Abbeville System........................................... $1,828,584
----------
Total for the Three CPLP Systems......................... $22,633,258
----------
----------
</TABLE>
The General Partner also did not consider historical or current market
prices for the LP Units or the CPLP Units in assessing the fairness of the
Transaction. Although there is no established trading market for the LP Units, a
small secondary market for such securities does exist; no market exists for the
CPLP Units. The General Partner does not have access to reliable information
about current or historical secondary market prices for such securities. The
General Partner believes that any sales of LP Units or CPLP Units in such
secondary markets are effected at significantly discounted prices, however, due
to the relative illiquidity of these interests. The General Partner also
believes that even if information were available with respect to secondary
market trading, due to deep discounting, trading prices might not be indicative
of the actual value of the Anderson County System.
The General Partner believes that an additional procedure followed by the
Partnership and CPLP reinforces the fairness of the Transaction. Despite the
fact that neither the Partnership Agreement nor the CPLP Partnership Agreement
required it to do so, both the General Partner and CPI retained Husch &
Eppenberger to act as special outside legal counsel on behalf of the Limited
Partners in connection with certain aspects of the Transaction. Husch &
Eppenberger has approximately 160 attorneys in five 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. Husch & Eppenberger was instructed to oversee compliance by the
Partnership and the General Partner with the terms and provisions of the
Partnership Agreement relating to the Partnership's liquidation process, the
Transaction and the Partnership Appraisal Process. Husch & Eppenberger oversaw
compliance by the AAA with the terms of the Partnership Agreement relating to
the selection of the second appraiser, reviewed the General Partner's compliance
with the terms of the Partnership Agreement relating to those aspects of the
Transaction which they were engaged to monitor and participated in the
preparation of this Disclosure Statement (including by reviewing relevant
documents and participating in telephone conferences relating to the Disclosure
Statement). As a condition to the closing of the Partnership Transaction or any
of the sales of the CPLP Systems pursuant to the CPLP Transaction, Husch &
Eppenberger will provide: (i) an opinion that the Partnership Appraisal Process
and the Partnership's solicitation of Consent have each been completed and that
the Partnership Transaction complies with the Partnership Agreement and (ii) an
opinion that the CPLP Appraisal Process has been completed and that the CPLP
Transaction satisfies the CPLP Partnership Agreement. A form of each such
opinion is attached to this Disclosure Statement as Exhibit B. The fees of Husch
& Eppenberger (totalling approximately $75,000) will be paid by the Partnership.
Husch & Eppenberger has been engaged by an affiliate of the Partnership only
once in the past, in which instance Husch & Eppenberger gave a similar opinion
with respect to the liquidation of CCIP, for compensation totalling
approximately $65,000.
In addition to its determination that the terms of the Transaction and the
prices offered in such sales are fair, the General Partner considered a number
of other factors in deciding to recommend that the Limited Partners approve the
Transaction. Among these is the fact that sales to the Purchasing Affiliates
25
<PAGE>
will enable a higher percentage of sale proceeds of the Transaction to be
initially available for distribution to the Limited Partners because the
affiliate purchasers will not require a special indemnification holdback. Such a
holdback would typically represent approximately five to seven percent of the
purchase price in sales involving cable television systems. As evidenced by the
terms of the Asset Purchase Agreements governing the proposed sales to be made
in the Transaction, copies of which Asset Purchase Agreements (along with a copy
of the assignment of the Lincolnton System Purchase Agreement from CC I to CC
II) are attached as Exhibit C to this Disclosure Statement (the "Purchase
Agreements"), neither the Partnership nor CPLP is required to make
representations and warranties regarding the Anderson County System's or the
Three CPLP Systems' assets and operations because the General Partner and CPI
currently manage such systems, and therefore have extensive knowledge as to such
assets and the operation thereof. Consequently, neither the Partnership nor CPLP
will need to hold in reserve any portion of the purchase price paid for the
Anderson County System or the Three CPLP Systems to fund indemnification
obligations for breaches or inaccuracies in any such representations and
warranties.
In light of the foregoing and the recent expiration of the Partnership's
term, the General Partner believes the Partnership Transaction would comply with
the Partnership Agreement and, following receipt of the Consent, can be
completed on an expedited basis. Furthermore, in light of the foregoing and the
requirement by CPLP's bank lenders that CPLP liquidate its assets, the General
Partner believes the CPLP Transaction to be in the best interests of the
Partnership, CPLP and the Limited Partners at this time. Based on its
consideration of the foregoing factors and the considerations and circumstances
described hereunder and under "--The Appraisal Processes; Summary of
Appraisals," on May 30, 1996, the Board of Directors of the General Partner
approved the Partnership Transaction unanimously, and the Board of Directors of
CPI approved the CPLP Transaction unanimously. Accordingly, the General Partner
recommends that the Limited Partners vote to approve the Transaction.
26
<PAGE>
MATERIAL TERMS OF THE TRANSACTION
PRICES
Pursuant to the terms of the Partnership Agreement, the aggregate purchase
price in the Partnership Transaction must not be less than the Anderson County
System Appraised Values (i.e., $35,900,000 and $36,000,000). The Anderson County
System Purchase Price is $36,700,000, exceeding the higher of the two Anderson
County System Appraised Values by $700,000. The Three CPLP Systems Purchase
Price is $52,450,000, exceeding the aggregate values determined pursuant to the
Bring-Down CPLP Appraisals (i.e., $51,150,000 and $52,000,000).
THE PURCHASE AGREEMENTS
Purchase Agreements for the Anderson County System, the Lincolnton System
and the Sanford System were entered into as of May 30, 1996, and a Purchase
Agreement for the Abbeville System was entered into as of April 26, 1996. Each
of the Purchase Agreements contains representations by the Partnership or CPLP,
as the case may be, relating to the organization and standing of the Partnership
or CPLP, the power and authority of the Partnership or CPLP to effect the sale
or sales thereunder and the due authorization and enforceability of each of the
Purchase Agreements by and against the Partnership or CPLP, respectively. No
other representations have been or will be made by or on behalf of the
Partnership or CPLP in connection with the Transaction, nor will any proceeds of
sale be reserved by the General Partner in connection therewith. Copies of the
Anderson County System Purchase Agreement and each of the Three CPLP Systems'
Purchase Agreements have been attached as Exhibit C to this Disclosure
Statement.
The Purchasing Affiliates intend to seek financing for their purchases of
the Anderson County System and the Three CPLP Systems, and the Purchase
Agreements include a financing contingency as a condition to its purchase
obligations. CC II intends to borrow the principal amount of approximately $45
million to fund a portion of the purchase prices payable by it for the Anderson
County System, the Abbeville System and the Lincolnton System. CC I also intends
to borrow the principal amount of approximately $18 million to fund a portion of
the purchase price payable by it for the Sanford System. The Purchasing
Affiliates intend to borrow these amounts by increasing their existing bank
credit facilities. The Purchasing Affiliates have reached agreements with their
principal lenders regarding the proposed terms of their loans. The terms of CC
I's and CC II's renegotiated credit facilities provide up to $20 million and $90
million, respectively, for various uses, including the acquisition of the the
Anderson County System and the Three CPLP Systems. The credit facilities mature
on September 30, 2005, and December 31, 2005, respectively, and allow CC I and
CC II to borrow at Prime, CD or LIBOR rates (as defined therein), and in the
case of CD or LIBOR borrowings, over various interest periods. In addition, CC I
is required to receive at least $3 million in cash equity towards the
acquisition of the Sanford System and CC II is required to receive at least $25
million in cash equity towards the acquisitions of the Anderson County System,
the Abbeville System and the Lincolnton System.
The Purchasing Affiliates are in the process of seeking the required
financing, including the required equity contribution to CC II. In this regard,
it should be noted that in the last three years the Purchasing Affiliates and
their affiliates have financed and completed the acquisition of cable television
systems valued at approximately $1.5 billion in the aggregate. Both the
Partnership and CPLP will be paid in full by the respective Purchasing Affiliate
upon the closing of the Transaction, as promptly as practicable after which time
distributions will be made to the Limited Partners. The Purchasing Affiliates
intend to repay the funds borrowed in connection with the Transaction out of
operating cash flow. In the event that either of the Purchasing Affiliates
defaults upon the loan obligations incurred in connection with the Transaction,
no financial effects will inure to the Partnership or the Limited Partners.
In addition to a financing contingency, all of the Purchase Agreements
contain a Consent contingency, which will prevent the Transaction from going
forward in the event the Consent of the Limited Partners is
27
<PAGE>
not obtained. The Purchase Agreement for each of the Three CPLP Systems was
amended and revised as of January 16, 1997 to add a Consent contingency.
The Purchase Agreements also include provisions requiring the Partnership or
CPLP, as the case may be, to indemnify the Purchasing Affiliates against any and
all claims, damages, losses, costs, expenses (including reasonable legal,
accounting and experts' fees and other fees and expenses incurred in the
investigation or defense of any of the following, and any interest and
penalties), obligations and liabilities incurred or suffered, as a result of,
arising in connection with or relating to any and all claims of third parties
(including the claims of Limited Partners) against, relating to or pertaining to
the Partnership and the Anderson County System or CPLP and the respective CPLP
Systems, as the case may be, which arise in connection with or relate to the
Partnership Transaction or any of the sales effected pursuant to the CPLP
Transaction, and/or the authority of the Partnership or CPLP, as the case may
be, to enter into and consummate such transactions and/or the propriety of such
transactions. Other indemnity obligations of the Partnership and CPLP are
described under "--Indemnification," below.
The Transaction will be effected pursuant to the Purchase Agreements and one
or more bills of sale and assignment and assumption agreements. The Purchase
Agreements contain the terms described above as well as the conditions described
under "--Conditions to Closing," below.
CONDITIONS TO CLOSING
Consummation of the Partnership Transaction and the sale of each of the
Three CPLP Systems are subject to certain conditions, including without
limitation, the following material conditions: (i) obtaining regulatory
approvals and approvals from local franchising authorities, where required; (ii)
obtaining the Consent of the Limited Partners; (iii) absence of material pending
or threatened litigation with respect to the Anderson County System or the
Partnership Transaction, or any of the Three CPLP Systems or the CPLP
Transaction, respectively; and (iv) receipt of required financing. The
consummation of the Partnership Transaction or any of sales of the Three CPLP
Systems are not contingent upon one another.
The waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended (the "HSR Act") in respect of the Transaction has already
expired. Some of the approvals required under subparagraph (i) above have
already been obtained and others will be requested immediately following
approval of the Transaction by the Limited Partners. Third party approvals are
expected to be obtained approximately 120 days after Consent is obtained. It is
expected that the sales contemplated by the Purchase Agreements will close
promptly after obtaining Consent. See "--Regulatory Approvals," below.
ANTITRUST APPROVALS
Under the HSR Act and the rules promulgated thereunder by the Federal Trade
Commission (the "FTC"), the Partnership Transaction and the CPLP Transaction may
not be consummated until notification has been given and certain information has
been furnished to the FTC and the Antitrust Division of the Department of
Justice (the "Antitrust Division") regarding such Transaction. Pursuant to the
HSR Act, the required notification and report forms were filed with the FTC and
the Antitrust Division. Early termination of the statutory 30-day waiting period
was granted on August 7, 1996.
At any time before or after the consummation of the Partnership Transaction
or the CPLP Transaction, and notwithstanding the early termination of the
waiting period under the HSR Act in respect of the Transaction, state antitrust
and other governmental authorities may take such action under the antitrust laws
as they deem necessary or desirable in the public interest. Such action might
include seeking to enjoin the consummation of either or both of the Partnership
Transaction or the CPLP Transaction or requiring the divestiture by the
Purchasing Affiliates of all or part of the assets acquired. Private parties may
also seek to take legal action under the antitrust laws under certain
circumstances.
28
<PAGE>
INDEMNIFICATION
The Partnership Agreement provides that each of the General Partner and each
affiliate of the General Partner which performed services on behalf of the
Partnership is entitled to be indemnified for any liability or loss incurred by
it in connection with the business of the Partnership if such party acted in
good faith and in a manner it reasonably believed to be in the best interests of
the Partnership, provided the relevant party's conduct did not constitute
negligence or misconduct. The Partnership Agreement further provides that no
party shall be denied indemnification merely because such party had an interest
in the transaction with respect to which the indemnification claim arises, so
long as the applicable transaction was otherwise permitted by the terms of the
Partnership Agreement. The CPLP Partnership Agreement provides that each of CPI
and its affiliates and their respective partners, officers, directors, employees
and agents, shall be indemnified and held harmless by CPLP from and against any
and all claims, demands, liabilities, costs, damages and causes of action of any
nature whatsoever arising out of or incidental to CPI's management of CPLP's
affairs, except where CPI has committed fraud, gross negligence or wilful
misconduct. If a claim is made against the General Partner or any of its
affiliates in connection with such party's actions on behalf of the Partnership
with respect to the Partnership Transaction, the General Partner expects that
it, as well as its affiliates, will seek to be indemnified by the Partnership or
CPLP with respect to such claim. As a result of these indemnification rights, a
Limited Partner's remedy with respect to claims against the General Partner or
its affiliates relating to their respective involvement in the Partnership
Transaction could be more limited than the remedy which would be available
absent the existence of these rights in the Partnership Agreement. A successful
claim for indemnification by the Partnership would reduce the amount of
Partnership cash (including the CPLP Distribution) available for distributions
to the Limited Partners by the amount paid to satisfy such claim, including the
Partnership's costs.
29
<PAGE>
FEDERAL AND STATE INCOME TAX CONSEQUENCES
GENERAL
The purpose of the following discussion is to inform the Limited Partners of
certain material federal and state income tax consequences to the Partnership
and to its Limited Partners arising from the Partnership Transaction, the CPLP
Transaction and anticipated payment of a catch-up distribution, which will be
funded with a portion of the net proceeds from the Transaction. The tax
information included herein was prepared from tax data compiled by the General
Partner in its role as the Partnership's tax administrator and by CPI in its
role as CPLP's tax administrator, and, such tax information is not based upon
the advice or formal opinion of counsel. The tax discussion that follows is
merely intended to inform the Limited Partners of factual information and should
not be considered tax advice. In this regard, the specific tax calculations set
forth below describe the federal and certain state income tax consequences
arising from the Partnership Transaction, the CPLP 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, state and other
tax consequences to each of them of the consummation of the Partnership
Transaction and the CPLP Transaction and related distributions and regarding the
application of the information set forth herein to their individual
circumstances.
FEDERAL
Through the end of the taxable year in which the Transaction is consummated,
the Limited Partners will have been allocated certain net tax losses as a result
of their investment in the Partnership. The ability to utilize these net losses
may have been limited by the passive activity limitations of Section 469 of the
Internal Revenue Code of 1986, as amended (the "Code"). Insofar as these net
losses have not previously been utilized, in general, Limited Partners may
reduce gain from the sale of the Anderson County System and the Three CPLP
Systems, 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 occur in 1997. The portion
of such gain that is allocable to the Limited Partners will be approximately
$587 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
$883 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 $535 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 $236 per LP Unit cash distribution from
the Partnership upon the consummation of the Transaction, and (ii) the estimated
$535 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
30
<PAGE>
such distributions occur), and by the Limited Partner's deemed assumption of its
allocable share of the Partnership's nonrecourse liabilities (estimated to be
$720 per LP Unit), and then by reducing this amount by the charitable
contributions, ordinary loss and Code Section 1231 loss reported on all
Schedules K-1 (including the Schedule K-1 for the taxable year in which such
distributions occur). All cash distributions made prior to the cash distribution
received from the Partnership upon the consummation of the Transaction would
further reduce a Limited Partner's tax basis. A Limited Partner will realize a
capital gain equal to the excess, if any, of (i) the aggregate amount of the
cash and deemed distributions received by any Limited Partner upon the
consummation of the Transaction and payment of a portion of the Partnership's
nonrecourse liabilities, respectively, over (ii) such Limited Partner's tax
basis in its LP Units. Original Limited Partners should not realize any capital
gain as a result of these distributions.
A Limited Partner who is a nonresident 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 and 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:
<TABLE>
<CAPTION>
PER LP
UNIT
---------
<S> <C>
ESTIMATED TAX BASIS PER LP UNIT (PRE TRANSACTION)
Initial Capital Contribution........................................................................... $ 1,000
Estimated Allocable Share of Partnership Nonrecourse Liabilities....................................... $ 720
Cash Distributions (through December 31, 1996)......................................................... $ (395)
Estimated Net Losses (through December 31, 1996)....................................................... $ (883)
---------
Estimated Tax Basis Per LP Unit Prior To Transaction................................................... $ 442
ESTIMATED TAX BASIS PER LP UNIT (POST TRANSACTION)
Estimated Tax Basis Per LP Unit........................................................................ $ 442
Estimated Section 1245 Gain............................................................................ $ 587
Estimated Section 1231 Gain............................................................................ $ --
---------
Estimated Tax Basis Per LP Unit Before Distributions................................................... $ 1,029
Cash Distributions..................................................................................... $ (236)
Deemed Distribution.................................................................................... $ (535)
Estimated Tax Basis Per LP Unit After Distributions.................................................... $ 258
---------
---------
</TABLE>
STATE
Many states impose income tax withholding requirements on partnerships that
have nonresident partners. The requirement is at the partnership level and
therefore cannot reflect the actual tax profile of the individual partner.
Missouri, North Carolina and South Carolina require tax withholding on income
from sources in those states that is distributable to nonresident partners.
Generally, these requirements will affect distributions to Limited Partners who
are not exempt from income tax under state law.
31
<PAGE>
These withholdings will be allocated to the Limited Partners for whom the
Partnership is subject to the requirement. The allocated withholdings will be
estimated tax payments that may be used to offset state tax due.
Some states begin the calculation of taxable income with federal taxable
income and provide for adjustments to arrive at income taxable in that state.
Other states provide for the carryforward of operating losses from sources
within their state. Under these provisions, individual taxpayers may find that
their actual tax liability is significantly less than the amount required to be
withheld. Refunds of some portion of the amounts withheld may result.
Accordingly, the Limited Partners are urged to consult their personal tax
advisors for advice regarding the application of the information set forth
herein to their individual circumstances, including the state tax consequences
to each of them of the consummation of the Partnership Transaction and the CPLP
Transaction and related distributions.
MISSOURI. Only individual nonresident Limited Partners are subject to
Missouri income tax withholding at the source of the distributions. Withholding
is not required from distributions to Limited Partners who are partnerships,
corporations, trusts or estates.
NORTH CAROLINA. North Carolina generally requires income tax withholding at
the source of all distributions to nonresident Limited Partners. The state will
relieve a partnership of this withholding obligation under specified
circumstances.
Limited Partners who are exempt from federal income tax under provisions of
the Internal Revenue Code will also generally be exempt from North Carolina
income tax. The Partnership will not be required to withhold North Carolina tax
from distributions to this group of Limited Partners provided that such Limited
Partners have represented to the Partnership, in writing, that they are in fact
exempt from federal income tax. It is contemplated that IRA accounts, pension
and profit sharing plans and Keogh accounts will fall into that category.
With regard to Limited Partners that are corporations, partnerships, trusts
or estates, withholding is required unless those Limited Partners sign and
provide to the Partnership an affirmation that they will directly report any tax
owed by them on their corporation, partnership, trust or estate income tax
return.
The Partnership is required to withhold North Carolina income tax from
distributions to all nonresident individuals.
SOUTH CAROLINA. South Carolina generally requires income tax withholding at
the source of all distributions to nonresident partners. The state will relieve
a partnership of this withholding obligation under specified circumstances.
Limited Partners who are exempt from federal income tax under provisions of
the Internal Revenue Code will also generally be exempt from South Carolina
income tax. The Partnership will not be required to withhold South Carolina
income tax from distributions to this group of Limited Partners provided that
each such Limited Partner provides the Partnership with a statement that the
Limited Partner is an organization exempt from income tax under the Internal
Revenue Code. The content of that statement must conform to requirements of the
state.
Any other nonresident Limited Partner may file an affidavit with the South
Carolina Tax Commission by which it agrees to be subject to the personal
jurisdiction of the Commission and the courts of South Carolina for the purpose
of determining and collecting South Carolina taxes. If such an affidavit is
filed with and accepted by the state and a copy is provided to the Partnership,
withholding will not be required with respect to that Limited Partner.
32
<PAGE>
SUMMARY OF EFFECT BY CATEGORY OF PARTNER
The table below estimates the maximum and minimum amount that may be
withheld from each LP Unit, by the type of Limited Partner, depending on whether
the Limited Partner provides the affidavits discussed above and below.
<TABLE>
<CAPTION>
PER LP UNIT PER LP UNIT
WITHHOLDING WITHHOLDING
(AFFIDAVITS NOT (AFFIDAVITS
TYPE OF PARTNER PROVIDED) PROVIDED)
- --------------------------------------------------------- --------------- -------------------
<S> <C> <C>
IRA Accounts, Keogh Accounts & Pension and Profit Sharing
Plans.................................................. $ 37.00 $ --(1)
Trusts................................................... $ 37.00 $ --(2)
Partnerships............................................. $ 37.00 $ --(2)
Corporations............................................. $ 37.00 $ --(2)
Individuals.............................................. $ 39.00 $ 22.00(3)
</TABLE>
- ------------------------
(1) Limited Partner must provide Partnership with an affidavit that it is not
taxable under IRC.
(2) Limited Partner must provide Partnership with an affidavit that it will file
returns with North and South Carolina, pay the tax with the return and be
subject to the courts of North and South Carolina.
(3) Partnership must withhold Missouri and North Carolina tax on nonresident
individuals. Limited Partner must provide the Partnership an affidavit that
it will file a South Carolina return, pay the tax with the return and will
be subject to the courts of South Carolina.
IRA ACCOUNTS, KEOGH ACCOUNTS, AND PENSION AND PROFIT SHARING PLANS. IRA
Accounts, Keogh Accounts, and Pension and Profit Sharing Plans that are exempt
from federal taxation under the Internal Revenue Code are exempt from
withholding in North and South Carolina provided each Limited Partner provides
the Partnership with affidavits of tax exempt status in a form provided for by
the respective states. The General Partner estimates that the North Carolina
income tax withholding will be $20.00 per LP Unit and the South Carolina income
tax withholding will be $17.00 per LP Unit. Tax withholding will be mandatory on
distributions to Limited Partners who do not provide the General Partner with
the required documentation. Withholding of Missouri tax is not required for this
category of Limited Partner.
TRUSTS, PARTNERSHIPS AND CORPORATIONS. Trusts, Partnerships and
Corporations are subject to withholding by North and South Carolina unless each
Limited Partner provides affidavits, in a form provided for by the respective
states, to the Partnership that they will file the returns required, pay the tax
due with the return and submit to the jurisdiction of the courts in North and
South Carolina. The General Partner estimates that the North Carolina income tax
withholding will be $20.00 per LP Unit. South Carolina tax withholdings are
estimated to be $17.00 per LP Unit. Tax withholding will be mandatory on
distributions to Limited Partners who do not provide the General Partner with
the required documentation. Withholding of Missouri tax is not required for this
category of Limited Partner.
INDIVIDUALS. The Partnership is required to withhold Missouri and North
Carolina taxes from all nonresident individual Limited Partners. The estimated
amounts to be withheld, per LP Unit, are $2.00 and $20.00, respectively. The
Partnership must withhold South Carolina taxes unless the Limited Partner
provides an affidavit to the Partnership, in a form provided for by South
Carolina, that such Limited Partner will file the return required, pay the tax
due with the return and submit to the jurisdiction of the courts in South
Carolina. The General Partner estimates that the income tax withholding will be
$20.00 per LP Unit for North Carolina, $17.00 per LP Unit for South Carolina and
$2.00 per LP Unit for Missouri. South Carolina tax will be withheld on
distributions to Limited Partners who do not provide the General Partner with
the required documentation.
33
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
The following tables set forth selected financial and statistical data
relating to the Partnership's and CPLP's financial condition since 1992 and to
the four cable systems (Anderson County, Sanford, Abbeville and Lincolnton)
proposed to be sold in the Transaction since 1994. Such data is qualified in its
entirety by, and should be read in conjunction with, the unaudited pro forma
financial information, information relating to distributions to the Limited
Partners and the limited partners of CPLP since the inception of each of the
Partnership and CPLP and the detailed information and financial statements
included or referenced elsewhere herein. All of the unaudited financial
information contained herein has been prepared in accordance with generally
accepted accounting principles and in the opinion of the General Partner and CPI
contains all adjustments (consisting of normal recurring adjustments) necessary
for a fair presentation thereof. See "SELECTED UNAUDITED PRO FORMA FINANCIAL
INFORMATION" and "CERTAIN INFORMATION ABOUT THE PARTNERSHIP, CPLP, THE GENERAL
PARTNER, CPI AND CERTAIN AFFILIATES."
SELECTED HISTORICAL FINANCIAL DATA
THE PARTNERSHIP
<TABLE>
<CAPTION>
UNAUDITED
-------------------------------------------------------------------------
AS OF AND FOR THE YEAR ENDED
DECEMBER 31,
-------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Service Revenues.......................... $ 18,155,382 $ 17,046,419 $ 16,257,928 $ 16,124,256 $ 15,079,748
Net loss.................................. (1,447,153) (2,292,563) (5,256,210) (8,653,943) (13,837,235)
Net loss per LP Unit(1)................... (16) (25) (57) (94) (151)
Cash distributions per LP Unit............ -- -- -- 60 68
BALANCE SHEET DATA:
Total assets.............................. 20,845,510 24,960,260 30,517,928 34,825,726 45,280,200
Long-term obligations, including current
maturities.............................. 36,700,000 40,400,000 44,700,000 44,700,000 41,600,000
Partners' (deficit) capital............... (21,828,007) (20,380,854) (18,088,291) (12,832,081) 1,276,762
MISCELLANEOUS DATA:
Ratio of earnings to fixed charges(2)..... -- -- -- -- --
Book value per LP Unit.................... $ (240) $ (224) $ (199) $ (141) $ 14
</TABLE>
- ------------------------
(1) The net loss per LP Unit is calculated based upon the loss allocated to the
LP Units as disclosed in the Statement of Partners' Capital in the
Partnership's Financial Statements.
(2) 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 years
ended December 31, 1996, 1995, 1994, 1993 and 1992 were insufficient to
cover the fixed charges by $1,447,153, $2,292,563, $5,256,210, $8,653,943
and $13,837,235 respectively. As a result of such insufficiency, these
ratios are not presented above.
34
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
ANDERSON COUNTY SYSTEM
<TABLE>
<CAPTION>
UNAUDITED
-----------------------------------------
AS OF AND FOR THE YEAR ENDED
DECEMBER 31,
-----------------------------------------
1996 1995 1994
------------- ------------ ------------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Service Revenues.................................................... $ 8,344,317 $ 7,771,085 $ 7,232,403
Operating Expenses.................................................. 8,577,968 8,350,509 6,976,828
Net Loss............................................................ (1,519,507) (2,077,508) (4,178,294)
BALANCE SHEET DATA:
Property, Plant and Equipment, net.................................. 13,178,400 15,326,732 16,587,211
Franchise Costs..................................................... 386,831 589,500 1,274,701
Total Assets...................................................... 13,697,214 16,071,968 17,963,744
Current Liabilities................................................. 964,936 758,219 648,798
</TABLE>
35
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
CPLP
<TABLE>
<CAPTION>
UNAUDITED
-------------------------------------------------------------------------
AS OF AND FOR THE YEAR ENDED
DECEMBER 31,
-------------------------------------------------------------------------
1996 1995 1994 1993 1992
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Service Revenues.......................... $ 13,748,224 $ 12,855,563 $ 12,075,857 $ 12,228,270 $ 11,800,374
Net loss.................................. (4,756,897) (5,835,749) (7,425,112) (6,176,748) (7,907,985)
Net loss per CPLP Unit(1)................. (15,990) (19,616) (24,959) (20,763) (26,581)
Cash distributions per CPLP Unit.......... -- -- -- -- --
BALANCE SHEET DATA:
Total assets.............................. 24,030,639 28,483,270 35,168,232 43,550,905 50,248,864
Long-term obligations, including current
maturities.............................. 34,957,500 34,957,500 37,339,350 38,710,000 39,900,000
Partners' (deficit) capital............... (15,871,301) (11,114,404) (5,278,655) 2,146,457 8,323,205
MISCELLANEOUS DATA:
Ratio of earnings to fixed charges(2)..... -- -- -- -- --
Book value per CPLP Unit.................. $ (54,168) $ (37,933) $ (18,016) $ 7,326 $ 28,407
</TABLE>
- ------------------------
(1) The net loss per CPLP Unit is calculated based upon the loss allocated to
the CPLP Units as disclosed in the Statement of Partners' Capital in CPLP's
Financial Statements.
(2) 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 years
ended December 31, 1996, 1995, 1994, 1993 and 1992 were insufficient to
cover the fixed charges by $4,756,897, $5,835,749, $7,425,112, $6,176,748
and $7,907,985, respectively. As a result of such insufficiency, these
ratios are not presented above.
36
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
SANFORD SYSTEM
<TABLE>
<CAPTION>
UNAUDITED
----------------------------------------
AS OF AND FOR THE YEAR ENDED
DECEMBER 31,
----------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Service Revenues................................................... $ 4,778,020 $ 4,552,708 $ 4,253,573
Operating Expenses................................................. 5,353,300 5,569,269 5,837,254
Net Loss........................................................... (1,898,079) (2,034,382) (2,564,425)
BALANCE SHEET DATA:
Property, Plant and Equipment, net................................. 5,865,570 5,864,762 6,008,398
Franchise Costs.................................................... 592,584 1,519,620 2,613,911
Total Assets..................................................... 7,094,262 8,206,703 13,996,169
Current Liabilities and Deferred Revenue........................... 637,862 554,216 356,294
</TABLE>
SELECTED HISTORICAL FINANCIAL DATA
ABBEVILLE SYSTEM
<TABLE>
<CAPTION>
UNAUDITED
----------------------------------
AS OF AND FOR THE YEAR ENDED
DECEMBER 31,
----------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Service Revenues......................................................... $ 976,165 $ 883,902 $ 805,296
Operating Expenses....................................................... 961,176 943,015 1,019,791
Net Loss................................................................. (172,971) (265,569) (410,081)
BALANCE SHEET DATA:
Property, Plant and Equipment, net....................................... 1,095,731 1,246,810 1,326,052
Franchise Costs.......................................................... 485,225 653,452 821,680
Total Assets........................................................... 1,596,307 1,914,169 2,188,331
Current Liabilities and Deferred Revenue................................. 612,522 598,497 70,053
</TABLE>
SELECTED HISTORICAL FINANCIAL DATA
LINCOLNTON SYSTEM
<TABLE>
<CAPTION>
UNAUDITED
----------------------------------------
AS OF AND FOR THE YEAR ENDED
DECEMBER 31,
----------------------------------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Service Revenues...................................................... $ 5,622,300 $ 5,222,042 $ 4,851,865
Operating Expenses.................................................... 6,722,270 7,072,148 7,555,293
Net Loss.............................................................. (2,200,877) (2,976,293) (3,791,984)
BALANCE SHEET DATA:
Property, Plant and Equipment, net.................................... 8,082,913 8,757,956 9,715,606
Franchise Costs....................................................... 3,303,370 4,389,131 5,642,720
Total Assets........................................................ 11,805,615 14,230,203 20,977,174
Current Liabilities and Deferred Revenue.............................. 467,716 322,486 360,592
</TABLE>
37
<PAGE>
SELECTED UNAUDITED PRO FORMA FINANCIAL
INFORMATION--THE PARTNERSHIP
The following unaudited pro forma balance sheet assumes a sale of the
Anderson County System, the Three CPLP Systems and the Texas Clusters as of
December 31, 1996. The unaudited pro forma statements of operations assume the
sale of the Anderson County System, the Three CPLP Systems and the Texas
Clusters as of the beginning of the period presented. Final results may differ
from such amounts. The unaudited pro forma balance sheet and statements of
operations should be read in conjunction with the notes thereto. The "as
reported" amounts were taken from the Partnership's audited financial
statements.
CENCOM CABLE INCOME PARTNERS II, L.P.
UNAUDITED PRO FORMA BALANCE SHEET
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PRO FORMA
BALANCE FOR
THE
PRO FORMA TRANSACTION
ADJUSTMENTS BALANCE FOR ADJUSTMENTS AND
FOR THE THE FOR THE THE TEXAS
AS REPORTED TRANSACTION TRANSACTION TEXAS SALES SALES
----------- ----------- ----------- ----------- --------------
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and Cash Equivalents................ $ 531,285 2$1,479,019(a) 2$2,010,304 $7,078,115(h) $ 29,088,419
Accounts receivable, net................. 222,708 (115,991)(b) 106,717 (53,839)(i) 52,878
Prepaid Expenses and other............... 78,705 (15,992)(b) 62,713 (164)(i) 62,549
----------- ----------- ----------- ----------- --------------
Total Current Assets................. 832,698 21,347,036 22,179,734 7,024,112 29,203,846
INVESTMENT IN UNCONSOLIDATED
SUBSIDIARY............................. -- 8,614,641(c) 2,692,669 -- 2,692,669
(5,921,972)(d)
PROPERTY AND EQUIPMENT, net.............. 18,938,808 (13,178,400)(b) 5,760,408 (2,416,737)(i) 3,343,671
FRANCHISE COSTS, net..................... 724,004 (386,831)(b) 337,173 (273,937)(i) 63,236
DEBT ISSUANCE COSTS...................... 350,000 -- 350,000 -- 350,000
----------- ----------- ----------- ----------- --------------
Total Assets......................... $20,845,510 1$0,474,474 3$1,319,984 $4,333,438 $ 35,653,422
----------- ----------- ----------- ----------- --------------
----------- ----------- ----------- ----------- --------------
LIABILITIES AND PARTNERS' CAPITAL
(DEFICIT)
CURRENT LIABILITIES:
Current maturities of long-term debt..... $36,700,000 ($19,800,000)(e) 1$6,900,000 ($5,300,000)(j) $ 11,600,000
Accounts payable and accrued expenses.... 2,416,134 (964,936)(b) 1,451,198 (239,255)(i) 1,211,943
Accrued distributions.................... -- 21,479,019(f) 21,479,019 7,078,115(k) 28,557,134
Payables to General Partner and
Affiliates............................. 3,532,580 -- 3,532,580 -- 3,532,580
----------- ----------- ----------- ----------- --------------
Total current liabilities............ 42,648,714 714,083 43,362,797 1,538,860 44,901,657
DEFERRED REVENUE......................... 24,803 -- 24,803 (11,633)(i) 13,170
PARTNERS' CAPITAL (DEFICIT):
General Partner.......................... (2,828,374) 2,828,374(g) -- -- --
Limited Partners......................... (18,540,466) 19,796,395(g) (11,608,449) 9,884,326(l) (8,802,238)
8,614,641(c) --
(21,479,019)(f) (7,078,115)(k)
Note receivable from General Partner..... (459,167) -- (459,167) -- (459,167)
----------- ----------- ----------- ----------- --------------
Total Partners' Capital (deficit).... (21,828,007) 9,760,391 (12,067,616) 2,806,211 (9,261,405)
----------- ----------- ----------- ----------- --------------
Total Liabilities and Partners'
Capital (deficit).................. $20,845,510 1$0,474,474 3$1,319,984 $4,333,438 $ 35,653,422
----------- ----------- ----------- ----------- --------------
----------- ----------- ----------- ----------- --------------
Book Value Per LP Unit................... $ (240) $ (133) $ (102)
</TABLE>
The accompanying notes to unaudited pro forma financial statements
are an integral part of this unaudited pro forma balance sheet.
38
<PAGE>
CENCOM CABLE INCOME PARTNERS II, L.P.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
PRO FORMA
BALANCE FOR
THE
PRO FORMA TRANSACTION
ADJUSTMENTS BALANCE FOR ADJUSTMENTS AND
FOR THE THE FOR THE THE TEXAS
AS REPORTED TRANSACTION TRANSACTION TEXAS SALES SALES
----------- ----------- ----------- ----------- --------------
<S> <C> <C> <C> <C> <C>
Service Revenues........................... 1$8,155,382 ($8,344,317)(m) $9,811,065 ($4,123,367)(q) $5,687,698
Operating Expenses:
Operating, general and administrative.... 10,572,015 (4,781,368)(n) 5,790,647 (2,292,042)(r) 3,498,605
Depreciation and amortization............ 6,235,182 (3,688,442)(n) 2,546,740 (1,057,187)(r) 1,489,553
----------- ----------- ----------- ----------- --------------
16,807,197 (8,469,810) 8,337,387 (3,349,229) 4,988,158
----------- ----------- ----------- ----------- --------------
Income from operations................... 1,348,185 125,493 1,473,678 (774,138) 699,540
Other Income (Expense):
Interest income.......................... 39,909 (18,358)(o) 21,551 (9,190)(s) 12,361
Interest expense......................... (2,835,247) 1,443,539(p) (1,391,708) 386,402(t) (1,005,306)
----------- ----------- ----------- ----------- --------------
Net Income (Loss).......................... ($1,447,153) $1,550,674 $ 103,521 $(396,926) $ (293,405)
----------- ----------- ----------- ----------- --------------
----------- ----------- ----------- ----------- --------------
Net Loss Per LP Unit....................... $ 16 $ 1 $ 3
</TABLE>
The accompanying notes to unaudited pro forma financial statements
are an integral part of this unaudited pro forma statement.
39
<PAGE>
NOTES TO UNAUDITED PRO FORMA FINANCIAL
INFORMATION--THE PARTNERSHIP
The unaudited pro forma balance sheet assumes the Partnership had sold the
Anderson County System and the Texas Clusters as of December 31, 1996. The
unaudited pro forma statements of operations for the year ended December 31,
1996 assume that the Partnership had sold the Anderson County System and the
Texas Clusters as of January 1, 1996.
For purposes of determining the pro forma effect of the sale of the Anderson
County System, the Three CPLP Systems and the Texas Clusters on the
Partnership's unaudited balance sheet, the following adjustments have been made
as of December 31, 1996:
(a) Cash and cash equivalents
<TABLE>
<S> <C> <C>
Proceeds from the sale of Anderson County System.... $36,700,000
Working capital adjustment:
Anderson County System current assets............. $ 131,983
Anderson County System current liabilities and
deferred revenue................................. (964,936)
---------
Total working capital............................... $ (832,953)
Estimated sales transaction expenses................ (712,000)
Estimated capital expenditures to be reimbursed..... 202,000
Estimated repayment of debt......................... (19,800,000)
Distributions from CPLP (see "SPECIAL FACTORS--
Certain Effects of the Transaction and the Texas
Sales")........................................... 5,921,972
-----------
$21,479,019
-----------
-----------
</TABLE>
(b) Reflects the disposition of assets and liabilities of the Anderson County
System as of December 31, 1996.
(c) Represents the estimated gain of approximately $22.5 million from the CPLP
Transaction allocated to the Partnership, net of unrecorded losses of
approximately $14.9 million. The equity method does not require losses in
excess of the investment unless the Partnership has guaranteed any
obligations or committed to provide further financial support.
(d) Represents the estimated distribution from CPLP as a result of the CPLP
Transaction.
(e) Reflects estimated payment on the outstanding indebtedness under the Credit
Agreement (as defined below).
(f) Represents estimated distributions to be made to the Limited Partners.
(g) Reflects the allocation of the gain on the sale of the Anderson County
System's assets, as of December 31, 1996. Section 7.2(c) of the Partnership
Agreement provides that the gain on sale is allocated to the Limited
Partners after it is applied on a PRO RATA basis between the Limited
Partners (as a group) and the General Partner, in proportion to their
negative capital accounts until such accounts equal zero in accordance with
Section 7.1A of the Partnership Agreement.
40
<PAGE>
(h) Cash and cash equivalents
<TABLE>
<S> <C> <C>
Proceeds from the Texas Sales........................ $15,250,000
Working capital adjustment:
Texas Clusters current assets...................... $ 54,003
Texas Clusters current liabilities and deferred
revenue............................................ (250,888)
---------
Total working capital................................ $ (196,885)
Estimated sales transaction expenses................. (150,000)
Holdback for indemnification......................... (2,525,000)
Estimated repayment of debt.......................... (5,300,000)
----------
$7,078,115
----------
----------
</TABLE>
(i) Reflects the disposition of assets and liabilities of the Texas Clusters as
of December 31, 1996.
(j) Reflects payment on the outstanding indebtedness under the Credit Agreement.
(k) Represents estimated distributions to be made to the Limited Partners.
(l) Reflects the allocation of the gain on the Texas Sales' net assets, as of
December 31, 1996. Section 7.2(c) of the Partnership Agreement provides that
the gain on sale is allocated to the Limited Partners after it is applied on
a PRO RATA basis between the Limited Partners (as a group) and the General
Partner, in proportion to their negative capital accounts until such
accounts equal zero in accordance with Section 7.1A of the Partnership
Agreement.
For purposes of determining the pro forma effect of the sale of the Anderson
County System and the Texas Clusters, the pro forma adjustments described below
have been made to the historical unaudited statements of operations of the
Partnership for the year as if the transactions had occurred as of January 1,
1996:
(m) Elimination of historical service revenues of the Anderson County System.
(n) Elimination of operating expenses of the Anderson County System. The general
and administrative expenses allocated to the System by the Partnership have
not been eliminated.
(o) Reflects the reduction of interest income due to the elimination of the cash
flows from the Anderson County System. The reduction to interest income was
estimated based on the ratio of the Anderson County System's subscribers to
the Partnership's total subscribers.
(p) 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
estimated payment of debt ($19.8 million) multiplied by the weighted average
interest rate for the period.
(q) Elimination of historical service revenues of the Texas Clusters.
(r) Elimination of operating expenses of the Texas Clusters. The general and
administrative expenses allocated to the Texas Clusters by the Partnership
have not been eliminated.
(s) Reflects the reduction of interest income due to the elimination of the cash
flows from the Texas Clusters. The reduction to interest income was
estimated based on the ratio of the Texas Clusters' subscribers to the total
Partnership's subscribers.
(t) Reflects an elimination of interest expense assuming the Texas Sales would
result in a reduction to borrowings under the Credit Agreement. Reduction of
interest expense was calculated based on the estimated payment of debt ($5.3
million) multiplied by the weighted average interest rate for the period.
41
<PAGE>
SELECTED UNAUDITED PRO FORMA FINANCIAL
INFORMATION--CPLP
The following unaudited pro forma balance sheet assumes a sale of the Three
CPLP Systems as of December 31, 1996. The unaudited pro forma statements of
operations assume the sale of the Three CPLP Systems as of January 1, 1996.
Final results may differ from such amounts. The unaudited pro forma balance
sheet and statements of operations should be read in conjunction with the notes
thereto. The "as reported" amounts were taken from CPLP's audited financial
statements.
CENCOM PARTNERS, L.P.
UNAUDITED PRO FORMA BALANCE SHEET
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
AS REPORTED ADJUSTMENTS BALANCE
------------- -------------- -------------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and Cash Equivalents....................................... $ 543,299 $ 12,812,453(a) $ 13,355,752
Accounts receivable, net........................................ 172,642 (469,248 (b) (296,606)
Prepaid Expenses and other...................................... 342,507 (1,968 (b) 340,539
------------- -------------- -------------
Total Current Assets.................................... 1,058,448 12,341,237 13,399,685
PROPERTY AND EQUIPMENT, net..................................... 16,895,746 (15,044,214 (b) 1,851,532
FRANCHISE COSTS, net............................................ 5,148,026 (4,381,179 (b) 766,847
OTHER ASSETS.................................................... 928,419 (599,575 (b) 328,844
------------- -------------- -------------
Total Assets.......................................... $ 24,030,639 $ (7,683,731) $ 16,346,908
------------- -------------- -------------
------------- -------------- -------------
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
CURRENT LIABILITIES:
Current maturities of long-term debt............................ 34,957,500 (34,957,500 (c) --
Accounts payable and accrued expenses........................... 1,410,965 (1,087,056 (b) 323,909
Accrued distributions........................................... -- 12,812,453(d) 12,812,453
Payables to CPI and Affiliates.................................. 3,358,684 (3,396,163 (e) (37,479)
------------- -------------- -------------
Total Current Liabilities............................. 39,727,149 (26,628,266) 13,098,883
DEFERRED REVENUE................................................ 174,791 (131,044 (b) 43,747
PARTNERS' CAPITAL (DEFICIT):
General Partner................................................. (269,004) 424,068(f) 48,468
(106,596 (d)
Limited Partners................................................ (17,602,297) 27,698,661(f) 3,155,810
(6,940,554 (d)
Special Limited Partner......................................... 2,000,000 3,765,303(d) --
(5,765,303 (d)
------------- -------------- -------------
Total Partners' Capital (deficit)....................... (15,871,301) 19,075,579 3,204,278
------------- -------------- -------------
Total Liabilities and Partners' Capital (deficit)............... $ 24,030,639 $ (7,683,731) $ 16,346,908
------------- -------------- -------------
------------- -------------- -------------
Book Value Per CPLP Unit........................................ $ (54,168) $ 10,936
</TABLE>
The accompanying notes to unaudited pro forma financial statements are
an integral part of this unaudited pro forma balance sheet.
42
<PAGE>
CENCOM PARTNERS, L.P. UNAUDITED PRO FORMA
STATEMENT OF OPERATIONS FOR THE YEAR ENDED
DECEMBER 31, 1996
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
AS REPORTED ADJUSTMENTS BALANCE
-------------- -------------- ------------
<S> <C> <C> <C>
Service Revenues................................................ $ 13,748,224 $ (11,376,485 (g) $ 2,371,739
Operating Expenses:
Operating, general and administrative......................... 7,958,845 (6,226,867 (h) 1,731,978
Depreciation and amortization................................. 7,565,531 (6,677,765 (h) 887,766
-------------- -------------- ------------
15,524,376 (12,904,632) 2,619,744
-------------- -------------- ------------
Income from operations........................................ (1,776,152) 1,528,147 (248,005)
Other Income (Expense):
Interest income............................................... 37,089 (30,783 (i) 6,306
Interest expense.............................................. (2,634,834) 2,634,834(j) --
Loss from Hurrican Fran....................................... (383,000) -- (383,000)
-------------- -------------- ------------
Net income (loss)............................................... $ (4,756,897) $ 4,132,198 $ (624,699)
-------------- -------------- ------------
-------------- -------------- ------------
Net Loss Per CPLP Unit.......................................... $ (15,990) $ (2,100)
</TABLE>
The accompanying notes to unaudited pro forma financial statements are
an integral part of this unaudited pro forma statement.
43
<PAGE>
NOTES TO UNAUDITED PRO FORMA FINANCIAL
INFORMATION--CPLP
The unaudited pro forma balance sheet assumes CPLP had sold the Three CPLP
Systems as of December 31, 1996. The unaudited pro forma statements of
operations for the year ended December 31, 1996, assume that CPLP had sold the
Three CPLP Systems as of January 1, 1996.
For purposes of determining the pro forma effect of the sale of the Three
CPLP Systems on CPLP's unaudited balance sheet, the following adjustments have
been made as of December 31, 1996:
<TABLE>
<S> <C> <C>
(a) Contract Sales Price of the Three CPLP Systems $52,450,000
Less:
Estimated working capital adjustment as of
September 30, 1996
Three CPLP Systems Current Assets......................... $ 471,216
Three CPLP Systems Current Liabilities and Deferred
Revenue (includes $500,000 deposit discussed in (e),
below).................................................. (1,718,100)
----------
Total Working Capital Adjustment........................ $(1,246,884)
Estimated sales transaction expenses........................ (798,000)
Estimated capital expenditures to be reimbursed............. 261,000
Estimated repayment of debt................................. (34,957,500)
Estimated payment of deferred management fees............... (2,896,163)
-----------
Estimated Net Proceeds Available for Distribution to the
Partners from the Sale of the Three CPLP Systems before
withholdings for state income taxes....................... $12,812,453
-----------
-----------
</TABLE>
(b) Reflects the disposition of assets and liabilities of the Three CPLP Systems
as of December 31, 1996.
(c) Reflects estimated payment on the outstanding indebtedness under the CPLP
Credit Facility.
(d) Represents estimated distributions to be made to the partners. Section
6.06(B)(ii) and (iii) of the CPLP Partnership Agreement specifies that
distributions shall be made to the special limited partners in proportion to
their Unrecovered Preference Return (as defined therein) until it is reduced
to zero, then the distributions shall be made to the special limited
partners in proportion to the Unrecovered Preference Amount (as defined in
the CPLP Partnership Agreement) until it is reduced to zero. Subsequent to
these distributions, distributions to all other partners may be made in
proportion to their initial capital contribution.
(e) Reflects (i) payment of deferred management fees to CPI of $2,896,163 and
(ii) a decrease of $500,000 related to the refundable advance paid by CC II
for the purchase of the Abbeville System.
(f) Reflects the allocation of the gain on the sale of the Three CPLP Systems'
net assets, as of December 31, 1996.
For purposes of determining the pro forma effect of the sale of the Three
CPLP Systems, the pro forma adjustments described below have been made to the
historical unaudited statement of operations of CPLP for the year as if the
transactions had occurred as of January 1, 1996:
(g) Elimination of historical service revenues of the Three CPLP Systems.
(h) Elimination of operating expenses of the Three CPLP Systems. The general and
administrative expenses allocated to the CPLP Systems by CPLP have not been
eliminated.
44
<PAGE>
(i) Reflects the reduction of interest income due to the elimination of the cash
flows from the Three CPLP Systems. The reduction to interest was estimated
based on the ratio of the Three CPLP Systems' subscribers to CPLP's total
subscribers.
(j) Reflects an elimination of interest expense assuming the sale of the Three
CPLP Systems would result in a reduction to borrowings under the CPLP Credit
Facility. Reduction of interest expenses was calculated based on the
estimated payment of debt multiplied by the weighted average interest rate
for the period.
45
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS--THE PARTNERSHIP
GENERAL INFORMATION
The following table sets forth certain items as a percentage of total
revenues for the periods indicated:
<TABLE>
<CAPTION>
UNAUDITED
-------------------------------
<S> <C> <C> <C>
FOR THE YEAR
ENDED DECEMBER 31,
-------------------------------
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Service Revenues:
Basic Services.................................................................... 74.3% 73.9% 73.3%
Premium Services.................................................................. 12.3 13.3 13.9
Other............................................................................. 13.4 12.8 12.8
--------- --------- ---------
100.0 100.0 100.0
Operating Expenses:
Operating, General and Administrative............................................. 58.2 57.5 58.8
Depreciation and Amortization..................................................... 34.4 36.4 52.9
--------- --------- ---------
92.6 93.9 111.7
Income (Loss) from Operations....................................................... 7.4 6.1 (11.7)
--------- --------- ---------
Interest Income (Expense):
Interest Income................................................................... 0.2 0.7 0.3
Interest Expense.................................................................... (15.6) (20.2) (19.4)
Equity in loss of unconsolidated limited partnership................................ -- -- (1.5)%
--------- --------- ---------
(15.4) (19.5) (20.6)
--------- --------- ---------
Net Loss............................................................................ (8.0)% (13.4)% (32.3)%
--------- --------- ---------
--------- --------- ---------
</TABLE>
Operating results of the Partnership's investment in CPLP are not
consolidated, as the Partnership owns only CPLP Units 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. The amount of unrecorded losses in excess of the
equity investment were approximately $4.0 million, $4.9 million and $6.0 million
for the years ended December 31, 1996, 1995 and 1994.
The following table sets forth a summary of subscriber data (rounded to the
nearest hundred) of the Partnership Systems as of the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
1996 1995 1994
--------- --------- ---------
Basic Subscribers:
Southeast Texas Systems............................................................ 21,900 22,200 21,800
Northeast Missouri Systems......................................................... 2,000 2,100 2,100
Anderson County System............................................................. 20,800 20,200 19,100
--------- --------- ---------
44,700 44,500 43,000
--------- --------- ---------
--------- --------- ---------
Premium Subscriptions:
Southeast Texas Systems............................................................ 7,600 8,400 7,900
Northeast Missouri Systems......................................................... 900 1,000 1,100
Anderson County System............................................................. 10,400 11,100 10,400
--------- --------- ---------
18,900 20,500 19,400
--------- --------- ---------
--------- --------- ---------
</TABLE>
46
<PAGE>
COMPARISON OF YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
REVENUES. In September 1993, when federal rate regulation affecting the
basic and expanded basic service tiers was implemented, rates were rolled back
10% throughout the Partnership Systems, which offset rate increases implemented
earlier in 1993. In 1994, additional rate reductions of up to 7% were required
for some local franchises. These rate reductions significantly impacted the
Partnership Systems' actual revenues as well as the potential to increase
revenues. Limited rate increases are permitted to pass-through to subscribers
certain external costs (such as copyright, programming and franchise fees).
Notwithstanding that, the average revenue per subscriber was reduced for basic
services during the 1992 to 1994 period and the Partnership Systems were able to
increase revenues on an overall basis by increasing the subscriber base, as well
as by increasing revenues from unregulated services such as premium cable
services, advertising and other ancillary revenues.
Partnership revenues increased 4.8% from $16,257,928 in 1994 to $17,046,419
in 1995, and by an additional 6.5% to $18,155,382 in 1996. During this period,
the Partnership increased revenues by increasing the number of its basic
subscribers by 3.5% from December 31, 1994 to December 31, 1995, and by an
additional 0.4% from December 31, 1995 to December 31, 1996; 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 45% at December 31, 1994, to 46% at December 31, 1995, to 42% at December
31, 1996. 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 and, in fact, may continue to decline. 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,
increased by 2.5% from $9,566,754 in 1994 to $9,804,576 in 1995, and by an
additional 7.8% to $10,572,015 in 1996. As a percentage of annual revenue, these
expenses, which include management fees, ranged between 58.8% and 57.5% during
the 1994-1996 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 and $242,000 in 1996, 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 $2,799,000 in 1994; such expenses increased by 11.1% to $3,110,000
in 1995 and by an additional 12.0% to $3,483,000 in 1996. The Partnership's
increased subscriber base also contributed to the overall increase in
programming expenses, since programming costs are determined on a per subscriber
basis.
The Partnership Systems' copyright fees for the carriage of distant signals
increased during the subject periods. Applicable FCC regulations required the
Partnership Systems to add local channels on the basic cable service tier, which
resulted in certain channels regularly carried by the Partnership Systems on the
basic cable service tier being moved to the expanded basic cable service tier.
Inclusion of additional revenues associated with the expanded basic cable
service tier resulted in increased copyright fee payments.
The Partnership also launched additional channels during the subject period,
with related programming costs and costs associated with channel line-up
changes, as the Partnership sought to improve the Partnership Systems' basic
product line as well as increase their subscriber base. Channel line-up changes,
47
<PAGE>
whether resulting from FCC mandated local "must carry" regulations (as discussed
below) or voluntary changes, also involve indirect costs such as marketing and
customer mailings. Increased compliance costs related to the 1992 Cable Act and
pertinent FCC regulations were reflected in operating expenses.
Depreciation and amortization as a percent of revenues, decreased during the
1994-1996 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 1996, 1995 and 1994 were 7.3%, 8.0% and 6.7% and $38,889,000,
$43,163,000 and $44,700,000, respectively. Interest expense decreased by
approximately $612,000 in 1996 versus 1995 as a result of a lower weighted
average of outstanding borrowings in 1996.
NET LOSS. Net loss was reduced by 56.4% for the year ended December 31,
1995 compared to the year ended December 31, 1994. In addition, the net loss was
reduced by 36.9% for the year ended December 31, 1996 compared to the year ended
December 31, 1995. The decreases are due primarily to reduced amortization
related to franchises which have become fully amortized and the fact that
Partnership is no longer recording the equity losses of CPLP, as the
Partnership's investment has been reduced to zero.
The allocation to the Partnership of its proportionate share of the net loss
of CPLP for the year ended December 31, 1994 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 1996, 1995 and 1994,
the unrecorded losses in excess of investment were $3,997,392, $4,903,780 and
$5,995,690, respectively.
LIQUIDITY AND CAPITAL RESOURCES--THE PARTNERSHIP
The Partnership's initial capital resources have included the aggregate of
approximately $81,574,000 (net of related expenses) raised through the sale of
LP Units and approximately $918,000 in General Partner contributions of cash and
notes. These sources of capital were used to fund the purchase of the
Partnership Systems and have since been supplemented with borrowings to finance
capital expenditures.
The Partnership maintains a secured revolving line of credit agreement (the
"Credit Agreement") with a syndicate of banks, for which The Toronto Dominion
Bank is the agent. Such Credit Agreement bears interest at a rate selected by
the Partnership equal to the Eurodollar rate, The Toronto Dominion Bank's prime
rate, or the certificate of deposit rate, as the case may be, plus a spread, and
has a maturity date of December 31, 1996, which was extended in December 1996 to
June 30, 1997. The Credit Agreement allows borrowings up to $65 million. While
the Partnership's cash flow from operations has been used to fund a portion of
capital expenditures, in prior periods the Partnership from time to time
incurred debt to cover the balance of capital expenditures. Outstanding
indebtedness of the Partnership under the Credit Agreement at December 31, 1995
and 1996, was $40,400,000 and $36,700,000, respectively. If the Partnership
Transaction is not consummated by June 30, 1997, the Credit Agreement will need
to be extended again, which extension, if obtainable, could result in
substantial fees being charged to the Partnership.
The Partnership made capital expenditures of approximately $2,108,000,
$3,001,000 and $1,913,000 during 1996, 1995 and 1994, respectively, in
connection with the improvement and upgrading of the Partnership Systems.
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
48
<PAGE>
1994, 1995 or 1996 to the Limited Partners. Distributions in arrears, totalling
approximately $49,807,086 at December 31, 1996 will be distributed in accordance
with the Partnership Agreement, although it is unlikely that all such amounts
will be satisfied. See "CERTAIN INFORMATION ABOUT THE PARTNERSHIP, CPLP, THE
GENERAL PARTNER, CPI AND CERTAIN AFFILIATES--Distributions Per LP Unit Since
Partnership Inception."
It is the General Partner's intention to sell the Partnership's remaining
assets as expeditiously as possible, subject to the receipt of offers to
purchase such assets at prices the General Partner deems reflective of their
fair market value. After the remaining Partnership assets, including the
Partnership's investment in CPLP, have been sold or liquidated for cash, the
General Partner will repay the balance of the Partnership's outstanding
obligations, expenses and other liabilities and distribute any remaining cash
(subject to holdback for contingencies) to the Limited Partners of the
Partnership, at which time the Partnership's existence will be terminated.
The Partnership's investment in CPLP represents approximately 25% of the
Partnership's total investment in cable systems. The Partnership's investment is
passive in nature as evidenced by its position in CPLP as a limited partner. The
financial statement losses recorded by the Partnership for its allocated share
of the total losses of CPLP do not represent current or future cash outlays and,
as such, should not impact the operating results or operating cash flows
generated by the Partnership's owned cable systems.
The Partnership accounts for its investments in CPLP on the equity method as
it does not retain management control of CPLP. Therefore, allocated losses from
CPLP in excess of the Partnership's investment are not recorded. The balance of
investment in unconsolidated limited partnership was reduced to zero during 1994
through the recognition of the Partnership's allocated share of the net loss of
CPLP up to the amount of the remaining investment.
RESULTS OF OPERATIONS--CPLP
GENERAL INFORMATION
The following table sets forth certain items as a percentage of total
revenues for the periods indicated:
<TABLE>
<CAPTION>
UNAUDITED
-------------------------------
<S> <C> <C> <C>
FOR THE YEAR ENDED
DECEMBER 31,
-------------------------------
<CAPTION>
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Service Revenues:
Basic Services..................................................................... 74.0% 73.3% 73.7%
Premium Services................................................................... 13.0 14.2 14.6
Other.............................................................................. 13.0 12.5 11.7
--------- --------- ---------
100.0 100.0 100.0
Operating Expenses:
Operating, General and Administrative.............................................. 57.9 56.7 55.6
Depreciation and Amortization...................................................... 55.0 66.8 86.2
--------- --------- ---------
112.9 123.5 141.8
Income (Loss) from Operations........................................................ (12.9) (23.5) (41.8)
--------- --------- ---------
Interest Income (Expense):
Interest Income.................................................................... 0.3 0.2 0.1
Interest Expense................................................................... (19.2) (22.1) (19.8)
Loss from Hurricane Fran........................................................... (2.8) -- --
--------- --------- ---------
(21.7) (21.9) (19.7)
--------- --------- ---------
Net Loss............................................................................. (34.6)% (45.4)% (61.5)%
--------- --------- ---------
--------- --------- ---------
</TABLE>
49
<PAGE>
COMPARISON OF YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
REVENUES. In September 1993, when federal rate regulation affecting the
basic and expanded basic service tiers was implemented, rates were rolled back
10% throughout the CPLP Systems, which offset rate increases implemented earlier
in 1993. In 1994, additional rate reductions of up to 7% were required for some
local franchises. These rate reductions significantly impacted the CPLP Systems'
actual revenues as well as the potential to increase revenues. Limited rate
increases are permitted to pass-through to subscribers certain external costs
(such as copyright, programming and franchise fees). Notwithstanding that, the
average revenue per subscriber was reduced for basic services during the 1992 to
1994 period and CPLP was able to increase revenues on an overall basis by
increasing the subscriber base, as well as by increasing revenues from
unregulated services such as premium cable services, advertising and other
ancillary revenues.
CPLP revenues increased 6.5% from approximately $12,076,000 in 1994 to
approximately $12,856,000 in 1995. Revenues then increased by 6.9% to
$13,748,000 in 1996. During this period, CPLP increased revenues by increasing
the number of its basic subscribers by 2.3% from December 31, 1994 to December
31, 1995, and by an additional 1.7% from December 31, 1995 to December 31, 1996;
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 "spillover" benefit for cable providers.
The ratio of premium service subscriptions per basic subscriber fluctuated
from 45% at December 31, 1994, to 44% at December 31, 1995 to 43% at December
31, 1996. CPLP anticipates that the ratio of subscriptions for premium services
to subscriptions for basic services may not increase over the next few years and
may continue to decline. CPLP has begun to offer premium services to subscribers
in a packaged format, providing subscribers with a discount from the combined
retail rates of these packaged services. However, premium subscription services
will still remain an important revenue source for CPLP.
OPERATING EXPENSES. Operating, general and administrative expenses
increased by 8.7% from approximately $6,710,000 in 1994 to approximately
$7,295,000 in 1995, and by an additional 9.1% to approximately $7,959,000 in
1996. As a percentage of annual revenue, these expenses, which include
management fees, increased from 55.6% to 57.9% during the 1994-1996 time period.
CPLP was able to control certain operating costs to offset the larger increases
in certain other categories, as discussed below. In addition, operating expenses
included liquidation costs of approximately $116,000 and $243,000 in 1995 and
1996, respectively, related to initiating the process to sell the assets of
CPLP.
CPLP's operating expenses were affected by substantial industry-wide
increases in programming expenses. Programming expenses were approximately
$2,207,000 in 1994 and such expenses increased by 17.4% to $2,591,000 in 1995
and by an additional 8.8% to $2,820,000 in 1996. CPLP's increased subscriber
base also contributed to the overall increase in programming expenses, since
programming costs are determined on a per subscriber basis.
The CPLP Systems' copyright fees for the carriage of distant signals
increased during the subject periods. Applicable FCC regulations required the
CPLP Systems to add local channels on the basic cable service tier, which
resulted in certain channels regularly carried by the CPLP Systems on the basic
cable service tier being moved to the expanded basic cable service tier.
Inclusion of additional revenues associated with the expanded basic cable
service tier resulted in increased copyright fee payments.
CPLP also launched additional channels during the subject period, with
related programming costs and costs associated with channel line-up changes, as
CPLP sought to improve the CPLP Systems' basic product line as well as increase
their subscriber base. Channel line-up changes, whether resulting from FCC
mandated local "must carry" regulations (as discussed below) or voluntary
changes, also involve
50
<PAGE>
indirect costs such as marketing and customer mailings. Increased compliance
costs related to the 1992 Cable Act and pertinent FCC regulations were reflected
in operating expenses.
Depreciation and amortization, both in terms of actual amounts and as a
percentage of revenues, decreased during the 1994-1996 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
$449,000 in 1995 due to higher interest rates offset somewhat by a partial
paydown of the debt balance; the weighted average interest rate and outstanding
borrowings for 1996, 1995 and 1994 were 7.5%, 7.8% and 6.1% and $34,957,500,
$36,439,000 and $38,062,000, respectively. Interest expense decreased by
approximately $210,000 in 1996 versus 1995 as a result of slightly lower
effective interest rates.
During 1996, CPLP recorded a loss of $383,000 related to damage caused by
Hurricane Fran. This non-operating loss reflects CPLP's allocated portion of the
insurance deductible.
LIQUIDITY AND CAPITAL RESOURCES--CPLP
CPLP's initial capital resources have included the aggregate of
approximately $29,300,000 in limited partner contributions, $450,000 in general
partner contributions and $2,000,000 in special limited partner contributions.
Included in the limited partner contributions is $25,000,000 contributed by the
Partnership which represents an ownership of approximately 84%. These sources of
capital were used to fund the purchase of the CPLP Systems and have since been
supplemented with borrowings to finance capital expenditures.
The CPLP Credit Facility bears interest as a rate selected by CPLP equal to
the Eurodollar rate, the Toronto Dominion Bank's prime rate, or the certificate
of deposit rate, as the case may be, plus a spread, and has a maturity date of
December 31, 1996, which was extended in December 1996 to June 30, 1997 to
accommodate completion of the Partnership's liquidation. There is no additional
available borrowings for CPLP in excess of the balance outstanding. While CPLP's
cash flow from operations has been used to fund a portion of capital
expenditures, CPLP incurred debt to cover the balance of capital expenditures
from time to time in prior periods. Outstanding indebtedness of CPLP under the
CPLP Credit Facility at December 31, 1995 and 1996 was $34,957,500. If the CPLP
Transaction is not consummated by June 30, 1997, the CPLP Credit Facility will
need to be extended again, which extension, if obtainable, could result in
substantial fees being charged to CPLP.
CPLP made capital expenditures of approximately $2,427,000, $1,974,000, and
$2,450,000 during 1996, 1995 and 1994, respectively, in connection with the
improvement and upgrading of the CPLP Systems.
Historically, CPLP has made no distributions to its limited partners or
special limited partners in order to provide greater financial flexibility in
meeting its debt covenants and in making capital expenditures necessary to
maintain CPLP's assets. In conjunction with the Transaction, CPLP intends to
repay all outstanding debt and will make a distribution to the special limited
partners equal to the sum of their unrecovered preference amount and their
preference return. The funds from the sale remaining after repayment of debt and
distributions to the special limited partners as well as the excess funds
available from future operations will be distributed in accordance with the CPLP
Partnership Agreement.
If the CPLP Transaction is not consummated (either due to failure to obtain
the Consent of the Limited Partnership to the Transaction or because other
conditions to closing the CPLP Transaction are not satisfied), the $500,000
advance previously paid by CC II towards the purchase of the Abbeville System
must be refunded to CC II.
51
<PAGE>
BUSINESS OF THE PARTNERSHIP AND CPLP
THE CABLE TELEVISION INDUSTRY
Cable television was introduced in the early 1950s to provide television
signals to small or rural towns with little or no available off-air television
signals and to communities with reception difficulties caused by terrain
problems. The cable television industry has since added non-broadcast
programming and increased channel capacity to these "classic system" subscribers
and has also expanded service to more densely populated areas and to those
communities in which off-air reception is not a problem. In addition, most cable
television systems offer a variety of channels and programming. See
"--Marketing, Programming and Rates."
In recent years, cable operators have been building more sophisticated
systems with greater channel capacity, thereby increasing the potential number
of programming offerings available to subscribers and, consequently, increasing
the potential revenue available per subscriber. Present day state-of-the-art
cable television systems are capable of providing 36 to 108 channels of
programming.
A cable television system consists of two principal operating components:
one or more signal origination points called "headends" and a signal
distribution system. It may also include program origination facilities. Each
headend includes a tower, antennae or other receiving equipment at a location
favorable for receiving broadcast signals and one or more earth stations that
receive signals transmitted by satellite. The headend facility also houses the
electronic equipment which amplifies, modifies and modulates the signals,
preparing them for passage over the system's network of cables.
The signal distribution system consists of amplifiers and trunk lines which
originate at the headend and carry the signal to various parts of the system,
smaller distribution cables and distribution amplifiers which carry the signal
to the immediate vicinity of the subscriber and drop lines which carry the
signal into the subscriber's home. In the past several years, many cable
operators have utilized fiber optic (in place of, or in combination with,
coaxial) technology to transmit signals through the primary trunk lines.
CERTAIN REGULATORY AND LEGISLATIVE DEVELOPMENTS
The cable television industry is subject to extensive regulation by federal,
local and, in some instances, state government agencies. The Cable Television
Consumer Protection and Competition Act of 1992 (the "1992 Cable Act")
significantly expanded the scope of cable television regulation on an
industry-wide basis by imposing rate regulation, requirements related to the
carriage of local broadcast stations, customer service obligations and other
requirements. Under the FCC's initial rate regulations pursuant to the 1992
Cable Act, regulated cable systems (i.e., those systems not subject to effective
competition) were required to apply a benchmark formula to determine their
maximum permitted rates. Those systems whose rates were above the benchmark on
September 30, 1992, were required to reduce their rates to the benchmark or by
10%, whichever was less. Under revised rate regulations adopted in February
1994, regulated cable systems were required to set their rates so that regulated
revenues per subscriber did not exceed September 30, 1992 levels, reduced by 17%
(taking into account the previous 10% reduction).
On June 15, 1995, the FCC released new rules to reduce the substantive and
procedural burdens of rate regulation applicable to small cable systems (i.e.,
cable systems servicing 15,000 or fewer subscribers that are owned by a cable
company which served, in the aggregate, 400,000 or fewer subscribers at the time
such rules went into effect). Cable companies falling outside of this definition
may petition the FCC for small company treatment if they can demonstrate similar
circumstances. The FCC's new small cable systems rules amended the FCC's
previous definitions of small cable entities to encompass a broader range of
cable systems that are eligible for special rate and administrative treatment.
Specifically, the new rules create a new cost-of-service approach for the
purpose of determining the rate applicable to a small cable system. The new
approach involves a five-element calculation based on a system's costs. The
Partnership and CPLP both applied to the appropriate regulatory authorities for
small cable system rate
52
<PAGE>
relief with regard to all of their systems. See "--Regulation and Legislation."
Such systems' status as "small cable systems" could be challenged by other
parties and could be denied by the FCC. With regard to most of the systems for
which small system applications were filed, the time period in which a challenge
could be filed has passed. However, regarding CCIP II's systems in Jasper and
Angelton, Texas, the FCC has issued an order which denies those systems small
system status. The Partnership has sought clarification of this order, but there
has been no response from the FCC to date. The order did not require any
reduction in rates or rate refunds. However, because of the FCC's ruling, the
Partnership will be unable to take advantage of the special regulatory benefits
accruing to small systems with regard to the Jasper and Angelton, Texas,
systems, including a presumption of reasonability of certain rates. Therefore,
for the Jasper and Angelton, Texas systems, the Partnership may be required to
justify its rates under the general rate processes applicable to cable
operators, which may be less favorable. At this time, however, the Partnership
is unable to determine whether the order will have any material impact on the
rates the partnership can charge subscribers in these particular franchise
areas.
On February 1, 1996, Congress passed the Telecommunications Act of 1996 (the
"Telecommunications Act," and, together with the 1992 Cable Act, the "Cable
Acts"). The Telecommunications Act was signed into law by the President on
February 8, 1996, and substantially amends the Communications Act of 1934 (the
"Communications Act") (including the re-regulation of subscriber rates under the
1992 Cable Act). The Telecommunications Act alters federal, state and local laws
and regulations pertaining to cable television, telecommunications and other
services. See "--Regulation and Legislation."
Certain provisions of the Telecommunications Act could materially affect the
growth and operation of the cable television industry and the cable services
provided by the Partnership. Although the new legislation is expected to
substantially lessen regulatory burdens, the cable television industry may be
subject to additional competition as a result thereof. There are numerous
rulemakings which have been, and which will be undertaken by the FCC which will
interpret and implement the Telecommunications Act's provisions. In addition,
certain provisions of the Telecommunications Act (such as the deregulation of
cable programming rates) are not immediately effective. In addition, the
legality of certain of the Telecommunications Act's provisions have been, and
are likely to continue to be, judicially challenged, and the FCC's regulations
implementing the Telecommunications Act may be appealed for reconsideration by
the FCC. The Partnership is unable at this time to predict the outcome of such
rulemaking or litigation or the substantive effect (financial or otherwise) of
the new legislation and the rulemakings on the Partnership. Likewise, CPLP is
unable at this time to predict the outcome of such rulemakings or litigations or
the substantive effect (financial or otherwise) of the new legislation and the
rulemakings on CPLP.
DESCRIPTION OF SYSTEMS; PROPERTY RELATING TO SYSTEMS
PARTNERSHIP SYSTEMS
Commencing in December 1987, the Partnership acquired the Partnership
Systems in a series of transactions. These acquisitions were financed through a
combination of the proceeds of the sale of LP Units, bank loans and, in certain
cases, seller financing. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS--Liquidity and Capital Resources."
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 Aqua Dulce, Angelton, Bailey's Prairie, Bellville, 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.
53
<PAGE>
The Marlin Cluster is a part of the Southeast Texas Systems which serves the
communities of Marlin, Madisonville and Buffalo, Texas.
The following table sets forth a summary of subscriber data (rounded to the
nearest hundred) of the Partnership Systems as of the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
1996 1995 1994
--------- --------- ---------
Basic Subscribers:
Southeast Texas Systems............................................................ 21,900 22,200 21,800
Northeast Missouri Systems......................................................... 2,000 2,100 2,100
Anderson County System............................................................. 20,800 20,200 19,100
--------- --------- ---------
44,700 44,500 43,000
--------- --------- ---------
--------- --------- ---------
Premium Subscriptions:
Southeast Texas Systems............................................................ 7,600 8,400 7,900
Northeast Missouri Systems......................................................... 900 1,000 1,100
Anderson County System............................................................. 10,400 11,100 10,400
--------- --------- ---------
18,900 20,500 19,400
--------- --------- ---------
--------- --------- ---------
</TABLE>
A brief description of the Partnership Systems follows.
The Southeast Texas Systems, including the Jasper Cluster and the Marlin
Cluster. The Southeast Texas Systems provide cable television service to 17
communities located in eastern and southern Texas. As of December 31, 1996, the
Southeast Texas Systems consisted of 13 headend sites and approximately 700
miles of activated distribution plant passing approximately 45,700 homes and
serving approximately 21,900 basic subscribers, subscribing for approximately
7,600 premium service units. At December 31, 1996, the Partnership employed 37
full-time equivalent persons in connection with the Southeast Texas Systems. The
largest communities served by the Southeast Texas Systems as of December 31,
1996 were Kingsville and Angelton, Texas, which accounted for approximately 24%
and 19%, respectively, of the basic subscribers served by the Southeast Texas
Systems. As of December 31, 1996, the Jasper Cluster and the Marlin Cluster
accounted for approximately 31% and 16%, respectively, of the basic subscribers
served by the Southeast Texas Systems. The original acquisition price of the
Southeast Texas Systems was $35,375,000.
THE NORTHEAST MISSOURI SYSTEMS. The Northeast Missouri Systems provide
cable television service to eight communities located in the northeastern
section of Missouri. As of December 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 900 premium service
units. At December 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 December 31, 1996, Canton and
LaGrange subscribers accounted for approximately 47% of the subscribers served
by the Northeast Missouri Systems. The original acquisition price of the
Northeast Missouri Systems was $3,060,000.
THE ANDERSON COUNTY SYSTEM. The Anderson County System provides cable
television service to 11 communities located in South Carolina. As of December
31, 1996, the Anderson County System consisted of four headends and
approximately 1,100 miles of activated distribution plant passing approximately
28,700 homes and serving customers subscribing to approximately 20,800 basic and
10,400 premium subscriptions. At December 31, 1996, the Partnership employed 26
full-time equivalent persons in connection with the operation of the Anderson
County System. The largest communities served by the Anderson County System are
unincorporated Anderson and Greenville Counties, which accounted for
54
<PAGE>
approximately 47% and 24%, respectively, of the basic subscribers served by the
Anderson County System. The original acquisition price of the Anderson County
System was $33,600,000.
CPLP SYSTEMS
Commencing in March 1990, CPLP acquired the CPLP Systems in a series of
transactions. These acquisitions were financed through two investments by the
Partnership, in March and June 1990 totaling approximately $25,000,000 in
equity, as well as through investments by CPI, unrelated third parties and bank
financing.
The Abbeville System serves communities located in and around Abbeville and
Abbeville County, South Carolina. The Lincolnton System serves communities
located in and around Lincolnton, Vale and Taylorsville, North Carolina, and the
Sanford System serves communities located in and around Sanford, Silver City,
Whispering Pines and Troy, North Carolina. The LaGrange System serves
communities located in and around LaGrange, Schulenberg, Hallettsville, Weimar
and Giddings, Texas.
The following table sets forth a summary of subscriber data (rounded to the
nearest hundred) of the CPLP Systems as of the dates indicated:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
1996 1995 1994
--------- --------- ---------
Basic Subscribers:
Abbeville System................................................................... 2,500 2,500 2,500
Lincolnton Systems................................................................. 14,800 14,300 14,000
Sanford Systems.................................................................... 12,600 12,600 12,200
LaGrange System.................................................................... 6,300 6,200 6,100
--------- --------- ---------
36,200 35,600 34,800
--------- --------- ---------
--------- --------- ---------
Premium Subscriptions:
Abbeville System................................................................... 900 900 800
Lincolnton Systems................................................................. 6,400 6,300 6,500
Sanford System..................................................................... 6,000 5,700 5,800
LaGrange System.................................................................... 2,400 2,600 2,500
--------- --------- ---------
15,700 15,500 15,600
--------- --------- ---------
--------- --------- ---------
</TABLE>
A brief description of each of the CPLP Systems follows.
THE ABBEVILLE SYSTEM. The Abbeville System provides cable television
service to one community located in South Carolina. As of December 31, 1996, the
Abbeville System consisted of one headend site and approximately 85 miles of
activated distribution plant passing approximately 3,700 homes and serving
approximately 2,500 basic subscribers, subscribing for approximately 900 premium
service units. At December 31, 1996, the Partnership employed five full-time
equivalent persons in connection with the Abbeville System. The largest
community served by the Abbeville System as of December 31, 1996 was Abbeville,
South Carolina, which accounted for approximately 100% of the basic subscribers
served by the Abbeville System. The original acquisition price of the Abbeville
System was $4,000,000.
THE LINCOLNTON SYSTEM. The Lincolnton System provides cable television
service to four communities located in North Carolina. As of December 31, 1996,
the Lincolnton System consisted of three headend sites and approximately 850
miles of activated distribution plant passing approximately 28,800 homes and
serving approximately 14,800 basic subscribers, subscribing for approximately
6,400 premium service units. At December 31, 1996, the Partnership employed 20
full-time equivalent persons in connection with the Lincolnton System. The
largest community served by the Lincolnton System as of December 31, 1996 was
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Lincolnton, North Carolina, which accounted for approximately 70% of the basic
subscribers served by the Lincolnton System. The original acquisition price of
the Lincolnton System was $21,406,000.
THE SANFORD SYSTEM. The Sanford System provides cable television service to
eight communities located in North Carolina. As of December 31, 1996, the
Sanford System consisted of four headend sites and approximately 600 miles of
activated distribution plant passing approximately 21,600 homes and serving
approximately 12,600 basic subscribers, subscribing for approximately 6,000
premium service units. At December 31, 1996, the Partnership employed 18
full-time equivalent persons in connection with the Sanford System. The largest
community served by the Sanford System as of December 31, 1996 was Sanford,
North Carolina, which accounted for approximately 73% of the basic subscribers
served by the Sanford System. The original acquisition price of the Sanford
System was $33,148,500.
THE LAGRANGE SYSTEM. The LaGrange System provides cable television service
to five communities located in Southeast Texas. As of December 31, 1996, the
LaGrange System consisted of five headend sites and approximately 120 miles of
activated distribution plant passing approximately 10,300 homes and serving
approximately 6,300 basic subscribers, subscribing for approximately 2,400
premium service units. At December 31, 1996, the Partnership employed ten
full-time equivalent persons in connection with the LaGrange System. The largest
community served by the LaGrange System as of December 31, 1996 was LaGrange,
Texas, which accounted for approximately 78% of the basic subscribers served by
the LaGrange System. The original acquisition price of the LaGrange System was
$12,643,000.
PROPERTIES
Principal physical assets of the Partnership and CPLP consist of, among
other things, the components of each of the cable television systems, which
include a central receiving apparatus, distribution cables and a local business
office. The receiving apparatus is comprised of a tower and antennae for
reception of over-the-air broadcast television signals and one or more earth
stations for reception of satellite signals. Located near these receiving
devices is a building that houses associated electronic gear and processing
equipment. Each of the Partnership and CPLP owns the receiving and distribution
equipment of each Partnership System or CPLP System, as the case may be, and
owns or leases small parcels of real property for the receiving sites.
Cable is either buried in trenches or is attached to utility poles pursuant
to license agreements with the owners of the poles. The Partnership and CPLP own
or lease the local business office of each system from which it dispatches
service employees, monitors the technical quality of the system, handles
customer service and billing inquiries and administers marketing programs.
Certain of the office facilities include studios for program production.
The General Partner believes that the Partnership's and CPLP's properties
are generally in good condition and fully utilized. The Partnership Systems
currently operate at between 300 and 450 megahertz, with the Anderson County
System operating at between 330 and 450 megahertz, whereas the General Partner
believes the typical plant in the cable television industry to be 450 megahertz.
All of the CPLP Systems, including the Three CPLP Systems, currently operate at
between 330 and 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 capital expenditures, see "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS--Financial Condition" and "-- Liquidity and Capital Resources."
MARKETING, PROGRAMMING AND RATES
Both the Partnership's and CPLP's marketing programs are based upon offering
various packages of cable services designed to appeal to different market
segments. The General Partner and CPI perform and
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utilize market research on selected Partnership Systems and CPLP Systems,
respectively, compare the data to national research and tailor a marketing
program for each individual market. Each of the General Partner and CPI utilizes
a coordinated array of marketing techniques to attract and retain subscribers,
including door-to-door solicitation, telemarketing, media advertising and direct
mail solicitations. The Partnership and CPLP regularly implement marketing
efforts instituted by the General Partner and CPI, respectively, in order to
gain new subscribers and increase basic and premium penetration in the
communities served by the systems.
Although services vary from system to system because of differences in
channel capacity, viewer interests and community demographics, each of the
individual Partnership Systems and CPLP Systems offers a "basic service tier,"
consisting of local television channels (network and independent stations)
available over-the-air, local public channels and governmental and leased access
channels. Each individual system also offers an expanded basic service tier of
television stations relayed from distant cities, specialized programming
delivered via satellite and various alpha-numeric channels providing information
on news, time, weather and the stock market. In addition to these services, the
systems typically provide one or more premium services purchased from
independent suppliers and combined in different formats to appeal to the various
segments of the viewing audience, such as Home Box Office, Cinemax, Showtime,
The Movie Channel and the Disney Channel. A "premium service unit" is a single
premium service for which a subscriber must pay an additional monthly fee in
order to receive the service. Subscribers may subscribe for one or more premium
service units. The systems also receive revenues from the sale or monthly use of
certain equipment (e.g., converters, wireless remote control devices, etc.) and
from cable programming guides, with some systems offering enhanced audio
services. Certain of the systems also generate revenues from the sale of
advertising spots on one or more channels, from the distribution and sale of
pay-per-view movies and events, and from commissions resulting from subscribers
participating in home shopping.
Rates to subscribers vary from market to market and in accordance with the
type of service selected. At December 31, 1996, the Partnership Systems' monthly
basic fees ranged from $8.23 to $15.60 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 $8.24 to $9.89 for the basic service tier and $15.01 to
$16.27 for the expanded basic service tier. The monthly basic fees for CPLP's
cable television systems ranged from $7.79 to $11.06 for the basic service tier
and $14.50 to $17.10 for the expanded basic tier. The Abbeville System's monthly
basic fees were $8.19 for the basic tier and $16.76 for the expanded basic tier.
The Sanford System's monthly basic fees were $8.95 for the basic tier and $14.50
for the expanded basic tier. The Lincolnton System's monthly basic fees ranged
from $7.79 to $9.03 for the basic tier and from $15.88 to $17.10 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 and CPLP regarding rates are
consistent with the current practices in the industry. See "--Regulation and
Legislation" for a discussion of rate-setting.
MANAGEMENT AGREEMENT
Prior to July 15, 1994, the Partnership Systems were managed by Cencom Cable
Associates, Inc. (now known as Cencom Cable Entertainment, Inc. and referred to
herein as "CCA") pursuant to a Management Agreement dated as of December 8, 1987
(the "Management Agreement"). CCA's rights and obligations under the Management
Agreement were assumed by the General Partner pursuant to an Assignment and
Assumption Agreement dated as of July 15, 1994 between CCA and the General
Partner. Consequently, the General Partner has the exclusive right,
authorization, and responsibility to manage the Partnership Systems.
Under the Management Agreement, the General Partner is to receive a
management fee equal to five percent of the gross operating revenues of the
Partnership for its services. Such fee is to be paid quarterly
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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 1996, 1995 and 1994
were approximately $905,100, $852,300 and $812,900, 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." Although the General Partner is currently entitled to collect 50%
of its management fees pursuant to the terms of the Management Agreement, the
General Partner has decided to defer receipt of such fees until such time as the
Partnership's outstanding indebtedness is reduced through a combination of
repayment and refinancing of such indebtedness.
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. For further
information regarding the foregoing, and for information regarding CPLP's
management agreement arrangement, see "CERTAIN INFORMATION ABOUT THE
PARTNERSHIP, CPLP, THE GENERAL PARTNER, CPI AND CERTAIN AFFILIATES--Certain
Affiliate Transactions."
FRANCHISES
The Partnership Systems and the CPLP Systems operate pursuant to an
aggregate of 36 and 21 non-exclusive franchises, permits or similar
authorizations, respectively, issued by governmental authorities. Franchises or
permits are awarded by a governmental authority and generally are not
transferable absent the consent of the governmental authority. Most of the
franchises pursuant to which the Partnership Systems and the CPLP Systems
operate may be terminated prior to their stated expiration by the granting
authority, after due process, following a breach of a material provision.
Currently, six of the Partnership's 36 franchises, serving approximately 5% of
the Partnership's subscribers in the aggregate, and eight of CPLP's 21
franchises, serving approximately 47.5% of CPLP's subscribers in the aggregate,
are within a three-year window period for renewal. Of the Anderson County
System's 11 franchises, five are due to expire before September 2005 and one is
currently undergoing renewal. Of the Three CPLP Systems' 16 franchises, 13 are
due to expire before August 2005 and six 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
Partnership Systems or CPLP Systems are located, although other cable operators
may operate systems in the vicinity of the Partnership Systems or CPLP Systems.
Cable system operators also compete for the right to construct systems in new
housing developments adjoining or otherwise located in proximity to such
operator's existing systems. The Partnership and CPLP believe that the selection
of a cable operator to construct a system in a new housing development (which
may be located near the cable systems of several different operators) is
typically based upon an evaluation by the real estate developer of the
programming and pricing offered by the different cable operators conducting
business in proximity to such housing development.
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Cable television systems also face competition from alternative methods of
receiving and distributing television signals and from other sources of home
entertainment. Within the home video programming market, the Partnership
competes primarily with other cable franchise holders and with home satellite
and wireless cable providers, and, when existing franchises become available for
renewal (or new franchises become available in the southeastern region of the
United States), with other cable franchise holders. The Partnership believes
that direct broadcast satellite ("DBS"), a service by which packages of
television programming are transmitted to individual homes which are serviced by
a single satellite dish, is currently the most significant competitive threat to
the Partnership Systems. However, there are currently 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).
In some instances the prices that consumers pay to obtain a DBS satellite dish
have been reduced substantially. Nevertheless, the product is still in its early
stages of implementation and it is difficult to assess the ultimate magnitude of
the impact that DBS will have on the cable industry or upon the Partnership's
operations and revenues. The Partnership does not expect DBS to become a more
significant threat to it in the foreseeable future because of the disadvantages
currently associated with DBS technology. To the extent these disadvantages are
ameliorated in the future as a result of technological or other advances, the
competitive impact of DBS on the cable industry and on the Partnership's
operations would need to be reevaluated.
Cable television systems also compete with wireless program distribution
services such as multichannel multipoint distribution service ("MMDS"), which
uses low power microwave frequencies to transmit video programming over-the-air
to customers. The FCC has amended its regulations to enable MMDS systems to
compete more effectively with cable systems by making available additional
channels to the MMDS industry and by refining the procedures by which MMDS
licenses are granted. The FCC also recently ruled that wireless cable operators
may increase their channel capacity and service offerings through digital
compression techniques. Such increased capacity and offerings may make wireless
cable a more significant competitor in the video programming industry. The 1992
Cable Act generally prohibits a cable operator from holding an FCC MMDS license
in its franchised cable service area. However, the Telecommunications Act allows
such common ownership if the cable operator is subject to "effective
competition." Although the Partnership and CPLP face some actual or potential
competition from MMDS operators, such competition is not yet significant.
Additionally, the FCC recently allocated frequencies in the 28 GHz band for a
new multichannel wireless video service similar to MMDS. The Partnership is
unable to predict the economic viability of wireless video services, such as
MMDS, or whether such services will present a competitive threat to the
Partnership or CPLP.
Additional forms of competition for cable systems are master antenna
television ("MATV") and satellite master antenna television system ("SMATV").
These systems are essentially small, closed cable systems which operate within
specific hotels, apartment or condominium complexes 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.
A federal statutory cross-ownership restriction had historically limited
entry into the cable television business by local telephone companies, which are
potentially strong competitors to cable operators. The
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Telecommunications Act repealed the cross-ownership restriction and authorizes
local exchange carriers ("LECs") to provide a wide variety of video services
competitive with services provided by cable systems and to provide cable
services directly to customers in the telephone companies' service areas, with
some regulatory safeguards. See " --Regulation and Legislation." Some video
programming services provided by telephone companies (e.g., "open video
systems") do not require local franchises. Further, certain of the Regional Bell
Operating Companies ("RBOCs") have already entered the cable television business
outside their service areas. The General Partner believes that telephone
companies will generally focus their efforts on cable acquisitions in larger
metropolitan areas, although there can be no assurance that this will be the
case.
The Telecommunications Act also authorizes registered utility holding
companies and their subsidiaries to provide video programming services,
notwithstanding the applicability of the Public Utility Holding Company Act. See
"--Regulation and Legislation."
Other new technologies may become competitive with non-entertainment
services that cable television systems can offer. Advances in communications
technology as well as changes in the marketplace and the regulatory and
legislative environment are constantly occurring. The General Partner cannot
predict the effect that ongoing or future developments might have on the cable
television industry generally or the Partnership or CPLP specifically.
REGULATION AND LEGISLATION
The cable television industry is subject to extensive regulation at the
federal, local and, in some instances, state levels. In addition, recent
legislative and regulatory changes and additional regulatory proposals under
consideration may materially affect the cable television industry. The Cable
Acts, both of which amended the Communications Act, establish a national policy
to guide the development and regulation of cable television systems. The
Communications Act was recently substantially amended by the Telecommunications
Act, which alters federal, state and local laws pertaining to cable television,
telecommunications and other services. Principal responsibility for implementing
the policies of the Cable Acts is allocated between the FCC and state or local
franchising authorities.
CABLE ACTS AND FCC REGULATION
The Cable Acts and the FCC's implementing rules establish, among other
things, (i) rate regulations, (ii) "anti-buy through" provisions, (iii) "must
carry" and "retransmission consent" requirements, (iv) rules for franchise
renewals and transfer, and (v) other regulations covering a variety of
operational areas.
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
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carrier must provide "comparable" programming services in the franchise area. In
regulating the basic service rates, certified local franchise authorities have
the authority to order a rate refund of previously paid rates determined to be
in excess of the maximum permitted reasonable rates.
For a defined class of "small cable operators," the Telecommunications Act
immediately eliminates regulation of cable programming rates. To qualify as a
"small cable operator," the operator must serve in the aggregate fewer than one
percent of all U.S. subscribers and have affiliate gross revenues not exceeding
$250,000,000 and serve 50,000 or fewer subscribers in any franchise area. Rate
regulation of the basic service tier remains subject to regulation by local
franchising authorities under the Telecommunications Act, except under specific
circumstances for certain small cable operators. Rates for the basic service
tier of small cable operators are deregulated if the system offered only a
single tier of services as of December 31, 1994. See "--Small Cable Systems,"
below.
Under the 1992 Cable Act, rates for cable programming services not carried
on the basic service tier ("non-basic services") could be regulated by the FCC
upon the filing of a complaint by franchise authorities or subscribers that
indicates the cable operator's rates for these services are unreasonable. Three
rate complaints have been filed with the FCC with respect to certain of the
Partnership's and CPLP's cable programming service tiers, one of which has been
filed with respect to the Anderson County System. The General Partner does not
believe that these rate complaints, even if decided against the Partnership,
will have a material adverse effect on the Partnership. The Telecommunications
Act eliminates regulation of the cable programming service tier (non-basic
programming) as of March 31, 1999. In the interim, rate regulation of the cable
programming tier can only be triggered by a franchising authority complaint to
the FCC. A franchising authority complaint must be based on more than one
subscriber complaint, which must be filed within 90 days after a rate increase.
If the FCC determines that the Partnership's cable programming service tier
rates are unreasonable, the FCC has the authority to order the Partnership to
reduce cable programming service tier rates and to refund to customers any
overcharges occurring from the filing date of the rate complaint at the FCC.
While management believes that the Partnership has complied in all material
respects with the rate provisions of the 1992 Cable Act, in jurisdictions that
have not yet chosen to certify, refunds covering a one-year period on basic
service may be ordered upon future certification if the Partnership or CPLP is
unable to justify its rates through a benchmark or cost-of-service filing or
small system cost-of-service filing pursuant to FCC rules. The General Partner
is unable to estimate at this time the amount of refunds that may be payable by
the Partnership in the event any of the Partnership Systems' rates are
successfully challenged by franchising authorities or found to be unreasonable
by the FCC, although it does not believe that the amount of any such refunds
would have a material adverse effect on 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 markup 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" allowed 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 applied through December 31, 1996. (During the third year, license fees are
subject to the general rate rules.) Thus, through 1996 the allowable rate
increases for channel adjustments and license fees could have totaled up to
$1.50 per subscriber per month. Under the "going-forward rules," in 1997, cable
operators may make an additional flat fee increase of 20 cents per channel per
month for channels added during that year, provided that the rate increases made
by cable operators over the three-year period (exclusive of license fees) do not
exceed $1.40 in the aggregate. For channels added after
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May 14, 1994, operators electing to take advantage of the 20 cents per channel
adjustment may not take a 7.5% markup on programming cost increases that are
otherwise currently permissible under the rate rules. The "going-forward rules"
are scheduled to expire on December 31, 1997.
The "going-forward rules" also allow cable operators to place channels that
were not offered on the cable system prior to October 1, 1994 on a new separate
unregulated service tier as long as the regulated basic and expanded basic
service tiers remain intact. Cable operators may offer the same new channels
simultaneously on both an expanded basic service tier and a new unregulated
service tier, and may at any time move them to the new tier. Thus, operators may
build up a following for new channels by putting them in the expanded basic
service tier before moving them to the new unregulated service tier. Channels
that were in the basic service tier or the expanded basic service tier prior to
September 30, 1994 may not be moved to the new tier, nor may such channels be
dropped from the basic or expanded basic service tiers and then added to a new
tier within the two-year period after the date upon which any such channel is
dropped.
In September 1995, the FCC developed an abbreviated cost-of-service form
that permits cable operators to recover the costs of significant upgrades that
provide benefits to subscribers of regulated cable services. Cable operators
seeking to raise rates to cover the costs of an upgrade would submit only the
costs of the upgrade instead of all current costs. In December 1995, the FCC
revised its cost-of-service rules. At this time, the Partnership is unable to
predict the effect of these revised rules on its or CPLP's business.
In another action in September 1995, the FCC established a new optional rate
adjustment methodology that encourages operators to limit their rate increases
to once per year to reflect inflation and changes in external costs and in the
number of channels. The rules permit cable operators to "project reasonable"
changes in their costs for the 12 months following the rate change (in an effort
to eliminate delays in recovering costs). The order also allows operators to
recover increases in additional types of franchise requirement costs. Permitted
pass-through increases include increases in the costs of providing institutional
networks, video services, data services to or from governmental and educational
institutions, and certain other cost increases. The Partnership is unable to
predict the effect of these new rate rules on its or CPLP's business.
In November 1995, the FCC proposed to provide cable operators with the
option of establishing uniform rates for similar service packages offered in
multiple franchise areas located in the same region. Under the FCC's current
rules, cable operators subject to rate regulation must establish rates on a
franchise-specific basis. The proposed rules could lower cable operators'
marketing costs and may also allow operators to better respond to competition
from alternative providers. The Partnership is unable to predict whether these
proposed rules will ultimately be promulgated by the FCC and, if they are
promulgated, what their effect on the Partnership or CPLP will be.
In July 1996, the FCC proposed to give operators more flexibility with
respect to the relative pricing of different tiers of service. Under this
proposal, once an operator has set rates in accordance with existing
regulations, the operator could decrease its basic service tier ("BST") rate and
then take a corresponding increase in its cable programming service tier
("CPST") rate to offset the lost revenue on the BST. In this proceeding, the FCC
has also asked parties to comment on whether it should place a limit on the
amount of any CPST rate increase or otherwise limit the amount by which the BST
and CPST rate may be adjusted.
The FCC expects that this proposal would give operators rate the structure
flexibility enjoyed by alternative providers of video services who are, or soon
will be, attempting to compete with cable operators but who are not subject to
the rate regulation imposed by statute on cable operators. The Partnership is
unable to predict whether these proposed rules will ultimately be promulgated by
the FCC and, if they are promulgated, what their effect on the Partnership or
CPLP will be.
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The uniform rate requirements in the 1992 Cable Act which require that cable
operators charge uniform rates through their franchise area are relaxed by the
Telecommunications Act. Specifically, the Telecommunications Act clarifies that
the uniform rate provision does not apply where a cable operator faces
"effective competition." In addition, bulk discounts to multiple dwelling units
are exempted from the uniform rate requirements. However, complaints concerning
"predatory" pricing (including with respect to bulk discounts to multiple
dwelling units) may be made to the FCC. The Telecommunications Act also permits
cable operators to aggregate, on a franchise system, regional or company level,
its equipment costs in broad categories. The Telecommunications Act should
facilitate the rationalization of equipment rates across jurisdictional
boundaries. However, these cost-aggregation rules do not apply to the limited
equipment used by subscribers who only receive basic programming.
"Anti-Buy Through" Provisions. The 1992 Cable Act and corresponding FCC
regulations have established requirements for customers to be able to purchase
video programming on a per channel or per program basis without having to
subscribe to any tier of service (other than the basic service tier), subject to
available technology. The available technology exception sunsets on October 5,
2002. Although most of the Partnership's subscribers are served by systems that
offer addressable technology, most of the Partnership's subscribers do not
currently have the requisite equipment in their home to utilize such technology.
As a result, most of the Partnership Systems are currently exempt from complying
with the requirements of the 1992 Cable Act. The Partnership cannot predict the
extent to which this provision of the 1992 Cable Act and the corresponding FCC
rules may cause customers to discontinue optional non-basic service tiers in
favor of the less expensive basic cable service.
"Must Carry" Requirements/'Retransmission Consents." Under the 1992 Cable
Act, cable television operators are subject to mandatory broadcast signal
carriage requirements that allow local commercial and non-commercial educational
television broadcast stations to elect to require a cable system to carry the
station, subject to certain exceptions, or, in the case of commercial stations,
to negotiate for "retransmission consent" to carry the station. In addition,
there are requirements for cable systems to obtain retransmission consent for
all "distant" commercial television stations (except for commercial/satellite-
delivered independent "superstations" such as WTBS), commercial radio stations
and certain low power television stations carried by such systems after October
6, 1993. The validity of mandatory signal carriage requirements is being
litigated in the United States Supreme Court, which heard arguments on the must
carry rule in October 1996; however, the carriage requirements will remain in
effect pending the outcome of such proceedings. As a result of the mandatory
carriage rules, the Partnership Systems and CPLP Systems have been required to
carry television broadcast stations that otherwise would not have been carried,
thereby causing displacement of possibly more attractive programming. The
retransmission consent rules have resulted in the deletion of certain local and
distant television broadcast stations which the Partnership Systems and CPLP
Systems were carrying. To the extent retransmission consent fees were paid for
the continued carriage of certain television stations, such costs were not
recoverable. Any future amounts paid in exchange for retransmission consent,
however, may be passed along to subscribers as additional programming costs.
FRANCHISE MATTERS. The 1984 Cable Act contains franchise renewal procedures
designed to protect against arbitrary denials of renewal. The 1992 Cable Act
made several changes to the renewal process that could make it easier for a
franchising authority to deny renewal. Moreover, even if a franchise is renewed,
a franchising authority may seek to impose new and more onerous requirements,
including requiring significant upgrades in facilities and services or increased
franchise fees. If a franchising authority's consent is required for the
purchase or sale of a cable television system, the franchising authority may
also seek to impose new and more onerous requirements as a condition to the
transfer. The acceptance of these new requirements, however, may not be made a
condition of the transfer. Historically, franchises have been renewed for cable
operators that have provided satisfactory services and have complied with the
terms of their franchises. Although the General Partner believes that the
Partnership has generally met the terms of its franchise agreements and has
provided quality levels of service, and anticipates that the Partnership's
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future franchise renewal prospects generally will be favorable, there can be no
assurance that any such franchises will be renewed or, if renewed, that the
franchising authority will not impose more onerous requirements on the
Partnership than previously existed. Similarly, the Partnership has been advised
by CPI that CPI believes that CPLP has generally met the terms of its franchise
agreements and has provided quality levels of service, and anticipates that
CPLP's future franchise renewal prospects generally will be favorable, there can
be no assurance that any such franchises will be renewed or, if renewed, that
the franchising authority will not impose more onerous requirements on CPLP than
previously existed. See "--Franchises" for information regarding the status of
the Partnership Systems' and CPLP Systems' franchises.
OTHER FCC REGULATIONS. The Partnership and CPLP are subject to a variety of
other FCC rules, covering such diverse areas as equal employment opportunity,
programming, maintenance of records and public inspection of files, technical
standards, leased access and customer service. The FCC has authority to enforce
its regulations through the imposition of substantial fines, the issuance of
cease and desist orders and/or the imposition of other administrative sanctions,
such as the revocation of FCC licenses needed to operate certain transmission
facilities often used in connection with cable operations. Although the General
Partner believes the Partnership is in compliance in all material respects with
all applicable FCC requirements, and the Partnership has been advised by CPI
that CPI believes CPLP is in compliance in all material respects with all
applicable FCC requirements, there can be no assurance that the FCC would not
find a violation and impose sanctions that could adversely affect the
Partnership's or CPLP's operations.
SMALL CABLE SYSTEMS. The FCC has implemented rules to reduce the
substantive and procedural burdens of rate regulation applicable to small cable
systems (i.e., cable systems serving 15,000 or fewer subscribers that are owned
by or affiliated with a cable company which served, in the aggregate, 400,000 or
fewer subscribers at the time such rules went into effect). Cable companies
falling outside of this definition may petition the FCC for small company
treatment if they can demonstrate similar circumstances. The FCC's small cable
systems rules amended the FCC's previous definitions of small cable entities to
encompass a broader range of cable systems that are eligible for special rate
and administrative treatment. In addition, these new rules made available to
this expanded category a new regulatory scheme which the FCC expects to provide
both rate relief and reduced administrative burdens. Specifically, the new rules
created a new cost-of-service approach involving a five-element calculation
based on a system's costs. The calculation will produce a per channel rate for
regulated services that will be presumed reasonable if it is no higher than
$1.24 per channel. If the formula generates a higher rate, the operator may
still charge that rate if not challenged by the franchising authority, or if,
upon being challenged, it meets its burden of proving that the rate is
reasonable. Under these new rules, the regulatory benefits accruing to such
small cable systems remain effective even if such small cable systems are later
acquired by cable companies which serve in excess of 400,000 subscribers. The
Partnership and CPLP both applied to the appropriate regulatory authorities for
small cable system rate relief with regard to all of their systems. Such
systems' status as small cable systems could be challenged by other parties and
could be denied by the FCC. With regard to most of the systems for which small
system applications were filed, the time period in which a challenge could be
filed has passed. However, regarding CCIP II's systems in Jasper and Angelton,
Texas, the FCC has issued an order which denies those systems small system
status. The Partnership plans to appeal this order. The order did not require
any reduction in rates or rate refunds. However, because of the FCC's ruling,
the Partnership will be unable to take advantage of the special regulatory
benefits accruing to small systems with regard to the Jasper and Angelton,
Texas, systems, including a presumption of reasonability of certain rates.
Therefore, for the Jasper and Angelton, Texas, systems, the Partnership may be
required to justify its rates under the general rate processes applicable to
cable operators, which may be less favorable. At this time, however, the
Partnership is unable to determine whether the order will have any material
impact on the rates the partnership can charge subscribers in these particular
franchise areas.
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RECENT TELECOMMUNICATIONS LEGISLATION
On February 1, 1996, Congress passed the Telecommunications Act. The
Telecommunications Act was signed into law by President Clinton on February 8,
1996, and substantially amends the Communications Act (including the
re-regulation of subscriber rates under the 1992 Cable Act). The
Telecommunications Act alters federal, state and local laws and regulations
pertaining to cable television, telecommunications, and other services. In
addition to the amendments previously discussed in this section, the legislation
also allows additional competition in video programming by telephone companies,
and makes other revisions to the Communications Act and the 1984 and 1992 Cable
Acts.
TELEPHONE PARTNERSHIP PROVISION OF VIDEO PROGRAMMING. Under the
Telecommunications Act, telephone companies can compete directly with cable
operators in the provision of video programming. The new legislation recognizes
several multiple entry options for telephone companies to provide competitive
video programming, including over their telephone facilities, through either
common carrier transport or an "open video system," by radio communication, or
as a regular cable system. LECs, including RBOCs, will be allowed to compete
with cable operators both inside and outside the LECs' telephone service areas.
The Telecommunications Act repeals the statutory ban on telephone company
provision of video programming services in the telephone company's service
areas. The FCC's video dialtone regulations have also been repealed. Pursuant to
the authority granted to the FCC in the Telecommunications Act, the FCC required
all video dialtone operators in order to continue to offer services, to elect
one of the four permissible options for telephone companies by November 6, 1996
(as discussed more fully below). Video dialtone operators were permitted to
apply for extensions based upon "good cause."
In particular, if a telephone company provides video via radio
communications, it will be regulated under Title III of the Communications Act
(the general sections governing use of the airwaves), rather than cable
regulation under Title VI. If a telephone company provides common carriage
transport of video programming, it will be subject to the requirements of Title
II of the Communications Act (the general common carrier provisions), rather
than Title VI cable regulation. Telephone companies providing video programming
through any other means (other than as an "open video system," as described
below) will be regulated under Title VI cable regulation.
The Telecommunications Act replaces the FCC's video dialtone rules with an
"open video system" plan by which telephone companies can provide video
programming service in their telephone service area. Telephone companies that
comply with the FCC's open video system regulations (which must be prescribed
within six months from enactment) will be subject to a relaxed regulatory
scheme. The open video system requirements are in lieu of Title II common
carrier regulation.
The FCC was directed and has prescribed rules that prohibit open video
systems from discriminating among video programming providers with regard to
carriage, and that ensure that open video system rates, terms and conditions for
service are reasonable and non-discriminatory. Pursuant to the
Telecommunications Act, the FCC has also adopted regulations prohibiting an open
video system operator and its affiliates from occupying more than one-third of
the system's activated channels when demand for channels exceeds supply. The
Telecommunications Act also mandates other open video system regulations,
including channel sharing and sports exclusivity. Open video systems will be
subject to the authority of local governments to manage public rights-of-way.
Local franchising authorities may require open video system operators to pay
franchise-type fees, which may not exceed the rate at which franchise fees are
imposed on any cable operator in the corresponding franchise area.
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
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where (1) the cable operator or LEC would be subject to undue economic distress;
(2) the cable television system or facilities would not be economically viable;
or (3) the anticompetitive effects of the proposed transaction are clearly
outweighed by the effect of the transaction in meeting community needs. The
relevant local franchising authority must approve any such waiver.
PUBLIC UTILITY COMPETITION. The Telecommunications Act also authorizes
another potential competitor, registered utility holding companies and their
subsidiaries, to provide video programming services, notwithstanding the Public
Utility Holding Company Act. Utilities must establish separate subsidiaries for
this purpose and must apply to the FCC for operating authority. Several such
utilities have been granted broad authority by the FCC to engage in activities
which could include video programming.
CROSS-OWNERSHIP; REDUCED REGULATIONS. The Telecommunications Act makes
several other changes to relax ownership restrictions and regulation of cable
systems. It repeals the 1992 Cable Act's three-year holding requirement
pertaining to sales of cable systems. The broadcast/cable cross-ownership
restrictions are eliminated, although the FCC's regulations prohibiting
broadcast/cable common ownership currently remain. The SMATV cable
cross-ownership and the MMDS cable cross-ownership restrictions have been
eliminated for cable operators subject to effective competition.
The Telecommunications Act amends the definition of "cable system" so that a
broader class of entities (including some entities which may compete with the
Partnership or CPLP) providing video programming will be exempt from regulation
as cable systems under the Communications Act.
POLE ATTACHMENTS. The Telecommunications Act also alters the scheme
pertaining to pole attachment rates (rates charged by telephone and utility
companies for delivery of cable services). The current method for determining
rates will continue for five years. The FCC recently adopted an Order to
implement the Telecommunications Act's pole attachment provisions. CPLP is
unable to predict the impact of this Order or of the FCC's new pole attachment
regulations on its business. Any increases pursuant to this new formula may not
begin for five years, and will be phased in over years five through ten in equal
increments. However, this new FCC formula does not apply in states which certify
that they regulate pole rates.
MISCELLANEOUS REQUIREMENTS AND PROVISIONS. The Telecommunications Act also
imposes other miscellaneous requirements on cable operators, including an
obligation to fully scramble or block at no charge the audio and video portion
of any channel not specifically subscribed to by a household. In addition,
sexually explicit programming must be scrambled or blocked. If the cable
operator is unable to scramble or block its signal completely, it must restrict
transmission to those hours of the day when children are unlikely to view the
programming, as determined by the FCC. A federal court has temporarily stayed
enforcement of this provision pending further consideration of a constitutional
challenge. If the provision is held to be constitutional, it could increase
operating expenses for operators of cable television systems, including the
Partnership, and provide a competitive advantage to less regulated providers of
video programming services. The Telecommunications Act also directs the FCC to
adopt regulations to ensure, with certain exceptions, that video programming is
fully accessible through closed captioning. The FCC recently released a report
to Congress on the level at which video programming is closed captioned. The FCC
has also initiated another proceeding to establish regulations to implement
closed captioning requirements.
Although the new legislation may substantially lessen regulatory burdens,
the cable television industry may be subject to additional competition as a
result thereof. There are numerous rulemakings which have been, and which will
be undertaken by the FCC which will interpret and implement the provisions of
the Telecommunications Act. In addition, certain provisions of the Act (such as
the deregulation of cable programming rates) are not immediately effective.
Further, certain provisions of the Telecommunications Act have been, and are
likely to continue to be subject to legal challenges. Certain provisions of the
Telecommunications Act could materially affect the Partnership's ability to sell
the Partnership Systems, however the Partnership is unable at this time to
predict the outcome of such rulemakings or litigation or
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the substantive effect (financial or otherwise) of the new legislation and the
rulemakings on the Partnership. Similarly, certain provisions of the
Telecommunications Act could materially affect CPLP's ability to sell the CPLP
Systems, however, CPLP is unable at this time to predict the outcome of such
rulemakings or litigation or the substantive effect (financial or otherwise) of
the new legislation and the rulemakings on CPLP.
FCC IMPLEMENTATION. The FCC is presently, and will be, engaged in numerous
proceedings to implement various provisions of the Telecommunications Act.
Recently, the FCC adopted cable television equipment cost aggregation rules and
adopted open video system rules. In addition to the proceedings previously
discussed herein, the FCC has recently initiated a proceeding to implement most
of the Cable Act reform provisions of the Telecommunications Act.
In this proceeding, the FCC has set forth certain interim rules to govern
while the FCC completes its implementation of the Telecommunications Act. Among
other things, the FCC is requiring on an interim basis that for a LEC to be
deemed to be offering "comparable" programming, such programming must include
the signals of local broadcasters. Cable systems that meet all of the relevant
criteria in the new effective competition test are exempt from rate regulation
as of February 8, 1996 (the date the Telecommunications Act was signed into law
by President Clinton). Cable systems may file a petition with the FCC at any
time for a determination of effective competition.
The FCC has also established interim rules governing the filing of rate
complaints by local franchising authorities. Local franchising authorities may
file rate complaints with the FCC when the local franchising authorities receive
more than one subscriber complaint concerning an operator's rate increase. If
the local franchising authority receives more than one subscriber complaint
within the 90-day period and decides to file its own complaint with the FCC, it
must do so within 180 days after the rate increase became effective. Before
filing a complaint with the FCC, the local franchising authority must first
provide the cable operator written notice of its intent to do so and must give
the operator a minimum of 30 days to file with the local franchising authority
the relevant FCC forms used to justify a rate increase. The local franchising
authority must then forward its complaint and the operator's response to the FCC
within the 180 day deadline. The FCC must issue a final order within 90 days
after it receives a local franchising authority complaint.
For interim purposes, the FCC has established that an operator serving fewer
than 617,000 subscribers is a "small cable operator" if its annual revenues,
when combined with the total annual revenues of all of its affiliates, do not
exceed $250 million in the aggregate. For interim purposes, "affiliate" will be
defined as a 20% or greater equity interest.
In addition to the interim rules discussed above and other miscellaneous
interim rules, the FCC is also engaged in a rule-making proceeding to create and
implement final rules relating to the cable reform provisions of the
Telecommunications Act. Among other issues, the FCC is considering whether to
establish a LEC market share that must be satisfied before a LEC will be deemed
to constitute "effective competition" to an incumbent cable operator (which
would free the cable operator from rate regulation). Neither the Partnership nor
CPLP can predict the outcome of this FCC proceeding or what its ultimate effect
will be.
COPYRIGHT
Cable television systems are subject to federal copyright licensing covering
carriage of television and radio broadcast signals. In exchange for filing
certain reports and contributing a percentage of their revenues to a federal
copyright royalty pool, cable operators can obtain blanket permission to
retransmit broadcast signals. The nature and amount of future copyright payments
for broadcast signal carriage cannot be predicted. The possible simplification,
modification or elimination of the compulsory copyright license is the subject
of continuing legislative review. The elimination or substantial modification of
the cable compulsory license could adversely affect the ability of the
Partnership or CPLP to obtain suitable
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programming and could substantially increase the cost of programming that
remained available for distribution to the customers of the Partnership and
CPLP. The General Partner cannot predict the result of such legislative activity
or the effect of such activity on the Partnership's or CPLP's condition
(financial or otherwise). See "--Regulation and Legislation."
STATE AND LOCAL REGULATION
Cable television systems generally are operated pursuant to non-exclusive
franchises, permits or licenses granted by a municipality or other state or
local government entity. Franchises generally are granted for fixed terms and in
many cases are terminable if the franchisee fails to comply with material
provisions of its franchise agreement. The terms and conditions of franchises
vary materially from jurisdiction to jurisdiction. A number of states subject
cable television systems to the 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 December 31, 1996, the Partnership employed a total of approximately
66 full-time equivalent employees in the operation of the Partnership Systems,
26 of which were employed in connection with the Anderson County System. None of
the employees of the Anderson County System are represented by a union. The
Partnership has never experienced a work stoppage. The Partnership believes its
employee relations are generally good.
As of December 31, 1996, CPLP employed a total of approximately 53 full-time
equivalent employees in the operation of the CPLP Systems. None of the employees
of the Three CPLP Systems are represented by a union. CPLP has never experienced
a work stoppage. CPLP believes its employee relations are generally good.
OTHER MATTERS
The Partnership and CPLP own, operate and invest in cable television systems
and do not engage in any other identifiable industry segments. Neither the
Partnership nor CPLP believes that changes of a seasonal nature are material to
the cable television business. Neither the Partnership nor CPLP has expended
material amounts during the last two fiscal years on research and development
activities. As the Partnership and CPLP are service-related organizations,
little or no raw materials are utilized by them. The necessary hardware, coaxial
cable and electronics required for construction of new cable plant are available
from a variety of vendors and are generally available in ample supply. There is
no one customer or affiliated group of customers to whom sales are made in
amounts which exceed ten percent (10%) of either of the Partnership's or CPLP's
revenues. Neither the Partnership nor CPLP believes it is affected by inflation
except to the extent that the economy in general is so affected.
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CERTAIN INFORMATION ABOUT THE PARTNERSHIP, CPLP,
THE GENERAL PARTNER, CPI AND CERTAIN AFFILIATES
GENERAL INFORMATION
THE PARTNERSHIP. The Partnership is a Delaware limited partnership that was
formed in August 1987 for the purpose of engaging in the ownership and operation
of, and investment in, existing cable television systems in the United States.
The General Partner is a Delaware corporation that was incorporated on August
13, 1987. The primary business activities engaged in by the Partnership are the
ownership and operation of cable television systems. The primary business
activities engaged in by the General Partner are its service as the general
partner of the Partnership and its management of the Partnership Systems. The
principal executive offices of the General Partner and the Partnership are
located at 12444 Powerscourt Drive, Suite 400, St. Louis, Missouri 63131, and
their telephone number is (314) 965-0555.
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.
CPLP. CPLP is a Delaware limited partnership that was formed in February
1990 for the purpose of engaging in the ownership and operation of cable
television systems in the United States. CPI is a Delaware corporation that was
incorporated on June 4, 1990. The primary business activities engaged in by CPLP
are the ownership and operation of cable television systems. The primary
business activities engaged in by CPI are its service as the general partner of
CPLP and its management of the CPLP Systems. The principal executive offices of
CPI and CPLP are located at 12444 Powerscourt Drive, Suite 400, St. Louis,
Missouri 63131, and their telephone number is (314) 965-0555.
CPLP has no directors or executive officers. The name, present principal
employment, the principal business address of such employment, and any material
occupation or employment for the past five years of each of the directors and
executive officers of CPI are set forth on Schedule 1 to this Disclosure
Statement.
The General Partner, CPLP, CPI and the Purchasing Affiliates are privately
held entities and are not subject to the reporting requirements of the Exchange
Act. The sole stockholder of the General Partner is CC II Holdings, Inc. ("CC II
Holdings"), which was incorporated in Delaware on June 29, 1994. The sole
stockholder of CPI is CC III Holdings, Inc. ("CC III Holdings"), which was
incorporated in Delaware on June 29, 1994. CC II Holdings and CC III Holdings
are wholly owned subsidiaries 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, CC III
Holdings and Charter are the same as those of the Partnership.
CC I. CC I is a Delaware limited partnership that was formed in November
1993. CC I's general partner is CCP One, Inc. ("CCP I"), a Delaware corporation,
whose principal business is serving as the general partner of CC I. CCP I's
principal executive offices are at the same location as those of the
Partnership.
CC II. CC II is a Delaware limited partnership that was formed in June
1994. CC II's general partner is CCP II, Inc. ("CCP II"), a Delaware
corporation, whose principal business is serving as the general partner of CC
II. CCP II's principal executive offices are at the same location as those of
the Partnership.
CC I owns cable television systems in Georgia, Alabama and Louisiana. CC II
owns cable television systems in South Carolina, North Carolina, Georgia,
Kentucky and Tennessee. Like many cable television
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operators, the Purchasing Affiliates and their affiliates attempt whenever
possible (i) to increase the number of subscribers in the cable television
systems they own and to purchase additional systems to add new subscribers, in
order to obtain lower per subscriber programming rates (i.e., volume discounts)
from providers of cable television programming, and (ii) to "cluster" cable
television systems together, in order to achieve economies of scale in operating
such systems. The acquisition of the Sanford System by CC I and of the Anderson
County System, the Abbeville System and the Lincolnton System by CC II is
expected to assist the Purchasing Affiliates in achieving greater economies of
scale in the operation of their respective cable television systems.
The only business activities engaged in by the Purchasing Affiliates are the
acquisition, ownership and operation of cable television systems and other cable
television assets. The executive business offices of the Purchasing Affiliates
are located at 12444 Powerscourt Drive, Suite 400, St. Louis, Missouri
63131-3660, and the telephone number is (314) 965-0555.
The Purchasing Affiliates have no directors or executive officers. The name,
present principal occupation or employment, the principal business and address
of such employment, and any material occupation or employment for the past five
years of each of the directors and executive officers of CCP I and 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 UNITHOLDERS
As of September 1, 1996, there were no beneficial owners of more than five
percent (5%) of the Partnership's outstanding LP Units, and none of the
directors or executive officers of the General Partner owned any LP Units.
As of September 1, 1996, Charter and the Partnership were beneficial owners
of more than five percent (5%) of CPLP's outstanding CPLP Units. None of the
directors or executive officers of CPI owned any CPLP Units.
As of September 1, 1996, the directors and executive officers of the General
Partner and of CPI 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 and CPI is a wholly owned subsidiary of CC III Holdings, both of which
are wholly owned subsidiaries of Charter.
CERTAIN RIGHTS WITH RESPECT TO THE LP UNITS
Except as disclosed in this Disclosure Statement, or in Schedule 1 hereto:
(i) neither the General Partner nor any affiliate thereof (including CC I, CC II
and the persons or entities listed in "--General Information") owns or has the
right to acquire, and to the best of the General Partner's knowledge, no
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associate or majority-owned subsidiary of the General Partner, any affiliate
thereof nor any pension, profit-sharing or similar plan of the General Partner,
or any of the persons listed on Schedule 1 hereto, beneficially owns or has a
right to acquire, any LP Units; (ii) none of the persons or entities referred to
in (i) above has effected any transaction in voting the LP Units during the past
60 days; (iii) neither the Partnership nor any of its affiliates, nor CC I or CC
II, has purchased any LP Units since January 1, 1993; (iv) neither the General
Partner or CPI nor, to the best of the General Partner's or CPI's knowledge, any
of the persons listed in Schedule 1 hereto, nor CC I or CC II, has any contract,
arrangement, understanding or relationship with any other person with respect to
any securities of the Partnership or CPLP, 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 (a) 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 and (b) between
CPLP, on the one hand, and CPI or, to the best of CPI'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 (a)
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 (b) between CPI or, to the best of CPI's
knowledge, any of its affiliates or the persons listed on Schedule 1 hereto, on
the one hand, and CPLP, on the other hand, concerning a merger or consolidation
or an acquisition, a tender offer for or another acquisition of securities of
CPLP or a sale or another transfer of a material amount of the assets of CPLP;
and (vii) since January 1, 1993, there have been no contacts or negotiations (a)
between any affiliates of the Partnership or between the Partnership or any of
its affiliates, on the one hand, and any person who is not affiliated with the
Partnership and who would have a direct interest in such matters, on the other
hand, concerning a merger or consolidation with or into the Partnership, an
election of directors of the General Partner, or a sale or another transfer of a
material amount of the assets of the Partnership and (b) between any affiliates
of CPLP or between CPLP or any of its affiliates, on the one hand, and any
person who is not affiliated with CPLP and who would have a direct interest in
such matters, on the other hand, concerning a merger or consolidation with or
into CPLP, an election of directors of CPI, or a sale or another transfer of a
material amount of the assets of CPLP . In addition, neither the Partnership,
the General Partner, CPLP, CPI, nor any of their affiliates has any material
legal proceedings pending.
TENDER OFFERS
In August 1996, Charter received a letter from Gale Island LLC ("Gale"), a
third party unaffiliated with the Partnership, the General Partner or any of
their affiliates, offering to purchase up to 4.9% of the total outstanding
limited partnership interests in the Partnership for a cash price of $250 per LP
Unit less the amount of any distribution received from the Partnership on or
after August 30, 1996, with the purchaser to pay the transfer fee of $150 per
transfer. (The amount of the transfer fee is $150 regardless of the number of LP
Units transferred.) The offer was due to expire on September 30, 1996, but was
extended by Gale to November 4, 1996. The General Partner has forwarded to all
Limited Partners a statement (the "Tender Offer Statement") expressing no
opinion with respect to the tender offer and providing, in accordance with
applicable securities laws and regulations, certain information bearing upon
Gale's tender offer, including notice of the impending distribution of this
Disclosure Statement to the Limited Partners and the possibility that if the
Transaction is consummated and if the Remaining Assets can be sold for an amount
which approximates, in the aggregate, the appraised value of those assets, the
amount of the total distribution from liquidation of the Partnership to the
Limited Partners will exceed $450 per LP Unit.
71
<PAGE>
There can be no assurance that any such Remaining Assets can be sold for an
amount at least equal to their appraised value. As of December 31, 1996, Gale
has purchased 1,786 LP Units pursuant to its offers.
In September 1996, the Limited Partners received a letter from Madison
Partnership Liquidity Investors V, LLC ("Madison"), a third party unaffiliated
with the Partnership, the General Partner or any of their affiliates, offering
to purchase up to 4.9% of the total outstanding limited partnership interests in
the Partnership for a cash price of $255 per LP Unit less the amount of any
distribution received from the Partnership on or after September 5, 1996. The
letter makes no reference to the Partnership transfer fee. The offer expired by
its terms on October 18, 1996. The General Partner sent a statement to the
Limited Partners which was substantially identical to the Tender Offer
Statement. Following completion of the first offer, Madison renewed its offer
through December 20, 1996, but at a purchase price of $275 per LP Unit. As of
December 31, 1996, Madison has purchased 671 LP Units pursuant to its offers.
DISTRIBUTIONS PER LP UNIT SINCE PARTNERSHIP INCEPTION
The following table sets forth the total distributions per LP Unit (rounded
to the nearest dollar) paid by the Partnership since its inception and the
percentage return of each such distribution:
<TABLE>
<CAPTION>
LP LP LP LP LP
AGGREGATE UNITS UNITS UNITS UNITS UNITS LP UNITS
DISTRIBUTIONS ISSUED ISSUED ISSUED ISSUED ISSUED ISSUED
FOR THE YEAR AS OF AS OF AS OF AS OF AS OF AS OF
ENDED: 4/1/88 4/29/88 7/1/88 5/5/89 6/2/89 8/23/88
- ------------------------------------------- ----------- ----------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
1988 50 44 33 -- -- --
1989 70 70 70 46 41 37
1990 80 80 80 80 80 80
1991 90 90 90 90 90 90
1992 60 60 60 60 60 60
1993 45 45 45 45 45 45
1994 -- -- -- -- -- --
1995 -- -- -- -- -- --
1996 -- -- -- -- -- --
Total Distributions to Date................ 395 389 378 321 316 312
</TABLE>
As of December 31, 1996, total distributions to the Limited Partners ranged
between $312 and $395 per LP Unit. Assuming approval and consummation of the
Transaction, the amount expected to be distributed to the Limited Partners per
LP Unit is approximately $236, bringing the total distributions made to the
Limited Partners to between $548 and $631 per LP Unit. In addition, this
anticipated distribution per LP Unit will be augmented by approximately $78,
reflecting the immediately distributable proceeds from the Texas Sales. These
distributions, however, do not include any return of the Limited Partner's
initial capital investment.
Distributions to the Limited Partners were suspended in the fourth quarter
of 1993. See "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS--Liquidity and Capital Resources." If the Partnership
Transaction is consummated and the Credit Agreement is successfully
renegotiated, additional operating cash flow should be available for payment of
the Partnership's indebtedness, enabling proceeds from future sales of the
Remaining Assets to be distributed to the Limited Partners. In addition, regular
quarterly distributions may recommence. Further, after a holdback of one year,
an additional amount of up to $28 per LP Unit, depending on the amount used for
liabilities or other contingencies related to the sales of the Texas Clusters,
will be distributed to the Limited Partners as the remaining proceeds from the
Texas Sales.
72
<PAGE>
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").
On July 15, 1994, in connection with certain transactions contemplated by
the Stock Purchase Agreement dated July 1, 1994 among Charter, a group of other
purchasers and Hallmark Cards, Incorporated (which indirectly owned all of the
issued and outstanding stock of CCA), CC II Holdings acquired all of the
outstanding capital stock of the General Partner. The interest of CCA in the
Management Agreement was transferred to the General Partner in connection with
such acquisition. See "BUSINESS OF THE PARTNERSHIP AND CPLP--Management
Agreement."
CPLP was originally financed with a limited partnership investment by CCIP
II, special limited partnership investments by unrelated third parties and the
seller of the cable systems, a general partnership investment by CPI and with
bank financing.
In January 1995, Charter acquired 1,746 LP Units as part of a negotiated
transaction for a sale of securities and assets in which Crown Media Inc., an
affiliate of HC Crown Corp., sold its cable television systems to a group of
investors, including Charter. In the same transaction, Charter also acquired
limited partnership and special limited partnership interests in CPLP from CCA.
CCA previously had acquired the special limited partnership interests through
private transactions with original investors in CPLP, including the seller of
the cable systems owned by CPLP. None of these transactions required the consent
of the limited partners of CPLP or CCIP II.
Affiliates have engaged and, in the future, will engage in other business
activities related to the cable television industry that may be in competition
with the business of the Partnership. Such activities may include the
acquisition of cable television systems. The Affiliates have no obligation to
offer to the Partnership the opportunity to participate in any other
transactions in which they participate.
The General Partner, pursuant to a First Amendment to Management Agreement
dated as of December 31, 1995, has extended the Management Agreement. The
officers and directors of the General Partner manage the Partnership Systems as
well as other cable television systems currently owned or later acquired by
certain of its Affiliates. Conflicts of interest may arise in managing the
operations of more than one entity with respect to the allocation of the General
Partner's and its Affiliates' time, personnel, and other resources among the
Partnership. The General Partner will resolve such conflicts in a manner deemed
in its reasonable judgment to be fair and appropriate.
CPLP has entered into definitive agreements to sell two of its cable
television systems to CC II pursuant to an Amended and Restated Asset Purchase
Agreement dated as of April 26, 1996 and an Amended and Restated Asset Purchase
Agreement dated as of May 30, 1996 and another of its cable television systems
to CC I pursuant to an Amended and Restated Asset Purchase Agreement dated as of
May 30, 1996. See "MATERIAL TERMS OF THE TRANSACTION--The Purchase Agreements."
As a result of approval and consummation of the Transaction as described
herein, the General Partner and CPI will receive the following previously
accrued but unpaid management fees:
<TABLE>
<S> <C>
CPI: management fees from CPLP.................................. $2,896,163
---------
</TABLE>
73
<PAGE>
In addition, the General Partner, CPI and Charter will receive the following
Limited Partner and General Partner interests as a result of the approval and
consummation of the Transaction:
<TABLE>
<S> <C>
Charter: limited partner interest in CPLP*...................... $1,018,582
Charter: special limited partner interest in CPLP*.............. $5,765,303
Charter: limited partner interest in the Partnership*........... $ 412,499
CPI: general partner interest in CPLP........................... $ 106,596
---------
$7,302,980
---------
---------
</TABLE>
Although the General Partner is otherwise entitled to receive accrued
management fees with respect to the Partnership (approximately $1.2 million as
of December 31, 1996) following the Transaction, it has decided to defer receipt
of such fees until such time as the Partnership's indebtedness is repaid in
full.
In addition, certain costs, otherwise chargeable during 1995 and 1996 to
CPLP in connection with the operation of the CPLP Systems, were paid by Charter,
resulting in savings to CPLP of approximately $245,000.
- ------------------------
* See "Special Factors--Certain Effects of the Transaction Use of Proceeds of
the CPLP Transaction."
74
<PAGE>
PLAN OF SOLICITATION
VOTING RIGHTS AND VOTE REQUIRED
The General Partner has fixed the close of business on February 28, 1997 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 7,600 Limited Partners, were
outstanding and entitled to vote with respect to the Transaction. The
affirmative vote of the Limited Partners whose combined capital contributions
represent a majority of total capital contributions is required to approve the
Transaction described in this Disclosure Statement.
Each Limited Partner is entitled to one vote for each LP Unit held. The
General Partner holds no LP Units and is not otherwise entitled to vote with
respect to the Transaction. Other employees and nonexecutive officers of the
General Partner (owning an additional 5 LP Units in the aggregate) intend to
vote in favor of the Transaction in accordance with the General Partner's
recommendation. Charter, the parent of the General Partner, owns approximately
1,746 LP Units, or 2.0% of the outstanding LP Units, and has indicated an
intention to vote its LP Units in favor of the Transaction.
Properly executed and duly returned consent forms will be counted as votes
for or against the Transaction, in accordance with the instructions thereon. If
no instructions are indicated with respect to the Transaction on a properly
signed consent form, the consent form will be voted in favor of the Transaction.
Abstentions will be counted as votes against the Transaction.
REVOCABILITY
The vote contained on any properly executed consent form may be revoked at
any time before 10:00 A.M. on [ ], 1997 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 [ ], 1997 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 [ ],
1997 or such later date as the General Partner shall determine. The time period
for delivering a consent form or revocation thereof will be extended for a
period of up to 45 days in the event that Consent to the Transaction has not
been obtained by 10:00 A.M. on [ ], 1997. Limited Partners may contact
Ms. Carol Wolf in the Investor Relations Department, (314) 965-0555, to
determine whether the initial deadline has been extended.
NO APPRAISAL RIGHTS FOR DISSENTERS
If the Consent of the Limited Partners to the Transaction is obtained, such
approval will bind all Limited Partners, including those who vote against
approving, or who abstain from voting with respect to, the Transaction. The
Partnership Agreement and the Delaware Revised Uniform Limited Partnership Act,
under which the Partnership is governed, do not give rights of appraisal or
similar rights to Limited Partners who dissent from the vote of the majority in
approving or disapproving the Transaction. Similarly, the General Partner will
not grant appraisal or dissenters' rights to Limited Partners who vote against
or abstain from voting on the Transaction. Accordingly, dissenting Limited
Partners do not have the right to have their interest in the Partnership
appraised nor do they have the right to have the value of those interests
returned to them because they disapprove of the action of a majority of the
Limited Partners. If the Limited Partners' Consent is obtained and the
Transaction is consummated, each Limited Partner will receive its pro rata share
(based on the number of LP Units held) of the net proceeds distributed to the
Limited Partners whether or not such Limited Partner votes in favor of or
against the Transaction.
75
<PAGE>
SOLICITATION
Votes may be solicited by mail, personal interview, telephone, telecopier
and telegram by officers and other employees of the General Partner or any of
its affiliates who will not be specifically compensated for such services, but
who will be reimbursed by the Partnership for their out-of-pocket expenses. The
Partnership will request banks, brokers and other custodians, nominees and
fiduciaries to forward solicitation materials to the beneficial owners of the
outstanding LP Units that such banks, brokers, custodians, nominees and
fiduciaries own of record. The Partnership will reimburse such custodians,
nominees and fiduciaries for reasonable out-of-pocket expenses incurred by them
in connection with such activities. The Partnership intends to retain an outside
solicitation firm to assist in the solicitation of votes, but has not yet done
so. The Partnership anticipates that the fees of any such firm will be
approximately $20,000, including reimbursement of solicitation, tabulation and
other out-of-pocket expenses. The Partnership will bear all costs of
solicitation.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
On August 22, 1994, the Partnership filed a Form 8-K with the Commission for
the purpose of informing the Commission of a change in the Partnership's
independent public accountants. On August 22, 1994, the Board of Directors of
the General Partner approved the engagement of Arthur Andersen LLP as the
Partnership's principal auditors subsequent to their retention by the General
Partner. The Partnership decided to dismiss KPMG Peat Marwick LLP, the
Partnership's prior auditors, and to retain Arthur Andersen LLP for the
convenience of having the same auditors as its General Partner. There were no
disagreements (either on the Partnership's or the General Partner's part) with
KPMG Peat Marwick LLP prior to August 22, 1994, with respect to any matter of
accounting principles or practices, financial statement disclosure, or audit
scope or procedures and the auditors' reports from KPMG Peat Marwick LLP
contained no adverse opinion relating to the Partnership's (or to the General
Partner's) financial statements.
AVAILABLE INFORMATION
The Partnership's Annual Report on 10-K for the fiscal year ended December
31, 1995 and the Partnership's unaudited Quarterly Reports on Form 10-Q for the
fiscal quarters ended March 31, 1996, June 30 and September 30, 1996, along with
the Partnership's reports on Form 8-K relating to events dated July 15, 1994 and
August 22, 1994, are hereby incorporated by reference herein. Copies of such
reports are available to each Limited Partner without charge upon written
request to: Ms. Carol Wolf, Investor Relations Department, Cencom Properties II,
Inc., 12444 Powerscourt Drive, Suite 400, St. Louis, Missouri 63131-3660.
Additional copies of the appraisals issued by Daniels and Western and of the
Purchase Agreements 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 Section 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.
A Rule 13e-3 Transaction Statement containing certain additional information
with respect to the transactions described herein is being filed by the
Partnership, the Purchasing Affiliates and certain of their affiliates with the
Commission simultaneously with the filing of this Disclosure Statement.
76
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
CENCOM CABLE INCOME PARTNERS II, L.P.:
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS................................................................. F-2
BALANCE SHEETS AT DECEMBER 31, 1996 AND 1995............................................................. F-3
STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994............................ F-4
STATEMENTS OF PARTNERS' CAPITAL (DEFICIT) FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994........... F-5
STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994............................ F-6
NOTES TO FINANCIAL STATEMENTS............................................................................ F-7
CENCOM PARTNERS, L.P.:
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS................................................................. F-17
BALANCE SHEETS AT DECEMBER 31, 1996 AND 1995............................................................. F-18
STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994............................ F-19
STATEMENTS OF PARTNERS' CAPITAL (DEFICIT) FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994........... F-20
STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994............................ F-21
NOTES TO FINANCIAL STATEMENTS............................................................................ F-22
CENCOM PROPERTIES II, INC.:
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS................................................................. F-30
BALANCE SHEET AT DECEMBER 31, 1996....................................................................... F-31
NOTES TO BALANCE SHEET................................................................................... F-32
CENCOM CABLE INCOME PARTNERS II, L.P.--ANDERSON COUNTY SYSTEM:
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS................................................................. F-35
BALANCE SHEET AT DECEMBER 31, 1996....................................................................... F-36
STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996............................................. F-37
STATEMENT OF SYSTEM'S EQUITY FOR THE YEAR ENDED DECEMBER 31, 1996........................................ F-38
STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1996............................................. F-39
NOTES TO FINANCIAL STATEMENTS............................................................................ F-40
CENCOM PARTNERS, L.P.--SANFORD COUNTY SYSTEM:
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS................................................................. F-47
BALANCE SHEET AT DECEMBER 31, 1996....................................................................... F-48
STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996............................................. F-49
STATEMENT OF SYSTEM'S EQUITY FOR THE YEAR ENDED DECEMBER 31, 1996........................................ F-50
STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1996............................................. F-51
NOTES TO FINANCIAL STATEMENTS............................................................................ F-52
CENCOM PARTNERS, L.P.--LINCOLNTON COUNTY SYSTEM:
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS................................................................. F-59
BALANCE SHEET AT DECEMBER 31, 1996....................................................................... F-60
STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996............................................. F-61
STATEMENT OF SYSTEM'S EQUITY FOR THE YEAR ENDED DECEMBER 31, 1996........................................ F-62
STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1996............................................. F-63
NOTES TO FINANCIAL STATEMENTS............................................................................ F-64
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Cencom Cable Income Partners II, L.P.:
We have audited the accompanying balance sheets of Cencom Cable Income
Partners II, L.P. (a Delaware limited partnership) as of December 31, 1996 and
1995, and the related statements of operations, partners' capital (deficit) and
cash flows for each of the three years in the period ended December 31, 1996.
These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Cencom Cable Income Partners
II, L.P. as of December 31, 1996 and 1995, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
1996, in conformity with generally accepted accounting principles.
St. Louis, Missouri,
February 21, 1997
F-2
<PAGE>
CENCOM CABLE INCOME PARTNERS II, L.P.
BALANCE SHEETS--DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
------------- --------------
<S> <C> <C>
<CAPTION>
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents........................................................ $ 531,285 $ 935,858
Accounts receivable, net of allowance for doubtful accounts of $34,763 and
$31,463, respectively.......................................................... 222,708 190,968
Prepaid expenses and other....................................................... 78,705 149,923
------------- --------------
Total current assets......................................................... 832,698 1,276,749
PROPERTY, PLANT AND EQUIPMENT...................................................... 18,938,808 22,572,631
FRANCHISE COSTS, net of accumulated amortization of $22,383,464 and $21,996,588.... 724,004 1,110,880
DEBT ISSUANCE COSTS, net of accumulated amortization of $-......................... 350,000 --
------------- --------------
$ 20,845,510 $ 24,960,260
------------- --------------
------------- --------------
<CAPTION>
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
<S> <C> <C>
CURRENT LIABILITIES:
Current maturities of long-term debt............................................. $ 36,700,000 $ 40,400,000
Accounts payable and accrued expenses............................................ 2,397,674 2,160,916
Payables to General Partner and affiliates....................................... 3,532,580 2,731,619
Subscriber deposits.............................................................. 18,460 20,675
------------- --------------
Total current liabilities.................................................... 42,648,714 45,313,210
------------- --------------
DEFERRED REVENUE................................................................... 24,803 27,904
------------- --------------
COMMITMENTS AND CONTINGENCIES
PARTNERS' CAPITAL (DEFICIT):
General Partner.................................................................. (2,828,374) (2,813,902)
Limited Partners (250,000 units authorized; 90,915 units issued and
outstanding)................................................................... (18,540,466) (17,107,785)
Note receivable from General Partner............................................. (459,167) (459,167)
------------- --------------
Total Partners' capital (deficit)............................................ (21,828,007) (20,380,854)
------------- --------------
$ 20,845,510 $ 24,960,260
------------- --------------
------------- --------------
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-3
<PAGE>
CENCOM CABLE INCOME PARTNERS II, L.P.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
SERVICE REVENUES:
Basic service..................................................... $ 13,485,981 $ 12,595,495 $ 11,924,583
Premium service................................................... 2,241,316 2,275,021 2,266,434
Other............................................................. 2,428,085 2,175,903 2,066,911
------------- ------------- -------------
18,155,382 17,046,419 16,257,928
------------- ------------- -------------
OPERATING EXPENSES:
Operating costs................................................... 7,864,914 7,233,700 7,071,292
General and administrative........................................ 1,560,430 1,619,143 1,682,566
Liquidation costs................................................. 241,600 99,414 --
Depreciation and amortization..................................... 6,235,182 6,204,807 8,605,938
Management fees--related party.................................... 905,071 852,319 812,896
------------- ------------- -------------
16,807,197 16,009,383 18,172,692
------------- ------------- -------------
Income (loss) from operations................................. 1,348,185 1,037,036 (1,914,764)
------------- ------------- -------------
OTHER INCOME (EXPENSE):
Interest income................................................... 39,909 117,613 55,125
Interest expense.................................................. (2,835,247) (3,447,212) (3,152,940)
Equity in loss of unconsolidated limited partnership.............. -- -- (243,631)
------------- ------------- -------------
(2,795,338) (3,329,599) (3,341,446)
------------- ------------- -------------
Net loss...................................................... $ (1,447,153) $ (2,292,563) $ (5,256,210)
------------- ------------- -------------
------------- ------------- -------------
NET LOSS PER LIMITED PARTNERSHIP UNIT............................... $ (15.76) $ (24.96) $ (57.24)
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE>
CENCOM CABLE INCOME PARTNERS II, L.P.
STATEMENTS OF PARTNERS' CAPITAL (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
NOTE
RECEIVABLE
FROM
GENERAL LIMITED GENERAL
PARTNER PARTNERS PARTNER TOTAL
------------- -------------- ----------- --------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1993........................... $ (2,738,414) $ (9,634,500) $ (459,167) $ (12,832,081)
Net loss........................................... (52,562) (5,203,648) -- (5,256,210)
------------- -------------- ----------- --------------
BALANCE, December 31, 1994........................... (2,790,976) (14,838,148) (459,167) (18,088,291)
Net loss........................................... (22,926) (2,269,637) -- (2,292,563)
------------- -------------- ----------- --------------
BALANCE, December 31, 1995........................... (2,813,902) (17,107,785) (459,167) (20,380,854)
Net loss........................................... (14,472) (1,432,681) -- (1,447,153)
------------- -------------- ----------- --------------
BALANCE, December 31, 1996........................... $ (2,828,374) $ (18,540,466) $ (459,167) $ (21,828,007)
------------- -------------- ----------- --------------
------------- -------------- ----------- --------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
CENCOM CABLE INCOME PARTNERS II, L.P.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................................................... $ (1,447,153) $ (2,292,563) $ (5,256,210)
Adjustments to reconcile net loss to net cash provided by operating
activities-
Depreciation and amortization.................................... 6,235,182 6,204,807 8,605,938
Equity in loss of unconsolidated limited partnership............. -- -- 243,631
Changes in assets and liabilities-
Accounts receivable, net....................................... (31,740) 35,000 3,169
Prepaid expenses and other..................................... 71,218 14,236 (45,764)
Accounts payable and accrued expenses.......................... 236,758 131,161 512,041
Payables to General Partner and affiliates..................... 800,961 876,180 440,123
Subscriber deposits............................................ (2,215) (350) (3,752)
Deferred revenue............................................... (3,101) 27,904 --
------------- ------------- -------------
Net cash provided by operating activities.................... 5,859,910 4,996,375 4,499,176
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment......................... (2,108,233) (3,000,860) (1,913,448)
------------- ------------- -------------
Net cash used in investing activities........................ (2,108,233) (3,000,860) (1,913,448)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under revolving line of credit.......................... 200,000 -- --
Payments of revolving line of credit............................... (3,900,000) (4,300,000) --
Debt issuance costs................................................ (456,250) -- (97,917)
------------- ------------- -------------
Net cash used in financing activities........................ (4,156,250) (4,300,000) (97,917)
------------- ------------- -------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS................. (404,573) (2,304,485) 2,487,811
CASH AND CASH EQUIVALENTS, beginning of year......................... 935,858 3,240,343 752,532
------------- ------------- -------------
CASH AND CASH EQUIVALENTS, end of year............................... $ 531,285 $ 935,858 $ 3,240,343
------------- ------------- -------------
------------- ------------- -------------
CASH PAID FOR INTEREST............................................... $ 2,868,914 $ 3,645,205 $ 3,093,440
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE>
CENCOM CABLE INCOME PARTNERS II, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION AND BASIS OF PRESENTATION
Cencom Cable Income Partners II, L.P., a Delaware limited partnership (the
"Partnership"), was formed on August 13, 1987, for the purpose of acquiring and
operating existing cable television systems. CC II Holdings, Inc. (CC II
Holdings) acquired the common stock of Cencom Properties II, Inc. (Cencom
Properties II or the "General Partner") from Cencom Cable Associates, Inc.
(presently doing business as Cencom Cable Entertainment, Inc. and referred to as
"Cencom Cable Associates" herein) in September 1994. CC II Holding is a wholly
owned subsidiary of Charter Communications, Inc. (Charter). The Partnership was
to be dissolved no later than December 31, 1995, as provided in the partnership
agreement (the "Partnership Agreement"). As of December 31, 1996, the
Partnership is in the process of a complete and orderly dissolution of the
Partnership (see Note 2).
As of December 31, 1996, the Partnership provided cable television service
to approximately 36 franchises serving approximately 44,700 basic subscribers in
northeast Missouri, South Carolina and Texas.
CASH EQUIVALENTS
Cash equivalents consist primarily of repurchase agreements with original
maturities of 90 days or less. These investments are carried at cost, which
approximates market value. The Partnership is subject to loss for amounts
invested in repurchase agreements in the event of nonperformance by the
financial institution, which acts as the counterparty under such agreements;
however, such noncompliance is not anticipated.
REVENUE RECOGNITION
Cable service revenues are recognized in the period 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.
DEPRECIATION AND AMORTIZATION
The Partnership provides depreciation using the composite method of
depreciation on a straight-line basis over the estimated useful lives of the
related property, plant and equipment as follows:
<TABLE>
<S> <C>
Trunk and distribution systems................................... 10 years
Subscriber installations......................................... 10 years
9-20
Buildings and headends........................................... years
Converters....................................................... 3-5 years
Vehicles and equipment........................................... 4-8 years
5-10
Office equipment................................................. years
</TABLE>
F-7
<PAGE>
CENCOM CABLE INCOME PARTNERS II, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
Franchise costs are being amortized using the straight-line method over the
term of the individual franchise agreements. Debt issuance costs are being
amortized over the term of the debt.
During 1995, the Partnership 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 Partnership 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 would be recorded as
a reduction of the assets' cost as if a permanent impairment has occurred. No
impairments have occurred and no adjustments to the financial statements of the
Partnership have been recorded related to SFAS No. 121.
INVESTMENT IN UNCONSOLIDATED LIMITED PARTNERSHIP
The Partnership owns Limited Partnership units of Cencom Partners, L.P.
(CPLP) which equate to an 84.03% ownership interest in CPLP. The Partnership
only owns Limited Partnership units and does not exercise significant influence
over CPLP's operations; therefore, its investment in CPLP is accounted for using
the equity method, and losses in excess of its investment in CPLP are not
recorded (see Note 4).
LIQUIDATION COSTS
Certain liquidation costs which are not directly attributed to the
Partnership (i.e., accounting, legal, etc.) have been allocated between the
Partnership and CPLP based upon the number of total basic subscribers.
INCOME TAXES
Income taxes are the responsibility of the partners and as such are not
provided for in the accompanying financial statements.
NET LOSS PER LIMITED PARTNERSHIP UNIT
The net loss per Limited Partnership unit has been calculated based on
90,915 weighted average Limited Partnership units outstanding each year.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures 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.
F-8
<PAGE>
CENCOM CABLE INCOME PARTNERS II, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
2. LIQUIDATION, DISTRIBUTIONS AND ALLOCATIONS:
DISTRIBUTIONS AND ALLOCATIONS
Profits and losses are generally allocated in proportion to the partners'
capital contributions. The Partnership is required to distribute all cash
available for distribution. Distributions are made within 60 days after the end
of each calendar quarter. The Limited Partners receive 100% of all cash
available for distribution until they receive a cumulative 11% per annum
preference return on their adjusted capital contributions. After the Limited
Partners have received the 11% preferred return, the General Partner will
receive 11% per annum on its capital contribution. Thereafter, the Limited
Partners will receive 99% and the General Partner will receive 1% of all
additional cash available for distribution. During the fourth quarter of 1993,
the Partnership suspended distributions to Limited Partners to meet its debt
covenants and allow for necessary capital expenditures. No distributions were
made in 1996, 1995 and 1994. Distributions in arrears are approximately
$49,807,000 as of December 31, 1996.
LIQUIDATION OF THE PARTNERSHIP
The Partnership Agreement provides for the dissolution of the Partnership on
or before December 31, 1995. In accordance with the Partnership Agreement, the
General Partner began dissolution during 1995. Two independent appraisals were
conducted during March 1995, resulting in an appraised value of $73,850,000 for
the Partnership's cable television systems (excluding its investment in CPLP).
The General Partner has accepted bids with respect to the South Carolina
systems, and for the Cleveland, Jasper, Woodville, Marlin, Madisonville and
Buffalo systems (which constitute approximately 47% of the basic subscribers of
the Texas systems), for an aggregate purchase price of $51,950,000, each subject
to execution of a final sale agreement. The accepted bids represent
approximately 69% of the Partnership's basic subscribers as of December 31,
1996. The bid for the South Carolina systems was submitted by an affiliate of
the General Partner. In accordance with the Partnership Agreement, the sale of
assets to an affiliate of the General Partner is subject to an appraisal
process, requiring two independent appraisers to jointly determine the appraised
value, and must be approved by a majority of outstanding Limited Partner units.
The General Partner is preparing a disclosure statement for distribution to the
Limited Partners which describes the various transactions and requests consent
for the sale to the affiliates of the General Partner. The affiliates of the
General Partner have reached agreements with their principal lenders regarding
the proposed terms of their loans. In addition, completion of the third-party
sales are subject to the successful arrangement of financing on the part of the
buyers of these systems.
Bids submitted to date with respect to the northeast Missouri systems and
the remainder of the Texas systems were considered to be too low relative to the
estimated fair market values of such systems established pursuant to the
appraisal process. Thus, these bids have not been accepted by the General
Partner. Accordingly, the General Partner will continue to seek potential
purchasers for the remaining systems.
The General Partner or other liquidating agent is required to liquidate
partnership assets and to distribute all available proceeds as soon as
practicable after their receipt by the Partnership. After payment of the
Partnership's liabilities, these sales proceeds will be distributed as set forth
above. Once the Limited Partners and the General Partner have received aggregate
cash distributions equal to their capital contributions plus the 11% preferred
return referred to above, sales proceeds will generally be allocated 70% to the
Limited Partners and 30% to the General Partner.
F-9
<PAGE>
CENCOM CABLE INCOME PARTNERS II, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
2. LIQUIDATION, DISTRIBUTIONS AND ALLOCATIONS: (CONTINUED)
Upon finalization of a plan of liquidation and execution of sale agreements,
the Partnership will change its basis of accounting from the going-concern basis
to the liquidation basis. Under the liquidation basis of accounting, assets are
recorded at their estimated realizable values and liabilities are recorded at
their estimated settlement amounts.
LIQUIDATION OF CPLP
Concurrent with the disposition of the Partnership's assets, including its
entire ownership interest in CPLP, CPLP has sought to dispose of its assets
through the sale of its cable television system to facilitate the liquidation of
the Partnership. Additionally, the asset sale is being effected to satisfy the
requirements by CPLP's senior bank lenders that the credit facility be repaid.
To dispose of the assets of CPLP, the general partner of CPLP obtained
appraisals as of March 31, 1995, from Daniels & Associates ("Daniels") and
Western Cablesystems, Inc. ("Western"), who jointly reached a valuation of
$60,900,000 for all of the CPLP cable television systems. Thereafter, Daniels
was retained to market the CPLP systems using an auction process substantially
identical to that employed for the Partnership's Systems. As a result of the
auction process, CPLP's general partner has executed final sale agreements with
two affiliates of the General Partner for CPLP's South Carolina and North
Carolina Systems for an aggregate price of $52,450,000. Completion of these
proposed sales are subject to the successful arrangement of financing on the
part of the buyers of these systems. The bids submitted for CPLP's Texas Systems
were below the appraised fair market value and have not been accepted. CPLP
intends to continue to operate its Texas Systems until an acceptable bid is
received. The affiliates of the General Partner have reached agreements with
their principal lenders regarding the proposed terms of their loans.
Following CPLP's proposed sales of some or all of its systems, it will use
the available sale proceeds to pay outstanding indebtedness and expenses
(including the payment of accrued and unpaid management fees to its General
Partner and repayment of its senior bank credit facility), with any remaining
proceeds to be distributed in accordance with the terms of CPLP's partnership
agreement, which will include distributions to the Partnership in its capacity
as a Limited Partner of CPLP.
3. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment is stated at cost and consists of the
following at December 31:
<TABLE>
<CAPTION>
1996 1995
-------------- --------------
<S> <C> <C>
Trunk and distribution systems.................................................... $ 33,744,552 $ 33,098,240
Subscriber installations.......................................................... 9,407,182 8,495,118
Land, buildings and headends...................................................... 5,559,636 5,378,614
Converters........................................................................ 3,902,610 3,726,224
Vehicles and equipment............................................................ 2,000,543 1,895,785
Office equipment.................................................................. 783,785 737,402
-------------- --------------
55,398,308 53,331,383
Less--Accumulated depreciation.................................................... (36,459,500) (30,758,752)
-------------- --------------
$ 18,938,808 $ 22,572,631
-------------- --------------
-------------- --------------
</TABLE>
F-10
<PAGE>
CENCOM CABLE INCOME PARTNERS II, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
4. INVESTMENT IN UNCONSOLIDATED LIMITED PARTNERSHIP:
The Partnership has invested approximately $25,000,000 in CPLP, a limited
partnership. CPLP utilized these funds to purchase cable television systems in
North Carolina, South Carolina and Texas. The Partnership's equity contribution
consisted of the balance of funds which had previously been restricted for
investment in cable television systems, plus approximately $18,135,000 of
allowable borrowings as specified by the Partnership Agreement. The Partnership
is allocated 84.03% (based on ownership interest) of CPLP's net income or losses
and accounts for its investment in CPLP under the equity method. Losses in
excess of its investment in CPLP are not recorded. As of December 31, 1996, the
unrecorded losses in excess of investment were approximately $14,897,000.
Additional partners of CPLP include Charter.
Summary financial information of CPLP as of December 31, 1996 and 1995, and
for each of the three years in the year period ended December 31, 1996, which is
not consolidated with the operating results of the Partnership, is as follows:
<TABLE>
<CAPTION>
1996 1995
-------------- --------------
<S> <C> <C>
Current assets................................................ $ 1,058,448 $ 659,926
Noncurrent assets--primarily investment in cable television
properties.................................................. 22,972,191 27,823,344
-------------- --------------
Total assets............................................ $ 24,030,639 $ 28,483,270
-------------- --------------
-------------- --------------
Current liabilities, including current maturities of long-term
debt of $34,957,500 and $34,957,500, respectively........... $ 39,727,149 $ 39,401,034
Deferred revenue.............................................. 174,791 196,640
Partners' capital (deficit)................................... (15,871,301) (11,114,404)
-------------- --------------
Total liabilities and partners' capital (deficit)....... $ 24,030,639 $ 28,483,270
-------------- --------------
-------------- --------------
</TABLE>
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Service revenues................................ $ 13,748,224 $ 12,855,563 $ 12,075,857
------------- ------------- -------------
------------- ------------- -------------
Loss from operations............................ $ (1,776,152) $ (3,020,280) $ (5,047,535)
------------- ------------- -------------
------------- ------------- -------------
Net loss........................................ $ (4,756,897) $ (5,835,749) $ (7,425,112)
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
In accordance with restrictions under CPLP's senior debt agreement, CPLP may
make no partnership distributions during the term of its senior debt agreement.
Furthermore, a maximum of $3,000,000 in CPLP assets may be sold without bank
permission, and all proceeds from any such sale must be used to reduce
borrowings under the senior debt agreement.
5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
Accounts payable and accrued expenses consist of the following at December
31:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Capital expenditures.............................................. $ 128,786 $ 114,928
Accrued salaries and related benefits............................. 158,372 144,024
</TABLE>
F-11
<PAGE>
CENCOM CABLE INCOME PARTNERS II, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES: (CONTINUED)
<TABLE>
<S> <C> <C>
Accrued liquidation costs......................................... 162,000 --
Professional fees................................................. 257,636 89,136
Debt issuance costs............................................... 350,000 --
Property taxes.................................................... 358,786 645,849
Franchise fees.................................................... 368,602 327,272
Programming expenses.............................................. 369,137 355,174
Other............................................................. 244,355 484,533
------------ ------------
$ 2,397,674 $ 2,160,916
------------ ------------
------------ ------------
</TABLE>
6. LONG-TERM DEBT:
The Partnership maintains a secured revolving line of credit agreement (the
"Credit Agreement") with a consortium of banks for borrowings up to $65,000,000.
On December 31, 1996, the Partnership and the banks amended the Credit Agreement
to extend the maturity date to June 30, 1997. The Partnership paid $350,000 in
amendment fees in connection with this amendment which were recorded as debt
issuance costs. Loans under the Credit Agreement bear interest, with the base
rate being at the partnership's election at the Toronto Dominion's (the agent
bank) prime rate of interest, Eurodollar or certificates of deposit rate, plus a
certain spread. The applicable spreads are based on the ratio of debt to
annualized operating cash flow. At December 31, 1996 and 1995, the interest
rates ranged from 6.81% to 8.50% and 7.38% to 9.00%, respectively. The weighted
average interest rates and borrowings for 1996, 1995 and 1994 were 7.29%, 7.99%
and 6.68%, and approximately $38,889,000, $43,163,000 and $44,700,000,
respectively. Borrowings under the Credit Agreement are subject to certain
financial and nonfinancial covenants and restrictions, the most restrictive of
which requires the maintenance of a ratio of debt to annualized operating cash
flow, as defined, not to exceed 4.5 to 1. Borrowings under the Credit Agreement
are collateralized by the assets of the Partnership. A quarterly commitment fee
of 0.375% per annum is payable on the unused portion of the Credit Agreement. As
this debt instrument bears interest at current market rates, its carrying amount
approximates fair market value at December 31, 1996 and 1995.
The Partnership has prepared projections of quarterly operating results for
1997 which demonstrate that the Partnership will be in compliance with its
financial covenants throughout the year. Such projections are dependent,
however, on sustained subscriber growth and the maintenance of current operating
margins. If current levels of subscriber growth and operating margins are not
maintained, the Partnership could be forced to renegotiate the terms of the
Credit Agreement or to seek alternative sources of financing.
7. RELATED-PARTY TRANSACTIONS:
During 1994, Cencom Cable Associates assigned management services under
contract with the Partnership to the General Partner. The management service
contract provides for the payment of fees equal to 5% of the Partnership's
annual gross operating revenue. Expenses recorded under this contract by the
Partnership during 1996, 1995 and 1994 were $905,071, $852,319 and $812,896,
respectively. Up to 50% of the management fee payment is subordinated to certain
quarterly distributions to the Limited Partners. Since assumption of the
responsibilities under the contract, the General Partner has elected to defer
payment of all such management fees. Management fees of $3,614,258 and
$2,709,187 have been deferred
F-12
<PAGE>
CENCOM CABLE INCOME PARTNERS II, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
7. RELATED-PARTY TRANSACTIONS: (CONTINUED)
and are included in Payables to General Partner and Affiliates at December 31,
1996 and 1995, respectively. In addition to the management fees, the Partnership
reimburses the General Partner for expenses incurred on behalf of the
Partnership for performance of services under the contract.
The Partnership has a noninterest-bearing promissory note receivable due on
demand from the General Partner which represents one-half of its required
capital contribution.
The Partnership and all entities affiliated with Charter collectively
utilize a combination of insurance coverage and self-insurance programs for
medical, dental and workers' compensation claims. the Partnership is allocated
charges monthly based upon its total number of employees, historical claims and
medical cost trend rates. During 1996 and 1995, the Partnership expensed
approximately $150,700 and $143,328, respectively, relating to insurance
allocations.
Affiliated entities maintain several regional offices. The regional offices
perform certain operational services on behalf of the Partnership and other
affiliated entities. The cost of these services is allocated to the Partnership
based on its number of subscribers. During 1996, 1995 and 1994, the Partnership
expensed approximately $189,000, $175,000 and $205,000, respectively, relating
to this allocation.
8. COMMITMENTS AND CONTINGENCIES:
LEASES
The Partnership leases certain facilities and equipment under noncancelable
operating leases. Rent expense incurred under these leases during 1996, 1995 and
1994 was approximately $99,200, $96,000 and $80,000, respectively.
Future minimum lease payments are as follows:
<TABLE>
<S> <C>
1997............................................................... $ 27,000
1998............................................................... 24,000
1999............................................................... 22,000
2000............................................................... 10,000
2001............................................................... 7,000
Thereafter......................................................... 1,000
</TABLE>
The Partnership rents utility poles in its operations. Generally, pole
rental agreements are short term, but the Partnership anticipates that such
rentals will continue to recur. Rent expense for pole attachments during 1996,
1995 and 1994 was approximately $317,000, $227,000 and $350,000, respectively.
INSURANCE COVERAGE
The Partnership 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 Partnership's management, the price is too
high for the coverage extended. Management believes that its experience with
such insurance coverage is consistent with general industry practice.
F-13
<PAGE>
CENCOM CABLE INCOME PARTNERS II, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
8. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
The Partnership's management will continue to monitor the insurance markets to
attempt to obtain coverage for the Partnership's distribution plant at
reasonable rates.
LITIGATION
The Partnership 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
Partnership's financial position or results of operations.
9. RATE REGULATION IN THE CABLE TELEVISION 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.
Congress enacted the Cable Television Consumer Protection and Competition
Act of 1992 (the "1992 Cable Act"), which became effective on December 4, 1992.
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, provided that the local franchising
authority becomes certified to regulate basic service units. 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.
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
services 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. Management is unable to
estimate at this time the amount of refunds, if any, that may be payable by the
Partnership 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 Partnership.
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 Partnership has generally met the terms of its franchise agreements and
has provided quality levels of service and anticipates 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.
During 1996, Congress passed and the President signed into law the
Telecommunications Act of 1996 (the "Telecommunications Act") which 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.
F-14
<PAGE>
CENCOM CABLE INCOME PARTNERS II, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
9. RATE REGULATION IN THE CABLE TELEVISION INDUSTRY: (CONTINUED)
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 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.
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 or results of operations of the Partnership.
10. 401(K) PLAN:
In 1994, the Partnership adopted the Charter Communications, Inc. 401(k)
Plan (the "Plan") for the benefit of its employees. All employees who have
completed one year of employment are eligible to participate in the Plan. The
Plan is a tax-qualified retirement savings plan to which employees may elect to
make pretax contributions up to the lesser of 10% of their compensation or
dollar thresholds established under the Internal Revenue Code. The Partnership
contributes an amount equal to 50% of the first 5% contributed by each employee.
During 1996, 1995 and 1994, the Partnership contributed approximately $26,200,
$26,500 and $40,900, respectively.
11. NET LOSS FOR INCOME TAX PURPOSES:
The following reconciliation summarizes the differences between the
Partnership's net loss for financial reporting purposes and net loss for federal
income tax purposes for the years ended December 31:
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Net loss for financial reporting purposes............................ $ (1,447,153) $ (2,292,563) $ (5,256,210)
Depreciation differences between financial reporting and tax
reporting.......................................................... 1,728,352 751,650 (91,608)
Equity in loss of unconsolidated Limited Partnership differences
between financial reporting and tax reporting...................... (2,853,381) (3,417,920) (4,564,540)
Differences in expenses recorded for financial reporting and for tax
purposes........................................................... 224,167 (364,558) 584,764
Differences in revenue reported for financial reporting and tax
reporting.......................................................... (3,100) 27,904 --
Other................................................................ 4,144 45,361 (19,489)
------------- ------------- -------------
Net loss for federal income tax purposes............................. $ (2,346,971) $ (5,250,126) $ (9,347,083)
------------- ------------- -------------
------------- ------------- -------------
Net loss per Limited Partnership unit for federal income tax
purposes........................................................... $ (25.82) $ (57.17) $ (101.78)
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The following summarizes the significant temporary differences between the
Partnership's financial reporting basis and federal income tax reporting basis
as of December 31:
F-15
<PAGE>
CENCOM CABLE INCOME PARTNERS II, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
11. NET LOSS FOR INCOME TAX PURPOSES: (CONTINUED)
<TABLE>
<CAPTION>
1996 1995
-------------- --------------
<S> <C> <C>
Assets:
Accounts receivable......................................... $ 34,763 $ 31,463
Accrued expenses............................................ 877,869 657,002
Deferred revenue............................................ 24,803 27,904
-------------- --------------
$ 937,435 $ 716,369
-------------- --------------
-------------- --------------
Liabilities:
Property, plant and equipment............................... $ (12,250,944) $ (13,979,613)
Investment in unconsolidated Limited Partnership............ (3,178,842) (8,864,469)
-------------- --------------
$ (15,429,786) $ (22,844,082)
-------------- --------------
-------------- --------------
</TABLE>
F-16
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Cencom Partners, L.P.:
We have audited the accompanying balance sheets of Cencom Partners, L.P. (a
Delaware limited partnership) as of December 31, 1996 and 1995, and the related
statements of operations, partners' capital (deficit) and cash flows for each of
the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Cencom Partners, L.P. as of
December 31, 1996 and 1995, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1996, in conformity
with generally accepted accounting principles.
St. Louis, Missouri,
February 21, 1997
F-17
<PAGE>
CENCOM PARTNERS, L.P.
BALANCE SHEETS--DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
-------------- --------------
<S> <C> <C>
<CAPTION>
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents....................................................... $ 543,299 $ 412,532
Accounts receivable, net of allowance for doubtful accounts of $25,788 and
$21,651, respectively......................................................... 172,642 140,541
Insurance receivables........................................................... 313,290 --
Prepaid expenses and other...................................................... 29,217 106,853
-------------- --------------
Total current assets........................................................ 1,058,448 659,926
-------------- --------------
PROPERTY, PLANT AND EQUIPMENT..................................................... 16,895,746 18,045,408
FRANCHISE COSTS, net of accumulated amortization of $21,960,618 and $19,648,414,
respectively.................................................................... 5,148,026 7,460,235
SUBSCRIBER LISTS, net of accumulated amortization of $9,472,652 and $8,015,285,
respectively.................................................................... 728,619 2,185,986
DEBT ISSUANCE COSTS, net of accumulated amortization of $- and $38,030,
respectively.................................................................... 199,800 131,715
-------------- --------------
$ 24,030,639 $ 28,483,270
-------------- --------------
-------------- --------------
<CAPTION>
LIABILITIES AND PARTNERS' CAPITAL (DEFICIT)
<S> <C> <C>
CURRENT LIABILITIES:
Current maturities of long-term debt............................................ $ 34,957,500 $ 34,957,500
Accounts payable and accrued expenses........................................... 1,358,434 1,635,873
Payables to General Partner and affiliates...................................... 3,358,684 2,743,225
Subscriber deposits............................................................. 52,531 64,436
-------------- --------------
Total current liabilities................................................... 39,727,149 39,401,034
-------------- --------------
DEFERRED REVENUE.................................................................. 174,791 196,640
-------------- --------------
COMMITMENTS AND CONTINGENCIES
PARTNERS' CAPITAL (DEFICIT):
General Partner................................................................. (268,880) (197,051)
Limited Partners (293 units authorized, issued and outstanding)................. (17,602,421) (12,917,353)
Special Limited Partner (20 units authorized, issued and outstanding)........... 2,000,000 2,000,000
-------------- --------------
Total Partners' capital (deficit)........................................... (15,871,301) (11,114,404)
-------------- --------------
$ 24,030,639 $ 28,483,270
-------------- --------------
-------------- --------------
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-18
<PAGE>
CENCOM PARTNERS, L.P.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
SERVICE REVENUES:
Basic service...................................................... $ 10,176,306 $ 9,418,509 $ 8,899,173
Premium service.................................................... 1,792,082 1,828,882 1,761,006
Other.............................................................. 1,779,836 1,608,172 1,415,678
------------- ------------- -------------
13,748,224 12,855,563 12,075,857
OPERATING EXPENSES:
Operating costs.................................................... 5,841,053 5,394,026 4,843,805
General and administrative......................................... 1,187,267 1,141,985 1,262,442
Liquidation costs.................................................. 243,154 115,910 --
Depreciation and amortization...................................... 7,565,531 8,581,137 10,413,352
Management fees--related party..................................... 687,371 642,785 603,793
------------- ------------- -------------
15,524,376 15,875,843 17,123,392
------------- ------------- -------------
Loss from operations........................................... (1,776,152) (3,020,280) (5,047,535)
------------- ------------- -------------
OTHER INCOME (EXPENSE):
Interest income.................................................... 37,089 29,469 18,030
Interest expense................................................... (2,634,834) (2,844,938) (2,395,607)
Loss from Hurricane Fran........................................... (383,000) -- --
------------- ------------- -------------
(2,980,745) (2,815,469) (2,377,577)
------------- ------------- -------------
Net loss....................................................... $ (4,756,897) $ (5,835,749) $ (7,425,112)
------------- ------------- -------------
------------- ------------- -------------
NET LOSS PER LIMITED PARTNERSHIP UNIT.............................. $ (15,990) $ (19,616) $ (24,959)
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-19
<PAGE>
CENCOM PARTNERS, L.P.
STATEMENTS OF PARTNERS' CAPITAL (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
SPECIAL
GENERAL LIMITED LIMITED
PARTNER PARTNERS PARTNER TOTAL
----------- -------------- ------------ --------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1993............................ $ 3,188 $ 143,269 $ 2,000,000 $ 2,146,457
Net loss............................................ (112,119) (7,312,993) -- (7,425,112)
----------- -------------- ------------ --------------
BALANCE, December 31, 1994............................ (108,931) (7,169,724) 2,000,000 (5,278,655)
Net loss............................................ (88,120) (5,747,629) -- (5,835,749)
----------- -------------- ------------ --------------
BALANCE, December 31, 1995............................ (197,051) (12,917,353) 2,000,000 (11,114,404)
Net loss............................................ (71,829) (4,685,068) -- (4,756,897)
----------- -------------- ------------ --------------
BALANCE, December 31, 1996............................ $ (268,880) $ (17,602,421) $ 2,000,000 $ (15,871,301)
----------- -------------- ------------ --------------
----------- -------------- ------------ --------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-20
<PAGE>
CENCOM PARTNERS, L.P.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................................................... $ (4,756,897) $ (5,835,749) $ (7,425,112)
Adjustments to reconcile net loss to net cash provided by operating
activities-
Depreciation and amortization.................................... 7,565,531 8,581,137 10,413,352
Changes in assets and liabilities--
Accounts receivable, net....................................... (32,101) 69,822 (65,112)
Other receivables.............................................. (313,290) -- --
Prepaid expenses and other..................................... 77,636 15,235 (52,682)
Accounts payable and accrued expenses.......................... (277,439) 164,801 (154,306)
Payables to General Partner and affiliates..................... 615,459 1,177,072 575,355
Subscriber deposits............................................ (11,905) (5,876) (7,960)
Deferred revenue............................................... (21,849) 196,640 --
------------- ------------- -------------
Net cash provided by operating activities.................... 2,845,145 4,363,082 3,283,535
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment......................... (2,427,274) (1,973,566) (2,449,847)
------------- ------------- -------------
Net cash used in investing activities........................ (2,427,274) (1,973,566) (2,449,847)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of long-term debt......................................... -- (2,381,850) (1,370,650)
Debt issuance costs................................................ (287,104) (67,562) (102,186)
------------- ------------- -------------
Net cash used in financing activities........................ (287,104) (2,449,412) (1,472,836)
------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS................. 130,767 (59,896) (639,148)
CASH AND CASH EQUIVALENTS, beginning of year......................... 412,532 472,428 1,111,576
------------- ------------- -------------
CASH AND CASH EQUIVALENTS, end of year............................... $ 543,299 $ 412,532 $ 472,428
------------- ------------- -------------
------------- ------------- -------------
CASH PAID FOR INTEREST............................................... $ 2,981,421 $ 2,653,014 $ 2,529,475
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these statements.
F-21
<PAGE>
CENCOM PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION AND BASIS OF PRESENTATION
Cencom Partners, L.P., a Delaware limited partnership (the "Partnership"),
was formed on January 30, 1990, for the purpose of acquiring and operating
existing cable television systems. The Partnership commenced operations
effective March 1990, through the acquisition of a cable television system in
South Carolina. The Partnership will terminate no later than June 30, 2001, as
provided in the partnership agreement (the "Partnership Agreement"). CC III
Holdings, Inc. (CC III Holdings) acquired the common stock of Cencom Properties,
Inc. (Cencom Properties) from Cencom Cable Associates, Inc. (presently doing
business as Cencom Cable Entertainment, Inc. and referred to as "Cencom Cable
Associates" herein) in September 1994. CC III Holdings is a wholly owned
subsidiary of Charter Communications, Inc. (Charter). Cencom Cable Income
Partners II, L.P. (CCIP II), an affiliate, owns 84.03% of the Limited Partner
units.
As of December 31, 1996, the Partnership provided cable television service
to approximately 22 franchises serving approximately 36,200 basic subscribers in
North Carolina, South Carolina and Texas.
CASH EQUIVALENTS
Cash equivalents consist primarily of repurchase agreements with original
maturities of 90 days or less. These investments are carried at cost, which
approximates market value. The Partnership is subject to loss for amounts
invested in repurchase agreements in the event of nonperformance by the
financial institution, which acts as the counterparty under such agreements;
however, such noncompliance is not anticipated.
REVENUE RECOGNITION
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.
DEPRECIATION AND AMORTIZATION
The Partnership provides depreciation using the composite method on a
straight-line basis over the estimated useful lives of the related property,
plant and equipment as follows:
<TABLE>
<S> <C>
Trunk and distribution systems................................... 10 years
Subscriber installations......................................... 10 years
9-20
Buildings and headends........................................... years
Converters....................................................... 3-5 years
Vehicles and equipment........................................... 4-8 years
5-10
Office equipment................................................. years
</TABLE>
F-22
<PAGE>
CENCOM PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
Franchise costs are being amortized using the straight-line method over the
term of the individual franchise agreements. Subscriber lists are being
amortized using the straight-line method over seven years. Debt issuance costs
are being amortized over the term of the debt.
During 1995, the Partnership 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 Partnership 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 would be recorded as
a reduction of the assets' cost as if a permanent impairment has occurred. No
impairments have occurred and adjustments to the financial statements of the
Partnership have been recorded related to SFAS No. 121.
LIQUIDATION COSTS
Certain liquidation costs which are not directly attributed to the
Partnership (i.e., accounting, legal, etc.) have been allocated between the
Partnership and CPLP based upon the number of total basic subscribers.
INCOME TAXES
Income taxes are the responsibility of the partners and as such are not
provided in the accompanying financial statements.
NET LOSS PER LIMITED PARTNERSHIP UNIT
The net loss per Limited Partnership unit has been calculated based on 293
weighted average Limited Partnership units outstanding in each year. In
accordance with the Partnership Agreement, no losses have been allocated to the
Special Limited Partner units.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. LIQUIDATION, DISTRIBUTIONS AND ALLOCATIONS:
The Partnership is comprised of the General Partner, 293 Limited Partnership
units and 20 Special Limited Partnership units. Under terms of the Partnership
Agreement, allocation of Partnership profits is as follows: (i) to partners with
deficit capital balances, until such deficits are reduced to zero; (ii) to the
Special Limited Partner, until its account has been allocated all unrecovered
preference return amounts, as
F-23
<PAGE>
CENCOM PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
2. LIQUIDATION, DISTRIBUTIONS AND ALLOCATIONS: (CONTINUED)
defined in the Agreement; and (iii) to the General Partner and Limited Partners
in proportion to their capital contributions.
Partnership losses are allocated among the General Partner and Limited
Partners in proportion to their capital contributions. Any distributions made by
the Partnership are to be made as follows: (i) to all partners to the extent of
any tax liabilities; (ii) to the Special Limited Partner to the extent of any
unpaid preference returns as defined in the Partnership Agreement; and (iii) to
the General Partner and Limited Partners in proportion to their capital
contributions. The Special Limited Partner's preference return is equal to its
adjusted capital balance, as defined, plus an amount equal to 15% per annum,
compounded quarterly, on such amount through June 30, 1993. Thereafter, the
preference return shall increase to 18% per annum, compounded quarterly in
accordance with the Partnership Agreement. The accreted balance of the Special
Limited Partner units is $5,765,303 at December 31, 1996.
LIQUIDATION OF THE PARTNERSHIP
CCIP II's partnership agreement provides for the dissolution of CCIP II on
or before December 31, 1995. The general partner of CCIP II is in the process of
a complete and orderly dissolution of CCIP II.
Concurrent with the disposition of CCIP II's assets, including its entire
ownership interest in the Partnership, the Partnership has sought to dispose of
its assets through the sale of its cable television systems to facilitate the
liquidation of CCIP II. Additionally, the asset sale is being effected to
satisfy the requirements by the Partnership's senior bank lenders that the
credit facility be repaid.
To dispose of the assets of the Partnership, the General Partner obtained
appraisals as of March 31, 1995, from Daniels & Associates ("Daniels") and
Western Cablesystems, Inc., who jointly reached a valuation of $60,900,000 for
all of the Partnership systems. Thereafter, Daniels was retained to market the
Partnership systems using an auction process. As a result of the auction
process, the General Partner has executed final sale agreements with two
affiliated entities of CCIP II for the Partnership's South Carolina and North
Carolina Systems for an aggregate price of $52,450,000. The accepted bids
represent approximately 83% of the Partnership's basic subscribers as of
December 31, 1996. Completion of these proposed sales are subject to the
successful arrangement of financing on the part of the buyers of these systems.
The bids submitted for the Partnership's Texas Systems were below the appraised
fair market value and have not been accepted. The Partnership intends to
continue to operate its Texas Systems until an acceptable bid is received. The
affiliates of the General Partner have reached agreements with their principal
lenders regarding the proposed terms of their loans.
Following the Partnership's proposed sales of some or all of the
Partnership's systems, it will use the available sale proceeds to pay
outstanding indebtedness and expenses (including the payment of accrued and
unpaid management fees (which were $2,896,163 as of December 31, 1996) to the
General Partner and repayment of its senior bank credit facility), with any
remaining proceeds to be distributed in accordance with the terms of the
Partnership Agreement, which will include distributions to CCIP II in its
capacity as a Limited Partner of the Partnership.
Upon finalization of a plan of liquidation and the determination of sales
price, the Partnership will change its basis of accounting from the
going-concern basis to the liquidation basis. Under the liquidation basis of
accounting, assets are recorded at their estimated realizable values and
liabilities are recorded at their estimated settlement amounts.
F-24
<PAGE>
CENCOM PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
3. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment is stated at cost and consists of the
following at December 31:
<TABLE>
<CAPTION>
1996 1995
-------------- --------------
<S> <C> <C>
Trunk and distribution systems................................ $ 21,851,645 $ 20,716,319
Subscriber installations...................................... 7,455,295 6,584,628
Land, buildings and headends.................................. 3,704,136 3,604,544
Converters.................................................... 2,748,418 2,499,502
Vehicles and equipment........................................ 917,817 895,168
Office equipment.............................................. 431,770 411,629
-------------- --------------
37,109,081 34,711,790
Less--Accumulated depreciation................................ (20,213,335) (16,666,382)
-------------- --------------
$ 16,895,746 $ 18,045,408
-------------- --------------
-------------- --------------
</TABLE>
4. ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
Accounts payable and accrued expenses consist of the following at December
31:
<TABLE>
<CAPTION>
1996 1995
------------ ------------
<S> <C> <C>
Accrued interest.................................................. $ -- $ 346,587
Salaries and related benefits..................................... 76,122 65,409
Property taxes.................................................... 69,338 158,079
Professional fees................................................. 174,000 66,000
Franchise fees.................................................... 260,464 226,246
Programming expenses.............................................. 281,477 259,920
Capital expenditures.............................................. 296,922 138,831
Other............................................................. 200,111 374,801
------------ ------------
$ 1,358,434 $ 1,635,873
------------ ------------
------------ ------------
</TABLE>
5. LONG-TERM DEBT:
The Partnership maintains a credit agreement (the "Credit Agreement") in the
form of a term loan with a consortium of banks. At December 31, 1996 and 1995,
$34,957,500 was outstanding related to the Credit Agreement. There is no
additional available borrowings for the Partnership in excess of the balance
outstanding. Loans under the Credit Agreement bear interest, with the base rate
being at the Partnership's election at the Toronto Dominion's (the agent bank)
prime rate of interest, the Eurodollar and certificates of deposit, plus a
certain spread. At December 31, 1996, the interest rate was 7.31% and at
December 31, 1995, the interest rates ranged from 7.38% to 8.18%. The weighted
average interest rate and borrowings for 1996, 1995 and 1994 were 7.54%, 7.81%
and 6.08% and approximately $34,957,500, $36,439,000 and $38,062,000,
respectively. Borrowings under the Credit Agreement are subject to certain
financial and nonfinancial covenants and restrictions, the most restrictive of
which requires maintenance of a ratio of debt to annualized operating cash flow,
as defined, not to exceed 5.25 to 1 at December 31, 1996. At December 31, 1995,
the Partnership was not in compliance with its capital expenditure covenant
contained
F-25
<PAGE>
CENCOM PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
5. LONG-TERM DEBT: (CONTINUED)
in the Credit Agreement. Pursuant to an amendment to the Credit Agreement, dated
March 1996, the Partnership received a waiver for such noncompliance. In
addition, the amendment changed the maturity date for all principal amounts and
other obligations then outstanding to be due and payable on December 31, 1996.
Amendment fees of $87,304 were paid related to this amendment and were expensed
during the year. On December 31, 1996, the Partnership and the banks amended the
Credit Agreement to extend the maturity date to June 30, 1997. Additional
amendment fees of $199,800 were paid in connection with this amendment and were
recorded as debt issuance costs. During the years ended December 31, 1996 and
1995, the Partnership incurred costs totaling $287,104 and $67,562,
respectively, relating to the amendment of certain covenants contained in the
Credit Agreement. Borrowings under the Credit Agreement are collateralized by
the assets of the Partnership. As this debt instrument bears interest at current
market rates, its carrying amount approximates fair market value at December 31,
1996 and 1995.
6. RELATED-PARTY TRANSACTIONS:
During 1994, Cencom Cable Associates assigned management services under
contract with the Partnership to the General Partner. The management service
provides for the payment of fees equal to 5% of the Partnership's gross
operating revenues. The Partnership was allowed to defer 60% of all such fees
through December 31, 1995. Since the assumption of the responsibilities under
the contract, the General Partner has elected to defer payment of all such
management fees. Expenses recognized by the Partnership under this contract
during 1996, 1995 and 1994 were $687,371, $642,785 and $603,793, respectively.
Management fees payable of $2,896,163 and $2,208,792 are included in Payables to
General Partner and Affiliates at December 31, 1996 and 1995, respectively. In
addition to the management fees, the Partnership reimburses the General Partner
for expenses incurred on behalf of the Partnership for performance of services
under the contract.
Included in the payables to General Partner and Affiliates $500,000 related
to a refundable deposit toward the purchase of the Abbeville System. The amount
will be refunded to Charter Communications II, L.P. (CC II) if the sale is not
consummated or applied to CC II's purchase of the Abbeville System.
The Partnership and all entities affiliated with Charter collectively
utilize a combination of insurance coverage and self-insurance programs for
medical, dental and workers' compensation claims. the Partnership is allocated
charges monthly based upon its total number of employees, historical claims and
medical cost trend rates. During 1996 and 1995, the Partnership expensed
approximately $144,600 and $149,400, respectively, relating to insurance
allocations.
Affiliated entities maintain several regional offices. The regional offices
perform certain operational services on behalf of the Partnership and other
affiliated entities. Generally, the costs of these services are allocated to the
Partnership based on the number of subscribers. During 1996 and 1995, certain
costs which should have been allocated to the Partnership were borne by Charter
on behalf of the Partnership. Charter is not obligated to make such payments in
the future. The amount of the costs which were paid by Charter during 1996 and
1995 was approximately $122,000 and $125,000, respectively.
F-26
<PAGE>
CENCOM PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
7. COMMITMENTS AND CONTINGENCIES:
LEASES
The Partnership leases certain facilities and equipment under noncancelable
operating leases. Rent expense incurred under these leases during 1996, 1995 and
1994 was approximately $64,000, $64,000 and $61,000, respectively.
Future minimum lease payments are as follows:
<TABLE>
<S> <C>
1997............................................................... $ 38,000
1998............................................................... 25,000
1999............................................................... 25,000
2000............................................................... 9,000
2001............................................................... 3,000
Thereafter......................................................... 14,000
</TABLE>
The Partnership rents utility poles in its operations. Generally, pole
rental agreements are short term, but the Partnership anticipates that such
rentals will recur. Rent expense for pole attachments during 1996, 1995 and 1994
was approximately $220,000, $153,000 and $185,000, respectively.
INSURANCE COVERAGE
The Partnership 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 Partnership's management, the price is too
high for the coverage extended. Management believes that its experience and
policy with such insurance coverage is consistent with general industry
practice. The Partnership's management will continue to monitor the insurance
markets to attempt to obtain coverage for the Partnership's distribution plant
at reasonable rates.
LITIGATION
The Partnership 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
Partnership's financial position or results of operations.
8. RATE REGULATION IN THE CABLE TELEVISION 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.
Congress enacted the Cable Television Consumer Protection and Competition
Act of 1992 (the "1992 Cable Act"), which became effective on December 4, 1992.
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, provided the local franchising authority
becomes certified to regulate basic service rates. The 1992 Cable Act and the
Federal Communications Commission's (FCC) rules implementing the 1992
F-27
<PAGE>
CENCOM PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
8. RATE REGULATION IN THE CABLE TELEVISION INDUSTRY: (CONTINUED)
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.
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
services 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. Management is unable to
estimate at this time the amount of refunds, if any, that may be payable by the
Partnership 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 Partnership.
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 agreements. Although management
believes that the Partnership has generally met the terms of its franchise
agreements and has provided quality levels of service and anticipates 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.
During 1996, Congress passed and the President signed into law the
Telecommunications Act of 1996 (the "Telecommunications Act") which 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.
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 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
Telecommunication 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.
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 or results of operations of the Partnership.
9. 401(K) PLAN:
In 1994, the Partnership adopted the Charter Communications, Inc. 401(k)
Plan (the "Plan") for the benefit of its employees. All employees who have
completed one year of employment are eligible to participate in the Plan. The
Plan is a tax-qualified retirement savings plan to which employees may elect to
make pretax contributions up to the lesser of 10% of their compensation or
dollar thresholds established under the Internal Revenue Code. The Partnership
contributes an amount equal to 50% of the first 5%
F-28
<PAGE>
CENCOM PARTNERS, L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996 AND 1995
9. 401(K) PLAN: (CONTINUED)
contributed by each employee. During 1996 and 1995, the Partnership contributed
approximately $20,500 and $22,100, respectively.
10. NET LOSS FOR INCOME TAX PURPOSES:
The following reconciliation summarizes the differences between the
Partnership's net loss for financial reporting purposes and net loss for federal
income tax purposes for the years ended December 31:
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Net loss for financial reporting purposes............................ $ (4,756,897) $ (5,835,749) $ (7,425,112)
Depreciation differences between financial reporting and tax
reporting.......................................................... (302,210) (299,122) (621,340)
Amortization differences between financial reporting and tax
reporting.......................................................... 1,501,067 1,857,724 2,243,924
Differences in expenses recorded for financial reporting and tax
reporting.......................................................... 181,261 7,973 89,320
Differences in revenue reported financial reporting and tax
reporting.......................................................... (21,849) 196,640 --
Other................................................................ 2,959 5,034 (8,762)
------------- ------------- -------------
Net loss for federal income tax purposes............................. $ (3,395,669) $ (4,067,500) $ (5,721,970)
------------- ------------- -------------
------------- ------------- -------------
Net loss per Limited Partnership unit for federal income tax
purposes........................................................... $ (11,414) $ (13,672) $ (19,236)
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
The following summarizes the significant temporary differences between the
Partnership's financial reporting basis and federal income tax reporting basis
as of December 31:
<TABLE>
<CAPTION>
1996 1995
-------------- -------------
<S> <C> <C>
Assets:
Accounts receivable.............................................................. $ 25,788 $ 21,651
Franchise costs and other assets................................................. 11,938,514 10,437,405
Accrued expenses................................................................. 597,057 419,932
Deferred revenue................................................................. 174,791 196,640
-------------- -------------
$ 12,736,150 $ 11,075,628
-------------- -------------
-------------- -------------
Liabilities--Property and equipment................................................ $ (10,048,954) $ (9,748,924)
-------------- -------------
-------------- -------------
</TABLE>
11. INSURANCE SETTLEMENT:
In September 1996, Hurricane Fran caused damage to certain of the
Partnership's North Carolina systems. The estimated total damage to the system
was approximately $1,900,000. As of December 31 the Partnership has incurred
approximately $1,600,000 in repairs. The Partnership received an insurance
advance of approximately $150,000 during 1996 and expects settlement in 1997. In
addition, the Partnership recorded a $383,000 nonoperating loss for its portion
of the insurance deductible.
F-29
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Cencom Properties II, Inc.:
We have audited the accompanying balance sheet of Cencom Properties II, Inc.
(a Delaware corporation and wholly owned subsidiary of CC II Holdings, Inc.) as
of December 31, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our 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 balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Cencom Properties II, Inc. as of
December 31, 1996, in conformity with generally accepted accounting principles.
St. Louis, Missouri,
February 21, 1997
F-30
<PAGE>
CENCOM PROPERTIES II, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
1996
-------------
<S> <C>
ASSETS
ASSETS:
Deferred management fees receivable, net......................................................... $ 1,050,602
-------------
Total assets................................................................................. $ 1,050,602
-------------
-------------
LIABILITIES AND SHAREHOLDER'S INVESTMENT
LIABILITIES:
Demand note payable to unconsolidated limited partnership........................................ $ 459,167
Loss in excess of equity investment in unconsolidated limited partnership........................ 60,021
-------------
Total liabilities............................................................................ 519,188
-------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDER'S INVESTMENT:
Common stock, $.01 par value, 1,000 shares authorized, issued and outstanding.................... 10
Additional paid-in capital....................................................................... 2,999,990
Retained earnings................................................................................ 531,414
Receivable from shareholder...................................................................... (3,000,000)
-------------
Total shareholder's investment............................................................... 531,414
-------------
Total liabilities and shareholder's investment............................................... $ 1,050,602
-------------
-------------
</TABLE>
The accompanying notes are an integral part of this balance sheet.
F-31
<PAGE>
CENCOM PROPERTIES II, INC.
NOTES TO BALANCE SHEET
1. ORGANIZATION AND BASIS OF PRESENTATION:
Cencom Properties II, Inc. (Cencom Properties II) is a wholly owned
subsidiary of CC II Holdings, Inc. (CC II Holdings) and was formed for the
purpose of serving as the General Partner of Cencom Cable Income Partners II,
L.P. (CCIP II). CC II Holdings purchased the common stock of Cencom Properties
II from Cencom Cable Associates, Inc. (presently doing business as Cencom Cable
Entertainment, Inc. and referred to as "Cencom Cable Associates" herein) in
September 1994. CC II Holdings is a wholly owned subsidiary of Charter
Communications, Inc. (Charter).
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements. Actual results could differ from those estimates.
2. INVESTMENT IN UNCONSOLIDATED LIMITED PARTNERSHIP:
Cencom Properties II records its general partnership investment in CCIP II
on the equity method. Under this method, its investment is originally recorded
at cost and is subsequently adjusted to recognize Cencom Properties II's share
of CCIP II's net earnings or losses as they occur and to record distributions
when received.
Summary financial information of CCIP II as of December 31, 1996, and for
the year then ended, which is not consolidated with the operating results of
Cencom Properties II, is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1996
-------------
<S> <C>
Current assets................................................................. $ 832,698
Noncurrent assets--primarily investment in cable television properties......... 20,462,812
-------------
Total assets............................................................... $ 21,295,510
-------------
-------------
Current maturities of long-term debt........................................... $ 36,700,000
Other current liabilities...................................................... 5,948,714
Deferred revenue............................................................... 24,803
Partners' capital (deficit).................................................... (21,378,007)
-------------
Total liabilities and partners' capital (deficit).......................... $ 21,295,510
-------------
-------------
Service revenues............................................................... $ 18,155,382
-------------
-------------
Income from operations......................................................... $ 1,798,185
-------------
-------------
Net loss....................................................................... $ (997,153)
-------------
-------------
</TABLE>
CCIP II's Partnership Agreement (the "Partnership Agreement") provides for
the dissolution of CCIP II on or before December 31, 1995. In accordance with
the Partnership Agreement, Cencom Properties II began dissolution during 1995.
Two independent appraisals were conducted during March 1995, resulting in an
appraised value of $73,850,000 for CCIP II's systems. Cencom Properties II has
accepted bids with respect to the South Carolina systems and for the Cleveland,
Jasper, Woodville, Marlin, Madisonville and Buffalo systems (which constitute
approximately 47% of the basic subscribers of
F-32
<PAGE>
CENCOM PROPERTIES II, INC.
NOTES TO BALANCE SHEET
2. INVESTMENT IN UNCONSOLIDATED LIMITED PARTNERSHIP: (CONTINUED)
the Texas systems), for an aggregate purchase price of $51,950,000, each subject
to execution of a final sale agreement.
The bid for the South Carolina systems was submitted by an affiliate of
Cencom Properties II. In accordance with the Partnership Agreement, the sale of
assets to an affiliate of Cencom Properties II is subject to an appraisal
process, requiring two independent appraisers to jointly determine the appraised
value, and must be approved by a majority of outstanding CCIP II's Limited
Partner units.
Bids submitted to date with respect to the northeast Missouri and the
remainder of the Texas systems were considered to be low relative to the fair
market values of such systems established pursuant to the appraisal process.
Thus, these bids have not been accepted by Cencom Properties II. Accordingly,
Cencom Properties II will seek potential purchasers for the remaining systems.
3. MANAGEMENT AGREEMENT:
Prior to July 15, 1994, CCIP II's cable television systems were managed by
Cencom Cable Associates pursuant to a management agreement (the "Management
Agreement"). Cencom Cable Associates rights and obligations under the Management
Agreement were assumed by Cencom Properties II pursuant to an Assignment and
Assumption Agreement, between Cencom Cable Associates and Cencom Properties II.
Under the Management Agreement, Cencom Properties II receives a management
fee equal to 5% of CCIP II's gross service revenues. However, commencing in
1989, the Management Agreement subordinated 50% of the management fee payment to
certain quarterly distributions to CCIP II's Limited Partners. Furthermore, CCIP
II suspended distributions to its Limited Partners during the fourth quarter of
1993. Unpaid management fees accrue without interest. Since the assumption of
the responsibilities under the management contract, Cencom Properties II has
elected to defer payment of all such management fees. Cencom Properties II has
decided to defer receipt of such fees until such time as CCIP II's outstanding
indebtedness is reduced.
Pursuant to its terms, the Management Agreement was to expire on the earlier
of December 31, 1995, or upon dissolution of CCIP II. Cencom Properties II has
agreed to extend the term of the Management Agreement through the "winding-up"
of CCIP II's operations.
4. COMMITMENTS AND CONTINGENCIES:
As the General Partner of CCIP II, Cencom Properties II remains contingently
liable for any liabilities incurred by CCIP II in excess of its assets.
5. DEMAND NOTE PAYABLE TO UNCONSOLIDATED LIMITED PARTNERSHIP:
In accordance with the Partnership Agreement, Cencom Properties II, in its
capacity as General Partner of CCIP II, shall contribute to the original capital
of CCIP II an amount equal to 1% of the total capital contribution of CCIP II.
Such capital contribution shall be one-half in cash and one-half in General
Partner's noninterest bearing demand promissory notes.
F-33
<PAGE>
CENCOM PROPERTIES II, INC.
NOTES TO BALANCE SHEET
6. INCOME TAXES:
Cencom Properties II is part of the consolidated tax group which files
consolidated federal income taxes with Charter. Charter accounts for income
taxes under the asset and liability method as prescribed by Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes."
As of December 31, 1996, Cencom Properties II had a net operating loss
carryforward for income tax purposes of approximately $2,110,000, which, if not
utilized to reduce taxable income in future periods, expires in the years 2000
through 2011.
F-34
<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, 1996, 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, 1996, and the results of its
operations and its cash flows for the year then ended, in conformity with
generally accepted accounting principles.
St. Louis, Missouri,
February 21, 1997
F-35
<PAGE>
CENCOM CABLE INCOME PARTNERS II, L.P. --
ANDERSON COUNTY SYSTEM
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
1996
-------------
<S> <C>
ASSETS
CURRENT ASSETS:
Cash............................................................................................. $ --
Accounts receivable, net of allowance for doubtful accounts of $11,939........................... 115,991
Prepaid expenses and other....................................................................... 15,992
-------------
Total current assets......................................................................... 131,983
PROPERTY, PLANT AND EQUIPMENT...................................................................... 13,178,400
FRANCHISE COSTS, net of accumulated amortization of $9,468,919..................................... 386,831
-------------
$ 13,697,214
-------------
-------------
LIABILITIES AND SYSTEM'S EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses............................................................ $ 962,636
Subscriber deposits.............................................................................. 2,300
-------------
Total current liabilities.................................................................... 964,936
-------------
COMMITMENTS AND CONTINGENCIES
SYSTEM'S EQUITY.................................................................................... 12,732,278
-------------
$ 13,697,214
-------------
-------------
</TABLE>
The accompanying notes are an integral part of this balance sheet.
F-36
<PAGE>
CENCOM CABLE INCOME PARTNERS II, L.P.--
ANDERSON COUNTY SYSTEM
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1996
-------------
<S> <C>
SERVICE REVENUES................................................................................... $ 8,344,317
-------------
OPERATING EXPENSES:
Operating, general and administrative............................................................ 4,472,310
Depreciation and amortization.................................................................... 3,688,442
Management fee--related party.................................................................... 417,216
-------------
8,577,968
-------------
Loss from operations........................................................................... (233,651)
-------------
INTEREST INCOME (EXPENSE):
Interest expense................................................................................. (1,304,214)
Interest income.................................................................................. 18,358
-------------
(1,285,856)
-------------
Net loss....................................................................................... $ (1,519,507)
-------------
-------------
</TABLE>
The accompanying notes are an integral part of this statement.
F-37
<PAGE>
CENCOM CABLE INCOME PARTNERS II, L.P. --
ANDERSON COUNTY SYSTEM
STATEMENT OF SYSTEM'S EQUITY
<TABLE>
<CAPTION>
SYSTEM'S
EQUITY
-------------
<S> <C>
BALANCE, December 31, 1995......................................................................... $ 15,313,749
Net activity with Parent......................................................................... (1,061,964)
Net loss......................................................................................... (1,519,507)
-------------
BALANCE, December 31, 1996......................................................................... $ 12,732,278
-------------
-------------
</TABLE>
The accompanying notes are an integral part of this statement.
F-38
<PAGE>
CENCOM CABLE INCOME PARTNERS II, L.P. --
ANDERSON COUNTY SYSTEM
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1996
-------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss..................................................................... $ (1,519,507)
Adjustments to reconcile net loss to net cash provided by operating
activities-
Depreciation and amortization.............................................. 3,688,442
Changes in assets and liabilities-
Accounts receivable, net................................................. 7,408
Prepaid expenses and other............................................... 16,346
Accounts payable and accrued expenses.................................... 206,817
Subscriber deposits...................................................... (100)
-------------
Net cash provided by operating activities.............................. 2,399,406
-------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment................................... (1,288,567)
Other........................................................................ (48,875)
-------------
Net cash used in investing activities.................................. (1,337,442)
-------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in capital account with Parent.................................... (1,061,964)
-------------
Net cash used in financing activities.................................. (1,061,964)
-------------
CASH, beginning and end of year................................................ $ --
-------------
-------------
</TABLE>
The accompanying notes are an integral part of this statement.
F-39
<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 or the
"General Partner") is the General Partner of CCIP II and is an indirect wholly
owned subsidiary of Charter Communication, Inc. (Charter). 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 (including the
sale of the System) and request consent for the proposed sale. An asset purchase
agreement was signed on May 30, 1996, and is subject to Limited Partners'
approval. The sale of the System is expected to be consummated in 1997. The
affiliate of the General Partner has reached agreements with their principal
lenders regarding the proposed terms of their loans.
As of December 31, 1996, the System serviced approximately 20,800 basic
subscribers in approximately 11 franchise areas. The System comprises
approximately 46% of total CCIP II basic subscribers at December 31, 1996.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is recorded at cost, including all direct and
certain indirect costs associated with the construction of cable transmission
and distribution facilities, and the cost of new customer installation. The
costs of disconnecting a customer are charged to expense in the period incurred.
Expenditures for repairs and maintenance are charged to expense as incurred, and
equipment replacement costs and betterments are capitalized.
F-40
<PAGE>
CENCOM CABLE INCOME PARTNERS II, L.P.--
ANDERSON COUNTY SYSTEM
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
Depreciation is provided using the composite method on a straight-line basis
over the estimated useful lives of assets as follows:
<TABLE>
<S> <C>
Trunk and distribution systems................................. 10 years
Subscriber installations....................................... 10 years
Converters..................................................... 3-5 years
9-20
Buildings and headends......................................... years
Vehicles and equipment......................................... 4-8 years
5-10
Office equipment............................................... years
</TABLE>
FRANCHISE COSTS
Franchise costs are being amortized using the straight-line method over the
term of the individual franchise agreements.
In accordance with 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," 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. No impairment has occurred and no adjustments
to the financial statements of the System have been recorded related to SFAS No.
121.
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 basic subscribers. Management considers
this allocation method to be reasonable for the operations of the System.
Expense allocated to the System totaled $108,158 during 1996.
INTERCOMPANY INTEREST EXPENSE
Interest expense allocated to the System has been determined by applying the
ratio of total System subscribers to total CCIP II basic subscribers at year-end
multiplied by the total CCIP II interest expense
F-41
<PAGE>
CENCOM CABLE INCOME PARTNERS II, L.P.--
ANDERSON COUNTY SYSTEM
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
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, 1996, CCIP II had
borrowings of $36,700,000 related to this debt agreement. The weighted average
borrowings for CCIP II during 1996 was $38,889,000. The borrowings pertaining to
the System are reflected within System's Equity. The weighted average interest
rate of CCIP II for 1996 was 7.29%.
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.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-42
<PAGE>
CENCOM CABLE INCOME PARTNERS II, L.P.--
ANDERSON COUNTY SYSTEM
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1996
-------------
<S> <C>
Trunk and distribution systems................................................. $ 22,680,129
Subscriber installations....................................................... 5,371,588
Converters..................................................................... 1,647,459
Land, buildings and headends................................................... 2,195,394
Vehicles and equipment......................................................... 490,745
Office equipment............................................................... 485,062
-------------
32,870,377
-------------
Less- Accumulated depreciation................................................. 19,691,977
-------------
$ 13,178,400
-------------
-------------
</TABLE>
3. ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
Accounts payable and accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1996
------------
<S> <C>
Accrued salaries and related benefits........................................... $ 96,377
Capital expenditures............................................................ 98,753
Accrued franchise fees.......................................................... 174,902
Accrued programming............................................................. 182,389
Accrued property tax............................................................ 334,373
Other........................................................................... 75,842
------------
$ 962,636
------------
------------
</TABLE>
4. SYSTEM'S EQUITY:
As of December 31, 1996, CCIP II had recorded in its capital account an
accumulated deficit of approximately $21,828,000, represented by losses and
partner distributions.
5. 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. Since the General Partner's assumption
of the contract, CCIP II has been allowed to defer all such fees through
December 31, 1996. Expenses recognized by the System under this contract were
$417,216 during 1996. Management believes these charges are indicative of the
expense which would have been incurred as a stand-alone entity. In
F-43
<PAGE>
CENCOM CABLE INCOME PARTNERS II, L.P.--
ANDERSON COUNTY SYSTEM
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. RELATED-PARTY TRANSACTIONS: (CONTINUED)
addition, CCIP II reimburses Cencom Properties II for expenses incurred on
behalf of CCIP II for performance of services under the contract.
CCIP II and all entities affiliated with Charter collectively utilize a
combination of insurance overage and self-insurance programs for medical, dental
and workers' compensation claims. The System is allocated charges monthly based
upon its total number of employees, historical claims and medical cost trend
rates. During 1996, the System expensed approximately $57,300 relating to
insurance allocations.
6. COMMITMENTS AND CONTINGENCIES:
LEASES
The System leases certain facilities and equipment under noncancelable
operating leases. Rent expense incurred under leases during 1996 was
approximately $9,000. Approximate future minimum lease payments are as follows:
<TABLE>
<S> <C>
1997................................................................ $ 1,478
1998 and thereafter................................................. --
</TABLE>
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 1996 was approximately $182,000.
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.
7. RATE REGULATION IN THE CABLE TELEVISION 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.
Congress enacted the Cable Television Consumer Protection and Competition
Act of 1992 (the "1992 Cable Act"), which became effective on December 4, 1992.
The 1992 Cable Act generally allows for a
F-44
<PAGE>
CENCOM CABLE INCOME PARTNERS II, L.P.--
ANDERSON COUNTY SYSTEM
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. RATE REGULATION IN THE CABLE TELEVISION INDUSTRY: (CONTINUED)
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, provided
the local franchising authority becomes certified to regulate basic service
rates.
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.
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.
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.
During 1996, Congress passed and the President signed into law the
Telecommunications Act of 1996 (the "Telecommunications Act") which 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.
Certain provisions of the Telecommunications Act could materially affect the
growth and operation of the cable television industry and the cable services
provided by the System. Although the new legislation may substantially lessen
regulatory burdens, the cable television industry may be subject to additional
competition as a result thereof. There are numerous rule makings to be
undertaken by the FCC which will interpret and implement the Telecommunications
Act's provisions. In addition, certain provisions of the Telecommunications Act
(such as the deregulation of cable programming rates) are not immediately
effective. Further, certain of the Telecommunications Act's provisions have been
and are likely to be subject to judicial challenges. The System's management is
unable at this time to predict the outcome of such rule-makings or litigation or
the substantive effect of the new legislation and the rule-makings on the
financial position and results of operations of the System.
F-45
<PAGE>
CENCOM CABLE INCOME PARTNERS II, L.P.--
ANDERSON COUNTY SYSTEM
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. 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, 1996:
<TABLE>
<S> <C>
Net loss for financial reporting purposes....................... $(1,447,153)
Depreciation differences between financial reporting and tax
reporting..................................................... 1,728,352
Equity in loss of unconsolidated Limited Partnership differences
between financial reporting and tax reporting................. (2,853,381)
Differences in expenses recorded for financial reporting and for
tax purposes.................................................. 224,167
Differences in revenue for financial reporting and tax
reporting..................................................... (3,100)
Other........................................................... 4,144
----------
Net loss for federal income tax purposes.................... $(2,346,971)
----------
----------
</TABLE>
The following summarizes the significant temporary differences between CCIP
II's financial reporting basis and federal income tax reporting basis as of
December 31, 1996:
<TABLE>
<S> <C>
Assets:
Accounts receivable.......................................... $ 34,763
Accrued expenses............................................. 877,869
Deferred revenue............................................. 24,803
-----------
$ 937,435
-----------
-----------
Liabilities:
Property, plant and equipment................................ $(12,250,944)
Investment in unconsolidated Limited......................... (3,178,842)
-----------
$(15,429,786)
-----------
-----------
</TABLE>
As discussed in Note 1, the System comprises approximately 46% of CCIP II's
total basic subscribers.
F-46
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Cencom Partners, L.P.:
We have audited the accompanying balance sheet of Cencom Partners,
L.P.--Sanford System (as defined in Note 1) as of December 31, 1996, and the
related statements of operations, System's equity and cash flows for the year
then ended. These financial statements are the responsibility of the System's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Cencom Partners,
L.P.--Sanford System as of December 31, 1996, and the results of its operations
and its cash flows for the year then ended, in conformity with generally
accepted accounting principles.
St. Louis, Missouri,
February 21, 1997
F-47
<PAGE>
CENCOM PARTNERS, L.P.--SANFORD SYSTEM
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
1996
------------
<S> <C>
<CAPTION>
ASSETS
<S> <C>
CURRENT ASSETS:
Cash.............................................................................................. $ --
Accounts receivable, net of allowance for doubtful accounts of $12,173............................ 77,874
Insurance receivables............................................................................. 313,290
Prepaid expenses and other........................................................................ 147
------------
Total current assets.......................................................................... 391,311
PROPERTY, PLANT AND EQUIPMENT....................................................................... 5,865,570
FRANCHISE COSTS, net of accumulated amortization of $7,970,095...................................... 592,584
SUBSCRIBER LISTS, net of accumulated amortization of $3,106,055..................................... 244,797
------------
$7,094,262
------------
------------
<CAPTION>
LIABILITIES AND SYSTEM'S EQUITY
<S> <C>
CURRENT LIABILITIES:
Accounts payable and accrued expenses............................................................. $ 528,039
Subscriber deposits............................................................................... 22,336
------------
Total current liabilities..................................................................... 550,375
DEFERRED REVENUE.................................................................................... 87,487
COMMITMENTS AND CONTINGENCIES
SYSTEM'S EQUITY..................................................................................... 6,456,400
------------
$7,094,262
------------
------------
</TABLE>
The accompanying notes are an integral part of this balance sheet.
F-48
<PAGE>
CENCOM PARTNERS, L.P. --
SANFORD SYSTEM
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1996
-------------
<S> <C>
SERVICE REVENUES................................................................................... $ 4,778,020
-------------
OPERATING EXPENSES:
Operating, general and administrative............................................................ 2,467,255
Depreciation and amortization.................................................................... 2,647,191
Management fee--related party.................................................................... 238,854
-------------
5,353,300
-------------
Loss from operations....................................................................... (575,280)
-------------
OTHER INCOME (EXPENSE):
Interest expense................................................................................. (952,780)
Interest income.................................................................................. 12,981
Loss from Hurricane Fran......................................................................... (383,000)
-------------
(1,322,799)
-------------
Net loss................................................................................... $ (1,898,079)
-------------
-------------
</TABLE>
The accompanying notes are an integral part of this statement.
F-49
<PAGE>
CENCOM PARTNERS, L.P.--
SANFORD SYSTEM
STATEMENT OF SYSTEM'S EQUITY
<TABLE>
<CAPTION>
SYSTEM'S
EQUITY
------------
<S> <C>
BALANCE, December 31, 1995.......................................................................... $ 7,652,487
Net activity with Parent.......................................................................... 701,992
Net loss.......................................................................................... (1,898,079)
------------
BALANCE, December 31, 1996.......................................................................... $ 6,456,400
------------
------------
</TABLE>
The accompanying notes are an integral part of this statement.
F-50
<PAGE>
CENCOM PARTNERS, L.P.--
SANFORD SYSTEM
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1996
-------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss......................................................................................... $ (1,898,079)
Adjustments to reconcile net loss to net cash provided by operating activities-
Depreciation and amortization.................................................................. 2,647,191
Changes in assets and liabilities-
Accounts receivable, net..................................................................... (334,876)
Prepaid expenses and other................................................................... 22,893
Accounts payable and accrued expenses........................................................ 96,327
Subscriber deposits.......................................................................... (1,744)
Deferred revenue............................................................................. (10,936)
-------------
Net cash provided by operating activities.................................................. 520,776
-------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment....................................................... (1,146,096)
Other............................................................................................ (76,672)
-------------
Net cash used in investing activities...................................................... (1,222,768)
-------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in capital account with Parent........................................................ 701,992
-------------
Net cash provided by (used in) financing activities........................................ 701,992
-------------
CASH, beginning and end of year.................................................................... $ --
-------------
-------------
</TABLE>
The accompanying notes are an integral part of this statement.
F-51
<PAGE>
CENCOM PARTNERS, L.P. -
SANFORD SYSTEM
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION AND BASIS OF PRESENTATION
The financial statements include the accounts of the Sanford cable
television system, which is owned and operated by Cencom Partners, L.P. (CPLP).
Cencom Partners, Inc. (Cencom Partners or the "General Partner") is the General
Partner of CPLP and is an indirect wholly owned subsidiary of Charter
Communications, Inc. (Charter). These financial statements include the
historical assets, liabilities and operations of the Sanford cable television
system, which provides service to communities in and around Sanford, North
Carolina, and is referred to herein as the "System." Cencom Cable Income
Partners II, L.P. (CCIP II), an affiliate, owns 84.03% of the Limited Partner
units of CPLP.
In May 1996, CPLP entered into an Asset Purchase Agreement to sell the
assets of the System to Charter Communications, L.P. (an affiliated entity) for
a purchase price of $20,750,000, subject to certain working capital adjustments.
The closing date shall be such date mutually agreed upon by the parties. The
asset sale is being effected to satisfy the requirement by the CPLP's senior
bank lender that the credit facility be repaid. CPLP's asset disposition was
also commenced to facilitate the liquidation of CCIP II which requires the
liquidation of all of CCIP II's assets, including its entire ownership interest
in CPLP. The affiliate of the General Partner has reached agreements with their
principal lenders regarding the proposed terms of their loans.
As of December 31, 1996, the System serviced approximately 12,600 basic
subscribers in approximately eight franchise areas. The System comprises
approximately 35% of total CPLP basic subscribers at December 31, 1996.
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 the related assets as follows:
<TABLE>
<S> <C>
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
</TABLE>
FRANCHISE COSTS AND SUBSCRIBER LISTS
Franchise costs are being amortized using the straight-line method over the
term of the individual franchises. Subscriber lists are being amortized using
the straight-line method over seven years.
F-52
<PAGE>
CENCOM PARTNERS, L.P. -
SANFORD SYSTEM
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
In accordance with 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," 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. No impairment has occurred and no adjustments
to the financial statements of the System have been recorded related to SFAS No.
121.
SERVICE REVENUES
Cable service revenues are recognized when the related services are
provided.
Installation revenues are recognized to the extent of direct selling costs
incurred. The remainder, if any, is deferred and amortized to income over the
average estimated period that customers are expected to remain connected to the
cable television system.
Franchise fees collected from cable subscribers and paid to local franchises
are reported as revenues.
OPERATING, GENERAL AND ADMINISTRATIVE EXPENSES
Included in operating, general and administrative expenses is the allocation
of certain expenses incurred by the holding company of CPLP on behalf of the
System. These expenses were allocated to the System based on the ratio of total
System's subscribers to total CPLP basic subscribers. Management considers this
allocation method to be reasonable for the operations of the System. Expenses
allocated to the System totaled $55,019 during 1996.
INTERCOMPANY INTEREST EXPENSE
Interest expense allocated to the System has been determined by applying the
ratio of total System subscribers to total CPLP basic subscribers at year-end
multiplied by total CPLP interest expense for the year. Management considers
this allocation method to be reasonable for the operations of the System. CPLP
makes disbursements on behalf of the System for interest expense. CPLP maintains
a term loan with a consortium of banks, secured by all of CPLP's assets,
including the System's assets. At December 31, 1996, CPLP had borrowings of
$34,957,500 related to this term loan and the interest rate was 7.31%. The
weighted average borrowings for CPLP during 1996 were $34,957,500. The
borrowings pertaining to the System are reflected within System's Equity. The
weighted average interest rate of CPLP for 1996 was 7.54%.
INCOME TAXES
Income taxes are the responsibility of the partners of CPLP and as such are
not provided for in the accompanying financial statements.
F-53
<PAGE>
CENCOM PARTNERS, L.P. -
SANFORD SYSTEM
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
CASH MANAGEMENT AND SYSTEM'S EQUITY ACCOUNT
The cash management function for the System is performed by the holding
company of CPLP. Excess cash funds are transferred to the holding company of
CPLP using the System's equity account. In addition, the holding company of CPLP
makes disbursements on behalf of the System for certain items such as payroll,
payroll taxes, employee benefits and other costs and incurs debt borrowings for
the System. Such amounts are transferred to the System through the System's
equity account and are recognized in the appropriate expense categories in the
accompanying statement of operations.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1996
------------
<S> <C>
Trunk and distribution systems.................................................. $ 6,869,199
Subscriber installations........................................................ 2,789,598
Converters...................................................................... 1,039,082
Land, buildings and headends.................................................... 813,290
Vehicles and equipment.......................................................... 277,131
Office equipment................................................................ 139,336
------------
11,927,636
Less--Accumulated depreciation.................................................. 6,062,066
------------
$ 5,865,570
------------
------------
</TABLE>
F-54
<PAGE>
CENCOM PARTNERS, L.P. -
SANFORD SYSTEM
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
Accounts payable and accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1996
------------
<S> <C>
Capital expenditures............................................................ $ 222,887
Accrued programming............................................................. 101,244
Accrued franchise fees.......................................................... 114,006
Other........................................................................... 89,902
------------
$ 528,039
------------
------------
</TABLE>
4. SYSTEM'S EQUITY:
As of December 31, 1996, CPLP had recorded in its capital account an
accumulated deficit of approximately $15,871,301, represented by losses and
partner distributions.
5. RELATED-PARTY TRANSACTIONS:
During 1994, Cencom Cable Associates, Inc., the parent of Cencom Holdings,
assigned management services under contract with the System to Cencom Partners.
The management service contract provides for the payment of fees equal to 5% of
the System's gross service revenues. Since the General Partners assumption of
the contract, CPLP has been allowed to defer all such fees through December 31,
1996. Expenses recognized by the System under this contract during 1996 were
$238,854. Management believes these charges are indicative of the expense which
would have been incurred as a stand-alone entity. In addition, CPLP reimburses
Cencom Partners for expenses incurred on behalf of CPLP for performance of
services under the contract.
CPLP and all entities affiliated with Charter collectively utilize a
combination of insurance coverage and self-insurance programs for medical,
dental and workers' compensation claims. The System is allocated charges monthly
based upon its total number of employees, historical claims and medical cost
trend rates. During 1996, the System expensed approximately $50,600 relating to
insurance allocations.
Affiliated entities maintain several regional offices. The regional offices
perform certain operational services on behalf of CPLP and other affiliated
entities. Generally, the costs of these services are allocated to CPLP based on
the number of subscribers. During 1996, certain costs which should have been
allocated to CPLP were borne by Charter on behalf of CPLP. Charter is not
obligated to make such payments in the future. The amount of the costs paid by
Charter during 1996 was approximately $122,000.
F-55
<PAGE>
CENCOM PARTNERS, L.P. -
SANFORD SYSTEM
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. COMMITMENTS AND CONTINGENCIES:
LEASES
The System leases certain facilities and equipment under noncancelable
operating leases. Rent expense incurred under leases during 1996 was
approximately $45,000. Approximate future minimum lease payments are as follows:
<TABLE>
<S> <C>
1997............................................................... $ 19,700
1998............................................................... 17,400
1999............................................................... 17,400
2000............................................................... 1,500
2001 and thereafter................................................ --
</TABLE>
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 1996 was approximately $80,600.
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.
7. RATE REGULATION IN THE CABLE TELEVISION 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.
Congress enacted the Cable Television Consumer Protection and Competition
Act of 1992 (the "1992 Cable Act"), which became effective on December 4, 1992.
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, provided the local franchising authority
becomes certified to regulate basic service rates. The 1992 Cable Act and the
Federal Communications Commission's (FCC) rules implementing the 1992
F-56
<PAGE>
CENCOM PARTNERS, L.P. -
SANFORD SYSTEM
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. RATE REGULATION IN THE CABLE TELEVISION INDUSTRY: (CONTINUED)
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.
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.
The 1992 Cable Act modified the franchise renewal process to make it easier
for a franchising authority to deny renewal. Historically, franchises have been
renewed for cable operators that have provided satisfactory services and have
complied with the terms of the franchise agreement. Although management believes
that the System has generally met the terms of its franchise agreements and has
provided quality levels of service, and anticipates the System's future
franchise renewal prospects generally will be favorable, there can be no
assurance that any such franchises will be renewed or, if renewed, that the
franchising authority will not impose more onerous requirements on the System
than previously existed.
During 1996, Congress passed and the President signed into law the
Telecommunications Act of 1996 (the "Telecommunications Act") which 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.
Certain provisions of the Telecommunications Act could materially affect the
growth and operation of the cable television industry and the cable services
provided by the System. Although the new legislation may substantially lessen
regulatory burdens, the cable television industry may be subject to additional
competition as a result thereof. There are numerous rule-makings to be
undertaken by the FCC which will interpret and implement the Telecommunications
Act's provisions. In addition, certain provisions of the Telecommunications Act
(such as the deregulation of cable programming rates) are not immediately
effective. Further, certain of the Telecommunications Act's provisions have been
and are likely to be subject to judicial challenges. The System's management is
unable at this time to predict the outcome of such rule-makings or litigation or
the substantive effect of the new legislation and the rule-makings on the
financial position and results of operations of the System.
F-57
<PAGE>
CENCOM PARTNERS, L.P. -
SANFORD SYSTEM
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. NET LOSS FOR INCOME TAX PURPOSES:
The following reconciliation summarizes the differences between CPLP's net
loss for financial reporting and federal income tax purposes for the year ended
December 31, 1996:
<TABLE>
<S> <C>
Net loss for financial reporting purposes....................... $(4,756,897)
Depreciation differences between financial reporting and tax
reporting..................................................... (302,210)
Amortization differences between financial reporting and tax
reporting..................................................... 1,501,067
Differences in expenses recorded for financial reporting and tax
reporting..................................................... 181,261
Differences in revenue for financial reporting and tax
reporting..................................................... (21,849)
Other........................................................... 2,959
----------
Net loss for federal income tax purposes.................. $(3,395,669)
----------
----------
</TABLE>
The following summarizes the significant temporary differences between
CPLP's financial reporting basis and federal income tax reporting basis as of
December 31, 1996:
<TABLE>
<S> <C>
Assets:
Accounts receivable.......................................... $ 25,788
Franchise costs and other assets............................. 11,938,514
Accrued expenses............................................. 597,057
Deferred revenue............................................. 174,791
-----------
$12,736,150
-----------
-----------
Liabilities--Property, plant and equipment................... $(10,048,954)
-----------
-----------
</TABLE>
As discussed in Note 1, the System comprises approximately 35% of CPLP's
total basic subscribers.
11. INSURANCE SETTLEMENT:
In September 1996, Hurricane Fran caused damage to the System. The estimated
total damage to the System was approximately $1,900,000. As of December 31,
1996, the System has incurred approximately $1,600,000 in repairs. The System
received an insurance advance of approximately $150,000 during 1996 and expects
settlement in 1997. In addition, the System recorded a $383,000 nonoperating
loss for its portion of the insurance deductible.
F-58
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Cencom Partners, L.P.:
We have audited the accompanying balance sheet of Cencom Partners,
L.P.--Lincolnton System (as defined in Note 1) as of December 31, 1996, and the
related statements of operations, System's equity and cash flows for the year
then ended. These financial statements are the responsibility of the System's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Cencom Partners, L.P.
- -Lincolnton System as of December 31, 1996, and the results of its operations
and its cash flows for the year then ended, in conformity with generally
accepted accounting principles.
St.Louis, Missouri,
February 21, 1997
F-59
<PAGE>
CENCOM PARTNERS, L.P.--
LINCOLNTON SYSTEM
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
1996
-------------
<S> <C>
ASSETS
CURRENT ASSETS:
Cash......................................................................... $ --
Accounts receivable, net of allowance for doubtful accounts of $7,664........ 64,554
-------------
Total current assets..................................................... 64,554
PROPERTY, PLANT AND EQUIPMENT.................................................. 8,082,913
FRANCHISE COSTS, net of accumulated amortization of $9,106,409................. 3,303,370
SUBSCRIBER LISTS, net of accumulated amortization of $4,501,027................ 354,778
-------------
$ 11,805,615
-------------
-------------
<CAPTION>
LIABILITIES AND SYSTEM'S EQUITY
<S> <C>
CURRENT LIABILITIES:
Accounts payable and accrued expenses........................................ $ 425,116
Subscriber deposits.......................................................... 17,101
-------------
Total current liabilities................................................ 442,217
-------------
DEFERRED REVENUE............................................................... 25,499
COMMITMENTS AND CONTINGENCIES
SYSTEM'S EQUITY................................................................ 11,337,899
-------------
$ 11,805,615
-------------
-------------
</TABLE>
The accompanying notes are an integral part of this balance sheet.
F-60
<PAGE>
CENCOM PARTNERS, L.P. --
LINCOLNTON SYSTEM
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1996
-------------
<S> <C>
SERVICE REVENUES................................................................................... $ 5,622,300
-------------
OPERATING EXPENSES:
Operating, general and administrative............................................................ 2,811,081
Depreciation and amortization.................................................................... 3,630,074
Management fee--related party.................................................................... 281,115
-------------
6,722,270
-------------
Loss from operations......................................................................... (1,099,970)
-------------
INTEREST INCOME (EXPENSE):
Interest expense................................................................................. (1,116,113)
Interest income.................................................................................. 15,206
-------------
(1,100,907)
-------------
Net loss..................................................................................... $ (2,200,877)
-------------
-------------
</TABLE>
The accompanying notes are an integral part of this statement.
F-61
<PAGE>
CENCOM PARTNERS, L.P. --
LINCOLNTON SYSTEM
STATEMENT OF SYSTEM'S EQUITY
<TABLE>
<CAPTION>
SYSTEM'S
EQUITY
-------------
<S> <C>
BALANCE, December 31, 1995..................................................... $ 13,879,030
Net activity with Parent..................................................... (340,254)
Net loss..................................................................... (2,200,877)
-------------
BALANCE, December 31, 1996..................................................... $ 11,337,899
-------------
-------------
</TABLE>
The accompanying notes are an integral part of this statement.
F-62
<PAGE>
CENCOM PARTNERS, L.P.--
LINCOLNTON SYSTEM
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1996
-------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss......................................................................................... $ (2,200,877)
Adjustments to reconcile net loss to net cash provided by operating activities-
Depreciation and amortization.................................................................. 3,630,074
Changes in assets and liabilities-
Accounts receivable, net..................................................................... (14,680)
Prepaid expenses and other................................................................... 22,111
Accounts payable and accrued expenses........................................................ 129,871
Subscriber deposits.......................................................................... (10,140)
Deferred revenue............................................................................. (3,188)
-------------
Net cash provided by operating activities.................................................. 1,553,171
-------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment....................................................... (1,102,601)
Other............................................................................................ (110,316)
-------------
Net cash used in investing activities...................................................... (1,212,917)
-------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in capital account with Parent........................................................ (340,254)
-------------
Net cash used in financing activities...................................................... (340,254)
-------------
CASH, beginning and end of year.................................................................... $ --
-------------
-------------
</TABLE>
The accompanying notes are an integral part of this statement.
F-63
<PAGE>
CENCOM PARTNERS, L.P.--
LINCOLNTON SYSTEM
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION AND BASIS OF PRESENTATION
The financial statements include the accounts of the Lincolnton cable
television system, which is owned and operated by Cencom Partners, L.P. (CPLP).
Cencom Partners, Inc. (Cencom Partners or the "General Partner") is the General
Partner of CPLP and is an indirect wholly owned subsidiary of Charter
Communications, Inc. (Charter). These financial statements include the
historical assets, liabilities and operations of the Lincolnton cable television
system, which provides service to communities in and around Lincolnton, North
Carolina, and is referred to herein as the "System." Cencom Cable Income
Partners II, L.P. (CCIP II), an affiliate, owns 84.03% of the Limited Partner
units of CPLP.
In May 1996, CPLP entered into an Asset Purchase Agreement to sell the
assets of the System to Charter Communications, L.P. (an affiliated entity) for
a purchase price of $27,500,000, subject to certain working capital adjustments.
The closing date shall be on any such date mutually agreed upon by the parties.
The CPLP asset sale is being effected to satisfy the requirements by CPLP's
senior bank lenders that the credit facility be repaid in accordance with its
terms. CPLP's asset disposition was also commenced to facilitate the liquidation
of CCIP II which requires the liquidation of all of CCIP II's assets, including
its entire ownership interest in CPLP. The affiliate of the General Partner has
reached agreements with their principal lenders regarding the proposed terms of
their loans.
As of December 31, 1996, the System serviced approximately 14,800 basic
subscribers in approximately seven franchise areas. The System comprises
approximately 41% of total CPLP basic subscribers at December 31, 1996.
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 the related assets as follows:
<TABLE>
<S> <C>
Trunk and distribution systems................................... 10 years
Subscriber installations......................................... 10 years
Converters....................................................... 3-5 years
9-20
Buildings and headends........................................... years
Vehicles and equipment........................................... 4-8 years
5-10
Office equipment................................................. years
</TABLE>
FRANCHISE COSTS AND SUBSCRIBER LISTS
Franchise costs are being amortized using the straight-line method over the
term of the individual franchises. Subscriber lists are being amortized using
the straight-line method over seven years.
F-64
<PAGE>
CENCOM PARTNERS, L.P.--
LINCOLNTON SYSTEM
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
In accordance with Statement of Financial Accounting Standards (SFAS) No.
121 entitled, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Disposed of," 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. No impairment has occurred and no adjustments
to the financial statements of the System have been recorded related to of SFAS
No. 121.
SERVICE REVENUES
Cable service revenues are recognized when the related services are
provided.
Installation revenues are recognized to the extent of direct selling costs
incurred. The remainder, if any, is deferred and amortized to income over the
average estimated period that customers are expected to remain connected to the
cable television system.
Franchise fees collected from cable subscribers and paid to local franchises
are reported as revenues.
OPERATING, GENERAL AND ADMINISTRATIVE EXPENSES
Included in operating, general and administrative expenses is the allocation
of certain expenses incurred by the holding company of CPLP on behalf of the
System. These expenses were allocated to the System based on the ratio of total
System's basic subscribers to total CPLP basic subscribers. Management considers
this allocation method to be reasonable for the operations of the System.
Expenses allocated to the System totaled $66,091 during 1996.
INTERCOMPANY INTEREST EXPENSE
Interest expense allocated to the System has been determined by applying the
ratio of total System's basic subscribers to total CPLP basic subscribers at
year-end multiplied by the total CPLP interest expense for the year. Management
considers this allocation method to be reasonable for the operations of the
System. CPLP makes disbursements on behalf of the System for interest expense.
CPLP maintains a term loan with a consortium of banks, secured by all of CPLP's
assets, including the System's assets. At December 31, 1996, CPLP had borrowings
of $34,957,500 related to this term loan and the interest rate was 7.31%. The
weighted average borrowings for CPLP during 1996 were $34,957,500. The
borrowings pertaining to the System are reflected within System's Equity. The
weighted average interest rate of CPLP for 1996 was 7.54%.
INCOME TAXES
Income taxes are the responsibility of the partners of CPLP and as such are
not provided for in the accompanying financial statements.
F-65
<PAGE>
CENCOM PARTNERS, L.P.--
LINCOLNTON SYSTEM
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
CASH MANAGEMENT AND SYSTEM'S EQUITY ACCOUNT
The cash management function for the System is performed by the holding
company of CPLP. Excess cash funds are transferred to the holding company of
CPLP using the System's equity account. In addition, the holding company of CPLP
makes disbursements on behalf of the System for certain items such as payroll,
payroll taxes, employee benefits and other costs and incurs debt borrowings for
the System. Such amounts are transferred to the System through the System's
equity account and are recognized in the appropriate expense categories in the
accompanying statement of operations.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1996
-------------
<S> <C>
Trunk and distribution systems................................................. $ 11,994,402
Subscriber installations....................................................... 3,702,003
Converters..................................................................... 1,210,370
Land, buildings and headends................................................... 610,272
Vehicles and equipment......................................................... 360,218
Office equipment............................................................... 119,177
-------------
-------------
17,996,442
Less--Accumulated depreciation................................................. (9,913,529)
-------------
-------------
$ 8,082,913
-------------
-------------
</TABLE>
F-66
<PAGE>
CENCOM PARTNERS, L.P.--
LINCOLNTON SYSTEM
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. ACCOUNTS PAYABLE AND ACCRUED EXPENSES:
Accounts payable and accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER
31,
1996
----------
<S> <C>
Accrued salaries and related benefits............................................. $ 27,778
Accrued property tax.............................................................. 37,277
Capital expenditures.............................................................. 65,788
Accrued franchise fees............................................................ 103,155
Accrued programming............................................................... 117,579
Other............................................................................. 73,539
----------
$ 425,116
----------
----------
</TABLE>
4. SYSTEM'S EQUITY:
As of December 31, 1996, CPLP had recorded in its capital account an
accumulated deficit of approximately $15,871,000 represented by losses and
partner distributions.
5. RELATED-PARTY TRANSACTIONS:
During 1994, Cencom Cable Associates, Inc., the parent of Cencom Holdings,
assigned management services under contract with the System to Cencom Partners.
The management service contract provides for the payment of fees equal to 5% of
the System's gross service revenues. Since the General Partner's assumption of
the contract, CPLP has been allowed to defer all such fees through December 31,
1996. Expenses recognized by the System under this contract during 1996 were
$281,115. Management believes these charges are indicative of the expense which
would have been incurred as a stand-alone entity. In addition, CPLP reimburses
Cencom Partners for expenses incurred on behalf of CPLP for performance of
services under the contract.
CPLP and all entities affiliated with Charter collectively utilize a
combination of insurance coverage and self-insurance programs for medical,
dental and workers' compensation claims. The System is allocated charges monthly
based upon its total number of employees, historical claims and medical cost
trend rates. During 1996, the System expensed approximately $59,300 relating to
insurance allocations.
Affiliated entities maintain several regional offices. The regional offices
perform certain operational services on behalf of CPLP and other affiliated
entities. Generally, the costs of these services are allocated to CPLP based on
the number of subscribers. During 1996, certain costs which should have been
allocated to CPLP were borne by Charter on behalf of CPLP. Charter is not
obligated to make such payments in the future. The amount of the costs paid by
Charter during 1996 was approximately $122,000.
F-67
<PAGE>
CENCOM PARTNERS, L.P.--
LINCOLNTON SYSTEM
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. COMMITMENTS AND CONTINGENCIES:
LEASES
The System leases certain facilities and equipment under noncancelable
operating leases. Rent expense incurred under leases during 1996 was
approximately $12,000. Approximate future minimum lease payments are as follows:
<TABLE>
<S> <C>
1997............................................................... $ 12,000
1998............................................................... 1,200
1999............................................................... 1,300
2000............................................................... 1,400
2001............................................................... 1,400
Thereafter......................................................... 1,400
</TABLE>
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 1996 was approximately $116,000.
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.
7. RATE REGULATION IN THE CABLE TELEVISION 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.
Congress enacted the Cable Television Consumer Protection and Competition
Act of 1992 (the "1992 Cable Act"), which became effective on December 4, 1992.
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, provided the local franchising authority
becomes certified to regulate basic service rates. The 1992 Cable Act and the
Federal Communications Commission's (FCC) rules implementing the 1992
F-68
<PAGE>
CENCOM PARTNERS, L.P.--
LINCOLNTON SYSTEM
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. RATE REGULATION IN THE CABLE TELEVISION INDUSTRY: (CONTINUED)
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.
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.
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.
During 1996, Congress passed and the President signed into law the
Telecommunications Act of 1996 (the "Telecommunications Act") which 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.
Certain provisions of the Telecommunications Act could materially affect the
growth and operation of the cable television industry and the cable services
provided by the System. Although the new legislation may substantially lessen
regulatory burdens, the cable television industry may be subject to additional
competition as a result thereof. There are numerous rule makings to be
undertaken by the FCC which will interpret and implement the Telecommunications
Act's provisions. In addition, certain provisions of the Telecommunications Act
(such as the deregulation of cable programming rates) are not immediately
effective. Further, certain of the Telecommunications Act's provisions have been
and are likely to be subject to judicial challenges. The System's management is
unable at this time to predict the outcome of such rule-makings or litigation or
the substantive effect of the new legislation and the rule-makings on the
financial position and results of operations of the System.
F-69
<PAGE>
CENCOM PARTNERS, L.P.--
LINCOLNTON SYSTEM
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. NET LOSS FOR INCOME TAX PURPOSES:
The following reconciliation summarizes the differences between CPLP's net
loss for financial reporting and federal income tax purposes for the year ended
December 31, 1996:
<TABLE>
<S> <C>
Net loss for financial reporting purposes....................... $(4,756,897)
Depreciation differences between financial reporting and tax
reporting..................................................... (302,210)
Amortization differences between financial reporting and tax
reporting..................................................... 1,501,067
Differences in expenses recorded for financial reporting and tax
reporting..................................................... 181,261
Differences in revenue recorded for financial reporting and tax
reporting..................................................... (21,849)
Other........................................................... 2,959
----------
Net loss for federal income tax purposes.................. $(3,395,669)
----------
----------
</TABLE>
The following summarizes the significant temporary differences between
CPLP's financial reporting basis and federal income tax reporting basis as of
December 31, 1996:
<TABLE>
<S> <C>
Assets:
Accounts receivable.......................................... $ 25,788
Franchise costs and other assets............................. 11,938,514
Accrued expenses............................................. 597,057
Deferred revenue............................................. 174,791
-----------
$12,736,150
-----------
-----------
Liabilities--Property, plant and equipment................... $(10,048,954)
-----------
-----------
</TABLE>
As discussed in Note 1, the System comprises approximately 41% of CPLP's
total basic subscribers.
F-70
<PAGE>
EXHIBIT A-1
APPRAISALS OF THE PARTNERSHIP SYSTEMS
<PAGE>
CONFIDENTIAL
CENCOM CABLE INCOME PARTNERS II, L.P.
APPRAISAL ANALYSIS SUMMARY
INTRODUCTION
Daniels & Associates, L.P. ("Daniels") was retained by Cencom Cable Income
Partners II, L.P. (the "Partnership") to appraise the fair market value of the
assets of the Partnership, in accordance with the "Appraisal Process" procedures
as outlined in the letter received from the Partnership dated April 28, 1995
(the Procedures Letter"), as well as the related Amended and Restated Agreement
of Limited Partnership (the "Partnership Agreement"). The "Valuation Date" of
the appraisal of the Partnership, as was mutually agreed upon in the Procedures
Letter, was March 31 ,1995. The Partnership owns and operates cable television
systems (referred to in the aggregate as the "Systems") that, as of March 31,
1995, passed approximately 71,455 homes and served approximately 44,232
equivalent basic subscribers ("EBUs") in the following three operating groups:
<TABLE>
<CAPTION>
BASIC
HOMES SUBSCRIBERS/ EQUIVALENT MILES OF NUMBER OF
AS 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).
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.
2
<PAGE>
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 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
3
<PAGE>
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.
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.
4
<PAGE>
There are ten franchises covering these systems, including two for
Greenville County which both expire in 1997. The systems' General Manager is
currently negotiating 15-year extensions and is confident they will be extended
without undue financial burden. The remaining eight franchises expire between
2001 and 2008.
None of the local franchising authorities have certified to regulate basic
rates, and the only valid tier complaint was in Williamston. Prior to April 1,
1995, the weighted average basic rate in these systems was $8.02 and the
weighted average tier rate was $14.67. The majority of these systems instituted
rate increases effective April 1, 1995, and the weighted average rate for basic
and expanded basic increased to $8.31 and $14.69, respectively.
The annualized revenue and cash flow for the three-month period ended March
31, 1995, for this group of Systems was $7.5 million and $3.5 million,
respectively. This equates to an average monthly revenue per EBU of $31.81 and
average annual cash flow per EBU of $177.73. This System's revenue and cash flow
per EBU exceeds that of the industry's averages for 1994 (noted above).
The industry in these communities is a mix of textile mills, manufacturing,
electronics and agriculture. Recently BMW opened a large new plant in
Greenville/Spartansburg that now employs several thousand people, and has had a
favorable economic impact in the communities close to Greenville. Unemployment
in the area is consistently below the national average, with many people in
these systems' service areas, particularly in Travelers Rest, commuting to
Greenville.
NORTHEAST MISSOURI
The Northeast Missouri ("NEMO") systems are the smallest of the three
operating groups of systems, and as of March 31, 1995 these systems passed 3,869
homes and served 2,112 EBUs. The eight communities served by these systems are
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.
5
<PAGE>
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
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
6
<PAGE>
was determined to be 13.65%. The following are the estimates of the costs of
debt and equity in the capitalization structure as of the Valuation Date used to
determine the discount rate.
<TABLE>
<CAPTION>
ASSUMED CAPITAL STRUCTURE % OF TOTAL CAPITAL COST OF CAPITAL
- ----------------------------------------------------------- --------------------- ---------------
<S> <C> <C>
Debt....................................................... 60% 8.75%
Equity..................................................... 40% 21.00%
Total Weighted Average..................................... 100% 13.65%
--- -----
--- -----
</TABLE>
The residual value multiples were determined assuming net cash flow growth
into perpetuity equal to one-half of the average cash flow growth rate of the
final two years of the forecasted period. The residual value multiples ranged
from 8.9 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
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> <C>
OK Based MSO........ Frontier Vision United Video 86,300 $120,500,000 $ 1,397 9.0
Various TX, OK, KS, Classic & Fanch Mission Cable
AZ................ 79,100 $97,500,000 $ 1,233 7.5 *
Various KS, MO, NE, Galaxy Douglas Cable
IL, IA............ 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, Fanch Comm. Leonard Comm.
MO................ 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 $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
8
<PAGE>
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.
9
<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.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1996
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
MILES OF ANNUALIZED CASH
PLANT EQUIVALENT FLOW FOR THE
/NUMBER OF HOMES HOMES BASIC UNITS/ PAY UNITS/ THREE M/E
SYSTEMS HEADENDS /MILE PASSED PENETRATION PENETRATION 3/31/96
- --------------------------------- ------------- ----------- --------- -------------- -------------- ---------------
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.
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.
<PAGE>
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 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
2
<PAGE>
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 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
3
<PAGE>
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.
<TABLE>
<CAPTION>
ASSUMED CAPITAL STRUCTURE % OF TOTAL CAPITAL COST OF CAPITAL
- ----------------------------------------------------------- ------------------- -----------------
<S> <C> <C>
Debt....................................................... 60.0% 8.0%
--- ---
Equity..................................................... 40.0% 23.0%
--- ---
Total Weighted Average Cost of Capital..................... 100% 14.0%
--- ---
--- ---
</TABLE>
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>
MULTIPLE OF TWO M/E
DISCOUNTED CASH 3/31/96 ANNUALIZED
SYSTEMS FLOW VALUATION CASH FLOW VALUE/EBU
- ----------------------------------------------------------------- --------------- --------------------- -----------
<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.
4
<PAGE>
COMPARABLE SALE TRANSACTIONS
<TABLE>
<CAPTION>
NO. OF PRICE/ CF
SYSTEM BUYER SELLER SUBSCRIBERS PRICE SUBSCRIBER MULTIPLE DATE
- ------------------------- --------------- -------------------- ----------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
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
Jones Jones Cable Fund
Orangeburg, SC........... Intercable 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.
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
5
<PAGE>
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.
6
<PAGE>
FAIR MARKET VALUE APPRAISAL FOR
CENCOM CABLE INCOME PARTNERS II, L.P.
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
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.
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.
<PAGE>
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.
TEXAS SYSTEM GENERAL DESCRIPTION
CCIP II owns systems serving a number of communities in eastern Texas. The
aggregate data are:
<TABLE>
<S> <C> <C>
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
</TABLE>
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:
<TABLE>
<CAPTION>
CLUSTER SUBSCRIBERS
- -------------------------------------------------------------------------- -----------
<S> <C> <C>
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%)
</TABLE>
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.
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
2
<PAGE>
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.
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:
<TABLE>
<S> <C> <C>
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%
</TABLE>
<TABLE>
<CAPTION>
HEADEND PASSINGS
- ---------------------------------------------------------------------------- -----------
<S> <C> <C>
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%)
</TABLE>
3
<PAGE>
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.
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.
<TABLE>
<S> <C> <C>
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
</TABLE>
The system is served by four headends. This appraisal is being done on the
aggregate system, but the approximate breakout may be helpful:
<TABLE>
<CAPTION>
NAME PASSINGS%
- ---------------------------------------------------------------------------------- ---------------
<S> <C>
Anderson.......................................................................... 13%
W. Pelzer......................................................................... 51%
Keowee Key........................................................................ 9%
Travelers Rest.................................................................... 27%
</TABLE>
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 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.
4
<PAGE>
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
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
5
<PAGE>
Personnel costs are based on current personnel costs, plus annual percentage
increases to reflect growth and expenses. We calculated the amounts for the
other expense categories on a per-sub or per-mile, or percentage of revenue
basis, as noted.
The per-sub and per-mile costs were increased over the 10-year period by
inflation. The percentage costs were held to the same percentage of revenue over
10 years, on the assumption that gradual increases in unit costs can be passed
on to customers.
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
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.
6
<PAGE>
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.
<TABLE>
<CAPTION>
SYSTEM DATE SUBS $/SUB CF MULT
- ---------------------------------------------------- --------- ---------- --------- -----------
<S> <C> <C> <C> <C>
Single larger systems
Newport News, VA.................................. 11/94 48,000 2,542 9.0
Anaheim, CA....................................... 11/94 135,000 2,119 10.5
Ansonia, CT....................................... 6/94 32,000 2,667 11.7
Henderson, NC..................................... 1/95 14,100 1,634 10.5
Small systems
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
</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 7.5 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.
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:
<TABLE>
<S> <C>
Total Discounted Cashflow Value................................. 76,063,000
Minimum Total Value............................................. 72,800,000
Maximum Total Value............................................. 78,000,000
</TABLE>
7
<PAGE>
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:
<TABLE>
<S> <C>
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
</TABLE>
We believe the foregoing appraised value represents the fair market value at
March 31, 1995 of the assemblage of system assets as a going concern, without
any discount imputed for brokers' fees. We believe the appraisal reflects the
relevant and material general market factors, assumptions, and limitations, all
of which are presented in this report. The appraisal was prepared using standard
appraisal techniques, and conforms to Standards 7-10 of the Uniform Standards of
Professional Appraisal Practice.
QUALIFICATIONS OF THE APPRAISER
The appraisal was prepared by R. Michael Kruger, owner and President of
Western Cablesystems, Inc. Since 1979, he has appraised hundreds of systems for
a variety of clients including major MSO's, independent operators, and clients
outside the CATV industry. Kruger has extensive background as a CATV executive.
From 1974 to 1979, he held various operating positions at ATC, one of the
industry's largest operators. In 1979, he joined a small MSO, and until mid-1986
was president of the 30,000-subscriber company. There, in addition to his
operating duties, Kruger prepared CATV system appraisals.
Kruger formed Western Cablesystems, Inc. in 1986, and is its sole owner and
principal. Western has been directly involved in all aspects of system
operations and finance, including several acquisitions and sales, partnership
formation, debt placement, franchising, and system construction and startup.
Western sold one property in 1993, and presently operates three small cable
systems. In addition to continuing appraisal work, Kruger has performed
consulting engagements for a wide range of topics and clients, including the
economic feasibility of international cable and restructuring of individual
systems to achieve financial improvements.
Kruger received a BS/MS in engineering from the Massachusetts Institute of
Technology in 1967/68. In 1974, he received a Masters in Business Administration
(MBA) from the Stanford University Graduate School of Business.
8
<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, L.P.
PREPARED BY
WESTERN CABLESYSTEMS, INC
R. MICHAEL KRUGER, PRESIDENT
CABLE TELEVISION MANAGEMENT,
CONSULTING, AND APPRAISALS
513 WILCOX, #230
CASTLE ROCK, CO 80104
303-688-4462
<PAGE>
BACKGROUND AND LIMITING CONDITIONS
Western was asked by Cencom to prepare an analysis of the fair market value
as a going concern of the assets of the 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 Cencom 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.
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>
2
<PAGE>
The system is served by four headends. This appraisal is being done on the
aggregate system, but the approximate breakout may be helpful:
<TABLE>
<CAPTION>
NAME PASSINGS %
- ---------------------------------------------------------------------------------- ---------------
<S> <C>
Anderson.......................................................................... 13%
W. Pelzer......................................................................... 51%
Keowee Key........................................................................ 9%
Travelers Rest.................................................................... 27%
</TABLE>
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
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>
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.
3
<PAGE>
SUBSCRIBER RATES AND SERVICES
Each headend has slightly different lineups and rates; representative data
is summarized below.
<TABLE>
<CAPTION>
CHANNELS RATE
------------- ---------------
<S> <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
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.
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.
4
<PAGE>
System staffing can be summarized as:
<TABLE>
<CAPTION>
ITEM OFFICE FIELD OTHER
- ------------------------------------------------------------------- --------- --------- -----------
<S> <C> <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.
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
Estimated Plant Build Dates:
<TABLE>
<CAPTION>
MILES PERCENT
----- -------------
<S> <C> <C>
1970's....................................................................... 353 33%
1980's....................................................................... 492 46%
1990's....................................................................... 225 21%
</TABLE>
5
<PAGE>
Estimated Channel Capacity:
<TABLE>
<CAPTION>
MILES PERCENT
----- -------------
<S> <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.
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.
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:
6
<PAGE>
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.
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.
7
<PAGE>
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 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 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.
8
<PAGE>
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:
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.
9
<PAGE>
COMPARABLE TRANSACTION DATA
We then select an approximate appropriate multiplier from information
available about other reasonably similar transactions, and the general state of
the market. The following data has been taken
from announcements in the trade press, information from brokers, recent issues
of the Cable TV Investor Newsletter, published by Paul Kagan Associates, and our
own knowledge.
<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 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.
10
<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.
11
<PAGE>
DISCOUNTED CASH FLOW MODEL FOR APPRAISAL OF ANDERSON COUNTY
<TABLE>
<CAPTION>
CHANGE CURR. PROJ. YEAR
ASSUMPTIONS ACTUAL 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 1 0,191,334 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%
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
CHANGE CURR. PROJ. YEAR
ASSUMPTIONS ACTUAL 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5
--------------- --------- ----------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
CAPITAL EXPENDITURES
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
</TABLE>
<TABLE>
<CAPTION>
Discount Rate.......................... 12.60% DISCOUNT RATE CALCULATION
---------------------------------------
PROPORTION RATE
----------- ---------
<S> <C> <C> <C> <C>
Net Present Value of Free Cashflow..... 19,095,600
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> <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%
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
YEAR 6 YEAR 7 YEAR 8 YEAR 9 YEAR 10
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
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>
14
<PAGE>
CENCOM APPRAISAL FOR ANDERSON CO
HISTORIC INCOME STATEMENTS AND FIRST-YEAR PROJECTION
<TABLE>
<CAPTION>
PROJECTED
1992 ACTUAL 1993 ACTUAL 1994 ACTUAL 1995 ACTUAL 96/Q1 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>
15
<PAGE>
EXHIBIT A-2
APPRAISALS OF THE CPLP SYSTEMS
<PAGE>
CONFIDENTIAL
CENCOM PARTNERS, L.P.
APPRAISAL ANALYSIS SUMMARY
INTRODUCTION
Daniels & Associates, L.P. ("Daniels") was retained by Cencom Partners, L.P.
(the "Partnership") to appraise the fair market value of the assets of the
Partnership, in accordance with the "Appraisal Process" procedures as outlined
in the letter from the Partnership dated April 28, 1995 (the "Procedures
Letter"), as well as the related Amended and Restated Agreement of Limited
Partnership (the "Partnership Agreement"). The "Valuation Date" of the appraisal
of the Partnership, as was mutually agreed upon in the Procedures Letter, was
March 31, 1995. The Partnership owns and operates cable television systems
(referred to in the aggregate as the "Systems") that, as of March 31, 1995,
passed approximately 62,948 homes and served approximately 35,655 equivalent
basic subscribers ("EBUs") in the following four operating groups:
<TABLE>
<CAPTION>
BASIC
AS OF HOMES SUBSCRIBERS/ EQUIVALENT MILES OF NUMBER OF
MARCH 31, 1995 PASSED PENETRATION BASIC UNITS PLANT HEADENDS
- ------------------------------------------------- --------- ----------------- ----------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Lincolnton, North Carolina....................... 28,540 14,199 / 49.8% 14,297 800 3
--
--------- ----------------- ----------- -----
Sanford, North Carolina.......................... 20,759 12,300 / 59.3% 12,524 428 4
--
--------- ----------------- ----------- -----
LaGrange, Texas.................................. 9,820 6,093 / 62.0% 6,300 170 2
--
--------- ----------------- ----------- -----
Abbeville, South Carolina........................ 3,829 2,515 / 65.7% 2,534 81 1
--
--------- ----------------- ----------- -----
Total............................................ 62,948 35,107 / 55.8% 35,655 1,479 10
--
--
--------- ----------------- ----------- -----
--------- ----------------- ----------- -----
</TABLE>
The appraisal was performed in conjunction with the anticipated dissolution
and liquidation of the Partnership following the planned sale of the
Partnership's assets. This report summarizes Daniels' conclusions and provides
an outline of the scope of the engagement, the process used, an overview of the
Systems by group, the valuation methodology, the assumptions relied upon, and an
explanation of the values derived.
PROCESS
Daniels prepared an independent appraisal analysis of the Partnership assets
and was then instructed, as per the Procedures Letter and the Partnership
Agreement, to work with Western Cablesystems, Inc., the appraiser appointed by
the American Arbitration Association, to attempt to jointly determine the fair
market value of the Partnership's assets.
The Systems were appraised on a going concern basis, in conformance with
standard appraisal techniques, utilizing a ten year discounted net cash flow
analysis and applying relevant market and economic factors. The appraisal
assumes the Systems have been and will continue to be operated as efficiently as
comparable cable systems, and that the franchises and leases of assets used in
the operation of the Systems will be renewed indefinitely without material
changes, other than rebuild requirements (see "The Systems" section).
The appraisal process included discussions with the Partnership's
management, due diligence visits to a majority of the Systems by Daniels'
personnel, research of demographic information concerning the various
communities served, and analyses of historical and forecasted financial and
operating information, as well as Daniels' general knowledge about the industry.
In addition, the impact of the 1992 Cable Act on each System's current and
forecasted financial performance was analyzed. From such due diligence,
summaries of the relevant operating, technical, financial and demographic
characteristics of the Systems by
2
<PAGE>
operating group were prepared. These critical characteristics of the Systems
were instrumental in determining respective values because they varied
significantly between the Systems.
In order to assess the fair market value of the Partnership's assets,
detailed operating and financial forecasts by operating group were prepared
incorporating the critical elements of operating revenues and expenses. These
financial forecasts then formed the basis for determining a discounted cash flow
value for each operating group, a standard valuation methodology used within the
industry. The combined values of the Systems by operating group provides a value
of the cable operating assets of the Partnership on a discounted cash flow
basis. Using the market multiple methodology, an aggregate value for the
Partnership's assets was derived by analyzing a value per subscriber and
operating cash flow multiples obtained in private market sales of comparable
cable television systems and then applying those comparable market multiples to
the Partnership Systems. The product of these two valuation methodologies were
then analyzed to determine a final appraisal value for the Partnership's assets.
THE SYSTEMS
The Systems owned by the Partnership served approximately 35,655 EBUs in
four operating groups (three states) as of the Valuation Date. The operating
groups are referred to as (i) Lincolnton, North Carolina; (ii) Sanford, North
Carolina; (iii) LaGrange, Texas; and (iv) Abbeville, South Carolina. The largest
operating group is Lincolnton, North Carolina (14,297 EBUs), and the smallest is
Abbeville, South Carolina (2,534 EBUs). As of the Valuation Date, the Systems
had basic subscriber penetration rates varying from 49.8% to 65.7% of homes
passed, and a total basic penetration level of 55.8%, compared to the national
average of approximately 62.6%.
The Systems are served by a total of 10 headends with approximately 1,479
miles of plant. The technical condition and current channel capacity of the
Systems varies widely from 300 MHz to 450 MHz. Many of the Systems require
significant amounts of capital expenditures to upgrade or rebuild the cable
plant in order to sustain existing revenue and cash flow levels and realize
future financial performance growth. For our valuation, we assumed all plant
that is currently designed to less than 450 MHz would be required to be rebuilt
or upgraded to at least 450 MHz capacity level, and in some instances a 550 MHz
level, during the first five years of the forecast period, depending upon
franchise terms and the competitive outlook. The majority of the Systems
requiring an upgrade or rebuild are forecasted to have that occur within the
first four years of the forecast period.
Rebuilding these Systems to either a 450 MHz or 550 MHz design capacity is a
reasonable industry standard based on the current technology and operating
environment. We have estimated the cost per mile to rebuild a System to 550 MHz
at $15,000/mile and to upgrade plant to 450 MHz at $6,000/mile. These cost
estimates are reasonable representations of the costs (design, cable plant,
electronics, and labor) associated with rebuilding and/or upgrading cable
systems in the geographic regions served by the Partnership Systems. These cost
estimates, however, do not include the costs associated with upgrading and
changing out converters. In the Systems that are forecast to be rebuilt,
converters are forecast to be at least partially replaced over a two to three
year period at a cost of $125 per converter. The total estimated cost of
rebuilding/upgrading all of the Systems (excluding converter replacement) was
forecasted to be $15.8 million, the majority of which ($9.5 million) resulted
from the estimated cost of rebuilding the Lincolnton, North Carolina Systems.
LINCOLNTON, NORTH CAROLINA
The Lincolnton group of systems are located in two clusters. The largest
cluster, serving approximately 74% of the subscribers, is located approximately
1/2 hour northwest of Charlotte, and directly north of Gastonia. The second
cluster, which serves approximately 26% of the subscribers, is located
approximately one hour north of Lincolnton, outside of Hickory. As of March 31,
1995, the Lincolnton systems passed 28,540 homes and served 14,297 EBUs.
3
<PAGE>
The Lincolnton systems are served from three headends, referred to as
Lincolnton, Vale, and Taylorsville. Lincolnton is a 330 MHz addressable system
(approximately 3,200 addressable converters) which serves approximately 70% of
the subscriber base. The Vale system is a single headend serving approximately
4.0% of the subscriber base from 450 MHz plant. This system serves subscribers
in west Lincoln County. The Taylorsville headend serves approximately 26% of the
subscriber base from a 300 MHz plant. The Lincolnton headend site is leased and
the Vale and Taylorsville headend sites are owned. Over the last two to three
years, all new plant and extensions have been built to 450 MHz.
Lincolnton, Lincolnton County, and Taylorsville have all certified and
perfected to regulate basic rates. There were no valid complaints filed against
the tier in any of the Lincolnton systems. The last rate increase was effective
April 1, 1995 when the average weighted basic rate increased from $7.34 to $7.37
and the average weighted expanded basic rate increased from $14.91 to $14.96.
The annualized revenue and cash flow for the three-month period ended March
31, 1995, for this group of Systems was $5.2 million and $2.7 million,
respectively. This equates to an average monthly revenue per EBU of $30.03 and
average annual cash flow per EBU of $187.00. This System's revenue per EBU is
below that of the industry's 1994 average of approximately $31.29, and its cash
flow per EBU exceeded the 1994 industry average of approximately $165.21, per
Paul Kagan Associates, Inc. Cable TV Investor, April 30, 1995.
There is strong growth in both Lincoln County and Alexander County. The
growth in Lincoln County is on the east side of the county, and is largely
attributable to people working in Charlotte but moving to Lincoln County because
of lower home prices and property taxes. There are several small and mid-size
developments here, ranging from middle class homes to affluent areas around the
scenic Lake Norman. Alexander County is also experiencing strong growth as it
becomes more of a bedroom community to Hickory. The economy of this area is a
very diverse mix of manufacturers, including textiles and specialty yarns,
cutting tools, pianos, pharmaceuticals, roller bearings and furniture, as well
as agriculture and poultry production. Some of the largest area employers
include Timken, Vermont American, Naska Pharmaceuticals, Kawai American,
Cochrane Furniture, Textilgruppe Hof and R-Anell Homes.
SANFORD, NORTH CAROLINA
This is the second largest group of systems, which as of March 31, 1995,
passed 20,759 homes and served 12,524 EBUs. The primary communities served
include Sanford, Siler City, Whispering Pines, and Troy. The systems are managed
by 19 employees out of a single leased office in Sanford.
The Sanford systems are served from four headends, referred to as Sanford,
Siler City, Troy, and Whispering Pines. The Sanford system is the largest,
accounting for approximately 70% of the homes passed, 72% of the subscribers,
and 68% of the plant miles. Currently, 39% of the Sanford system's plant is
designed at 300 MHz, 30% is at 330 MHz, and 31% is at 450 MHz. The makeup of the
plant for the other three systems is 66% 330 MHz and 34% 450 MHz. Only the
Sanford system is currently addressable, with approximately 3,000 addressable
converters in the system. All four headend sites are leased.
There are eight franchises covering these systems, three of which expire in
1995, one in 1997, one in 1998, two in 1999, and one in 2004. The Sanford
franchise expires in July 1997.
Five of the eight franchising authorities have certified and perfected to
regulate basic rates. There were no valid complaints against the tier rates in
any of the systems. Prior to April 1, 1995, the weighted average basic rate in
these systems was $8.49 and the weighted average tier rate was $12.36. The
majority of the systems instituted rate changes effective April 1, 1995,
including reorganizing the channel offerings of basic and tier in Troy and Moore
County. The rate changes and tier realignment caused the post April 1, 1995,
weighted average basic rate to decline to $7.80 and the weighted average tier
rate to increase to $13.22.
4
<PAGE>
The annualized revenue and cash flow for the three-month period ended March
31, 1995, for this group of systems was $4.4 million and $2.3 million,
respectively. This equates to an average monthly revenue per EBU of $29.03 and
average annual cash flow per EBU of $183.75. This system's revenue per EBU at
this time was less than that of the industry's average, however, its cash flow
per EBU exceeded the industry 1994 average (noted above).
The Sanford economy appears stable, with a mix of light industry, textiles,
furniture, brick making, electronics and military (Fort Bragg and Pope AFB). The
majority of the community appears to be middle to lower middle class, however,
there is modest home growth in Lee County (off the Sanford headend) which is
upper middle class. Fort Bragg, located approximately 25 miles south of Sanford,
has a large economic effect on the area, is not on the base closure list, and is
instead adding troops. Siler City is a small community with a large employment
base in wood products and chicken processing, and is the retail center for much
of the surrounding area. Whispering Pines is a retirement community centered
around golfing. Troy is a lower class community with minimal industry, primarily
textiles.
LAGRANGE, TEXAS
The LaGrange, Texas operating group consists of two cable systems located
within a tightly clustered grouping approximately 95 miles west of Houston. As
of March 31, 1995, these systems passed 9,820 homes and served 6,300 EBUs within
the communities of Giddings, La Grange, Weimar, Schulenburg, and Halletsville.
These systems are managed by eleven employees out of a single owned office in La
Grange.
There are two headends serving these systems--one in Giddings and one in
Schulenburg. The Giddings system passed 1,900 homes with 38 miles of 330 MHz
plant while the Schulenburg system passed 7,920 homes with 132 miles of 330 MHz
plant in the communities of La Grange, Weimar, Schulenburg, and Halletsville. A
broadband microwave feed is used to transmit programming from Schulenburg to the
other communities. There are leased headend and tower sites in Giddings, La
Grange, Schulenburg, and Halletsville. The Weimar headend and tower site is
owned. As of the Valuation Date neither of the systems were over-built and there
were no MMDS operators in the service area. A minimal number of homes are served
by DBS.
The Giddings and Schulenburg systems' current basic rates are $9.06 and
$11.06, respectively. Expanded basic is $13.60 in Giddings and $11.79 in
Schulenburg. The systems have not adjusted rates since September of 1993 when
rates were changed to comply with federal rate regulations.
The annualized revenue and cash flow for the three-month period ended March
31, 1995, for this group of systems was $2.2 million and $1.2 million,
respectively. This equates to an average monthly revenue per EBU of $28.99 and
average annual cash flow per EBU of $186.84. This system's revenue per EBU is
less than that of the industry's 1994 average, however, its cash flow per EBU
exceeded the industry average.
These systems are operated under five franchise agreements with expiration
dates ranging from November 1995 to February 2006. The city of Weimar has
certified to regulate rates but has not taken any regulatory action. There were
no complaints issued against any of the tiers.
These communities are middle to lower-middle income rural communities with
below average growth potential. The economic base of the communities consists
mostly of small manufacturing, ranching, farming, and oil. The community of
Giddings, which has several productive oil fields, has the best economy of the
communities served. Three of the five communities are county seats, providing a
stable base of government jobs.
ABBEVILLE, SOUTH CAROLINA
Abbeville is the smallest of the four operating groups owned by the
Partnership. As of March 31, 1995, the Abbeville system passed 3,829 homes and
served 2,534 EBUs. The Abbeville system employs five
5
<PAGE>
people and is served from a single, owned office which shares a building with
the headend. There are two franchises covering this system--one for the town and
one for Abbeville County. The town franchise expires in late 1999 and the county
franchise expires in early 2000.
Abbeville is a single headend, 450 MHz system which was totally rebuilt in
1985. There is a total of 81 miles of plant, of which only one mile is
underground. While capable of carrying 60 channels, the system is currently
offering only 49 channels.
Neither the town nor the county has certified to regulate basic rates and
there have been no valid complaints against the tier. The last rate increase was
effective March 1, 1995 when the tier increased by $0.63. The current basic rate
is $6.24 and the expanded basic is $15.95.
The annualized revenue and cash flow for the three-month period ended March
31, 1995, for this system was $860,000 and $410,000, respectively. This equates
to an average monthly revenue per EBU of $28.40 and average annual cash flow per
EBU of $163.91. While this system's revenue per EBU was lower than that of the
industry's 1994 average, its cash flow per EBU was in line with the industry's
average (as noted above).
Abbeville is a small town located approximately 60 miles directly south of
Greenville, South Carolina. The town is stable with low unemployment, and a
local economy driven primarily by the railroad (CSX), and various textile mills.
It is a very quaint town, but one which has seen minimal growth historically,
and probably will remain stable with minimal future growth. The larger area
employers include Milliken Textiles, Dirrell Cable, CSX Railway and IT Fabrics.
Some of the town's work force also commute to Greenwood, approximately 15 miles
east, for employment.
METHODOLOGY
In order to appraise the fair market value of the assets of the Partnership,
Daniels used two valuation methodologies, (i) a discounted cash flow valuation
analysis and (ii) an analysis of market multiples realized from comparable
private market cable transactions. The respective aggregate fair market values
of the Partnership from each valuation methodology used were then compared, and
a final value was derived.
DISCOUNTED CASH FLOW
This methodology measures the present value of the Systems' forecasted net
cash flows, defined as pre-tax operating income, less capital expenditures,
including all upgrade and rebuild costs. The Systems' forecasted net cash flow
is determined through the creation of a long-range operating forecast which
provides for detailed forecasts of critical revenue and expense components. A
residual value was forecasted based on growth of the Systems' 10th year net cash
flow into perpetuity, and discounted back to the present at the same discount
rate as the forecasted net cash flow. Daniels prepared a detailed 10-year
revenue, cash flow and capital expenditure forecast for each of the System
groups to apply this discounted cash flow method.
The revenue forecasts were based upon Daniels' forecast of homes passed,
subscriber penetration levels, rates and other non-subscriber based revenue
sources. The expense forecasts were based primarily on assumed rates of
inflation over the forecast period and were adjusted for the particular growth
characteristics of each System group. The capital expenditure forecasts were
based upon costs associated with the construction of new miles of plant, plant
maintenance and rebuild requirements, replacement and upgrading of converters,
and the periodic replacement of vehicles.
To determine the appropriate discount rate for this valuation, Daniels
attempted to approximate the weighted average cost of capital using an array of
entities within the cable television industry that are capable of consummating
an acquisition similar in size to the acquisition of these Systems. The weighted
average cost of capital is an entity's 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
6
<PAGE>
an investment as high as the value that will allow it to meet its weighted
average cost of capital, or hurdle rate requirement.
The cost of the debt was arrived at by analyzing the aggregate cost of debt
of a variety of both large and small public and private cable companies to
determine an estimated average debt cost. The cost of equity was determined by
sampling the estimated private market cost of equity for cable television
investments over this time horizon and blending that with equity return
objectives of large publicly traded companies. Such equity returns are those
which would be required by experienced private equity investors and publicly
traded companies in cable television investments with similar characteristics as
those of the Partnership's Systems. The weighted average cost of capital
utilized for the discounted cash flow analyses was determined to be 13.65%. The
following are the estimates of the costs of debt and equity in the
capitalization structure as of the Valuation Date used to determine the discount
rate.
<TABLE>
<CAPTION>
ASSUMED CAPITAL STRUCTURE % OF TOTAL CAPITAL COST OF CAPITAL
- ----------------------------------------------------------- --------------------- ---------------
<S> <C> <C>
Debt....................................................... 60% 8.75%
--- -----
Equity..................................................... 40% 21.00%
--- -----
Total Weighted Average..................................... 100% 13.65%
--- -----
--- -----
</TABLE>
The residual value multiples were determined assuming net cash flow growth
into perpetuity equal to one-half of the average cash flow growth rate of the
final two years of the forecasted period. The residual value multiples ranged
from 8.7 to 10.2 times net cash flow.
COMPARABLE TRANSACTIONS
In addition to the Discounted Cash Flow Valuation methodology, Daniels also
used the Comparable Transactions methodology, which is another generally
accepted valuation methodology used to correlate the findings of the discounted
cash flow methodology with the realities of the private market. Under this
method, the market multiples reported in the sales of cable systems of similar
size, markets and technical condition are compared to the subject Systems. In
the case of cable television system values, the most commonly used market
multiples are (i) a multiple of operating cash flow and (ii) the price per
subscriber. Because detailed financial, operating, and technical information is
not generally available regarding private cable system transactions, it is
difficult to relate specific transaction values and multiples directly to the
subject Systems. However, through an analysis of both the range and average of
the market multiples derived from a group of comparable system transactions
about which information is available, this methodology provides a general
measure of the market multiples realized from comparable transactions, which are
then applied to the subject Systems in order to assess fair market value.
Because of the variety of System characteristics involved in this
Partnership, Daniels divided the Systems, and corresponding comparables into two
groups. The first group is mid-sized systems, in which we would include
Lincolnton and Sanford, North Carolina. The second group is small systems with
below average growth potential, representative of systems similar to the La
Grange, Texas and Abbeville, South Carolina systems.
7
<PAGE>
MID-SIZE SYSTEMS
<TABLE>
<CAPTION>
NO. OF PRICE/ CF
SYSTEM BUYER SELLER SUBSCRIBERS PRICE SUBSCRIBER MULTIPLE DATE
- ------------------------ ------------------ ------------------ ----------- ---------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Henderson, Franklin,
NC.................... Adelphia Henderson Comm. 14,100 $22,400,000 $ 1,589 10.2 1/95
No. Augusta, GA......... Jones ACT2 15,200 $27,300,000 $ 1,793 9.5 12/93
Gaston Cty, NC.......... Bresnan Jones 19,900 $35,000,000 $ 1,759 9.2 4/94
San Bernardino, CA...... Marks Cablevision Chambers Video 14,000 $25,000,000 $ 1,786 10.5 2/94
Alabama................. Comcast CableSouth 29,600 $54,800,000 $ 1,851 9.2 5/95
Georgia................. Charter CableSouth 29,300 $48,500,000 $ 1,655 8.2 5/95
Average of Mid-Size
System Comparables.... 20,350 $35,500,000 $ 1,744 9.3x --
</TABLE>
- ------------------------
SOURCE: Paul Kagan Associates, Inc. Cable TV Investor through June 30, 1995
and Daniels & Associates' Data Base as of June 30, 1995
SMALL SYSTEMS
<TABLE>
<CAPTION>
NO. OF PRICE/ CF
SYSTEM BUYER SELLER SUBSCRIBERS PRICE SUBSCRIBER MULTIPLE DATE
- -------------------- -------------------- -------------------- ------------- ----------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
OK Based MSO........ Frontier Vision United Video 86,300 $120,500,000 $ 1,397 9.0
Various TX, OK, KS,
AZ................ Classic & Fanch Mission Cable 79,100 $97,500,000 $ 1,233 7.5 *
Various KS, MO, NE,
IL, IA............ Galaxy Douglas Cable 59,900 $65,000,000 $ 1,086 7.6 *
MA Based MSO........ Galaxy Vista Comm. 31,000 $40,500,000 $ 1,305 8.0 *
IA Based MSO........ Galaxy Vantage 30,500 $38,400,000 $ 1,259 7.9 12/94
Various CO, NM, MN,
MO................ Fanch Comm. Leonard Comm. 24,700 $35,300,000 $ 1,428 7.9 5/95
Various AR, CO, TX.. Classic Cable United Video 21,900 $31,800,000 $ 1,454 8.2 *
Various, LA & KS.... Fanch Cablevision Leonard Comm. 12,100 $15,400,000 $ 1,273 7.5 2/95
Woodward, OK........ WT Acquisition Corp Time Warner 6,200 $ 8,900,000 $ 1,435 8.5 10/94
Cameron, TX......... Galaxy Telecom Galaxy Cablevision 3,500 $ 3,600,000 $ 1,029 8.0 4/95
Average of Small
System
Comparables....... 35,520 $45,690,000 $ 1,287 8.1 --
</TABLE>
- ------------------------
* Announced deal, closing pending
SOURCE: Paul Kagan Associates, Inc. Cable TV Investor through June 30, 1995
and Daniels & Associates' Data Base as of June 30, 1995
The analysis of the market multiples derived from comparable transactions
led to the conclusion that the cash flow multiples for the purpose of assessing
the fair market value of the Partnership's Lincolnton systems should range from
9.75--10.25 times cash flow, comparable to the upper end of the range of cash
flow multiples derived from the group of mid-sized system transactions, due to
the stronger growth characteristics of this property. It was concluded that the
Sanford systems market multiple would be between the market multiple range of
the average of the small-sized system transactions and mid-sized transactions,
8.1--9.3 times cash flow, at 8.5--9.0 times, due to the below average growth
potential of the market and the forecasted future capital expenditure
requirements necessary to upgrade the Systems. The analysis of comparable small
system market multiples led to the conclusion that the La Grange systems cash
flow multiple should range from 8.0--8.5 times cash flow, within the range of
comparable transactions' multiples. The market multiple for the Abbeville system
was determined to be between 8.5 and 9.0 times, at the high end of the range of
comparable small system transactions multiples of 7.5 to 9.0 times,
8
<PAGE>
due to the fact that it is already built to 450 MHz technical capacity,
therefore, not requiring any significant capital for a plant upgrade in the
foreseeable future.
VALUATION
Based on these analyses using the above-described methodologies, the
estimated fair market value of the cable television operating assets of the
Partnership, as of March 31, 1995, is $60,900,000 for 35,655 EBUs, or a weighted
average of $1,708 per EBU.
This value equates to a multiple of 9.3 times the annualized operating cash
flow for the three-month period ended March 31, 1995. This multiple is
consistent with the range of current average market multiples of 8.1 to 9.3
times cash flow for small and mid-size system transactions and is not
inconsistent with multiples derived in transactions involving large blocks of
subscribers. In addition, the value per EBU of $1,708 is comparable to the
values derived in private market transactions from similar sized cable
television properties with like characteristics.
It should be noted that the market sometimes places a premium on the ability
to acquire a large block of subscribers in a single transaction, due to
economies of scale and the lack of opportunity to purchase large numbers of
subscribers from a single seller. Therefore, while the various Systems were
appraised at the operating group level, as per the Procedures Letter, selling
the entire Partnership to one or a limited number of buyers could generate a
premium cash flow multiple, and thus a higher price. In addition, to certain
strategic buyers, some of these individual Systems might command a premium price
due to its fit with the acquiror's other systems and future plans.
MATERIAL RELATIONSHIPS
Daniels currently has one other active engagement agreement with the general
partner of the Partnership and its affiliates related to an additional cable
system appraisal.
SUMMARY
Our opinion of value expressed in this appraisal is based on financial and
operating information provided to Daniels by the Partnership, as well as
published demographic 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.
9
<PAGE>
CONFIDENTIAL
APPRAISAL OF
CENCOM PARTNERS, L.P.
SANFORD, NORTH CAROLINA SYSTEMS
AS OF MARCH 31, 1996
PREPARED BY
DANIELS & ASSOCIATES, L.P.
<PAGE>
CONFIDENTIAL
CENCOM PARTNERS, L.P.
SANFORD, NORTH CAROLINA
APPRAISAL ANALYSIS SUMMARY
INTRODUCTION
Daniels & Associates, L.P. ("Daniels") was retained by Cencom Partners, L.P.
("Cencom") to appraise the fair market value of Cencom's Sanford, North Carolina
cable television systems. The Sanford cable television systems serve several
communities in central North Carolina (referred to in the aggregate as the
"Systems") that, as of March 31, 1996, passed 21,461 homes and served 12,941
equivalent basic subscribers ("EBUs"). The "Valuation Date" of the appraisal of
the Systems was March 31, 1996.
As of March 31, 1996
<TABLE>
<CAPTION>
MILES OF ANNUALIZED CASH
PLANT / EQUIVALENT BASIC FLOW FOR THE
NUMBER OF HOMES UNITS / PAY UNITS / THREE M/E
SYSTEM HEADENDS HOMES / MILE PASSED PENETRATION PENETRATION 3/31/96
- -------------------------------------- ----------- ------------- --------- ----------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Sanford............................... 339 / 1 45 15,162 9,365 / 61.8% 4,172 / 44.5% --
Siler City............................ 47 / 1 65 3,065 1,704 / 55.6% 946 / 55.5% --
Troy.................................. 41 / 1 24 998 779 / 78.1% 423 / 54.3% --
Whispering Pines...................... 59 / 1 38 2,236 1,093 / 48.9% 212 / 19.4% --
Total................................. 486 / 4 44 21,461 12,941 / 60.3% 5,753 / 44.5% $ 2,467,868
</TABLE>
This report summarizes Daniels' conclusions and provides an outline of the
scope of the engagement, the process used, an overview of the Systems, the
valuation methodology, the assumptions relied upon and an explanation of the
values derived.
PROCESS
Daniels prepared an independent appraisal analysis to determine the fair
market value of the Systems as of March 31, 1996. The Systems were appraised on
a going-concern basis, in conformance with standard appraisal techniques,
utilizing a ten-year discounted net cash flow analysis and applying relevant
market and economic factors. The appraisal assumes that the Systems have been
and will continue to be operated as efficiently as comparable cable systems, and
that the franchises and leases of assets used in the operation of the Systems
will be renewed indefinitely without material changes, other than rebuild
requirements (see "The Systems" section below).
The appraisal process included discussions with Cencom's management,
research of published demographic information concerning the various communities
served, and analyses of historical and forecasted financial and operating
information, as well as Daniels' general knowledge about the cable television
industry. Daniels' personnel did not visit the Systems as part of this
appraisal; however, Daniels' personnel did visit the Systems for a previous
appraisal of the Systems which it prepared as of March 31, 1995. From Daniels'
due diligence, a summary of the relevant operating, technical, financial and
demographic characteristics of the Systems was prepared. These characteristics
of the Systems were instrumental in determining value.
In order to assess the fair market value of the Systems, a detailed
operating and financial forecast was prepared incorporating the critical
elements of operating revenues and expenses as well as capital expenditure
requirements. This financial forecast then formed the basis for determining a
discounted cash flow value, a standard valuation methodology used within the
industry. In addition, using the market multiple valuation methodology, an
aggregate value for the Systems was derived by analyzing value per
2
<PAGE>
subscriber and operating cash flow multiples obtained in private market sales of
comparable cable television systems, and then by applying those comparable
market multiples to the Systems. The products of these two valuation
methodologies were then analyzed to determine a final appraised value for the
Systems as of March 31, 1996.
THE SYSTEMS
The Sanford Systems are served from four headends, referred to as Sanford,
Siler City, Troy, and Whispering Pines. The Sanford system is the largest,
accounting for approximately 71% of the homes passed, 72% of the subscribers,
and 70% of the plant miles. As of March 31, 1996, the Systems passed 21,461
homes and served 12,941 equivalent basic units, for a penetration rate of 60.3%.
The Systems are served from four headends, referred to as Sanford, Siler
City, Troy, and Whispering Pines, with a total of 486 miles of plant. Sanford, a
300 MHz addressable system (approximately 1,664 addressable subscribers), serves
approximately 72.0% of the subscribers with 339 miles of plant. The Siler City
system serves approximately 13% of the subscriber base from 47 miles of
primarily 330 MHz plant and a single headend. The Troy system, located
approximately 45 miles southwest of Sanford, is a 330 MHz system, serving
approximately 6% of the subscriber base from 41 miles of plant. The remaining 8%
of the subscribers are served from the Whispering Pines headend, a 330 MHz
system with 59 miles of plant, located 35 miles south of Sanford. Over the last
three years, all new plant and extensions have been built to 450 MHz.
All of the Systems' headend sites are leased. The four headends utilize
primarily Scientific Atlanta and General Instruments equipment, and the plant
electronics are primarily Scientific Atlanta. Pay security is controlled with
addressability and negative traps in the Sanford system, and negative traps in
the other three Systems.
There are eight franchises covering the Systems, with expiration dates
ranging between 1996 and 2004. The franchise for Sanford, accounting for
approximately 34% of the subscriber base, expires in July 1997. Cencom believes
that they have strong relationships with all of the franchising authorities and
does not anticipate any problems with franchise renewals.
All four systems offer both a Basic and an Expanded Basic service. The
Sanford and Siler City systems offer a 13-channel Basic for rates ranging by
franchise area from $7.69 to $8.14. Troy and Whispering Pines both have
12-channel Basic packages for $7.95 to $8.26. The Expanded Basic service ranges
from 18 to 21 channels at rates from $13.69 to $14.26. While the Basic and
Expanded Basic rates differ by franchise area, the total rate for subscribers to
both Basic and Expanded Basic is $21.95 in all of the Systems. Five of the eight
franchising authorities have certified and perfected to regulate Basic rates.
There have been no valid complaints filed against the Expanded Basic rate in any
of the Systems. Cencom believes its rates are within the allowable rates under
the FCC rate regulation rules as they existed on March 31, 1996.
The annualized revenue and cash flow for the three-month period ended March
31, 1996 for the Systems was $4.7 million and $2.5 million, respectively. This
equates to an average monthly revenue per EBU of $30.25 and average annual cash
flow per EBU of $191.80. The Systems' average monthly revenue per EBU is $3.55
below that of the cable television industry's 1995 average of approximately
$33.80, while its annual cash flow per EBU is above the industry average of
$182.52 for the year 1995, as reported by Paul Kagan Associates, Inc., Cable TV
Investor.
Sanford is located near the geographic center of the state, approximately 45
miles southwest of Raleigh and 58 miles southeast of Greensboro. It's economy is
a mix of light industry, textiles, furniture manufacturing, brick making,
electronics, and military (Fort Bragg and Pope Air Force Base). Fort Bragg,
located approximately 25 miles south of Sanford also has a large economic effect
on the area and is not currently on the military base closure list. Two other
large employers in the area include Phizer Pharmaceuticals and Eaton.
3
<PAGE>
According to National Decision Systems ("NDS"), an independent demographic
service, the population of Lee County, which includes Sanford as its largest
city and the county seat, increased 11.4% from 1990 to 1996, and is projected to
increase an additional 5.7% over the next five years. The number of households
in Lee County increased 12.9% during the last six years, and are projected by
NDS to increase an additional 5.9% during the next five years. Both the
projected population and household growth rates are below the projected growth
rates for the State of North Carolina.
The other three primary communities served by the Systems include Siler
City, Whispering Pines, and Troy. Siler City, which serves approximately 13% of
the subscribers, has a large employment base in wood products and chicken
processing, and is the retail center for much of the surrounding area. Several
new restaurants and shops are indications of the importance of this community as
a retail center. Whispering Pines is a vacation and retirement community known
for the area's premier golf courses, including the Pinehurst Country Club. Troy,
is a small, stable community whose primary economy is textiles.
The lack of excess channel capacity, the reality of near-term competition
from alternative multi-channel video providers and the potential to provide
ancillary telecommunications and data services suggest that a rebuild or upgrade
of all of the Systems to at least 450 MHz capacity would be prudent in the near
term, although there are no current franchise requirements to rebuild or upgrade
any of the Systems. Daniels has estimated the cost per mile to rebuild a system
to 550 MHz at $15,000/mile for aerial and $18,000/mile for underground, and to
upgrade to 450 MHz at $6,000/mile for aerial and $9,000/mile for underground.
Daniels has assumed that the Siler City, Troy and Whispering Pines systems would
be upgraded to 450 MHz and that the Sanford systems would be rebuilt to 550 MHz
at a total cost of approximately $5.2 million. Daniels believes that these cost
estimates are reasonable representations of the costs (design, cable plant,
electronics and labor) associated with rebuilding and/or upgrading the Systems.
These cost estimates do not, however, include the costs associated with
upgrading and changing out converters, which Daniels has added as an additional
capital requirement in its forecast in addition to the rebuild/upgrade estimate.
METHODOLOGY
In order to appraise the fair market value of the Systems as of March 31,
1996, Daniels used two valuation methodologies: (i) a discounted cash flow
("DCF") valuation analysis; and (ii) an analysis of market multiples realized
from comparable private market cable transactions. The respective aggregate fair
market values of the Systems from each valuation methodology used were then
compared, and a final valuation was derived.
DISCOUNTED CASH FLOW
This methodology measures the present value of the Systems' forecasted net
cash flows, defined as pre-tax operating income less capital expenditures
including all rebuild/upgrade costs. The Systems' forecasted net cash flow is
determined through the creation of a long-range operating forecast which
provides for detailed forecasts of critical revenue and expense components. A
residual value was forecasted based on growth of the Systems' net cash flow into
perpetuity, and discounted back to the present at the same discount rate as the
forecasted net cash flow. Daniels prepared a detailed 10-year revenue, cash flow
and capital expenditure forecast for the combined Systems.
The revenue forecasts were based upon Daniels' forecast of homes passed,
subscriber penetration levels and rates and non-subscriber based revenue
sources. The expense forecasts were based primarily on assumed rates of
inflation over the forecast period, and were adjusted for particular growth
characteristics. The capital expenditure forecasts were based upon costs
associated with the construction of new miles of plant, plant maintenance and
rebuild/upgrade requirements, replacement of converters, and the periodic
replacement of vehicles. Daniels believes the markets served by the Systems
offer an opportunity for the Systems to provide ancillary telecommunications and
data services; however, because the technology, costs
4
<PAGE>
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.
<TABLE>
<CAPTION>
ASSUMED CAPITAL STRUCTURE % OF TOTAL CAPITAL COST OF CAPITAL
- ----------------------------------------------------------- ------------------- -----------------
<S> <C> <C>
Debt....................................................... 60.0% 8.0%
Equity..................................................... 40.0% 23.0%
Total Weighted Average Cost of Capital..................... 100% 14.0%
--- ---
--- ---
</TABLE>
The DCF value of the Systems arrived at from this analysis was $20.7
million, which is equal to 8.4 times the annualized operating cash flow for the
three-month period ended March 31, 1996, and $1,597 per EBU.
<TABLE>
<CAPTION>
DISCOUNTED CASH FLOW MULTIPLE OF THREE M/E 3/31/96
SYSTEMS VALUATION ANNUALIZED CASH FLOW VALUE/EBU
- -------------------------------------------------- -------------------- ------------------------------- -----------
<S> <C> <C> <C>
Sanford, North Carolina........................... $ 20,669,419 8.4 $ 1,597
</TABLE>
COMPARABLE TRANSACTIONS
In addition to the DCF valuation methodology, Daniels also used the
comparable transactions methodology, which is another generally accepted
valuation methodology used to correlate and validate the findings of the DCF
method with the realities of the private market. Under this method, the market
multiples reported in sales of cable systems of similar size, markets and
technical condition are compared to the subject Systems. In the case of cable
television system values, the most commonly used market multiples are (i) a
multiple of operating cash flow and (ii) the price per subscriber. Because
detailed financial, operating and technical information is not generally
available regarding private cable system transactions, it is difficult to relate
specific transaction values and multiples directly to the subject Systems.
However, through an analysis of both the range and average of the market
multiples derived from a group of comparable system transactions, about which
information is available, this methodology provides a general measure of the
market multiples realized from comparable transactions, which are then applied
to the subject Systems in order to assess fair market value.
5
<PAGE>
COMPARABLE SALE TRANSACTIONS
<TABLE>
<CAPTION>
NO. OF PRICE/ CF
SYSTEM BUYER SELLER SUBSCRIBERS PRICE SUBSCRIBER MULTIPLE DATE
- -------------------- -------------------- -------------------- ------------- ----------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Columbus, MS........ Post-Newsweek Columbus TV 15,700 $23,000,000 $ 1,465 9.5 2/96
Various KS & LA..... Fanch Cablevision Leonard Comm. 12,100 $17,200,000 $ 1,421 8.4 3/95
Orangeburg, SC...... Jones Intercable Jones Cable Fund 12,000 $18,350,000 $ 1,529 8.8 8/95
Ridgecrest, CA...... Benchmark Mediacom 11,000 $20,800,000 $ 1,891 7.5 12/95
Martinsburg, WV..... GS Comm. Time Warner 7,500 $13,100,000 $ 1,740 9.0 3/96
Colton, CA.......... TCI Colton Cablevision 7,260 $10,000,000 $ 1,377 8.0 7/95
Frankford, IN....... Marcus Nixon Newspapers 5,000 $ 7,000,000 $ 1,400 8.6 *
-------------------- -------------------- --
------ ----------- ----------- ---------
Total / Average of System Comparables........................... 70,560 $109,450,000 $ 1,551 8.4
</TABLE>
Source: Paul Kagan Associates, Inc. Cable TV Investor through March 31, 1996
and Daniels & Associates' Data Base as of March 31, 1996
- ------------------------
* This transaction, while pending, has been publicly announced, and is
governed by a definitive agreement. Although there can be no assurance that
this transaction will be consummated, the inclusion of data regarding it
incorporates the most recent comparable market values.
The comparable transactions analysis yields a cash flow multiple range of
7.5 to 9.5 times cash flow and a weighted average for all of the transactions of
8.4 times cash flow. The range for the value per subscriber is between $1,400
and $1,891 with an overall weighted average of $1,551 per subscriber.
SALES PROCESS
Daniels was engaged by Cencom on August 17, 1995 to conduct a sales process
in order to solicit private market bids for all of the systems owned by Cencom,
including the Sanford Systems described in this appraisal report. Under the
Procedures Letter, which was sent to all potential bidders, the General Partner
had a Bid Option Right to submit a higher bid within two business days than the
highest third-party bid received, with the condition that the General Partner's
bid had to exceed the highest bid proposal received by at least 0.5%. If the
General Partner exercised his Bid Option Right, Daniels was then required to
notify the previously highest bidder and allow him a similar bid right within
two business days. The Procedures Letter allowed for this Secondary Bid Process
to continue until the highest binding cash Proposal was received.
Daniels conducted the sales process, and on January 31, 1996 received a high
bid proposal for the Systems of $19,000,000 from Bay Cable Management, Inc.
("Bay Cable"). Within two business days, the General Partner submitted a higher
bid, to which Bay Cable then topped the General Partner's bid. This process
continued until, on February 14, 1996, the General Partner submitted a bid
letter for $20,750,000 and Bay Cable informed Daniels orally that they would not
top the General Partner's bid. This final bid of $20,750,000 then became the
final purchase price for the Systems.
MATERIAL RELATIONSHIPS
Daniels has no ownership position in Cencom; however, from time to time
Daniels has rendered various investment banking and brokerage services to Cencom
and its General Partner for customary and reasonable compensation. In addition,
at the present time Daniels has two active engagement agreements with Cencom and
its affiliates related to the sale of this and certain other cable television
systems owned by Cencom and affiliates of Cencom. Daniels does not believe that
these prior and present relationships in any way affect its ability to fairly
and impartially render the opinion of value expressed herein.
6
<PAGE>
VALUATION
Based on the analyses using the above-described methodologies, the estimated
fair market value of the Systems, as of March 31, 1996, is 8.4 times the
annualized operating cash flow for the three-month period ended March 31, 1996.
This translates to a gross value of $20.7 million, and a value per EBU of
$1,600.
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.
7
<PAGE>
CONFIDENTIAL
APPRAISAL OF
CENCOM PARTNERS, L.P.
ABBEVILLE, SOUTH CAROLINA SYSTEM
AS OF MARCH 31, 1996
PREPARED BY
DANIELS & ASSOCIATES, L.P.
<PAGE>
CONFIDENTIAL
CENCOM PARTNERS, L.P.
ABBEVILLE, SOUTH CAROLINA
APPRAISAL ANALYSIS SUMMARY
INTRODUCTION
Daniels & Associates, L.P. ("Daniels") was retained by Cencom Partners, L.P.
("Cencom") to appraise the fair market value of Cencom's Abbeville, South
Carolina cable television system. The Abbeville cable television system
(referred to as the "System") serves Abbeville and Abbeville County in northwest
South Carolina. As of March 31, 1996, the System passed 3,678 homes and served
2,623 equivalent basic subscribers ("EBUs"). The "Valuation Date" of the
appraisal of the System was March 31, 1996.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1996
----------------------------------------------------------------------------------------
MILES OF ANNUALIZED CASH
PLANT / EQUIVALENT FLOW FOR THE
NUMBER OF HOMES BASIC UNITS / PAY UNITS / THREE
SYSTEM HEADENDS HOMES/ MILE PASSED PENETRATION PENETRATION M/E 3/31/96
- ----------------------------------------- ----------- ------------- ----------- ------------- ------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Abbeville, SC............................ 85 / 1 43 3,678 2,623 / 71.3% 1,007 / 38.4% $ 456,048
</TABLE>
This report summarizes Daniels' conclusions and provides an outline of the
scope of the engagement, the process used, an overview of the System, the
valuation methodology, the assumptions relied upon and an explanation of the
values derived.
PROCESS
Daniels prepared an independent appraisal analysis to determine the fair
market value of the System as of March 31, 1996. The System was appraised on a
going-concern basis, in conformance with standard appraisal techniques,
utilizing a ten-year discounted net cash flow analysis and applying relevant
market and economic factors. The appraisal assumes that the System has been and
will continue to be operated as efficiently as a comparable cable System, and
that the franchises and leases of assets used in the operation of the System
will be renewed indefinitely without material changes, other than rebuild
requirements (see "The System" section below).
The appraisal process included discussions with Cencom's management,
research of published demographic information concerning the various communities
served, and analyses of historical and forecasted financial and operating
information, as well as Daniels' general knowledge about the cable television
industry. Daniels' personnel did not visit the System as part of this appraisal;
however, Daniels' personnel did visit the System for a previous appraisal of the
System which it prepared as of March 31, 1995. From Daniels' due diligence, a
summary of the relevant operating, technical, financial and demographic
characteristics of the System was prepared. These characteristics of the System
were instrumental in determining value.
In order to assess the fair market value of the System, a detailed operating
and financial forecast was prepared incorporating the critical elements of
operating revenues and expenses as well as capital expenditure requirements.
This financial forecast then formed the basis for determining a discounted cash
flow value, a standard valuation methodology used within the industry. In
addition, using the market multiple valuation methodology, an aggregate value
for the System was derived by analyzing value per subscriber and operating cash
flow multiples obtained in private market sales of a comparable cable television
System, and then by applying those comparable market multiples to the System.
The products of these two valuation methodologies were then analyzed to
determine a final appraised value for the System as of March 31, 1996.
2
<PAGE>
THE SYSTEM
As of March 31, 1996, the System passed 3,678 homes and served 2,623
equivalent basic units. Cencom acquired the System in March 1990.
Abbeville is a single headend, 450 MHz addressable system capable of
carrying 60 channels, although it is currently offering only 46 channels. The
System was totally rebuilt in 1985, and currently includes 85 miles of plant, of
which only two miles are underground. The plant utilizes Scientific Atlanta and
CommScope cable and Scientific Atlanta electronics. The headend equipment is
primarily Scientific Atlanta, and the converters are Scientific Atlanta 8550-321
addressables, Pioneer BC-4535P non-addressables, and Panasonic PC-145302
non-addressables. The headend is located in the office building, which is owned
by Cencom.
There are two franchises covering this system--one for Abbeville and one for
Abbeville County. The Abbeville franchise expires in August 1999 and the
Abbeville County franchise expires in February 2000. Cencom believes that they
have a strong relationship with the franchising authorities.
The System offers both a Basic and an Expanded Basic service. The Basic
service includes 12 channels for $6.24, while the Expanded Basic service
includes 29 more channels for an additional $16.36. Neither the town nor the
county has certified to regulate Basic rates, and there have been no valid
complaints filed against the Expanded Basic rate.
The annualized revenue and cash flow for the three-month period ended March
31, 1996 for the System was $0.9 million and $0.5 million, respectively. This
equates to an average monthly revenue per EBU of $29.93 and average annual cash
flow per EBU of $176.56. This System's average monthly revenue per EBU is $3.87
below that of the cable television industry's 1995 average of approximately
$33.80, and its annual cash flow per EBU is $5.96 below the industry average of
$182.52 for the year 1995, as reported by Paul Kagan Associates, Inc., Cable TV
Investor.
Abbeville, located approximately 52 miles south of Greenville, is one of the
oldest and most historic towns of the South, and also serves as the county seat
of Abbeville County. According to National Decision System ("NDS"), an
independent demographic service, the population of Abbeville County increased
2.2% from 1990 to 1996, and is projected to increase an additional 0.7% over the
next five years. The number of households in Abbeville County increased by 5.7%
during the last six years, and are projected by NDS to increase an additional
0.2% during the next five years.
The history and restored charm of this town contributes to a large tourist
industry for the area. The development of nearby Lake Russell turned
already-popular hunting and fishing into an additional economic driver for the
community as well. While originally dependent upon agriculture, Abbeville County
has developed a strong industrial base over the last 30 years that now rivals
agriculture as the area's economic driver. Currently more than 30 industries
employ approximately 4,000 people in Abbeville. Some of the largest employers in
Abbeville County include Abbeville Manufacturing Company; Abbeville Shirtmakers,
Inc.; CSX Railroad; Flexible Technologies; Hydra Industries, Inc.; Milliken
Textiles; and Reelco of Abbeville, Inc.
Because the System currently has 14 channels of excess capacity, Daniels did
not assume an upgrade of the System until the year 2000. There are no current
franchise requirements to rebuild or upgrade the System. Daniels has estimated
the cost per mile to upgrade the System to 550 MHz in the year 2000 at
$7,000/mile for aerial and $10,000/mile for underground. The total estimated
cost of this upgrade in the Year 2000 is $601,000. Daniels believes that these
cost estimates are reasonable representations of the costs (design, cable plant,
electronics and labor) associated with upgrading the System. These cost
estimates do not, however, include the costs associated with upgrading and
changing out converters, which Daniels has added as an additional capital
requirement in its forecast in addition to the upgrade estimate.
3
<PAGE>
METHODOLOGY
In order to appraise the fair market value of the System as of March 31,
1996, Daniels used two valuation methodologies: (i) a discounted cash flow
("DCF") valuation analysis; and (ii) an analysis of market multiples realized
from comparable private market cable transactions. The respective aggregate fair
market values of the System from each valuation methodology used were then
compared, and a final valuation was derived.
DISCOUNTED CASH FLOW
This methodology measures the present value of the System's forecasted net
cash flows, defined as pre-tax operating income less capital expenditures
including all rebuild/upgrade costs. The System's forecasted net cash flow is
determined through the creation of a long-range operating forecast which
provides for detailed forecasts of critical revenue and expense components. A
residual value was forecasted based on growth of the System's net cash flow into
perpetuity, and discounted back to the present at the same discount rate as the
forecasted net cash flow. Daniels prepared a detailed 10-year revenue, cash flow
and capital expenditure forecast for the System.
The revenue forecasts were based upon Daniels' forecast of homes passed,
subscriber penetration levels and rates and non-subscriber based revenue
sources. The expense forecasts were based primarily on assumed rates of
inflation over the forecast period, and were adjusted for particular growth
characteristics. The capital expenditure forecasts were based upon costs
associated with the construction of new miles of plant, plant maintenance and
rebuild/upgrade requirements, replacement of converters, and the periodic
replacement of vehicles. Daniels believes the market served by the System offers
an opportunity for the System to provide ancillary telecommunications and data
services; however, because the technology, costs and revenue potential are
uncertain, Daniels did not include telephony or data services revenue, expenses
or capital costs in its forecasts.
To determine the appropriate discount rate for this valuation, Daniels
attempted to approximate the weighted average cost of capital using an array of
entities within the cable television industry that are capable of consummating
an acquisition similar in size to the acquisition of this System. The weighted
average cost of capital is an entity's required return on an investment
necessary to satisfy the expectations of all of the entity's investors, both
debt and equity. An entity, therefore, will be willing to pay a price for an
investment as high as the value that will allow it to meet its weighted average
cost of capital or hurdle rate requirement.
The cost of debt was arrived at by analyzing the aggregate cost of debt of a
variety of both large and mid-size public and private cable companies to
determine an estimated average debt cost. The cost of equity was determined by
sampling the estimated private market cost of equity for cable television
investments as of the Valuation Date and blending that with equity return
objectives of large publicly traded companies. Such equity returns are those
which would be required by experienced private equity investors and publicly
traded companies in cable television investments with similar characteristics as
those of the Client's System. The weighted average cost of capital Daniels
derived for the discounted cash flow analyses was 14.0%. The following are the
estimates of the costs of debt and equity in the capitalization structure as of
the Valuation Date used to determine the discount rate.
<TABLE>
<CAPTION>
ASSUMED CAPITAL STRUCTURE % OF TOTAL CAPITAL COST OF CAPITAL
- ----------------------------------------------------------- ------------------- -----------------
<S> <C> <C>
Debt....................................................... 60.0% 8.0%
Equity..................................................... 40.0% 23.0%
Total Weighted Average Cost of Capital..................... 100% 14.0%
</TABLE>
4
<PAGE>
The DCF value of the System arrived at from this analysis was $4.1 million,
which is equal to 9.0 times the annualized operating cash flow for the
three-month period ended March 31, 1996, and $1,567 per EBU.
<TABLE>
<CAPTION>
DISCOUNTED CASH FLOW MULTIPLE OF THREE M/E 3/31/96
SYSTEM VALUATION ANNUALIZED CASH FLOW VALUE/EBU
- -------------------------------------------------- -------------------- ------------------------------- -----------
<S> <C> <C> <C>
Abbeville, South Carolina......................... $ 4,110,093 9.0 $ 1,567
</TABLE>
COMPARABLE TRANSACTIONS
In addition to the DCF valuation methodology, Daniels also used the
comparable transactions methodology, which is another generally accepted
valuation methodology used to correlate and validate the findings of the DCF
method with the realities of the private market. Under this method, the market
multiples reported in sales of cable System of similar size, markets and
technical condition are compared to the subject System. In the case of cable
television system values, the most commonly used market multiples are (i) a
multiple of operating cash flow and (ii) the price per subscriber. Because
detailed financial, operating and technical information is not generally
available regarding private cable system transactions, it is difficult to relate
specific transaction values and multiples directly to the subject System.
However, through an analysis of both the range and average of the market
multiples derived from a group of comparable system transactions, about which
information is available, this methodology provides a general measure of the
market multiples realized from comparable transactions, which are then applied
to the subject System in order to assess fair market value.
COMPARABLE SALE TRANSACTIONS
<TABLE>
<CAPTION>
NO. OF PRICE/ CF
SYSTEM BUYER SELLER SUBSCRIBERS PRICE SUBSCRIBER MULTIPLE DATE
- ------------------ ---------------------- ------------------- ------------- ------------ ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Frankfort, IN..... Marcus Nixon Newspapers 5,000 $ 7,000,000 $ 1,400 8.6 *
Pickens County,
SC.............. Genesis Charter Comm. 4,500 $ 8,000,000 $ 1,779 9.0 1/96
Berkeley, WV...... MidSouth Cablevision Raystay 2,800 $ 4,400,000 $ 1,571 9.0 10/95
Crosby, MN........ Bresnan Bye Cable 2,000 $ 2,900,000 $ 1,450 8.3 8/95
Rankin, MS........ York Cable Time Warner 1,650 $ 2,700,000 $ 1,612 9.1 9/95
League City,
Texas........... TCI Cablenet Comm. 1,680 $ 2,200,000 $ 1,310 8.5 7/95
--
---------------------- ------------------- ------ ------------ ----------- ---------
Total / Average of System Comparables........................ 17,630 $ 27,200,000 $ 1,543 8.8
</TABLE>
Source: Paul Kagan Associates, Inc. Cable TV Investor through March 31, 1996 and
Daniels & Associates' Data Base as of March 31, 1996
- ------------------------
* This transaction, while pending, has been publicly announced, and is
governed by a definitive agreement. Although there can be no assurance
that this transaction will be consummated, the inclusion of data regarding
it incorporates the most recent comparable market values.
The comparable transactions analysis yields a cash flow multiple range of
8.3 to 9.1 times cash flow and a weighted average for all of the transactions of
8.8 times cash flow. The range for the value per subscriber is between $1,310
and $1,779 with an overall weighted average of $1,543 per subscriber.
SALES PROCESS
Daniels was engaged by Cencom on August 17, 1995, to conduct a sales process
in order to solicit private market bids for all of the System owned by Cencom,
including the Abbeville System described in this appraisal report. Under the
Procedures Letter, which was sent to all potential bidders, the General
5
<PAGE>
Partner had a Bid Option Right to submit a higher bid within two business days
than the highest third-party bid received, with the condition that the General
Partner's bid had to exceed the highest bid proposal received by at least 0.5%.
If the General Partner exercised his Bid Option Right, Daniels was then required
to notify the previously highest bidder and allow him a similar bid right within
two business days. The Procedures Letter allowed for this Secondary Bid Process
to continue until the highest binding cash Proposal was received.
Daniels conducted the sales process, and on January 31, 1996 received a high
bid proposal for the System of $4,000,000 from Helicon Corp. ("Helicon"). Within
two business days, the General Partner submitted a higher bid, to which Helicon
then topped the General Partner's bid. This process continued until, on February
16, 1996, Helicon submitted a letter stating that they would not attempt to top
the General Partner's final bid of $4,200,000, which then became the final
purchase price for the System.
MATERIAL RELATIONSHIPS
Daniels has no ownership position in Cencom; however, from time to time
Daniels has rendered various investment banking and brokerage services to Cencom
and its General Partner for customary and reasonable compensation. In addition,
at the present time Daniels has two active engagement agreements with Cencom and
its affiliates related to the sale of this and certain other cable television
systems owned by Cencom and affiliates of Cencom. Daniels does not believe that
these prior and present relationships in any way affect its ability to fairly
and impartially render the opinion of value expressed herein.
VALUATION
Based on the analyses using the above-described methodologies, the estimated
fair market value of the System, as of March 31, 1996, is 9.0 times the
annualized operating cash flow for the three-month period ended March 31, 1996.
This translates to a gross value of $4.1 million, and a value per EBU of $1,563.
Our opinion of value expressed in this appraisal is based on financial and
operating information provided to Daniels by Cencom, as well as published
demographic information for the service areas. While Daniels believes such
sources to be reliable and accurate, it has not independently verified any such
information. The valuation is based on information available to Daniels as of
the valuation date. Daniels undertakes no responsibility for updating this
opinion to reflect changes in the value of the assets subsequent to the
valuation date of March 31, 1996, such as market, economic, technological,
operational, governmental and other changes.
6
<PAGE>
CONFIDENTIAL
APPRAISAL OF
CENCOM PARTNERS, L.P.
LINCOLNTON, NORTH CAROLINA SYSTEMS
AS OF MARCH 31, 1996
PREPARED BY
DANIELS & ASSOCIATES, L.P.
<PAGE>
CONFIDENTIAL
CENCOM PARTNERS, L.P.
LINCOLNTON, NORTH CAROLINA
APPRAISAL ANALYSIS SUMMARY
INTRODUCTION
Daniels & Associates, L.P. ("Daniels") was retained by Cencom Partners, L.P.
("Cencom") to appraise the fair market value of Cencom's Lincolnton, North
Carolina cable television systems. The Lincolnton cable television systems serve
several communities northwest of Charlotte, North Carolina (referred to in the
aggregate as the "Systems") that, as of March 31, 1996, passed 28,447 homes and
served 14,720 equivalent basic subscribers ("EBUs"). The "Valuation Date" of the
appraisal of the Systems was March 31, 1996.
<TABLE>
<CAPTION>
MILES OF ANNUALIZED CASH
PLANT / EQUIVALENT FLOW FOR THE
NUMBER OF HOMES BASIC UNITS / PAY UNITS / THREE
SYSTEMS HEADENDS HOMES/ MILE PASSED PENETRATION PENETRATION M/E 3/31/96
- ---------------------------------- ----------- ------------- --------- -------------- ------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Lincolnton........................ 407 / 1 49 20,089 10,243 / 51.0% 4,741 / 46.3% --
Vale.............................. 111 / 1 10 1,133 582 / 51.4% 219 / 37.6% --
Taylorsville...................... 320 / 1 23 7,225 3,895 / 53.9% 1,575 / 40.4% --
Total............................. 838 / 3 34 28,447 14,720 / 51.7% 6,535 / 44.4% $ 2,775,084
</TABLE>
This report summarizes Daniels' conclusions and provides an outline of the
scope of the engagement, the process used, an overview of the Systems, the
valuation methodology, the assumptions relied upon and an explanation of the
values derived.
PROCESS
Daniels prepared an independent appraisal analysis to determine the fair
market value of the Systems as of March 31, 1996. The Systems were appraised on
a going-concern basis, in conformance with standard appraisal techniques,
utilizing a ten-year discounted net cash flow analysis and applying relevant
market and economic factors. The appraisal assumes that the Systems have been
and will continue to be operated as efficiently as comparable cable systems, and
that the franchises and leases of assets used in the operation of the Systems
will be renewed indefinitely without material changes, other than rebuild
requirements (see "The Systems" section below).
The appraisal process included discussions with Cencom's management,
research of published demographic information concerning the various communities
served, and analyses of historical and forecasted financial and operating
information, as well as Daniels' general knowledge about the cable television
industry. Daniels' personnel did not visit the Systems as part of this
appraisal; however, Daniels' personnel did visit the Systems for a previous
appraisal of the Systems which it prepared as of March 31, 1995. From Daniels'
due diligence, a summary of the relevant operating, technical, financial and
demographic characteristics of the Systems was prepared. These characteristics
of the Systems were instrumental in determining value.
In order to assess the fair market value of the Systems, a detailed
operating and financial forecast was prepared incorporating the critical
elements of operating revenues and expenses as well as capital expenditure
requirements. This financial forecast then formed the basis for determining a
discounted cash flow value, a standard valuation methodology used within the
industry. In addition, using the market multiple valuation methodology, an
aggregate value for the Systems was derived by analyzing value per subscriber
and operating cash flow multiples obtained in private market sales of comparable
cable television systems, and then by applying those comparable market multiples
to the Systems. The products of these two valuation methodologies were then
analyzed to determine a final appraised value for the Systems as of March 31,
1996.
2
<PAGE>
THE SYSTEMS
Two of the Systems, accounting for approximately 74% of the subscriber base,
serve Lincolnton and surrounding communities located approximately 30 miles
northwest of Charlotte and 17 miles directly north of Gastonia. The other system
serves Taylorsville and surrounding Alexander County, approximately 37 miles
north of Lincolnton, on the outskirts of Hickory, North Carolina. As of March
31, 1996, the Systems passed 28,447 homes and served 14,720 equivalent basic
units. Cencom acquired the Systems in June 1990.
The Systems are served from three headends, referred to as Lincolnton, Vale,
and Taylorsville. Lincolnton, a 330 MHz addressable system (approximately 2,400
addressable subscribers), serves approximately 70.0% of the subscribers with 407
miles of plant. The Vale system, built in 1989, serves approximately 4.0% of the
subscriber base in west Lincoln County from 111 miles of 450 MHz plant and a
single headend. The remaining 26.0% of the subscribers are served from the
Taylorsville headend, a 300 MHz system with 320 miles of plant. Over the last
three years, all new plant and extensions have been built to 450 MHz.
The Lincolnton headend site is leased, while the Vale and Taylorsville sites
are owned. All three headends utilize primarily Scientific Atlanta, Jerrold and
General Instruments equipment. The plant electronics are a combination of
Scientific Atlanta, Jerrold and Magnavox. Pay security is controlled with
addressability and negative traps in the Lincolnton system, negative traps in
the Vale system, and positive and negative traps in the Taylorsville system.
There are seven franchises covering the Systems, with expiration dates
ranging between 1998 and 2000. The franchises for Lincolnton and Lincoln County,
accounting for approximately 56% of the subscriber base, do not expire until
September 2000. Cencom believes that they have strong relationships with all of
the franchising authorities.
All three systems offer both a Basic and an Expanded Basic service. The
Lincolnton and Vale systems offer identical 14 channel Basic and 23 channel
Expanded Basic packages. The rates vary by franchise area, with Basic ranging
from $7.34 to $7.78 and Expanded Basic service from $16.01 to $16.40. The
Taylorsville system offers a 12 channel Basic for $6.54 to $7.46, and a 22
channel Expanded Basic service for $15.18 to $15.55. Lincolnton, Lincoln County,
and Taylorsville have all certified and perfected to regulate Basic rates. There
have been no valid complaints filed against the Expanded Basic rate in any of
the Systems.
The annualized revenue and cash flow for the three-month period ended March
31, 1996 for the Systems was $5.4 million and $2.8 million, respectively. This
equates to an average monthly revenue per EBU of $31.04 and average annual cash
flow per EBU of $190.41. The Systems' average monthly revenue is $2.76 below
that of the cable television industry's 1995 average of approximately $33.80,
while its annual cash flow per EBU is above the industry average of $182.52 for
the year 1995, as reported by Paul Kagan Associates, Inc., Cable TV Investor.
Lincolnton and Lincoln County are located approximately 25 miles northwest
of Charlotte, the state's largest city and one of the top ten growth regions in
the United States. The economy of this area is a mix of manufacturers, including
textiles and specialty yarns, cutting tools, pharmaceuticals, roller bearings,
and furniture. In addition, there is a large agricultural (orchards and
processing) and poultry production base. Some of the largest area employers
include Timken, Vermont American, Naska Pharmaceuticals, Kawai American,
Chocrane Furniture, Textilgruppe Hof, and R-Anell Homes.
According to National Decision Systems ("NDS"), an independent demographic
service, the population of Lincoln County, for which Lincolnton serves as the
largest city and county seat, increased 17.2% from 1990 to 1996, and is
projected to increase an additional 14.3% over the next five years. The number
of households in Lincolnton County increased 22.9% during the last six years,
and are projected by NDS to increase an additional 16.0% during the next five
years. Much of the growth in Lincoln County is directly attributable to the
strong economy and growth of nearby Charlotte. As Charlotte expands, many people
are moving into Lincoln County seeking larger homes at lower prices and lower
property taxes.
3
<PAGE>
The Taylorsville and Alexander County system, located on the outskirts of
Hickory, serve approximately 26% of the subscriber base, with the majority of
the subscribers in the county. This area has grown as a bedroom community to
Hickory, and because of its location between Hickory and Winston-Salem. During
the period 1990 to 1996, the population of Alexander County increased 11.1% and
the number of households grew by 14.2%. NDS projects that the population and
households in the county will increase an additional 9.0% and 9.8%,
respectively, over the next five years.
The lack of excess channel capacity, the reality of near-term competition
from alternative multi-channel video providers, and the potential to provide
ancillary telecommunications and data services suggest that a rebuild or upgrade
of all of the Systems would be prudent in the near term, although there are no
current franchise requirements to rebuild or upgrade any of the Systems. Daniels
has estimated the cost per mile to rebuild a system to 550 MHz at $15,000/mile
for aerial and $18,000/mile for underground, and to upgrade from 450 MHz to 550
MHz at $6,000/mile for aerial and $9,000/mile for underground. Daniels assumed
that the Vale system would be upgraded to 550 MHz and that the Lincolnton and
Taylorsville systems would be rebuilt to 550 MHz at a total cost of
approximately $10.9 million. Daniels believes that these cost estimates are
reasonable representations of the costs (design, cable plant, electronics and
labor) associated with rebuilding and/or upgrading the Systems. These cost
estimates do not, however, include the costs associated with upgrading and
changing out converters, which Daniels has added as an additional capital
requirement in its forecast in addition to the rebuild/upgrade estimate.
METHODOLOGY
In order to appraise the fair market value of the Systems as of March 31,
1996, Daniels used two valuation methodologies: (i) a discounted cash flow
("DCF") valuation analysis; and (ii) an analysis of market multiples realized
from comparable private market cable transactions. The respective aggregate fair
market values of the Systems from each valuation methodology used were then
compared, and a final valuation was derived.
DISCOUNTED CASH FLOW
This methodology measures the present value of the Systems' forecasted net
cash flows, defined as pre-tax operating income less capital expenditures
including all rebuild/upgrade costs. The Systems' forecasted net cash flow is
determined through the creation of a long-range operating forecast which
provides for detailed forecasts of critical revenue and expense components. A
residual value was forecasted based on growth of the Systems' net cash flow into
perpetuity, and discounted back to the present at the same discount rate as the
forecasted net cash flow. Daniels prepared a detailed 10-year revenue, cash flow
and capital expenditure forecast for the combined Systems.
The revenue forecasts were based upon Daniels' forecast of homes passed,
subscriber penetration levels and rates and non-subscriber based revenue
sources. The expense forecasts were based primarily on assumed rates of
inflation over the forecast period, and were adjusted for particular growth
characteristics. The capital expenditure forecasts were based upon costs
associated with the construction of new miles of plant, plant maintenance and
rebuild/upgrade requirements, replacement of converters, and the periodic
replacement of vehicles. Daniels believes some of the markets served by the
Systems offer an opportunity for the Systems to provide ancillary
telecommunications and data services; however, because the technology, costs and
revenue potential are uncertain, Daniels did not include telephony or data
services revenue, expenses or capital costs in its forecasts.
To determine the appropriate discount rate for this valuation, Daniels
attempted to approximate the weighted average cost of capital using an array of
entities within the cable television industry that are capable of consummating
an acquisition similar in size to the acquisition of these Systems. The weighted
average cost of capital is an entity's required return on an investment
necessary to satisfy the expectations of all of the entity's investors, both
debt and equity. An entity, therefore, will be willing to pay a price for an
investment as high as the value that will allow it to meet its weighted average
cost of capital or hurdle rate requirement.
4
<PAGE>
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.
<TABLE>
<CAPTION>
ASSUMED CAPITAL STRUCTURE % OF TOTAL CAPITAL COST OF CAPITAL
- ------------------------------------------------------------- --------------------- -----------------
<S> <C> <C>
Debt......................................................... 60.0% 8.0%
Equity....................................................... 40.0% 23.0%
Total Weighted Average Cost of Capital....................... 100% 14.0%
</TABLE>
The DCF value of the Systems arrived at from this analysis was $27.1
million, which is equal to 9.8 times the annualized operating cash flow for the
three-month period ended March 31, 1996, and $1,841 per EBU.
<TABLE>
<CAPTION>
DISCOUNTED CASH FLOW MULTIPLE OF THREE M/E 3/31/96
SYSTEM VALUATION ANNUALIZED CASH FLOW VALUE/EBU
- -------------------------------------------------- -------------------- ------------------------------- -----------
<S> <C> <C> <C>
Lincolnton, North Carolina........................ $ 27,103,230 9.8 $ 1,841
</TABLE>
COMPARABLE TRANSACTIONS
In addition to the DCF valuation methodology, Daniels also used the
comparable transactions methodology, which is another generally accepted
valuation methodology used to correlate and validate the findings of the DCF
method with the realities of the private market. Under this method, the market
multiples reported in sales of cable systems of similar size, markets and
technical condition are compared to the subject Systems. In the case of cable
television system values, the most commonly used market multiples are (i) a
multiple of operating cash flow and (ii) the price per subscriber. Because
detailed financial, operating and technical information is not generally
available regarding private cable system transactions, it is difficult to relate
specific transaction values and multiples directly to the subject Systems.
However, through an analysis of both the range and average of the market
multiples derived from a group of comparable system transactions, about which
information is available, this methodology provides a general measure of the
market multiples realized from comparable transactions, which are then applied
to the subject Systems in order to assess fair market value.
COMPARABLE SALE TRANSACTIONS
<TABLE>
<CAPTION>
NO. OF PRICE/ CF
SYSTEM BUYER SELLER SUBSCRIBERS PRICE SUBSCRIBER MULTIPLE DATE
- -------------------------- ----------------- ------------------ ------------- ------------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Various North Carolina.... Charter Masada 21,300 $ 36,000,000 $ 1,690 9.1 12/95
Kona, HI.................. Time Warner ACT 4 16,900 $ 31,300,000 $ ,1852 9.5 7/95
Columbus, MS.............. Post-Newsweek Columbus TV 15,700 $ 23,000,000 $ 1,465 9.5 2/96
Russellville, AR.......... TCA Time Warner 15,000 $ 27,000,000 $ 1,800 10.0 5/95
Orangeburg, SC............ Jones Intercable Jones Cable Fund 12,000 $ 18,350,000 $ 1,529 8.8 8/95
Salem, NJ................. Lenfest Time Warner 7,400 $ 14,200,000 $ 1,919 9.9 9/95
------ ------------- ----------- ---
Total / Average of System Comparables............................ 88,300 $ 149,850,000 $ 1,697 9.4
</TABLE>
- ------------------------------
SOURCE: Paul Kagan Associates, Inc. Cable TV Investor through March 31, 1996 and
Daniels & Associates' Data Base as of March 31, 1996
The comparable transactions analysis yields a cash flow multiple range of
8.8 to 10.0 times cash flow and a weighted average for all of the transactions
of 9.4 times cash flow. The range for the value per subscriber is between $1,465
and $1,919 with an overall weighted average of $1,697 per subscriber.
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 Lincolnton Systems described in this appraisal report. Under the
Procedures Letter, which was sent to all potential bidders, the General Partner
had a Bid Option Right to submit a higher bid within two business days than the
highest third-party bid received, with the condition that the General Partner's
bid had to exceed the highest bid proposal received by at least 0.5%. If the
General Partner exercised his Bid Option Right, Daniels was then required to
notify the previously highest bidder and allow him a similar bid right within
two business days. The Procedures Letter allowed for this Secondary Bid Process
to continue until the highest binding cash Proposal was received.
Daniels conducted the sales process, and on January 31, 1996 received a high
bid proposal for the Systems of $26,600,000 from G Force LLC ("G Force").
Subsequently, on February 7, 1996 G Force submitted a letter to Daniels
withdrawing its bid. The second highest bid proposal was $25,050,000 from Falcon
Cable TV ("Falcon"). Within two business days, the General Partner submitted a
higher bid, to which Falcon then topped the General Partner's bid. This process
continued until March 6, 1996, when Falcon submitted a bid letter for
$27,500,000 and the General Partner chose not to top Falcon's bid. This then
became the final purchase price for the Systems.
MATERIAL RELATIONSHIPS
Daniels has no ownership position in Cencom; however, from time to time
Daniels has rendered various investment banking and brokerage services to Cencom
and its General Partner for customary and reasonable compensation. In addition,
at the present time Daniels has two active engagement agreements with Cencom and
its affiliates related to the sale of this and certain other cable television
systems owned by Cencom and affiliates of Cencom. Daniels does not believe that
these prior and present relationships in any way affect its ability to fairly
and impartially render the opinion of value expressed herein.
VALUATION
Based on the analyses using the above-described methodologies, the estimated
fair market value of the Systems, as of March 31, 1996, is 9.8 times the
annualized operating cash flow for the three-month period ended March 31, 1996.
This translates to a gross value of $27.2 million, and a value per EBU of
$1,848.
Our opinion of value expressed in this appraisal is based on financial and
operating information provided to Daniels by Cencom, as well as published
demographic information for the service areas. While Daniels believes such
sources to be reliable and accurate, it has not independently verified any such
information. The valuation is based on information available to Daniels as of
the valuation date. Daniels undertakes no responsibility for updating this
opinion to reflect changes in the value of the assets subsequent to the
valuation date of March 31, 1996, such as market, economic, technological,
operational, governmental and other changes.
6
<PAGE>
FAIR MARKET VALUE APPRAISAL FOR
CENCOM PARTNERS, L.P.
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
<PAGE>
BACKGROUND AND LIMITING CONDITIONS
Western was asked by Cencom Partners, Inc., as general partner of Cencom
Partners 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 LaGrange, Texas,
Abbeville, SC, Lincolnton, NC, and Sanford, NC.
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 historical
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 engagment
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.
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 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.
2
<PAGE>
LAGRANGE GENERAL DESCRIPTION
The system serves five communities in south-central Texas, located 90 miles
northwest of Houston, and 60 miles southeast of Austin.
<TABLE>
<S> <C> <C>
Homes Passed.................................................. 9,820
Residential Basic Subs........................................ 6,074 (62%)
Commercial/Bulk EBU's (207 units)............................. 26
Total EBU's............................................... 6,100
Pay Units..................................................... 2,443 (40%)
Plant Miles................................................... 171
Homes Per Mile................................................ 58
Number of headends............................................ 2
Average subs per headend...................................... 3,000
Channels in use............................................... 36
Plant Channel Capacity........................................ 40
</TABLE>
The system operates from a single office in LaGrange. (This office also
operates several headends owned by CCIP II, but this appraisal considers only
the systems owned by CCP.) One headend serves Giddings; another headend in
Schulenberg serves that town, plus Weimar, Halletsville, and LaGrange by CARS
microwave with receivers in each town.
<TABLE>
<CAPTION>
HEADEND PASSINGS
- ---------------------------------------------------------------------------- -----------
<S> <C> <C>
Giddings.................................................................... 1,900 (18%)
Schulenberg................................................................. 1,800 (17%)
LaGrange.................................................................... 2,850 (27%)
Weimar...................................................................... 1,850 (18%)
Hallettsville............................................................... 2,045 (20%)
Total................................................................... 10,445 (100%)
</TABLE>
Giddings is an "oil patch" community, with some ranching in the area. The
LaGrange economy is based on local services for the ranching and farming in the
area, but also has some light manufacturing and oil. Oil activity in both towns
is increasing slightly as a result of new drilling techniques. There is a large
power plant just north of LaGrange. LaGrange is also a county seat. Schulenberg,
which is located on I-10, has several small manufacturing plants which produce
components sold to larger Houston companies. Weimar and Halletsville are also
near I-10, and have manufacturing plants producing cabinets and wood products.
Some residents in the last 3 towns commute to the Houston area, which is about
an hour away.
All towns have a relatively dense core with a normal mix of older homes.
There are few new subdivisions, and some multifamily housing areas. Typical
3-bedroom homes sell for $60,000 or so. The towns are well-maintained, clean,
and stable.
The retired segment is higher than normal, but otherwise the demographics
are lower-income blue-collar. Unemployment is low.
3
<PAGE>
ABBEVILLE GENERAL DESCRIPTION
The system serves the small rural town of Abbeville, South Carolina, located
about 40 miles south of Greenville, SC.
<TABLE>
<S> <C> <C>
Homes Passed.................................................... 3,829
Residential Basic Subs.......................................... 2,515 (66%)
Commercial/Bulk EBU's (37 units)................................ 19
Total EBU's................................................. 2,534
Pay Units....................................................... 883 (35%)
Plant Miles..................................................... 80
Homes Per Mile.................................................. 48
Number of headends.............................................. 1
Plant Channels In Use........................................... 49
Plant Channel Capacity.......................................... 60
</TABLE>
Abbeville has a downtown retail and service base, and a number of
manufacturing plants including textiles such as carpet yarn, towels, fabric, and
tire cord. CSX Railroad is also a significant area employer. Some residents
commute to nearby Greenwood (12 miles). The overall economy in South Carolina is
quite strong; Abbeville employers are all stable or growing slightly.
Unemployment is low.
Abbeville is a lovely old town, with a number of carefully-restored homes
dating from before the Civil War, and many large homes built in recent years.
There are several subdivisions, in which a few new homes are being built. The
balance of the town is comprised of typical older small homes priced in the
$60,000-- $90,000 range.
Residents can be described as middle-class working family. There are a few
low-income areas. There is no unusual retirement segment or seasonality.
LINCOLNTON GENERAL DESCRIPTION
The system principally serves the community of Lincoln County, including the
city of Lincolnton. This area is located midway between Charlotte and Hickory
(about 25 miles from each.) The operations also include a separate headend
serving the town of Taylorsville, about 45 minutes north of Licolnton.
<TABLE>
<S> <C> <C>
Homes Passed................................................... 28,500
Residential Basic Subs......................................... 14,199 (50%)
Commercial/Bulk EBU's (379 units).............................. 98
Total EBU's................................................ 14,297
Pay Units...................................................... 6,566 (46%)
Plant Miles.................................................... 800
Homes Per Mile................................................. 36
Number of headends............................................. 3
Channels in use (typical)...................................... 44
Plant Channel Capacity......................................... 42-44
</TABLE>
The system is served by three headends. This appraisal is being done on the
aggregate system, but the approximate breakout may be helpful:
<TABLE>
<CAPTION>
NAME SUBSCRIBERS
- --------------------------------------------------------------------------------- ---------------
<S> <C>
Lincolnton/Lincoln Co............................................................ 69%
Vale (remote area in L.C.)....................................................... 4%
Taylorsville..................................................................... 27%
</TABLE>
4
<PAGE>
Lincoln County is a sprawling small-town/rural area. It stretches from small
farming areas on the west to an affluent Charlotte "bedroom" area on the east.
The east end is located on a beautiful lake. Lincolnton itself is a busy
community with a broad mix of retail and service. Lincoln County manufacturers
include ball bearings, tools, pharmaceuticals, textiles, and furniture. About
40% of the area residents commute to a broad range of manufacturing, finance,
and service jobs in Charlotte (30-45 minutes). The overall economy in North
Carolina is strong, and employers are all stable or growing. Unemployment is
low.
There is a relatively dense "small-town" area in Lincolnton with a normal
mix of older homes. Numerous new subdivisions are scattered throughout the
surrounding areas, particularly in the east end. Some of the subdivisions are
quite large, and include planned and gated-communities. The eastern subdivisions
located on the lake include large homes valued at around $300,000. New homes in
other areas are priced around $150,000, and older homes range downward. There
are some multi-family projects, but the area is mostly single-family. New homes
are typically valued at $70,000--$150,000, with some much higher and lower. The
market is brisk, and homes sell quickly. Demographics cover a broad range from
low-income rural to wealthy professional. The area would be described as
"typical" overall.
Taylorsville is a similar area. Local industry includes principally
furniture and components, and many residents commute to Hickory.
Demographics cover a full range from rural low-income to high-income
professional, and overall would be considered average.
SANFORD GENERAL DESCRIPTION
The system serves four outlying communities located southwest of
Raleigh/Durham, NC.
<TABLE>
<S> <C> <C>
Homes Passed................................................ 20,759
Residential Basic Subs...................................... 12,300 (59%)
Commercial/Bulk EBU's (1,125 units)......................... 145
Total EBU's............................................. 12,445
Pay Units................................................... 6,083 (49%)
Plant Miles................................................. 428
Homes Per Mile.............................................. 48
Number of headends.......................................... 4
Channels in use (typical)................................... 40
Plant Channel Capacity...................................... 40
</TABLE>
The system is served by four headends, but most subscribers are located in
Sanford:
<TABLE>
<CAPTION>
HEADEND SUBSCRIBERS
- --------------------------------------------------------------------------- -----------
<S> <C> <C>
Sanford.................................................................... 8,850 (72%)
Siler City................................................................. 1,600 (13%)
Whispering Pines........................................................... 985 (8%)
Troy....................................................................... 860 (7%)
</TABLE>
Sanford is a fairly large industrial and agricultural community located
about 45 minutes from Raleigh. Local manufactured products include brick,
electrical equipment, automotive parts, and some pharmaceuticals. A lovely gated
development just north of town, with golf courses, lakes, and more expensive new
homes, attracts a number of Raleigh commuters. Raleigh/Durham is one of the
major medical research centers in the world.
Siler City is a small industrial community about an hour from Raleigh, with
several small wood product and food processing plants. Whispering Pines, about
20 miles south of Sanford, is more dependent
5
<PAGE>
on the numerous golf resorts in nearby Southern Pines. Troy, further west of
Whispering Pines, is a more rural agricultural community.
All towns have a relatively dense core with a normal mix of older homes.
There are several small new subdivisions, and some multifamily housing areas.
Carolina Trace, in Sanford (mentioned earlier) is the largest subdivision, with
3200 lots and 670 existing homes; its build-out rate is about 25 homes/year.
There are some multi-family projects, but the area is mostly single-family. New
homes are typically valued at $70,000--$130,000, with some much higher and
lower.
Demographics cover a broad range from low-income rural to wealthy
professional. The area would be described as "typical" overall.
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 predicable changes in operations.
FIRST-YEAR PROJECTION
We first prepared a detailed Projected-Year statement of operating income
for the systems. To do so, we reviewed the company's 1992, 1993, 1994, and
1995/Ql 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/Ql rates, plus appropriate adjustments for additional actual 1995 rate
changes. Other revenue items were based on consideration of past results and
trends, and 1995/Q1 results
Certain Projected-Year expense items such as programming costs which are
based on subscribers or revenue have been adjusted to match the subscriber and
revenue projections shown, using prior-year unit costs or ratios plus an
allowance for increases where appropriate. Overhead items, such as maintenance
and property tax have been based principally on 1992-94 average results, to
reflect longer-term trends. In preparing our detailed analysis, we also reviewed
key operating ratios, such as programming cost/ subscriber, staffing ratios,
copyright and bad debt expense levels, etc. and compared them to industry norms
and our experience.
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.) 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
6
<PAGE>
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.
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
Ten-year free cashflow was projected, as discussed previously. The annual
free cashflow was discounted using an average cost of capital.
7
<PAGE>
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
ey factors, including growth, demographics, competition, system construction,
opportunity for new revenues, operations, marketability.
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>
Single larger systems
Newport News, VA........................................................ 11/94 48,000 2,542 9.0
Anaheim, CA............................................................. 11/94 135,000 2,119 10.5
Ansonia, CT............................................................. 6/94 32,000 2,667 11.7
Henderson, NC........................................................... 1/95 14,100 1,634 10.5
Small systems
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
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
</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 7.5 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.
8
<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:
<TABLE>
<S> <C>
Total Discounted Cashflow Value................................. 61,829,000
Minimum Total Value............................................. 59,700,000
Maximum Total Value............................................. 62,150,000
</TABLE>
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 $60,900,000. The multiples and per-subscriber
values implicit in this appraised value are:
<TABLE>
<S> <C>
Total EBU Subscriber Count..................................... 35,651
Total Year 1 Projected Op. Income.............................. 6,524,000
Appraised Value................................................ $60,900,000
Implicit Multiple.............................................. 9.33
Implicit Per-Subscriber Value.................................. $ 1,708
</TABLE>
We believe the foregoing appraised value represents the fair market value at
March 31, 1995 of the assemblage of system assets as a going concern, without
any discount imputed for brokers' fees. We believe the appraisal reflects the
relevant and material general market factors, assumptions, and limitations, all
of which are presented in this report. The appraisal was prepared using standard
appraisal techniques, and conforms to Standards 7-10 of the Uniform Standards of
Professional Appraisal Practice.
QUALIFICATIONS OF THE APPRAISER
The appraisal was prepared by R. Michael Kruger, owner and President of
Western Cablesystems, Inc. Since 1979, he has appraised hundreds of systems for
a variety of clients including major MSO's, independent operators, and clients
outside the CATV industry. Kruger has extensive background as a CATV executive.
From 1974 to 1979, he held various operating positions at ATC, one of the
industry's largest operators. In 1979, he joined a small MSO, and until mid-1986
was president of the 30,000-- subscriber company. There, in addition to his
operating duties, Kruger prepared CATV system appraisals
Kruger formed Western Cablesystems, Inc. in 1986, and is its sole owner and
principal. Western has been directly involved in all aspects of system
operations and finance, including several acquisitions and sales, partnership
formation, debt placement, franchising, and system construction and startup.
Western sold one property in 1993, and presently operates three small cable
systems. In addition to continuing appraisal work, Kruger has performed
consulting engagements for a wide range of topics and clients, including the
economic feasibility of international cable and restructuring of individual
systems to achieve financial improvements.
Kruger received a BS/MS in engineering from the Massachusetts Institute of
Technology in 1967/68. In 1974, he received a Masters in Business Administration
(MBA) from the Stanford University Graduate School of Business.
9
<PAGE>
FAIR MARKET VALUE APPRAISAL FOR
SANFORD, NORTH CAROLINA
MARCH 31, 1996 UPDATE
PREPARED FOR
CENCOM PARTNERS, INC
CENCOM PARTNERS, L.P.
PREPARED BY
WESTERN CABLESYSTEMS, INC
R. MICHAEL KRUGER, PRESIDENT
CABLE TELEVISION MANAGEMENT,
CONSULTING, AND APPRAISALS
513 WILCOX, #230
CASTLE ROCK, CO 80104
303-688-4462
<PAGE>
BACKGROUND AND LIMITING CONDITIONS
Western was asked by Cencom to prepare an analysis of the fair market value
as a going concern of the assets of the Sanford, North Carolina cable television
system as of March 31, 1995. We were recently asked to update our work and issue
a new report. This appraisal report is being issued pursuant to the April 28,
1995 and April 19, 1996 engagement letters between Cencom and Western. This
report presents key data, our analysis and assumptions, and our conclusions.
The assets being appraised include, as an assemblage, all of the tangible
and intangible assets and personal property necessary to operate the Sanford
cable television system as a going concern, consistent with past practice and
industry norms. The assets include the antennas and signal receiving equipment,
strand, conduit, cables, amplifiers, passive devices, drops, converters, tools,
test equipment, subscriber records, franchises, pole attachment agreements,
easements, supplier and programming contracts, and goodwill. Financial assets
such as accounts receivable and liabilities are not included.
The appraisal is based principally on financial data provided by Cencom,
including Income Statements for the 12 months ended December 31, 1995, 1994,
1993, and 1992, and 3 months ended March 31, 1996. Management also provided the
operational data presented herein, such as passings and subscriber counts. The
appraiser visited the system in May, 1995. The system manager was interviewed at
length to obtain additional data including subscriber history, technical data,
demographics, and local economic information. The appraiser toured
representative portions of the general market area. This information was
reviewed and updated in 1996 by means of a telephone interview with the manager.
The work herein is based in part on data provided by Cencom and others, and
we assume no responsibility for the accuracy of such data. Western has used
customary techniques and industry knowledge available to Western in preparing
this report. Western does not warrant or represent that the appraised value is
that which would actually be obtained in an open market transaction, or that the
value would be upheld in litigation or administrative proceeding. Accordingly,
Western (including its officers, employees, and owners) does not indemnify or
hold harmless any user of this report in any manner against any costs, losses,
or damages arising out of the use of the appraised value or other conclusions
contained herein.
GENERAL DESCRIPTION
The system serves four outlying communities located southwest of
Raleigh/Durham, NC.
<TABLE>
<S> <C> <C>
Homes Passed................................................... 21,461
Residential Basic Subs......................................... 12,722 (59%)
Commercial/Bulk EBU's (1,125 units)............................ 219
Total EBU's......................................... 12,941
Pay Units...................................................... 5,753 (45%)
Plant Miles.................................................... 448
Homes Per Mile................................................. 48
Number of headends............................................. 4
Channels in use (typical)...................................... 42
Plant Channel Capacity......................................... 42
</TABLE>
The system is served by four headends, but most subscribers are located in
Sanford:
<TABLE>
<CAPTION>
HEADEND SUBSCRIBERS
- --------------------------------------------------------------------------- -------------
<S> <C> <C>
Sanford.................................................................... 8,850 (72%)
Siler City................................................................. 1,600 (13%)
Whispering Pines........................................................... 985 (8%)
Troy....................................................................... 860 (7%)
</TABLE>
2
<PAGE>
Sanford is a fairly large industrial and agricultural community located
about 45 minutes from Raleigh. Local manufactured products include brick,
electrical equipment, automotive parts, and some pharmaceuticals. A lovely gated
development just north of town, with golf courses, lakes, and more expensive new
homes, attracts a number of Raleigh commuters. Raleigh/Durham is one of the
major medical research centers in the world.
Siler City is a small industrial community about an hour from Raleigh, with
several small wood product and food processing plants. Whispering Pines, about
20 miles south of Sanford, is more dependent on the numerous golf resorts in
nearby Southern Pines. Troy, further west of Whispering Pines, is a more rural
agricultural community.
All towns have a relatively dense core with a normal mix of older homes.
There are several small new subdivisions, and some multifamily housing areas.
Carolina Trace, in Sanford (mentioned earlier) is the largest subdivision, with
3200 lots and 800 existing homes; its build-out rate is about 25 homes/year.
There are some multi-family projects, but the area is mostly single-family. New
homes are typically valued at $70,000--$130,000, with some much higher and
lower.
Demographics cover a broad range from low-income rural to wealthy
professional. The area would be described as "typical" overall.
PASSINGS GROWTH
During 1992-1995, the system reports that it has added about 2,273 passings,
or 757/year (about 3.5%). Management believes that about half this amount has
come from new homes, and the balance from short line extensions to existing
homes. This would indicate housing growth of about 1.5% per year, which appears
reasonable based on our field inspection.
Due to capital constraints, not all of the homes built in earlier years were
provided service immediately. Other areas have increased in density, and are now
feasible. The chief engineer indicated there are 5 areas to be built inside the
existing franchise, with a total of about 500 homes on 25 miles of plant.
SUBSCRIBER PENETRATION
The system provided the following data:
<TABLE>
<CAPTION>
PASSINGS BASIC PAY BASIC % PAY %
----------- --------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
12/95.............................................................. 21,455 12,579 5,683 59% 45%
12/94.............................................................. 20,700 12,151 5,759 59% 47%
12/93.............................................................. 20,273 11,666 5,005 58% 43%
12/92.............................................................. 19,182 11,186 5,031 58% 45%
12/91.............................................................. 18,669 n/a n/a n/a n/a
</TABLE>
The 1994 Cable Factbook reports penetrations in nearby Raleigh of 62% basic
and 69% pay. The system is doing well, with normal room for improvement and
gains. Basic should continue to grow at 1% per year.
3
<PAGE>
SUBSCRIBER RATES AND SERVICES
Each headend has slightly different lineups, but all have 38-42 channels in
use. Information for Sanford, which serves most of the customer base, is
summarized below.
<TABLE>
<CAPTION>
CHANNELS RATE
------------ --------------
<S> <C> <C>
Basic.......................................................... 13 7.69
Tier........................................................... 20 14.26
Total.......................................................... 33 $ 21.95
Pay channels................................................... 5 8.45--11.45
Pay-per-view................................................... 2 n/a
Converters..................................................... 1.51--2.19
Remote control................................................. .25
Wire maintenance............................................... .95
</TABLE>
Approximately 99% of the customers take the tier.
Basic includes 9 offair, and WGN and WTBS. The tier is all satellite
services. Pay includes Cinemax, HBO, Showtime, Movie, and Disney. Pay-per-view
offerings are Viewers Choice, an adult programming channel, and events.
There is no fee for additional outlets. Other ancillary services offered
include guides and DMX audio. There are a number of small transaction fees,
including late charges. Typical aerial installation fees are $35. Applicable FCC
and franchise fees are added as a separate charge. There are several package
discounts and promotional rates available from time to time. Rates are
reasonable, and consistent with industry practice.
The system took small quarterly external cost adjustments in 1994 and 1995.
The company plans an increase of $1.50 on June 1, 1996.
RATE REGULATION
Franchisors covering 90% of the customer base are regulating rates. There
have been no tier complaints, and thus no tier regulation to date. The company
feels it is approximately at benchmarks, and there have been no problems with
the franchisors. The company will be deregulated in the near future pursuant to
new FCC regulations.
NON-SUBSCRIBER REVENUE
The company sells spot advertising by an outside contract with Cable AdNet.
There is no other significant revenue source (fiber rental, tower rental,
phone), existing at present or likely in the future.
STAFF AND OPERATIONS
The system operates from a main office in Sanford. There are contract
payment dropoff sites in the remote towns. The office, and all headends, are
leased. Rents are reasonable, expirations and renewals are not a concern, and
there are no unique sites that could not be replaced (although relocation is
always a burden).
The system has a normal complement of test equipment, inventory, and
vehicles, but only one bucket truck. The office staff is well-equipped, and uses
centralized Cabledata billing services.
The system offers customary business-day service Monday through Friday, with
partial staffing Saturday morning. Phones are answered by a central company
facility after hours, and technicians are dispatched on outages if necessary.
4
<PAGE>
Management reports about 30% annual turnover, and 25% annual service call
volume. Backlogs are 2-3 days on installs, and same-day on service. All are
normal.
System staffing can be summarized as:
<TABLE>
<CAPTION>
ITEM OFFICE FIELD OTHER
- ------------------------------------------------------------------- --------- --------- -----------
<S> <C> <C> <C>
Number of employees................................................ 6 10 0
Subs/employee...................................................... 2,100 1,300
Average wage....................................................... 27,400 22,500 --
</TABLE>
The company occasionally uses contract installers to do new installs. Wages
are reasonable for the area. Staff ratios are reasonable, especially considering
the drive time involved.
MARKETING
The system uses contractor commissioned direct salespeople on a regular
basis. Direct mail and newspaper are used from time to time.
FRANCHISES
The major Sanford and Lee County franchises expire in 1997/98, and
discussions have started. Renewal is expected, but it is likely that a rebuild
to 550 Mhz will be required. Three small franchises were recently renewed with
no problems.
COMPETITION
Most areas can receive 6-8 offair signals, with fair to good quality. There
is a local LPTV in Sanford.
There is no cable overbuild, and no contiguous operator, although Time
Warner is close to Whispering Pines and Troy. There is no cable competition for
new subdivisions.
There is no MMDS.
The company believes it may have lost 300 customers (2.5%) to DBS. This
would be a significant loss, but even with a loss of this size, the company
continues to grow.
TECHNICAL PROFILE
Mileage: 296 aerial, 133 underground, no fiber
Headend Electronics: S-A
Plant Electronics: S-A
Amplifier Cascade: 54 in Sanford; others 12-14
Power: About 20% standby
Trunk Cable: 750 P3
Distribution Cable: 500 P3
Pay Security: Some addressability, some program, most traps
Percent of Addressable Subs: 17%
Converter Types: S-A
Estimated Plant Build Dates: Sanford was substantially rebuilt in 1980, and
the other 3 headends were built new in 1982. A substantial expansion was done in
1988-92, and management estimates that about half the plant in place was built
from 1988 through 1995.
5
<PAGE>
Estimated Channel Capacity:
The chief engineer provided the total breakout of plant mileage by capacity.
We made a further estimated breakout by age based on the management estimate
that half the total plant was built after 1988, and adjusting for the fact that
recent construction has been weighted toward underground:
<TABLE>
<CAPTION>
TOTAL POST-88 PRE-88
---------- ----------- -----------
<S> <C> <C> <C>
Aerial
300 Mhz........................................................................... 85 0 85
330 Mhz........................................................................... 118 22 96
450 Mhz........................................................................... 92 92 0
---------- --- ---
Total............................................................................. 295 114 181
Underground
300 Mhz........................................................................... 29 0 29
330 Mhz........................................................................... 58 54 4
450 Mhz........................................................................... 46 46 0
---------- --- ---
Total............................................................................. 133 100 33
Grand Total......................................................................... 428 214 214
</TABLE>
The plant itself appears to be in good condition, but fiber is needed to
reduce the cascade, which would improve reliability and reduce noise problems.
The company will be required to upgrade to 550 mhz for franchise renewal.
The DBS pressure, and general industry trends, will also push the company to
complete a rebuild in the near future.
ESTIMATED UPGRADE COSTS
<TABLE>
<S> <C>
Fiber Overlay
20% x 429 Miles x $6,000/mile.................................... 516,000
Upgrade Pre-1988 300/330 Plant
Aerial, 91 mi at 12,000...................................... 1,092,000
Aerial, 90 @ 5,000........................................... 450,000
U/G, 10 mi @ 24,000.......................................... 240,000
U/G, 23 mi @ 5,000........................................... 115,000
Upgrade Post-1988 300/330 Plant
Aerial, 22 @ 5,000........................................... 110,000
U/G, 54 @ 5,000.............................................. 270,000
Other work, estimate............................................. 707,000
Grand Total Upgrade Cost..................................... 3,500,000
</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.
6
<PAGE>
FIRST-YEAR PROJECTION
We first prepared a detailed Projected-Year statement of operating income.
To do so, we reviewed the company's historic income statements, and used them to
prepare an estimate of projected operating income for the 12 months beginning
April 1, 1996. A projection worksheet is attached.
The Projected-Year subscriber revenues are based on the March 31, 1996
subscriber count, plus allowances for growth, and on 1996/Q1 rates, plus planned
1996 increases. Other revenue items were based on consideration of past results
and trends.
Certain Projected-Year expense items such as programming costs which are
based on subscribers or revenue have been adjusted to match the subscriber and
revenue projections shown, using prior-year unit costs or ratios plus an
allowance for increases where appropriate. Overhead items, such as maintenance
and property tax have been based principally on average results, to reflect
longer-term trends. In preparing our detailed analysis, we also reviewed key
operating ratios, such as programming cost/subscriber, staffing ratios,
copyright and bad debt expense levels, etc. and compared them to industry norms
and our experience. A brief discussion of key individual items follows:
Passings: First-year growth was estimated at 1.5%, the historic
estimate, plus 400 of the existing unserved homes. Thereafter, growth was
estimated at 1% per year.
Basic Penetration: We used a 1--point gain based on recent results.
Pay Penetration: We made a small increase, based on a continuation of
recent small gains.
Average Basic+Tier Revenue/Subscriber: We used the 1996 level, plus an
allowance for the 1996 rate increase.
Average Pay Revenue/Unit: We used recent averages, which are very
stable.
Pay-Per-View Revenues: We allowed for substantial increases on this
area, given renewed marketing efforts.
Advertising: We increased 1995 results, allowing for the new agent.
G&A Salary: Levels and ratios are normal; we used 1995 levels plus 3%
for growth and 3% for inflation.
Office Operation: We used the 1995 level plus 3% for inflation anbd 1.5%
for growth.
Professional Services, Allocated Costs: We made an estimate based on
1995/96 levels.
Operating Wages: Ratios and levels are reasonable; increase 1995 by 6%
for growth and inflation.
Basic Programming: Use 1996 levels plus 5%.
Premium/PPV Programming: We used the average historic levels expressed
as a percentage of revenue.
Marketing/Sales: Industry norms vary from 1% of revenue in classic
systems with little need for sales, to 4% in urban markets. This system is
in the middle at 2%, and we used this level.
TEN-YEAR CASHFLOW PROJECTIONS
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.
7
<PAGE>
Revenue items used are the same as for the first-year analysis. However,
they are based on forecasts for system growth in areas such as passings,
penetration, and revenue/subscriber. The small amount of commercial revenue was
converted to EBU's and for simplicity we did our forecast using total EBU's.
Passings growth was continued at 1%.
Penetration increases: We increased at 1%, reflecting DBS concerns.
Addressable Subs & PPV Revenue/Sub: This system will eventually be 100%
addressable, and should generate good revenue increases. However, it will take
time given the nature of the market.
Basic Rate Increases: Rate regulation and competition will normally limit
increases to 3.25%, just over inflation. However, on completion of the rebuild,
the company can add new channels and achieve 5% increases for a few years.
The ten-year model uses summary expense variables which were calculated from
the one-year information as follows:
Personnel: Salaries, Tax/benefit, Professional services, cost
allocations, and capitalized labor
Per-Subscriber: Office rent, Office Operation, Basic Programming, LO
Programming
Revenue-related: Franchise fee, copyright, bad debt, marketing, and
advertising sales
Premium Programming: Pay and pay-per-view
Per-Mile: Insurance, Property Tax, Pole Rent, Power, System Maintenance
Personnel costs are based on current personnel costs, plus annual
percentage increases to reflect growth and expenses.
We calculated the amounts for the other expense categories on a per-sub or
per-mile, or percentage of revenue basis, as noted. The per-sub and per-mile
costs were increased over the 10-year period as noted. The percentage costs were
held to the same percentage of revenue over 10 years, on the assumption that
gradual increases in unit costs can be passed on to customers.
Capital costs were forecast for several items. New plant costs were
calculated using new plant mileage derived from passings growth at 55 new
homes/mile and an average per-mile cost for new plant (aerial and U/G). Drops
were calculated on the assumption that a certain percentage of existing drops is
replaced each year, and new drops are added equal to growth plus a churn
allowance of 5%. Costs for new addressable converters were allowed based on the
increase in addressable subscribers. Capitalized labor is based on 1995 levels,
plus inflation. The capital costs for vehicles and miscellaneous is estimated
from system size and current vehicle count.
We used the rebuild cost estimates developed earlier in the text, and did
the rebuild in year 2, consistent with franchise requirements.
DETERMINATION OF APPRAISED VALUE
GENERAL METHODOLOGY
Appraisal of income-producing property typically relies on one or more of
three main approaches.
Replacement cost, which is the cost to assemble and put the property into
operation, is not typically used in the cable television industry for valuing a
property as a whole. Cable television system sales include a very substantial
intangible value for franchise, goodwill, and customer lists. Although these
intangibles can be valued separately, more direct approaches to overall value
are easier to use, and more appropriate.
8
<PAGE>
Market value as determined by comparable transactions is a very common
approach for estimates of value. Transaction value is typically reported on the
basis of either per-subscriber cost or operating income multiple. We consider
both ratios, but place more reliance on the income multiple.
The Income Approach is widely used in business valuation, and we use this as
our first approach. Our method involves determination of the discounted present
value of free cashflow generated over ten years, plus an allowance for the
terminal value after ten years.
INCOME APPROACH
Ten-year free cashflow was projected, as discussed previously. The annual
free cashflow was discounted using an average cost of capital calculated as
shown on the spreadsheet.
The FCC cost-of-service rules will permit a cost-of-capital rate of 11.25%,
plus further upward adjustments related to tax matters; the result is typically
in the 12%--13% range. Small cable operators may use even higher numbers,
subject to certain overall limits. We do not believe the FCC cost-of-capital
should be used directly, but do find that the FCC values support our calculation
of 12.6%.
We then added a terminal value based on the resale value of the system in
year 10. The terminal value was calculated at 5 x year 10 cashflow. The industry
will increasingly feel the effects of maturity, regulation and increased
competition. Sale multiples will gradually decline as the opportunities for
growth into new lines are realized or abandoned. Non-cable businesses currently
trade in the 3-6 x cashflow range. Regulated telephone companies presently trade
at around 5-7 x cashflow. Selection of 5x should reflect the industry's gradual
maturity and the relatively slow growth and DBS competition which this system
faces.
The terminal value was then discounted to a present value using the same
discount rate. The discounted cashflow and discounted terminal values were
added, to arrive at the estimate of potential system value shown on the
worksheet.
MARKET VALUE
The prices of cable system transactions are frequently evaluated to
determine the ratio of operating income (income before depreciation, interest,
and management fees) to purchase price; sales results are frequently reported in
the trade press. Per-subscriber values are also widely reported. We consider
principally the multiple of first year projected operating income. To facilitate
our analysis, we compared this system to the overall market with respect to some
key factors. The analysis is subjective, and based on our personal knowledge,
but nonetheless helps to structure the process:
Future passing and subscriber growth: The system has about average
prospects.
Demographics: Demographics are normal.
Competitive situation: Competition is limited to offair signals; the
system is favorably situated in this regard.
System Capacity/Quality: The need for rebuild is a negative.
General Operations: With regard to matters such as staff, franchise
problems, etc., the system is normal.
New Revenues: The economy is good, and the main system is of reasonable
size; there should be average opportunties for new sources.
System marketability: The system is about average, and in an area with
several qualified buyers.
9
<PAGE>
COMPARABLE TRANSACTION DATA
We then select an approximate appropriate multiplier from information
available about other reasonably similar transactions, and the general state of
the market. The following data has been taken from announcements in the trade
press, information from brokers, recent issues of the Cable TV Investor
Newsletter, published by Paul Kagan Associates, and our own knowledge.
<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 valued more highly than rural systems.
After considering all factors, we believe the system would be valued at 9 x
income, or $1,600/subscriber.
APPRAISED VALUE
The multiples calculated by dividing the discounted cashflow approach by
current subscriber count and projected income are:
<TABLE>
<S> <C>
Discounted Cashflow Value....................................... 20,720,000
Current subscribers............................................. 12,941
Projected operating income...................................... 2,589,000
Resulting per-sub value......................................... 1,601
Resulting income multiple....................................... 8.0
</TABLE>
The values calculated by using the same subscriber count, and multiples
selected from market data are:
<TABLE>
<S> <C>
Value, at 9 x operating income less $3,500,000 rebuild......... $19,801,000
Value, at $1,600 per sub....................................... $20,705,000
</TABLE>
The values calculated by the three different methods are generally within a
reasonable range. We place more reliance on the discounted cashflow method,
because it directly incorporates the key variables which impact value. Operating
income multiples reflect the variables, but are more subjective. Per-subscriber
values are useful as broad indicators.
After considering the foregoing, we set the appraised value at $20,700,000.
We believe the foregoing appraised value represents the fair market value at
March 31, 1996 of the assemblage of system assets as a going concern, without
any discount imputed for brokers' fees. We believe the appraisal reflects the
relevant and material general market factors, assumptions, and limitations, all
of which are presented in this report. The appraisal was prepared using standard
appraisal techniques, and conforms to Standards 7-10 of the Uniform Standards of
Professional Appraisal Practice.
10
<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.
11
<PAGE>
CENCOM APPRAISAL FOR SANFORD
HISTORIC INCOME STATEMENTS AND FIRST-YEAR PROJECTION
<TABLE>
<CAPTION>
PROJECTED
1992 ACTUAL 1993 ACTUAL 1994 ACTUAL 1995 ACTUAL 96/Q1 YEAR
----------- ----------- ----------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Ending Homes Passed............ 19,182 20,273 20,700 21,455 21,461 22,561
Ending Basic................... 11,186 11,666 12,151 12,579 12,722 13,424
Subscribers
Ending Pay Subscribers......... 5,031 5,005 5,759 5,683 5,753 6,578
Ending Basic................... 58.32% 57.54% 58.70% 58.63% 59.28% 59.50%
Penetration
Ending Pay Penetration......... 44.98% 42.90% 47.40% 45.18% 45.22% 49.00%
Average Basic Subs............. 10,914 11,426 11,909 12,365 12,651 13,073
Average Pay Units.............. 4,971 5,018 5,382 5,721 5,718 6,165
Avg Basic+Tier Rev/Sub......... $ 22.24 $ 23.02 $ 20.79 $ 21.17 $ 21.54 $ 23.04
Average Pay Rev/Unit........... $ 10.20 $ 9.76 $ 9.88 $ 10.12 $ 9.42 $ 9.77
REVENUE
Basic,Tier Revenue............. 2,912,886 3,155,700 2,970,315 3,140,562 817,345 3,711,411
Ancillary Revenue.............. 367,258 352,872 205,469 247,840 68,033 285,600
Commercial Basic............... 0 0 55,567 66,340 18,334 73,000
Premium........................ 608,243 587,910 638,361 694,581 161,609 722,823
Pay-Per-View................... 0 0 20,824 64,377 18,803 75,000
Installation................... 61,670 64,960 110,740 94,938 22,888 100,000
Advertising.................... 128,833 123,017 141,529 68,485 22,376 90,000
Shopping/Other................. 2,089 1,755 21,214 35,180 8,487 40,000
Franchise/FCC Fees............. 0 0 89,553 110,405 29,737 112,152
Billed
Total Revenue.................. 4,080,979 4,286,214 4,253,572 4,522,708 1,167,612 5,209,986
EXPENSES
G&A Salary..................... 95,195 101,656 121,600 108,096 41,044 114,582
Tax/Benefit-G&A................ 27,840 31,545 30,597 33,563 64,96 34,375
Office Rent.................... 41,520 41,520 43,320 43,314 10,736 44,000
Office Operation............... 98,742 105,611 128,074 176,974 37,607 185,823
Billing........................ 90,046 87,459 108,375 124,319 30,580 117,656
Bad Debt/Collection............ 87,935 89,431 53,797 89,748 10,287 62,520
Professional Services.......... 31,527 57,669 719 119 0 2,000
Insurance...................... 27,650 28,208 25,311 36,700 8,705 38,000
Property Tax................... 41,074 38,232 42,500 39,452 8,751 40,000
Franchise/FCC/Copyright........ 124,055 143,863 143,333 114,134 29,687 175,577
Cost Allocation................ 0 0 77,568 16,649 4,350 17,000
Operating Wages,............... 220,452 208,562 246,242 256,296 56,153 271,674
Overtime
Tax/Benefit- Op Wages.......... 42,731 42,930 46,839 43,692 11,624 54,335
Labor Capitalized.............. (47,176) (40,751) (61,225) (49,851) (16,810) (50,000)
Pole Rent...................... 92,616 49,998 52,818 56,254 18,172 60,000
Power.......................... 38,375 41,860 43,182 45,282 12,451 50,000
System Maint.,................. 95,124 105,004 99,441 153,257 30,181 165,000
Operation
Programming-Basic.............. 348,679 408,711 431,278 519,293 143,705 666,718
Programming-Premium............ 271,230 268,466 290,319 291,321 72,657 332,499
Programming-PPV................ 0 0 15,388 37,564 10,209 45,000
Programming-LO, Other.......... 2,217 2,120 9,573 29,364 10,174 40,000
Marketing/Sales................ 99,760 81,107 83,899 99,945 13,886 104,200
Cost of Advertising............ 62,688 67,943 72,499 36,384 0 49,500
Sales
Total Expenses................. 1,892,280 1,961,144 2,105,447 2,301,869 550,645 2,620,456
Operating Income............... 2,188,699 2,325,070 2,148,125 2,220,839 616,967 2,589,530
Operating Margin............... 53.63% 54.25% 50.50% 49.10% 52.84% 49.70%
</TABLE>
<PAGE>
DISCOUNTED CASHFLOW MODEL FOR APPRAISAL OF SANFORD
<TABLE>
<CAPTION>
CHANGE CURR. PROJ.
ASSUMPTIONS ACTUAL YEAR 1 YEAR 2 YEAR 3 YEAR 4
--------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Ending Passings.................. 21,461 22,561 22,787 23,014 23,245
Passings Growth.................. 1.00% 1.00% 1.00%
Ending Basic EBU's............... 12,941 13,688 14,053 14,423 14,800
Ending Pay Units................. 5,753 6,578 6,788 7,004 7,223
Ending Basic EBU Pen............. 60.30% 60.67% 61.67% 62.67% 63.67%
Basic Penetration................ 1.00% 1.00% 1.00% 1.00%
Change
Pay/Basic Penetration............ 0.25% 44.46% 48.06% 48.31% 48.56% 48.81%
Average Basic EBU's.............. 13,315 13,870 14,238 14,612
Average Pay Units................ 6,166 6,683 6,896 7,113
Addressable Sub %................ 10.00% 17.00% 20.00% 30.00% 40.00% 50.00%
Ending Plant Miles............... 448 483 488 492 497
New Miles........................ 50 35 5 5 5
New Drops........................ 1.05 784 383 389 396
Rebuild Miles.................... 300
Replace Drops %.................. 5.00% 5.00% 15.00% 15.00%
Basic Revenue/EBU................ $ 284.23 $ 293.47 $ 303.01 $ 318.16
Basic Rev/EBU.................... 3.25% 3.25% 5.00%
Increase
Ancillary Rev/EBU................ 4.00% $ 21.45 $ 22.31 $ 23.20 $ 24.13
Pay Revenue/Unit................. 1.50% $ 117.24 $ 119.00 $ 120.78 $ 122.59
PPV Rev/Addr. Sub................ 6.00% $ 28.16 $ 29.85 $ 31.65 $ 33.54
Late/Shop/Oth $/EBU.............. 4.00% $ 3.00 $ 3.12 $ 3.25 $ 3.38
Advertising Rev/EBU.............. 4.00% $ 6.58 $ 6.84 $ 7.11 $ 7.40
Personnel Cost Incr. %........... 3.00% 9.79% 4.80% 4.79% 4.77%
Per-Sub Expense.................. 4.50% $ 74.09 $ 77.43 $ 80.91 $ 84.55
% of Rev. Expense %.............. 8.29% 8.29% 8.29% 8.29%
Pay/PPV Expense %................ 47.32% 47.32% 47.32% 47.32%
Per-Mile Expense................. 4.00% $ 731 $ 760 $ 790 $ 822
Capex per drop................... 2.00% $ 70 $ 71 $ 73 $ 74
Capex per new mile............... 3.00% $ 18,000 $ 18,540 $ 19,096 $ 19,669
Capex per rebuild mile........... $ 11,667 #DIV/0! #DIV/0!
Capex per new adr. sub........... 1.00% $ 100 $ 101 $ 102 $ 103
REVENUE
Basic/Tier/Com'l................. 3,784,411 4,070,536 4,314,247 4,648,848
Ancillary........................ 285,600 309,425 330,333 352,562
Pay.............................. 722,823 795,270 832,897 872,056
Pay-per-view..................... 75,000 124,229 180,231 245,074
Installation..................... 4.00% 100,000 104,000 108,160 112,486
Late/Other/Shop.................. 40,000 43,337 46,265 49,378
Advertising...................... 90,000 94,847 101,256 108,070
Franch. Fee billed............... 2.20% 112,152 115,108 122,827 132,790
Total Revenue.................... 5,209,986 5,656,752 6,036,216 6,521,264
EXPENSES
Personnel........................ 443,966 465,274 487,543 510,816
Per-Sub costs.................... 1,014,197 1,088,077 1,167,033 1,251,399
Per-mile costs................... 353,000 370,550 388,974 408,317
Percent of Rev. costs............ 431,797 468,824 500,274 540,474
Pay & PPV Costs.................. 377,499 435,071 479,373 528,582
Total Expenses................... 2,620,459 2,827,797 3,023,197 3,239,589
OPERATING INCOME................. 2,589,527 2,828,955 3,013,019 3,281,675
Operating Ratio.................. 49.70% 50.01% 49.92% 50.32%
</TABLE>
2
<PAGE>
DISCOUNTED CASHFLOW MODEL FOR APPRAISAL OF SANFORD (CONTINUED)
<TABLE>
<CAPTION>
YEAR 5 YEAR 6 YEAR 7 YEAR 8 YEAR 9 YEAR 10
--------- --------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Ending Passings..................... 23,477 23,712 23,949 24,188 24,430 24,675
Passings Growth..................... 1.00% 1.00% 1.00% 1.00% 1.00% 1.00%
Ending Basic EBU's.................. 15,183 15,572 15,967 16,369 16,777 17,191
Ending Pay Units.................... 7,448 7,678 7,913 8,153 8,398 8,648
Ending Basic EBU Pen................ 64.67% 65.67% 66.67% 67.67% 68.67% 69.67%
Basic Penetration................... 1.00% 1.00% 1.00% 1.00% 1.00% 1.00%
Change
Pay/Basic Penetration............... 49.06% 49.31% 49.56% 49.81% 50.06% 50.31%
Average Basic EBU's................. 14,991 15,377 15,769 16,168 16,573 16,984
Average Pay Units................... 7,336 7,563 7,795 8,033 8,275 8,523
Addressable Sub %................... 60.00% 70.00% 80.00% 90.00% 100.00% 100.00%
Ending Plant Miles.................. 501 506 511 516 520 525
New Miles........................... 5 5 5 5 5 5
New Drops........................... 402 408 415 422 428 435
Rebuild Miles
Replace Drops %..................... 15.00% 5.00% 5.00% 5.00% 5.00% 5.00%
Basic Revenue/EBU................... $ 334.07 $ 350.77 $ 368.31 $ 380.28 $ 392.64 $ 405.40
Basic Rev/EBU....................... 5.00% 5.00% 5.00% 3.25% 3.25% 3.25%
Increase
Ancillary Rev/EBU................... $ 25.09 $ 26.10 $ 27.14 $ 28.23 $ 29.36 $ 30.53
Pay Revenue/Unit.................... $ 124.43 $ 126.30 $ 128.19 $ 130.11 $ 132.07 $ 134.05
PPV Rev/Addr. Sub................... $ 35.56 $ 37.69 $ 39.95 $ 42.35 $ 44.89 $ 47.58
Late/Shop/Oth $/EBU................. $ 3.51 $ 3.66 $ 3.80 $ 3.95 $ 4.11 $ 4.28
Advertising Rev/EBU................. $ 7.69 $ 8.00 $ 8.32 $ 8.65 $ 9.00 $ 9.36
Personnel Cost Incr. %.............. 4.76% 4.75% 4.74% 4.73% 4.72% 4.70%
Per-Sub Expense..................... $ 88.36 $ 92.33 $ 96.49 $ 100.83 $ 105.37 $ 110.11
% of Rev. Expense %................. 8.29% 8.29% 8.29% 8.29% 8.29% 8.29%
Pay/PPV Expense %................... 47.32% 47.32% 47.32% 47.32% 47.32% 47.32%
Per-Mile Expense.................... $ 855 $ 889 $ 925 $ 962 $ 1,000 $ 1,040
Capex per drop...................... $ 76 $ 77 $ 79 $ 80 $ 82 $ 84
Capex per new mile.................. $ 20,259 $ 20,867 $ 21,493 $ 22,138 $ 22,802 $ 23,486
Capex per rebuild mile.............. $ 9,628
Capex per new adr. sub.............. $ 104 $ 105 $ 106 $ 107 $ 108 $ 109
REVENUE
Basic/Tier/Com'l.................... 5,008,144 5,393,899 5,807,999 6,148,254 6,507,001 6,885,198
Ancillary........................... 376,194 401,311 428,005 456,371 486,508 518,524
Pay................................. 912,803 955,196 999,298 1,045,170 1,092,878 1,142,489
Pay-per-view........................ 319,835 405,709 504,020 616,227 743,949 808,155
Installation........................ 116,986 121,665 126,532 131,593 136,857 142,331
Late/Other/Shop..................... 52,688 56,206 59,945 63,917 68,138 72,622
Advertising......................... 115,314 123,013 131,195 139,890 149,128 158,942
Franch. Fee billed.................. 143,566 155,225 167,837 179,191 191,354 202,614
Total Revenue....................... 7,045,529 7,612,224 8,224,830 8,780,613 9,375,813 9,930,875
EXPENSES
Personnel........................... 535,137 560,551 587,108 614,857 643,850 674,142
Per-Sub costs....................... 1,341,533 1,437,815 1,540,650 1,650,469 1,767,729 1,892,919
Per-mile costs...................... 428,625 449,945 472,328 495,828 520,500 546,402
Percent of Rev. costs............... 583,924 630,891 681,663 727,726 777,055 823,058
Pay & PPV Costs..................... 583,236 643,928 711,312 786,109 869,116 922,969
Total Expenses...................... 3,472,455 3,723,131 3,993,061 4,274,988 4,578,250 4,859,491
</TABLE>
3
<PAGE>
DISCOUNTED CASHFLOW MODEL FOR APPRAISAL OF SANFORD (CONTINUED)
<TABLE>
<CAPTION>
YEAR 5 YEAR 6 YEAR 7 YEAR 8 YEAR 9 YEAR 10
--------- --------- --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
OPERATING INCOME.................... 3,573,074 3,889,094 4,231,769 4,505,625 4,797,563 5,071,384
Operating Ratio..................... 50.71% 51.09% 51.45% 51.31% 51.17% 51.07%
CAPITAL EXPENDITURES
Drops............................... 102,813 77,513 185,909 194,293
Addr. Converters.................... 53,763 149,301 158,477 168,009
New plant........................... 630,000 83,656 87,028 90,535
Rebuild............................. 0 3,500,000
Labor capitalized................... 11.26% 50,000 52,400 54,908 57,529
Vehicles............................ 5.00% 40,000 42,000 44,100 46,305
Other............................... 3.00% 75,000 80,000 82,400 84,872
Total Capex......................... 951,576 3,984,870 612,822 641,543
DISCOUNTED FREE CASHFLOW
Operating Income.................... 2,589,527 2,828,955 3,013,019 3,281,675
Less Capital........................ 951,576 3,984,870 612,822 641,543
Expenditures
Free cashflow....................... 1,637,952 (1,155,915) 2,400,197 2,640,132
CAPITAL EXPENDITURES
Drops............................... 203,014 91,737 95,648 99,711 103,932 108,318
Addr. Converters.................... 177,909 188,189 198,860 209,935 221,428 45,335
New plant........................... 94,183 97,979 101,927 106,035 110,308 114,754
Rebuild
Labor capitalized................... 60,268 63,130 66,121 69,246 72,511 75,923
Vehicles............................ 48,620 51,051 53,604 56,284 59,098 62,053
Other............................... 87,418 90,041 92,742 95,524 98,390 101,342
Total Capex......................... 671,413 582,126 608,901 636,735 665,668 507,723
DISCOUNTED FREE CASHFLOW
Operating Income.................... 3,573,074 3,889,094 4,231,769 4,505,625 4,797,563 5,071,384
Less Capital........................ 671,413 582,126 608,901 636,735 665,668 507,723
Expenditures
Free cashflow....................... 2,901,661 3,306,967 3,622,868 3,868,890 4,131,896 4,563,660
</TABLE>
4
<PAGE>
DISCOUNTED CASHFLOW MODEL FOR APPRAISAL OF SANFORD (CONTINUED)
<TABLE>
<S> <C> <C> <C> <C>
DISCOUNT RATE
Discount Rate.......................... 12.60% CALCULATION
--------------------
Net Present Value of Free Cashflow..... 12,981,047 PROPORTION RATE
----------- ---------
Equity.............. 30.00% 20.00%
Senior.............. 60.00% 9.00%
Debt
Sub. Debt........... 10.00% 12.00%
Blended............. 12.60%
</TABLE>
<TABLE>
<S> <C> <C> <C>
TERMINAL VALUE
Year 10 operating income............ 5,071,384
Multiple............................ 5
Terminal Value...................... 25,356,919
Discounted at....................... 12.60% 7,739,494
POTENTIAL VALUE
NPV of Free Cashflow................ 12,981,047
NPV of Terminal Value............... 7,739,494
Total Potential..................... 20,720,542
Value
RATIOS
Current EBU's....................... 12,941
First-year Op. Income............... 2,589,527
Value per EBU....................... $ 1,601
Op. Income Multiple................. 8.00
</TABLE>
5
<PAGE>
FAIR MARKET VALUE APPRAISAL FOR
ABBEVILLE, SOUTH CAROLINA
MARCH 31, 1996 UPDATE
PREPARED FOR
CENCOM PARTNERS, INC
CENCOM PARTNERS, L.P.
PREPARED BY
WESTERN CABLESYSTEMS, INC
R. MICHAEL KRUGER, PRESIDENT
CABLE TELEVISION MANAGEMENT,
CONSULTING, AND APPRAISALS
513 WILCOX, #230
CASTLE ROCK, CO 80104
303-688-4462
<PAGE>
BACKGROUND AND LIMITING CONDITIONS
Western was asked by Cencom to prepare an analysis of the fair market value
as a going concern of the assets of the Abbeville, South Carolina cable
television system as of March 31, 1995. We were recently asked to update our
work and issue a new report. This appraisal report is being issued pursuant to
the April 28, 1995 and April 19, 1996 engagement letters between Cencom and
Western. This report presents key data, our analysis and assumptions, and our
conclusions.
The assets being appraised include, as an assemblage, all of the tangible
and intangible assets and personal property necessary to operate the Abbeville
cable television system as a going concern, operating consistent with past
practice and industry norms. The assets include the antennas and signal
receiving equipment, strand, conduit, cables, amplifiers, passive devices,
drops, converters, tools, test equipment, subscriber records, franchises, pole
attachment agreements, easements, supplier and programming contracts, and
goodwill. Liabilities, and financial assets such as accounts receivable, are not
considered.
The appraisal is based principally on financial data provided by Cencom,
including Income Statements for the 12 months ended December 31, 1995, 1994,
1993, and 1992, and 3 months ended March 31, 1996. Management also provided the
operational data presented herein, such as passings and subscriber counts. The
appraiser visited the system in May, 1995. The system manager was interviewed at
length to obtain additional data including subscriber history, technical data,
demographics, and local economic information. The appraiser toured
representative portions of the general market area. This information was
reviewed and updated in 1996 by means of a telephone interview of the manager.
The work herein is based in part on data provided by Cencom and others, and
we assume no responsibility for the accuracy of such data. Western has used
customary techniques and industry knowledge available to Western in preparing
this report. Western does not warrant or represent that the appraised value is
that which would actually be obtained in an open market transaction, or that the
value would be upheld in litigation or administrative proceeding. Accordingly,
Western (including its officers, employees, and owners) does not indemnify or
hold harmless any user of this report in any manner against any costs, losses,
or damages arising out of the use of the appraised value or other conclusions
contained herein.
GENERAL DESCRIPTION
The system serves the small rural town of Abbeville, South Carolina, located
about 40 miles south of Greenville, SC.
<TABLE>
<S> <C> <C>
Homes Passed................................................. 3,678
Residential Basic Subs....................................... 2,588 (70%)
Commercial/Bulk EBU's (37 units)............................. 35
Total EBU's.......................................... 2,623
Pay Units.................................................... 1,007 (35%)
Plant Miles.................................................. 85
Homes Per Mile............................................... 43
Number of headends........................................... 1
Plant Channels In Use........................................ 50
Plant Channel Capacity....................................... 60
</TABLE>
Abbeville has a downtown retail and service base, and a number of
manufacturing plants including textiles such as carpet yarn, towels, fabric, and
tire cord. CSX Railroad is also a significant area employer. Some residents
commute to nearby Greenwood (12 miles). The overall economy in South Carolina is
quite strong; Abbeville employers are all stable or growing slightly.
Unemployment is low.
Abbeville is a lovely old town, with a number of carefully-restored homes
dating from before the Civil War, and many large homes built in recent years.
There are several subdivisions, in which a few new homes
2
<PAGE>
are being built. The balance of the town is comprised of typical older small
homes priced in the $60,000 - $90,000 range.
Residents can be described as middle-class working family. There are a few
low-income areas. There is no unusual retirement segment or seasonality.
PASSINGS GROWTH
Map and database information was updated in 1995. This resulted in a decline
in passing count from reports for prior years, to the number shown above.
Management estimated that new housing growth has been steady at about 20-30
homes per year.
We expect the area to grow at 30 new homes/year for a number of years. There
are a few feasible short line extensions possible which would add about 40 homes
in the first year. They have not been built due to a lack of capital, but would
be built by a new owner. There are no possible acquisitions.
SUBSCRIBER PENETRATION
The system provided subscriber counts and passings for 3/95 and 3/91; we
estimated passings counts for other years:
<TABLE>
<CAPTION>
PASSINGS BASIC PAY BASIC % PAY %
- -------------------- --------- --- ------------- -----------
<S> <C> <C> <C> <C> <C>
12/95 3,678 2,543 942 69 37
12/94 3,815 2,508 825 66 33
12/93 3,745 2,421 657 65 27
12/92 3,675 2,349 508 64 22
12/91 3,600 2,303 463 64 20
</TABLE>
The 1994 Cable Factbook reports penetrations in nearby Greenwood of 71%
basic and 42% pay.
There has been slow growth in basic penetration, and we expect that it will
continue at a slower rate after the system passes 70%.
SUBSCRIBER RATES AND SERVICES
<TABLE>
<CAPTION>
CHANNELS RATE
------------- --------------
<S> <C> <C>
Basic.............................................................. 12 7.74
Tier............................................................... 29 16.76
Total.............................................................. 41 $24.50
Pay channels....................................................... 4 8.45-11.45
Pay-per-view....................................................... 1 --
Converters......................................................... .78- 1.55
Remote control..................................................... .13
Wire maintenance................................................... .95
</TABLE>
Approximately 80% of the customers take the tier.
Basic includes 9 offair, 1 access, and 2 satellite. The tier has 29
satellite. Pay services are HBO, Disney, Movie, Showtime. Pay-per-view offerings
include only special events.
There is no charge for AO's. Typical aerial installation fees are $35.
Applicable FCC and franchise fees are added as a separate charge. There are a
number of small transaction fees. There are several premium package discounts
and promotional rates. Rates are reasonable, and consistent with industry
practice.
3
<PAGE>
There was no rate change in 1994. The system increased rates in 1995, and
plans an increase of $1.90 on 4/1/96.
RATE REGULATION
None of the franchisors has filed for certification to regulate rates, and
no such action is expected. There are no tier complaints. The local and national
political climate regarding rate regulation is favorable. We do not believe
regulation will be a factor.
NON-SUBSCRIBER REVENUE
The company has historically only sold advertising on the character
generator. The company has a contract with an independent contractor who sells
advertising spots on satellite channels.
There is no other significant revenue source (fiber rental, tower rental,
phone), existing at present or likely in the future.
STAFF AND OPERATIONS
The system has a small office and headend located in the center of town; it
is company-owned.
The system has a normal complement of test equipment, inventory, and three
trucks including a bucket truck. The office staff is well-equipped, and uses a
standalone billing system.
The system offers customary business-day service Monday through Friday.
Phones are answered by a service after hours, and technicians are dispatched on
outages if necessary.
Management reports about 20% annual turnover, and 25% service call volume.
Substantially all work is completed the same day.
System staffing can be summarized as:
<TABLE>
<CAPTION>
ITEM OFFICE FIELD OTHER
- ----------------------------------------------------------------------------- --------- --------- -----------
<S> <C> <C> <C>
Number of FTE employees...................................................... 2 2 0
Subs/employee................................................................ 1,311 1,311
Average wage................................................................. 22,400 30,200 --
</TABLE>
Field wages are a bit higher than normal, because the staff has been with
the company for a very long time, and is capable of independent operation.
Ratios are normal for a small system.
MARKETING
There is an annual direct sales campaign using an outside contractor. The
system uses occasional direct mail and newspaper. The level is appropriate to
the situation.
FRANCHISES
The system has a city franchise which expires in 1999, and a county
franchise which expires in 2000. There are no unusual conditions. Franchise
relations are good.
COMPETITION
Residents can get good reception on 4-5 signals with standard antennas from
Greenville and Spartanburg. Due to distance and terrain, reception is likely to
be a problem from time to time. There is no cable overbuild, and no contiguous
operator. There is no MMDS. DBS impact in the region has been minimal. The
company is competitive on rates and services, and has the added advantage of
offair signals.
4
<PAGE>
TECHNICAL PROFILE
Mileage: 82 aerial, 3 underground, no fiber
Headend Electronics: S-A
Plant Electronics: S-A
Amplifier Cascade: 22
Power: Some areas have standby
Trunk Cable: 750 P3, some 500
Distribution Cable: Mostly 500 P3
Pay Security: Addressability on Movie, Disney, traps on HBO, Show Percent of
Addressable
Subs: 7%
Converter Types: S-A addressable, conventional misc.
Estimated Plant Build Dates: Totally rebuilt in 1985, including cable and
much of the strand.
Estimated Channel Capacity: 60-channel, 450 Mhz
The plant is reported to be in good condition, with no significant or
unusual problems.
This system does not require an upgrade in the foreseeable future. There is
no nearby "big system" to create pressure. The local residents are not likely to
demand the greatly expanded options offered by DBS. The system can probably add
10-15 channels with existing equipment, and satisfy customer demands.
DETERMINATION OF OPERATING INCOME
Appraising the value of cable television systems involves calculation of
historic and projected operating income (commonly called "cashflow"). Operating
income is defined as direct operating revenues less expenses, before capital
expenditures, depreciation, and management fees. The operating income considered
in appraisals is typically that which will be derived by the buyer, using his
cost structure and nominal predictable changes in operations.
FIRST-YEAR PROJECTION
We first prepared a detailed Projected-Year statement of operating income.
To do so, we reviewed the company's historic income statements, and used them to
prepare an estimate of projected operating income for the 12 months beginning
April 1, 1996. A projection worksheet is attached.
The Projected-Year subscriber revenues are based on the March 31, 1996
subscriber count, plus allowances for growth, and on 1996/Q1 rates, plus
appropriate adjustments for additional actual 1996 rate changes. Other revenue
items were based on consideration of past results and trends.
Certain Projected-Year expense items such as programming costs which are
based on subscribers or revenue have been adjusted to match the subscriber and
revenue projections shown, using prior-year unit costs or ratios plus an
allowance for increases where appropriate. Overhead items, such as maintenance
and property tax have been based principally on prior average results, to
reflect longer-term trends. In preparing our detailed analysis, we also reviewed
key operating ratios, such as programming cost/ subscriber, staffing ratios,
copyright and bad debt expense levels, etc. and compared them to industry norms
and our experience. A brief discussion of key individual items follows:
Passings: In the first year, we allowed for construction of postponed line
extensions, and normal
growth of about 30 homes.
Basic Penetration: We reduced past trends as the system passes 70%
Pay Penetration: We continued the past growth.
Average Basic+Tier Revenue/Subscriber: Use 96/Q1 rates plus 1.90
Average Pay Revenue/Unit: Use 96/Q1
Pay-Per-View Revenues: Allow some growth
Advertising: Allow a small increase, related to the new contract.
5
<PAGE>
Shopping/Other: This is fluctuating; use an average.
Franchise Fees Billed: Use the average rate
G&A Salary: Use 1995, plus inflation.
Office Operation: Use an average due to fluctuations.
Billing: Use 1995
Professional Services, Allocated Costs: Use 1995/96 levels
Insurance, Property Tax, System Maintenance, Pole Rent, Power: We checked
the per-mile cost
ratios, and found them to be reasonable.
Operating Wages: Ratios and wages are good; use 1995 plus inflation.
Basic Programming: Use 1996 per-sub levels, plus inflation
Premium/PPV Programming: We used the average historic levels expressed as a
percentage of
revenue.
Marketing/Sales: Industry norms vary from 1% of revenue in classic systems
with little need for
sales, to 4% in urban markets. This system is at 1% and fits the norms; we
used historic levels.
TEN-YEAR CASHFLOW PROJECTIONS
Our principal appraisal technique involves projection of free cashflow for
10 years; free cashflow is equal to operating income less capital expenditures,
but still before depreciation and interest, and taxes. (Projected free cashflow
is then discounted at an appropriate cost-of-capital rate, and a terminal value
is added to get the value of the property.) Our projection for this system is
shown on the two-page spreadsheet enclosed. We started with the data contained
in the first-year projection spreadsheet, and expanded it with the variables and
assumptions shown.
Revenue items used are the same as for the first-year analysis. However,
they are based on forecasts for system growth in areas such as passings,
penetration, and revenue/subscriber. The small amount of commercial revenue was
converted to EBU's and for simplicity we did our forecast using total EBU's.
Passing growth is continued at the same level of about 30 homes/year.
Basic penetration is increased at the same rate of about .5 pt/year.
Addressable Subs & PPV Revenue/Sub: The market is probably less attractive
for PPV due to its demographics, but we have allowed for long term increases in
addressable subs, and in revenue/sub.
Basic Rate Increases: Competition will limit increases to just over inflation,
or 3.25%. However, on completion of the rebuild, the company can add some new
channels and tiers, and should be able to achieve 5% overall increases for a few
years.
The ten-year model uses summary expense variables which were calculated from
the one-year information as follows:
Personnel: Salaries, Tax/benefit, Professional services, cost allocations,
and capitalized labor
Per-Subscriber: Office rent, Office Operation, Basic Programming, LO
Programming
Revenue-related: Franchise fee, copyright, bad debt, marketing, and
advertising sales
Premium Programming: Pay and pay-per-view
Per-Mile: Insurance, Property Tax, Pole Rent, Power, System Maintenance
Personnel costs ae based on current personnel costs, plus annual percentage
increases to reflect growth and expenses. We calculated the amounts for the
other expense categories on a per-sub or per-mile, or percentage of revenue
basis, as noted.
The per-sub and per-mile costs were increased over the 10-year period by
inflation. The percentage costs were held to the same percentage of revenue over
10 years, on the assumption that gradual increases in unit costs can be passed
on to customers.
Capital costs were forecast for several items. New plant costs were
calculated using new plant mileage derived from passings growth and an average
per-mile cost for new plant (aerial and U/G). Drops were
6
<PAGE>
calculated on the assumption that a certain percentage of existing drops is
replaced each year, and new drops are added equal to growth plus a churn
allowance of 5%. Costs for new addressable converters were allowed based on the
increase in addressable subscribers. Capitalized labor is based on 1994 levels,
plus inflation. The capital costs for vehicles and miscellaneous is estimated
from system size and current vehicle count (assuming vehicles are replaced every
5 years).
We allowed a nominal annual amount for plant upgrades.
DETERMINATION OF APPRAISED VALUE
GENERAL METHODOLOGY
Appraisal of income-producing property typically relies on one or more of
three main approaches.
Replacement cost, which is the cost to assemble and put the property into
operation, is not typically used in the cable television industry for valuing a
property as a whole. Cable television system sales include a very substantial
intangible value for franchise, goodwill, and customer lists. Although these
intangibles can be valued separately, more direct approaches to overall value
are easier to use, and more appropriate.
Market value as determined by comparable transactions is a very common
approach for estimates of value. Transaction value is typically reported on the
basis of either per-subscriber cost or operating income multiple. We consider
both ratios, but place more reliance on the income multiple.
The Income Approach is widely used in business valuation, and we use this as
our first approach. Our method involves determination of the discounted present
value of free cashflow generated over ten years, plus an allowance for the
terminal value after ten years.
INCOME APPROACH
Ten-year free cashflow was projected, as discussed previously. The annual
free cashflow was discounted using an average cost of capital calculated as
shown on the spreadsheet.
The FCC cost-of-service rules will permit a cost-of-capital rate of 11.25%,
plus further upward adjustments related to tax matters; the result is typically
in the 12%--13% range. Small cable operators may use even higher numbers,
subject to certain overall limits. We do not believe the FCC cost-of-capital
should be used directly, but do find that the FCC values support our calculation
of 12.6%.
We then added a terminal value based on the resale value of the system in
year 10. The terminal value was calculated at 5 x year 10 cashflow. The industry
will increasingly feel the effects of maturity, regulation and increased
competition. Sale multiples will gradually decline as the opportunities for
growth into new lines are realized or abandoned. Non-cable businesses currently
trade in the 3-6 x cashflow range. Regulated telephone companies presently trade
at around 5-7 x cashflow. Selection of 5x should reflect the industry's gradual
maturity and transformation to a "normal" telecommunications industry, and this
system's small size.
The terminal value was then discounted to a present value using the same
discount rate. The discounted cashflow and discounted terminal values were
added, to arrive at the estimate of potential system value shown on the
worksheet.
MARKET VALUE
The prices of cable system transactions are frequently evaluated to
determine the ratio of operating income (income before depreciation, interest,
and management fees) to purchase price; sales results are frequently reported in
the trade press. Per-subscriber values are also widely reported. We consider
principally the multiple of first year projected operating income. To facilitate
our analysis, we compared this system to the overall market with respect to some
key factors. The analysis is subjective, and based on our personal knowledge,
but nonetheless helps to structure the process:
7
<PAGE>
Future passing and subscriber growth: Abbeville is limited in this area, and
below average.
Demographics: As discussed above, demographics are average.
Competitive situation: Competition is somewhat limited.
System Capacity/Quality: The system is average.
General Operations: With regard to matters such as staff, franchise
problems, etc., the system is
normal.
New Revenues: New revenue opportunities are limited.
System marketability: The system would be a bit difficult to market because
of location and size, and
is thus below average.
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 valued more highly than rural systems.
After considering all factors, we believe Abbeville would be valued at
approximately 8 x operating income, or $1,500/sub.
APPRAISED VALUE
The multiples calculated by dividing the discounted cashflow approach by
current subscriber count and projected income are:
<TABLE>
<S> <C>
Discounted Cashflow Value........................................ 3,988,000
Current subscribers.............................................. 2,623
Projected operating income....................................... 495,000
Resulting per-sub value.......................................... $ 1,520
Resulting income multiple........................................ 8.05
</TABLE>
The values calculated by using the same subscriber count, and multiples
selected from market data are:
<TABLE>
<S> <C>
Value, at 8 x operating income................................... 3,960,000
Value, at $1,500 per sub......................................... 3,934,000
</TABLE>
The values calculated by the three different methods are consistent and we
set the appraised value at $3,950,000.
8
<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.
9
<PAGE>
CENCOM APPRAISAL FOR ABBEVILLE
HISTORIC INCOME STATEMENTS AND FIRST-YEAR PROJECTION
<TABLE>
<CAPTION>
1992 1993 1994 1995 PROJECTED
ACTUAL ACTUAL ACTUAL ACTUAL 96/Q1 YEAR
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Ending Homes Passed........................ 3,675 3,745 3,815 3,678 3,678 3,710
Ending Basic............................... 2,349 2,421 2,508 2,543 2,623 2,683
Subscribers
Ending Pay Subscribers..................... 508 657 825 942 1,007 1,107
Ending Basic............................... 63.92% 64.65% 65.74% 69.14% 71.32% 72.32%
Penetration
Ending Pay Penetration..................... 21.63% 27.14% 32.89% 37.04% 38.39% 41.26%
Average Basic Subs......................... 2,326 2,385 2,465 2,526 2,588 2,653
Average Pay Units.......................... 485 583 741 884 975 1,057
Avg Basic+Tier Rev/Sub..................... $ 22.13 $ 23.41 $ 20.45 $ 21.69 $ 21.79 $ 23.63
Average Pay Rev/Unit....................... $ 10.73 $ 10.14 $ 10.76 $ 9.84 $ 9.53 $ 9.53
REVENUE
Basic,Tier Revenue......................... 617,577 670,135 604,888 657,473 169,213 752,285
Ancillary Revenue.......................... 71,341 60,324 37,026 44,968 11,093 46,000
Commercial Basic........................... 0 0 8,519 8,843 2,316 9,264
Premium.................................... 62,476 70,903 95,681 104,348 27,873 120,879
Pay-Per-View............................... 3,053 2,657 4,207 5,552 2,637 7,500
Installation............................... 6,591 13,577 18,822 22,875 6,513 26,000
Advertising................................ 10,328 11,874 6,861 7,226 3,857 9,500
Shopping/Other............................. 1,087 698 5,300 5,823 1,649 6,300
Franchise/FCC Fees......................... 0 23,992 26,794 6,753 30,310
Billed
Total Revenue.......................... 772,453 830,168 805,296 883,902 231,904 1,008,037
EXPENSES
G&A Salary................................. 49,248 54,481 54,136 44,747 12,310 47,700
Tax/Benefit-G&A............................ 8,705 10,871 12,362 9,738 2,241 10,494
Office Rent................................ 0 0 0 30 0 0
Office Operation........................... 22,253 27,282 21,438 27,574 7,661 30,000
Billing.................................... 12,029 16,337 11,369 13,245 3,178 14,645
Bad Debt/Collection........................ 9,786 9,402 5,379 10,886 (873) 10,080
Professional Services...................... 6,568 12,105 179 24 0 0
Insurance.................................. 4,779 9,154 6,817 7,036 1,699 7,300
Property Tax............................... 13,992 41,585 22,775 50,334 11,302 48,000
Franchise/FCC/Copyright.................... 24,321 25,603 24,644 28,965 7,294 33,265
Cost Allocation............................ 0 0 16,353 3,555 1,076 4,400
Operating Wages,........................... 53,300 56,181 57,878 60,439 16,824 62,252
Overtime
Tax/Benefit- Op Wages...................... 10,797 11,701 12,913 11,586 3,084 13,073
Labor Capitalized.......................... (9,244) (8,713) (6,645) (28,437) (8,803) (35,000)
Pole Rent.................................. 6,812 8,568 8,514 5,017 2,361 9,500
Power...................................... 6,316 6,447 4,559 6,224 1,585 6,500
System Maint., Operation................... 10,306 9,787 13,222 10,203 2,245 11,000
Programming-Basic.......................... 81,514 103,600 112,232 136,447 37,692 162,364
Programming-Premium........................ 27,667 31,392 39,873 47,448 13,598 56,813
Programming-PPV............................ 2,099 2,396 1,656 2,570 1,131 4,500
Programming-LO, Other...................... 5,155 3,873 561 3,749 1,041 4,000
Marketing/Sales............................ 10,964 9,546 8,424 10,775 1,245 12,096
Cost of Advertising........................ 0 0 0 0 0 0
Sales
Total Expenses......................... 357,367 441,598 428,639 462,155 117,891 512,982
Operating Income........................... 415,086 388,570 376,657 421,747 114,013 495,055
Operating Margin........................... 53.74% 46.81% 46.77% 47.71% 49.16% 49.11%
</TABLE>
<PAGE>
DISCOUNTED CASHFLOW MODEL FOR APPRAISAL OF ABBEVILLE
<TABLE>
<CAPTION>
CHANGE CURRENT PROJ.
ASSUMPTIONS ACTUAL YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5 YEAR 6 YEAR 7
------------- ----------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Ending Passings.... 3,678 3,710 3,780 3,808 3,837 3,866 3,895 3,924
Passings Growth.... 1.89% 0.75% 0.75% 0.75% 0.75% 0.75%
Ending Basic
EBU's............ 2,623 2,716 2,786 2,826 2,866 2,907 2,949 2,990
Ending Pay Units... 1,007 1,107 1,143 1,166 1,183 1,200 1,217 1,234
Ending Basic EBU
Pen.............. 71.32% 73.21% 73.71% 74.21% 74.71% 75.21% 75.71% 76.21%
Basic
Penetration...... 0.50% 0.50% 0.50% 0.50% 0.50% 0.50%
Change
Pay/Basic
Penetration...... 0.25% 38.39% 40.76% 41.01% 41.26% 41.26% 41.26% 41.26% 41.26%
Average Basic
EBU's............ 2,670 2,751 2,806 2,846 2,887 2,928 2,969
Average Pay
Units............ 1,057 1,125 1,154 1,174 1,191 1,208 1,225
Addressable Sub
%................ 10.00% 7.00% 10.00% 20.00% 30.00% 40.00% 50.00% 60.00% 70.00%
Ending Plant
Miles............ 85 86 87 87 88 88 89 89
New Miles.......... 55 1 1 1 1 1 1 1
New Drops.......... 1.05 98 74 42 42 43 43 44
Rebuild Miles
Replace Drops %.... 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00%
Basic
Revenue/EBU...... $ 285.28 $ 294.55 $ 304.12 $ 319.33 $ 335.29 $ 352.06 $ 363.50
Basic Rev/EBU...... 3.25% 3.25% 5.00% 5.00% 5.00% 3.25%
Increase
Ancillary
Rev/EBU.......... 3.00% $ 17.23 $ 17.75 $ 18.28 $ 18.83 $ 19.39 $ 19.98 $ 20.58
Pay Revenue/Unit... 1.50% $ 114.36 $ 116.08 $ 117.82 $ 119.58 $ 121.38 $ 123.20 $ 125.05
PPV Rev/Addr.
Sub.............. 4.00% $ 28.10 $ 29.22 $ 30.39 $ 31.60 $ 32.87 $ 34.18 $ 35.55
Late/Shop/Oth
$/EBU............ 4.00% $ 2.36 $ 2.45 $ 2.55 $ 2.65 $ 2.76 $ 2.87 $ 2.99
Advertising
Rev/EBU.......... 4.00% $ 3.50 $ 3.64 $ 3.78 $ 3.93 $ 4.09 $ 4.26 $ 4.43
Personnel Cost
Incr. %.......... 3.00% 5.12% 5.03% 4.01% 4.01% 4.01% 4.01% 4.01%
Per-Sub Expense.... 4.50% $ 77.69 $ 81.19 $ 84.84 $ 88.66 $ 92.65 $ 96.82 $ 101.17
% of Rev. Expense
%................ 5.50% 5.50% 5.50% 5.50% 5.50% 5.50% 5.50%
Pay/PPV Expense
%................ 47.76% 47.76% 47.76% 47.76% 47.76% 47.76% 47.76%
Per-Mile Expense... 4.00% $ 962 $ 1,000 $ 1,040 $ 1,082 $ 1,125 $ 1,170 $ 1,217
Capex per drop..... 2.00% $ 70 $ 71 $ 73 $ 74 $ 76 $ 77 $ 79
Capex per new
mile............. 3.00% $ 18,000 $ 18,540 $ 19,096 $ 19,669 $ 20,259 $ 20,867 $ 21,493
Capex per rebuild
mile
Capex per new adr.
sub.............. 1.00% $ 100 $ 101 $ 102 $ 103 $ 104 $ 105 $ 106
REVENUE
Basic/Tier/Com'l... 761,549 810,327 853,401 908,895 967,954 1,030,805 1,079,394
Ancillary.......... 46,000 48,828 51,299 53,594 55,989 58,489 61,098
Pay................ 120,879 130,560 135,993 140,431 144,571 148,826 153,200
Pay-per-view....... 7,500 16,077 25,581 35,981 47,442 60,050 73,893
Installation....... 4.00% 26,000 27,040 28,122 29,246 30,416 31,633 32,898
Late/Other/Shop.... 6,300 6,752 7,163 7,556 7,970 8,407 8,867
Advertising........ 9,500 10,008 10,616 11,199 11,813 12,460 13,142
Franch. Fee
billed........... 3.10% 30,310 31,024 32,888 35,133 37,516 40,058 42,204
Total
Revenue........ 1,008,038 1,080,614 1,145,063 1,222,035 1,303,672 1,390,728 1,464,696
EXPENSES
Personnel.......... 102,919 108,101 112,439 116,950 121,640 126,515 131,583
Per-Sub costs...... 211,009 226,199 239,767 254,136 269,355 285,472 302,541
Per-mile costs..... 82,300 86,865 90,876 95,072 99,464 104,059 108,868
Percent of Rev.
costs............ 55,441 59,433 62,977 67,211 71,701 76,489 80,557
Pay & PPV Costs.... 61,313 70,033 77,167 84,253 91,704 99,758 108,458
Total
Expenses....... 512,982 550,630 583,226 617,622 653,863 692,293 732,007
OPERATING INCOME... 495,056 529,984 561,837 604,413 649,809 698,435 732,689
Operating Ratio.... 49.11% 49.04% 49.07% 49.46% 49.84% 50.22% 50.02%
CAPITAL EXPENDI-
TURES
Drops.............. 25,848 25,152 23,636 24,443 25,277 26,138 27,027
Addr. Converters... 8,799 28,849 29,644 30,781 31,953 33,159 34,401
New plant.......... 10,473 23,596 9,843 10,215 10,600 11,000 11,415
Rebuild............ 3.00% 25,000 25,750 26,523 27,318 28,138 28,982 29,851
Labor
capitalized...... 7.77% 8,000 8,403 8,740 9,091 9,455 9,834 10,228
Vehicles........... 5.00% 8,000 8,400 8,820 9,261 9,724 10,210 10,721
Other.............. 3.00% 25,000 25,000 25,750 26,523 27,318 28,138 28,982
Total Capex.... 111,119 145,150 132,955 137,631 142,465 147,461 152,625
DISCOUNTED FREE
CASHFLOW
Operating Income... 495,056 529,984 561,837 604,413 649,809 698,435 732,689
Less Capital....... 111,119 145,150 132,955 137,631 142,465 147,461 152,625
Expenditures
Free cashflow...... 383,937 384,835 428,882 466,782 507,344 550,975 580,064
<CAPTION>
YEAR 8 YEAR 9 YEAR 10
--------- --------- ---------
<S> <C> <C> <C>
Ending Passings.... 3,953 3,983 4,013
Passings Growth.... 0.75% 0.75% 0.75%
Ending Basic
EBU's............ 3,032 3,075 3,118
Ending Pay Units... 1,251 1,269 1,287
Ending Basic EBU
Pen.............. 76.71% 77.21% 77.71%
Basic
Penetration...... 0.50% 0.50% 0.50%
Change
Pay/Basic
Penetration...... 41.26% 41.26% 41.26%
Average Basic
EBU's............ 3,011 3,054 3,097
Average Pay
Units............ 1,242 1,260 1,278
Addressable Sub
%................ 70.00% 70.00% 70.00%
Ending Plant
Miles............ 90 91 91
New Miles.......... 1 1 1
New Drops.......... 44 45 45
Rebuild Miles
Replace Drops %.... 10.00% 10.00% 10.00%
Basic
Revenue/EBU...... $ 375.32 $ 387.51 $ 400.11
Basic Rev/EBU...... 3.25% 3.25% 3.25%
Increase
Ancillary
Rev/EBU.......... $ 21.19 $ 21.83 $ 22.48
Pay Revenue/Unit... $ 126.92 $ 128.83 $ 130.76
PPV Rev/Addr.
Sub.............. $ 36.97 $ 38.45 $ 39.99
Late/Shop/Oth
$/EBU............ $ 3.11 $ 3.23 $ 3.36
Advertising
Rev/EBU.......... $ 4.60 $ 4.79 $ 4.98
Personnel Cost
Incr. %.......... 4.00% 4.00% 4.00%
Per-Sub Expense.... $ 105.73 $ 110.48 $ 115.46
% of Rev. Expense
%................ 5.50% 5.50% 5.50%
Pay/PPV Expense
%................ 47.76% 47.76% 47.76%
Per-Mile Expense... $ 1,265 $ 1,316 $ 1,369
Capex per drop..... $ 80 $ 82 $ 84
Capex per new
mile............. $ 22,138 $ 22,802 $ 23,486
Capex per rebuild
mile
Capex per new adr.
sub.............. $ 107 $ 108 $ 109
REVENUE
Basic/Tier/Com'l... 1,130,224 1,183,397 1,239,019
Ancillary.......... 63,820 66,661 69,625
Pay................ 157,696 162,316 167,065
Pay-per-view....... 77,935 82,194 86,682
Installation....... 34,214 35,583 37,006
Late/Other/Shop.... 9,352 9,863 10,402
Advertising........ 13,861 14,619 15,417
Franch. Fee
billed........... 44,122 46,128 48,224
Total
Revenue........ 1,531,224 1,600,760 1,673,440
EXPENSES
Personnel.......... 136,853 142,331 148,026
Per-Sub costs...... 320,616 339,757 360,026
Per-mile costs..... 113,900 119,165 124,675
Percent of Rev.
costs............ 84,216 88,040 92,037
Pay & PPV Costs.... 112,536 116,776 121,188
Total
Expenses....... 768,120 806,069 845,952
OPERATING INCOME... 763,104 794,690 827,488
Operating Ratio.... 49.84% 49.64% 49.45%
CAPITAL EXPENDI-
TURES
Drops.............. 27,946 28,895 29,875
Addr. Converters... 3,167 3,234 3,302
New plant.......... 11,845 12,292 12,756
Rebuild............ 30,747 31,669 32,619
Labor
capitalized...... 10,638 11,064 11,506
Vehicles........... 11,257 11,820 12,411
Other.............. 29,851 30,747 31,669
Total Capex.... 125,451 129,720 134,138
DISCOUNTED FREE
CASHFLOW
Operating Income... 763,104 794,690 827,488
Less Capital....... 125,451 129,720 134,138
Expenditures
Free cashflow...... 637,653 664,970 693,350
</TABLE>
2
<PAGE>
DISCOUNTED CASHFLOW MODEL FOR APPRAISAL OF ABBEVILLE (CONTINUED)
<TABLE>
<S> <C> <C> <C> <C>
DISCOUNT RATE
Discount Rate.......................... 12.60% CALCULATION
--------------------
<CAPTION>
Net Present Value of Free Cashflow..... 2,725,603 PROPORTION RATE
----------- ---------
<S> <C> <C> <C> <C>
Equity.............. 30.00% 20.00%
Senior.............. 60.00% 9.00%
Debt................
Sub. Debt........... 10.00% 12.00%
Blended............. 12.60%
</TABLE>
<TABLE>
<S> <C> <C> <C>
TERMINAL VALUE
Year 10 operating income........... 827,488
Multiple........................... 5
Terminal Value..................... 4,137,441
Discounted at...................... 12.60% 1,262,839
POTENTIAL VALUE
NPV of Free Cashflow............... 2,725,603
NPV of Terminal Value.............. 1,262,839
Total Potential Value.............. 3,988,442
RATIOS
Current EBU's...................... 2,623
First-year Op. Income.............. 495,056
Value per EBU...................... $1,521
Op. Income Multiple................ 8.06
</TABLE>
3
<PAGE>
FAIR MARKET VALUE APPRAISAL FOR
LINCOLNTON, NORTH CAROLINA
MARCH 31, 1996 UPDATE
PREPARED FOR
CENCOM PARTNERS, INC
CENCOM PARTNERS, L.P.
PREPARED BY
WESTERN CABLESYSTEMS, INC
R. MICHAEL KRUGER, PRESIDENT
CABLE TELEVISION MANAGEMENT,
CONSULTING, AND APPRAISALS
513 WILCOX, #230
CASTLE ROCK, CO 80104
303-688-4462
<PAGE>
BACKGROUND AND LIMITING CONDITIONS
Western was asked by Cencom to prepare an analysis of the fair market value
as a going concern of the assets of the Lincolnton, North Carolina cable
television system as of March 31, 1995. 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 Cencom and
Western. This report presents key data, our analysis and assumptions, and our
conclusions.
The assets being appraised include, as an assemblage, all of the tangible
and intangible assets and personal property necessary to operate the cable
television system as a going concern, consistent with past practice and industry
norms. The assets include the antennas and signal receiving equipment, strand,
conduit, cables, amplifiers, passive devices, drops, converters, tools, test
equipment, subscriber records, franchises, pole attachment agreements,
easements, supplier and programming contracts, and goodwill. Financial assets
such as accounts receivable, and liabilities, are not included.
The appraisal is based principally on financial data provided by Cencom,
including Income Statements for the 12 months ended December 31, 1995, 1994,
1993, and 1992, and 3 months ended March 31, 1996. Management also provided the
operational data presented herein, such as passings and subscriber counts. The
appraiser visited the system in May, 1995. The system manager was interviewed at
length to obtain additional data including subscriber history, technical data,
demographics, and local economic information. The appraiser toured
representative portions of the general market area. This information was
reviewed and updated in 1996 by means of a telephone interview with the manager.
The work herein is based in part on data provided by Cencom and others, and
we assume no responsibility for the accuracy of such data. Western has used
customary techniques and industry knowledge available to Western in preparing
this report. Western does not warrant or represent that the appraised value is
that which would actually be obtained in an open market transaction, or that the
value would be upheld in litigation or administrative proceeding. Accordingly,
Western (including its officers, employees, and owners) does not indemnify or
hold harmless any user of this report in any manner against any costs, losses,
or damages arising out of the use of the appraised value or other conclusions
contained herein.
GENERAL DESCRIPTION
The system principally serves the community of Lincoln County, including the
city of Lincolnton. This area is located midway between Charlotte and Hickory
(about 25 miles from each.) The operations also include a separate headend
serving the town of Taylorsville, about 45 minutes north of Lincolnton.
<TABLE>
<S> <C>
Homes Passed................................................ 28,447
Residential Basic Subs...................................... 14,592(51%)
Commercial/Bulk EBU's (379 units)........................... 128
Total EBU's............................................. 14,720
Pay Units................................................... 6,535(46%)
Plant Miles................................................. 815
Homes Per Mile.............................................. 35
Number of headends.......................................... 3
Channels in use (typical)................................... 44
Plant Channel Capacity...................................... 42-44
</TABLE>
2
<PAGE>
The system is served by three headends. This appraisal is being done on the
aggregate system, but the approximate breakout may be helpful:
<TABLE>
<CAPTION>
NAME SUBSCRIBERS
- --------------------------------------------------------------------------------- ---------------
<S> <C>
Lincolnton/Lincoln Co............................................................ 69%
Vale (remote area in L.C.)....................................................... 4%
Taylorsville..................................................................... 27%
</TABLE>
Lincoln County is a sprawling small-town/rural area. It stretches from small
farming areas on the west to an affluent Charlotte "bedroom" area on the east.
The east end is located on a beautiful lake. Lincolnton itself is a busy
community with a broad mix of retail and service. Lincoln County manufacturers
include ball bearings, tools, pharmaceuticals, textiles, and furniture. About
40% of the area residents commute to a broad range of manufacturing, finance,
and service jobs in Charlotte (30-45 minutes). The overall economy in North
Carolina is strong, and employers are all stable or growing. Unemployment is
low.
There is a relatively dense "small-town" area in Lincolnton with a normal
mix of older homes. Numerous new subdivisions are scattered throughout the
surrounding areas, particularly in the east end. Some of the subdivisions are
quite large, and include planned and gated communities. The eastern subdivisions
located on the lake include large homes valued at around $300,000. New homes in
other areas are priced around $150,000, and older homes range downward. There
are some multi-family projects, but the area is mostly single-family.
New homes are typically valued at $70,000-$150,000, with some much higher
and lower. The market is brisk, and homes sell quickly. Demographics cover a
broad range from low-income rural to wealthy professional. The area would be
described as "typical" overall.
Taylorsville is a similar area. Local industry includes principally
furniture and components, and many residents commute to Hickory.
Demographics cover a full range from rural low-income to high-income
professional, and overall would be considered average.
PASSINGS GROWTH
System information on historic passings growth was not accurate. The present
number is based on 1995 audits and updates. Further complicating analysis of
housing growth is the fact that the system has not been able to provide service
to all new areas being built due to capital constraints. Management estimates
that the actual total home growth is presently about 600 units per year.
There are a number of unserved subdivisions in Lincolnton, and some rural
areas in Taylorsville which may be feasible. The estimated potential is:
<TABLE>
<CAPTION>
HOMES MILES
----------- -----
<S> <C> <C>
Lincolnton.................................................................... 1,000 25
Taylorsville.................................................................. 1,000 50
</TABLE>
There are no significant acquisition possibilities.
3
<PAGE>
SUBSCRIBER PENETRATION
The system provided the following data:
<TABLE>
<CAPTION>
PASSINGS BASIC PAY BASIC % PAY %
----------- --------- --------- ------------- -----------
<S> <C> <C> <C> <C> <C>
12/95.......................................... 28,447 14,305 6,335 50% 44%
12/94.......................................... 28,308 14,033 6,459 50% 46%
12/93.......................................... 27,850 13,285 5,752 48% 43%
12/92.......................................... 27,474 12,549 5,802 46% 46%
12/91.......................................... 27,099 12,410 6,597 46% 53%
</TABLE>
The 1994 Cable Factbook reports penetrations in nearby Charlotte of 65%
basic and 57% pay.
Because of potential errors in the passing count, past basic penetration may
be slightly understated. In any event, basic penetration is growing, at about 1
point per year. We believe the growth rate would increase with aggressive new
management; 50% is an unreasonably low level for this market. Pay penetration
appears to be fairly stable at about 46%, but should grow slowly in the future.
SUBSCRIBER RATES AND SERVICES
Each headend has slightly different lineups and rates; information for
Lincolnton, which serves nearly 70% of the customer base, is summarized below.
<TABLE>
<CAPTION>
CHANNELS RATE
------------- -----------
<S> <C> <C>
Basic................................................................. 14 7.34
Tier.................................................................. 23 16.01
Total................................................................. 37 $22.40
Pay channels.......................................................... 5 8.45-11.45
Pay-per-view.......................................................... 2 n/a
Converters............................................................ 1.84-2.45
Remote control........................................................ .23
Wire maintenance...................................................... .95
</TABLE>
Approximately 98% of the customers take the tier.
Basic includes 9 offair, and WGN and WTBS. The tier is all satellite
services. Pay includes Cinemax, HBO, Showtime, Movie, and Disney. Pay-per-view
offerings consist of Viewers Choice, adult programming channels, and events.
There is no fee for additional outlets. There are a number of small
transaction fees, including late charges. Typical aerial installation fees are
$37. Applicable FCC and franchise fees are added as a separate charge. There are
several package discounts and promotional rates available from time to time.
Rates are reasonable, and consistent with industry practice.
The system took small external cost adjustments in 1994 and 1995; an
increase of $1.95 is planned for September 1, 1996.
RATE REGULATION
Lincolnton, Lincoln County, and Taylorsville all certified to regulate
rates. Relations with the cities are good, and there has been no effort to
require strict conformance. There have been no tier complaints. This system will
be deregulated in the near future pursuant to recent new federal regulations.
4
<PAGE>
NON-SUBSCRIBER REVENUE
The company has a contract with Catawba Cable (a nearby operator) pursuant
to which Catawba sells advertising spots on satellite channels. The system
receives an allocated portion of revenues. While the amount is not large, it
appears to be a reasonable arrangement, with little chance of major improvement.
There is no other significant revenue source (fiber rental, tower rental,
phone), existing at present or likely in the future.
STAFF AND OPERATIONS
The system rents its main office and separate headend in Lincolnton.The
other headends are owned. Rents are reasonable, expirations and renewals are not
a concern, and there are no unique sites that could not be replaced (although
relocation is always a burden).
The system has a normal complement of test equipment, inventory, and
vehicles, including two bucket trucks. The office staff is well-equipped, and
uses centralized Cabledata billing services.
The system offers customary business-day service Monday through Friday, with
partial staffing Saturday morning. Phones are answered by a central company
facility after hours, and technicians are dispatched on outages if necessary.
Management reports about 23% annual turnover, and 50% annual service call
volume. Turnover is fairly high, but reflective of lower penetration. The
service call rate is very high, and indicates some technical concerns as
discussed below. Backlogs are 3-4 days on installs, and same-day on service. All
are normal.
System staffing can be summarized as:
<TABLE>
<CAPTION>
ITEM OFFICE FIELD OTHER
- ------------------------------------------------------------------- --------- --------- -----------
<S> <C> <C> <C>
Number of employees................................................ 9 11 0
Subs/employee...................................................... 1,635 1,338
Average wage....................................................... 16,800 28,400 --
</TABLE>
The company also uses a varying number of contract installers to do all new
installs and some reconnects. It appears there may be some minor wage allocation
issues between office and field, but the overall average wage is quite
reasonable. Staff ratios are reasonable, especially considering the drive time
involved.
MARKETING
The system uses in-house commissioned direct salespeople on a regular basis,
but at present none are on the payroll. Direct mail and newspaper are used from
time to time.
FRANCHISES
The major Lincolnton and Lincoln County franchises expire in 2000. The
Dallas franchise was recently renewed through 2010, with a requirement for an
upgrade to 450 mhz and installation of fiber to improve picture quality. Three
franchises, including Taylorsville, expire in 1998; renewal notice has been
given by the system, but discussions have not started pending sale to a new
owner.
COMPETITION
In the east end near Charlotte, residents can get good reception on 5-7
Charlotte signals with standard antennas. Reception in the west end can be more
limited.
5
<PAGE>
There is no cable overbuild, and no contiguous operator, although Time
Warner is nearby, and a major presence. The company has the only franchise in
the county, so there is no cable competition for new subdivisions.
There is no MMDS.
The company estimates that it has lost perhaps 100 customers to DBS.
However, because the company has not kept pace with new subdivision
construction, it has lost a number of potential customers; there may be at least
100 DBS dishes in unserved areas.
TECHNICAL PROFILE
Mileage: 639 aerial, 176 underground, no fiber
Headend Electronics: S-A
Plant Electronics: S-A
Amplifier Cascade: 35-48
Power: Most areas standby
Trunk Cable: 750-875 P3, some 1000 and a bit of 500
Distribution Cable: Mostly 500 P3
Pay Security: Mostly addressability, 2 headends use traps
Percent of Addressable Subs: 40%
Converter Types: TOCOM, Jerrold, Pioneer, S-A
Estimated Plant Build Dates:
<TABLE>
<CAPTION>
MILES PERCENT
----- -------------
<S> <C> <C>
1970's....................................................................... 353 33%
1980's....................................................................... 492 46%
1990's....................................................................... 225 21%
</TABLE>
Estimated Channel Capacity:
<TABLE>
<CAPTION>
MILES PERCENT
----- -------------
<S> <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, but there are cascade problems; substantial fiber is needed to reduce
the cascade to improve reliability.
Capacity is limited, and needs to be increased to meet competitive
pressures. There are no "big urban" systems nearby, and no indication of
franchise pressures at this time. An upgrade to 450 Mhz should be adequate at
present. About 1/2 of the plant is likely to be 10 years old or less. Management
indicates that an electronics drop-in with some respacing and cable replacement,
plus more fiber, would result in 450 Mhz capacity.
6
<PAGE>
UPGRADE COSTS
<TABLE>
<S> <C>
Fiber Overlay
20% x 800 miles x $6,000/mile............................... $ 960,000
Retrofit existing 450 plant
100 miles x $3,000/mile..................................... 300,000
Retrofit existing 330 plant in good shape
500 miles x $5,000/mile..................................... 2,500,000
Rebuild old plant
200 miles x $12,000......................................... 2,400,000
---------
Total upgrade costs..................................... $6,160,000
</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.
Certain Projected-Year expense items such as programming costs which are
based on subscribers or revenue have been adjusted to match the subscriber and
revenue projections shown, using prior-year unit costs or ratios plus an
allowance for increases where appropriate. Overhead items, such as maintenance
and property tax have been based principally on average results, to reflect
longer-term trends. In preparing our detailed analysis, we also reviewed key
operating ratios, such as programming cost/subscriber, staffing ratios,
copyright and bad debt expense levels, etc. and compared them to industry norms
and our experience. A brief discussion of key individual items follows:
Passings: Increase by the estimate of 600 homes/year of growth. Do not add
the deferred line extensions in year 1 because of the extent and capital cost,
but do include them in year 2.
Basic Penetration: Increase by 2 points, with a decline as the system passes
60%.
Pay Penetration: Make only small gains, matching recent years.
Average Basic+Tier Revenue/Subscriber: Use the average for Q1/96 plus the
1996 increase.
Average Pay Revenue/Unit: Has been fluctuating; use a midpoint.
Pay-Per-View Revenues: Data is limited, but indicates growth, which will
continue
Advertising: Use the 1995 levels, plus some growth for the new contracts.
G&A Salary: Ratios are good, but wages are a bit low. Increase 1995 levels
by inflation and growth.
Insurance: Fluctuating; use 3-year level
7
<PAGE>
Bad Debt: Has been fluctuating, but appears to be declining. Use a normal
level of 1.2%,
Professional Services, Allocated Costs: Use 1995 levels.
Operating Wages: Ratios and levels good; increase 1995 levels for inflation
and growth.
Basic Programming: Use the 1996 level plus increases of 5%.
Premium/PPV Programming: We used the average historic level of 48.5% of
revenue.
Marketing/Sales: Industry norms vary from 1% of revenue in classic systems
with little need for sales, to 4% in urban markets. This system is at about 2%,
and we used this historic level.
TEN-YEAR CASHFLOW PROJECTIONS
Our principal appraisal technique involves projection of free cashflow for
10 years; free cashflow is equal to operating income less capital expenditures,
but still before depreciation and interest, and taxes. (Projected free cashflow
is then discounted at an appropriate cost-of-capital rate, and a terminal value
is added to get the value of the property.) Our projection for this system is
shown on the two-page spreadsheet enclosed. We started with the data contained
in the first-year projection spreadsheet, and expanded it with the variables and
assumptions shown.
Revenue items used are the same as for the first-year analysis. However,
they are based on forecasts for system growth in areas such as passings,
penetration, and revenue/subscriber. The small amount of commercial revenue was
converted to EBU's and for simplicity we did our forecast using total EBU's.
Passings growth in the second year included normal growth of 600/year, plus
the deferred line extensions. In the following years, we used a growth rate of
2%, which is about the historic level.
Penetration increases: The system has been growing at about 2 pt/year, and
since levels are low, this should continue for several years. In year 7, we
slowed the growth, reflecting increasing competition from other technologies.
Addressable Subs & PPV Revenue/Sub: The system is a prime candidate for
addressability; we increased the number of customers in a conservative manner,
and allowed a fairly fast 6% increase in revenue/sub, reflecting the
demographics.
Basic Rate Increases: Rate regulation and competition will normally limit
increases to a bit over inflation; we used 3.25%. However, on completion of the
rebuild, the company can add some new channels and tiers, and make 5% overall
increases for two years.
The ten-year model uses summary expense variables which were calculated from
the one-year information as follows:
Personnel: Salaries, Tax/benefit, Professional services, cost
allocations, and capitalized labor
Per-Subscriber: Office rent, Office Operation, Basic Programming, LO
Programming
Revenue-related: Franchise fee, copyright, bad debt, marketing, and
advertising sales
Premium Programming: Pay and pay-per-view
Per-Mile: Insurance, Property Tax, Pole Rent, Power, System Maintenance
Personnel costs ae based on current personnel costs, plus annual percentage
increases to reflect growth and expenses. We calculated the amounts for the
other expense categories on a per-sub or per-mile, or percentage of revenue
basis, as noted.
8
<PAGE>
The per-sub and per-mile costs were increased over the 10-year period for
inflation. The percentage costs were held to the same percentage of revenue over
10 years, on the assumption that gradual increases in unit costs can be passed
on to customers.
Capital costs were forecast for several items. New plant costs were
calculated using new plant mileage derived from passings growth and an average
per-mile cost for new plant (aerial and U/G). Drops were calculated on the
assumption that a certain percentage of existing drops is replaced each year,
and new drops are added equal to growth plus a churn allowance of 5%. Costs for
new addressable converters were allowed based on the increase in addressable
subscribers.
Capitalized labor is based on 1995 levels, plus inflation. The capital costs
for vehicles and miscellaneous is estimated from system size and current vehicle
count. We used the rebuild cost estimates developed earlier in the text, and
spread them over 2 years.
DETERMINATION OF APPRAISED VALUE
GENERAL METHODOLOGY
Appraisal of income-producing property typically relies on one or more of
three main approaches.
Replacement cost, which is the cost to assemble and put the property into
operation, is not typically used in the cable television industry for valuing a
property as a whole. Cable television system sales include a very substantial
intangible value for franchise, goodwill, and customer lists. Although these
intangibles can be valued separately, more direct approaches to overall value
are easier to use, and more appropriate.
Market value as determined by comparable transactions is a very common
approach for estimates of value. Transaction value is typically reported on the
basis of either per-subscriber cost or operating income multiple. We consider
both ratios, but place more reliance on the income multiple.
The Income Approach is widely used in business valuation, and we use this as
our first approach. Our method involves determination of the discounted present
value of free cashflow generated over ten years, plus an allowance for the
terminal value after ten years.
INCOME APPROACH
Ten-year free cashflow was projected, as discussed previously. The annual
free cashflow was discounted using an average cost of capital calculated as
shown on the spreadsheet.
The FCC cost-of-service rules will permit a cost-of-capital rate of 11.25%,
plus further upward adjustments related to tax matters; the result is typically
in the 12%-13% range. Small cable operators may use even higher numbers, subject
to certain overall limits. We do not believe the FCC cost-of-capital should be
used directly, but do find that the FCC values support our calculation of 12.6%.
We then added a terminal value based on the resale value of the system in
year 10. The terminal value was calculated at 5.5 x year 10 cashflow. The
industry will increasingly feel the effects of maturity, regulation and
increased competition. Sale multiples will gradually decline as the
opportunities for growth into new lines are realized or abandoned. Non-cable
businesses currently trade in the 3-6 x cashflow range. Regulated telephone
companies presently trade at around 5-7 x cashflow. Selection of 5.5x should
reflect the industry's maturity, and the system's location and growth outlook.
The terminal value was then discounted to a present value using the same
discount rate. The discounted cashflow and discounted terminal values were
added, to arrive at the estimate of potential system value shown on the
worksheet.
9
<PAGE>
MARKET VALUE
The prices of cable system transactions are frequently evaluated to
determine the ratio of operating income (income before depreciation, interest,
and management fees) to purchase price; sales results are frequently reported in
the trade press. Per-subscriber values are also widely reported. We consider
principally the multiple of first year projected operating income. To facilitate
our analysis, we compared this system to the overall market with respect to some
key factors. The analysis is subjective, and based on our personal knowledge,
but nonetheless helps to structure the process:
Future passing and subscriber growth: Lincolnton will have above-average
growth rates.
Demographics: As discussed above, demographics are overall average for
cable.
Competitive situation: Competition from DBS could be a problem in some
areas, and due to lack of cable service DBS has already established a foothold
in the area. There is little other direct competition, so overall the system is
average in this regard.
System Capacity/Quality: The need for rebuild/upgrade is a negative.
General Operations: With regard to matters such as staff, franchise
problems, etc., the system is normal.
New Revenues: The system should be able to generate more sources of new
revenue than other rural/ suburban systems, because of its size and good
demographics.
System marketability: The system is of a very attractive size, and is in a
market with a number of qualified buyers.
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 valued more highly than rural systems. After
considering all factors, we believe the system would be valued at 10 x income,
and about $1,800/subscriber.
10
<PAGE>
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....................................... 26,942,000
Current subscribers............................................. 14,720
Projected operating income...................................... 3,046,000
Resulting per-sub value......................................... 1,830
Resulting income multiple....................................... 8.8
</TABLE>
The values calculated by using the same subscriber count, and multiples
selected from market data are:
<TABLE>
<S> <C>
Value, at 10 x operating income less capex for rebuild and new
build......................................................... 24,110,000
Value, at $1,800 per sub........................................ 26,496,000
</TABLE>
The values calculated by the three different methods are generally within a
reasonable range. We place more reliance on the discounted cashflow method,
because it directly incorporates the key variables which impactvalue. Operating
income multiples reflect some of the variables, but are more subjective. Per-
subscriber values are useful as broad indicators.
After reviewing the foregoing results, and considering the limits of each
method, we set the appraised value at $26,500,000.
We believe the foregoing appraised value represents the fair market value at
March 31, 1996 of the assemblage of system assets as a going concern, without
any discount imputed for brokers' fees. We believe the appraisal reflects the
relevant and material general market factors, assumptions, and limitations, all
of which are presented in this report. The appraisal was prepared using standard
appraisal techniques, and conforms to Standards 7-10 of the Uniform Standards of
Professional Appraisal Practice.
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.
11
<PAGE>
CENCOM APPRAISAL FOR LINCOLNTON
HISTORIC INCOME STATEMENTS AND FIRST-YEAR PROJECTION
<TABLE>
<CAPTION>
PROJECTED
1992 ACTUAL 1993 ACTUAL 1994 ACTUAL 1995 ACTUAL 96/Q1 YEAR
----------- ----------- ----------- ----------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
Ending Homes Passed............... 27,474 27,850 28,308 28,447 28,447 29,047
Ending Basic...................... 12,549 13,205 14,033 14,305 14,592 15,250
Subscribers
Ending Pay Subscribers............ 5,802 5,752 6,459 6,335 6,535 6,862
Ending Basic...................... 45.68% 47.41% 49.57% 50.29% 51.30% 52.50%
Penetration
Ending Pay Penetration............ 46.23% 43.56% 46.03% 44.29% 44.78% 45.00%
Average Basic Subs................ 12,479 12,877 13,619 14,169 14,449 14,921
Average Pay Units................. 6,199 5,777 6,106 6,397 6,435 6,699
Avg Basic+Tier Rev/Sub............ $ 23.57 $ 24.34 $ 21.72 $ 22.40 $ 22.94 $ 24.89
Average Pay Rev/Unit.............. $ 9.67 $ 9.51 $ 10.02 $ 9.63 $ 9.31 $ 9.31
REVENUE
Basic,Tier Revenue................ 3,529,584 3,760,717 3,550,402 3,809,462 994,326 4,456,556
Ancillary Revenue................. 405,091 355,541 267,355 295,693 74,424 312,581
Commercial Basic.................. 0 0 28,557 33,462 9,617 38,000
Premium........................... 719,182 659,574 734,270 739,178 179,813 748,376
Pay-Per-View...................... 0 0 46,184 65,525 21,803 85,000
Installation...................... 65,205 77,053 99,748 114,148 29,468 125,000
Advertising....................... 60,257 44,785 4,916 37,409 11,962 45,000
Shopping/Other.................... 0 0 24,945 27,569 9,217 30,000
Franchise/FCC Fees................ 0 0 95,489 99,596 26,593 116,810
Billed
Total Revenue................. 4,779,319 4,897,670 4,851,866 5,222,042 1,357,223 5,957,323
EXPENSES
G&A Salary........................ 107,657 135,193 150,910 149,938 37,750 161,933
Tax/Benefit-G&A................... 47,543 50,077 51,036 46,020 13,467 45,341
Office Rent....................... 22,482 12,366 24,773 11,818 2,967 12,000
Office Operation.................. 140,290 163,695 153,588 146,250 34,259 155,025
Billing........................... 104,853 108,103 112,282 149,399 34,240 139,659
Bad Debt/Collection............... 98,414 58,371 78,310 61,269 9,244 77,445
Professional Services............. 35,503 72,269 7,297 526 0 2,000
Insurance......................... 37,086 32,530 28,222 41,768 9,836 40,000
Property Tax...................... 75,000 30,297 36,664 39,091 10,050 40,000
Franchise/FCC/Copyright........... 95,193 120,411 111,472 111,981 31,352 137,018
Cost Allocation................... 0 0 84,053 18,997 6,093 25,000
Operating Wages,.................. 303,370 320,400 272,381 298,769 78,100 322,671
Overtime
Tax/Benefit-Op Wages.............. 59,526 70,072 59,871 55,836 12,694 64,534
Labor Capitalized................. (40,606) (48,229) (52,919) (46,625) (10,244) (45,000)
Pole Rent......................... 87,252 136,832 109,345 79,550 28,526 114,000
Power............................. 83,812 80,222 85,877 85,223 20,333 87,000
System Maint.,.................... 120,645 68,741 90,271 135,034 29,884 150,000
Operation
Programming-Basic................. 449,288 546,932 606,518 696,276 189,252 820,049
Programming-Premium............... 359,468 335,596 354,810 341,515 88,323 362,962
Programming-PPV................... 0 0 30,832 37,699 14,688 51,000
Programming-LO, Other............. 0 0 0 24,428 7,516 30,000
Marketing/Sales................... 116,286 86,108 105,823 82,996 15,059 119,146
Cost of Advertising............... 0 0 0 63 0
Sales
Total Expenses................ 2,303,062 2,379,986 2,501,416 2,567,758 663,452 2,911,785
Operating Income.................. 2,476,257 2,517,684 2,350,450 2,654,284 693,771 3,045,538
Operating Margin.................. 51.81% 51.41% 48.44% 50.83% 51.12% 51.12%
</TABLE>
<PAGE>
DISCOUNTED CASHFLOW MODEL FOR APPRAISAL OF LINCOLNTON
<TABLE>
<CAPTION>
CHANGE CURRENT PROJ.
ASSUMPTIONS ACTUAL YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5 YEAR 6 YEAR 7
--------------- ----------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Ending Passings....... 28,447 29,047 31,647 32,280 32,926 33,584 34,256 34,941
Passings Growth....... 8.95% 2.00% 2.00% 2.00% 2.00% 2.00%
Ending Basic EBU's.... 14,720 15,377 17,386 18,380 19,406 20,466 21,389 22,341
Ending Pay Units...... 6,566 6,862 7,802 8,294 8,805 9,337 9,812 10,305
Ending Basic EBU
Pen................. 51.75% 52.94% 54.94% 56.94% 58.94% 60.94% 62.44% 63.94%
Basic Penetration..... 2.00% 2.00% 2.00% 2.00% 1.50% 1.50%
Change
Pay/Basic
Penetration......... 0.25% 44.61% 44.63% 44.88% 45.13% 45.38% 45.63% 45.88% 46.13%
Average Basic EBU's... 15,049 16,382 17,883 18,893 19,936 20,927 21,865
Average Pay Units..... 6,714 7,332 8,048 8,550 9,071 9,575 10,058
Addressable Sub %..... 10.00% 15.00% 25.00% 35.00% 45.00% 55.00% 65.00% 75.00% 85.00%
Ending Plant Miles.... 815 900 947 959 971 982 995 1,007
New Miles............. 55 85 47 12 12 12 12 12
New Drops............. 1.05 690 2,110 1,043 1,077 1,113 969 999
Rebuild Miles......... 400 400 200 200
Replace Drops %....... 5.00% 5.00% 20.00% 20.00% 25.00% 10.00% 5.00%
Basic Revenue/EBU..... $ 298.67 $ 308.38 $ 318.40 $ 334.32 $ 351.04 $ 362.45 $ 374.22
Basic Rev/EBU......... 3.25% 3.25% 5.00% 5.00% 3.25% 3.25%
Increase
Ancillary Rev/EBU..... 5.00% $ 20.77 $ 21.81 $ 22.90 $ 24.05 $ 25.25 $ 26.51 $ 27.84
Pay Revenue/Unit...... 1.50% $ 111.46 $ 113.14 $ 114.83 $ 116.56 $ 118.30 $ 120.08 $ 121.88
PPV Rev/Addr. Sub..... 6.00% $ 22.59 $ 23.95 $ 25.39 $ 26.91 $ 28.52 $ 30.24 $ 32.05
Late/Shop/Oth $/EBU... 4.00% $ 1.99 $ 2.07 $ 2.16 $ 2.24 $ 2.33 $ 2.43 $ 2.52
Advertising Rev/EBU... 6.00% $ 2.93 $ 3.10 $ 3.29 $ 2.00 $ 3.00 $ 4.00 $ 4.24
Personnel Cost Incr.
%................... 3.00% 10.45% 12.16% 6.46% 6.40% 6.35% 5.88% 5.85%
Per-Sub Expense....... 4.50% $ 75.22 $ 78.61 $ 82.15 $ 85.84 $ 89.71 $ 93.74 $ 97.96
% of Rev. Expense %... 5.60% 5.60% 5.60% 5.60% 5.60% 5.60% 5.60%
Pay/PPV Expense %..... 49.67% 49.67% 49.67% 49.67% 49.67% 49.67% 49.67%
Per-Mile Expense...... 4.00% $ 479 $ 498 $ 518 $ 539 $ 560 $ 583 $ 606
Capex per drop........ 2.00% $ 70 $ 71 $ 73 $ 74 $ 76 $ 77 $ 79
Capex per new mile.... 3.00% $ 18,000 $ 18,540 $ 19,096 $ 19,669 $ 20,259 $ 20,867 $ 21,493
Capex per rebuild
mile................ $ 7,700 $ 7,700 $ 0 $ 0
Capex per new adr.
sub................. 1.00% $ 100 $ 101 $ 102 $ 103 $ 104 $ 105 $ 106
REVENUE
Basic/Tier/Com'l...... 4,494,556 5,051,749 5,693,956 6,316,222 6,998,146 7,584,940 8,182,293
Ancillary............. 312,581 357,287 409,532 454,288 503,335 554,786 608,622
Pay................... 748,376 829,528 924,183 996,513 1,073,192 1,149,732 1,225,919
Pay-per-view.......... 85,000 137,315 204,292 279,615 369,618 474,555 595,638
Installation.......... 6.00% 125,000 132,500 140,450 148,877 157,810 167,278 177,315
Late/Other/Shop....... 30,000 33,964 38,560 42,366 46,493 50,758 55,153
Advertising........... 45,000 50,817 58,802 37,785 59,807 83,709 92,706
Franch. Fee billed.... 2.00% 116,810 124,717 141,205 156,427 174,101 190,219 206,580
Total Revenue..... 5,957,323 6,717,876 7,610,979 8,432,094 9,382,503 10,255,977 11,144,226
EXPENSES
Personnel............. 576,479 646,578 688,373 732,453 778,946 824,723 872,981
Per-Sub costs......... 1,156,733 1,366,740 1,509,842 1,665,870 1,835,906 2,005,061 2,188,538
Per-mile costs........ 431,000 471,784 496,616 522,804 550,424 579,556 610,286
Percent of Rev.
costs............... 333,609 376,200 426,213 472,196 525,418 574,333 624,075
Pay & PPV Costs....... 413,962 480,259 560,546 633,890 716,685 806,830 904,820
Total Expenses.... 2,911,783 3,341,560 3,681,591 4,027,213 4,407,379 4,790,503 5,200,699
OPERATING INCOME...... 3,045,540 3,376,316 3,929,388 4,404,881 4,975,124 5,465,474 5,943,527
Operating Ratio....... 51.12% 50.26% 51.63% 52.24% 53.03% 53.29% 53.33%
CAPITAL EXPENDITURES
Drops................. 102,109 212,709 343,670 368,345 471,986 240,217 166,847
Addr. Converters...... 163,625 226,338 222,956 247,512 273,621 287,863 312,933
New plant............. 1,530,000 876,436 219,759 230,879 242,561 254,835 267,730
Rebuild............... 0 3,080,000 3,080,000
Labor capitalized..... 13.88% 80,000 89,728 95,528 101,645 108,097 114,450 121,147
Vehicles.............. 5.00% 50,000 52,500 55,125 57,881 60,775 63,814 67,005
Other................. 3.00% 75,000 80,000 82,400 84,872 87,418 90,041 92,742
Total Capex....... 2,000,734 4,617,711 4,099,438 1,091,134 1,244,459 1,051,220 1,028,404
DISCOUNTED FREE
CASHFLOW
Operating Income...... 3,045,540 3,376,316 3,929,388 4,404,881 4,975,124 5,465,474 5,943,527
Less Capital.......... 2,000,734 4,617,711 4,099,438 1,091,134 1,244,459 1,051,220 1,028,404
Expenditures
Free cashflow......... 1,044,806 (1,241,395) (170,050) 3,313,748 3,730,665 4,414,254 4,915,123
<CAPTION>
YEAR 8
---------
<S> <C>
Ending Passings....... 35,640
Passings Growth....... 2.00%
Ending Basic EBU's.... 23,322
Ending Pay Units...... 10,816
Ending Basic EBU
Pen................. 65.44%
Basic Penetration..... 1.50%
Change
Pay/Basic
Penetration......... 46.38%
Average Basic EBU's... 22,831
Average Pay Units..... 10,560
Addressable Sub %..... 95.00%
Ending Plant Miles.... 1,020
New Miles............. 13
New Drops............. 1,030
Rebuild Miles.........
Replace Drops %....... 5.00%
Basic Revenue/EBU..... $ 386.39
Basic Rev/EBU......... 3.25%
Increase
Ancillary Rev/EBU..... $ 29.23
Pay Revenue/Unit...... $ 123.71
PPV Rev/Addr. Sub..... $ 33.97
Late/Shop/Oth $/EBU... $ 2.62
Advertising Rev/EBU... $ 4.49
Personnel Cost Incr.
%................... 5.83%
Per-Sub Expense....... $ 102.37
% of Rev. Expense %... 5.60%
Pay/PPV Expense %..... 49.67%
Per-Mile Expense...... $ 630
Capex per drop........ $ 80
Capex per new mile.... $ 22,138
Capex per rebuild
mile................
Capex per new adr.
sub................. $ 107
REVENUE
Basic/Tier/Com'l...... 8,821,717
Ancillary............. 667,306
Pay................... 1,306,379
Pay-per-view.......... 736,853
Installation.......... 187,954
Late/Other/Shop....... 59,895
Advertising........... 102,613
Franch. Fee billed.... 224,308
Total Revenue..... 12,107,025
EXPENSES
Personnel............. 923,851
Per-Sub costs......... 2,387,489
Per-mile costs........ 642,705
Percent of Rev.
costs............... 677,991
Pay & PPV Costs....... 1,014,933
Total Expenses.... 5,646,969
OPERATING INCOME...... 6,460,056
Operating Ratio....... 53.36%
CAPITAL EXPENDITURES
Drops................. 176,622
Addr. Converters...... 339,481
New plant............. 281,277
Rebuild...............
Labor capitalized..... 128,206
Vehicles.............. 70,355
Other................. 95,524
Total Capex....... 1,091,465
DISCOUNTED FREE
CASHFLOW
Operating Income...... 6,460,056
Less Capital.......... 1,091,465
Expenditures
Free cashflow......... 5,368,591
</TABLE>
2
<PAGE>
DISCOUNTED CASHFLOW MODEL FOR APPRAISAL OF LINCOLNTON (CONTINUED)
<TABLE>
<CAPTION>
YEAR 9 YEAR 10
------------ ------------
<S> <C> <C>
Ending Passings.................................................................... 36,352 37,080
Passings Growth.................................................................... 2.00% 2.00%
Ending Basic EBU's................................................................. 24,152 25,006
Ending Pay Units................................................................... 11,261 11,721
Ending Basic EBU Pen............................................................... 66.44% 67.44%
Basic Penetration.................................................................. 1.00% 1.00%
Change
Pay/Basic Penetration.............................................................. 46.63% 46.88%
Average Basic EBU's................................................................ 23,737 24,579
Average Pay Units.................................................................. 11,038 11,491
Addressable Sub %.................................................................. 100.00% 100.00%
Ending Plant Miles................................................................. 1,033 1,046
New Miles.......................................................................... 13 13
New Drops.......................................................................... 871 897
Rebuild Miles
Replace Drops %.................................................................... 5.00% 5.00%
Basic Revenue/EBU.................................................................. $ 398.94 $ 411.91
Basic Rev/EBU...................................................................... 3.25% 3.25%
Increase
Ancillary Rev/EBU.................................................................. $ 30.69 $ 32.22
Pay Revenue/Unit................................................................... $ 125.56 $ 127.45
PPV Rev/Addr. Sub.................................................................. $ 36.01 $ 38.17
Late/Shop/Oth $/EBU................................................................ $ 2.73 $ 2.84
Advertising Rev/EBU................................................................ $ 4.76 $ 5.05
Personnel Cost Incr. %............................................................. 5.41% 5.41%
Per-Sub Expense.................................................................... $ 106.98 $ 111.79
% of Rev. Expense %................................................................ 5.60% 5.60%
Pay/PPV Expense %.................................................................. 49.67% 49.67%
Per-Mile Expense................................................................... $ 655 $ 682
Capex per drop..................................................................... $ 82 $ 84
Capex per new mile................................................................. $ 22,802 $ 23,486
Capex per rebuild mile
Capex per new adr. sub............................................................. $ 108 $ 109
REVENUE
Basic/Tier/Com'l................................................................... 9,469,741 10,124,295
Ancillary.......................................................................... 728,466 792,018
Pay................................................................................ 1,386,011 1,464,528
Pay-per-view....................................................................... 854,788 938,211
Installation....................................................................... 199,231 211,185
Late/Other/Shop.................................................................... 64,762 69,741
Advertising........................................................................ 113,085 124,121
Franch. Fee billed................................................................. 241,752 258,641
Total Revenue...................................................................... 13,057,835 13,982,741
EXPENSES
Personnel.......................................................................... 973,875 1,026,538
Per-Sub costs...................................................................... 2,583,714 2,795,432
Per-mile costs..................................................................... 676,907 712,993
Percent of Rev. costs.............................................................. 731,236 783,031
Pay & PPV Costs.................................................................... 1,113,069 1,193,510
Total Expenses..................................................................... 6,078,802 6,511,505
</TABLE>
3
<PAGE>
DISCOUNTED CASHFLOW MODEL FOR APPRAISAL OF LINCOLNTON (CONTINUED)
<TABLE>
<CAPTION>
YEAR 9 YEAR 10
------------ ------------
<S> <C> <C>
OPERATING INCOME................................................................... 6,979,034 7,471,236
Operating Ratio.................................................................... 53.45% 53.43%
CAPITAL EXPENDITURES
Drops.............................................................................. 170,517 179,595
Addr. Converters................................................................... 216,145 93,383
New plant.......................................................................... 295,509 310,462
Rebuild
Labor capitalized.................................................................. 135,148 142,456
Vehicles........................................................................... 73,873 77,566
Other.............................................................................. 98,390 101,342
Total Capex........................................................................ 989,582 904,804
DISCOUNTED FREE CASHFLOW
Operating Income................................................................... 6,979,034 7,471,236
Less Capital....................................................................... 989,582 904,804
Expenditures
Free cashflow...................................................................... 5,989,452 6,566,432
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
DISCOUNT RATE
Discount Rate.......................... 12.60% CALCULATION
--------------------
<CAPTION>
Net Present Value of Free Cashflow..... 14,399,971 PROPORTION RATE
----------- ---------
<S> <C> <C> <C> <C>
Equity.............. 30.00% 20.00%
Senior.............. 60.00% 9.00%
Debt
Sub. Debt........... 10.00% 12.00%
Blended............. 12.60%
</TABLE>
<TABLE>
<S> <C> <C> <C>
TERMINAL VALUE
Year 10 operating income........... 7,471,236
Multiple........................... 5.5
Terminal Value..................... 41,091,800
Discounted at...................... 12.60% 12,542,129
POTENTIAL VALUE
NPV of Free Cashflow............... 14,399,971
NPV of Terminal Value.............. 12,542,129
Total Potential Value.............. 26,942,100
RATIOS
Current EBU's...................... 14,720
First-year Op. Income.............. 3,045,540
Value per EBU...................... $1,830
Op. Income Multiple................ 8.85
</TABLE>
4
<PAGE>
EXHIBIT B
FORM OF LEGAL OPINIONS OF HUSCH & EPPENBERGER
<PAGE>
, 1997
Limited Partners of Cencom Cable
Income Partners II, L.P.
c/o Cencom Properties II, Inc.
12444 Powerscourt Drive, Suite 550
St. Louis, Missouri 63131-3660
Re: Cencom Cable Income Partners II, L.P.
Ladies and Gentlemen:
We have acted as special counsel for the Limited Partners (as defined below)
of Cencom Cable Income Partners II, L.P. (the "Partnership") in connection with
(i) the selection process whereby the American Arbitration Association has
selected an appraiser, which appraiser, along with the appraiser selected by
Cencom Properties II, Inc. (the "General Partner"), valued the assets of the
Partnership, and (ii) the compliance by the General Partner with the terms and
provisions of the Partnership Agreement (as defined below) as they relate to the
rights of the Limited Partners in the dissolution process of the Partnership,
including the proposed sale by the Partnership to Charter Communications II,
L.P., a Delaware limited partnership (the "Purchasing Affiliate"), of the
Partnership's cable television system located in and around Anderson County,
South Carolina (the "System") for a price of $36,700,000 (the "Sale"). Unless
otherwise defined herein or the context otherwise requires, the capitalized
terms appearing in this letter shall have the meanings ascribed to them in that
certain Amended and Restated Agreement of Limited Partnership of Cencom Cable
Income Partners, L.P. dated as of August 18, 1987 (the "Partnership Agreement")
by and among the General Partner, Jerald L. Kent, as the Initial Limited
Partner, and those persons currently listed in the books and records of the
Partnership as Limited Partners (the "Limited Partners").
This Opinion Letter is governed by, and shall be interpreted in accordance
with, the Legal Opinion Accord (the "Accord") of the ABA Section of Business Law
(1991) as in effect on the date hereof. As a consequence this Opinion Letter is
subject to a number of qualifications, exceptions, definitions, limitations on
coverage, and other limitations, all as more particularly described in the
Accord, and this Opinion Letter should be read in conjunction therewith. The law
covered by the opinions expressed herein is limited to the Law of the State of
Missouri.
In connection with the foregoing, we have examined originals or copies of,
or have taken into account, the following:
(a) The Partnership Agreement;
(b) The Notice of Written Vote dated , 1997 and the Disclosure
Statement dated , 1997, each of which has been mailed to the Limited
Partners and filed with the Securities and Exchange Commission;
(c) Copies of correspondence between the General Partner (on behalf of
the Partnership) and the appraisers who participated in the Partnership
Appraisal Process pursuant to the Partnership Agreement, which copies have
been represented by the General Partner as being complete and accurate;
(d) Reports and other correspondence supplied to us by the appraisers
who participated in the Partnership Appraisal Process;
(e) The executed Asset Purchase Agreement related to the Sale dated as
of May 30, 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
1
<PAGE>
to any other legal matters or issues other than those set forth in our opinion
dated as of to the Limited Partners with respect to Cencom Partners, L.P.
Our engagement commenced in August of 1994, and our fees have been or will be
paid by the Partnership.
On the basis of the foregoing examinations and assumptions and in reliance
thereon, and upon consideration of applicable law, subject to the qualifications
herein stated, we are of the opinion that:
1. The General Partner has complied with the written requirements of
the Partnership Agreement as such terms and provisions relate to the rights
of the Limited Partners in connection with (i) the Partnership Appraisal
Process, (ii) the solicitation of Consent, (iii) the Sale and (iv) the Sale
Agreement; and
2. Subject to (i) the limitation that we have not independently
verified the accuracy, completeness or fairness of the statements contained
in the Disclosure Statement, (ii) the limitations inherent in the
information available to us and the limited scope of our engagement,
including our participation in the Disclosure Statement preparation being
limited solely to our review of the Disclosure Statement and review of
various drafts of the Disclosure Statement, and comment thereon related to
matters and issues within the scope of our engagement (whether in writing or
in telephone conferences with counsel to the General Partner preparing such
documentation), and (iii) the nature and extent of our review of the
Disclosure Statement being such that we are unable to assume, and do not
assume, responsibility for the accuracy, completeness or fairness of such
statements, no facts have come to our direct and specific attention which
would lead us to believe that the Disclosure Statement, at the time it was
filed with the Commission and sent to the Limited Partners, or as of the
date hereof, contained or contains any untrue statement of a material fact
or omitted or omits to state any material fact required to be stated therein
or necessary to make the statements therein not misleading.
It should be noted that we are licensed to practice law in the State of
Missouri and express no opinion as to the applicability or effect of the laws of
any other jurisdiction. In addition, we express no opinion as to any
applicability of any federal or state securities laws or compliance with any
federal or state securities laws by the General Partner or the Partnership with
respect to the Partnership Agreement, the Sale, the Sale Agreement, the
solicitation of Consent or any other matter.
This opinion is being furnished to you by us as special counsel for the
Limited Partners for the sole purpose described in the first paragraph hereof.
We consent to the disclosure and description of, and quotation from, this
opinion as set forth in the Disclosure Statement, but otherwise this opinion may
not be relied upon by any other persons other than the Limited Partners, or for
any other purpose and may not otherwise be referred to or quoted from, without
our prior express written consent. This opinion is limited to the facts as known
and disclosed to us and to the laws as such exist on the date of this opinion.
We undertake no duty to supplement or update our opinion.
Sincerely,
HUSCH & EPPENBERGER
By:___________________________________
Stan Johnston, Partner
2
<PAGE>
, 1997
Limited Partners of Cencom Cable
Income Partners II, L.P.
c/o Cencom Properties II, Inc.
12444 Powerscourt Drive, Suite 550
St. Louis, Missouri 63131-3660
Re: Liquidation of Cencom Partners, L.P.
Ladies and Gentlemen:
We have acted as special counsel for those persons currently listed as
limited partners (the "Limited Partners") of Cencom Cable Income Partners II,
L.P. (the "Partnership") in connection with: the compliance by Cencom Partners
L.P. ("CPLP") and Cencom Partners, Inc. ("CPI"), CPLP's general partner, with
the terms and provisions of the CPLP Partnership Agreement (as defined below) as
they relate to the liquidation of CPLP and indirectly to the rights of the
Limited Partners in the liquidation and dissolution of CPLP, including the
proposed sales by CPLP to (i) Charter Communications L.P., a Delaware limited
partnership ("Charter I"), of CPLP's cable television system located in Sanford,
North Carolina (the "Sanford System") for a price of $20,750,000, and (ii)
Charter Communications II, L.P., a Delaware limited partnership ("Charter II"),
of CPLP's cable television systems located in and around Abbeville, South
Carolina (the "Abbeville System") and Lincolnton, North Carolina (the
"Lincolnton System") for a price of $4,200,000 and $27,500,000, respectively
(collectively, the "Sales"). Unless otherwise defined herein or the context
otherwise requires, the capitalized terms appearing in this letter shall have
the meanings ascribed to them in that certain Amended and Restated Agreement of
Limited Partnership of Cencom Partners, L.P. dated as of June 29, 1990 (the
"CPLP Partnership Agreement") by and among CPI, the Partnership and other
limited partners, or (ii) the Disclosure Statement (as defined below).
This Opinion Letter is governed by, and shall be interpreted in accordance
with, the Legal Opinion Accord (the "Accord") of the ABA Section of Business Law
(1991) as in effect on the date hereof. As a consequence this Opinion Letter is
subject to a number of qualifications, exceptions, definitions, limitations on
coverage, and other limitations, all as more particularly described in the
Accord, and this Opinion Letter should be read in conjunction therewith. The law
covered by the opinions expressed herein is limited to the Law of the State of
Missouri.
In connection with the foregoing, we have examined originals or copies of,
or have taken into account, the following:
(a) The CPLP Partnership Agreement;
(b) The Notice of Written Vote of the Limited Partners dated ,
1997, and the Disclosure Statement of the Partnership dated , 1997
(the "Disclosure Statement"), each of which has been mailed to the Limited
Partners;
(c) Copies of correspondence between CPII (on behalf of the Partnership)
and the appraisers who participated in the CPLP Appraisal Process, which
copies have been represented by CPII as being complete and accurate;
(d) Reports and other correspondence supplied to us by the appraisers
who participated in the CPLP Appraisal Process;
(e) The executed Second Amended and Restated Asset Purchase Agreement
related to the sale of the Sanford System dated as of January 16, 1997
between Charter I and CPLP (the "Sanford Sale Agreement");
(f) The executed Second Amended and Restated Asset Purchase Agreement
related to the sale of the Abbeville System dated as of January 16, 1997
between Charter II and CPLP (the "Abbeville Sale Agreement");
(g) The executed Second Amended and Restated Asset Purchase Agreement
related to the sale of the Lincolnton System dated as of January 16, 1997
between Charter II and CPLP (the "Lincolnton Sale Agreement"); and
3
<PAGE>
(h) Such other records of the Partnership and CPLP, and such other
documents and records as we have deemed necessary for the purpose of this
letter.
Our knowledge of the Partnership and its legal and other affairs is limited
by the scope of our engagement. We have been engaged by the Partnership only in
connection with the matters set forth in the first paragraph of this opinion,
and do not represent the Partnership or the Limited Partners with respect to any
other legal matters or issues other than those set forth in our opinion dated
to the Limited Partners with respect to the Partnership. Our engagement
commenced in August of 1994, and our fees have been or will be paid by the
Partnership.
On the basis of the foregoing examinations and assumptions and in reliance
thereon, and upon consideration of applicable law, subject to the qualifications
herein stated, we are of the opinion that:
1. CPLP has complied with the written requirements of the CPLP
Partnership Agreement as such terms and provisions relate to the rights of
the Partnership in connection with (i) the CPLP Appraisal Process, (ii) the
Sales, (iii) the Sanford Sale Agreement, (iv) the Abbeville Sale Agreement,
and (v) the Lincolnton Sale Agreement and the Lincolnton Assignment; and
2. Subject to (i) the limitation that we have not independently
verified the accuracy, completeness or fairness of the statements contained
in the Disclosure Statement, (ii) the limitations inherent in the
information available to us and the limited scope of our engagement,
including our participation in the Disclosure Statement preparation being
limited solely to our review of the Disclosure Statement and review of
various drafts of the Disclosure Statement, and comment thereon related to
matters and issues within the scope of our engagement (whether in writing or
in telephone conferences with counsel to the General Partner preparing such
documentation), and (iii) the nature and extent of our review of the
Disclosure Statement being such that we are unable to assume, and do not
assume, responsibility for the accuracy, completeness or fairness of such
statements, no facts have come to our direct and specific attention which
would lead us to believe that the Disclosure Statement, at the time it was
filed with the Commission and sent to the Limited Partners, or as of the
date hereof, contained or contains any untrue statement of a material fact
or omitted or omits to state any material fact required to be stated therein
or necessary to make the statements therein not misleading.
It should be noted that we are licensed to practice law in the State of
Missouri and express no opinion as to the applicability or effect of the laws of
any other jurisdiction. In addition, we express no opinion as to any
applicability of any federal or state securities laws or compliance with any
federal or state securities laws by CPLP or the Partnership with respect to the
CPLP Partnership Agreement, the Sales, the Sanford Sale Agreement, the Abbeville
Sale Agreement, the Lincolnton Sale Agreement, the Lincolnton Assignment or any
other matter.
This opinion is being furnished to you by us as special counsel for the
Limited Partners for the sole purpose described in the first paragraph hereof.
We consent to the disclosure and description of, and quotation from, this
opinion as set forth in the Disclosure Statement, but otherwise this opinion may
not be relied upon by any other persons other than the Limited Partners, or for
any other purpose and may not otherwise be referred to or quoted from, without
our prior express written consent. This opinion is limited to the facts as known
and disclosed to us and to the laws as such exist on the date of this opinion.
We undertake no duty to supplement or update our opinion.
Sincerely,
HUSCH & EPPENBERGER
By:___________________________________
Stan Johnston, Partner
4
<PAGE>
EXHIBIT C
PURCHASE AGREEMENTS
<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
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TABLE OF CONTENTS
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1. PURCHASE AND SALE OF ASSETS.................................................................................... 1
1.1 Assets to be Sold............................................................................ 1
1.2 Excluded Assets.............................................................................. 2
2. CALCULATION AND PAYMENT OF PURCHASE PRICE...................................................................... 3
2.1 Payment of Purchase Price.................................................................... 3
2.2 Assumption of Liabilities.................................................................... 3
2.3 Purchase Price Adjustments................................................................... 4
2.4 Excluded Liabilities......................................................................... 4
2.5 Allocation of Consideration.................................................................. 4
2.6 Proration of Revenue......................................................................... 4
3. CLOSING........................................................................................................ 4
3.1 Closing Date................................................................................. 4
3.2 Deliveries by Seller......................................................................... 5
3.3 Deliveries by Purchaser...................................................................... 5
4. REPRESENTATIONS AND WARRANTIES................................................................................. 6
4.1 Organization and Standing.................................................................... 6
4.2 Power and Authority.......................................................................... 6
4.3 Authorization................................................................................ 6
5. ADDITIONAL UNDERTAKINGS AND ACTIONS............................................................................ 7
5.1 Consents..................................................................................... 7
5.2 Access to Assets............................................................................. 7
5.3 Operations Prior to Closing.................................................................. 7
5.4 Antitrust Laws Compliance.................................................................... 7
5.5 Bulk Sales................................................................................... 8
6. CONDITIONS PRECEDENT TO OBLIGATIONS OF PURCHASER............................................................... 8
6.1 HSR Act...................................................................................... 8
6.2 Governmental or Legal Action................................................................. 8
6.3 Representations; Performance of Agreements................................................... 8
6.4 Financing.................................................................................... 9
6.5 No Material Adverse Change................................................................... 9
6.6 Consents and Approvals....................................................................... 9
6.7 Transfer Documents........................................................................... 9
6.8 Opinions of Seller's Counsel................................................................. 9
6.9 Discharge of Liens........................................................................... 9
6.10 No Default Under Documents................................................................... 9
6.11 Additional Documents and Acts................................................................ 10
7. CONDITIONS PRECEDENT TO OBLIGATIONS OF SELLER.................................................................. 10
7.1 HSR Act...................................................................................... 10
7.2 Governmental or Legal Actions................................................................ 10
7.3 Representations; Performance of Agreements................................................... 10
7.4 Consent and Approvals........................................................................ 11
7.5 Payments..................................................................................... 11
7.6 Assumption of Liabilities.................................................................... 11
7.7 Additional Documents and Acts................................................................ 11
8. REMEDIES....................................................................................................... 11
8.1 Costs........................................................................................ 11
8.2 Termination Without Liability................................................................ 11
8.3 Termination on Default....................................................................... 11
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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
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ASSET PURCHASE AGREEMENT
THIS ASSET PURCHASE AGREEMENT (this "Agreement") is made as of this 30th day
of May, 1996 by and between Charter Communications II, L.P., a limited
partnership organized and existing under the laws of the State of Delaware ("CC
II" or the "Purchaser") and Cencom 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 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").
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1.2 EXCLUDED ASSETS. Notwithstanding anything to the contrary in this
Agreement, any insurance policies and rights and claims thereunder; all rights
to tax refunds and refunds of fees of any nature, in either case relating to the
period prior to the Closing Date; Seller's rights under 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.
2.3 PURCHASE PRICE ADJUSTMENTS. (a) At the Closing, the Purchase Price
shall be increased by an amount equal to 99% of the face amount of accounts
receivable from subscribers of the System which, as of the Closing Date, have
been outstanding for 60 days or less. There shall be no increase to the Purchase
Price for accounts receivable from subscribers of the System which have been
outstanding for more than 60 days.
(b) Following the Closing, Purchaser and Seller shall adjust the Purchase
Price pursuant to customary working capital adjustments for transactions of this
type calculated as of the Closing Date. The difference between the actual
Purchase Price paid and the adjusted Purchase Price shall be paid in cash by the
party owing such adjustment no later than sixty (60) days after the Closing
Date.
2.4 EXCLUDED LIABILITIES. Seller shall pay or otherwise satisfy all
indebtedness, liabilities or other obligations of Seller arising prior to or on
the Closing Date from the ownership or operation of any of the Assets.
2.5 ALLOCATION OF CONSIDERATION. The parties agree that the consideration
payable for the Assets, consisting of the Purchase Price and the liabilities of
Seller to be assumed by Purchaser hereunder, shall be allocated among the Assets
in accordance with Section 1060 of the Internal Revenue Code of 1986, as
amended, and the regulations thereunder. The parties agree to cooperate in the
preparation, execution and filing with the Internal Revenue Service of all
information to be filed by the parties under Section 1060 and such regulations,
and to file Form 8594 (or any substitute therefor) when required by applicable
law.
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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. 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.
(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.
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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 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 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.
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6. CONDITIONS PRECEDENT TO OBLIGATIONS OF PURCHASER
The obligations of Purchaser under this Agreement are subject to the
satisfaction at or prior to the Closing of each of the following conditions, any
one or more of which may be waived by Purchaser, in its sole discretion;
provided, however, that no such waiver of a condition shall constitute a waiver
by Purchaser of any of its other rights or remedies, at law or in equity, if
Seller shall be in default of any of its obligations under this Agreement.
6.1 HSR ACT. All filings required under the HSR Act, if any, shall have
been made and the applicable waiting period shall have expired or been earlier
terminated without the receipt of any objection or the commencement or threat of
any litigation by a Governmental Authority of competent jurisdiction to restrain
or prevent the consummation of the transactions contemplated by this Agreement.
6.2 GOVERNMENTAL OR LEGAL ACTION. No action, suit or proceeding shall be
pending or threatened by any Governmental Authority or other person and no law,
rule or regulation or similar requirement shall have been enacted, promulgated
or issued or deemed applicable to any of the transactions contemplated by this
Agreement by any Governmental Authority or other person that would (a) prohibit
Purchaser's ownership or operation of all or a material portion of the System or
the Assets, (b) enjoin, prevent or make illegal the consummation of the
transactions contemplated by this Agreement or (c) challenge, set aside or
modify any authorization of the transactions provided for herein or any
approvals, consents, waivers or authorizations made or described hereunder.
6.3 REPRESENTATIONS; PERFORMANCE OF AGREEMENTS. The representations and
warranties of Seller set forth in Section 4 hereof shall be true in all material
respects as of and at the Closing Date with the same effect as though such
representations and warranties had been made again at and as of such time.
Seller shall have performed, satisfied and complied in all material respects
with all covenants, 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
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shall Seller have knowledge of any condition or event which, with notice or
lapse of time or both, would constitute such a violation or default.
6.11 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
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
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successful or prevailing party shall be entitled to recover reasonable
attorneys' fees and other costs incurred in that action or proceeding, in
addition to any other relief to which it or they may be entitled.
8.2 TERMINATION WITHOUT LIABILITY. On the Closing Date, either party may
terminate this Agreement, without liability to the other, if any conditions
precedent to such party's performance shall not have been satisfied on the
Closing Date.
8.3 TERMINATION ON DEFAULT. Without limiting the provisions of Sections
8.1, 8.2 and 9 hereof, if either Seller, on the one hand, or Purchaser, on the
other hand, shall default in the due and timely performance of any of the
covenants or agreements under the Agreement, the other of Seller or Purchaser,
as the case may be, may, in addition to any other remedy available thereto, on
the Closing Date give notice of termination ("Termination Notice") of this
Agreement. The Termination Notice shall specify with particularity the default
or defaults on which it is based and state that this Agreement is terminated.
The Termination Notice shall be effective when given. The rights and remedies
granted in this Section 8.3 are cumulative and not exclusive of any other right
or remedy granted herein or provided by law or in equity.
9. INDEMNIFICATION
9.1 SELLER'S INDEMNITY. Seller shall indemnify and hold harmless Purchaser
and its shareholders, partners, officers, directors, employees, controlling
persons and representatives, against and in respect of any and all claims,
damages, losses, costs, expenses (including reasonable legal, accounting and
experts' fees and other fees and expenses incurred in the investigation or
defense of any of the following, and any interest and penalties), obligations
and liabilities which any such person may incur or suffer, as a result of,
arising in connection with or relating to any and all claims of third parties
(including the claims of any limited partners of the Seller) against, relating
to or pertaining to the Seller, the Assets and/or the System, which arise in
connection with or relate to the period prior to the Closing or to the
transactions contemplated hereunder and/or the authority of the Seller to enter
into and consummate such transactions and/or the propriety of such transactions.
9.2 PURCHASER'S INDEMNITY. Purchaser shall indemnify and hold harmless
Seller against and in respect of any and all claims, damages, losses, costs,
expenses (including reasonable legal, accounting and experts' fees and other
fees and expenses incurred in the investigation or defense of any of the
following, and any interest and penalties), obligations and liabilities which
Seller may incur as a result of, arising in connection with or relating to which
it may incur by reason of a material breach of any of the representations or
warranties of Purchaser set forth in this Agreement.
9.3 PROCEDURE. In the event that any claim shall be asserted against a
party entitled to indemnification hereunder (the "Indemnitee"), the Indemnitee
shall promptly notify the other party (the "Indemnitor") of such claim in
writing, and shall extend to the Indemnitor an opportunity to defend against
such claim at the Indemnitor's sole expense. Within 15 days of receiving any
such notice from the Indemnitee, the Indemnitor shall notify the Indemnitee as
to whether or not the Indemnitor elects to assume the defense of any such claim.
In the event the Indemnitor does not so elect to assume such defense, any costs
incurred by the Indemnitee in defending such claim shall be reimbursed to the
Indemnitee, on an as-incurred basis, pursuant to this Section 9. In the event
the Indemnitor elects to assume such defense, the Indemnitee shall, at its
option and expense, have the right to participate in any defense undertaken by
the Indemnitor with legal counsel of its own selection, provided that such legal
counsel is reasonably acceptable to Indemnitor. No settlement or compromise of
any claim that may result in indemnification liability may be made by the
Indemnitor without the prior written consent of the Indemnitee, which consent
may not be unreasonably withheld.
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
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records are preserved, duly authorized representatives of Seller shall have
access thereto, on reasonable prior notice to Purchaser and during regular
business hours to examine, inspect and copy, at its own expense, such books and
records, so long as such examination and inspection takes place on the premises
of Purchaser and does not unreasonably interfere with Purchaser's use thereof.
Purchaser, on the one hand, and Seller, on the other hand, agree that each of
them shall reasonably cooperate with the other of Purchaser or Seller, as
applicable, if the records relating to the System owned shall be of material
assistance to the other of Purchaser or Seller in any threatened or pending
litigation or proceeding or the preparation of tax returns.
10. GENERAL PROVISIONS
10.1 ENTIRE AGREEMENT, MODIFICATION AND WAIVER. This Agreement constitutes
the entire agreement between the parties pertaining to the subject matter
contained in it and supersedes all prior and contemporaneous agreements,
representations and understandings of the parties. No supplement, modification
or amendment of this Agreement shall be binding unless executed in writing by
all the parties. No waiver of any of the provisions of this Agreement shall be
deemed, or shall constitute a continuing waiver. No waiver shall be binding
unless executed in writing by the party making the waiver.
10.2 RIGHTS OF PARTIES. Nothing in this Agreement, whether express or
implied, is intended to confer any rights or remedies under or by reason of this
Agreement upon any persons other than the parties and their respective permitted
successors and assigns, nor is anything in this Agreement intended to relieve or
discharge the obligation or liability of any third person or any party to this
Agreement, nor shall any provision give any third person any right of
subrogation or action against any party to this Agreement.
10.3 ASSIGNMENT. No assignment of any rights or obligations of either
party under this Agreement may be made without the prior written consent of the
other party to this Agreement, which consent is not to be unreasonably withheld,
except that Purchaser shall have the right to assign any or all of its rights
and liabilities hereunder to any of its affiliates, provided that each such
affiliate assumes Purchaser's obligations hereunder; and further provided that
Seller shall have been promptly provided written notice of such assignment
(including the name of the assignee). Any attempted assignment of rights or
obligations in violation of this Section 10.3 shall be null and void. Reference
to any of the parties in this Agreement shall be deemed to include the
successors and assigns of such party.
10.4 CONSTRUCTION. The language in this Agreement shall, in all cases, be
construed as a whole according to its fair meaning and neither strictly for nor
against Seller or Purchaser.
10.5 EXPENSES OF THE PARTIES. Except as expressly provided herein, all
expenses incurred by or on behalf of the parties hereto in connection with the
authorization, preparation and consummation of this Agreement including, without
limitation, all fees and expenses of agents, representatives, counsel and
accountants employed by the parties hereto in connection with the authorization,
preparation, execution and consummation of this Agreement shall be borne solely
by the party who shall have incurred the same.
10.6 FURTHER ASSURANCES. Seller, at any time after the Closing Date, will
promptly execute, acknowledge and deliver 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.
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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.
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
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SECOND
AMENDED AND RESTATED
ASSET PURCHASE AGREEMENT
THIS SECOND AMENDED AND RESTATED ASSET PURCHASE AGREEMENT (this "Agreement")
is made as of this 16th day of January, 1997 by and between Charter
Communications, L.P., a limited partnership organized and existing under the
laws of the State of Delaware ("CC I" or the "Purchaser") and Cencom Partners,
L.P., a limited partnership organized and existing under the laws of the State
of Delaware ("Seller"), and hereby amends that Amended and Restated Asset
Purchase Agreement dated as of the 30th day of May, 1996 between the parties.
W I T N E S S E T H:
WHEREAS, Seller is the owner and operator of a cable television system
serving Sanford, North Carolina (the "System");
WHEREAS, Seller desires to sell, and Purchaser desire to purchase, pursuant
to the terms and subject to the conditions of this Agreement, the System
together with all of the assets, property, interests, rights and privileges of
Seller, including but not limited to those utilized in the cable television
business owned and operated by Seller in Sanford, North Carolina (the "CATV
Business").
NOW, THEREFORE, in consideration of the mutual promises, agreements and
covenants set forth herein, and for other good and valuable consideration, the
sufficiency of which is hereby acknowledged, the parties hereto, intending
legally to be bound, hereby agree as follows:
1. PURCHASE AND SALE OF ASSETS
1.1 ASSETS TO BE SOLD. Subject to the terms and conditions of this
Agreement, Seller hereby agrees to sell, convey, assign, transfer and deliver to
Purchaser at the Closing (as hereinafter defined) and Purchaser hereby agrees to
acquire, for the consideration hereinafter provided, all of the assets,
properties, rights, titles and privileges of Seller of every kind, character and
description, whether tangible, intangible, real, personal or mixed, of whatever
description and wherever located, involved in, related to, owned, used or held
for use or useful in connection with the ownership, use or operation of the
System and all other assets of Seller relating to the System whether or not
required to be listed on Seller's balance sheet in accordance with generally
accepted accounting principles, including, without limitation, all additions,
accessions and substitutions made prior to the Closing as permitted pursuant to
the terms of this Agreement (collectively, the "Assets"), but excluding the
Excluded Assets (defined below) and assets disposed of by Seller between the
date hereof and the Closing Date on an arms' length basis in the ordinary course
of business. The Assets include, without limitation, the following:
(a) all of the real property interests of Seller relating to the System
(collectively, the "Real Property");
(b) all items of tangible personal property owned, used, held for use or
useful by Seller in the operation of the System, including, without
limitation, all equipment relating to the System (collectively, the
"Equipment"); and
(c) all the rights of Seller under any and all franchises, licenses
(including those required by the FCC), permits, authorizations, easements,
registrations, leases, variances, consents and certificates and similar
rights which authorize or are required in connection with the operation of
the System, including any applications for any of the foregoing
(collectively, the "Governmental Permits") that are obtained from or are
pending with any federal, state, county, municipal, local or foreign
government and any governmental agency, bureau, commission, authority, body,
court (or other judicial body), administrative or executive agency,
legislative or quasi-legislative body, commission, council or other agency,
including any such agency, authority or body responsible for the issuance or
administration of any Governmental Permit or whose consent is required for
the sale and transfer of the Assets (each, a "Governmental Authority") and
all subscription contracts with subscribers of Seller relating to the
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System, pole attachment agreements, access agreements and all other
contracts, leases, agreements or undertakings (other than those that are
included in the Excluded Assets or which constitute Governmental Permits),
written or oral, relating to the ownership, operation or maintenance of the
System and/or the Assets (the "Contracts").
1.2 EXCLUDED ASSETS. Notwithstanding anything to the contrary in this
Agreement, any insurance policies and rights and claims thereunder; all rights
to tax refunds and refunds of fees of any nature, in either case relating to the
period prior to the Closing Date; Seller's rights under this Agreement, and the
Purchase Price payable pursuant hereto; Seller's organizational documents and
partnership and financial records not included in Section 1.1; Seller's cash in
the bank and cash equivalents at the time of the Closing; and all assets of
Seller other than the Assets (collectively, the "Excluded Assets") are expressly
excluded from this sale, are not to be purchased or assumed by Purchaser, and do
not constitute part of the "Assets."
2. CALCULATION AND PAYMENT OF PURCHASE PRICE
2.1 PAYMENT OF PURCHASE PRICE.
(a) The purchase price to be paid by Purchaser to Seller for the Assets
shall be an amount equal to $20,750,000 (the "Purchase Price").
(b) On the Closing Date, Purchaser shall pay to Seller the Purchase
Price, by wire transfer of immediately available funds to an account
designated by Seller in writing.
2.2 ASSUMPTION OF LIABILITIES. As additional consideration for the Assets,
Purchaser shall, from and after the Closing Date, and pursuant to an Assignment
and Assumption Agreement in a form agreed between the parties (the "Assumption
Agreement"), assume the obligations of Seller under or in connection with all of
the Assets. In addition, Purchaser shall assume (i) all obligations relating to
the Assets entered into by Seller in the ordinary course of business between the
date hereof and the Closing Date (other than any obligations, if any, relating
to the Excluded Assets), to the extent such obligations continue after the
Closing and (ii) all liabilities relating to (y) all customer advance payments
and deposits, prepaid advertising revenues and other prepaid revenues or income
received or held by Seller for services to be rendered or obligations to be
performed in connection with the System subsequent to the Closing; (z) the
performance of the Contracts from and after the Closing Date; provided, however,
that Seller shall pay all sales, use, excise and similar taxes arising out of
the transfer of the Assets. Except as otherwise provided in this Section 2.2,
Purchaser shall not assume or become liable for any other obligations,
liabilities or indebtedness of Seller.
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.
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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. New
York time on May 30, 1997, 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.
(c) Such other documents, opinions, instruments and certificates, in
form and substance reasonably satisfactory to Seller, as Seller may
reasonably request.
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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 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. 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 but not limited to the written consents of the
limited partners holding a majority of units of limited partnership of Cencom
Cable Income Partners II, L.P. (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
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party shall keep the other party apprised of the status of any inquiries made of
such party by the Federal Trade Commission, the Antitrust Division of the United
States Department of Justice, or any other Governmental Authority with respect
to this Agreement or the transactions contemplated hereby. Each party shall use
reasonable efforts to obtain the earliest termination or waiver of the HSR Act
waiting period possible.
5.5 BULK SALES. Purchaser waives compliance with provisions of the Uniform
Commercial Code relating to bulk transfer and similar laws in connection with
the sale of the Assets, subject to the indemnification provisions of Section 9
hereof.
6. CONDITIONS PRECEDENT TO OBLIGATIONS OF PURCHASER
The obligations of Purchaser under this Agreement are subject to the
satisfaction at or prior to the Closing of each of the following conditions, any
one or more of which may be waived by Purchaser, in its sole discretion;
provided, however, that no such waiver of a condition shall constitute a waiver
by Purchaser of any of its other rights or remedies, at law or in equity, if
Seller shall be in default of any of its obligations under this Agreement.
6.1 HSR ACT. All filings required under the HSR Act, if any, shall have
been made and the applicable waiting period shall have expired or been earlier
terminated without the receipt of any objection or the commencement or threat of
any litigation by a Governmental Authority of competent jurisdiction to restrain
or prevent the consummation of the transactions contemplated by this Agreement.
6.2 GOVERNMENTAL OR LEGAL ACTION. No action, suit or proceeding shall be
pending or threatened by any Governmental Authority or other person and no law,
rule or regulation or similar requirement shall have been enacted, promulgated
or issued or deemed applicable to any of the transactions contemplated by this
Agreement by any Governmental Authority or other person that would (a) prohibit
Purchaser's ownership or operation of all or a material portion of the System or
the Assets, (b) enjoin, prevent or make illegal the consummation of the
transactions contemplated by this Agreement or (c) challenge, set aside or
modify any authorization of the transactions provided for herein or any
approvals, consents, waivers or authorizations made or described hereunder.
6.3 REPRESENTATIONS; PERFORMANCE OF AGREEMENTS. The representations and
warranties of Seller set forth in Section 4 hereof shall be true in all material
respects as of and at the Closing Date with the same effect as though such
representations and warranties had been made again at and as of such time.
Seller shall have performed, satisfied and complied in all material respects
with all covenants, obligations, agreements and conditions required by this
Agreement to be performed, satisfied or complied with by Seller at or prior to
the Closing Date.
6.4 FINANCING. Purchaser shall have obtained such financing as it may
require in order to consummate the transactions contemplated by this Agreement.
6.5 CONSENTS AND APPROVALS. Seller shall have delivered to Purchaser
evidence that all of the Consents have been obtained or given and all such
Consents shall be in form and substance reasonably satisfactory to Purchaser and
Seller.
6.6 TRANSFER DOCUMENTS. Seller shall have delivered to Purchaser customary
bills of sale, general warranty deeds, assignments and other instruments of
transfer sufficient to convey good and marketable title to the Assets in
accordance with the terms of this Agreement, including the documents and
instruments described under Section 3.2(a). Seller shall have executed and
delivered to Purchaser the Assumption Agreement.
6.7 OPINIONS OF SELLER'S COUNSEL. Purchaser shall have received the
opinions of counsel for Seller reasonably required by Purchaser.
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6.8 DISCHARGE OF LIENS. Seller shall have secured the termination,
discharge and release of all material encumbrances of any nature on the Assets.
6.9 NO DEFAULT UNDER DOCUMENTS. As of the Closing Date, Seller shall not
be in material violation or default under any statute, rule, regulation,
agreement, or other document to which Seller is a party or by which Seller is
bound in a manner which would materially adversely affect the operation of the
System, nor shall Seller have knowledge of any condition or event which, with
notice or lapse of time or both, would constitute such a violation or default.
6.10 ADDITIONAL DOCUMENTS AND ACTS. Seller shall have delivered or caused
to be delivered to Purchaser all such additional documents and instruments, in
form and content reasonably satisfactory to Purchaser and its counsel, as
Purchaser shall reasonably request, and shall have done all other acts or things
reasonably requested by Purchaser to evidence compliance with the conditions set
forth in this Section 6.
7. CONDITIONS PRECEDENT TO OBLIGATIONS OF SELLER
The obligations of Seller under the Agreement are subject to the
satisfaction, at or prior to the Closing, of each of the following conditions,
any one or more of which may be waived by Seller in its sole discretion;
provided, however, that no such waiver of a condition shall constitute a waiver
by Seller of any of its rights or remedies, at law or in equity, if Purchaser
shall be in default of any of its obligations under this Agreement.
7.1 HSR ACT. All filings required under the HSR Act, if any, shall have
been made and the applicable waiting period shall have expired or been earlier
terminated without the receipt of any objection or the commencement or threat of
any litigation by a Governmental Authority of competent jurisdiction to restrain
or prevent the consummation of the transactions contemplated by this Agreement.
7.2 GOVERNMENTAL OR LEGAL ACTIONS. No action, suit or proceeding shall be
pending or threatened by any Governmental Authority or other person and no law,
rule, regulation or other similar requirement shall have been enacted,
promulgated or issued or deemed applicable to any of the transactions
contemplated by this Agreement by any Governmental Authority or other person
that would (a) prohibit Purchaser's ownership or operation of all or any
material portion of the System or the Assets, (b) enjoin, prevent or make
illegal the consummation of the transactions contemplated by this Agreement, or
(c) challenge, set aside or modify any authorization of the transactions
provided for herein or any approvals, consents, waivers or authorizations made
or described hereunder.
7.3 REPRESENTATIONS; PERFORMANCE OF AGREEMENTS. The representations and
warranties of Purchaser set forth in Section 4 hereof shall be true in all
material respects as of and at the Closing Date with the same effect as though
such representations and warranties had been made again at and as of such time.
Purchaser shall have performed, satisfied and complied in all material respects
with all covenants, obligations, agreements and conditions required by this
Agreement to be performed, satisfied or complied with by Purchaser at or prior
to the Closing Date.
7.4 CONSENT AND APPROVALS. All consents and authorizations required to be
obtained by Purchaser, shall have been obtained or given.
7.5 PAYMENTS. Purchaser shall have paid to Seller the Purchase Price.
7.6 ASSUMPTION OF LIABILITIES. Purchaser shall have delivered to Seller
the Assumption Agreement.
7.7 ADDITIONAL DOCUMENTS AND ACTS. Purchaser shall have delivered or
caused to be delivered to Seller all such additional documents and instruments,
in form and content reasonably satisfactory to Seller and its counsel, as Seller
shall reasonably request, and shall have done all other acts or things
reasonably requested by Seller to evidence compliance with the conditions set
forth in this Section 7.
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8. REMEDIES
8.1 COSTS. If any legal action or other proceeding is brought for the
enforcement of this Agreement or any other instrument or document to be
executed, delivered or performed hereunder, or because of an alleged dispute,
breach, default or misrepresentation in connection with any of the provisions of
this Agreement or any other instrument or document to be executed, delivered or
performed hereunder, the successful or prevailing party shall be entitled to
recover reasonable attorneys' fees and other costs incurred in that action or
proceeding, in addition to any other relief to which it or they may be entitled.
8.2 TERMINATION WITHOUT LIABILITY. On the Closing Date, either party may
terminate this Agreement, without liability to the other, if any conditions
precedent to such party's performance shall not have been satisfied on the
Closing Date.
8.3 TERMINATION ON DEFAULT. Without limiting the provisions of Sections
8.1, 8.2 and 9 hereof, if either Seller, on the one hand, or Purchaser, on the
other hand, shall default in the due and timely performance of any of the
covenants or agreements under the Agreement, the other of Seller or Purchaser,
as the case may be, may, in addition to any other remedy available thereto, on
the Closing Date give notice of termination ("Termination Notice") of this
Agreement. The Termination Notice shall specify with particularity the default
or defaults on which it is based and state that this Agreement is terminated.
The Termination Notice shall be effective when given. The rights and remedies
granted in this Section 8.3 are cumulative and not exclusive of any other right
or remedy granted herein or provided by law or in equity.
9. INDEMNIFICATION
9.1 SELLER'S INDEMNITY. Seller shall indemnify and hold harmless Purchaser
and its shareholders, partners, officers, directors, employees, controlling
persons and representatives, against and in respect of any and all claims,
damages, losses, costs, expenses (including reasonable legal, accounting and
experts' fees and other fees and expenses incurred in the investigation or
defense of any of the following, and any interest and penalties), obligations
and liabilities which any such person may incur or suffer, as a result of,
arising in connection with or relating to any and all claims of third parties
(including the claims of any limited partners of the Seller) against, relating
to or pertaining to the Seller, the Assets and/or the System, which arise in
connection with or relate to the period prior to the Closing or to the
transactions contemplated hereunder and/or the authority of the Seller to enter
into and consummate such transactions and/or the propriety of such transactions.
9.2 PURCHASER'S INDEMNITY. Purchaser shall indemnify and hold harmless
Seller against and in respect of any and all claims, damages, losses, costs,
expenses (including reasonable legal, accounting and experts' fees and other
fees and expenses incurred in the investigation or defense of any of the
following, and any interest and penalties), obligations and liabilities which
Seller may incur as a result of, arising in connection with or relating to which
it may incur by reason of a material breach of any of the representations or
warranties of Purchaser set forth in this Agreement.
9.3 PROCEDURE. In the event that any claim shall be asserted against a
party entitled to indemnification hereunder (the "Indemnitee"), the Indemnitee
shall promptly notify the other party (the "Indemnitor") of such claim in
writing, and shall extend to the Indemnitor an opportunity to defend against
such claim at the Indemnitor's sole expense. Within 15 days of receiving any
such notice from the Indemnitee, the Indemnitor shall notify the Indemnitee as
to whether or not the Indemnitor elects to assume the defense of any such claim.
In the event the Indemnitor does not so elect to assume such defense, any costs
incurred by the Indemnitee in defending such claim shall be reimbursed to the
Indemnitee, on an as-incurred basis, pursuant to this Section 9. In the event
the Indemnitor elects to assume such defense, the Indemnitee shall, at its
option and expense, have the right to participate in any defense undertaken by
the Indemnitor with legal counsel of its own selection, provided that such legal
counsel is reasonably acceptable to Indemnitor. No settlement or compromise of
any claim that may result in indemnification
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liability may be made by the Indemnitor without the prior written consent of the
Indemnitee, which consent may not be unreasonably withheld.
9.4 PRESERVATION AND ACCESS TO RECORDS. Purchaser will preserve and keep
all books and records of Seller included in the Assets for a period of at least
five years from the Closing Date, except such records as Purchaser usually
disposes of in the ordinary course of business. During the period that such
books and records are preserved, duly authorized representatives of Seller shall
have access thereto, on reasonable prior notice to Purchaser and during regular
business hours to examine, inspect and copy, at its own expense, such books and
records, so long as such examination and inspection takes place on the premises
of Purchaser and does not unreasonably interfere with Purchaser's use thereof.
Purchaser, on the one hand, and Seller, on the other hand, agree that each of
them shall reasonably cooperate with the other of Purchaser or Seller, as
applicable, if the records relating to the System owned shall be of material
assistance to the other of Purchaser or Seller in any threatened or pending
litigation or proceeding or the preparation of tax returns.
10. GENERAL PROVISIONS
10.1 ENTIRE AGREEMENT, MODIFICATION AND WAIVER. This Agreement constitutes
the entire agreement between the parties pertaining to the subject matter
contained in it and supersedes all prior and contemporaneous agreements,
representations and understandings of the parties. No supplement, modification
or amendment of this Agreement shall be binding unless executed in writing by
all the parties. No waiver of any of the provisions of this Agreement shall be
deemed, or shall constitute a continuing waiver. No waiver shall be binding
unless executed in writing by the party making the waiver.
10.2 RIGHTS OF PARTIES. Nothing in this Agreement, whether express or
implied, is intended to confer any rights or remedies under or by reason of this
Agreement upon any persons other than the parties and their respective permitted
successors and assigns, nor is anything in this Agreement intended to relieve or
discharge the obligation or liability of any third person or any party to this
Agreement, nor shall any provision give any third person any right of
subrogation or action against any party to this Agreement.
10.3 ASSIGNMENT. No assignment of any rights or obligations of either
party under this Agreement may be made without the prior written consent of the
other party to this Agreement, which consent is not to be unreasonably withheld,
except that Purchaser shall have the right to assign any or all of its rights
and liabilities hereunder to any of its affiliates, provided that each such
affiliate assumes Purchaser's obligations hereunder; and further provided that
Seller shall have been promptly provided written notice of such assignment
(including the name of the assignee). Any attempted assignment of rights or
obligations in violation of this Section 10.3 shall be null and void. Reference
to any of the parties in this Agreement shall be deemed to include the
successors and assigns of such party.
10.4 CONSTRUCTION. The language in this Agreement shall, in all cases, be
construed as a whole according to its fair meaning and neither strictly for nor
against Seller or Purchaser.
10.5 EXPENSES OF THE PARTIES. Except as expressly provided herein, all
expenses incurred by or on behalf of the parties hereto in connection with the
authorization, preparation and consummation of this Agreement including, without
limitation, all fees and expenses of agents, representatives, counsel and
accountants employed by the parties hereto in connection with the authorization,
preparation, execution and consummation of this Agreement shall be borne solely
by the party who shall have incurred the same.
10.6 FURTHER ASSURANCES. Seller, at any time after the Closing Date, will
promptly execute, acknowledge and deliver 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,
8
<PAGE>
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.
IN WITNESS WHEREOF, the undersigned, intending to be legally bound, have
executed this Second Amended and Restated Asset Purchase Agreement as of the
date first written above.
SELLER:
CENCOM PARTNERS, L.P.
By: Cencom Partners, Inc.,
its General Partner
By: /s/ JERALD L. KENT
-----------------------------------------
Name: Jerald L. Kent
Title: EXECUTIVE VICE PRESIDENT
PURCHASER:
CHARTER COMMUNICATIONS, L.P.
By: CCP One, Inc.,
its General Partner
By: /s/ KENT D. KALKWARF
-----------------------------------------
Name: Kent D. Kalkwarf
Title: VICE PRESIDENT
Signature Page for Sanford, NC Asset Purchase Agreement
9
<PAGE>
SECOND
AMENDED AND RESTATED
ASSET PURCHASE AGREEMENT
AMONG
CENCOM PARTNERS, L.P.,
AS SELLER
AND
CHARTER COMMUNICATIONS II, L.P.,
AS PURCHASER
DATED AS OF JANUARY 16, 1997
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C> <C> <C>
1. PURCHASE AND SALE OF ASSETS.................................................................................... 1
1.1 Assets to be Sold............................................................................ 1
1.2 Excluded Assets.............................................................................. 2
1.3 'AS IS" AND "WHERE IS'....................................................................... 3
2. CALCULATION AND PAYMENT OF PURCHASE PRICE...................................................................... 3
2.1 Payment of Purchase Price.................................................................... 3
2.2 Assumption of Liabilities.................................................................... 3
2.3 Purchase Price............................................................................... 4
2.4 Excluded Liabilities......................................................................... 4
2.5 Allocation of Consideration.................................................................. 4
2.6 Provation of Revenue......................................................................... 5
3. CLOSING........................................................................................................ 5
3.1 Closing Date................................................................................. 5
3.2 Deliveries by Seller......................................................................... 5
3.3 Deliveries by Purchaser...................................................................... 6
4. REPRESENTATIONS AND WARRANTIES................................................................................. 6
4.1 Organization and Standing.................................................................... 6
4.2 Power and Authority.......................................................................... 6
4.3 Authorization................................................................................ 7
5. ADDITIONAL UNDERTAKINGS AND ACTIONS............................................................................ 7
5.1 Consents..................................................................................... 7
5.2 Access to Assets............................................................................. 7
5.3 Operations Prior to Closing.................................................................. 8
5.4 Antitrust Laws Compliance.................................................................... 8
5.5 Bulk Sales................................................................................... 8
6. CONDITIONS PRECEDENT TO OBLIGATIONS OF PURCHASER............................................................... 8
6.1 HSR Act...................................................................................... 8
6.2 Governmental or Legal Action................................................................. 9
6.3 Representations; Performance of Agreements................................................... 9
6.4 Financing.................................................................................... 9
6.5 Consents and Approvals....................................................................... 9
6.6 Transfer Documents........................................................................... 9
6.7 Opinions of Seller's Counsel................................................................. 10
6.8 Discharge of Liens........................................................................... 10
6.9 No Default Under Documents................................................................... 10
6.10 Additional Documents and Acts................................................................ 10
7. CONDITIONS PRECEDENT TO OBLIGATIONS OF SELLER.................................................................. 10
7.1 HSR Act...................................................................................... 10
7.2 Governmental or Legal Actions................................................................ 11
7.3 Representations; Performance of Agreements................................................... 11
7.4 Consent and Approvals........................................................................ 11
7.5 Payments..................................................................................... 11
7.6 Assumption of Liabilities.................................................................... 11
7.7 Additional Documents and Acts................................................................ 11
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----
<S> <C> <C> <C>
8. REMEDIES....................................................................................................... 12
8.1 Costs........................................................................................ 12
8.2 Termination Without Liability................................................................ 12
8.3 Termination on Default....................................................................... 12
9. INDEMNIFICATION................................................................................................ 12
9.1 Seller's Indemnity........................................................................... 12
9.2 Purchaser's Indemnity........................................................................ 13
9.3 Procedure.................................................................................... 13
9.4 Preservation and Access to Records........................................................... 14
10. MISCELLANEOUS PROVISIONS 14
10.1 Entire Agreement, Modification and Waiver.................................................... 14
10.2 Rights of Parties............................................................................ 14
10.3 Assignment................................................................................... 15
10.4 Construction................................................................................. 15
10.5 Expenses of the Parties...................................................................... 15
10.6 Further Assurances........................................................................... 15
10.7 Counterparts................................................................................. 15
10.8 Headings..................................................................................... 16
</TABLE>
ii
<PAGE>
SECOND AMENDED AND RESTATED
ASSET PURCHASE AGREEMENT
THIS SECOND AMENDED AND RESTATED ASSET PURCHASE AGREEMENT (this "Agreement")
is made as of this 16th day of January, 1997 by and between Charter
Communications II, L.P., a limited partnership organized and existing under the
laws of the State of Delaware ("CC II" or the "Purchaser") and Cencom Partners,
L.P., a limited partnership organized and existing under the laws of the State
of Delaware ("Seller"), and hereby amends that Amended and Restated Asset
Purchase Agreement dated as of the 26th day of April, 1996 between the parties
hereto.
W I T N E S S E T H:
WHEREAS, Seller is the owner and operator of a cable television system
serving Abbeville, South Carolina (the "System");
WHEREAS, Seller desires to sell, and Purchaser desire to purchase, pursuant
to the terms and subject to the conditions of this Agreement, the System
together with all of the assets, property, interests, rights and privileges of
Seller, including but not limited to those utilized in the cable television
business owned and operated by Seller in Abbeville, South Carolina (the "CATV
Business").
NOW, THEREFORE, the parties hereto hereby agree as follows:
1. PURCHASE AND SALE OF ASSETS
1.1 ASSETS TO BE SOLD. Subject to the terms and conditions of this
Agreement, Seller hereby agrees to sell, convey, assign, transfer and deliver to
Purchaser at the Closing (as hereinafter defined) and Purchaser hereby agrees to
acquire, for the consideration hereinafter provided, all of the assets,
properties, rights, titles and privileges of Seller of every kind, character and
description, whether tangible, intangible, real, personal or mixed, of whatever
description and wherever located, involved in, related to, owned, used or held
for use or useful in connection with the ownership, use or operation of the
System and all other assets of Seller relating to the System whether or not
required to be listed on Seller's balance sheet in accordance with generally
accepted accounting principles, including, without limitation, all additions,
accessions and substitutions made prior to the Closing as permitted pursuant to
the terms of this Agreement (collectively, the "Assets"), but excluding the
Excluded Assets (defined below) and assets disposed of by Seller between the
date hereof and the Closing Date on an arms' length basis in the ordinary course
of business. The Assets include, without limitation, the following:
(a) all of the real property interests of Seller relating to the System
(collectively, the "Real Property");
(b) all items of tangible personal property owned, used, held for use or
useful by Seller in the operation of the System, including, without
limitation, all equipment relating to the System (collectively, the
"Equipment"); and
(c) all the rights of Seller under any and all franchises, licenses
(including those required by the FCC), permits, authorizations, easements,
registrations, leases, variances, consents and certificates and similar
rights which authorize or are required in connection with the operation of
the System, including any applications for any of the foregoing
(collectively, the "Governmental Permits") that are obtained from or are
pending with any federal, state, county, municipal, local or foreign
government and any governmental agency, bureau, commission, authority, body,
court (or other judicial body), administrative or executive agency,
legislative or quasi-legislative body, commission, council or other agency,
including any such agency, authority or body responsible for the issuance or
administration of any Governmental Permit or whose consent is required for
the sale and transfer of the Assets (each, a "Governmental Authority") and
all subscription contracts with subscribers of Seller relating to the
System, pole attachment agreements, access agreements and all other
contracts, leases, agreements or
<PAGE>
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
any nature, in either case relating to 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 accounts receivable; and all assets of Seller other
than the Assets (collectively, the "Excluded Assets") are expressly excluded
from this sale, are not to be purchased or assumed by Purchaser, and do not
constitute part of the "Assets."
1.3 "AS IS" AND "WHERE IS". PURCHASER SHALL ACQUIRE THE ASSETS, "AS IS"
AND "WHERE IS," EXCEPT FOR THE REPRESENTATIONS AND WARRANTIES IN ARTICLE III
HEREOF, AND ANY AND ALL OTHER REPRESENTATIONS AND WARRANTIES WITH RESPECT TO THE
ASSETS, WHETHER EXPRESS OR IMPLIED, ARE HEREBY DISCLAIMED, INCLUDING ANY
REPRESENTATIONS OR WARRANTIES AS TO MERCHANTABILITY OR FITNESS FOR ANY
PARTICULAR PURPOSE.
2. CALCULATION AND PAYMENT OF PURCHASE PRICE
2.1 PAYMENT OF PURCHASE PRICE.
(a) The purchase price to be paid by Purchaser to Seller for the Assets
shall be an amount equal to $4,200,000 (the "Purchase Price").
(b) On the Closing Date, Purchaser shall pay to Seller the Purchase Price
less then $500,000 advance previously paid by Purchaser to Seller (the
"Advance"), 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.
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
<PAGE>
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,
therefor) when required by applicable law.
2.6 PROVATION OF REVENUE. All revenue earned arising from the Assets shall
be prorated between Purchaser and Seller as of (and the Closing shall be deemed
effective as of) 12:01 a.m., New York time, on the Closing Date.
3. CLOSING
3.1 CLOSING DATE. The closing of the transactions contemplated hereunder
(the "Closing") shall take place at the offices of Paul, Hastings, Janofsky &
Walker, 399 Park Avenue, 31st Floor, New York, New York 10022, at 10:00 A.M. New
York time on May 30, 1997, 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.
(c) Such other documents, opinions, instruments and certificates, in
form and substance reasonably satisfactory to Seller, as Seller may
reasonably request.
3
<PAGE>
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 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. 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 but not limited to the written consents of the
limited partners holding a majority of units of limited partnership of Cencom
Cable Income Partners II, L.P. (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
4
<PAGE>
party shall keep the other party apprised of the status of any inquiries made of
such party by the Federal Trade Commission, the Antitrust Division of the United
States Department of Justice, or any other Governmental Authority with respect
to this Agreement or the transactions contemplated hereby. Each party shall use
reasonable efforts to obtain the earliest termination or waiver of the HSR Act
waiting period possible.
5.5 BULK SALES. Purchaser waives compliance with provisions of the Uniform
Commercial Code relating to bulk transfer and similar laws in connection with
the sale of the Assets, subject to the indemnification provisions of Section 9
hereof.
6. CONDITIONS PRECEDENT TO OBLIGATIONS OF PURCHASER
The obligations of Purchaser under this Agreement are subject to the
satisfaction at or prior to the Closing of each of the following conditions, any
one or more of which may be waived by Purchaser, in its sole discretion;
provided, however, that no such waiver of a condition shall constitute a waiver
by Purchaser of any of its other rights or remedies, at law or in equity, if
Seller shall be in default of any of its obligations under this Agreement.
6.1 HSR ACT. All filings required under the HSR Act, if any, shall have
been made and the applicable waiting period shall have expired or been earlier
terminated without the receipt of any objection or the commencement or threat of
any litigation by a Governmental Authority of competent jurisdiction to restrain
or prevent the consummation of the transactions contemplated by this Agreement.
6.2 GOVERNMENTAL OR LEGAL ACTION. No action, suit or proceeding shall be
pending or threatened by any Governmental Authority or other person and no law,
rule or regulation or similar requirement shall have been enacted, promulgated
or issued or deemed applicable to any of the transactions contemplated by this
Agreement by any Governmental Authority or other person that would (a) prohibit
Purchaser's ownership or operation of all or a material portion of the System or
the Assets, (b) enjoin, prevent or make illegal the consummation of the
transactions contemplated by this Agreement or (c) challenge, set aside or
modify any authorization of the transactions provided for herein or any
approvals, consents, waivers or authorizations made or described hereunder.
6.3 REPRESENTATIONS; PERFORMANCE OF AGREEMENTS. The representations and
warranties of Seller set forth in Section 4 hereof shall be true in all material
respects as of and at the Closing Date with the same effect as though such
representations and warranties had been made again at and as of such time.
Seller shall have performed, satisfied and complied in all material respects
with all covenants, obligations, agreements and conditions required by this
Agreement to be performed, satisfied or complied with by Seller at or prior to
the Closing Date.
6.4 FINANCING. Purchaser shall have obtained such financing as it may
require in order to consummate the transactions contemplated by this Agreement.
6.5 CONSENTS AND APPROVALS. Seller shall have delivered to Purchaser
evidence that all of the Consents have been obtained or given and all such
Consents shall be in form and substance reasonably satisfactory to Purchaser and
Seller.
6.6 TRANSFER DOCUMENTS. Seller shall have delivered to Purchaser customary
bills of sale, general warranty deeds, assignments and other instruments of
transfer sufficient to convey good and marketable title to the Assets in
accordance with the terms of this Agreement, including the documents and
instruments described under Section 3.2(a). Seller shall have executed and
delivered to Purchaser the Assumption Agreement.
6.7 OPINIONS OF SELLER'S COUNSEL. Purchaser shall have received the
opinions of counsel for Seller reasonably required by Purchaser.
5
<PAGE>
6.8 DISCHARGE OF LIENS. Seller shall have secured the termination,
discharge and release of all material encumbrances of any nature on the Assets.
6.9 NO DEFAULT UNDER DOCUMENTS. As of the Closing Date, Seller shall not
be in material violation or default under any statute, rule, regulation,
agreement, or other document to which Seller is a party or by which Seller is
bound in a manner which would materially adversely affect the operation of the
System, nor shall Seller have knowledge of any condition or event which, with
notice or lapse of time or both, would constitute such a violation or default.
6.1 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
such representations and warranties had been made again at and as of such time.
Purchaser shall have performed, satisfied and complied in all material respects
with all covenants, obligations, agreements and conditions required by this
Agreement to be performed, satisfied or complied with by Purchaser at or prior
to the Closing Date.
7.4 CONSENT AND APPROVALS. All consents and authorizations required to be
obtained by Purchaser, shall have been obtained or given.
7.5 PAYMENTS. Purchaser shall have paid to Seller the Purchase Price less
the Advance.
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.
6
<PAGE>
8. REMEDIES
8.1 COSTS. If any legal action or other proceeding is brought for the
enforcement of this Agreement or any other instrument or document to be
executed, delivered or performed hereunder, or because of an alleged dispute,
breach, default or misrepresentation in connection with any of the provisions of
this Agreement or any other instrument or document to be executed, delivered or
performed hereunder, the successful or prevailing party shall be entitled to
recover reasonable attorneys' fees and other costs incurred in that action or
proceeding, in addition to any other relief to which it or they may be entitled.
8.2 TERMINATION WITHOUT LIABILITY. On the Closing Date, either party may
terminate this Agreement, without liability to the other, if any conditions
precedent to such party's performance shall not have been satisfied on the
Closing Date.
8.3 TERMINATION ON DEFAULT. Without limiting the provisions of Sections
8.1, 8.2 and 9 hereof, if either Seller, on the one hand, or Purchaser, on the
other hand, shall default in the due and timely performance of any of the
covenants or agreements under the Agreement, the other of Seller or Purchaser,
as the case may be, may, in addition to any other remedy available thereto, on
the Closing Date give notice of termination ("Termination Notice") of this
Agreement. The Termination Notice shall specify with particularity the default
or defaults on which it is based and state that this Agreement is terminated.
The Termination Notice shall be effective when given. The rights and remedies
granted in this Section 8.3 are cumulative and not exclusive of any other right
or remedy granted herein or provided by law or in equity.
9. INDEMNIFICATION
9.1 SELLER'S INDEMNITY. Seller shall indemnify and hold harmless Purchaser
and its shareholders, partners, officers, directors, employees, controlling
persons and representatives, against and in respect of any and all claims,
damages, losses, costs, expenses (including reasonable legal, accounting and
experts' fees and other fees and expenses incurred in the investigation or
defense of any of the following, and any interest and penalties), obligations
and liabilities which any such person may incur or suffer, as a result of,
arising in connection with or relating to any and all claims of third parties
(including the claims of any limited partners of the Seller) against, relating
to or pertaining to the Seller, the Assets and/or the System, which arise in
connection with or relate to the period prior to the Closing or to the
transactions contemplated hereunder and/or the authority of the Seller to enter
into and consummate such transactions and/or the propriety of such transactions.
9.2 PURCHASER'S INDEMNITY. Purchaser shall indemnify and hold harmless
Seller against and in respect of any and all claims, damages, losses, costs,
expenses (including reasonable legal, accounting and experts' fees and other
fees and expenses incurred in the investigation or defense of any of the
following, and any interest and penalties), obligations and liabilities which
Seller may incur as a result of, arising in connection with or relating to which
it may incur by reason of a material breach of any of the representations or
warranties of Purchaser set forth in this Agreement.
9.3 PROCEDURE. In the event that any claim shall be asserted against a
party entitled to indemnification hereunder (the "Indemnitee"), the Indemnitee
shall promptly notify the other party (the "Indemnitor") of such claim in
writing, and shall extend to the Indemnitor an opportunity to defend against
such claim at the Indemnitor's sole expense. Within 15 days of receiving any
such notice from the Indemnitee, the Indemnitor shall notify the Indemnitee as
to whether or not the Indemnitor elects to assume the defense of any such claim.
In the event the Indemnitor does not so elect to assume such defense, any costs
incurred by the Indemnitee in defending such claim shall be reimbursed to the
Indemnitee, on an as-incurred basis, pursuant to this Section 9. In the event
the Indemnitor elects to assume such defense, the Indemnitee shall, at its
option and expense, have the right to participate in any defense undertaken by
the Indemnitor with legal counsel of its own selection, provided that such legal
counsel is reasonably acceptable to Indemnitor. No settlement or compromise of
any claim that may result in indemnification
7
<PAGE>
liability may be made by the Indemnitor without the prior written consent of the
Indemnitee, which consent may not be unreasonably withheld.
9.4 PRESERVATION AND ACCESS TO RECORDS. Purchaser will preserve and keep
all books and records of Seller included in the Assets for a period of at least
five years from the Closing Date, except such records as Purchaser usually
disposes of in the ordinary course of business. During the period that such
books and records are preserved, duly authorized representatives of Seller shall
have access thereto, on reasonable prior notice to Purchaser and during regular
business hours to examine, inspect and copy, at its own expense, such books and
records, so long as such examination and inspection takes place on the premises
of Purchaser and does not unreasonably interfere with Purchaser's use thereof.
Purchaser, on the one hand, and Seller, on the other hand, agree that each of
them shall reasonably cooperate with the other of Purchaser or Seller, as
applicable, if the records relating to the System owned shall be of material
assistance to the other of Purchaser or Seller in any threatened or pending
litigation or proceeding or the preparation of tax returns.
10. MISCELLANEOUS PROVISIONS
10.1 ENTIRE AGREEMENT, MODIFICATION AND WAIVER. This Agreement constitutes
the entire agreement between the parties pertaining to the subject matter
contained in it and supersedes all prior and contemporaneous agreements,
representations and understandings of the parties. No supplement, modification
or amendment of this Agreement shall be binding unless executed in writing by
all the parties. No waiver of any of the provisions of this Agreement shall be
deemed, or shall constitute a continuing waiver. No waiver shall be binding
unless executed in writing by the party making the waiver.
10.2 RIGHTS OF PARTIES. Nothing in this Agreement, whether express or
implied, is intended to confer any rights or remedies under or by reason of this
Agreement upon any persons other than the parties and their respective permitted
successors and assigns, nor is anything in this Agreement intended to relieve or
discharge the obligation or liability of any third person or any party to this
Agreement, nor shall any provision give any third person any right of
subrogation or action against any party to this Agreement.
10.3 ASSIGNMENT. No assignment of any rights or obligations of either
party under this Agreement may be made without the prior written consent of the
other party to this Agreement, which consent is not to be unreasonably withheld,
except that Purchaser shall have the right to assign any or all of its rights
and liabilities hereunder to any of its affiliates, provided that each such
affiliate assumes Purchaser's obligations hereunder; and further provided that
Seller shall have been promptly provided written notice of such assignment
(including the name of the assignee). Any attempted assignment of rights or
obligations in violation of this Section 10.3 shall be null and void. Reference
to any of the parties in this Agreement shall be deemed to include the
successors and assigns of such party.
10.4 CONSTRUCTION. The language in this Agreement shall, in all cases, be
construed as a whole according to its fair meaning and neither strictly for nor
against Seller or Purchaser.
10.5 EXPENSES OF THE PARTIES. Except as expressly provided herein, all
expenses incurred by or on behalf of the parties hereto in connection with the
authorization, preparation and consummation of this Agreement including, without
limitation, all fees and expenses of agents, representatives, counsel and
accountants employed by the parties hereto in connection with the authorization,
preparation, execution and consummation of this Agreement shall be borne solely
by the party who shall have incurred the same.
10.6 FURTHER ASSURANCES. Seller, at any time after the Closing Date, will
promptly execute, acknowledge and deliver any further deeds, assignments,
conveyances and other assurances, documents and instruments of transfer,
reasonably requested by Purchaser and necessary for Seller to comply with its
covenants contained herein and will take any other action consistent with the
terms of this Agreement that may reasonably be requested by Purchaser for the
purpose of assigning, transferring, granting, conveying,
8
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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.
IN WITNESS WHEREOF, the undersigned, intending to be legally bound, have
executed this Second Amended and Restated Asset Purchase Agreement as of the
date first written above.
SELLER:
CENCOM PARTNERS, L.P.
By: Cencom Partners, Inc.,
its General Partner
By: /s/ JERALD L. KENT
------------------------------------------
Name: Jerald L. Kent
Title: Executive Vice President
PURCHASER:
CHARTER COMMUNICATIONS, L.P.
By: CCP II, Inc.,
its general partner
By: /s/ KENT D. KALKWARF
------------------------------------------
Name: Kent D. Kalkwarf
Title: Vice President
Signature Page for Sanford, NC Asset Purchase Agreement
9
<PAGE>
SECOND
AMENDED AND RESTATED
ASSET PURCHASE AGREEMENT
BETWEEN
CENCOM PARTNERS, L.P.,
AS SELLER
AND
CHARTER COMMUNICATIONS II, L.P.,
AS PURCHASER
DATED AS OF JANUARY 16, 1997
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C> <C> <C>
1. PURCHASE AND SALE OF ASSETS.................................................................................... 1
1.1 Assets to be Sold............................................................................ 1
1.2 Excluded Assets.............................................................................. 2
2. CALCULATION AND PAYMENT OF PURCHASE PRICE...................................................................... 3
2.1 Payment of Purchase Price.................................................................... 3
2.2 Assumption of Liabilities.................................................................... 3
2.3 Purchase Price............................................................................... 4
2.4 Excluded Liabilities......................................................................... 4
2.5 Allocation of Consideration.................................................................. 4
2.6 Proration of Revenue......................................................................... 4
3. CLOSING........................................................................................................ 4
3.1 Closing Date................................................................................. 4
3.2 Deliveries by Seller......................................................................... 5
3.3 Deliveries by Purchaser...................................................................... 5
4. REPRESENTATIONS AND WARRANTIES................................................................................. 6
4.1 Organization and Standing.................................................................... 6
4.2 Power and Authority.......................................................................... 6
4.3 Authorization................................................................................ 6
5. ADDITIONAL UNDERTAKINGS AND ACTIONS............................................................................ 7
5.1 Consents..................................................................................... 7
5.2 Access to Assets............................................................................. 7
5.3 Operations Prior to Closing.................................................................. 7
5.4 Antitrust Laws Compliance.................................................................... 7
5.5 Bulk Sales................................................................................... 8
6. CONDITIONS PRECEDENT TO OBLIGATIONS OF PURCHASER............................................................... 8
6.1 HSR Act...................................................................................... 8
6.2 Governmental or Legal Action................................................................. 8
6.3 Representations; Performance of Agreements................................................... 8
6.4 Financing.................................................................................... 9
6.5 Consents and Approvals....................................................................... 9
6.6 Transfer Documents........................................................................... 9
6.7 Opinions of Seller's Counsel................................................................. 9
6.8 Discharge of Liens........................................................................... 9
6.9 No Default Under Documents................................................................... 9
6.10 Additional Documents and Acts................................................................ 9
7. CONDITIONS PRECEDENT TO OBLIGATIONS OF SELLER.................................................................. 10
7.1 HSR Act...................................................................................... 10
7.2 Governmental or Legal Actions................................................................ 10
7.3 Representations; Performance of Agreements................................................... 10
7.4 Consent and Approvals........................................................................ 11
7.5 Payments..................................................................................... 11
7.6 Assumption of Liabilities.................................................................... 11
7.7 Additional Documents and Acts................................................................ 11
8. REMEDIES....................................................................................................... 11
8.1 Costs........................................................................................ 11
8.2 Termination Without Liability................................................................ 11
8.3 Termination on Default....................................................................... 11
</TABLE>
i
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<TABLE>
<CAPTION>
PAGE
-----
<S> <C> <C> <C>
9. INDEMNIFICATION................................................................................................ 12
9.1 Seller's Indemnity........................................................................... 12
9.2 Purchaser's Indemnity........................................................................ 12
9.3 Procedure.................................................................................... 12
9.4 Preservation and Access to Records........................................................... 13
10. GENERAL PROVISIONS............................................................................................. 13
10.1 Entire Agreement, Modification and Waiver.................................................... 13
10.2 Rights of Parties............................................................................ 14
10.3 Assignment................................................................................... 14
10.4 Construction................................................................................. 14
10.5 Expenses of the Parties...................................................................... 14
10.6 Further Assurances........................................................................... 14
10.7 Counterparts................................................................................. 15
10.8 Headings..................................................................................... 15
</TABLE>
ii
<PAGE>
SECOND
AMENDED AND RESTATED
ASSET PURCHASE AGREEMENT
THIS SECOND AMENDED AND RESTATED ASSET PURCHASE AGREEMENT (this "Agreement")
is made as of this 16th day of January, 1997 by and between Charter
Communications II, L.P., a limited partnership organized and existing under the
laws of the State of Delaware ("CC II" or the "Purchaser") and Cencom Partners,
L.P., a limited partnership organized and existing under the laws of the State
of Delaware ("Seller"), and hereby amends that Amended and Restated Asset
Purchase Agreement dated as of May 30, 1996 between Charter Communications, L.P.
and the Seller.
WITNESSETH:
WHEREAS, Seller is the owner and operator of a cable television system
serving Lincolnton, North Carolina (the "System");
WHEREAS, Seller desires to sell, and Purchaser desire to purchase, pursuant
to the terms and subject to the conditions of this Agreement, the System
together with all of the assets, property, interests, rights and privileges of
Seller, including but not limited to those utilized in the cable television
business owned and operated by Seller in Lincolnton, North Carolina (the "CATV
Business").
NOW, THEREFORE, in consideration of the mutual promises, agreements and
covenants set forth herein, and for other good and valuable consideration, the
sufficiency of which is hereby acknowledged, the parties hereto, intending
legally to be bound, hereby agree as follows:
1. PURCHASE AND SALE OF ASSETS
1.1 ASSETS TO BE SOLD. Subject to the terms and conditions of this
Agreement, Seller hereby agrees to sell, convey, assign, transfer and deliver to
Purchaser at the Closing (as hereinafter defined) and Purchaser hereby agrees to
acquire, for the consideration hereinafter provided, all of the assets,
properties, rights, titles and privileges of Seller of every kind, character and
description, whether tangible, intangible, real, personal or mixed, of whatever
description and wherever located, involved in, related to, owned, used or held
for use or useful in connection with the ownership, use or operation of the
System and all other assets of Seller relating to the System whether or not
required to be listed on Seller's balance sheet in accordance with generally
accepted accounting principles, including, without limitation, all additions,
accessions and substitutions made prior to the Closing as permitted pursuant to
the terms of this Agreement (collectively, the "Assets"), but excluding the
Excluded Assets (defined below) and assets disposed of by Seller between the
date hereof and the Closing Date on an arms' length basis in the ordinary course
of business. The Assets include, without limitation, the following:
(a) all of the real property interests of Seller relating to the System
(collectively, the "Real Property");
(b) all items of tangible personal property owned, used, held for use or
useful by Seller in the operation of the System, including, without
limitation, all equipment relating to the System (collectively, the
"Equipment"); and
(c) all the rights of Seller under any and all franchises, licenses
(including those required by the FCC), permits, authorizations, easements,
registrations, leases, variances, consents and certificates and similar
rights which authorize or are required in connection with the operation of
the System, including any applications for any of the foregoing
(collectively, the "Governmental Permits") that are obtained from or are
pending with any federal, state, county, municipal, local or foreign
government and any governmental agency, bureau, commission, authority, body,
court (or other judicial body), administrative or executive agency,
legislative or quasi-legislative body, commission, council or other agency,
including any such agency, authority or body responsible for the issuance or
administration of any Governmental Permit or whose consent is required for
the sale and transfer of the Assets (each, a "Governmental Authority") and
all subscription contracts with subscribers of Seller relating to the
<PAGE>
System, pole attachment agreements, access agreements and all other
contracts, leases, agreements or undertakings (other than those that are
included in the Excluded Assets or which constitute Governmental Permits),
written or oral, relating to the ownership, operation or maintenance of the
System and/or the Assets (the "Contracts").
1.2 EXCLUDED ASSETS. Notwithstanding anything to the contrary in this
Agreement, any insurance policies and rights and claims thereunder; all rights
to tax refunds and refunds of fees of any nature, in either case relating to the
period prior to the Closing Date; Seller's rights under this Agreement, and the
Purchase Price payable pursuant hereto; Seller's organizational documents and
partnership and financial records not included in Section 1.1; Seller's cash in
the bank and cash equivalents at the time of the Closing; and all assets of
Seller other than the Assets (collectively, the "Excluded Assets") are expressly
excluded from this sale, are not to be purchased or assumed by Purchaser, and do
not constitute part of the "Assets."
2. CALCULATION AND PAYMENT OF PURCHASE PRICE
2.1 PAYMENT OF PURCHASE PRICE.
(a) The purchase price to be paid by Purchaser to Seller for the Assets
shall be an amount equal to $27,500,000 (the "Purchase Price").
(b) On the Closing Date, Purchaser shall pay to Seller the Purchase Price,
by wire transfer of immediately available funds to an account designated by
Seller in writing.
2.2 ASSUMPTION OF LIABILITIES. As additional consideration for the Assets,
Purchaser shall, from and after the Closing Date, and pursuant to an Assignment
and Assumption Agreement in a form agreed between the parties (the "Assumption
Agreement"), assume the obligations of Seller under or in connection with all of
the Assets. In addition, Purchaser shall assume (i) all obligations relating to
the Assets entered into by Seller in the ordinary course of business between the
date hereof and the Closing Date (other than any obligations, if any, relating
to the Excluded Assets), to the extent such obligations continue after the
Closing and (ii) all liabilities relating to (y) all customer advance payments
and deposits, prepaid advertising revenues and other prepaid revenues or income
received or held by Seller for services to be rendered or obligations to be
performed in connection with the System subsequent to the Closing; (z) the
performance of the Contracts from and after the Closing Date; provided, however,
that Seller shall pay all sales, use, excise and similar taxes arising out of
the transfer of the Assets. Except as otherwise provided in this Section 2.2,
Purchaser shall not assume or become liable for any other obligations,
liabilities or indebtedness of Seller.
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
<PAGE>
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. New
York time on May 30, 1997, 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.
(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:
3
<PAGE>
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 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. 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 but not limited to the written consents of the
limited partners holding a majority of units of limited partnership of Cencom
Cable Income Partners II, L.P. (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
4
<PAGE>
party shall use reasonable efforts to obtain the earliest termination or waiver
of the HSR Act waiting period possible.
5.5 BULK SALES. Purchaser waives compliance with provisions of the Uniform
Commercial Code relating to bulk transfer and similar laws in connection with
the sale of the Assets, subject to the indemnification provisions of Section 9
hereof.
6. CONDITIONS PRECEDENT TO OBLIGATIONS OF PURCHASER
The obligations of Purchaser under this Agreement are subject to the
satisfaction at or prior to the Closing of each of the following conditions, any
one or more of which may be waived by Purchaser, in its sole discretion;
provided, however, that no such waiver of a condition shall constitute a waiver
by Purchaser of any of its other rights or remedies, at law or in equity, if
Seller shall be in default of any of its obligations under this Agreement.
6.1 HSR ACT. All filings required under the HSR Act, if any, shall have
been made and the applicable waiting period shall have expired or been earlier
terminated without the receipt of any objection or the commencement or threat of
any litigation by a Governmental Authority of competent jurisdiction to restrain
or prevent the consummation of the transactions contemplated by this Agreement.
6.2 GOVERNMENTAL OR LEGAL ACTION. No action, suit or proceeding shall be
pending or threatened by any Governmental Authority or other person and no law,
rule or regulation or similar requirement shall have been enacted, promulgated
or issued or deemed applicable to any of the transactions contemplated by this
Agreement by any Governmental Authority or other person that would (a) prohibit
Purchaser's ownership or operation of all or a material portion of the System or
the Assets, (b) enjoin, prevent or make illegal the consummation of the
transactions contemplated by this Agreement or (c) challenge, set aside or
modify any authorization of the transactions provided for herein or any
approvals, consents, waivers or authorizations made or described hereunder.
6.3 REPRESENTATIONS; PERFORMANCE OF AGREEMENTS. The representations and
warranties of Seller set forth in Section 4 hereof shall be true in all material
respects as of and at the Closing Date with the same effect as though such
representations and warranties had been made again at and as of such time.
Seller shall have performed, satisfied and complied in all material respects
with all covenants, obligations, agreements and conditions required by this
Agreement to be performed, satisfied or complied with by Seller at or prior to
the Closing Date.
6.4 FINANCING. Purchaser shall have obtained such financing as it may
require in order to consummate the transactions contemplated by this Agreement.
6.5 CONSENTS AND APPROVALS. Seller shall have delivered to Purchaser
evidence that all of the Consents have been obtained or given and all such
Consents shall be in form and substance reasonably satisfactory to Purchaser and
Seller.
6.6 TRANSFER DOCUMENTS. Seller shall have delivered to Purchaser customary
bills of sale, general warranty deeds, assignments and other instruments of
transfer sufficient to convey good and marketable title to the Assets in
accordance with the terms of this Agreement, including the documents and
instruments described under Section 3.2(a). Seller shall have executed and
delivered to Purchaser the Assumption Agreement.
6.7 OPINIONS OF SELLER'S COUNSEL. Purchaser shall have received the
opinions of counsel for Seller reasonably required by Purchaser.
6.8 DISCHARGE OF LIENS. Seller shall have secured the termination,
discharge and release of all material encumbrances of any nature on the Assets.
5
<PAGE>
6.9 NO DEFAULT UNDER DOCUMENTS. As of the Closing Date, Seller shall not
be in material violation or default under any statute, rule, regulation,
agreement, or other document to which Seller is a party or by which Seller is
bound in a manner which would materially adversely affect the operation of the
System, nor shall Seller have knowledge of any condition or event which, with
notice or lapse of time or both, would constitute such a violation or default.
6.10 ADDITIONAL DOCUMENTS AND ACTS. Seller shall have delivered or caused
to be delivered to Purchaser all such additional documents and instruments, in
form and content reasonably satisfactory to Purchaser and its counsel, as
Purchaser shall reasonably request, and shall have done all other acts or things
reasonably requested by Purchaser to evidence compliance with the conditions set
forth in this Section 6.
7. CONDITIONS PRECEDENT TO OBLIGATIONS OF SELLER
The obligations of Seller under the Agreement are subject to the
satisfaction, at or prior to the Closing, of each of the following conditions,
any one or more of which may be waived by Seller in its sole discretion;
provided, however, that no such waiver of a condition shall constitute a waiver
by Seller of any of its rights or remedies, at law or in equity, if Purchaser
shall be in default of any of its obligations under this Agreement.
7.1 HSR ACT. All filings required under the HSR Act, if any, shall have
been made and the applicable waiting period shall have expired or been earlier
terminated without the receipt of any objection or the commencement or threat of
any litigation by a Governmental Authority of competent jurisdiction to restrain
or prevent the consummation of the transactions contemplated by this Agreement.
7.2 GOVERNMENTAL OR LEGAL ACTIONS. No action, suit or proceeding shall be
pending or threatened by any Governmental Authority or other person and no law,
rule, regulation or other similar requirement shall have been enacted,
promulgated or issued or deemed applicable to any of the transactions
contemplated by this Agreement by any Governmental Authority or other person
that would (a) prohibit Purchaser's ownership or operation of all or any
material portion of the System or the Assets, (b) enjoin, prevent or make
illegal the consummation of the transactions contemplated by this Agreement, or
(c) challenge, set aside or modify any authorization of the transactions
provided for herein or any approvals, consents, waivers or authorizations made
or described hereunder.
7.3 REPRESENTATIONS; PERFORMANCE OF AGREEMENTS. The representations and
warranties of Purchaser set forth in Section 4 hereof shall be true in all
material respects as of and at the Closing Date with the same effect as though
such representations and warranties had been made again at and as of such time.
Purchaser shall have performed, satisfied and complied in all material respects
with all covenants, obligations, agreements and conditions required by this
Agreement to be performed, satisfied or complied with by Purchaser at or prior
to the Closing Date.
7.4 CONSENT AND APPROVALS. All consents and authorizations required to be
obtained by Purchaser, shall have been obtained or given.
7.5 PAYMENTS. Purchaser shall have paid to Seller the Purchase Price.
7.6 ASSUMPTION OF LIABILITIES. Purchaser shall have delivered to Seller
the Assumption Agreement.
7.7 ADDITIONAL DOCUMENTS AND ACTS. Purchaser shall have delivered or
caused to be delivered to Seller all such additional documents and instruments,
in form and content reasonably satisfactory to Seller and its counsel, as Seller
shall reasonably request, and shall have done all other acts or things
reasonably requested by Seller to evidence compliance with the conditions set
forth in this Section 7.
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8. REMEDIES
8.1 COSTS. If any legal action or other proceeding is brought for the
enforcement of this Agreement or any other instrument or document to be
executed, delivered or performed hereunder, or because of an alleged dispute,
breach, default or misrepresentation in connection with any of the provisions of
this Agreement or any other instrument or document to be executed, delivered or
performed hereunder, the successful or prevailing party shall be entitled to
recover reasonable attorneys' fees and other costs incurred in that action or
proceeding, in addition to any other relief to which it or they may be entitled.
8.2 TERMINATION WITHOUT LIABILITY. On the Closing Date, either party may
terminate this Agreement, without liability to the other, if any conditions
precedent to such party's performance shall not have been satisfied on the
Closing Date.
8.3 TERMINATION ON DEFAULT. Without limiting the provisions of Sections
8.1, 8.2 and 9 hereof, if either Seller, on the one hand, or Purchaser, on the
other hand, shall default in the due and timely performance of any of the
covenants or agreements under the Agreement, the other of Seller or Purchaser,
as the case may be, may, in addition to any other remedy available thereto, on
the Closing Date give notice of termination ("Termination Notice") of this
Agreement. The Termination Notice shall specify with particularity the default
or defaults on which it is based and state that this Agreement is terminated.
The Termination Notice shall be effective when given. The rights and remedies
granted in this Section 8.3 are cumulative and not exclusive of any other right
or remedy granted herein or provided by law or in equity.
9. INDEMNIFICATION
9.1 SELLER'S INDEMNITY. Seller shall indemnify and hold harmless Purchaser
and its shareholders, partners, officers, directors, employees, controlling
persons and representatives, against and in respect of any and all claims,
damages, losses, costs, expenses (including reasonable legal, accounting and
experts' fees and other fees and expenses incurred in the investigation or
defense of any of the following, and any interest and penalties), obligations
and liabilities which any such person may incur or suffer, as a result of,
arising in connection with or relating to any and all claims of third parties
(including the claims of any limited partners of the Seller) against, relating
to or pertaining to the Seller, the Assets and/or the System, which arise in
connection with or relate to the period prior to the Closing or to the
transactions contemplated hereunder and/or the authority of the Seller to enter
into and consummate such transactions and/or the propriety of such transactions.
9.2 PURCHASER'S INDEMNITY. Purchaser shall indemnify and hold harmless
Seller against and in respect of any and all claims, damages, losses, costs,
expenses (including reasonable legal, accounting and experts' fees and other
fees and expenses incurred in the investigation or defense of any of the
following, and any interest and penalties), obligations and liabilities which
Seller may incur as a result of, arising in connection with or relating to which
it may incur by reason of a material breach of any of the representations or
warranties of Purchaser set forth in this Agreement.
9.3 PROCEDURE. In the event that any claim shall be asserted against a
party entitled to indemnification hereunder (the "Indemnitee"), the Indemnitee
shall promptly notify the other party (the "Indemnitor") of such claim in
writing, and shall extend to the Indemnitor an opportunity to defend against
such claim at the Indemnitor's sole expense. Within 15 days of receiving any
such notice from the Indemnitee, the Indemnitor shall notify the Indemnitee as
to whether or not the Indemnitor elects to assume the defense of any such claim.
In the event the Indemnitor does not so elect to assume such defense, any costs
incurred by the Indemnitee in defending such claim shall be reimbursed to the
Indemnitee, on an as-incurred basis, pursuant to this Section 9. In the event
the Indemnitor elects to assume such defense, the Indemnitee shall, at its
option and expense, have the right to participate in any defense undertaken by
the Indemnitor with legal counsel of its own selection, provided that such legal
counsel is reasonably acceptable to Indemnitor. No settlement or compromise of
any claim that may result in indemnification
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<PAGE>
liability may be made by the Indemnitor without the prior written consent of the
Indemnitee, which consent may not be unreasonably withheld.
9.4 PRESERVATION AND ACCESS TO RECORDS. Purchaser will preserve and keep
all books and records of Seller included in the Assets for a period of at least
five years from the Closing Date, except such records as Purchaser usually
disposes of in the ordinary course of business. During the period that such
books and records are preserved, duly authorized representatives of Seller shall
have access thereto, on reasonable prior notice to Purchaser and during regular
business hours to examine, inspect and copy, at its own expense, such books and
records, so long as such examination and inspection takes place on the premises
of Purchaser and does not unreasonably interfere with Purchaser's use thereof.
Purchaser, on the one hand, and Seller, on the other hand, agree that each of
them shall reasonably cooperate with the other of Purchaser or Seller, as
applicable, if the records relating to the System owned shall be of material
assistance to the other of Purchaser or Seller in any threatened or pending
litigation or proceeding or the preparation of tax returns.
10. GENERAL PROVISIONS
10.1 ENTIRE AGREEMENT, MODIFICATION AND WAIVER. This Agreement constitutes
the entire agreement between the parties pertaining to the subject matter
contained in it and supersedes all prior and contemporaneous agreements,
representations and understandings of the parties. No supplement, modification
or amendment of this Agreement shall be binding unless executed in writing by
all the parties. No waiver of any of the provisions of this Agreement shall be
deemed, or shall constitute a continuing waiver. No waiver shall be binding
unless executed in writing by the party making the waiver.
10.2 RIGHTS OF PARTIES. Nothing in this Agreement, whether express or
implied, is intended to confer any rights or remedies under or by reason of this
Agreement upon any persons other than the parties and their respective permitted
successors and assigns, nor is anything in this Agreement intended to relieve or
discharge the obligation or liability of any third person or any party to this
Agreement, nor shall any provision give any third person any right of
subrogation or action against any party to this Agreement.
10.3 ASSIGNMENT. No assignment of any rights or obligations of either
party under this Agreement may be made without the prior written consent of the
other party to this Agreement, which consent is not to be unreasonably withheld,
except that Purchaser shall have the right to assign any or all of its rights
and liabilities hereunder to any of its affiliates, provided that each such
affiliate assumes Purchaser's obligations hereunder; and further provided that
Seller shall have been promptly provided written notice of such assignment
(including the name of the assignee). Any attempted assignment of rights or
obligations in violation of this Section 10.3 shall be null and void. Reference
to any of the parties in this Agreement shall be deemed to include the
successors and assigns of such party.
10.4 CONSTRUCTION. The language in this Agreement shall, in all cases, be
construed as a whole according to its fair meaning and neither strictly for nor
against Seller or Purchaser.
10.5 EXPENSES OF THE PARTIES. Except as expressly provided herein, all
expenses incurred by or on behalf of the parties hereto in connection with the
authorization, preparation and consummation of this Agreement including, without
limitation, all fees and expenses of agents, representatives, counsel and
accountants employed by the parties hereto in connection with the authorization,
preparation, execution and consummation of this Agreement shall be borne solely
by the party who shall have incurred the same.
10.6 FURTHER ASSURANCES. Seller, at any time after the Closing Date, will
promptly execute, acknowledge and deliver 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,
8
<PAGE>
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.
IN WITNESS WHEREOF, the undersigned, intending to be legally bound, have
executed this Second Amended and Restated Asset Purchase Agreement as of the
date first written above.
SELLER:
CENCOM PARTNERS, L.P.
By: Cencom Partners, Inc.,
its General Partner
By: /s/ JERALD L. KENT
-----------------------------------------
Name: Jerald L. Kent
Title: Executive Vice President
PURCHASER:
CHARTER COMMUNICATIONS II, L.P.
By: CCP II, Inc.,
its General Partner
By: /s/ KENT D. KALKWARF
-----------------------------------------
Name: Kent D. Kalkwarf
Title: Vice President
Signature Page for Lincolnton, NC Asset Purchase Agreement
9
<PAGE>
SCHEDULE 1
EXECUTIVE OFFICERS, DIRECTORS AND
CERTAIN AFFILIATES OF THE GENERAL PARTNER AND CPI
<PAGE>
EXECUTIVE OFFICERS, DIRECTORS AND
CERTAIN AFFILIATES OF THE GENERAL PARTNER AND CPI
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.
CPLP has no officers or directors. CPI manages and controls substantially
all of CPLP's affairs and has general responsibility and ultimate authority in
all matters affecting CPLP's business. In addition, the General Partner is
responsible for operating and managing CPLP's cable television systems.
Set forth below is the present principal occupation or employment and
employment history of the executive officers and directors of the General
Partner and CPI, as of December 31, 1996:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------- --- -------------------------------------------
<S> <C> <C>
Howard L. Wood............................. 57 President, Chief Executive Officer and
Director
Barry L. Babcock........................... 49 Executive Vice President, Chief Operating
Officer, Secretary and Director
Jerald L. Kent............................. 40 Executive Vice President, Chief Financial
Officer and Director
</TABLE>
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 VanLiner Group, Inc.,
First State Bank and Data Research Associates.
Mr. Babcock has been Executive Vice President, Chief Operating Officer and
Director of the General Partner since 1994 and holds the position of Chairman,
Secretary and General Counsel of Charter. Mr. Babcock also co-founded CCG in
1992. Prior to that time, Mr. Babcock was associated with CCA, where he served
as the Executive Vice President from February 1986 to November 1992, and as
Chief Operating Officer from May 1986 to November 1992. Mr. Babcock served as
Vice President and Director of CCA from the Company's inception in 1982 until
1984 when he was named Senior Vice President. Mr. Babcock's responsibilities
included overseeing the operational and business aspects of all cable television
systems owned and managed by CCA. Mr. Babcock is on the Board of Directors of
Charter and is Chairman of the Board of Directors of Community
Telecommunications Association. He also serves on the board of the National
Cable Television Association, C-SPAN, Cable in the Classroom, the Mercantile
Bank--St. Louis, the Missouri Historical Society and the St. Louis Civic
Entrepreneurs Organization.
Mr. Kent has been Executive Vice President, Chief Financial Officer and
Director of the General Partner since 1994 and holds the position of President
and Chief Financial Officer of Charter. Mr. Kent also co-founded CCG in 1992.
Prior to that time, he was associated with CCA as Executive Vice President
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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. Mr. Kent serves on the Board of Directors of Charter,
CCA Acquisition Corp., CCT Holdings Corp., CCA Holdings Corp. and The Magic
House.
The directors of the general partners of CC I and CC II are the same as
those of the General Partner and CPI. The executive officers of CCP I and CCP II
are Barry L. Babcock--Chairman, Jerald L. Kent-- President and Chief Financial
Officer, Howard L. Wood--Chairman of the Management Committee.
2
<PAGE>
1997 CONSENT FORM
CENCOM CABLE INCOME PARTNERS II, L.P.
FOR DELIVERY BY OR BEFORE 10:00 A.M. ON [ ], 1997
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 [ ],
1997 (the "Disclosure Materials"); acknowledges that the undersigned Limited
Partner has reviewed the Disclosure Materials; and hereby
<TABLE>
<CAPTION>
APPROVES the Transaction / /
<S> <C>
ABSTAINS from Voting on the Transaction / /
DISAPPROVES the Transaction / /
</TABLE>
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.
<PAGE>
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: , 1997
--------------------------------------
(Signature)
--------------------------------------
(Signature if held jointly)
PLEASE PROMPTLY MARK, SIGN, DATE AND RETURN THIS CONSENT FORM
IN THE ENCLOSED ENVELOPE.
