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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934
of the Securities Exchange Act of 1934
Filed by the Registrant þ
Filed by a Party other than the Registrant o
Filed by a Party other than the Registrant o
Check appropriate box:
o Preliminary Proxy Statement
o Confidential, For Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
þ Definitive Proxy Statement
o Definitive Additional Materials
o Soliciting Material under Rule 14a-12
o Confidential, For Use of the Commission Only (as permitted by Rule 14a-6(e)(2))
þ Definitive Proxy Statement
o Definitive Additional Materials
o Soliciting Material under Rule 14a-12
Northland Cable Properties Eight Limited Partnership
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of filing fee (Check the appropriate box):
o No fee required.
þ Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
þ Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) | Title of each class of securities to which transaction applies: | ||
Units of limited partnership interest. | |||
(2) | Aggregate number of securities to which transaction applies: | ||
19,087 Units of limited partnership interest | |||
(3) | Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee is calculated and state how it was determined): | ||
The filing fee was determined by multiplying 0.0000307 by $8,100,000 (the purchase price of the transaction). | |||
(4) | Proposed maximum aggregate value of transaction: | ||
$8,100,000 | |||
(5) | Total fee paid: | ||
$248.67 |
þ | Fee paid previously with preliminary materials: | |
o | Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. |
(1) | Amount Previously Paid: | ||
(2) | Form, Schedule or Registration Statement No.: | ||
(3) | Filing Party: | ||
(4) | Date Filed: |
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NORTHLAND CABLE PROPERTIES EIGHT PARTNERSHIP
101 Stewart Street, Suite 700
101 Stewart Street, Suite 700
Seattle, Washington 98101
December 19, 2007
To our Limited Partners:
Enclosed is a proxy statement on Schedule 14A accompanied by a proxy card in connection with a special meeting of the limited partners of Northland Cable Properties Eight Limited Partnership (“NCP-Eight”) to be held on February 27, 2008. The special meeting, and any postponements or adjournments, will be held at 101 Stewart Street, Suite 700, Seattle, Washington 98101. Only limited partners of record as of December 14, 2007 will be entitled to notice of and to vote at the special meeting. The meeting is called for the following purposes:
1. FIRST PROPOSAL: To authorize NCP-Eight and its general partner to sell substantially all of NCP-Eight’s assets to Green River Media and Communications, LLC or its assignee with the consent of NCP-Eight (“Green River”) for cash in the amount of $8,100,000, which we sometimes refer to as the “Green River transaction” pursuant to the terms of an asset purchase agreement dated as of July 5, 2007 between NCP-Eight and Green River, which we sometimes refer to as the “Green River purchase agreement”;
2. SECOND PROPOSAL: Subject to the approval of the third proposal below, to authorizeNCP-Eight and its general partner to sell substantially all of NCP-Eight ’s existing assets to the general partner of NCP-Eight or one or more of its affiliates in the event that the Green River transaction is not consummated by March 31, 2008, or such later date mutually agreed upon by NCP-Eight and Green River, or in the event that the Green River transaction is otherwise terminated prior to such date, on substantially the same terms and conditions provided in the Green River purchase agreement, which we sometimes refer to as the “alternative sale transaction”;
3. THIRD PROPOSAL: To authorize an amendment to the Amended and Restated Agreement of Limited Partnership of Northland Cable Properties Eight Limited Partnership dated August 10, 1989, which we refer to sometimes as the “NCP-Eight partnership agreement”, to exclude the alternative sale transaction from the independent appraisal procedures that would otherwise be required under theNCP-Eight partnership agreement; and
4. To transact any other business that properly comes before the special meeting, including any adjournments or postponements of the meeting.
Each proposal will be adopted if holders of a majority of the outstanding units of limited partnership interest (for purposes of the second and third proposals, not including any such units held by the general partner or its affiliates) vote to “APPROVE” the proposal. Neither NCP-Eight’s general partner nor any of its affiliates will, however, enter into the transaction described in the Second Proposal if the amendment to the NCP-Eight partnership agreement described in the Third Proposal is not approved by a majority of the outstanding units of limited partnership interest, even if the Green River transaction terminates.
Pursuant to the terms of the NCP-Eight partnership agreement, the limited partnership will be dissolved upon the sale of all, or substantially all of NCP-Eight’s assets, and the general partner will wind up the business and affairs of NCP-Eight without requiring any further consent or vote by the partners. Accordingly, if either the Green River transaction or the alternative sale transaction closes as planned, the general partner will commence the dissolution and winding up of NCP-Eight during the first half of 2008.
Limited partners are not entitled to dissenters’ or appraisal rights under Washington law or the NCP-Eight partnership agreement with respect to the approval and consummation of either the Green River transaction or the alternative sale transaction.
The general partner recommends that you vote to “APPROVE” the Green River transaction, the alternative sale transaction, and the related amendment to the NCP-Eight partnership agreement. The general partner has significant conflicts of interest in recommending approval of the proposed alternative sale transaction and the related amendment to the NCP-Eight partnership agreement. As a result,
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the general partner of NCP-Eight and its affiliates will abstain from voting on whether to approve the second and third proposals. Only limited partners of NCP-Eight not affiliated with the general partner will determine whether the alternative sale transaction, and the related amendment to the NCP-Eight partnership agreement should be approved. The general partner’s conflicts of interest are described in greater detail in the accompanying proxy statement. The general partner urges you to read the full text of the proxy statement and its exhibits carefully before making your decision on these proposals.
Pursuant to the first proposal, if the requisite majority of the outstanding units of limited partnership interest approve the Green River transaction and all conditions to closing are satisfied, NCP-Eight will sell all of its cable television systems and other assets to Green River, in an asset sale which is valued at $8,100,000, subject to adjustment pursuant to the terms of the Green River purchase agreement.
Pursuant to the second proposal, if the requisite majority of the outstanding units of limited partnership interest approve the alternative sale transaction and the related amendment to the NCP-Eight partnership agreement, and the Green River transaction is not consummated by March 31, 2008, or such later date mutually agreed upon by NCP-Eight and Green River, or in the event that the Green River transaction is otherwise terminated prior to such date, NCP-Eight will be authorized to sell all of its cable television systems and other assets to the general partner of NCP-Eight or one or more of its affiliates on substantially the same terms and subject to substantially the same conditions as would have applied to the Green River transaction, except the general partner’s obligation to close will be subject to the general partner’s ability to secure satisfactory financing. If such condition has not been met within 90 days after the agreement for the alternative sale transaction becomes effective, the general partner would have the right to terminate the alternative purchase agreement without penalty. The general partner has proposed an amendment to the NCP-Eight partnership agreement that would exclude the alternative sale transaction from the NCP-Eight partnership agreement’s independent appraisal requirement for sales of assets to the general partner. The general partner has proposed this amendment because the alternative sale transaction would be consummated (assuming the conditions to closing are met) at the same price and on substantially the same terms as the Green River transaction, which price and terms were negotiated on an arm’s-length basis with an unrelated third party. Pursuant to the third proposal, the NCP-Eight partnership agreement would be amended to exclude the alternative sale transaction from the independent appraisal procedures that otherwise would be required by the NCP-Eight partnership agreement. If the third proposal is not approved, the general partner will not enter into the purchase agreement for the alternative sale transaction even if the Green River transaction terminates.
Assuming either the Green River transaction or alternative sale transaction as described in this proxy statement is consummated and NCP-Eight is dissolved and wound up, projected cash distributions to be made to the limited partners of NCP-Eight (per $500 unit of limited partnership interest) are as follows:
Within | Eighteen Months | |||||
60 Days After Closing | Non-Resident Tax(1) | After Closing(2) | Total | |||
$232 | $(12) | $42 | $262 |
(1) | NCP-Eight on behalf of its limited partners expects to pay a required non-resident state income tax resulting from the proposed sales out of purchase price proceeds to the states of Alabama and Georgia in the aggregate amount of $12 per partnership unit. |
(2) | Assumes no claims will be made against the $810,000 holdback escrow. |
The amounts set forth in the preceding table are provided on a pro forma basis as of September 30, 2007. Actual amounts will vary from these projections. If the Green River transaction or the alternative sale transaction is not closed when anticipated (first quarter 2008), funds available for NCP-Eight to distribute to its limited partners may differ materially from these projections.(For details, see “Dissolution and Liquidation Consequences of the Proposed Sales — Projected Cash Available from Liquidation” on page 50.)
The proposals found in this proxy statement have not been approved or disapproved by the Securities and Exchange Commission. The Commission has not passed upon the fairness or merits of the proposals described in, nor upon the accuracy or adequacy of the information contained in, this proxy statement. Any representation to the contrary is unlawful.
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You should make your decision on the proposals presented in this document based on the information presented in this proxy statement as opposed to basing your decision on previously received materials including prior correspondence from the general partner. You are urged to carefully review this proxy statement and to return your proxy card promptly in order for it to be received by the general partner on or before February 22, 2008.
We are first mailing this proxy statement to limited partners on or about December 28, 2007.
Sincerely,
Northland Communications Corporation,
General Partner of Northland Cable Properties Eight
Limited Partnership
General Partner of Northland Cable Properties Eight
Limited Partnership
By:
/s/ John S. Whetzell
John S. Whetzell, CEO
Seattle, Washington
December 19, 2007
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This summary contains a brief discussion of the material terms of the proposed transactions. You should carefully read this entire proxy statement and the attached exhibits for a more complete understanding of the three proposals set forth herein.
This proxy statement solicits limited partner approval (i) to authorize the sale of substantially all the assets of Northland Cable Properties Eight Limited Partnership (“NCP-Eight”) to Green River Media and Communications, LLC, or its assignee with NCP-Eight’s consent (“Green River”), which we sometimes refer to as the “Green River transaction”, (ii) to authorize the alternative sale of substantially all of NCP-Eight’s assets to Northland Communications Corporation, NCP-Eight’s general partner, or one or more affiliates of Northland Communications Corporation, if the Green River transaction is not consummated by March 31, 2008, or such later date mutually agreed upon by NCP-Eight and Green River, or in the event that the Green River transaction is otherwise terminated prior to such date, which we sometimes refer to as the “alternative sale transaction”, and (iii) to authorize an amendment to the Amended and Restated Agreement of Limited Partnership of Northland Cable Properties Eight Limited Partnership dated August 10, 1989, which we refer to sometimes as the “NCP-Eight partnership agreement”, to exclude the alternative sale transaction from the independent appraisal procedures that would otherwise be required by the NCP-Eight partnership agreement. The purchase agreement that would be entered into with respect to the alternative sale transaction would contain substantially the same terms and conditions as provided in the Green River purchase agreement, except that the general partner’s obligation to close will be subject to the general partner’s ability to secure satisfactory financing. If such condition has not been met within 90 days after the agreement for the alternative sale transaction becomes effective, the general partner would have the right to terminate the alternative purchase agreement without penalty. The alternative sale transaction will not be entered into unless the proposal to amend the NCP-Eight partnership agreement is approved by a majority of the outstanding units of limited partnership interest (excluding units held by the general partner or its affiliates).
Pursuant to the terms of the NCP-Eight partnership agreement, the limited partnership will be dissolved upon the sale of all, or substantially all of NCP-Eight’s assets, and the general partner will wind up the business and affairs of NCP-Eight without requiring any further consent or vote by the partners. Accordingly, if either the Green River transaction or the alternative sale transaction closes as planned, the general partner will commence the dissolution and winding up of NCP-Eight during the first half of 2008.
On July 5, 2007, NCP-Eight executed an asset purchase agreement, which we sometimes refer to as the “Green River purchase agreement” to sell the operating assets and franchise rights of its remaining cable systems serving the communities of Aliceville, Alabama and Swainsboro, Georgia to Green River, an unaffiliated third party. The Green River purchase agreement includes a sales price of $8,100,000, which may be adjusted based on subscription revenue generated prior to closing, and requires that approximately ten percent of the gross proceeds be placed in escrow to secure NCP-Eight’s indemnification obligations with respect to breaches of its representations, warranties and covenants in the asset purchase agreement, to be released from escrow eighteen months after the closing of the transaction. Net proceeds to be received upon closing will be used to pay all remaining liabilities of NCP-Eight, including transaction costs and amounts outstanding under NCP-Eight’s Term Loan Agreement (with a balance of $2,052,872 as of September 30, 2007), and to make liquidating distributions to the limited partners. NCP-Eight will receive a final distribution of the amounts in escrow, subject to any indemnification claims against the escrow account, eighteen months after the closing, and soon thereafter, the limited partners will receive a final distribution.
Northland Cable Properties Eight Limited Partnership
101 Stewart Street, Suite 700
Seattle, Washington 98101
(206) 621-1351
101 Stewart Street, Suite 700
Seattle, Washington 98101
(206) 621-1351
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NCP-Eight is a Washington limited partnership whose sole equity owners include its limited partners and a general partner. The general partner is Northland Communications Corporation, a Washington corporation and wholly owned subsidiary of Northland Telecommunications Corporation. See “Information about NCP-Eight — The General Partner”. As general partner, Northland Communications Corporation manages the operations ofNCP-Eight. NCP-Eight’s business consists of owning and operating cable television systems. NCP-Eight’s cable systems are operated as two separate operating groups located in and around the communities of Aliceville, Alabama and Swainsboro, Georgia.
Mr. John F. Whetzell is the Chief Executive Officer and a director of both Northland Telecommunications Corporation and Northland Communications Corporation, the general partner. Mr. Richard I. Clark is the Executive Vice President and a director of both Northland Telecommunications Corporation and the general partner. Mr. Whetzell, in his capacity as Chief Executive Officer, exercises voting and investment control over the interest in NCP-Eight owned by the general partner. Mr. Clark does not exercise voting and investment control over the interest in NCP-Eight owned by the general partner.
Green River Media and Communications, LLC
4601 Six Forks Road, Suite 500
Raleigh, NC 27609
(919) 321-2560
Green River’s business consists of identifying, acquiring and operating rural communications and media companies. Green River has extensive private market financing experience, including longstanding relationships with various senior secured lenders. Concurrent with entering into the Green River purchase agreement, Green River also entered into purchase agreements on similar terms with Northland Cable Properties Seven Limited Partnership and Northland Cable Properties, Inc., both affiliates of NCP-Eight.
Green River will not be obligated to close their purchase of NCP-Eight’s assets unless certain material closing conditions pursuant to the Green River purchase agreement are satisfied, including the following:
• | the Green River transaction shall have been approved by holders of a majority of the outstanding units of limited partnership interest of NCP-Eight; | |
• | there shall have been no action, suit or other proceeding pending or threatened to prevent or restrict the Green River transaction; | |
• | NCP-Eight shall have received a fairness opinion issued by Duff & Phelps, LLC (“Duff & Phelps”) regarding the consideration to be received by the limited partners of NCP-Eight in the Green River transaction in form and substance acceptable to NCP-Eight; | |
• | NCP-Eight shall have obtained consent to the transfer of certain rights and assets from the FCC (with limited exceptions), franchising authorities and other third parties, respectively; | |
• | there shall have been no changes that would have a material adverse effect on the operations or financial condition of NCP-Eight’s systems (other than those that affect the industry as a whole); | |
• | the purchase price shall not have increased above the Purchase Price Ceiling or decreased below the Purchase Price Floor, as each of those terms are defined in the Green River purchase agreement, excluding the effect of other adjustments; and | |
• | encumbrances specified in the Green River purchase agreement shall have been removed. |
The general partner currently anticipates that the sale of substantially all of NCP-Eight’s assets to Green River will close during the first quarter of 2008.
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Alternative Sale of NCP-Eight’s Assets to the General Partner or One or More of the Affiliates of the General Partner (See page 46)
This proxy statement also solicits approval from the limited partners of NCP-Eight to authorize the sale of substantially all of NCP-Eight’s assets to Northland Communications Corporation, NCP-Eight’s general partner, or to one or more affiliates of Northland Communications Corporation if the Green River transaction is not consummated by March 31, 2008, or such later date upon which NCP-Eight and Green River mutually agree, or in the event that the Green River transaction is otherwise terminated prior to such date. Neither Northland Communications Corporation nor any of its affiliates will enter into the purchase agreement relating to the alternative sale transaction unless the proposal to amend the NCP-Eight partnership agreement described below is approved by a majority of the outstanding units of limited partnership interest.
If the general partner would enter into the alternative sale transaction, it would consider assigning its rights to purchase the assets of NCP-Eight to either or both of Northland Cable Television, Inc., a Washington corporation (NCTV), and Northland Cable Properties, Inc., a Washington corporation (NCPI). Any such assignment would be made primarily to facilitate the financing of the asset purchase. The business address for both NCTV and NCPI is: 101 Stewart Street, Suite 700, Seattle, Washington 98101; Tel:(206) 621-1351. NCTV does business in Washington, California, Texas, South Carolina and North Carolina. NCPI does business in Washington, North Carolina, Texas and Idaho. Neither NCTV nor NCPI have had any negotiations, transactions or material contracts with NCP-Eight during the past two years. Additionally, neither NCTV nor NCPI owns any securities issued by NCP-Eight, and neither have entered into any agreement, arrangement or understanding with respect to any securities issued by NCP-Eight. Neither NCTV nor NCPI have been convicted in a criminal proceeding during the past five years. Further, neither NCTV nor NCPI were party to any judicial or administrative proceeding during the past five years that resulted in a judgment, decree or final order enjoining them from future violations of, or prohibiting activities subject to, federal or state securities laws, or a finding of any violation of federal or state securities laws.
Messrs. Whetzell and Clark, in their capacities as executive officers of the general partner determined that the general partner would be willing to purchase NCP-Eight’s assets on substantially the same terms and conditions as the Green River purchase agreement if the Green River transaction were terminated. The business address for both Mr. Whetzell and Mr. Clark is: 101 Stewart Street, Suite 700, Seattle, Washington 98101; Tel:(206) 621-1351. Mr. Whetzell is the Chief Executive Officer and a director of both Northland Telecommunications Corporation and the general partner. Mr. Clark is the Executive Vice President and a director of both Northland Telecommunications Corporation and the general partner. Neither Mr. Whetzell nor Mr. Clark owns any securities issued by NCP-Eight, and neither have entered into any agreement, arrangement or understanding with respect to any securities issued by NCP-Eight. Neither Mr. Whetzell nor Mr. Clark has been convicted in a criminal proceeding during the past five years. Further, neither Mr. Whetzell nor Mr. Clark were party to any judicial or administrative proceeding during the past five years that resulted in a judgment, decree or final order enjoining them from future violations of, or prohibiting activities subject to, federal or state securities laws, or a finding of any violation of federal or state securities laws. Messrs. Whetzell and Clark are both United States citizens.
Pursuant to the terms of an asset purchase agreement substantially in the form of Exhibit C hereto, which we sometimes refer to as the “alternative purchase agreement”, the general partner would have the right to purchase or to cause one or more of its affiliates to purchase substantially all of NCP-Eight’s existing assets. In the event that the Green River transaction is not consummated by March 31, 2008 or such later date upon which NCP-Eight and Green River mutually agree, or in the event that the Green River transaction is otherwise terminated prior to such date, NCP-Eight and Northland Communications Corporation could enter into the alternative purchase agreement, provided that the third proposal described below is approved by the limited partners.
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Differences Between the Terms of the Alternative Purchase Agreement and the Green River Purchase Agreement (See page 46)
The alternative purchase agreement would contain substantially the same terms and conditions set forth in the Green River purchase agreement (including those relating to indemnification for breaches of NCP-Eight’s representations, warranties and covenants and the related escrow arrangements), except that the general partner’s obligation to close would be conditioned on the ability to arrange financing for the transaction on terms satisfactory to the general partner. If such condition has not been met within 90 days of the expiration or termination of the Green River purchase agreement, the general partner would have the right to terminate the alternative purchase agreement without penalty.
NCP-Eight has yet to execute the alternative purchase agreement because even if the Green River transaction terminates and the proposed amendment to the NCP-Eight partnership agreement is duly approved, the general partner may in its discretion determine not to enter into the alternative purchase agreement and instead continue its efforts to identify prospective purchasers for NCP-Eight’s assets. If entered into, the alternative purchase agreement would automatically terminate without any action required by NCP-Eight or the general partner, in the event that closing of the alternative sale transaction has not occurred on or before the first anniversary of the termination of the Green River transaction.
This proxy statement also solicits approval from the limited partners to authorize an amendment to the NCP-Eight partnership agreement that would exclude the alternative sale transaction from the independent appraisal procedures that would otherwise be required by the NCP-Eight partnership agreement with respect to sales of NCP-Eight’s assets to the general partner. The form of that proposed amendment to the NCP-Eight partnership agreement is attached to this proxy statement as Exhibit E.
Pursuant to the limited partnership agreement, all or any portion of NCP-Eight’s assets may be sold to the general partner or any of its affiliates upon a majority vote of the limited partners approving the terms of the transaction and a price determined in accordance with the following appraisal procedure. The general partner would select two independent third-party appraisers, who would together select a third independent third-party appraiser. During the two-month period immediately preceding the proposed transaction, each of the appraisers would determine the fair market value of the assets proposed to be sold. All fees and costs of such appraisals would be borne by the general partner. The general partner and its affiliates would have the right, but not the obligation, to purchase the appraised assets for a price equal to the greater of (1) the price paid by NCP-Eight for such assets, or (2) the average of the values determined by the three appraisers. The general partner would also be required to provide a report to the limited partners including a general description of the assets to be sold, the date of purchase and the purchase price paid for such assets by NCP-Eight, the appraised values and the dates of the appraisals, and the purchase price and date of purchase for the sale of the assets to the general partner or any of its affiliates. Unless the NCP-Eight partnership agreement is amended as proposed, these independent appraisal procedures would apply to the alternative sale transaction. These procedures are not, however, applicable to the Green River transaction because Green River is not an affiliate of the general partner.
As currently proposed, the price to be paid for NCP-Eight’s assets in the alternative sale transaction equals the price to be paid in the Green River transaction, which was negotiated as an arm’s-length transaction. Accordingly, the general partner is unwilling to bear the cost of obtaining three separate appraisals and believes that the costs and potential delays associated with obtaining three separate appraisals of the fair market value of NCP-Eight’s assets would not outweigh any perceived benefits from such appraisals. Neither the general partner nor any of its affiliates intends to enter into the alternative sale transaction if the proposed amendment to the NCP-Eight partnership agreement is not approved by a majority of the outstanding units of limited partnership interest, even if the Green River transaction terminates.
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Pursuant to NCP-Eight’s partnership agreement, the limited partnership will be dissolved upon the sale of all, or substantially all of NCP-Eight’s assets, and the general partner will wind up the business and affairs of NCP-Eight without requiring any further consent or vote by the partners. Accordingly, if either the Green River transaction or the alternative sale transaction closes as planned, the general partner will immediately commence the dissolution and winding up of NCP-Eight. The general partner expects the dissolution and winding up of NCP-Eight to commence sometime during the first half of 2008. NCP-Eight will use the net sale proceeds, less the amount to be placed in escrow, to pay all remaining liabilities of NCP-Eight, including transaction costs and amounts outstanding under the Amended and Restated Credit Agreement betweenNCP-Eight and U.S. Bank National Association dated September 7, 2006, which we sometimes refer to as the “term loan agreement”. NCP-Eight will also pay the general partner management and other fees and costs as described below under “— Conflicts of Interest of the General Partner” on page 6. NCP-Eight will then distribute the balance of the cash proceeds received at closing to the limited partners in accordance with the terms of the NCP-Eight partnership agreement. Any funds distributed to NCP-Eight out of the escrow after the eighteen month escrow period has expired will be distributed to partners in accordance with the terms of the NCP-Eight partnership agreement. See “Specific Terms of the Proposed Sales — Distributions to General and Limited Partners” on page 48 for the rights of those parties to participate in such distributions.
Estimated Distributions to Limited Partners as a Result of the Proposed Sales and Subsequent Liquidation of NCP-Eight (See page 52)
Assuming the Green River transaction closes as contemplated and the application of proceeds to pay outstanding debt obligations takes place, projected cash available for distribution by NCP-Eight per unit of limited partnership interest and per $1,000 investment is estimated to equal the following:
Per $500 Unit of | ||||||||
Limited Partnership | Per $1,000 | |||||||
Interest | Investment | |||||||
Limited partners’ capital account balance(1) | $ | 10 | $ | 20 | ||||
Allocation of gain to limited partners’ capital account balance pursuant to Article 16(c) of the NCP-Eight partnership agreement | 265 | 530 | ||||||
Limited partners’ adjusted capital balance pursuant to Article 16(c) of the NCP-Eight partnership agreement | 275 | 550 | ||||||
Projected cash distributions to limited partners pursuant to Article 16(d)(iii) of the NCP-Eight partnership agreement | 274 | 548 | ||||||
Nonresident tax paid on behalf of the limited partners(2) | (12 | ) | (24 | ) | ||||
Projected cash distributions to limited partners pursuant to Article 16(d)(iv) of the NCP-Eight partnership agreement(3) | — | — | ||||||
Total projected cash distributions to limited partners(4) | $ | 262 | $ | 524 | ||||
(1) | Capital Account balance as of September 30, 2007 for limited partners. Accordingly, this capital account balance does not reflect any capital expenditure or cash flow that is subsequent to September 30, 2007. | |
(2) | NCP- Eight has operating assets in the states of Alabama and Georgia. These states impose an income tax on the net income earned by nonresident partners from the property located in the state. NCP-Eight is required to compute and pay this tax on behalf of its limited partners. This tax will be paid on behalf of the limited partners out of the proceeds from the proposed sale that could otherwise be distributed directly to the limited partners. See “Special Factors of the Proposed Sales — Federal and State Income Tax Consequences of the Proposed Sales — State Income Tax Considerations” beginning on page 20 for a more detailed discussion of this state tax. |
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(3) | Based on estimates of projected aggregate cash available for distribution to limited partners upon dissolution, NCP-Eight expects that limited partners will not receive distributions pursuant to Article 16(d)(iv) of the NCP-Eight partnership agreement. |
(4) | Assumes no claims will be made against the $810,000 holdback escrow. |
The Green River transaction is expected to close during the first quarter of 2008. If the Green River transaction is terminated, NCP-Eight and Northland Communications Corporation are expected to enter into the alternative purchase agreement, provided the limited partners have approved the alternative sale transaction and the related amendment to the NCP-Eight partnership agreement. In that event, the alternative sale transaction is expected to close in the second quarter of 2008. The amount available for distribution toNCP-Eight’s limited partners could differ materially as a result of this delay.
The amounts set forth in the preceding tables are estimates and are being provided for illustrative purposes only. Actual amounts will vary from these projections. For details, see “Dissolution and Liquidation Consequences of the Proposed Sales — Projected Cash Available from Liquidation” on page 50.
Upon the disposition of the assets, taxable income will be recognized by NCP-Eight to the extent that the amount realized from the disposition exceeds the adjusted tax basis of the assets disposed of. The taxable gain from the sale will be allocated among the partners in accordance with the NCP-Eight partnership agreement. The allocation of gain to the limited partners will increase their adjusted tax basis in NCP-Eight and increase their “amount at risk” with respect to NCP-Eight’s activity.
The distribution of cash by NCP-Eight to its limited partners in liquidation of their partnership interests will generally result in a taxable transaction. NCP-Eight’s limited partners will realize gain or loss on the distribution of cash on units of limited partnership interest to the extent of the difference between the amount of cash distributed and the adjusted tax basis of the limited partner’s interest in NCP-Eight immediately before the distribution but after taking into account the allocation of gain described in the preceding paragraph. Upon closing of the proposed sales, and dissolution of NCP-Eight, any limited partner with accrued but unused net losses suspended under the passive activity loss rules of the Internal Revenue Code may use such losses to offset any income and gain from the proposed sales. In addition, the sales may also be taxable under applicable state, local and foreign tax laws.Limited partners are strongly urged to consult with their own tax advisor concerning the impact of the above-discussed rules on their investment in NCP-Eight and how those rules will likely be applied to their distributions resulting from the sale of NCP-Eight’s assets.
Northland Communications Corporation is the general partner of NCP-Eight and is proposed to be a named party to the alternative purchase agreement. If the Green River transaction is not completed, the second proposal authorizes NCP-Eight to enter into the alternative purchase agreement with the general partner or one or more of its affiliates, pursuant to which they would purchase NCP-Eight’s assets on substantially the same terms and conditions as the Green River transaction (including those relating to the indemnification forNCP-Eight’s representations, warranties and covenants and the related escrow agreement), except that the general partner’s obligation to close would be conditioned on the ability to arrange financing for the transaction on terms satisfactory to the general partner. If such condition has not been met within 90 days of the expiration or termination of the Green River purchase agreement, the general partner would have the right to terminate the alternative purchase agreement without penalty. The third proposal, if approved, would permit the alternative sale transaction to proceed without following the independent appraisal procedures required by the NCP-Eight partnership agreement for asset sales to the general partner. As general partner of NCP-Eight, Northland Communications Corporation has negotiated and structured the terms of the Green River transaction on behalf of NCP-Eight. Consequently, if the proposed amendment to the NCP-Eight partnership agreement is approved and the alternative sale transaction is consummated, the general partner will benefit from the terms it negotiated onNCP-Eight’s behalf with respect to the Green River transaction without following the
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independent appraisal procedures established in the NCP-Eight partnership agreement. Northland Communications Corporation has an interest in seeing that its affiliates pay the lowest possible purchase price for their acquisition of assets from NCP-Eight. At the same time, Northland Communications Corporation is primarily responsible for negotiating, on behalf of NCP-Eight, the highest possible price forNCP-Eight’s assets. Northland Communications Corporation took a number of steps to protect against the conflicts of interest inherent in its negotiation of the Green River transaction. See “Special Factors of the Proposed Sales — Fairness of the Proposed Sales — The General Partner’s Beliefs as to Fairness” on page 29. Notwithstanding, Northland Communications Corporation is faced with substantial conflicts of interest with respect to the proposed alternative sale transaction.
Furthermore, upon consummation of either the Green River transaction or the alternative sale transaction, Northland Communications Corporation is entitled to receive payment of management and other fees from NCP-Eight for its services as general partner and for cost reimbursements prior to closing either the Green River transaction or the alternative sale transaction. The estimated amount of these fees and reimbursements as of September 30, 2007 is $44,243 in the aggregate.
Messrs. Whetzell and Clark, executive officers of the general partner, hold an ownership interest in Northland Telecommunications Corporation, the parent corporation of the general partner. Mr. Whetzell is the largest holder of Northland Telecommunications Corporation’s common stock. Additionally, Mr. Whetzell is the Chief Executive Officer and a director of both Northland Telecommunications Corporation and the general partner. Mr. Whetzell, in his capacity as Chief Executive Officer of the general partner, exercises voting and investment control over the general partner interest in NCP-Eight owned by the general partner. While Mr. Clark also owns common stock of Northland Telecommunications Corporation and is the Executive Vice President and a director of both Northland Telecommunications Corporation and the general partner, he does not exercise voting and investment control over the interest in NCP-Eight owned by the general partner. No other person owns shares of Northland Telecommunications Corporation common stock in an amount that would entitle such person to a controlling stockholder vote with respect to Northland Telecommunications Corporation. If the Green River transaction is consummated, Mr. Whetzell and Mr. Clark would have no continuing direct or indirect interest in NCP-Eight’s business. If the alternative sale transaction is consummated, Mr. Whetzell and Mr. Clark would likely have an indirect interest in NCP-Eight’s business through their ownership interest in the general partner’s parent corporation, Northland Telecommunications Corporation. However, the amount of Mr. Whetzell’s and Mr. Clark’s indirect interest in NCP-Eight’s business, and the indirect ownership percentage that represents, would depend on a number of factors, including the amount and form of debt and equity financing used by the general partner or its affiliate to consummate the purchase of NCP-Eight’s assets and whether third parties participated in the equity financing. Consequently, Mr. Whetzell’s and Mr. Clark’s indirect interests in NCP-Eight’s business should the alternative sale transaction be consummated cannot be quantified at this time.
The General Partner Recommends Approving the Proposed Green River Transaction, the Alternative Sale Transaction and the Amendment to the NCP-Eight Partnership Agreement (See page 15)
The general partner recommends for approval the proposed sale of assets to Green River. The general partner also recommends for approval the proposal relating to the alternative sale to the general partner or one or more of its affiliates in the event that the Green River transaction is not consummated as contemplated by the Green River purchase agreement. The general partner also recommends for approval the proposed amendment to the NCP-Eight partnership agreement. The alternative purchase agreement will not be entered into unless the proposal to amend the NCP-Eight partnership agreement is approved by a majority of the outstanding units of limited partnership interest.
The general partner believes the terms of the proposed Green River transaction are fair to NCP-Eight and its limited partners. The general partner based its determination as to the fairness of the terms of the proposed
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sale to Green River on the following material factors, each of which is described in greater detail in this proxy statement:
• | the form and amount of consideration offered to the limited partners as a result of the proposed sale; | |
• | the third-party bid solicitation process undertaken by NCP-Eight to obtain bids from third parties for the purchase ofNCP-Eight’s assets, which bids were used in part in the determination of the fair market value of the assets and in the general partner’s evaluation of the proposed sales price for those assets; |
• | the price offered for units of limited partnership interest in recent unsolicited offers; |
• | the liquidation and going concern value of NCP-Eight; | |
• | the requirement that a majority ofNCP-Eight’s units of limited partnership interest approve the proposed sale; and | |
• | the fairness opinion rendered by Duff & Phelps, following its evaluation and analysis of the consideration to be received by the limited partners of NCP-Eight in the aggregate for the proposed sale. Duff & Phelps’s opinion addressed the fairness, from a financial point of view, to the limited partners of NCP-Eight as of July 5, 2007 of the aggregate consideration to be received by such limited partners assuming consummation of the Green River transaction (without giving effect to any impacts of the Green River transaction on any particular limited partner other than in its capacity as a limited partner). It did not, however, address the fairness of the consideration projected to be received by the unaffiliated limited partners of NCP-Eight. (See “Special Factors of the Proposed Sales — Fairness of the Proposed Sales — Opinion of Duff & Phelps” at page 31). |
The general partner believes the terms of the proposed alternative sale ofNCP-Eight’s assets, in the event the Green River transaction is not consummated, to the general partner or one or more of its affiliates are fair to NCP-Eight and its limited partners because the alternative sale transaction would be subject to substantially the same terms (including purchase price) as the Green River transaction, which the general partner determined to be fair based on the factors described above.
The following table summarizes the most likely consequences of a majority vote for or against each of the two proposals found in this proxy statement.
1. | Likely Consequences of a Vote to “APPROVE” the Proposed Green River Transaction. | • All the operating assets of NCP-Eight will be sold to Green River unless the Green River transaction is not consummated by March 31, 2008, or such later date upon which NCP-Eight and Green River mutually agree, or in the event that the Green River transaction is otherwise terminated prior to such date. | ||||
• After closing the proposed sale to Green River, net proceeds from the sale (excluding funds placed in escrow and after payment of liabilities and the general partner’s fees and costs) will be distributed to the partners as outlined in this proxy statement. | ||||||
2. | Likely Consequences of a Vote to “DISAPPROVE” the Proposed Green River Transaction. | • In the event that the alternative sale transaction and the proposed amendment to the NCP-Eight partnership agreement is approved, the general partner or its affiliates would consider entering into the alternative sale transaction to purchase NCP-Eight’s assets. |
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• In the event that either the alternative sale transaction or the proposed amendment to the NCP-Eight partnership agreement are not approved, NCP-Eight will continue to operate its cable systems. In such case, the general partner will continue its efforts to identify prospective purchasers forNCP-Eight’s assets, and NCP-Eight will continue to incur costs related to its ongoing public reporting obligations and pay management fees to its general partner. | ||||||
3. | Likely Consequences of a Vote to “APPROVE” the Proposed Alternative Sale Transaction. | • All the operating assets of NCP-Eight may be sold to Northland Communications Corporation or one or more of its affiliates (on substantially the same terms and conditions as set forth in the asset purchase agreement for the Green River transaction) only in the event that the Green River transaction is not consummated by March 31, 2008, or such later date upon which NCP-Eight and Green River agree, or in the event that the Green River transaction is otherwise terminated prior to such date, except that the general partner’s obligation to close shall be conditioned on its ability to arrange financing for the transaction on terms satisfactory to the general partner. If such condition has not been met within 90 days after the alternative purchase agreement becomes effective, the general partner would have the right to terminate the alternative purchase agreement without penalty. The alternative purchase agreement will not be entered into unless the proposal, described in this proxy statement, to amend the NCP-Eight partnership agreement is approved by a majority of the outstanding units of limited partnership interest. | ||||
• After closing the proposed alternative sale transaction, net proceeds from the sale (excluding funds placed in escrow and after payment of liabilities and the general partner’s fees and costs) will be distributed to the limited partners as outlined in this proxy statement. | ||||||
4. | Likely Consequences of a Vote to “DISAPPROVE” the Proposed Alternative Sale Transaction. | • In the event that the Green River transaction is not approved or not consummated, NCP-Eight will continue to operate its cable systems. The general partner will continue its efforts to identify prospective purchasers forNCP-Eight’s assets, and NCP-Eight will continue to incur costs related to its ongoing public reporting obligations and pay management fees to its general partner. | ||||
5. | Likely Consequences of a Vote to “APPROVE” the Proposed Amendment to the NCP-Eight Partnership Agreement. | • In the event the proposed amendment to the NCP-Eight partnership agreement is approved and the Green River transaction is not consummated, NCP-Eight may be sold to Northland Communications Corporation or one or more of its affiliates (on substantially the same terms and conditions as set forth in Green River purchase agreement, except for an additional condition regarding financing), without following the independent appraisal procedures that would otherwise be required by the NCP-Eight partnership agreement. | ||||
6. | Likely Consequences of a Vote to “DISAPPROVE” the Proposed Amendment to the NCP-Eight Partnership Agreement. | • In the even the Green River transaction is not consummated, the alternative sale transaction would not be entered into andNCP-Eight will continue to operate its cable systems. The general partner will continue its efforts to identify prospective purchasers forNCP-Eight’s assets, andNCP-Eight will continue to incur costs related to its ongoing public reporting obligations and pay management fees to its general partner. |
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You are entitled to one vote at the special meeting for each participation interest inNCP-Eight, which we sometimes refer to as a “unit of limited partnership interest”, that you held of record on the close of business on December 14, 2007. The affirmative vote of limited partners holding a majority of the outstanding units of limited partnership interest ofNCP-Eight is required to “APPROVE” the proposed Green River transaction. The affirmative vote of limited partners holding a majority of the outstanding units of limited partnership interest ofNCP-Eight is required to “APPROVE” the proposed alternative sale transaction. The affirmative vote of limited partners holding a majority of the outstanding units of limited partnership interest ofNCP-Eight is required to “APPROVE” the proposed amendment to theNCP-Eight partnership agreement. If you “ABSTAIN” from voting, it will have the same effect as a vote to “DISAPPROVE” the proposal, or proposals, from which you abstain. Additionally, broker non-votes will have the same effect as a vote to “DISAPPROVE” the proposals.
A proxy card is included with this proxy statement, and the general partner is asking you to complete, date and sign the proxy card and return it in the enclosed envelope as soon as possible. A proxy card that is properly completed, dated, signed and returned in time for voting with a vote specified on the proxy will be voted as requested.
As of December 14, 2007, the record date for the special meeting, there were 19,087 units of limited partnership interest outstanding, held by 852 limited partners of record. All abstentions shall be counted as a “no” vote. Any signed and returned proxy cards that fail to vote on any or all of the proposed measures will be treated as a vote to approve each proposed measure for which no vote was cast.
You may revoke your proxy at any time prior to the special meeting by delivering to Northland Communications Corporation either (a) an instrument revoking the proxy, (b) a duly executed proxy bearing a later date, or (c) by attending the special meeting and voting in person. Your attendance at the special meeting, by itself, will not revoke your proxy.
Limited partners are not entitled to dissenters’ or appraisal rights in connection with the proposed sales under either theNCP-Eight partnership agreement or Washington law.
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The selected data presented below for thenine-month period ended September 30, 2007, the six-month period ended June 30, 2007 and the three month period ended March 31, 2007, and as of September 30, 2007, June 30, 2007 and March 31, 2007, are derived from the unaudited Consolidated Financial Statements ofNCP-Eight that are included elsewhere in this proxy statement.
The selected data presented below under the captions “Summary of Operations” and “Balance Sheet Data” for, and as of the end of, each of the years in the five-year period ended December 31, 2006, are derived from the Consolidated Financial Statements ofNCP-Eight, which financial statements have been audited by KPMG LLP, an independent registered public accounting firm. The consolidated financial statements as of December 31, 2006 and 2005, and for each of the years in the three-year period ended December 31, 2006, and the report thereon, are included elsewhere in this proxy statement.
Nine Months | Six Months | Three Months | ||||||||||||||||||||||||||||||
Ended | Ended | Ended | ||||||||||||||||||||||||||||||
September 30, | June 30, | March 31, | Years Ended December 31, | |||||||||||||||||||||||||||||
2007 | 2007 | 2007 | 2006 | 2005 | 2004 | 2003 | 2002 | |||||||||||||||||||||||||
SUMMARY OF OPERATIONS: | ||||||||||||||||||||||||||||||||
Service revenues | $ | 2,796,599 | $ | 1,864,737 | $ | 915,667 | $ | 3,532,887 | $ | 3,406,867 | $ | 3,393,246 | $ | 3,331,725 | $ | 3,378,058 | ||||||||||||||||
Operating income (loss) | 382,505 | 273,306 | 130,501 | 403,392 | 159,992 | 134,640 | 281,940 | 404,119 | ||||||||||||||||||||||||
Income from continuing operations | 382,505 | 273,306 | 130,501 | 238,841 | 51,346 | 24,652 | 137,509 | 191,165 | ||||||||||||||||||||||||
Income (loss) from discontinued operations(1) | — | — | — | — | 799,736 | 96,450 | 1,448,414 | (9,063 | ) | |||||||||||||||||||||||
Net income | $ | 127,112 | $ | 190,360 | $ | 90,234 | $ | 238,841 | $ | 851,082 | $ | 121,102 | $ | 1,585,923 | $ | 182,102 | ||||||||||||||||
Net income from continuing operations per limited partnership unit | $ | 7 | $ | 10 | $ | 5 | $ | 12 | $ | 3 | $ | 1 | $ | 7 | $ | 9 | ||||||||||||||||
Net income (loss) from discontinued operations per unit of limited partnership interest | — | — | — | — | 41 | 5 | 75 | — | ||||||||||||||||||||||||
Net income per limited partner unit | $ | 7 | $ | 10 | $ | 5 | $ | 12 | $ | 44 | $ | 6 | $ | 82 | $ | 10 | ||||||||||||||||
(1) | On March 11, 2003 and March 21, 2005, the partnership sold the operating assets and franchise rights of its La Conner, Washington and Marion and Eutaw, Alabama systems, respectively. The results of operations and the sale of the La Conner, Marion and Eutaw systems are presented as discontinued operations in this filing and the accompanying financial statements. |
September 30, | June 30, | March 31, | December 31, | |||||||||||||||||||||||||||||
2007 | 2007 | 2007 | 2006 | 2005 | 2004 | 2003 | 2002 | |||||||||||||||||||||||||
BALANCE SHEET DATA: | ||||||||||||||||||||||||||||||||
Total assets | $ | 6,315,921 | $ | 6,356,413 | $ | 6,272,050 | $ | 6,359,648 | $ | 6,381,727 | $ | 6,546,410 | $ | 7,410,618 | $ | 9,641,472 | ||||||||||||||||
Term loan | 2,052,872 | 2,092,872 | 2,153,763 | 2,193,768 | 2,318,768 | 3,487,718 | 4,457,696 | 8,213,663 | ||||||||||||||||||||||||
Total liabilities | 2,674,400 | 2,651,644 | 2,667,407 | 2,845,239 | 3,092,307 | 4,103,622 | 5,088,932 | 8,905,709 | ||||||||||||||||||||||||
General partner’s deficit | (43,621 | ) | (42,988 | ) | (43,990 | ) | (44,892 | ) | (47,280 | ) | (55,791 | ) | (57,002 | ) | (72,861 | ) | ||||||||||||||||
Limited partners’ capital | 3,641,521 | 3,747,757 | 3,648,633 | 3,559,301 | 3,336,700 | 2,498,579 | 2,378,688 | 808,624 |
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A number of special factors apply to the proposed sales. You should consider the following factors carefully in evaluating the proposed sales. You are also urged to read all of this proxy statement and all exhibits carefully when evaluating whether to approve authorizing the proposed sales before completing the accompanying proxy card.
NCP-Eight was formed on September 21, 1988 and began operations in 1989.NCP-Eight serves the communities and surrounding areas of Aliceville, Alabama and Swainsboro, Georgia (collectively, we refer to the operating assets in these locations as the “properties” or the “Systems”). As of September 30, 2007, the total number of basic subscribers served by the Systems was 5,054 andNCP-Eight’s penetration rate (basic subscribers as a percentage of homes passed) was approximately 54%.NCP-Eight’s properties are located in rural areas, which, to some extent, do not offer consistently acceptable off-air broadcast network signals. Management believes that this factor, combined with the existence of fewer entertainment alternatives than in large markets contributes to the percentage of the population subscribing to cable television.
NCP-Eight has 11 non-exclusive franchises to operate the Systems. These franchises, which will expire at various dates through the year 2019, have been granted by local and county authorities in the areas in which the Systems operate. Effective July 1, 2007, the Georgia State Legislation passed the Consumer Choice for Television Act (the “Georgia Act”). Under the Georgia Act,NCP-Eight can opt out of certain local franchise obligations and elect to be governed by a state franchise, as to all or part of its service areas in Georgia. In the alternative,NCP-Eight may continue to operate under its existing franchises through their stated term. While the franchises have defined lives based on the franchising agreement, renewals are routinely granted by the local franchising authority, or a cable provider can apply for a franchise through the state in the state of Georgia. Management is no longer obligated to seek a renewal from the local franchising authority in the state of Georgia, but expects local renewals to continue to be granted. In the state of Alabama, franchises are granted at the municipal and county level. The state has not enacted legislation authorizing the state to grant franchises. Management currently expects to continue its operations under the existing franchise agreements for the foreseeable future and effects of obsolescence, competition and other factors are minimal. In addition, the level of maintenance expenditures required to obtain the future cash flows expected from the franchises is not material in relation to the carrying value of the franchises. This expectation is supported by management’s experience withNCP-Eight’s franchising authorities and the franchising authorities ofNCP-Eight’s affiliates. Annual franchise fees are paid to the granting authorities. These fees vary between 2% and 5% and are generally based on the respective gross revenues of the Systems in a particular community. The franchises may be terminated for failure to comply with their respective conditions.
The general partner’s actions have also been motivated by activity of an unrelated third party in making unsolicited offers to purchase units ofNCP-Eight at prices which, in the general partner’s opinion, do not fairly represent the underlying value of limited partner units inNCP-Eight. The offers that have come to the general partner’s attention are as follows:
Maximum | ||||||||||||
Offer Amount | Units to be | |||||||||||
Offering Party | Dates of Offer | (per $500 Unit) | Purchased | |||||||||
MacKenzie Patterson Fuller, LP. | July 18, 2007 | $ | 140.00 | 442 | ||||||||
December 3, 2007 | $ | 175.00 | 302 |
The maximum amounts offered to be purchased by the bidder are equal to approximately 2% of the outstanding units. The offering prices per unit are lower than recent sale prices for those trades in NCP-Eight units in the secondary market brought to the general partner’s attention. Based on information provided by the American Partnership Board, the price per unit (excluding fees and commissions) has ranged from $250 to $280 for 50 units of limited partnership interest that were sold during the two-month period beginning on July 1, 2007 and ending on September 1, 2007. The offered prices per unit are also less than the amount of
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currently forecasted proceeds to be received by the limited partners ofNCP-Eight per unit of limited partnership interest if the Green River transaction or the alternative sale transaction are consummated as authorized. It has come to the general partner’s attention that 60 units of limited partnership interest have been tendered by the limited partners of NCP-Eight in response to the July 18, 2007 unsolicited offer.
Northland Communications Corporation currently serves, and in the past has served, as the general partner of several limited partnerships. It has been Northland Communications Corporation’s experience that especially as the end of the term of a partnership grows near or an announcement regarding a plan to sell substantially all assets of a partnership is made, unsolicited offers are made for units of limited partnership interest at values that are less than the value of the partnership’s underlying assets. These offers are made with the expectation of a positive return upon liquidation of the partnership at or near the expiration of the partnership’s term or dissolution, as applicable. The general partner is not familiar with how the party making the unsolicited offers for units of limited partnership interest inNCP-Eight arrived at its offered price, nor is the general partner familiar with the auction process used by the American Partnership Board which has resulted in the sale of units of limited partnership interest inNCP-Eight from time to time. The general partner has, however, referred limited partners who have desired to sell their units of limited partnership interest to the American Partnership Board since the American Partnership Board’s auction process at various times can provide a mechanism for the sale of units of limited partnership interest where a secondary market for the sale of those units does not otherwise exist.
Chronology of Events Leading Up to the Proposed Sales
In response to numerous inquiries fromNCP-Eight’s limited partners, during the Spring and Summer months of 2005, the general partner, represented by Mr. Whetzell and Mr. Clark, its executive officers, coordinated with cable television industry investment banker Daniels & Associates (“Daniels”) to explore opportunities to sell some or all ofNCP-Eight’s assets. Those discussions were motivated by a desire to raise funds for distribution toNCP-Eight’s limited partners, and the possibility of presenting to those limited partners an opportunity to vote on whether to sell the partnership’s remaining assets leading to the final dissolution ofNCP-Eight, provided a reasonable purchase price could be negotiated. Those efforts resulted in Daniels contacting seventy potential purchasers in July 2005, based on Daniel’s knowledge and experience of possible purchasers of cable television assets. Following those initial contacts, eight parties expressed serious interest and executed Nondisclosure Agreements withNCP-Eight, allowing them to receive the sales memorandum prepared by Daniels with the assistance of the general partner, which memorandum described the assets available for purchase. Of those eight parties, two potential purchasers touredNCP-Eight’s operating systems in late August and early September. Daniels then organized a sealed bid process to solicit actual purchase offers from the interested parties, but no one submitted an offer by the September 30, 2005 bid date.
At the request of Mr. Whetzell and Mr. Clark, acting on behalf of the general partner, Daniels then reinitiated the process in September 2006 by contacting fifty potential purchasers. In response, nine parties executed Nondisclosure Agreements withNCP-Eight and were provided an updated sales memorandum prepared by Daniels with the assistance of the general partner. Of those nine parties, six parties delivered indications of interest to Daniels in November 2006. The general partner sought indications of interest for all of the properties of NCP-Eight (Aliceville and Swainsboro), and all of the properties of its affiliate, Northland Cable Properties Seven Limited Partnership, and a property in Clayton, Georgia. Daniels prepared a summary of the indications of interest for the general partner. This summary indicates that only three of the six interested parties submitted complete bids for all of the properties. The three parties submitting complete bids included Green River and two other bidders, which we refer to as Bidder B and Bidder C. As a result, these bids are not comparable with the incomplete indications of interest. The summary reflects that Green River valued the Aliceville and Swainsboro properties at $1,548 per subscriber; Bidder B valued the Aliceville and Swainsboro properties at a range of $1,300 - $1,500 per subscriber; and Bidder C valued the Aliceville property at $1,286 per subscriber and the Swainsboro property at $1,675 per subscriber. Additionally, the summary reflects that the bidders assigned the following valuation multiples to the properties: Green River valued the properties at 5.9x annualized cash flow and 8.2x annualized EBITDA; Bidder B valued the properties at 5.1x — 5.9x annualized cash flow and 7.1x — 8.2x annualized EBITDA; and Bidder C valued
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the properties at 5.9x annualized cash flow and 8.2x annualized EBITDA. Of the six parties that delivered indications of interest, three parties then conducted tours of NCP-Eight’s operating systems between October 2006 and January 2007. Final bids were then solicited by Daniels pursuant to a sealed bid process wherein interested parties would submit their sealed bids to Daniels, which bids were to include the bidder’s highest offer and amark-up of the form of asset purchase agreement proposed by the general partner. Two final bids were received by Daniels in February 2007.
The two final bids were then sent to Mr. Whetzell and Mr. Clark for evaluation. Mr. Whetzell and Mr. Clark, discussed with Daniels the ability of each of the final two bidders to complete the transaction and, as a result of the review of the final bids and those discussions, they decided that the winning bid was presented by Green River. The other final bid from Orange Broadband valued theNCP-Eight assets at a price of $6,899,100 based on 5,307 equivalent basic subscribers, or $1,300 per subscriber as of December 31, 2006. By contrast, Green River’s final bid valued the NCP-Eight assets at a price of $8,100,000. In evaluating the final two bids for the purchase of NCP-Eight’s assets, Mr. Whetzell and Mr. Clark primarily considered the potential resulting cash distribution to the limited partners. Orange Broadband’s final bid was at the low end of its initial valuation range and was also lower than Green River’s bid. If NCP-Eight had accepted Orange Broadband’s offer, the limited partners would have been likely to receive a distribution of $203 per unit, approximately $59 per unit less than the distribution per unit expected if the Green River transaction is consummated.
The second most important factor that Mr. Whetzell and Mr. Clark, considered in evaluating the final two bids was whether the competing bidders would be able to complete the transaction. The evaluation of this second factor included considering whether each of the final two bidders had the ability to finance the transaction and had experience in the cable industry that would enable them to overcome any challenges that may arise during the transfer process accompanying the execution of the proposed asset sale. Based on its discussions with Daniels, the general partner understood that both Orange Broadband and Green River had the ability to complete the transaction.
Upon selecting Green River as the winning bid, the general partner worked toward signing a letter of intent which outlined the principal terms of a sales transaction between Green River andNCP-Eight. The letter of intent was formally signed on April 4, 2007 and included the major points for incorporation into a formal asset purchase agreement. Negotiations on the asset purchase agreement took place over the next three months and a formal agreement was signed and put in place on July 5, 2007. Concurrent with entering into the Green River purchase agreement, Green River also entered into purchase agreements on similar terms with Northland Cable Properties Seven Limited Partnership and Northland Cable Properties, Inc., both affiliates ofNCP-Eight.
The board of directors of the general partner discussed these transactions and their status on April 30, 2007 and September 4, 2007.
After the Green River purchase agreement was entered into, the Mr. Whetzell and Mr. Clark in their capacities as executive officers of the general partner, began considering a contingency plan in the event the Green River transaction were not completed for some reason. If the Green River transaction is not completed, Mr. Whetzell and Mr. Clark believe it to be in the best interests ofNCP-Eight and its limited partners to complete a sale ofNCP-Eight’s assets and dissolve and wind up the limited partnership in part to relieveNCP-Eight of its reporting obligations under the Securities Exchange Act of 1934 and the related costs and other burdens associated with such reporting obligations. Mr. Whetzell and Mr. Clark, as representatives of the general partner, considered that the general partner may be willing to purchaseNCP-Eight’s assets on substantially the same terms and conditions as the Green River purchase agreement if the Green River transaction were not completed. In forming a contingency plan, the general partner elected not to resolicit additional bids through an auction process or contact those parties who had previously expressed an interest in the limited partnership’s assets because it did not appear that such a resolicitation would lead to a superior bid. The bid received from Green River was significantly greater than any other competing offer received in the course of NCP-Eight’s three year effort to sell the systems. Additionally, pursuant to the Green River purchase agreement, NCP-Eight agreed that it would not solicit, initiate or knowingly encourage any proposal that could reasonably be expected to lead to the acquisition of the assets that are the subject of the Green River
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transaction. If the Green River transaction is not completed and the proposed amendment to theNCP-Eight partnership agreement is approved,NCP-Eight would be authorized to enter into an alternative purchase agreement with Northland Communications Corporation or one or more of its affiliates having the terms set forth in the form of the alternative purchase agreement attached as Exhibit C hereto.
No special provisions have been made to grant unaffiliated holders of units of limited partnership interest access to the corporate files of the general partner or to obtain counsel or appraisal services at the expense of the general partners.
The general partner, Mr. Whetzell and Mr. Clark believe the reason forNCP-Eight to enter into the Green River transaction or the alternative sale transaction is that it provides an opportunity for the efficient winding up ofNCP-Eight for an amount they believe represents fair value forNCP-Eight’s assets. In reaching their conclusion to present the proposed sales toNCP-Eight’s unaffiliated limited partners for approval the general partner, Mr. Whetzell and Mr. Clark considered the following factors:
• | the business, operations, properties and assets, and financial condition of NCP-Eight (as described under “Information About NCP-Eight”), NCP-Eight’s business strategy and prospects, including the risks associated with achieving those prospects, the nature of the industry in which NCP-Eight competes, industry trends and economic and market conditions, both on a historical and on a prospective basis; | |
• | the relative lack of liquidity for units of limited partnership interest inNCP-Eight; | |
• | the recent unsolicited offers to purchase units at prices which, in the general partner’s opinion, do not fairly represent the underlying value of the units; | |
• | the terms of the Green River purchase agreement; | |
• | the cost of ongoing public reporting and securities law compliance; |
The general partner also considered the following risks and potentially negative factors in deliberations concerning the proposed sales:
• | the possibility that the value of the systems and assets might increase from the proposed sale valuations prior to or following closing of the various asset sales; | |
• | the conflicts of interest facing the general partner in structuring and implementing the proposed sales; | |
• | the fact that upon consummation of the proposed sales and dissolution of NCP-Eight, limited partners would no longer participate in the future earnings or growth of NCP-Eight; | |
• | the tax impact of the proposed sales on limited partners; and | |
• | the costs of the proposed sales and the effect of transaction expenses and other known and contingent liabilities on the net amount to be distributed to limited partners. |
The foregoing summarizes the material factors considered by the general partner, Mr. Whetzell and Mr. Clark. Following their analysis of the factors considered, the general partner, Mr. Whetzell and Mr. Clark concluded that the anticipated benefits of the proposed sales to the limited partners of NCP-Eight outweighed the possible disadvantages. In view of the wide variety of the factors considered and the complexity of these matters, the general partner, Mr. Whetzell and Mr. Clark did not find it practicable to quantify or otherwise assign relative weights to the foregoing factors. The general partner, Mr. Whetzell and Mr. Clark recommend entering into the proposed sales based upon the totality of the information presented to and considered by them.
Northland Communications Corporation and its affiliates’ reasons for entering into the proposed alternative sale transaction are to acquire additional cable assets for a suitable price in geographic locations that are complimentary to Northland Communications Corporation’s existing operations. Further, as discussed above in “— Chronology of Events Leading Up to the Proposed Sales”, if the Green River transaction terminates, the
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general partner, Mr. Whetzell and Mr. Clark believe it to be in the best interests of NCP-Eight and its limited partners to complete a sale of NCP-Eight’s assets and dissolve and wind up the limited partnership in part to relieve NCP-Eight of the costs related to ongoing public reporting obligations under the Securities Exchange Act of 1934, increased costs in complying with requirements under the Sarbanes Oxley Act of 2002 and its obligation to pay management fees to the general partner. If the proposed alternative sale transaction closes, Northland Communications Corporation or its affiliates will acquire additional cable assets at the same price and on the same terms and conditions that Green River had negotiated. Among other things, this means that Northland Communications Corporation or its affiliates would have the benefit of the representations and warranties made in the Green River purchase agreement and the related indemnification and escrow provisions. Assuming that the proposed alternative sale transaction closes, the value of the distribution to Northland Communications Corporation as general partner is estimated to be approximately $53,000.
Under theNCP-Eight partnership agreement, the general partner and certain of its affiliates are entitled to receive payment of management and other fees fromNCP-Eight for its services and for cost reimbursements prior to liquidation ofNCP-Eight. The estimated amounts of these fees and reimbursements as of September 30, 2007 totaled $34,958. See “Dissolution and Liquidation Consequences of the Proposed Sales — Projected Cash Available from Liquidation” beginning on page 50. This amount is not, however, unique to the proposed alternative sale and would also be received by the general partner if the assets are sold to Green River.
A reason for Mr. Whetzell and Mr. Clark to approve entering into the proposed alternative sale transaction is that as equity owners in Northland Telecommunications Corporation, they believe that the assets to be purchased by the general partner, or one or more of its affiliates in the proposed alternative sale transaction are of the type customarily purchased and operated by the companies affiliated with Northland Telecommunications Corporation and those assets are being purchased for a price that they believe is acceptable and within the range for which acceptable borrowing terms can be secured. Mr. Whetzell is the largest holder of Northland Telecommunications Corporation’s common stock. Additionally, Mr. Whetzell is the Chief Executive Officer and a director of both Northland Telecommunications Corporation and the general partner. Accordingly, Mr. Whetzell, in his capacity as Chief Executive Officer, exercises voting and investment control over the general partner interest in NCP-Eight owned by the general partner. While Mr. Clark also owns common stock of Northland Telecommunications Corporation and is the Executive Vice President and a director of both Northland Telecommunications Corporation and the general partner, he does not exercise voting and investment control over the interest in NCP-Eight owned by the general partner. No other person owns shares of Northland Telecommunications Corporation common stock in an amount that would entitle such person to a controlling stockholder vote with respect to Northland Telecommunications Corporation. If the Green River transaction is consummated, Mr. Whetzell and Mr. Clark would have no continuing direct or indirect interest in NCP-Eight’s business. If the alternative sale transaction is consummated, Mr. Whetzell and Mr. Clark would likely have an indirect interest in NCP-Eight’s business through their ownership interest in the general partner’s parent corporation, Northland Telecommunications Corporation. However, the amount of Mr. Whetzell’s and Mr. Clark’s indirect interest in NCP-Eight’s business, and the indirect ownership percentage that represents, would depend on a number of factors, including the amount and form of debt and equity financing used by the general partner or its affiliate to consummate the purchase of NCP-Eight’s assets and whether third parties participated in the equity financing. Consequently, Mr. Whetzell’s and Mr. Clark’s indirect interests in NCP-Eight’s business should the alternative sale transaction be consummated cannot be quantified at this time.
The following discussion provides a general summary of the financial income tax consequences of a disposition ofNCP-Eight assets as applicable toNCP-Eight. This discussion is based on provisions of the Internal Revenue Code of 1986, as amended (the “Code”), on the regulations promulgated thereunder, and on published administrative rulings and judicial decisions now in effect, all of which are subject to change or different interpretations. No assurance can be given that future legislation, administrative rulings or court decisions will not modify the conclusions set forth in this summary. In addition, since the proposed sales are not expected to close until the first quarter of 2008, Congress could pass further legislation that could
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significantly change the tax consequences of the proposed sales from that discussed below. This discussion is necessarily general, and does not describe all of the U.S. federal income tax consequences that may be relevant to particular circumstances of investors, or to investors that may be subject to special U.S. federal income tax rules (including, for example, traders or dealers in securities or currencies, banks and other financial institutions, insurance companies, governmental entities, organizations generally exempt from taxation,flow-through entities and Limited Partners with a functional currency other than the U.S. dollar). The actual tax and financial consequences of the proposed asset sales will vary depending upon the investor’s circumstances. The following constitutes a general summary of some of the provisions of the Code and tax acts. The general partner has not sought, nor will it receive, a legal opinion as to the matters discussed below. For purposes of this discussion, a “U.S. Person” is a citizen or resident of the United States, a corporation, partnership or other entity created or organized in the United States or under the law of the United States or any State, an estate, the income of which is subject to U.S. federal income taxation regardless of its source, or a trust if it (i) is subject to the primary supervision of a court within the U.S. and one or more U.S. persons have the authority to control all substantial decisions of the trust, or (ii) has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. Person.
THIS DISCUSSION DOES NOT CONSTITUTE TAX ADVICE, IS NOT INTENDED OR WRITTEN TO BE USED AND CANNOT BE USED TO AVOID PENALTIES IMPOSED BY THE CODE, AND IS NOT INTENDED AS A SUBSTITUTE FOR TAX PLANNING. EACH PROSPECTIVE INVESTOR IS STRONGLY URGED TO CONSULT ITS OWN TAX ADVISOR WITH RESPECT TO THE FEDERAL, STATE, LOCAL AND FOREIGN INCOME TAX CONSEQUENCES OF THE PROPOSED ASSET SALES.
Certain material tax consequences toNCP-Eight’s limited partners will result from the proposed sales. To avoid the additional expense,NCP-Eight has not obtained a tax opinion in connection with the proposed transaction.
Upon the disposition of the assets, taxable income will be recognized byNCP-Eight to the extent that the amount realized from the disposition exceeds the adjusted tax basis of the assets disposed of. The taxable gain from the sale will be allocated among the partners in accordance with theNCP-Eight partnership agreement. The allocation of gain to the limited partners will increase their adjusted tax basis inNCP-Eight and increase their “amount at risk” with respect toNCP-Eight’s activity. Suspended or current passive activity losses from a limited partner’s interest inNCP-Eightand/or other passive activities may be used to offset gain from the disposition of the assets. See “— Federal Tax Consequences of a Decision Not to Sell” beginning on page 18 for a discussion of passive activity loss limitations and suspended losses. The general partner believes that these allocations will have “substantial economic effect,” as required by regulations issued by the Treasury Department. In the event the Internal Revenue Service (“IRS”) should prevail in any contention that the taxable gain from the sale should be allocated differently from the manner reported by the general partner, the amounts of capital gain (or loss) and ordinary income (or loss) of the limited partners would be adjusted in equal offsetting amounts.
The majority of assets being sold byNCP-Eight will be treated as “Section 1231 assets.” Section 1231 assets are generally defined as depreciable and amortizable assets used in a trade or business, and real property used in a trade or business, which have been held by the taxpayer for more than one year. The assets comprising the distribution systems ofNCP-Eight, including franchise rights and associated intangible assets, are Section 1231 assets. A limited partner’s share of gain or loss on the sale of the assets (excluding ordinary income depreciation recapture, discussed below) will be combined with any other Section 1231 gain or loss the limited partner incurs in that taxable year and the limited partner’s net Section 1231 gain or loss will be taxed as capital gain or ordinary loss, as the case may be. However, Section 1231 gain will be converted into ordinary income to the extent a limited partner has net Section 1231 losses in the five most recent tax years (“non-recaptured net Section 1231 losses”). The tax treatment of Section 1231 gains will depend on the
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limited partner’s tax situation. In addition, cost recovery deductions which have been taken with respect to certain assets will be subject to recapture as ordinary income upon the sale to the extent of gain on the sale, and each limited partner will be allocated a share of this ordinary income depreciation recapture in proportion to the cumulative net losses previously allocated to the limited partner under theNCP-Eight partnership agreement. It is anticipated that the majority of the gain allocated to the limited partners will be ordinary income. Each limited partner will also recognize gain or loss upon the liquidation ofNCP-Eight following the disposition of the assets to the extent that the cash distributed in the liquidation exceeds or is less than the limited partner’s adjusted tax basis in its partnership interest. See “— Tax Rates” beginning on page 19 for a discussion of the applicable tax rates for ordinary income and capital gains.
NeitherNCP-Eight nor any partner is allowed to deduct or to amortize amounts paid for syndication expenses. Syndication expenses are amounts which were paid or incurred byNCP-Eight in connection with the issuance and marketing of the units of limited partnership interest, including sales costs. These expenses have not been deducted byNCP-Eight, but were allocated to the limited partners and reflected as a decrease in their capital accounts as reported onSchedule K-1. Upon liquidation ofNCP-Eight the treasury regulations also provide thatNCP-Eight may not deduct the syndication expenses. However, there is uncertainty in the law concerning whether a limited partner may claim a capital loss for the remaining portion of their tax basis inNCP-Eight which is attributable to the syndication expenses. The IRS may contend that the limited partners are not entitled to use this offset because they should have instead reduced their basis in their partnership interests by an amount equal to their allocated share of the syndication expenses. In such event, the IRS may also contend that the limited partners should recognize an additional amount of capital gain.You should consult with your individual tax advisor with respect to your treatment of syndication expenses upon termination ofNCP-Eight.
If the IRS were to argue successfully that the allocations of taxable income among the partners should differ from the allocations that are reported onNCP-Eight’s tax returns, the amounts of ordinary income and loss and capital gain and loss limited partners report will change. Notwithstanding, the general partner believes this change will not have a material adverse effect on the limited partners inNCP-Eight. There will be no federal tax consequences toNCP-Eight resulting from the proposed sales. All federal tax consequences are instead imposed on the partners ofNCP-Eight.
Unrelated Business Taxable Income
Unrelated business taxable income (“UBTI”) will be generated by the sale of the assets and allocated to limited partners that are qualified retirement plans and tax exempt trusts (“Plans”) as defined by the Code and subject to the Employment Retirement Income Security Act of 1974 (i.e., IRAs, Keoghs, pension plans, etc.).
Generally, partnership allocations of ordinary income, Section 1231 gains and capital gains will result in UBTI to Plans and generate an unrelated business income tax. The Code allows an exempt entity a specific deduction for UBTI of up to $1,000 per year and thus the annual UBTI generated by the Plans will be taxed to the extent it exceeds $1,000. If the Plan has net operating loss and suspended basis loss carryovers, the UBTI may also first be reduced by these carryover losses.
Federal Tax Consequences of a Decision Not to Sell
The general tax consequence of a decision not to sell and to continue to operateNCP-Eight as a partnership is that each limited partner will continue to be allocated its share ofNCP-Eight’s income, deduction, gain and loss, and will be distributed its share of cash available for distribution as determined under theNCP-Eight partnership agreement. In general, income or loss from operations ofNCP-Eight constitutes ordinary income or loss and is allocated to limited partners in accordance with theNCP-Eight partnership agreement. Cash distributions to limited partners are not taxable unless they exceed the adjusted tax basis of the limited partner’s partnership interest. Limited partners may not deduct losses allocated to them to the extent the losses exceed the adjusted tax basis of their partnership interest. These unused losses may be carried forward and utilized in future years, subject to the same limitation based on the limited partner’s tax basis in itsNCP-Eight interest.
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With respect to the deductibility of partnership losses by a limited partner, the Code does not allow certain taxpayers to use losses and credits from a business activity in which he or she does not materially participate (e.g., a limited partner in a limited partnership) to offset other income such as salary, active business income, dividends, interest, royalties and investment capital gains. The taxpayers affected by the passive activity loss rules are individuals, estates, trusts, closely-held C corporations and personal service corporations. However, passive activity losses can be used to offset passive activity taxable income from another passive activity. In addition, disallowed losses and credits from one tax year may be suspended and carried forward by a taxpayer and used to offset income from passive activities in the future. The disallowed losses carried forward from a passive activity will be allowed in full when the taxpayer recognizes gain or loss upon a taxable disposition of his or her entire interest in the passive activity. A limited partner should note that the Treasury Department prescribed regulations that will recharacterize certain income as “portfolio” income and restrict the offset of that income by losses from a passive activity. These regulations could impact the use of passive activity losses or income fromNCP-Eight. For example, the Treasury Department has issued regulations holding that interest earned on partnership cash balances represents portfolio income, and thus may not be offset by passive activity losses.
If a decision is made not to sell, the losses (if any) allocated to certain limited partners inNCP-Eight will be subject to the passive activity loss rules discussed above. Unless the limited partner has income from other passive activities, the losses allocated byNCP-Eight will not be currently deductible. In addition, the limited partner could be allocated interest income or other portfolio income that could not be offset by passive activity losses.
You should note that the effect of the passive activity loss limitations may vary from one taxpayer to another depending on each taxpayer’s individual tax situation. Therefore, you should consult your personal tax advisor with respect to the application of the passive activity loss limitations to your particular tax situation.
With respect to the recovery of capital expenditures, eligible personal property placed in service after December 31, 1986 is assigned to a three-year class, five-year class, seven-year class, ten-year class, or twenty-year class. The depreciation method applicable to the three-year, five-year, seven-year and ten-year classes is the 200 percent declining balance method. The cost of non-residential real property is recovered using the straight-line method over 39 years. Partnership equipment that is placed in service after December 31, 1986 is classified as seven-year or five-year property and the purchase price for that equipment is depreciated over the applicable period.
The Code has eliminated the investment tax credit for all property placed in service after December 31, 1985, subject to certain transitional rules that do not currently apply toNCP-Eight.
Tax Rates
The following discussion relates primarily to individual taxpayers. Different tax rules may apply to other taxpayers (e.g., corporations, estates, trusts, etc.). The Code currently provides for a maximum tax rate on ordinary income of 35%. The benefits of certain itemized deductions and personal exemptions are reduced for certain higher income taxpayers. Capital gain income, including net Section 1231 gains treated as capital gains, will generally receive favorable tax treatment as discussed below.
Capital gains from sales of certain property held more than one year are now taxed at maximum tax rates that vary from 5% to 28%, depending on the type of property sold, the taxpayer’s marginal tax rate and the holding period of the property. These gains are taxed at the taxpayer’s regular tax rate if the maximum capital gains rate is higher. For tax years beginning after 2007 the 5% maximum capital gains rate is reduced to 0% for taxpayers at certain income levels. The large majority ofNCP-Eight’s assets will have been held byNCP-Eight for more than one year at the time of the proposed transaction. None ofNCP-Eight’s assets are collectibles subject to the 28% maximum capital gains rate. Therefore the majority of capital gain income (including the Section 1231 gains) recognized by the limited partners will constitute long-term gains eligible for 15% or 0% tax rates, as applicable, depending upon the taxable income and marginal tax rate of the taxpayer. As discussed above, to the extent that a limited partner has non-recaptured net Section 1231 losses in
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the last five years, their Section 1231 gain will be treated as ordinary income and will not receive the favorable capital gain tax rates. Also as discussed above, gain attributable to prior depreciation and amortization deductions on personal property will be taxed as ordinary income under the depreciation recapture rules. It is anticipated that the majority of the gain allocated to the limited partners will be ordinary income. Finally, a small portion ofNCP-Eight gain may be attributable to depreciable real estate that would be subject to a maximum tax rate of 25%.
Depending on the level of the alternative minimum taxable income, a taxpayer is subject to tax rates of 26% or 28% on such alternative minimum taxable income. The favorable capital gain tax rates discussed above also apply for alternative minimum tax purposes. In general, accelerated depreciation used for regular tax purposes on property placed in service after 1986 is a preference to the extent different from alternative minimum tax depreciation (using the 150 percent declining balance method, and using longer lives for personal property placed in service before 1999). An exception to this rule applied to certain assets placed in service in tax years 2002 to 2004, wherein there was no difference between regular tax depreciation and alternative minimum tax depreciation. A taxpayer paying alternative minimum tax is allowed a tax credit for the alternative minimum tax liability attributable to timing differences. In general, this minimum tax credit can be carried forward and used against the taxpayer’s regular tax liability to the extent the taxpayer’s regular tax liability exceeds his or her minimum tax liability. Upon the sale ofNCP-Eight’s assets, limited partners will be allocated an adjustment amount that will reduce their taxable gain for alternative minimum tax purposes. This adjustment amount arises because the prior depreciation deductions claimed for regular tax purposes will have exceeded the amount of depreciation claimed for alternative minimum tax purposes.
An individual taxpayer generally is not allowed a deduction for investment interest expense in excess of net investment income. Net investment income generally includes interest, dividends, annuities, royalties and short-term capital gains, less expenses attributable to the production of the income. Long-term capital gains from investment property are not generally included in net investment income, however a taxpayer may elect to forego the favorable tax rates available for long-term gains and include them in net investment income. Long-term gains from business property (such asNCP-Eight’s assets) are not included in net investment income. Therefore, the gain allocated to a limited partner from the proposed transaction will not increase his or her net investment income. Investment interest expense includes all interest paid or accrued on indebtedness incurred or continued to purchase or carry property held for investment. Investment interest does not include interest that is taken into account in determining a taxpayer’s income or loss from a passive activity provided, however, that interest expense which is properly attributable to portfolio income from the passive activity is treated as investment interest. Any interest a limited partner incurred to acquire units inNCP-Eight is treated as a passive activity deduction, and not investment interest.
In addition to the federal income tax considerations outlined above, the proposed sales have state income tax consequences. Limited partners who are residents of states imposing income taxes should consult their own tax advisor or their own state law to determine the state tax consequences and their state’s filing requirements.
The following is only a brief summary of the potential state tax considerations of the proposed sales for nonresidents of Alabama and Georgia. You should consult your own tax advisors concerning the application of each state’s income tax laws and other state and local laws to your specific situation.
Alabama
The State of Alabama, where certain of NCP- Eight’s assets are located, imposes an income tax on the net income earned by non-resident partners from property located in Alabama or from a business operation conducted in Alabama. This includes property owned or a business conducted through a partnership. This state tax generally applies to the limited partners ofNCP-Eight.
NCP-Eight will be responsible for reporting each non-resident partner’s share of the income derived from Alabama sources, and paying state income taxes on this income. The Alabama tax will be based on the
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income generated byNCP-Eight’s operations, including the income to be generated by the proposed sales, as apportioned to Alabama under state law. For corporate partners, the tax rate will be 6.5%; for non-corporate partners, the tax rate will be 5%. The Alabama tax paid on a partner’s behalf will be reported on the partner’sSchedule K-1 for 2008, and will be treated for federal income tax purposes as cash distributed to that partner. No further filing in Alabama will be required by an individual non-resident partner, unless the partner has other income from Alabama sources or is due a refund in which case the individual non-resident partner generally will be obligated to file an Alabama income tax return. Any partner filing an Alabama income tax return should claim the amount paid byNCP-Eight on the partner’s behalf as estimated tax paid on their Alabama return. Alabama personal income tax rates increase on a graduated scale, beginning at 1% up to a maximum marginal tax rate of 5%.
Georgia
The State of Georgia, where certain ofNCP-Eight’s assets are located, imposes an income tax on the net income earned by non-resident partners from property located in Georgia or from a business operation conducted in Georgia. This includes property owned or a business conducted through a partnership. This state tax applies to the limited partners ofNCP-Eight.
NCP-Eight is responsible for reporting each non-resident partner’s share of the income derived from Georgia.NCP-Eight will withhold and remit to the Georgia Department of Revenue 4% of any income paid or credited to a non-resident partner and attributable toNCP-Eight’s property or business in Georgia. The Georgia tax withheld and remitted on behalf of the partner will be reported on the partner’sSchedule K-1 for 2008, and will be treated for federal income tax purposes as cash distributed to that partner. An individual non-resident partner generally will be obligated to file a Georgia income tax return. A partner should claim the amount withheld as estimated tax paid on their Georgia individual tax return. The non-resident partner’s Georgia tax will be based on the income generated byNCP-Eight’s operations, including the income to be generated by the proposed sales, as apportioned to Georgia under state law. Georgia personal income tax rates increase on a graduated scale, beginning at 1% up to a maximum marginal tax rate of 6%.
While the general partner believes the proposed Green River transaction and the alternative sale transaction to the general partner or one or more affiliates of the general partner are fair toNCP-Eight and its limited partners, their deliberations have made them aware of certain risks associated with the proposed sales. In order to apprise you of these risks, the general partner wishes to draw your attention to the following factors.
Although the general partner believes that the price to be paid for the purchase ofNCP-Eight’s assets represents fair value for the assets being acquired, those assets may increase in value prior to closing.
While the general partner believes that the total sales price represents fair value forNCP-Eight’s assets, the purchase price to be paid forNCP-Eight’s asset is fixed, subject to adjustment as described in “Specific Terms of the Proposed Sales — Potential Purchase Price Adjustments” beginning on page 43 and will not otherwise be adjusted for any increase in value that might occur prior to closing. The amount of the purchase price was determined by the signing of the Green River purchase agreement on July 5, 2007. If the closings occur in or about the first quarter of 2008, more than seven months will have lapsed between the fixing of the purchase price and the closing.
The general partner did not form a limited partner committee or designate an unaffiliated third-party to represent the limited partners’ interest in structuring the proposed sales. Had such representation been arranged, the terms of the proposed sales might have been more favorable to the limited partners.
It is not uncommon, where conflicts of interest exist, for a fiduciary to designate an independent third-party to safeguard the interest of limited partners. The general partner did not form a limited partner committee, or designate an independent unaffiliated third-party, to specifically represent the interest of the
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limited partners even though it stands to benefit from the terms negotiated with Green River in the event it consummates the purchase of substantially all ofNCP-Eight’s assets should the Green River transaction fail to close. The general partner took a number of procedural steps, as described in “— Fairness of the Proposed Sales — The General Partner’s Belief as to Fairness” beginning on page 29, to protect the limited partners from potential overreaching that could result from the general partner’s control over the negotiation process with its affiliated purchasers. The general partner has negotiated the terms of the Green River purchase agreement with an unaffiliated third party, secured a favorable fairness opinion and is submitting the proposed sales to the partnership’s unaffiliated limited partners for approval. These procedural steps, however, may not have afforded limited partners the same level of protection that they would have received if an independent third-party had been negotiating the proposed sales’ terms on their behalf.
A limited partner does not have any dissenters’ or appraisal rights in this transaction.
A limited partner is not entitled to dissenters’ or appraisal rights under either theNCP-Eight partnership agreement or Washington law with respect to the proposed sales, or the subsequent liquidation ofNCP-Eight.NCP-Eight will not voluntarily provide any similar rights in connection with the proposed sales. Therefore, even if a limited partner disapproves of the proposed sales and votes against it, the proposed sales will proceed if they receive the requisite limited partner approval, and the limited partner, though disapproving, will not be able to demand that the assets be appraised to determine their fair value.
If the purchaser makes a successful claim after closing against the $810,000 hold-back escrow, that claim will decrease the distributions received by the limited partners.
Both asset purchase agreements contemplate an $810,000 hold-back escrow as a source to satisfy claims for breaches ofNCP-Eight’s representations, warranties and covenants. The representations and warranties, as well as the escrow survive for a period of eighteen months from the closing of the sale. Any funds remaining in the hold-back escrow following eighteen months after the closing of the proposed sales will be released from the escrow and will be made available toNCP-Eight’s partners for distribution. A successful claim against the hold back escrow by the purchaser will decrease or possibly even exceed the amount left in the hold-back escrow. The result would be that less money will be available for distribution toNCP-Eight’s limited partners.
The amount and timing of final distributions to limited partners may be adversely affected by changes in subscriber revenue.
Both purchase agreements contemplate that the aggregate purchase price is subject to certain adjustments based primarily on subscriber revenue. In the event subscriber revenue falls below 99% of a $266,295.00 threshold, the purchase price will be reduced by an amount equal to the percentage difference between that threshold amount and subscriber revenue less one percent; provided however, that if the adjusted purchase price would be less than 93% of the purchase price, excluding the effect of other adjustments, the purchaser may elect to set the adjusted purchase price at 93%, but if the purchaser chooses not to do so,NCP-Eight may delay closing for up to 90 days to remediate the situation or terminate the purchase agreement and return the $75,000 deposit. If subscriber revenue were to be less than 93% of the $266,295.00 threshold, and the purchaser were to elect to set the adjusted purchase price at 93% of the purchase price, or $7,533,000, limited partners would receive a distribution approximately $28 lower per unit of limited partnership interest than currently projected.
The amount and timing of final distributions to limited partners may be affected by unanticipated or contingent liabilities, including any potential litigation arising out of the proposed sales.
The general partner is not aware of any contingent liabilities that are likely to exceed the $810,000hold-back escrow. Notwithstanding, such liabilities might arise. If, for example, claims were brought against the general partner for breaches of fiduciary duty, securities law violations, or other claims, such actions would likely give rise to indemnity claims by such persons againstNCP-Eight, possibly reducing the amounts available for distribution to its limited partners. In this regard, limited partners should be aware that Northland
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Communications Corporation serves, and has served, as general partner of other limited partnerships involved in the cable television industry. In June 1998, the limited partners of one such limited partnership, Northland Cable Properties Five Limited Partnership, voted by a 74% majority vote to approve the disposition of that partnership’s assets to a company affiliated with Northland Communications Corporation and the subsequent liquidation of that partnership. A class action lawsuit was subsequently filed against that partnership and its general partners alleging various claims, including that the purchase price paid did not represent fair value and breaches of fiduciary duties in the transaction. That action was ultimately settled and dismissed. If the unaffiliated limited partners ofNCP-Eight vote to approve the proposed sales and the proposed sales close, and if a similar lawsuit is brought againstNCP-Eight, such lawsuit may have the effect of delaying payment of or reducing the amount of cumulative distributions.
The proposed sales will be taxable for U.S. Federal income tax purposes. This may result in substantial recognition of gain toNCP-Eight’s limited partners.
The receipt of cash from the proposed sales will be a taxable transaction for U.S. federal income tax purposes and may also be taxable under applicable state, local and foreign tax laws. Accordingly, limited partners will recognize a gain or loss on the payment of cash on units of limited partnership interest to the extent of the difference between the amount realized and the limited partner’s adjusted tax basis in their units. Upon closing each proposed sale, any net losses ofNCP-Eight that were suspended under the passive loss rules of the Internal Revenue Code may be used to offset income and gain in that sale.
Even if the requisite majority of the limited partners ofNCP-Eight vote to APPROVE both of the proposed sales, neither of the proposed sales may close due to a failure to satisfy conditions to closing.
The Green River purchase agreement and the alternative purchase agreement contain certain conditions which must be satisfied prior to closing. Additionally, the alternative purchase agreement is subject to the general partner or one or more of its affiliates obtaining financing on satisfactory terms within 90 days after the Green River transaction terminates. The general partner has not yet sought any financing for the alternative sale transaction because it currently believes that it is highly probable that the Green River transaction will close during the first quarter of 2008. While the general partner and its affiliates have been able to obtain financing in the past, there can be no assurance that they would be able to obtain financing for the alternative sale transaction during the first half of 2008. Therefore, even if the requisite majority of the limited partners ofNCP-Eight vote to approve the proposed sales, one or both of the sales may not close.
Even if the requisite majority of the outstanding units of limited partnership interest are voted to APPROVE the terms of the alternative sale transaction, the general partner may choose not to enter into the alternative purchase agreement.
While approval of the terms of the alternative sale transaction by the requisite majority of the outstanding units of limited partnership interest would provide authorization for the general partner to execute the proposed alternative purchase agreement, it would in no way obligate the general partner to do so. For example, the general partner would not execute the alternative purchase agreement if:
• | satisfactory financing is not likely to be obtained; | |
• | the Green River transaction has not terminated; or | |
• | the proposed amendment to the NCP-Eight partnership agreement has not also been approved by the requisite majority of the outstanding units of limited partnership interest. |
Additionally, even if the Green River transaction terminates and the proposed amendment to the NCP-Eight partnership agreement is duly approved, the general partner may in its discretion determine not to enter into the alternative purchase agreement and instead continue its efforts to identify prospective purchasers for NCP-Eight’s assets.
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The following is a brief summary of certain risks associated with the ongoing operations ofNCP-Eight and its cable systems, if the continued operation of such systems is necessary.
NCP-Eight’s business is subject to extensive governmental legislation and regulation, which could adversely affect its business.
Regulation of the cable industry has increased cable operators’ administrative and operational expenses and limited their revenues. Cable operators are subject to, among other things:
• | rules governing the provision of cable equipment and compatibility with new digital technologies; | |
• | rules and regulations relating to subscriber privacy; | |
• | limited rate regulation; | |
• | requirements governing when a cable system must carry a particular broadcast station and when it must first obtain consent to carry a broadcast station; | |
• | rules for franchise renewals and transfers; and | |
• | other requirements covering a variety of operational areas such as equal employment opportunity, technical standards and customer service requirements. |
Additionally, many aspects of these regulations are currently the subject of judicial proceedings and administrative or legislative proposals. There are ongoing efforts to amend or expand the federal, state and local regulation ofNCP-Eight’s cable systems, which may compound the regulatory risks already faced.
NCP-Eight’s cable systems are operated under franchises that are subject to non-renewal or termination. The failure to renew a franchise in one or more key markets could adversely affectNCP-Eight’s business.
NCP-Eight’s cable systems generally operate pursuant to franchises, permits and similar authorizations issued by a state or local governmental authority controlling the public rights-of-way. Many franchises establish comprehensive facilities and service requirements, as well as specific customer service standards and monetary penalties for non-compliance. In many cases, franchises are terminable if the franchisee fails to comply with significant provisions set forth in the franchise agreement governing system operations. Franchises are generally granted for fixed terms and must be periodically renewed. Franchising authorities may resist granting a renewal if either past performance or the prospective operating proposal is considered inadequate. Franchise authorities often demand concessions or other commitments as a condition to renewal. In some instances, franchises have not been renewed at expiration, andNCP-Eight has operated under temporary operating agreements while negotiating renewal terms with the local franchising authorities. In some states in whichNCP-Eight operates cable systems, effective January 1, 2008, franchises may be obtained from the respective state agency.
NCP-Eight may not be able to comply with all significant provisions ofNCP-Eight’s franchise agreements. Additionally, although historicallyNCP-Eight has renewed its franchises without incurring significant costs, there can be no assurances thatNCP-Eight will be able to renew, or to renew as favorably, its franchises in the future. A termination of or a sustained failure to renew a franchise in one or more key markets could adversely affectNCP-Eight’s business in the affected geographic area.
NCP-Eight’s cable systems are operated under franchises that are non-exclusive. Accordingly, franchising authorities can grant additional franchises and create competition in market areas where none existed previously, resulting in overbuilds, which could adversely affect results of operations.
NCP-Eight’s cable systems are operated under non-exclusive franchises. Consequently, franchising authorities can grant additional franchises to competitors in the same geographic area or operate their own cable systems. In addition, certain telephone companies are seeking and in some instances have already obtained authority to operate. As a result, competing operators may build systems in areas in whichNCP-Eight
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holds franchises. In some cases municipal utilities may legally compete withNCP-Eight without obtaining a franchise from a local franchising authority.
Numerous legislative proposals have been periodically introduced in the United States Congress and in some state legislatures that would greatly streamline cable franchising and transform the established regulatory framework for incumbent cable systems and potential competitors. This legislation is intended to facilitate entry by new competitors, particularly local telephone companies. Such legislation has already passed in many states and legislation is pending in several more. Although various legislative proposals provide some regulatory relief for incumbent cable operators, these proposals are generally viewed as being more favorable to new entrants due to a number of varying factors, including efforts to withhold streamlined cable franchising from incumbents until after the expiration of their existing franchises and the potential for new entrants to serve only the higher-income areas of a particular community. To the extent incumbent cable operators are not able to avail themselves of the benefits under new legislation, such operators may continue to be subject to more onerous franchise requirements at the local level than new entrants. The Federal Communications Commission (“FCC”) recently initiated a proceeding to determine whether local franchising authorities are impeding the deployment of competitive cable services through unreasonable franchising requirements and whether such impediments should be preempted, and has passed general guidelines regarding cable franchise renewal standards. At this time, management is not able to determine what impact such proceeding may have onNCP-Eight.
Further regulation of the cable industry could causeNCP-Eight to delay or cancel service or programming enhancements or impairNCP-Eight’s ability to raise rates to cover its increasing costs, resulting in reductions to net income.
Currently, rate regulation is strictly limited to the basic service tier and associated equipment and installation activities in areas where the local franchising authority has asserted regulatory authority and where the cable operator lacks “effective competition”. However, the FCC and the U.S. Congress continue to be concerned that cable rate increases are exceeding inflation. It is possible that either the FCC or the U.S. Congress will again restrict the ability of cable system operators to implement rate increases. Should this occur, it would impedeNCP-Eight’s ability to raise its rates. IfNCP-Eight is unable to raise its rates in response to increasing costs, its income would decrease.
There has been considerable legislative and regulatory interest in requiring cable operators to offer historically bundled programming services on an à la carte basis or to at least offer a separately available child-friendly “Family Tier.” It is possible that new marketing restrictions could be adopted in the future. Such restrictions could adversely affectNCP-Eight’s operations by disrupting its preferred marketing practices.
Actions by pole owners might subjectNCP-Eight to significantly increased pole attachment costs.
Pole attachments are wires that are attached to poles. Cable system attachments to public utility poles historically have been regulated at the federal or state level, generally resulting in favorable pole attachment rates for attachments used to provide cable service. Despite the existing regulatory regime, utility pole owners in many areas are attempting to raise pole attachment fees and impose additional costs on cable operators and others. In addition, the favorable pole attachment rates afforded cable operators under federal law can be increased by utility companies if the operator provides telecommunications services, as well as cable service, over cable wires attached to utility poles. Further, cable systems attach to poles owned by municipalities and co-operative organizations. The federal laws and regulations governing regulated utilities, including rules regarding the maximum allowable rates, are not applicable to such organizations and they are free to charge significantly higher pole attachment fees under more onerous terms and conditions. Any significant increased costs could have a material adverse impact onNCP-Eight’s profitability and discourage system upgrades and the introduction of new products and services.
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NCP-Eight may be required to provide access to its networks to other Internet service providers, which could significantly increase competition and adversely affectNCP-Eight’s ability to provide new products and services.
A number of companies, including independent Internet service providers, or ISPs, have requested local authorities and the FCC to require cable operators to provide nondiscriminatory access to cable’s broadband infrastructure, so that these companies may deliver Internet services directly to customers over cable facilities. In a June 2005 ruling, commonly referred to as Brand X, the Supreme Court upheld an FCC decision (and overruled a conflicting Ninth Circuit opinion) making it less likely that any nondiscriminatory “open access” requirements (which are generally associated with common carrier regulation of “telecommunications services”) would be imposed on the cable industry by local, state or federal authorities. Given how recently Brand X was decided, however, the nature of any legislative or regulatory response remains uncertain. In addition, it is possible that other “net neutrality” restrictions might be placed on broadband network owners. For example, limitations onNCP-Eight’s ability to charge content providers whose services require a large amount of network capacity could be imposed. The imposition of this or other such requirements could materially affectNCP-Eight’s business.
IfNCP-Eight were required to allocate a portion of its bandwidth capacity to other Internet service providers, management believes that it would impairNCP-Eight’s ability to use its bandwidth in ways that would generate maximum revenues.
Changes in channel carriage regulations could impose significant additional costs onNCP-Eight.
Cable operators also face significant regulation of their channel carriage. They currently can be required to devote substantial capacity to the carriage of programming that they would not carry voluntarily, including certain local broadcast signals, local public, educational and government access programming, and unaffiliated commercial leased access programming. This carriage burden could increase in the future. For example, the FCC has recently required that cable systems, subject to certain limitations, carry both the analog and digital versions of local broadcast signals (dual carriage). The FCC did not require cable operators to carry multiple program streams included within a single digital broadcast transmission (multicast carriage) at this time. Additional government-mandated broadcast carriage obligations could disrupt existing programming commitments, interfere withNCP-Eight’s preferred use of limited channel capacity and limitNCP-Eight’s ability to offer services that would maximize customer appeal and revenue potential. Although the FCC issued a decision in February 2005, confirming an earlier ruling against mandating either dual carriage or multicast carriage, that decision has been appealed. In addition, the FCC could reverse its own ruling or Congress could legislate additional carriage obligations.
Offering voice communications service may subjectNCP-Eight to additional regulatory burdens, causing it to incur additional costs.
The regulatory requirements applicable to VoIP service are unclear, although the FCC has declared that certain VoIP services are not subject to traditional state public utility regulation. The full extent of the FCC preemption of VoIP services is not yet resolved. ExpandingNCP-Eight’s offering of these services may requireNCP-Eight to obtain certain authorizations, including federal, state and local licenses.NCP-Eight may not be able to obtain such authorizations in a timely or cost effective manner, or conditions could be imposed upon such licenses or authorizations that may not be favorable toNCP-Eight. Furthermore, telecommunications companies generally are subject to significant regulation, including payments to the intercarrier compensation regime, and it may be difficult or costly forNCP-Eight to comply with such regulations were it to be determined that they applied to VoIP. The FCC has already determined that VoIP providers must comply with traditional 911 emergency service obligations (“E911”), has imposed a specific timeframe for VoIP providers to accommodate law enforcement wiretaps, and has required that VoIP providers pay into the Federal Universal Service Fund. The FCC is considering regulating VoIP in other ways. The E911 requirements causedNCP-Eight to slow its implementation of VoIP services to its various systems. In addition, pole attachment rates are higher for providers of telecommunications services than for providers of cable service. If there were to be a final legal determination by the FCC, a state Public Utility Commission, or appropriate court that VoIP
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services are subject to these higher rates,NCP-Eight’s pole attachment costs could increase significantly, which could adversely affect its financial condition and results of operations.
NCP-Eight’s indebtedness could materially and adversely affect its business
NCP-Eight’s capital structure currently includes certain levels of debt. This indebtedness could have an adverse effect onNCP-Eight’s business. For example, it could:
• | increase vulnerability to general adverse economic and industry conditions or a downturn in business; | |
• | reduce the availability of cash flow to fund working capital, capital expenditures and other general business purposes; | |
• | limit flexibility in planning for, or reacting to, changes inNCP-Eight’s industries, makingNCP-Eight more vulnerable to economic downturns; or | |
• | placeNCP-Eight at a competitive disadvantage compared to competitors that have less debt. |
Because there is no public market forNCP-Eight’s units of limited partnership interest, limited partners may not be able to sell their units.
There is no established trading market for the units of limited partnership interest. There can be no assurance as to:
• | the liquidity of any trading market that may develop; | |
• | the ability of holders to sell their units; or | |
• | the price at which the holders would be able to sell their units. |
Northland Communications Corporation, the general partner, is responsible for conductingNCP-Eight’s business and managing its operations. Affiliates of the general partner may have conflicts of interest and limited fiduciary duties, which may permit the general partner to favor its own interests toNCP-Eight’s detriment.
Conflicts of interest may arise between management of Northland Communications Corporation, the general partner and its affiliates, and the limited partners. As a result of these conflicts, it is possible that the general partner may favor its own interests and the interests of its affiliates over the interests ofNCP-Eight’s unitholders.
Unitholders have limited voting rights and limited ability to influenceNCP-Eight’s operations and activities.
Unitholders have only limited voting rights on matters affectingNCP-Eight’s operations and activities and, therefore, limited ability to influence management’s decisions regardingNCP-Eight’s business. Unitholders’ voting rights are further restricted by theNCP-Eight partnership agreement provisions providing limited ability of unitholders to call meetings or to acquire information about operations, as well as other provisions limiting the unitholders’ ability to influence the manner or direction of management.
Furthermore, unitholders did not elect the general partner or the board of directors of the general partner and there is no process by which unitholders elect the general partner or the board of directors of the general partner on an annual or other continuing basis. The trading price at which units of limited partnership interest trade may be adversely affected by these circumstances.
The control of the general partner may be transferred to a third party without unitholder consent.
The general partner may transfer its general partner interest to a third party in a merger or in a sale of all or substantially all of its assets without the consent of the unitholders. Furthermore, theNCP-Eight Partnership Agreement does not restrict the ability of the shareholders of the general partner from transferring their
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respective interests in the general partner to a third party. The new controlling parties of the general partner would then be in a position to replace the board of directors of the general partner with their own choices and to control the decisions taken by the board of directors.
NCP-Eight does not have its own officers and has a limited number of management employees.NCP-Eight relies solely on the officers and management employees of the general partner and its affiliates to manageNCP-Eight’s business and affairs.
NCP-Eight does not have its own officers and has a limited number of management employees.NCP-Eight relies solely on the officers and management employees of the general partner and its affiliates to manageNCP-Eight’s business and affairs.
If the proposed transactions do not close,NCP-Eight will continue to incur costs regarding public reporting and securities law compliance, which costs are expected to increase in connection with an assessment ofNCP-Eight’s internal controls and procedures regarding financial accounting
NCP-Eight believes that it is unlikely that there will be sufficient time and resources to effectively complete the processes and procedures necessary for its management to be able to complete their assessment, required under Section 404 of the Sarbanes Oxley Act of 2002 and the rules and regulations under that section, of the effectiveness of our internal control over financial reporting, which is required to be included in our annual report onForm 10-K for the year ending December 31, 2007.NCP-Eight intends to terminate the registration of its limited partnership interests under the Securities Exchange Act of 1934, and to cease filing periodic and current reports and other documents required thereunder, after the sale of assets to Green River (or the alternative sale transaction), dissolution ofNCP-Eight and deregistration ofNCP-Eight’s units of limited partnership interest are completed. If these transactions and our deregistration under the Securities Exchange Act is not completed by the date by which ourForm 10-K is due, and if management’s assessment is not completed prior to such date, we will be unable to timely file a10-K that complies with the SEC’s rules. Moreover, we cannot assure you that our internal control over financial reporting is effective.
In addition to the two proposed sales, the general partner considered the following alternatives, when reaching its conclusion that a sale of substantially all ofNCP-Eight’s assets would provide the limited partners with the highest return for their investment inNCP-Eight. The following list describes those alternatives that were considered:
• | The continuation of the operation ofNCP-Eight as currently structured. As discussed in this proxy statement,NCP-Eight believes that it is unlikely that there will be sufficient time and resources to effectively complete the processes and procedures necessary for its management to be able to complete their assessment, required under Section 404 of the Sarbanes Oxley Act of 2002 and the rules and regulations under that section, of the effectiveness of our internal control over financial reporting, which is required to be included in our annual report onForm 10-K for the year ending December 31, 2007.NCP-Eight intends to terminate the registration of its limited partnership interests under the Securities Exchange Act of 1934, and to cease filing periodic and current reports and other documents required thereunder, after the sale of assets to Green River (or the alternative sale transaction), dissolution ofNCP-Eight and deregistration ofNCP-Eight’s units of limited partnership interest are completed. If these transactions and our deregistration under the Securities Exchange Act is not completed by the date by which ourForm 10-K is due, and if management’s assessment is not completed prior to such date, we will be unable to timely file a10-K that complies with the SEC’s rules. Moreover, we cannot assure you that our internal control over financial reporting is effective. | |
• | The sale of only a portion of the assets in several installments. As discussed in this proxy statement,NCP-Eight is subject to certain loan covenants that requireNCP-Eight to apply the proceeds from the sale of any assets outside the ordinary course of business towardsNCP-Eight’s existing debt. As a result, the general partner has concluded that partial asset sales, without an accompanying opportunity |
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to sellNCP-Eight’s remaining assets, will only be suitable in situations where a very favorable price can be obtained. This conclusion is supported by the general partner’s belief that if only certain assets are sold without making arrangements for the sale of the remaining assets ofNCP-Eight,NCP-Eight could be left with certain less attractive assets that are harder to sell, while still being required to pay its operating expenses from a resulting smaller pool of operating cash flow. |
• | The refinancing or other form of new borrowings byNCP-Eight aimed at generating proceeds to make distributions to the limited partners ofNCP-Eight. The general partner concluded that lenders will not currently support such transactions, and that the only viable option forNCP-Eight to generate adequate unrestricted funds for distribution to its limited partners is through the sale of enough assets that after paying off existing debt, adequate funds remain to make meaningful distributions to the partners ofNCP-Eight. |
After considering each of these alternatives, the general partner has concluded that a sale of the assets ofNCP-Eight as structured in either of the proposed sales is the most viable option available for maximizing distributions to the limited partners ofNCP-Eight at this time.
The general partner, and Mr. Whetzell and Mr. Clark, executive officers of the general partner, have considered the issue of fairness of the proposed sales to the unaffiliated limited partners ofNCP-Eight. In analyzing the fairness issue, the discussions of the general partner and Mr. Whetzell and Mr. Clark focused on appropriate valuation of the assets and conflicts of interest faced by the general partner. The general partner and Mr. Whetzell and Mr. Clark believe that the terms of the proposed sales are reasonable and fair to the unaffiliated limited partners ofNCP-Eight and recommend that unaffiliated limited partners vote to “APPROVE” the proposed sales.
The following discussion highlights the material factors underlying the general partner’s belief that the proposed transactions are fair to the unaffiliated limited partners. Each of these factors was considered by the general partner and Mr. Whetzell and Mr. Clark. In view of the wide variety of factors considered in connection with their evaluation of the fairness of the Green River transaction and alternative sale transaction, the general partner and Mr. Whetzell and Mr. Clark did not attempt to quantify, rank or otherwise assign relative weights to these factors.
• | Third-Party Bid Solicitation. In September 2005, Daniels contacted thirty-seven potential purchasers, based on Daniel’s knowledge and experience of possible purchasers of cable television assets. Following those initial contacts, ten parties expressed serious interest and executed Nondisclosure Agreements withNCP-Eight, allowing them to receive the sales memorandum prepared by Daniels with the assistance of the general partner, which memorandum described the assets available for purchase. Of those ten parties, only one, Telemedia, submitted an indication of interest, which indication was submitted on November 3, 2005. Telemedia’s initial interest level was only for the Swainsboro, Georgia system and was at an indicated purchase price range of $1,300 to $1,500 per subscriber prior to any closing adjustments. Daniels and the general partner responded on November 9, 2005 requesting Telemedia to clarify its interest by providing a specific proposed purchase price, a proposed definition for what would constitute a subscriber for purposes of calculating that purchase price, a proposed adjustment mechanism for purchase price adjustment at closing, and an initial explanation of the purchaser’s sources of debtand/or equity financing for the transaction. Telemedia never responded, leading to abandonment of that effort. |
Daniels then reinitiated the process in September 2006 by contacting fifty potential purchasers. In response, nine parties executed Nondisclosure Agreements withNCP-Eight and were provided an updated sales memorandum by Daniels. Of those nine parties, six parties delivered indications of
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interest to Daniels in November 2006. Of those six, three interested parties conducted tours of the partnership’s operating systems between October 2006 and January 2007. Final bids were then solicited by Daniels pursuant to a sealed bid process wherein interested parties would submit their sealed bids to Daniels, which bids were to include the bidder’s highest offer and amark-up of the form of asset purchase agreement proposed by the general partner. Two final bids were received by Daniels in February 2007.
• | Opinion of Duff & Phelps. The general partner considered and reviewed the opinion of Duff & Phelps to the effect that, as of July 5, 2007, the aggregate consideration to be received by the limited partners ofNCP-Eight in the Green River transaction was fair from a financial point of view, to such limited partners. When reviewing the opinion of Duff & Phelps, the general partner recognized that the opinion specifically evaluated the fairness of the consideration to be received byNCP-Eight in the Green River transaction, as opposed to the fairness of the amounts estimated to finally be distributed to the unaffiliated limited partners ofNCP-Eight. Notwithstanding the foregoing, because the Green River transaction reflects an effort to sell all of the assets ofNCP-Eight in order to liquidate the partnership near the end of the limited partnership’s term, the general partner’s primary emphasis focused on the fairness of the consideration to be paid toNCP-Eight for the partnership’s assets. During the process of liquidatingNCP-Eight, all amounts received byNCP-Eight in the proposed sales will be first used to pay off existing partnership debt and the balance will be distributed to the partners ofNCP-Eight in proportion to their pro-rata ownership interests in the partnership. Therefore, the general partner feels that the relevant inquiry as to the fairness of the Green River transaction is whether the consideration to be received byNCP-Eight for its assets is fair from a financial point of view. The general partner recognizes that the Duff & Phelps opinion only evaluated the fairness of the aggregate consideration to be received by the limited partners from the Green River transaction. The general partner did not engage Duff & Phelps to address the fairness of the alternative sale transaction because it contains substantially the same terms (including purchase price and valuation) and conditions as the Green River transaction. |
• | Unsolicited Offers for Units of limited partnership Interest inNCP-Eight. The general partner considered the price offered for units of limited partnership interest in recent unsolicited offers. As already discussed in this proxy statement under “Special Factors of the Proposed Sales — Background of the Proposed Sales — Secondary Sales of Units of limited partnership interest” beginning on page 12, the general partner and Mr. Whetzell and Mr. Clark are familiar with recent unsolicited offers made for the purchase of units of limited partnership interest inNCP-Eight. While they do not believe that such offers amount to a reliable secondary market, the general partner and Mr. Whetzell and Mr. Clark do believe that the price offered provides a relevant factor to consider when determining whether the Green River transaction or alternative sale transaction is fair to the limited partners ofNCP-Eight. Following their evaluation, the general partner and Mr. Whetzell and Mr. Clark concluded that the forecasted distributions to be received by the limited partners ofNCP-Eight as a result of the Green River transaction and alternative transaction will exceed the amount per unit offered for units of limited partnership interest in the offers. |
• | Net Book Value, Liquidation Value and Going Concern Value. The general partner did not consider net book value to be relevant in its fairness determination. Several of the assets ofNCP-Eight have been significantly depreciated over time for tax and accounting purposes. As a result, the net book value of thoseNCP-Eight assets is significantly less than their fair market value. Notwithstanding, the net book value ofNCP-Eight’s assets as of September 30, 2007 was calculated to equal $5,862,000. By comparison, the amount to be received byNCP-Eight, assuming the Green River transaction or alternative sale transaction close as contemplated, is $8,100,000. Liquidation value, on the other hand, was considered by the general partner and Mr. Whetzell and Mr. Clark since the proposed transaction is in essence a liquidation ofNCP-Eight. As already discussed in this section of the proxy statement, each of those parties has concluded that the amount to be received byNCP-Eight upon the sale of the entirety ofNCP-Eight’s assets is fair to the limited partners ofNCP-Eight. To the extent the general partner has been able to quantify the liquidation value ofNCP-Eight it believes an orderly liquidation |
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analysis would yield a value less than the amount received byNCP-Eight assuming the Green River transaction or alternative sale transaction close as contemplated. The general partner also considered the going concern value ofNCP-Eight when making their determination as to fairness. Current management and goodwill associated with the Northland name would not be transferred withNCP-Eight’s operating systems upon their sale to a third party purchaser, which could have a negative impact on the going concern value ofNCP-Eight’s operating systems. The general partner did not, however, discount the going concern value of those operating systems to take such factors into account. Instead, the general partner considered the going concern value ofNCP-Eight based on current operations and performance. |
• | Consent Procedures and Procedural Safeguards. The general partner acknowledged that the Green River transaction and alternative sale transaction can take place only if limited partners holding a majority ofNCP-Eight’s units of limited partnership interest approve the respective proposed transactions. If holders of a majority of those units vote to disapprove the Green River transaction, the proposed Green River transaction will be terminated. Further, if holders of a majority of units of limited partnership interest vote to disapprove the alternative sale transaction,NCP-Eight will not enter into the alternative purchase agreement. |
The general partner believes the terms of the proposed alternative sale ofNCP-Eight’s assets, in the event the Green River transaction is not consummated, to the general partner or one or more of its affiliates are fair toNCP-Eight and its limited partners because the alternative sale transaction contains substantially the same terms as the Green River transaction, which the general partner determined to be fair based on the factors described above.
In evaluating the fairness of the alternative sale transaction, the general partner considered that the alternative sale transaction would be conditioned upon the approval of an amendment to theNCP-Eight limited partnership agreement, permittingNCP-Eight to sell its assets to the general partner on substantially the same terms and conditions of the Green River purchase agreement without following the independent appraisal procedures that would otherwise be required by theNCP-Eight partnership agreement. As currently proposed, the price to be paid forNCP-Eight’s assets in the alternative sale transaction equals the price to be paid in the Green River transaction, which was negotiated as an arm’s-length transaction. Accordingly, the general partner believes that the costs and potential delays associated with obtaining three separate appraisals of the fair market value ofNCP-Eight’s assets would outweigh any perceived benefits from such appraisals.
On August 8, 2007, the general partner engaged Duff & Phelps on behalf ofNCP-Eight to render an opinion as to the fairness, as of July 5, 2007, to the limited partners ofNCP-Eight of the aggregate consideration to be received by such limited partners, from a financial point of view, in the Green River transaction. Duff & Phelps did not assist the general partner with any of the negotiations with Green River or any company affiliated with Northland Communications Corporation. Duff & Phelps held discussions withNCP-Eight’s management regarding the aggregate purchase price being subject to certain adjustments based on subscriber revenue, pursuant to the Green River purchase agreement. Duff & Phelps was informed that company management is optimistic that Subscriber Revenue will be adequate at the time of closing the sale of NCP Eight’s Systems to avoid a downward adjustment to the purchase price. Based on management’s representation, Duff & Phelps concluded that the probability of a material adjustment to the purchase price was low and did not factor potential purchase price adjustments into its fairness analysis.
Duff & Phelps rendered a written opinion to the general partner ofNCP-Eight to the effect that, as of July 5, 2007, and subject to the assumptions, limitations and qualifications set forth in its written opinion, the consideration to be received by the limited partners ofNCP-Eight in the Green River transaction was fair to such limited partners, from a financial point of view (without giving effect to any impacts of the Green River transaction on any particular limited partner other than in its capacity as a limited partner).
The full text of the written opinion of Duff & Phelps, dated September 28, 2007, which sets forth, among other things, assumptions made, matters considered, and limitations on the review undertaken in connection with the opinion, is attached as Exhibit D. The following summary of Duff & Phelps’s
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opinion is qualified in its entirety by reference to the full text of the opinion. The opinion expressed by Duff & Phelps was provided for the information and assistance of the general partner ofNCP-Eight in connection with its consideration of the transaction contemplated by the Green River purchase agreement, and such opinion does not constitute a recommendation as to any action that any limited partner ofNCP-Eight should take in connection with the Green River transaction or any aspect thereof and is not a recommendation as to whether or not any holder of partnership units should tender their units in connection with the Green River transaction or how any holder of units should vote with respect to the Green River transaction. You are urged to read the opinion carefully and in its entirety.
The following is a summary of the material financial analyses performed by Duff & Phelps in connection with rendering its opinion.THE DUFF & PHELPS OPINION IS BASED ON THE TOTALITY OF THE VARIOUS ANALYSES THAT IT PERFORMED, AND NO PARTICULAR PORTION OF THE ANALYSIS HAS ANY MERIT STANDING ALONE.
The preparation of a fairness opinion is a complex process that involves various determinations as to the most appropriate and relevant methods of financial analysis and the application of these methods to the particular circumstances. Therefore, a fairness opinion is not readily susceptible to partial analysis or a summary description. In arriving at its opinion, Duff & Phelps did not attribute any particular weight to any analysis or factor considered by it, but rather made qualitative judgments as to the significance and relevance of each analysis and factor. Accordingly, Duff & Phelps believes that its analyses must be considered as a whole and that selecting portions of its analyses and of the factors considered by it, without considering all analyses and factors, could create a misleading or incomplete view of the evaluation process underlying its opinion. Several analytical methodologies were employed and no one method of analysis should be regarded as critical to the overall conclusion reached by Duff & Phelps. Each analytical technique has inherent strengths and weaknesses, and the nature of the available information may further affect the value of particular techniques. The conclusion reached by Duff & Phelps is based on all analyses and factors taken, as a whole, and also on application of Duff & Phelps’s own experience and judgment. This conclusion may involve significant elements of subjective judgment and qualitative analysis. Duff & Phelps gives no opinion as to the value or merit standing alone of any one or more parts of the analysis it performed. In performing its analyses, Duff & Phelps made numerous assumptions with respect to the industry outlook, general business and other conditions and matters many of which are beyond the control ofNCP-Eight and Duff & Phelps. Any estimates contained in these analyses are not necessarily indicative of actual values or predictive of future results or values, which may be significantly more or less favorable than those suggested by these analyses. Accordingly, analyses relating to the value of businesses do not purport to be appraisals or to reflect the prices at which these businesses actually may be sold in the future, and these estimates are inherently subject to uncertainty.
In connection with this opinion, Duff & Phelps made such reviews, analyses and inquiries as it deemed necessary and appropriate under the circumstances. No limits were placed on Duff & Phelps byNCP-Eight or its general partner in terms of the information to which it had access or the matters it could consider. Duff & Phelps’s due diligence with regards to the Green River transaction included, but was not limited to, the items summarized below.
• | Conducted meetings at the company’s headquarters in Seattle, Washington and held multiple telephone conversations with the following members of the senior management of Northland Communications Corporation regarding the Green River transaction and the history, current operations and future outlook forNCP-Eight: |
• | Gary Jones, President | |
• | Richard Clark, Executive Vice President | |
• | Richard Dyste, Senior Vice President of Technical Services | |
• | Paul Milan, Vice President, Senior Counsel | |
• | Rick McElwee, Vice President, Controller |
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• | Held discussions with Patrick Lentz and Randy Wells of Daniels regarding their sale process for the company; | |
• | Reviewed audited financial statements for the company for the fiscal years ended December 31, 2002 through 2006 and unaudited financial statements for the six-month period ended June 30, 2007 and the equivalent prior year period; | |
• | Reviewed management prepared earnings projections for the fiscal years ended December 31, 2007 through 2016 and held general discussions with management regarding long-term growth prospects, profitability levels, and required capital investment levels; | |
• | Reviewed the Green River purchase agreement, including management-provided schedules of estimated closing adjustments and aggregate proceeds distributable to limited partners; | |
• | Reviewed Northland Communications Corporation’s board of directors meeting minutes from 2006 through year-to-date 2007; | |
• | Reviewed letters of interest and letters of intent received by the company during 2006 and 2007; | |
• | Analyzed financial and market information for selected public companies and M&A transactions that Duff & Phelps deemed relevant; | |
• | Reviewed other operating and financial information provided by company management; and | |
• | Reviewed certain other relevant, publicly available information, including economic, industry, and investment information. |
Management’s projections reviewed by Duff & Phelps were comprised of:
• | estimated revenue growth of approximately 5.0% in 2007 and then projected to slow from a high of 10.3% in 2012 down to 7.2% by 2016; | |
• | estimated EBITDA margin of 28.8% in 2007, which was expected to decrease to 25.7% in 2011 and then increase to 27.6% by 2016; and | |
• | capital expenditures increasing from $254,000 in 2007 to $727,000 in 2008 for system upgrades and then decreasing to $355,000 in 2016. |
Management’s projections were based upon the following material assumptions:
• | Subscriber growth. Video subscriber growth is projected to decline based on historical trends. Once the systems are upgraded, video subscriber growth of 2% is projected. Internet subscriber growth is projected to grow at an average rate of approximately 18% per year and is projected to service approximately 12% of available homes by year-end 2007 and nearly 46% by 2016. | |
• | Rates. Video service rates are projected to rise 2% through 2011, and 2.5% thereafter. Internet service rates are projected to raise 1% through 2011, and 2% thereafter. | |
• | Expenses. Expense line items are projected to increase at inflationary rates (generally 3%) except payroll benefits which are projected to increase 7% annually. Programming expenses are expected to increase between 5% and 7% annually. Network service fees are not expected to increase. Circuit costs are projected to increase approximately 22% annually. |
Duff & Phelps also took into account its assessment of general economic, market and financial conditions, and its experience in securities and business valuation, in general, and with respect to transactions similar to the Green River transaction in particular. Duff & Phelps did not make any independent evaluation, appraisal or physical inspection of the company’s solvency or of any specific assets or liabilities (contingent or otherwise). Duff & Phelps’s opinion should not be construed as a credit rating, solvency opinion, an analysis of the company’s credit worthiness or otherwise as tax advice or as accounting advice. In rendering its opinion, Duff & Phelps relied upon the fact that the general partner and the company have been advised by counsel as to all legal matters with respect to the Green River transaction, including whether all procedures required by
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law to be taken in connection with the Green River transaction have been duly, validly and timely taken; and Duff & Phelps did not make, and assumes no responsibility to make, any representation, or render any opinion, as to any legal matter.
In preparing its forecasts, performing its analysis and rendering its opinion with respect to the Green River transaction, Duff & Phelps: (1) relied upon the accuracy, completeness, and fair presentation of all information, data, advice, opinions and representations obtained from public sources or provided to it from private sources, including company management, and did not attempt to independently verify such information, and (2) assumed that any estimates, evaluations and projections furnished to Duff & Phelps were reasonably prepared and based upon the latest and best currently available information and good faith judgment of the person furnishing the same. Duff & Phelps’s opinion further assumes that information supplied and representations made byNCP-Eight management are substantially accurate regarding the company and the Green River transaction. Neither the company’s management nor the general partner placed any limitations upon Duff & Phelps with respect to the procedures followed or factors considered by Duff & Phelps in rendering its opinion.
In its analysis and in connection with the preparation of its opinion, Duff & Phelps made numerous assumptions with respect to industry performance, general business, market and economic conditions and other matters, many of which are beyond the control of any party involved in the Green River transaction. Duff & Phelps has also assumed that all of the conditions precedent required to implement the Green River transaction will be satisfied and that the Green River transaction will be completed in accordance with the documents that were provided for its review. The basis and methodology for Duff & Phelps’s opinion have been designed specifically for the express purposes of the general partner ofNCP-Eight and may not translate to any other purposes.
To the extent that any of the foregoing assumptions or any of the facts on which Duff & Phelps’s opinion is based proves to be untrue in any material respect, its opinion cannot and should not be relied upon. Duff & Phelps prepared its opinion effective as of July 5, 2007. The opinion is necessarily based upon market, economic, financial and other conditions as they existed and could be evaluated as of such date, and Duff & Phelps disclaims any undertaking or obligation to advise any person of any change in any fact or matter affecting the opinion which may come or be brought to the attention of Duff & Phelps after such date. Duff & Phelps’s opinion should not be construed as creating any fiduciary duty on Duff & Phelps’s part to any party.
Duff & Phelps’s opinion is not a recommendation as to how the general partner or any limited partner should vote or act with respect to any matters relating to the Green River transaction, or whether to proceed with the Green River transaction or any related transaction, nor does it indicate that the consideration received is the best possible attainable under any circumstances. The decision as to whether to proceed with the Green River transaction or any related transaction may depend on an assessment of factors unrelated to the financial analysis on which Duff & Phelps’s opinion is based. As a result, the opinion and presentation of Duff & Phelps was only one of many factors taken into consideration by the general partner in making its determination with respect to the Green River transaction.
The preparation of a fairness opinion is a complex process and is not necessarily susceptible to partial analysis or summary description. In addition, the process of preparing a fairness opinion necessarily requires a broad range of subjective judgments with respect to appropriate selected public companies, appropriate multiples of various selected financial data, appropriate discount rates and other financial and other factors. Analyses and estimates of the values of companies do not purport to be appraisals or necessarily reflect the prices at which companies or their securities may actually be sold.
In preparing its opinion, Duff & Phelps performed certain financial and comparative analyses summarized in the following paragraphs. Duff & Phelps believes that its analyses must be considered as a whole and that selecting portions of such analyses and the factors it considered, without considering all such analyses and factors, could create an incomplete view of the analyses and the process underlying its opinion. While the conclusions reached in connection with each analysis were considered carefully by Duff & Phelps in arriving at its opinion, Duff & Phelps made various subjective judgments in arriving at its opinion and did not consider
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it practicable to, nor did it attempt to, assign relative weights to the individual analyses and specific factors considered in reaching its opinion.
Although these paragraphs include some information in tabular format, those tables are not intended to stand alone, and must be read together with the full text of each summary and the limitations and qualifications in the opinion. Duff & Phelps’s analysis was comprised of a fundamental valuation analysis ofNCP-Eight using generally accepted valuation methodologies.
Fundamental Valuation Analysis
As part of its analysis to determine whether the consideration to be received by the limited partners ofNCP-Eight pursuant to the Purchase Agreement was fair, from a financial point of view, as of July 5, 2007, to such limited partners, Duff & Phelps took into account whether the consideration to be paid by Green River was not less than the fair market value ofNCP-Eight’s assets by estimating the fair market value of theNCP-Eight business.
Discounted Cash Flow Analysis. Duff & Phelps performed a discounted cash flow analysis on a controlling interest basis to derive indications of total enterprise value. Duff & Phelps’s free cash flow projections were based on management’s forecast for 2007 through 2016 financial performance and general discussions with, and guidance from,NCP-Eight management.
Duff & Phelps used discount rates ranging from 10.5% to 11.5% to reflect the overall risk associated with the company’s operations and projected financial performance. Duff & Phelps calculated a terminal value at the end of 2016 using a constant growth model, which incorporated a range of perpetuity growth rates from 2.0% to 3.0%. Duff & Phelps also calculated a terminal value at the end of 2016 using a terminal multiple approach, which incorporated a range of EBITDA multiples from 5.5x to 6.5x.
DISCOUNTED CASH FLOW ANALYSIS ($000s)
Enterprise Value | Enterprise Value | |||||||||||||||
Terminal Growth of | EBITDA Multiple of | |||||||||||||||
Discount Rate | 2.0% | 3.0% | 5.5x | 6.5x | ||||||||||||
10.5% | $ | 8,710 | $ | 9,433 | $ | 8,000 | $ | 8,781 | ||||||||
11.0% | $ | 8,159 | $ | 8,776 | $ | 7,735 | $ | 8,483 | ||||||||
11.5% | $ | 7,667 | $ | 8,198 | $ | 7,481 | $ | 8,198 | ||||||||
Concluded Enterprise Value Range: | $ | 7,500 | to | $ | 9,400 | |||||||||||
Based on this analysis, Duff & Phelps estimated that the company’s total enterprise value ranged from $7.5 million to $9.4 million.
Market Approach. Duff & Phelps applied the market approach, which consists of the application of valuation multiples to certain financial and operating variables of the company, where the selected multiples are based on valuation metrics derived from an analysis of selected public companies trading as well as selected merger and acquisition transactions.
Selected Public Company Analysis. No company used in this analysis is identical toNCP-Eight and, accordingly, a public company analysis involves complex and subjective considerations and judgments concerning differences in financial and operating characteristics of businesses and other factors that affect trading prices and overall valuation of the various companies being compared.
The companies selected by Duff & Phelps consisted of six publicly traded companies that operate cable television systems and provide residential cable television services. The selected public companies are as follows:
• | Comcast Corp. | |
• | Time Warner Cable, Inc. |
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• | Charter Communications, Inc. | |
• | Mediacom Communications Corp. | |
• | Knology, Inc. | |
• | RCN Corp. |
Based on publicly reported financial data as well as published estimates of financial performance for each of the selected public companies, Duff & Phelps analyzed certain valuation metrics. Multiples of enterprise value to projected 2008 EBITDA for the selected public companies ranged from 6.4x to 9.4x, with a mean and median of 8.3x and 8.4x, respectively. Multiples of enterprise value per basic subscriber for the selected public companies ranged from $3,074 to $6,410, with a mean and median of $4,569 and $4,463, respectively.
MARKET MULTIPLES
EV as a Multiple of | ||||||||
LTM | Proj. | |||||||
Selected Public Company | EBITDA | EBITDA | ||||||
Comcast Corp. | 10.9 | x | 9.4 | x | ||||
Time Warner Cable, Inc. | 10.2 | x | 8.2 | x | ||||
Charter Communications, Inc. | 10.8 | x | 8.9 | x | ||||
Mediacom Communications Corp. | 9.6 | x | 8.1 | x | ||||
Knology, Inc. | 13.8 | x | 8.6 | x | ||||
RCN Corp. | 7.9 | x | 6.4 | x | ||||
Highest | 13.8 | x | 9.4 | x | ||||
Lowest | 7.9 | x | 6.4 | x | ||||
Mean | 10.5 | x | 8.3 | x | ||||
Median | 10.5 | x | 8.4 | x | ||||
NCP-8 (implied by Transaction) | 7.9 | x | 8.0 | x | ||||
Notes:
EV = Enterprise Value; LTM = Latest twelve months
Selected public company financials have been adjusted for special items.
Sources: Capital IQ, Inc. andForm 10-K SEC filings.
Selected public company financials have been adjusted for special items.
Sources: Capital IQ, Inc. andForm 10-K SEC filings.
Selected Transactions Analysis. No transaction used in this analysis is identical to the proposed transaction and, accordingly, a transactions analysis involves complex and subjective considerations and judgments concerning differences in financial and operating characteristics of businesses and other factors that affect transaction prices and overall valuation of the various transactions being compared. Duff & Phelps identified 31 relevant controlling interest cable system transactions announced since January 1, 2006 and for which adequate information was available to derive meaningful valuation multiples.
Multiples of transaction value to projected 2008 EBITDA for the selected transactions ranged from 6.4x to 11.4x, with a mean and median of 8.1x and 7.6x, respectively. Multiples of transaction value per basic subscriber for the selected transactions ranged from $1,075 to $5,919, with a mean and median of $2,247 and $1,800, respectively.
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Transaction | TV/ | TV/ | ||||||||||||||
Value(1) | Basic | Proj. | ||||||||||||||
Date | Seller (Target) Name | Acquirer Name | ($ in mils.) | Sub | EBITDA | |||||||||||
May 2007 | Suddenlink (formerly Cebridge) | Jet Broadband | $ | 115.5 | $ | 2,887 | 8.9 | x | ||||||||
Apr 2007 | Patriot Media | Comcast | $ | 483.0 | $ | 5,919 | 8.7 | x | ||||||||
Apr 2007 | PrairieWave Holdings, Inc. | Knology, Inc. | $ | 255.0 | $ | 4,035 | 7.5 | x | ||||||||
Mar 2007 | Suddenlink (formerly Cebridge) | NewWave Communications | $ | 18.8 | $ | 1,880 | 7.3 | x | ||||||||
Mar 2007 | NewWave Communications | Green Country Partners | $ | 3.2 | $ | 2,100 | 7.3 | x | ||||||||
Mar 2007 | Green Country Partners | NewWave Communications | $ | 1.7 | $ | 1,419 | 6.7 | x | ||||||||
Mar 2007 | NewWave Communications | Partel Broadband | $ | 1.6 | $ | 1,750 | 6.7 | x | ||||||||
Feb 2007 | Mediacom | NA | $ | 22.9 | $ | 3,019 | 8.8 | x | ||||||||
Feb 2007 | Rapid Communications | Jet Broadband | $ | 8.4 | $ | 1,075 | 7.1 | x | ||||||||
Feb 2007 | Jet Broadband | Rapid Communications | $ | 0.8 | $ | 1,075 | 7.3 | x | ||||||||
Jan 2007 | Starstream Communications, Inc. | Wave Division Holdings, LLC | $ | 87.4 | $ | 4,162 | 8.8 | x | ||||||||
Jan 2007 | Range TV | Mediacom | $ | 7.3 | $ | 1,732 | 7.6 | x | ||||||||
Jan 2007 | Sun Country Cable | Sierra Nevada Communications | $ | 0.6 | $ | 1,289 | 6.6 | x | ||||||||
Nov 2006 | G Force, LLC | Atlantic Broadband | $ | 62.0 | $ | 2,952 | 10.0 | x | ||||||||
Oct 2006 | Suddenlink (formerly Cebridge) | Bright House | $ | 63.8 | $ | 3,358 | 9.7 | x | ||||||||
Sep 2006 | Charter Communications | Allegiance Communications | $ | 37.7 | $ | 1,300 | 6.5 | x | ||||||||
Aug 2006 | Sigecom | Avista Capital Partners | $ | 115.0 | $ | 4,259 | 8.2 | x | ||||||||
Jul 2006 | Galaxy Cablevision | Eagle Communications | $ | 3.7 | $ | 1,441 | 6.4 | x | ||||||||
May 2006 | WOW | Avista Capital Partners | $ | 825.0 | $ | 2,578 | 9.5 | x | ||||||||
May 2006 | Cebridge Connections | Eagle Communications | $ | 9.9 | $ | 1,585 | 6.8 | x | ||||||||
Apr 2006 | Eastern CT Cable TV | MetroCast Communications | $ | 118.7 | $ | 3,300 | 11.4 | x | ||||||||
Mar 2006 | Charter Communications | Orange Broadband | $ | 78.7 | $ | 1,800 | 7.6 | x | ||||||||
Mar 2006 | Cequel III | Tele-Media Corp. | $ | 1.4 | $ | 1,393 | 7.7 | x | ||||||||
Mar 2006 | Klip Interactive | Florida Cable | $ | 0.5 | $ | 1,130 | 7.7 | x | ||||||||
Feb 2006 | Charter Communications | Cebridge Connections | $ | 770.0 | $ | 3,208 | 9.7 | x | ||||||||
Feb 2006 | Charter Communications | NewWave Communications | $ | 126.0 | $ | 1,658 | 7.0 | x | ||||||||
Feb 2006 | Cable One | Custer Tel. Broadband | $ | 0.4 | $ | 1,152 | 6.7 | x | ||||||||
Jan 2006 | CableAmerica Corp. | Cox Communications | $ | 125.3 | $ | 3,350 | 11.1 | x | ||||||||
Jan 2006 | Charter Communications | Chester Communications | $ | 5.4 | $ | 1,944 | 8.7 | x | ||||||||
Jan 2006 | Rapid Cable | Inter Mountain Cable | $ | 4.2 | $ | 1,300 | 7.1 | x | ||||||||
Jan 2006 | Klip Interactive | Pineland Tel. of GA | $ | 0.2 | $ | 1,272 | 8.7 | x | ||||||||
Highest | $ | 825.0 | $ | 5,919 | 11.4 | x | ||||||||||
Lowest | $ | 0.2 | $ | 1,075 | 6.4 | x | ||||||||||
Mean | $ | 107.1 | $ | 2,247 | 8.1 | x | ||||||||||
Median | $ | 18.8 | $ | 1,800 | 7.6 | x | ||||||||||
NCP-8 (implied by Transaction) | $ | 8.1 | $ | 1,526 | 8.0 | x | ||||||||||
Notes:
(1) | Represents implied 100% enterprise values where acquisitions were less than 100%. |
TV = Transaction Value; NA = Not available
Sources: Daniels & Associates and www.danielsonline.com; Cable TV Investor, SNL Kagan, January 31, 2007 through May 31, 2007 issues.
Sources: Daniels & Associates and www.danielsonline.com; Cable TV Investor, SNL Kagan, January 31, 2007 through May 31, 2007 issues.
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Application of Selected Multiples. Based on its assessment ofNCP-Eight’s historical and projected size, growth and profitability relative to the selected public companies and to the target companies from the selected transactions, as well as an assessment of certain company specific risk factors, Duff & Phelps chose valuation multiples to apply toNCP-Eight’s latest-twelve-month 2007 EBITDA, projected 2008 EBITDA, and number of basic subscribers of6.5x-7.5x,6.0x-7.0x, and $1,380-$1,540, respectively. In the determination ofNCP-Eight’s representative level of latest-twelve-month 2007 EBITDA, Duff & Phelps excluded approximately $38,700 in non-recurring expenses associated with a programmer litigation settlement and one-time additional programmer license fees. Company specific risk factors that Duff & Phelps attributed toNCP-Eight included the company’s weaker historical and projected revenue growth and EBITDA margin relative to the majority of the selected public companies, and its weaker monthly EBITDA per subscriber relative to the majority of both the selected public companies and the selected transaction target companies. Based on this analysis, Duff & Phelps concluded total enterprise value indications ranging from $6.1 million to $8.2 million.
Fundamental Valuation Analysis Conclusions
As noted above, Duff & Phelps compared the enterprise value based on the purchase price with valuation indications under its fundamental analyses and all such comparisons supported an indication of fairness from a financial point of view. In addition, Duff & Phelps utilized its fundamental valuation analysis to derive indications ofNCP-Eight’s enterprise value ranging from $7.5 million to $8.2 million, as summarized below. Duff & Phelps also observed that the enterprise value amount of $8.1 million based on the purchase price falls above the midpoint of the concluded enterprise value range, and therefore supported a determination of fairness from a financial point of view.
Concluded Valuation | ||||||||||||||||
Range | ||||||||||||||||
Low | High | Purchase Price | ||||||||||||||
Methodologies ($000s) | ||||||||||||||||
DCF Analysis | $ | 7,500 | — | $ | 9,400 | |||||||||||
Selected Public Company/M&A Transaction Analysis | $ | 6,100 | — | $ | 8,200 | |||||||||||
Concluded Enterprise Value Range | $ | 7,500 | — | $ | 8,200 | $ | 8,100 |
Implied Valuation Multiples (Enterprise Value) | ||||||||||||||||||||
LTM 2007 EBITDA | $ | 1,030 | 7.3 | x | — | 8.0 | x | 7.9 | x | |||||||||||
Projected 2008 EBITDA | $ | 1,010 | 7.4 | x | — | 8.1 | x | 8.0 | x | |||||||||||
Basic Subscribers (000s) | 5.31 | $ | 1,413 | — | $ | 1,545 | $ | 1,526 |
Duff & Phelps held discussions with both Daniels & Associates, the company’s investment banker, and management regarding the sale process that took place from 2005 until the letter of intent was received from Green River on April 4, 2007. Based on Duff & Phelps’s understanding, there were no other offers received by the company that were superior to the offer made by Green River.
Summary Analysis
Based on the foregoing analyses, Duff & Phelps concluded that the consideration to be received by the limited partners of NCP-Eight in the Green River transaction was fair to such limited partners, from a financial point of view (without giving effect to any impacts of the Green River transaction on any particular limited partner other than in its capacity as a limited partner), as of July 5, 2007. Duff & Phelps’s opinion did not address the relative merits of the Green River transaction as compared to any alternative business strategies that might exist for NCP-Eight or the effect of any other business combination in which NCP-Eight might engage.
Compensation and Material Relationships
NCP-Eight paid Duff & Phelps a customary fee plus certain out-of-pocket expenses for its services in connection with rendering its opinion as to the fairness, from a financial point of view, to the limited partners
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of NCP-Eight of the consideration to be received by such limited partners in the Green River transaction. The amount paid to Duff & Phelps was not conditioned upon the outcome of its opinion and was negotiated prior to Duff & Phelps’s evaluation of any of the assets of NCP-Eight. NCP-Eight has also agreed to reimburse Duff & Phelps for its expenses incurred in performing its services and to indemnify Duff & Phelps and its affiliates, their respective directors, officers, agents and employees and each person, if any, controlling Duff & Phelps or any of its affiliates against certain liabilities and expenses, including certain liabilities under federal securities laws, related to or arising out of Duff & Phelps’s engagement and any related transactions.NCP-Eight retained Duff & Phelps to evaluate the assets ofNCP-Eight and the consideration to be received in the Green River transaction due to Duff & Phelps’s experience and reputation in evaluating transactions and rendering opinions regarding fairness for various companies in various industries, including companies operating in the telecommunications sector. Duff & Phelps is a nationally recognized investment banking firm that is regularly engaged to render financial opinions in connection with mergers and acquisitions, tax matters, ESOP and ERISA matters, corporate planning, and other purposes. Prior to this engagement, neither Northland Communications Corporation nor any of its affiliates had entered into a relationship with Duff & Phelps, and to the knowledge of the general partner, Duff & Phelps does not own any interest in, or have any management control over, any Northland Communications Corporation affiliated company. Duff & Phelps was also engaged by NCP-Seven as an independent financial advisor to its general partners to render an opinion as to the fairness of the consideration to be received by its limited partners, from a financial point of view, to such limited partners. Duff & Phelps has consented to the use of its opinion in connection with this proxy statement.
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The following table sets forth the ratios of earnings to fixed charges of NCP-Eight for the period indicated. For purposes of the table, “earnings” represents pretax income from continuing operations and fixed charges. “Fixed Charges” consists of interest and amortization of loan costs.
Three Months | ||||||||||||||||||||
Nine Months | Six Months | Ended | Year Ended | Year Ended | ||||||||||||||||
Ended Sept 30, | Ended June 30, | March 31, | December 31, | December 31, | ||||||||||||||||
2007 | 2007 | 2007 | 2006 | 2005 | ||||||||||||||||
Ratio of Earnings to Fixed Charges | 2.02 | 3.27 | 3.13 | 2.42 | 1.38 |
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This proxy statement is being furnished in connection with the solicitation of proxies by the general partner ofNCP-Eight. The proxies are for use at the special meeting of limited partners to be held on February 27, 2008 at 4:00 p.m., local time, at the offices ofNCP-Eight at 101 Stewart Street, Suite 700, Seattle, Washington 98101, and at any adjournment or postponement of the meeting.
Limited partners are invited to attend the special meeting and are urged to submit a proxy even if they will be able to attend the special meeting. The approximate date of mailing this proxy statement and the accompanying proxy card is December 28, 2007.
The purpose of the meeting is to vote on
• | a proposal to approve the proposed sale of substantially all ofNCP-Eight’s assets to Green River; |
• | a proposal to approve the proposed sale of substantially all ofNCP-Eight’s assets to the general partner or one or more affiliates of the general partner in the event that the Green River transaction is not consummated by March 31, 2008, or such later date upon whichNCP-Eight and Green River mutually agree, or is otherwise terminated prior to such date, on substantially the same terms and conditions as the Green River transaction except that the general partner shall have an additional 90 days to arrange financing; and |
• | a proposal to approve an amendment to theNCP-Eight partnership agreement that would exclude the alternative sale transaction from the independent appraisal procedures that would otherwise be required by theNCP-Eight partnership agreement; |
in each case as described further in this proxy statement.
Only persons who are limited partners of record ofNCP-Eight at the close of business on December 14, 2007 will be entitled to vote at the special meeting or at any adjournment or postponement of the special meeting. As of the close of business on December 14, 2007 (the “record date”), there were 19,087 units of limited partnership interest outstanding, held by 852 limited partners of record. Limited partners will be entitled to one vote on each matter presented for approval at the special meeting for each unit of limited partnership held as of the close of business on the record date.
Pursuant to theNCP-Eight partnership agreement, the presence in person or by proxy of holders of units of limited partnership interest representing a majority of the votes entitled to be cast at the special meeting constitutes a quorum for the transaction of business at the special meeting. Abstentions and non-broker votes are included in the calculation of the number of votes represented at a meeting for purposes of determining whether a quorum has been achieved. The approval of the proposal relating to the Green River transaction requires the affirmative vote of the holders of a majority of the outstanding units of limited partnership interest. The approval of the proposal relating to the alternative sale transaction requires the affirmative vote of the holders of a majority of the outstanding units of limited partnership interest. The approval of the proposal relating to the amendment to theNCP-Eight partnership agreement also requires the affirmative vote of the holders of a majority of the outstanding units of limited partnership interest. A failure to submit a proxy card (or to vote in person at the special meeting) will have the same effect as a vote to “Disapprove” both proposals.
The general partner will ensure that all properly executed proxies received before the special meeting will be voted at the special meeting as instructed on the proxy. Abstentions and broker non-votes will have the
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effect of a vote against the proposal(s) for which they have abstained. Properly executed proxy cards that do not contain voting instructions with regard to a proposal will be treated as a vote to “APPROVE” any such proposal. All questions as to the validity, form, eligibility, time of receipt, and acceptance of any proxies will be determined by the general partner in its sole discretion, which determination will be final and binding.
The general partner knows of no matters that will be presented for a vote at the special meeting other than the matters identified in this proxy statement and on the proxy card. If any other matters are properly presented, the persons designated as proxies on the enclosed proxy card intend to vote on the matters in accordance with the form of the proxy being solicited that is included as Exhibit A to this proxy statement. An actual execution-ready proxy card accompanies this proxy statement. By submitting a completed and executed proxy, a limited partner will be appointing each of John S. Whetzell and Richard I. Clark as attorney-in-fact to vote the limited partner’s units at the special meeting with respect to approval or disapproval, as specified on the proxy card. Messrs. Whetzell and Clark are granted the authority to appoint substitutes for purposes of voting proxies. Messrs. Whetzell and Clark serve as Chief Executive Officer and Executive Vice President, respectively, of the general partner. The general partner request that limited partners complete, date and sign the accompanying proxy card and return it promptly in the enclosed postage-paid envelope, even if they are planning to attend the special meeting.
Once you submit a signed proxy, you may change your vote only by (1) delivering to the general partner before the special meeting either a signed notice of revocation or a signed proxy dated subsequent to the date of the proxy previously given, or (2) personally appearing at the special meeting and, prior to the commencement of the special meeting, delivering to the general partner notice in writing that the proxy already given is being revoked. Attendance at the special meeting, by itself, will not revoke a proxy.
This proxy statement is being furnished to the limited partners of NCP-Eight by the general partner, whose principal executive offices are located at 101 Stewart Street, Suite 700, Seattle, Washington 98101 and whose telephone number is(206) 621-1351. The principal executive offices and telephone number ofNCP-Eight are the same.
In addition to use of the mail, proxies may be solicited by telephone or personally by the general partner and any of its directors, officers, partners and employees. The general partner will not pay any additional compensation to any of these people for their services in this regard. The expenses of the solicitation will be borne byNCP-Eight.
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The terms and conditions of the Green River purchase agreement pursuant to whichNCP-Eight would sell substantially all of its assets to Green River are set forth as Exhibit B. With limited exceptions, the assets to be sold under the Green River purchase agreement includeNCP-Eight’s personal property, real property, contracts, subscriber relationships, records relating to the Systems, franchises, accounts receivable, contracts and deposits with vendors, utilities, landlords and governmental agencies relating to the services provided by the Systems. The purchased assets expressly exclude, among other things,NCP-Eight’s cash on hand, cash in bank accounts, including customer advance payments and deposits, any surety instruments, insurance policies and other similar items, books and records required to be retained, tax and copyright refunds, programming agreements, certain retransmission consent agreements, trademark and other similar proprietary rights ofNCP-Eight.
In consideration for the assets to be purchased, Green River will payNCP-Eight an aggregate purchase price of $8,100,000, subject to adjustment as described below in “— Potential Purchase Price Adjustments”. Upon execution of the Green River purchase agreement, Green River deposited $75,000 to secure Green River’s obligations to close the transaction, which will be held in escrow and credited, together with interest, against the purchase price at closing. The deposit may be returned to Green River or forfeited toNCP-Eight under certain conditions. At closing, ten percent of the purchase price will be held in escrow as a holdback fund. The escrow holdback is to be used to indemnify Green River from certain claims, if any, that may arise within a period of eighteen months post closing. Following the eighteen month period, any remaining amounts with respect to the escrow holdback, and any interest accumulated on the escrow funds, will be paid toNCP-Eight. See “— Indemnification” on page 44 for more details.
With respect to the proposed sale, the value assigned to the purchased assets is based on the following assumptions:
• | NCP-Eight will transfer the assets free and clear of all liens and encumbrances (except as those detailed in the Green River purchase agreement); | |
• | Green River will assume no debts and liabilities ofNCP-Eight (other than obligations arising from the acquired assets after closing, from conduct by Green River after closing, or those that are expressly assumed in the Green River purchase agreement); | |
• | the contracts being transferred to Green River will only relate to the business or operations of the systems being purchased; | |
• | Green River will not receive accounts receivable and all payments and sums deposited or advanced byNCP-Eight to landlords, utilities, governmental agencies or any other party requiring a security deposit in exchange for service initiation or performance; and | |
• | Green River will not receive any ofNCP-Eight’s cash on hand, customer advanced payments and deposits, refunds due from local, state or federal taxes, trademarks, or certain other immaterial assets. |
In connection with the sale of the assets to Green River, the aggregate purchase price is subject to certain adjustments based primarily on subscriber revenue, which consists of the gross amounts billed to active customers of the Systems — including revenues collected from basic, bulk and digital cable services, and internet and telephone services — for the most recent billing cycles prior to closing (“Subscriber Revenue”). Accordingly, at closing the purchase price will be adjusted in the following manner:
• | if Subscriber Revenue falls below 99% of $266,295.00 (the “Subscriber Revenue Threshold”), the purchase price will be reduced by an amount equal to the percentage difference between the Subscriber Revenue Threshold and the Subscriber Revenue less one percent; provided, however that if the adjusted purchase price would be less than 93% of the purchase price, excluding the effect of other adjustments, |
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Green River may elect to set the adjusted purchase price at 93% (the “Purchase Price Floor”), but if Green River chooses not to do so,NCP-Eight may delay closing for up to 90 days to remediate the situation or terminate the Green River purchase agreement and return the deposit to Green River; and |
• | if Subscriber Revenue exceeds 102.5% of the Subscriber Revenue Threshold, the purchase price will be increased by an amount equal to the percentage difference between the Subscriber Revenue Threshold and the Subscriber Revenue less two and one-half percent; provided, however the purchase price will only be increased up to 104%, excluding the effect of other adjustments. In the event that the adjusted purchase price would be greater than 104% without such limit,NCP-Eight may elect to set the purchase price at 104% (the “Purchase Price Ceiling”), but ifNCP-Eight chooses not to do so, Green River may elect to terminate the Green River purchase agreement and receive the return of the deposit. |
In addition, if Subscriber Revenue is negatively impacted by $25,000 or more, and such impact is attributed to a force majeure event, as defined in the Green River purchase agreement,NCP-Eight may delay closing up to 30 days to remediate the circumstances.
Based on information provided byNCP-Eight’s operational personnel in Alabama and Georgia, the general partner is optimistic that Subscriber Revenue will be adequate at the time of closing the sale ofNCP-Eight’s Systems to avoid a downward adjustment to the purchase price.
Additionally, Green River will purchaseNCP-Eight’s rights to receive payment for services rendered byNCP-Eight which have been unpaid as of the closing date which will increase the amount of cash received byNCP-Eight. Additionally, Green River will receive credit for the amount of subscriber prepayments received byNCP-Eight and customer deposits held byNCP-Eight, which will reduce the amount of cash received byNCP-Eight. See “Dissolution and Liquidation Consequences of the Proposed Sales-Projected Cash Available from Liquidation” beginning on page 50 for estimates of these amounts.
With respect to its proposed acquisition of substantially all ofNCP-Eight’s assets, Green River will have the right to seek indemnification from the escrow holdback for damages resulting from any breach of representations, warranties and covenants byNCP-Eight. The escrow holdback will be held in escrow for eighteen months after closing, and the balance less any payments due to Green River and less any pending claims, including any interest accrued, will then be released toNCP-Eight. In the Green River purchase agreement,NCP-Eight has specifically agreed to indemnify Green River for:
• | any losses stemming from any untrue representation, breach of warranty or nonfulfillment of a covenant byNCP-Eight, once such losses have exceeded $25,000; | |
• | any obligations ofNCP-Eight not assumed by Green River; | |
• | any losses resulting fromNCP-Eight’s operation or ownership of the purchased systems or assets prior to closing; and | |
• | any legal claim, judgment or investigation or enforcement related toNCP-Eight’s stated indemnities. |
Absent fraud, and except for certain claims related to organization, authority, title to real and personal property, ERISA, taxes and environmental claims, claims for breaches of representations, warranties and covenants by Green River are limited to the amounts held in the escrow holdback.
Green River will indemnifyNCP-Eight for the following:
• | any losses resulting from any untrue representation, breach of warranty or nonfulfillment of a covenant by Green River; | |
• | any of the liabilities assumed by Green River; | |
• | any losses resulting from Green River’s operation or ownership of the purchased systems or assets on and after the closing; and | |
• | any legal claim, judgment or investigation or enforcement related to Green River’s stated indemnities. |
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As discussed above in “— General Structure of the Proposed Green River Transaction” beginning on page 43, Green River will pay the purchase price, minus the escrow holdback, by wiring the amount directly toNCP-Eight at closing. Green River has represented that it will have available on the closing date sufficient unrestricted funds to enable it to consummate the transaction. Green River will not be relying on any financing for the purchase price to be delivered at closing.
In the event that the alternative sale transaction is consummated instead, the purchase price will be financed. The general partner has not yet sought any financing for the alternative sale transaction because it currently believes that it is highly probable that the Green River transaction will close during the first quarter of 2008. Accordingly, the general partner considers that the probability that it would enter into the alternative sale transaction to be remote. Since 1981 the general partner, through various affiliated entities, has been engaged in the process of raising debt and equity capital used in the acquisition of cable television properties similar to those being sold in this transaction. The general partner and its affiliates have established and maintained long term business relationships with lenders who are experienced and active in lending transactions that involve properties similar to those owned by NCP-Eight. Currently, the general partner and its affiliates (excluding NCP-Eight) have lending arrangements exceeding $159 million with various banks and other institutions. Although no specific discussion regarding the financing of a potential acquisition ofNCP-Eight’s assets have taken place, the general partner and its affiliates have frequent discussions with lenders regarding the capital markets and availability of debt financing for acquisitions similar to the alternative sale transaction. Currently, based on these discussions and its assessment of the capital markets, the general partner feels it is probable that sufficient debt financing can be obtained to consummate the alternative sale transaction. While the general partner and its affiliates have been able to obtain financing in the past, there can be no assurance that any of them would be able to obtain financing for a transaction during the first half of 2008. The general partner would likely deem proposed financing terms to be unsatisfactory if they would feature one or more of the following:
• | Financial covenants, such as ratios of debt to operating cash flow and operating cash flow to interest expenses, that if set too close to the projected operating results of the acquiring affiliate, as of the time of financing, would increase the risk of: (1) restricting or prohibiting the acquiring affiliate in making management fee payments to its parent; (2) non-compliance with these covenants in the event of a deviation in expected operating performance; or (3) preventing or restricting the acquiring affiliate from making adequate levels of capital investment to remain competitive; | |
• | rates charged by lenders are at levels that would result in interest expense on debt borrowed for the acquisition exceeding the cash flow of the assets being acquired; or | |
• | a parent company guarantee. |
The general partner anticipates that the Green River transaction will be consummated during the first quarter of 2008. However, the Green River transaction is subject to the satisfaction of certain material closing conditions, including the following:
• | the Green River transaction must be approved by holders of a majority of the outstanding units of limited partnership interest ofNCP-Eight; | |
• | there must be no action, suit or other proceeding pending or threatened to prevent or restrict the Green River transaction; | |
• | NCP-Eight shall have received a fairness opinion issued by Duff & Phelps regarding the sale of the assets in form and substance acceptable toNCP-Eight; | |
• | NCP-Eight must obtain consents from the FCC (with limited exceptions) and all franchising and other third party authorities; |
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• | the non-occurrence of any changes that would have a material adverse effect on the operations or financial conditions for the systems (other than those that affect the industry as a whole); | |
• | the purchase price will not have increased above the Purchase Price Ceiling or decreased below the Purchase Price Floor, excluding the effect of other adjustments; and | |
• | the discharge or removal of encumbrances specified in the Green River purchase agreement. |
The Green River transaction may not close if one or more of these conditions are not satisfied or waived, even if the proposed sale is approved by limited partners holding a majority ofNCP-Eight’s units of limited partnership interest.
The Green River purchase agreement provides for the termination of the Green River transaction in the following circumstances:
• | by mutual consent ofNCP-Eight and Green River, if an action, suit or proceeding enjoins or prohibits the consummation of the sale, so long as such circumstance is not a result of a breach of warranty or nonfulfillment of a covenant; | |
• | by Green River if any of the conditions to closing that are provided in the Green River purchase agreement for its benefit have not been fulfilled or waived, so long as such circumstance is not a result of a breach of warranty or nonfulfillment of a covenant by Green River; | |
• | byNCP-Eight if any of the conditions to closing that are provided in the Green River purchase agreement for its benefit have not been met or fulfilled or waived, so long as such circumstance is not a result of a breach of warranty or nonfulfillment of a covenant byNCP-Eight; | |
• | by eitherNCP-Eight or Green River if the other party has not cured a material breach of its representations, warranties or covenants, such breach has not been waived and the terminating party is not concurrently in material breach of any of its representations, warranties or covenants; and | |
• | by eitherNCP-Eight or Green River if the conditions to closing have not been satisfied by March 31, 2008, so long as such failure to close is not attributable to a breach, action or inaction by the party seeking termination. |
General Structure of the Alternative Sale Transaction
The terms and conditions of the alternative purchase agreement pursuant to whichNCP-Eight would sell substantially all of its assets to Northland Communications Corporation, its general partner, or one or more of its affiliates are set forth as Exhibit C. This agreement incorporates by reference all of the representations, warranties, covenants, terms and conditions of the Green River purchase agreement, including the purchase price amount and purchase price adjustment provisions, indemnification provisions and related escrow arrangements, subject to the following additional conditions:
• | the rights and obligations under the alternative purchase agreement are only effective when Northland Communications Corporation andNCP-Eight execute the alternative purchase agreement in the event that the Green River transaction is not consummated by March 31, 2008, or such later date upon whichNCP-Eight and Green River mutually agree, or in the event that the Green River transaction is otherwise terminated prior to such date; | |
• | Northland Communications Corporation’s obligation to consummate the purchase ofNCP-Eight’s assets pursuant to the terms of the alternative purchase agreement will be subject to the condition that Northland Communications Corporation shall have arranged for satisfactory financing; if such condition shall not have been met within 90 days of the expiration or termination of the Green River purchase agreement, Northland Communications Corporation would have the right to terminate the alternative purchase agreement without penalty. |
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The general partner is seeking the approval to enter into the alternative sale transaction by a majority of the outstanding units of limited partnership interest not held by the general partner or any affiliates. While such approval would provide authorization to the general partner to execute the proposed alternative purchase agreement, it would in no way obligate the general partner to do so. The general partner would consider executing the alternative purchase agreement only if:
• | the Green River transaction terminates; | |
• | the terms of the alternative sale transaction have been approved by a majority of the outstanding units of limited partnership interest not held by the general partner or any affiliates; and | |
• | the proposed amendment to the NCP-Eight partnership agreement has also been approved by a majority of the outstanding units of limited partnership interest not held by the general partner or any affiliates. |
Accordingly the alternative sale transaction will not be entered into unless the proposal to amend theNCP-Eight partnership agreement is approved by a majority of the outstanding units of limited partnership interest.
NCP-Eight has not yet executed the alternative purchase agreement. The general partner has not yet decided whether it will enter into the alternative sale transaction. Even if the Green River transaction terminates and the proposed amendment to the NCP-Eight partnership agreement is duly approved, the general partner may in its discretion determine not to enter into the alternative purchase agreement and instead continue its efforts to identify prospective purchasers for NCP-Eight’s assets. If entered into, the alternative purchase agreement would automatically terminate without any action required by NCP-Eight or the general partner, in the event that closing of the alternative sale transaction has not occurred on or before the first anniversary of the termination of the Green River transaction.
Amendment of theNCP-Eight Partnership Agreement
Pursuant to proposed amendment to theNCP-Eight partnership agreement, the form of which is included as Exhibit E to this proxy statement,NCP-Eight would be authorized to sellNCP-Eight’s assets to the general partner or one or more of its affiliates on substantially the same terms and conditions (including purchase price), as contained in the Green River purchase agreement, except for an additional condition regarding financing, without having to comply with any independent appraisal procedures. In its current form, theNCP-Eight partnership agreement requires that independent appraisal procedures be followed for determining the price to be paid whenever the general partner or any of its affiliates propose to purchase any assets fromNCP-Eight. These procedures provide a framework for determining the price to be paid by the general partner or any of its affiliates for assets to be sold by NCP-Eight while protecting the interests of the limited partners. These procedures were originally established to provide a procedure to protect against the general partner agreeing, on behalf ofNCP-Eight, to a below fair market value sale price for any NCP-Eight assets as a result of the conflict of interest that would be inherent in any negotiations between NCP-Eight and its general partner.
Pursuant to the appraisal procedure set forth in the NCP-Eight partnership agreement, the general partner would select two independent third-party appraisers, who would together select a third independent third-party appraiser. During the two-month period immediately preceding the proposed transaction involving the general partner or any of its affiliates, each of these three appraisers would determine the fair market value of the assets proposed to be sold by NCP-Eight. The general partner and its affiliates would then have the right, but not the obligation, to purchase the appraised assets for a price equal to the greater of (1) the price paid by NCP-Eight for such assets, or (2) the average of the fair market values determined by the three appraisers. The general partner would also be required to provide a report to the limited partners including a general description of the assets to be sold, the date of purchase and the purchase price paid for such assets by NCP-Eight, the appraised values and the dates of the appraisals, and the purchase price and date of purchase for the sale of the assets to the general partner or any of its affiliates.
Unless the NCP-Eight partnership agreement is amended as proposed, these independent appraisal procedures would apply to the alternative sale transaction. These procedures are not, however, applicable to the Green River transaction because Green River is not an affiliate of the general partner. The general partner
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believes that because the alternative sale transaction would be consummated at the same price and on substantially the same terms as the Green River transaction, which was negotiated as an arm’s-length transaction, the costs and potential delays associated with separate appraisals of the fair market value ofNCP-Eight’s assets would not outweigh any perceived benefits from such appraisals.
If this proposed amendment to the NCP-Eight partnership agreement is approved by the requisite majority of the outstanding units of limited partnership interest, but the alternative sale transaction is not so approved, the amendment would become effective upon execution by NCP-Eight and the general partner. Pursuant to the amendment, NCP-Eight would be able to sell all of its assets to the general partner or any of its affiliates at any time in the future without following the independent appraisal procedures so long as the transaction:
• | has substantially the same terms and conditions as the Green River transaction, except for an additional condition regarding financing; and | |
• | is approved by the requisite majority of the outstanding units of limited partnership interest. |
Distributions to General and Limited Partners
Under theNCP-Eight partnership agreement, cash and any unsold assets ofNCP-Eight are to be distributed upon liquidation and winding up of the partnership in the following order of priority:
• | first, pursuant to Article 16(d)(i) of theNCP-Eight partnership agreement, to the payment of all liabilities or obligations ofNCP-Eight, including any obligations owed to its general partner or any of its affiliates; | |
• | second, pursuant to Article 16(d)(ii) of theNCP-Eight partnership agreement, to the setting up of reasonable reserves for any contingent liabilities or obligations ofNCP-Eight or of its general partner arising out of or in connection with the partnership, to be held in escrow through a liquidating trust; | |
• | third, pursuant to Article 16(d)(iii) of theNCP-Eight partnership agreement, to the partners ofNCP-Eight pro rata in the amount of their positive capital account balances, after adjustment in accordance with the terms of theNCP-Eight Partnership Agreement; and | |
• | fourth, pursuant to Article 16(d)(iv) of theNCP-Eight partnership agreement, the balance, if any, to be allocated 20% to its general partner and 80% to its limited partners. |
Limited partners will participate in the distributions that are to be made to them in proportion to the number of units of limited partnership interest they hold.
NCP-Eight will applyNCP-Eight’s available cash to discharge unpaidNCP-Eight liabilities. The general partner has estimated the amount ofNCP-Eight’s total liabilities on a pro forma basis, assuming that the sales had occurred as of September 30, 2007. See “Dissolution and Liquidation Consequences of the Proposed Sales — Projected Cash Available from Liquidation” beginning on page 50. WhileNCP-Eight’s actual liabilities will differ from those set forth in the pro forma statement, the general partner does not anticipate thatNCP-Eight’s actual liabilities, either at closing or thereafter, will be materially greater than those set forth in the pro forma statement.
The net cash proceeds will be applied to coverNCP-Eight’s expenses, whether or not such expenses are greater or less than those set forth in the pro forma statement before cash distributions are made to the limited partners. The balance of the net sale proceeds will then be distributed to the limited partners in proportion to their rights under theNCP-Eight partnership agreement, as described above under “Distributions upon Liquidation of the Partnership.” The amounts of these distributions are estimated to be in the range of those amounts as set forth under “Dissolution and Liquidation Consequences of the Proposed Sales — Projected Cash Available from Liquidation” beginning on page 50.
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The aggregate estimated value of the general partner’s cash distributions, if either of the sale transactions are consummated as described in this proxy statement, was calculated using pro forma financial data as of September 30, 2007 based on the assumption that the proposed sales will close as contemplated. The value of the distribution to Northland Communications Corporation as general partner is estimated to be approximately $53,000. See “Dissolution and Liquidation Consequences of the Proposed Sales — Projected Aggregate Cash Available Following Closing the Proposed Sales” beginning on page 51. Several variables could effect the actual value of the general partner’s interest inNCP-Eight, including purchase price adjustments at the closing of the proposed sales, or a post closing claim made against the escrow holdback.
As soon as is reasonably practicable after the closing of the proposed sales,NCP-Eight intends to distribute to the general partner and the limited partners their respective shares of the net cash proceeds then available, after discharging all knownNCP-Eight liabilities.NCP-Eight expects these cash distributions to be made in one lump sum within 60 days of the closing.
Limited partners will receive a final distribution shortly after the expiration of the eighteen month escrow period to the extent that remaining holdback funds are distributed toNCP-Eight out of escrow.
See “Dissolution and Liquidation Consequences of the Proposed Sales — Projected Cash Available from Liquidation” beginning on page 50 for estimates of the amounts distributable to the limited partners if the proposed sales are closed. Considering this arrangement, limited partners should bear in mind that the pro forma statement includes projected expenses of $50,000 for unknown and contingent liabilities. The general partner considers this estimate to be reasonable, but such expenses and liabilities may exceed that amount.
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If either of the proposed sales close as contemplated, the general partner will commence dissolution ofNCP-Eight during the first half of 2008.NCP-Eight will continue to file periodic reports with the Securities and Exchange Commission under the Securities Exchange Act of 1934 until it is dissolved. Upon its dissolutionNCP-Eight will file a Certification and Notice of Termination on Form 15 with the Securities and Exchange Commission, and will thereafter no longer be subject to the Securities Exchange Act and will cease filing periodic reports with the Securities and Exchange Commission.NCP-Eight will have completed the dissolution process when it has discharged all knownNCP-Eight liabilities, disposed of allNCP-Eight assets, other thanNCP-Eight’s rights to the amounts to which it may be entitled out of the escrow holdback, and funded the liquidating trust to provide for estimated contingent liabilities and obligations ofNCP-Eight. Following dissolution of the partnership,NCP-Eight will no longer provide its limited partners with annual, semiannual, or quarterly reports if either or both of the proposed sales are approved.
The following tables set forth an estimate of the cash available for distribution to the limited partners if the proposed Green River transaction is closed. The tables provide estimates based on an initial $500 and $1,000 investment inNCP-Eight. They project cash distributions to limited partners from the proposed sales of $524 per $1,000 investment and $262 per $500 unit. If the alternative purchase agreement is entered into and the alternative sale transaction is consummated, the cash available for distribution to limited partners is expected to be substantially equivalent.
The estimates are computed on a pro forma basis and based upon a number of assumptions. The projected net cash available assumes that each proposed sale will close on September 30, 2007, and reflects payments of principal and interest onNCP-Eight indebtedness and certain accrued receipts and costs as of September 30, 2007. The current estimated total expenses in the proposed sales are approximately $625,000 (including transaction and proxy costs, andNCP-Eight administrative expenses), but such estimate does not include administrative costs of dissolving and winding upNCP-Eight. Although these expenses will vary depending on the timing and structure of the sales transactions, the expenses incurred would likely be equal to or greater than those set forth in the following tables. Other expenses, such asNCP-Eight administrative costs and miscellaneous costs, represent expenses that would be incurred byNCP-Eight regardless of the parties to or structure of a sale ofNCP-Eight’s assets.
Pursuant to the terms of the Green River purchase agreement, $810,000 of the purchase price will be held in a third party escrow account, against which Green River may assert indemnification claims under the purchase agreement. At the end of the eighteen months, any funds remaining in escrow (net of any pending indemnification claims) will be released toNCP-Eight.NCP-Eight will promptly thereafter distribute the net proceeds from escrow to its partners. The projections set forth in the following tables assume that the hold back escrow will be distributed in full. See “Specific Terms of the Proposed Asset Sales — General Structure of the Proposed Sale to Green River” beginning on page 43 for more details.
The estimates set forth on the following tables are provided on a pro forma basis as of September 30, 2007, and are being provided for illustrative purposes only. The general partner currently anticipates closing the proposed Green River transaction in the first quarter of 2008. If the alternative purchase agreement is entered into and the alternative sale transaction is consummated, the cash available for distribution to limited partners is expected to be substantially equivalent. Actual amounts will vary from the estimates included on the following tables. The amount of cash actually distributed to limited partners will also vary from these estimates. The amount of the variance will depend on a variety of factors, including, but not limited to, the actual dates of closing, the possibility that the proposed sales may not
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close as anticipated, the results of operations ofNCP-Eight prior to the close of the proposed sales of its assets, and the incurrence of unexpected liabilities. The amount of the variance could be significant.
Although the figures are presented on a pro forma basis as if the proposed sales occurred on September 30, 2007, the general partner does not anticipate that any events will occur between September 30, 2007 and the expected closing date of the Green River transaction that would materially affect the figures.
Assuming the proposed Green River transaction close as contemplated, projected cash available for distribution byNCP-Eight to its limited partners was estimated as of September 30, 2007 to equal the following:
Projections for Entirety ofNCP-Eight: | ||||
Gross aggregate valuation for the proposed sales | $ | 8,100,000 | ||
Adjustments to gross aggregate valuation: | ||||
Accounts receivable purchased | 58,381 | |||
Current liabilities assumed(1) | (182,562 | ) | ||
Adjusted gross aggregate valuation for the proposed sales | 7,975,819 | |||
Plus (less) partnership liabilities and other assets: | ||||
Other assets(2) | 94,257 | |||
Cash on hand | 273,826 | |||
Broker expenses | (162,000 | ) | ||
Transaction and proxy costs(3) | (283,000 | ) | ||
Partnership administrative costs(4) | (180,000 | ) | ||
Debt repayment to others(5) | (2,389,597 | ) | ||
Other costs; contingencies(6) | (50,000 | ) | ||
Projected net aggregate cash value for the proposed sales(7)(8) | 5,279,305 | |||
Less projected value of distributions to the general partner(8) | (53,056 | ) | ||
Projected aggregate cash available for distribution to limited partners from the proposed sales(8) | $ | 5,226,249 | ||
(1) | Includes advance subscriber payments and deposits. | |
(2) | IncludesNCP-Eight’s (i) prepaid expenses of $84,972 plus (ii) intercompany receivables of $9,285 from the general partner and affiliates, all of which amounts were determined as of September 30, 2007. | |
(3) | Estimated costs of this proxy solicitation and closing of the proposed sales include legal fees and expenses of approximately $100,000, fees and costs associated with the issuance of a fairness opinion for the proposed sales of approximately $50,500, printing costs of approximately $110,000, and Securities and Exchange Commission filing fees and other expenses of approximately $22,500.NCP-Eight will be responsible for all of these costs. No significant auditing or solicitation costs are expected to be incurred in connection with the proposed sales. |
(4) | General and administrative, auditing, accounting, legal, reporting and other costs have been estimated through the final distribution, which is assumed to occur eighteen months from the closing date. It is estimated that approximately $85,000 of this amount will be payable to the general partner for its services in the dissolution and winding up ofNCP-Eight. Services provided by the general partner will include ongoing accounting and legal services as well as administrative and investor relations services during the dissolution and winding up ofNCP-Eight. The amount to be paid to the general partner represents an estimate of the actual cost incurred by the general partner to provide these services toNCP-Eight. |
(5) | Includes $44,243 owed to general partner. | |
(6) | This amount will be set aside to cover unknown and contingent liabilities that may exist after closing the proposed sales and will be held inNCP-Eight’s liquidating trust. |
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(7) | “Projected net aggregate cash value” includes the partners’ distributive share of cash. | |
(8) | The difference between “projected net aggregate cash value” and “projected aggregate cash available for distribution to limited partners” represents the projected value of the projected cash to be distributed to the general partner. This amount was calculated using the applicable formula found in Article 16(d) of theNCP-Eight partnership agreement. That formula applies to the calculation of the share of distributable proceeds to be paid to the general partner and limited partners upon dissolution ofNCP-Eight. |
Estimated Distributions to Limited Partners as a Result of the Proposed Sales and Subsequent Liquidation ofNCP-Eight
Assuming the Green River transaction closes as contemplated and the application of proceeds to pay outstanding debt obligations takes place, projected cash available for distribution byNCP-Eight per unit of limited partnership interest and per $1,000 investment is estimated to equal the following:
Per $500 Unit of | ||||||||
Limited Partnership | Per $1,000 | |||||||
Interest | Investment | |||||||
Limited partners’ capital account balance(1) | $ | 10 | $ | 20 | ||||
Allocation of gain to limited partners’ capital account balance pursuant to Article 16(c) of theNCP-Eight partnership agreement | 265 | 530 | ||||||
Limited partners’ adjusted capital balance pursuant to Article 16(c) of theNCP-Eight partnership agreement | 275 | 550 | ||||||
Projected cash distributions to limited partners pursuant to Article 16(d)(iii) of theNCP-Eight partnership agreement | 274 | 548 | ||||||
Nonresident tax paid on behalf of the limited partners(2) | (12 | ) | (24 | ) | ||||
Projected cash distributions to limited partners pursuant to Article 16(d)(iv) of theNCP-Eight partnership agreement(3) | — | — | ||||||
Total projected cash distributions to limited partners(4) | $ | 262 | $ | 524 | ||||
(1) | Capital Account balance as of September 30, 2007 for limited partners. Accordingly, this capital account balance does not reflect any capital expenditure or cash flow that is subsequent to September 30, 2007. | |
(2) | NCP-Eight has operating assets in the states of Alabama and Georgia. These states impose an income tax on the net income earned by nonresident partners from the property located in the state.NCP-Eight is required to compute and pay this tax on behalf of its limited partners. This tax will be paid on behalf of the limited partners out of the proceeds from the proposed sale that could otherwise be distributed directly to the limited partners. See “Special Factors of the Proposed Sales — Federal and State Income Tax Consequences of the Proposed Sales — State Income Tax Considerations” beginning on page 20 for a more detailed discussion of this state tax. | |
(3) | Based on estimates of projected aggregate cash available for distribution to limited partners upon dissolution,NCP-Eight expects that limited partners will not receive distributions pursuant Article 16(d)(iv) of theNCP-Eight partnership agreement. | |
(4) | Assumes no claims will be made against the $810,000 holdback escrow. |
Assuming the Green River transaction is not consummated by March 31, 2008, or such later date upon whichNCP-Eight and Green River mutually agree, or in the event that the Green River transaction is otherwise terminated prior to such date and the alternative purchase agreement is entered into and the alternative sale transaction is consummated instead, cash available for distribution toNCP-Eight’s limited partners would be substantially similar as presented in the above table, except that such payment may be made up to 90 days later than would have been made otherwise.
If neither of the proposed sales ofNCP-Eight’s assets is consummated in the first half of 2008 as planned, funds available forNCP-Eight to distribute to its partners may materially differ from the projections presented in the above table.
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NCP-Eight is a Washington limited partnership consisting of a general partner and approximately 852 limited partners and 19,087 units of limited partnership interest outstanding as of September 30, 2007. There is currently no established trading market for the units of limited partnership interest. Northland Communications Corporation, a Washington corporation, is the general partner ofNCP-Eight.
Northland Communications Corporation was formed in March 1981 and is principally involved in the ownership and management of cable television systems. Northland Communications Corporation currently manages the operations and is the general partner for cable television systems owned by two limited partnerships, and is the managing member of Northland Cable Networks, LLC, which also owns and operates cable television systems. Northland Communications Corporation is also the parent company of Northland Cable Properties, Inc., which was formed in February 1995 and is principally involved in direct ownership of cable television systems, and is the majority member and manager of Northland Cable Ventures, LLC. Northland Communications Corporation is an indirectlywholly-owned subsidiary of Northland Telecommunications Corporation (“NTC”). Other subsidiaries, direct and indirect, of NTC include:
NORTHLAND CABLE TELEVISION, INC. — formed in October 1985 and principally involved in the direct ownership of cable television systems.
NORTHLAND CABLE SERVICES CORPORATION — formed in August 1993 and principally involved in the support of computer software used in billing and financial record keeping for, and Internet services offered by, Northland Communications Corporation affiliated cable systems. Also provides technical support associated with the build out and upgrade of Northland Communications Corporation affiliated cable systems. Sole shareholder of Cable Ad-Concepts, Inc.
CABLE AD-CONCEPTS, INC. — formed in November 1993 and principally involved in the sale, development and production of video commercial advertisements that are cablecast on Northland Communications Corporation -affiliated cable systems.
NORTHLAND MEDIA, INC. — formed in April 1995 as a holding company. Sole shareholder of Corsican Media, Inc.
The general partner has not yet sought any financing for the alternative sale transaction because it currently believes that it is highly probable that the Green River transaction will close during the first quarter of 2008. Accordingly, the general partner considers the probability that it would have to consider entering into the alternative sale transaction to be remote. Since 1981 the general partner, through various affiliated entities, has been engaged in the process of raising debt and equity capital used in the acquisition of cable television properties similar to those being sold in this transaction. The general partner and its affiliates have established and maintained long term business relationships with lenders who are experienced and active in lending transactions that involve properties similar to those owned by NCP-Eight. Currently, the general partner and its affiliates (excluding NCP-Eight) have lending arrangements exceeding $159 million with various banks and other institutions. While the general partner and its affiliates have been able to obtain financing in the past, there can be no assurance that they would be able to obtain financing for the alternative sale transaction during the first half of 2008.
Mr. Whetzell is the largest holder of NTC common stock. Additionally, Mr. Whetzell is the Chief Executive Officer and a director of both NTC and the general partner. Accordingly, Mr. Whetzell, in his capacity as Chief Executive Officer, exercises voting and investment control over the interest inNCP-Eight owned by the general partner. While Mr. Clark also owns common stock of NTC and is the Executive Vice President and a director of both NTC and the general partner, he does not exercise voting and investment control over the interest inNCP-Eight owned by the general partner. No other person owns shares of NTC common stock in an amount that would entitle such person to a controlling vote of NTC.
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NCP-Eight was formed on September 21, 1988 and began operations in 1989.NCP-Eight serves the communities and surrounding areas of Aliceville, Alabama and Swainsboro, Georgia (collectively, the “Systems”). As of September 30, 2007, the total number of basic subscribers served by the Systems was 5,084, andNCP-Eight’s penetration rate (basic subscribers as a percentage of homes passed) was approximately 54%.NCP-Eight’s properties are located in rural areas, which, to some extent, do not offer consistently acceptable off-air broadcast network signals. Management believes that this factor, combined with the existence of fewer entertainment alternatives than in large markets contributes to the percentage of the population subscribing to cable television.
NCP-Eight has 11 non-exclusive franchises to operate the Systems. These franchises, which will expire at various dates through the year 2019, have been granted by local and county authorities in the areas in which the Systems operate. Effective July 1, 2007, the Georgia State Legislation passed the Consumer Choice for Television Act (the “Georgia Act”). Under the Georgia Act,NCP-Eight can opt out of certain local franchise obligations and elect to be governed by a state franchise, as to all or part of its service areas in Georgia. In the alternative,NCP-Eight may continue to operate under its existing franchises through their stated term. While the franchises have defined lives based on the franchising agreement, renewals are routinely granted by the local franchising authority, or a cable provider can apply for a franchise through the state in the state of Georgia. Management is no longer obligated to seek a renewal from the local franchising authority in the state of Georgia, but expects local renewals to continue to be granted. In the state of Alabama, franchises are granted at the municipal and county level. The state has not enacted legislation authorizing the state to grant franchises. Management currently expects to continue its operations under the existing franchise agreements for the foreseeable future and effects of obsolescence, competition and other factors are minimal. In addition, the level of maintenance expenditures required to obtain the future cash flows expected from the franchises is not material in relation to the carrying value of the franchises. This expectation is supported by management’s experience withNCP-Eight’s franchising authorities and the franchising authorities ofNCP-Eight’s affiliates. Annual franchise fees are paid to the granting authorities. These fees vary between 2% and 5% and are generally based on the respective gross revenues of the Systems in a particular community. The franchises may be terminated for failure to comply with their respective conditions.
NCP-Eight’s revenues are derived primarily from monthly payments received from cable television subscribers. Subscribers are divided into three categories: basic subscribers, tier subscribers and premium subscribers. “Basic subscribers” are households that subscribe to the basic level of service, which generally provides access to all broadcast networks available on the system, including the four major television networks (ABC, NBC, CBS and Fox), PBS (the Public Broadcasting System) and certain satellite programming services, such as ESPN, CNN or The Discovery Channel. “Tier subscribers” are households that subscribe to an additional level of programming services the content of which varies from system to system. “Premium subscribers” are households that subscribe to one or more “pay channels” in addition to the basic service. These pay channels include services such as Showtime, Home Box Office, Cinemax or The Movie Channel.
In the past two years,NCP-Eight has made no cash distributions.NCP-Eight is generally restricted from paying distributions (other than for expense allocations and payment of management fees) under its credit agreement with its lender.
NCP-Eight operates two groups of cable systems serving the communities of and areas surrounding Aliceville, Alabama and Swainsboro, Georgia. The following is a description of these operating groups.
Aliceville, AL: The Aliceville system serves the communities in west central Alabama. The communities, located south and west of Tuscaloosa, include Aliceville, Carrollton, Pickensville, Reform, Gordo,
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Millport and Kennedy. Certain information regarding the Aliceville, AL system as of December 31, 2006 is as follows:
Basic Subscribers | 2,703 | |||
Expanded Basic Subscribers | 1,739 | |||
Premium Subscribers | 375 | |||
Digital Subscribers | 58 | |||
Internet Subscribers | 468 | |||
Estimated Homes Passed | 5,345 |
Swainsboro, GA: The Swainsboro system serves the incorporated community of Swainsboro and nearby unincorporated areas of Emanuel County, Georgia. Swainsboro is predominantly an agricultural community located in central Georgia, and is the county seat for Emanuel County. Certain information regarding the Swainsboro, GA system as of December 31, 2006 is as follows:
Basic Subscribers | 2,604 | |||
Expanded Basic Subscribers | 1,899 | |||
Premium Subscribers | 784 | |||
Digital Subscribers | 316 | |||
Internet Subscribers | 352 | |||
Estimated Homes Passed | 4,148 |
NCP-Eight had nine employees as of December 31, 2006. Management of these systems is handled through offices located in the towns of Aliceville, Alabama and Swainsboro, Georgia. Pursuant to theNCP-Eight partnership agreement,NCP-Eight reimburses the General Partner for time spent by the general partner’s accounting staff on Partnership accounting and bookkeeping matters.
The business ofNCP-Eight is not dependent on a single customer or a few customers, so the loss of any one or more customers would not have a material adverse effect on its business. No customer accounts for 10% or more of revenues. No material portion ofNCP-Eight’s business is subject to renegotiation of profits or termination of contracts or subcontracts at the election of any governmental unit, except that franchise agreements may be terminated or modified by the local franchising authorities. See “— Applicable Regulations and Legislation.”
NCP-Eight’s cable television business is generally not seasonal.
NCP-Eight’s video service currently experiences competition from several sources, including broadcast television, cable overbuilds, satellite services, motion pictures, home video recorders, and the Internet.NCP-Eight’s internet and phone service currently experiences competition from several sources, including land line and cellular phone companies, and internet access providers.
The following summary addresses the key regulatory developments and legislation affectingNCP-Eight and its systems. Other applicable existing federal legislation and regulations, copyright licensing and, in many jurisdictions, state and local franchise requirements are currently the subject of a variety of judicial
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proceedings, legislative hearings and administrative and legislative proposals. Resulting development could change, in varying degrees, the manner in whichNCP-Eight must operate. There can be no assurance that the final form of regulation will not have a material adverse impact onNCP-Eight’s operations.
Cable Rate Regulation
The cable industry has operated under a federal rate regulation regime for more than a decade. The regulations currently restrict the prices that cable systems charge for the minimum level of video programming service, referred to as “basic service”, and associated equipment. All other cable offerings are now universally exempt from rate regulation. Although basic rate regulation operates pursuant to a federal formula, local governments, commonly referred to as local franchising authorities, are primarily responsible for administering this regulation. Many ofNCP-Eight’s local franchising authorities have not certified to regulate basic cable rates, but they retain the right to do so (and order rate reductions and refunds), except in those specific communities facing “effective competition,” as defined under federal law. With increased Direct Broadcast Satellite (“DBS”) competition, it is increasingly likely that some ofNCP-Eight’s systems will satisfy the effective competition standard.
There have been frequent calls to impose expanded rate regulation on the cable industry. Confronted with rapidly increasing cable programming costs, it is possible that Congress may adopt new constraints on the retail pricing or packaging of cable programming. For example, there has been considerable legislative and regulatory interest in requiring cable companies to offer programming on an a la carte basis or at least to offer a separately available child-friendly “Family Tier”. Programming services have historically been bundled into programming packages containing a variety of programming services. Any constraints on this practice could adversely affectNCP-Eight’s operations.
Federal rate regulations generally require cable operators to allow subscribers to purchase premium orpay-per-view services without the necessity of subscribing to any tier of service, other than the basic service tier. As Northland attempts to respond to a changing marketplace with competitive pricing practices, such as targeted promotions and discounts,NCP-Eight may face additional legal restraints and challenges that impedeNCP-Eight’s ability to compete.
Must Carry/Retransmission Consent
There are two alternative legal methods for carriage of local broadcast television stations on cable systems. Federal law currently includes “must carry” regulations, which require cable systems to carry certain local broadcast television stations that the cable operator would not select voluntarily. Alternatively, federal law includes “retransmission consent” regulations, by which popular commercial broadcast television stations can prohibit cable carriage unless the cable operator first negotiates for “retransmission consent,” which may be conditioned on significant payments or other concessions. Either option has a potentially adverse effect onNCP-Eight’s business. On three-year cycles, the next cycle commencing January 1, 2008, each broadcast station must elect within specific time windows, to be either “must carry” or “retransmission consent” status. Failing to do so, results in the broadcast station being deemed “must carry” by default.
The burden associated with must carry will increase significantly in the upcoming retransmission election cycle. Cable systems will be required to simultaneously carry both the analog and digital signals of each television station (dual carriage), as the broadcast industry transitions from an analog to a digital format. Further, cable systems will be required to carry a limited number of multiple program streams included within a single digital broadcast transmission (multicast carriage). Additional government-mandated broadcast carriage obligations could disrupt existing programming commitments, interfere withNCP-Eight’s preferred use of limited channel capacity and limit its ability to offer services that would maximize customer appeal and revenue potential. Although the FCC issued a decision in 2005 confirming an earlier ruling against mandating either dual carriage or multicast carriage, that decision has been appealed. In addition, the FCC could reverse its own ruling or Congress could legislate additional carriage obligations. The President has signed into law legislation establishing February 2009 as the deadline to complete the broadcast transition to digital spectrum and to reclaim analog spectrum. Cable operators may need to take additional operational steps at that time to
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ensure that customers not otherwise equipped to receive digital programming retain access to broadcast programming.
Access Channels
Local franchise agreements, and more recently, state franchise legislation, often require cable operators to set aside certain channels for public, educational and governmental access programming. Federal law also requires cable systems to designate a portion of their channel capacity for commercial leased access by unaffiliated third parties. Increased activity in this area could further burden the channel capacity ofNCP-Eight’s cable systems.
Access to Programming
The Communications Act and the FCC’s “program access” rules generally prevent satellite video programmers affiliated with cable operators from favoring cable operators over competing multichannel video distributors, such as DBS, and limit the ability of such programmers to offer exclusive programming arrangements to cable operators. The FCC has extended the exclusivity restrictions through October 2012. Given the heightened competition and media consolidation that Northland faces, it is possible that Northland will find it increasingly difficult to gain access to popular programming at favorable terms. Such difficulty could adversely impactNCP-Eight’s business.
Ownership Restrictions
Federal regulation of the communications field traditionally included a host of ownership restrictions, which limited the size of certain media entities and restricted their ability to enter into competing enterprises. Through a series of legislative, regulatory, and judicial actions, most of these restrictions recently were eliminated or substantially relaxed. For example, historic restrictions on local exchange carriers offering cable service within their telephone service area, as well as those prohibiting broadcast stations from owning cable systems within their broadcast service area, no longer exist. Changes in this regulatory area, including some still subject to review, could alter the business landscape in whichNCP-Eight operates, as formidable new competitors (including electric utilities, local exchange carriers, and broadcast/media companies) may increasingly choose to offer cable or cable related services.
Internet Service
Over the past several years, proposals have been advanced at the FCC and Congress that would require a cable operator offering Internet service to provide non-discriminatory access to its network to competing Internet service providers. In a 2005 ruling, commonly referred to as Brand X, the Supreme Court upheld an FCC classification of cable-provided Internet service as an “information service” making it less likely that any non-discriminatory “open access” requirements (which are generally associated with common carrier regulation of “telecommunications services”) would be imposed on the cable industry by local, state or federal authorities.
Notwithstanding Brand X, the FCC issued a non-binding policy statement in 2005 establishing four basic principles that the FCC says will inform its ongoing policymaking activities regarding broadband-related Internet services. Those principles state that consumers are entitled to access the lawful Internet content of their choice, consumers are entitled to run applications and services of their choice, subject to the needs of law enforcement, consumers are entitled to connect their choice of legal devices that do not harm the network, and consumers are entitled to competition among network providers, application and service providers and content providers. There have been increasing calls to mandate “network neutrality” requirements on all high-speed Internet providers and various legislative proposals are being considered. For example, there could be regulations imposed on broadband network owners that would limitNCP-Eight’s ability to charge content owners whose services require a large amount of network capacity. At this time, however, it is unclear what, if any, network neutrality regulations Congress or the FCC might impose on Northland’s Internet service, and what, if any, impact, such regulations might have onNCP-Eight’s business. In addition, while it is unlikely the
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FCC will regulate Internet service to the extent it regulates cable or telecommunications services, broadband providers are obligated to accommodate law enforcement wiretaps and the FCC is considering expanding other regulatory requirements such as consumer protection and universal service obligations to broadband providers.
As the Internet has matured, it has become the subject of increasing regulatory interest. Congress and federal regulators have adopted a wide range of measures directly or potentially affecting Internet use, including, for example, consumer privacy, copyright protections (which afford copyright owners certain rights against us that could adversely affectNCP-Eight’s relationship with a customer accused of violating copyright laws), defamation liability, taxation, obscenity, and unsolicited commerciale-mail. State and local governmental organizations have also adopted Internet-related regulations. These various governmental jurisdictions are also considering additional regulations in these and other areas, such as pricing, service and product quality, and intellectual property ownership. The adoption of new Internet regulations or the adaptation of existing laws to the Internet could adversely affectNCP-Eight’s business.
Phone Service
The 1996 Telecom Act, which amended the Communications Act, created a more favorable regulatory environment for us to provide telecommunications services. In particular, it limited the regulatory role of local franchising authorities. Many implementation details remain unresolved, and there are substantial regulatory changes being considered that could impact, in both positive and negative ways, Northland’s primary telecommunications competitors and Northland’s own entry into the field of phone service. The FCC and state regulatory authorities are considering, for example, whether common carrier regulation traditionally applied to incumbent local exchange carriers should be modified. The FCC has concluded that alternative voice technologies, like certain types of “voice over internet protocol” (“VoIP”), should be regulated only at the federal level, rather than by individual states. A legal challenge to that FCC decision is pending. While the FCC’s decision appears to be a positive development for VoIP offerings, it is unclear whether and how the FCC will apply certain types of common carrier regulations, such as intercarrier compensation to alternative voice technology. The FCC has already determined that providers of phone services using Internet Protocol technology must comply with traditional 911 emergency service obligations (“E911”), make universal service fund contributions, and it has extended requirements for accommodating law enforcement wiretaps to such providers. The FCC decision regarding 911 emergency services implementation has caused Northland to slow its implementation of VoIP services to its various systems. It is unclear how these regulatory matters ultimately will be resolved and how they will further affectNCP-Eight’s expansion into phone service.
Pole Attachments
The Communications Act requires most utilities to provide cable systems with access to poles and conduits and simultaneously subjects the rates charged for this access to either federal or state regulation. The Act specifies that significantly higher rates apply if the cable plant is providing telecommunications service, as well as traditional cable service. The FCC has clarified that a cable operator’s favorable pole rates are not endangered by the provision of Internet access and VoIP services. It remains possible that the underlying pole attachment formula, or its application to Internet and telecommunications offerings, will be modified in a manner that substantially increasesNCP-Eight’s pole attachment costs.
Cable Equipment
The FCC has undertaken several steps to promote competition in the delivery of cable equipment and compatibility with new digital technology. The FCC has expressly ruled that cable customers must be allowed to purchase set-top terminals from third parties and established a multi-year phase-in during which security functions (which would remain in the operator’s exclusive control) would be unbundled from the basic converter functions, which could then be provided by third party vendors. The first phase of implementation has already passed. Effective July 1, 2007, cable operators could no longer put into service digital set-top terminals with integrated security that had not previously been placed in service.
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The FCC has adopted rules implementing an agreement between major cable operators and manufacturers of consumer electronics on “plug and play” specifications for one-way digital televisions. The rules require cable operators to provide “CableCard” security modules and support to customer owned digital televisions and similar devices equipped with built-in set-top terminal functionality.
The FCC is conducting additional related rulemakings, and the cable and consumer electronics industries are currently negotiating an agreement that would establish additional specifications for two-way digital televisions. Congress is also considering companion “broadcast flag” legislation to provide copy protection for digital broadcast signals. It is unclear how this process will develop and how it will affectNCP-Eight’s offering of cable equipment andNCP-Eight’s relationship with its customers.
Other Communications Act Provisions and FCC Regulatory Matters
In addition to the Communications Act provisions and FCC regulations noted above, there are other statutory provisions and FCC regulations affectingNCP-Eight’s business. The Communications Act and the FCC regulate, for example, and among other things, (1) cable-specific privacy obligations; (2) equal employment opportunity obligations; (3) customer service standards; (4) technical service standards; (5) mandatory blackouts of certain network, syndicated and sports programming; (6) requirements and restrictions regarding political advertising; (7) requirements and restrictions regarding advertising in children’s programming; (8) requirements and restrictions regarding origination cablecasting; (9) requirements and restrictions regarding carriage of lottery programming; (10) sponsorship identification obligations; (11) closed captioning of video programming; (12) licensing of systems and facilities; (13) maintenance of public files; and (14) emergency alert systems.
It is possible that Congress or the FCC will expand or modify its regulation of cable systems in the future, and Northland cannot predict at this time how that might impactNCP-Eight’s business. For example, there have been recent discussions about imposing “indecency” restrictions directly on cable programming.
Copyright
Cable systems are subject to federal copyright licensing covering carriage of television and radio broadcast signals. The possible modification or elimination of this compulsory copyright license is the subject of continuing legislative review and could adversely affect Northland’s ability to obtain desired broadcast programming. Moreover, the Copyright Office has not yet provided any guidance as to the how the compulsory copyright license should apply to newly offered digital broadcast signals.
Copyright clearances for non-broadcast programming services are arranged through private negotiations. Cable operators also must obtain music rights for use of copyrighted materials in locally originated programming and advertising from the major music performing rights organizations. These licensing fees have been the source of litigation in the past, and Northland cannot predict with certainty whether license fee disputes may arise in the future.
Franchise Matters
Cable systems generally are operated pursuant to nonexclusive franchises granted by a municipality or other state or local government entity in exchange for the right to cross public rights-of-way. Cable franchises generally are granted for fixed terms and in many cases include penalties for noncompliance including a right of termination for material violations.
The specific terms and conditions of cable franchises vary materially between jurisdictions. Each franchise generally contains provisions governing cable operations, franchise fees, system construction, maintenance, technical performance, and customer service standards. A number of states subject cable systems to the jurisdiction of centralized state government agencies, such as public utility commissions. Although local franchising authorities have considerable discretion in establishing franchise terms, there are certain federal protections. For example, federal law caps local franchise fees and includes renewal procedures designed to protect incumbent franchisees from arbitrary denials of renewal. Even if a franchise is renewed, however, the
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local franchising authority may seek to impose new and more onerous requirements as a condition of renewal. Similarly, if a local franchising authority’s consent is required for the purchase or sale of a cable system, the local franchising authority may attempt to impose more burdensome requirements as a condition for providing its consent.
Numerous legislative proposals have been periodically introduced in the United States Congress and in some state legislatures that would greatly streamline cable franchising and transform the established regulatory framework for incumbent cable systems and potential competitors. This legislation is intended to facilitate entry by new competitors, particularly local telephone companies. Such legislation has already passed in a number of states, and many others have bills pending. Although various legislative proposals provide some regulatory relief for incumbent cable operators, these proposals are generally viewed as being more favorable to new entrants due to a number of varying factors, including efforts to withhold streamlined cable franchising from incumbents until after the expiration of their existing franchises and the potential for new entrants to serve only the higher-income areas of a particular community. To the extent incumbent cable operators are not able to avail themselves of the benefits of new legislation, such operators may continue to be subject to more onerous franchise requirements at the local level than new entrants. The FCC recently initiated a proceeding to determine whether local franchising authorities are impeding the deployment of competitive cable services through unreasonable franchising requirements and whether any such impediments should be preempted, and has passed general guidelines regarding cable franchise renewal standards. At this time,NCP-Eight is not able to determine what impact such proceeding may have on it.
In March 2005, Northland Communications Corporation filed a complaint against one of its programming networks seeking a declaration that a December 2004 contract between Northland Communications Corporation and the programmer was an enforceable contract related to rates Northland Communications Corporation would pay for its programming and damages for breach of that contract. The programmer counter-claimed, alleging copyright infringement and breach of contract.
On September 14, 2006 Northland Communications Corporation and the programmer entered into a settlement agreement (the “Settlement Agreement”), under which, (i) the parties mutually released each other from and against all claims, (ii) the parties agreed to dismiss the lawsuit, and (iii) the parties set forth the definitive terms of carriage of the programmer’s services for the period commencing December 1, 2004, through December 31, 2007.
In addition, under the terms of the Settlement Agreement, Northland Communications Corporation made payment in full of all license fees from all Northland Communications Corporation affiliates, includingNCP-8, for the period of December 1, 2004, through July 31, 2006, all of which had been previously accrued. In addition, Northland Communications Corporation agreed to pay to the programmer, in four installments, a Supplemental License fee, approximately $45,000, or 3.6%, of which will be remitted byNCP-Eight.NCP-Eight recorded a charge of $30,000 in expense associated with this supplemental license fee during 2006, which has been classified as programming expense. The remaining $15,000 will be recorded on a pro rata basis over the remaining contract period. The unpaid total balance by all Northland Communications Corporation entities relative to this Supplemental License Fee was $500,000 as of December 31, 2006. Based on Management’s analysis all Northland Communications Corporation affiliates, including NCP-8 has adequate liquidity to meet the remaining Supplemental License Fee obligation without impairing its ability to meet its future obligations in the ordinary course of business and payment of this obligation will not result in the violation of any financial covenant under its loan agreement.NCP-Eight incurred approximately $14,000 in legal fees associated this litigation, which has been recorded as general and administrative expenses in the accompanying financial statements.
In August of 2005,NCP-Eight settled a legal claim made by a former employee. Under the settlement,NCP-Eight paid the employee $75,000 in damages, fees and costs. In addition,NCP-Eight incurred approximately $110,000 in legal fees associated with the defense of this claim.NCP-Eight has recorded both the
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settlement to the employee and the associated legal fees as general and administrative expenses of continuing operations in the accompanying financial statements.
NCP-Eight may be party to other ordinary and routine litigation proceedings that are incidental toNCP-Eight ’s business. Management believes that the outcome of such legal proceedings will not, individually or in the aggregate, have a material adverse effect onNCP-Eight, its financial conditions, prospects or debt service abilities.
The general partner is not recommending the proposed sales due to insufficient working capital or declining results of operations..NCP-Eight has generated sufficient operating income to service its debt and achieve certain levels of cash distributions to limited partners in prior years.
Results of Continuing Operations — Nine Months Ended September 30, 2007 and 2006
Total basic subscribers decreased from 5,307 as of December 31, 2006 to 5,084 as of September 30, 2007. The loss in subscribers is a result of several factors including competition from DBS providers, availability of off-air signals inNCP-Eight’s markets and regional and local economic conditions. To reverse this customer trend,NCP-Eight is increasing its customer retention efforts and its emphasis on bundling its video and data products.
Revenue totaled $2,796,599 for the nine months ended September 30, 2007, an increase of 5% from $2,654,411 for the nine months ended September 30, 2006. Revenues from continuing operations for the nine months ended September 30, 2007 were comprised of the following sources:
• | $2,045,203 (73%) from basic and expanded services | |
• | $132,708 (5%) from premium services | |
• | $19,798 (1%) from digital services | |
• | $334,020 (12%) from high speed internet services | |
• | $95,336 (3%) from advertising | |
• | $59,977 (2%) from late fees | |
• | $109,557 (4%) from other sources |
Average monthly revenue per subscriber increased $5.59 or approximately 11% from $53.26 for nine months ended September 30, 2006 to $58.85 for the nine months ended September 30, 2007. This increase is attributable to rate increases implemented throughoutNCP-Eight’s systems during the first quarter of 2007, and increased penetration of new products, specifically, high-speed Internet services. These increases in average monthly revenue per subscriber were offset by the aforementioned decrease in basic subscribers.
Operating expenses, excluding general and administrative, programming, and depreciation expenses, totaled $288,898 for the nine months ended September 30, 2007, a decrease of $23,789 or approximately 8% from the same period in 2006. This decrease is primarily attributable to decreased pole rent and operating overhead expenses. While operating expenses decreased for the nine months ended September 30, 2007, management expects increases in operating expenses in the future. Employee wages, which represent the primary component of operating expenses, are reviewed annually, and in most cases, increased based on cost of living adjustments and other factors. Therefore, assuming the number of operating and regional employees remains constant, management expects increases in operating expenses in the future.
General and administrative expenses totaled $717,649 for the nine months ended September 30, 2007, a decrease of approximately 2% from $731,355 for the same period in 2006. This decrease is primarily
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attributable to decreased legal expenses primarily attributable to the settlement of litigation with one ofNCP-Eight’s programmers in September 2006.
Programming expenses totaled $998,848 for the nine months ended September 30, 2007, representing an increase of $90,983 or approximately 10% over the same period in 2006. The increase is partially attributable to higher costs charged by various program suppliers, higher costs associated with an increase in high-speed Internet subscribers, offset by a reduction in other programming expenses and a decrease in video subscribers from 5,406 as of September 30, 2006 to 5,084 as of September 30, 2007. Rate increases from program suppliers, as well as new fees due to the launch of additional channels and high-speed Internet services, will contribute to the trend of increased programming costs in the future, assuming that the number of subscribers remains constant.
Depreciation expense for the nine months ended September 30, 2007 increased approximately 3% from $398,144 for the nine months ended September 30, 2006 to $410,449 for the nine months ended September 30, 2007. Such increase is attributable to depreciation of recent purchases related to the upgrade of plant and equipment.
Interest expense and amortization of loan fees totaled $124,320 for the nine months ended September 30, 2007, remaining relatively constant with the same period in 2006. Lower average outstanding indebtedness, as a result of required principal repayments, were offset by higher interest rates in 2007 compared to 2006.
Other expense totaled $131,402 for the nine months ended September 30, 2007 and consists primarily of costs incurred in connection with the sale of NCP-Eight’s assets.
Results of Continuing Operations — Three Months Ended September 30, 2007 and 2006
Total basic subscribers decreased from 5,228 as of June 30, 2007 to 5,084 as of September 30, 2007. The loss in subscribers is a result of several factors including competition from Direct Broadcast Satellite (DBS) providers, availability of off-air signals inNCP-Eight’s markets and regional and local economic conditions. To address this customer trend,NCP-Eight is increasing its customer retention efforts and its emphasis on bundling its video and data products.
Revenue totaled $931,862 for the three months ended September 30, 2007, an increase of 6% from $879,529 for the three months ended September 30, 2006. Revenues from continuing operations for the three months ended September 30, 2007 were comprised of the following sources:
• | $672,425 (72%) from basic and expanded services | |
• | $44,645 (5%) from premium services | |
• | $6,032 (1%) from digital services | |
• | $114,379 (12%) from high speed internet services | |
• | $32,419 (3%) from advertising | |
• | $24,684 (3%) from late fees | |
• | $37,278 (4%) from other sources |
Average monthly revenue per subscriber increased $6.75 or approximately 13% from $53.91 for three months ended September 30, 2006 to $60.66 for the three months ended September 30, 2007. This increase is attributable to rate increases implemented throughoutNCP-Eight’s systems during the first quarter of 2007, and increased penetration of new products, specifically, high-speed Internet services. These increases in average monthly revenue per subscriber were offset by the aforementioned decrease in basic subscribers.
Operating expenses, excluding general and administrative, programming, and depreciation expenses, totaled $102,114 for the three months ended September 30, 2007, an increase of $2,259 or approximately 2% from the same period in 2006. This increase is primarily attributable to increases operating salaries and employees benefit costs offset by a decrease in regional management expenses. Employee wages, which
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represent the primary component of operating expenses, are reviewed annually, and in most cases, increased based on cost of living adjustments and other factors. Therefore, assuming the number of operating and regional employees remains constant, management expects increases in operating expenses in the future.
General and administrative expenses totaled $244,273 for the three months ended September 30, 2007, a decrease of approximately 1% from $247,845 for the same period in 2006. This decrease is attributable to a reduction in marketing expenses and a decrease in legal expenses primarily attributable to the settlement of litigation with one ofNCP-Eight’s programmers in September 2006 offset by an increase in bad debt expenses.
Programming expenses totaled $338,709 for the three months ended September 30, 2007, an increase of approximately 7% from $317,863 for the same period in 2006. This increase is attributable to higher costs charged by various program suppliers, higher costs associated with an increase in high-speed Internet subscribers offset by a decrease in video subscribers from 5,406 as of September 30, 2006 to 5,084 as of September 30, 2007 and the recognition of approximately $27,000 in additional programming expense during the three months ended September 30, 2006 associated with settlement of litigation with one of NCP-Eight’s programmers.
Depreciation expense totaled $137,567 for the three months ended September 30, 2007, an increase of approximately 3% from $133,737 for the same period in 2006. Increases attributable to the depreciation of recent purchases related to the upgrade of plant and equipment. Interest expense and amortization of loan fees totaled $40,426 for the three months ended September 30, 2007 a decrease of approximately 8% from $44,039 for the same period in 2006. This decrease is attributable to lower average outstanding indebtedness, as a result of required principal repayments.
Other expense totaled $132,202 for the three months ended September 30, 2007 and consists primarily of costs incurred in connection with the sale of NCP-Eight’s assets.
Results of Continuing Operations for Years Ended 2006 and 2005
Total basic subscribers attributable to continuing operations decreased from 5,508 as of December 31, 2005 to 5,307 as of December 31, 2006. The loss in subscribers is a result of several factors including competition from DBS providers, availability of off-air signals inNCP-Eight’s markets and regional and local economic conditions. In its efforts to reverse this customer trend,NCP-Eight is increasing its customer retention efforts and its emphasis on bundling its video and data products.
Revenue from continuing operations totaled $3,532,887 for the year ended December 31, 2006, increasing 4% from $3,406,867 for the year ended December 31, 2005. Revenues from continuing operations for the year ended December 31, 2006 were comprised of the following sources:
• | $2,674,673 (75%) from basic services, | |
• | $182,619 (5%) from premium services | |
• | $30,485 (1%) from digital services | |
• | $312,580 (9%) from high speed Internet services | |
• | $130,980 (4%) from advertising | |
• | $70,830 (2%) from late fees | |
• | $130,720 (4%) from other sources. |
Average monthly revenue per subscriber increased $4.02 or approximately 8% from $49.66 for year ended December 31, 2005 to $53.68 for the year ended December 31, 2006. This increase is attributable to rate increases implemented throughout NCP-Eight’s systems during the second quarter of 2006 and increased penetration of new products, specifically, high-speed Internet services, and increased advertising revenue. This increase was partially offset by the aforementioned decrease in subscribers.
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The following table displays historical average rate information for various services offered byNCP-Eight’s systems (amounts per subscriber per month):
2006 | 2005 | 2004 | 2003 | 2002 | ||||||||||||||||
Basic Rate | $ | 37.95 | $ | 36.25 | $ | 34.15 | $ | 32.20 | $ | 30.75 | ||||||||||
Expanded Basic Rate | 5.60 | 6.50 | 7.50 | 8.25 | 8.50 | |||||||||||||||
HBO Rate | 11.50 | 11.50 | 11.50 | 11.00 | 10.00 | |||||||||||||||
Cinemax Rate | 10.00 | 9.00 | 9.00 | 9.00 | 8.50 | |||||||||||||||
Showtime Rate | 11.00 | 10.25 | 10.25 | 8.75 | 8.75 | |||||||||||||||
Encore Rate | 3.75 | 3.25 | 2.75 | 2.50 | 2.00 | |||||||||||||||
Starz | 4.25 | 4.25 | 3.50 | 3.00 | 3.50 | |||||||||||||||
Digital Rate (Incremental) | 8.00 | 10.00 | 14.50 | 9.00 | 9.00 | |||||||||||||||
Internet Rate | 37.00 | 37.00 | 38.00 | — | — |
Operating expenses, excluding general and administrative and programming expenses, attributable to continuing operations totaled $411,008 for the year ended December 31, 2006, representing a decrease of 4% from $428,017 for the year ended December 31, 2005. Decreased employee salary and benefit costs due to a decrease in number of operating employees, were offset by increased pole rental costs. In addition,NCP-Eight recorded deductibles and coinsurance costs related to certain insurance claims that were made as a result of hurricanes Katrina and Rita during 2005, which were not recorded in 2006. This amount totaled $23,787 and was recorded as an operating loss from continuing operations. Employee wages, which represent the primary component of operating expenses, are reviewed annually and, in most cases, increased based on cost of living adjustments and other factors. Therefore, assuming the number of operating and regional employees remains constant, management expects increases in operating expenses in the future.
General and administrative expenses attributable to continuing operations totaled $970,896 for the year ended December 31, 2006, representing a decrease of approximately 10% from $1,080,212 for the same period in 2005. This decrease is primarily attributable to legal fees and other costs associated with the settlement of a claim made by a former employee in August of 2005. Under the settlement,NCP-Eight paid the employee $75,000 in damages, fees and costs. In addition,NCP-Eight incurred approximately $110,000 in legal fees associated with the defense of this claim. These costs were not incurred during 2006, but were partially offset by increased administrative service and marketing costs during the year.
Programming expenses attributable to continuing operations totaled $1,215,248 for the year ended December 31, 2006, an increase of 9% from $1,116,463 for the year ended December 31, 2005. This increase is partially attributable to the recognition of $30,000 in additional programming expense associated with settlement of litigation with one ofNCP-Eight’s programmers. The increase is also attributable to higher costs charged by various program suppliers, increased costs associated with high-speed Internet services, offset by decreased subscribers from 5,508 as of December 31, 2005 to 5,307 as of December 31, 2006. Rate increases from program suppliers, as well as new fees due to the launch of additional channels and high-speed Internet services, will contribute to the trend of increased programming costs in the future, assuming that the number of subscribers remains constant.
Depreciation and amortization expense allocated to continuing operations decreased approximately 14%, from $621,324 in 2005 to $533,843 in 2006. Such decrease is attributable to certain assets becoming fully depreciated, offset by depreciation of recent purchases related to the upgrade of plant and equipment.
Interest expense and amortization of loan fees allocated to continuing operations increased approximately 23% from $135,779 in 2005 to $167,665 in 2006. This increase is primarily attributable to higher interest rates in 2006 compared to 2005, offset by lower average outstanding indebtedness during 2006 as a result of required principal repayments.
In 2006,NCP-Eight generated income from continuing operations of $238,841 compared to $51,346 in 2005.NCP-Eight has generated positive operating income in each of the three years ended December 31, 2006, and management anticipates that this trend will continue.
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Results of Continuing Operations for Years Ended 2005 and 2004
Total basic subscribers attributable to continuing operations decreased from 6,125 as of December 31, 2004 to 5,508 as of December 31, 2005. The loss in subscribers is a result of several factors including competition from DBS providers, availability of off-air signals inNCP-Eight’s markets and regional and local economic conditions. In its efforts to reverse this customer trend,NCP-Eight is increasing its customer retention efforts and its emphasis on bundling its video and data products.
Revenue from continuing operations totaled $3,406,867 for the year ended December 31, 2005, increasing 1% from $3,393,246 for the year ended December 31, 2004. Revenues from continuing operations for the year ended December 31, 2005 were comprised of the following sources:
• | $2,680,983 (79%) from basic services | |
• | $164,274 (5%) from premium services | |
• | $30,434 (1%) from digital services | |
• | $217,050 (6%) from high speed Internet services | |
• | $122,703 (4%) from advertising | |
• | $75,609 (2%) from late fees | |
• | $115,814 (3%) from other sources. |
Average monthly revenue per subscriber increased $4.60 or approximately 10% from $45.06 for year ended December 31, 2004 to $49.66 for the year ended December 31, 2005. This increase is attributable to rate increases implemented throughoutNCP-Eight’s systems during the second quarter of 2005 and increased penetration of new products, specifically, high-speed Internet services, and increased advertising revenue. This increase was partially offset by the aforementioned decrease in subscribers.
Operating expenses, excluding general and administrative and programming expenses, attributable to continuing operations totaled $428,017 for the year ended December 31, 2005, representing an increase of approximately 11% from $384,621 for the year ended December 31, 2004. This increase is primarily attributable to increases in employee salary and benefit costs, and increases in vehicle costs in certain ofNCP-Eight’s systems. In addition,NCP-Eight recorded deductibles and coinsurance costs related to certain insurance claims that were made as a result of hurricanes Katrina and Rita. This amount totaled $23,787 and was recorded as an operating expense of continuing operations.
General and administrative expenses attributable to continuing operations totaled $1,080,212 for the year ended December 31, 2005, representing an increase of approximately 16% from $931,234 for the same period in 2004. This increase is primarily attributable to increased legal fees and other costs associated with the settlement of a claim made by a former employee in August of 2005. Under the settlement,NCP-Eight paid the employee $75,000 in damages, fees and costs. In addition,NCP-Eight incurred approximately $110,000 in legal fees associated with the defense of this claim. These increased legal fees and settlement costs were partially offset by decreases in marketing expenses, franchise fees and other general overhead costs for the year ended December 31, 2005.
Programming expenses attributable to continuing operations totaled $1,116,463 for the year ended December 31, 2005, an increase of 5% from $1,059,169 for the year ended December 31, 2004. Higher costs charged by various program suppliers and increased costs associated with high-speed Internet services were offset by decreased subscribers.
Depreciation and amortization expense allocated to continuing operations decreased approximately 30%, from $882,064 in 2004 to $621,324 in 2005. Such decrease is attributable to certain assets becoming fully depreciated, offset by depreciation of recent purchases related to the upgrade of plant and equipment.
Interest expense and amortization of loan fees allocated to continuing operations increased approximately 20% from $112,774 in 2004 to $135,779 in 2005. This increase is primarily attributable to by higher interest
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rates in 2005 compared to 2004, offset by lower average outstanding indebtedness during 2005 as a result of required principal repayments.
In accordance withEITF 87-24, “Allocation of Interest to Discontinued Operations”,NCP-Eight allocated interest expense to discontinued operations using the historic weighted average interest rate applicable toNCP-Eight’s existing credit facility (the “Refinanced Credit Facility”) and approximately $970,000 in principal payments related to the sale of the Marion and Eutaw systems, which were applied to the term loan as a result of the system sale.
Liquidity and Capital Resources
NCP-Eight’s primary source of liquidity is cash flow provided by operations.NCP-Eight generates cash through the monthly billing of subscribers for cable and other services. Losses from uncollectible accounts have not been material. Based on management’s analysis,NCP-Eight’s cash flow from operations and cash on hand will be sufficient to cover future operating costs, debt service, planned capital expenditures and working capital needs over the next twelve-month period.
Net cash provided by operating activities totaled $469,607 for the nine months ended September 30, 2007. Adjustments to the $127,112 net income for the period to reconcile to net cash provided by operating activities consisted primarily of depreciation of $410,449 and loan fee amortization of $5,465 offset by changes in other operating assets and liabilities of $71,669.
Net cash used in investing activities totaled $150,781 for the nine months ended September 30, 2007, and consisted primarily of $155,037 of capital expenditures.
Net cash used in financing activities for the nine months ended September 30, 2007 consisted of $140,896 in principal payments on long-term debt.
Term Loan
In September 2006,NCP-Eight agreed to certain terms and conditions with its existing lender and amended its Term Loan Agreement. The terms of the amendment extend the maturity date of the loan to March 31, 2010 and modify the principal repayment schedule and the Funded Debt to Cash Flow Ratio. The term loan is collateralized by a first lien position on all present and future assets ofNCP-Eight. Interest rates are based on LIBOR and include a margin paid to the lender based on overall leverage, and may increase or decrease asNCP-Eight’s leverage fluctuates. Principal payments plus interest are due quarterly until maturity on March 31, 2010. In connection with the credit amendment,NCP-Eight paid approximately $6,400 in additional loan fees, which are being amortized over the extended term of the loan. All previously capitalized loan fees remained capitalized. As of September 30, 2007, the balance of the term loan agreement was $2,052,872.
Annual maturities of the term loan after September 30, 2007 are as follows:
2007 | 40,000 | |||
2008 | 220,000 | |||
2009 | 260,000 | |||
2010 | 1,532,872 | |||
$ | 2,052,872 | |||
Under the terms of the amended Term Loan Agreement,NCP-Eight has agreed to restrictive covenants which require the maintenance of certain ratios, including a Funded Debt to Cash Flow Ratio of no more than 2.75 to 1 decreasing over time to 2.00 to 1, a Cash Flow Coverage Ratio of no less than 1.10 to 1, and a limitation on the maximum amount of annual capital expenditures of $700,000, among other restrictions. The General Partner submits quarterly debt compliance reports toNCP-Eight’s creditor under this agreement. As of September 30, 2007,NCP-Eight was in compliance with the terms of its loan agreement.
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As of September 30, 2007, the balance under the Refinanced Credit Facility is $2,052,872 at a LIBOR based interest rate of 7.25%. This interest rate expires during the fourth quarter of 2007, at which time a new rate will be established.
Obligations and Commitments
In addition to working capital needs for ongoing operations,NCP-Eight has capital requirements for annual maturities related to the Refinanced Credit Facility and required minimum operating lease payments. The following table summarizesNCP-Eight’s contractual obligations as of September 30, 2007:
Payments Due By Period | ||||||||||||||||||||
Less Than 1 | 1-3 | 3-5 | More Than | |||||||||||||||||
Total | Year | Years | Years | 5 Years | ||||||||||||||||
Notes payable | 2,052,872 | 205,000 | 1,847,872 | — | — | |||||||||||||||
Minimum operating lease payments | 50,600 | 9,300 | 9,200 | 9,200 | 22,900 | |||||||||||||||
Total | 2,103,472 | 214,300 | 1,857,072 | 9,200 | 22,900 | |||||||||||||||
(a) | These contractual obligations do not include accounts payable and accrued liabilities, which are expected to be paid in 2007. | |
(b) | NCP-Eight also rents utility poles in its operations. Amounts due under these agreements are not included in the above minimum operating lease payments amounts as, generally, pole rentals are cancelable on short notice.NCP-Eight does however anticipate that such rentals will recur. | |
(c) | Note that obligations related toNCP-Eight’s term loan exclude interest expense. |
Capital Expenditures
During the first nine months of 2007,NCP-Eight paid approximately $155,037 in capital expenditures. These expenditures include quality assurance projects to maintain the plant in both the Aliceville, AL and Swainsboro, GA systems.
NCP-Eight plans to invest approximately $87,000 in capital expenditures during the remainder of 2007. Planned expenditures during the remainder of 2007 include additional quality assurance projects to maintain the integrity of the existing cable television system plant.
System Sales
On March 21, 2005,NCP-Eight sold the operating assets and franchise rights of its cable systems in and around the communities of Marion and Eutaw, Alabama. The Marion and Eutaw systems served approximately 1,500 subscribers, and were sold at a price of $978,950, net of working capital adjustments, all of whichNCP-Eight received at closing. The sales price was adjusted at closing for the proration of certain revenues and expenses and substantially all of the proceeds were used to pay down amounts outstanding underNCP-Eight’s term loan agreement.
Critical Accounting Policies
This discussion and analysis of financial condition and results of operations is based onNCP-Eight’s financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates. The following critical accounting policies require a more significant amount of management judgment than other accounting policiesNCP-Eight employs.
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Revenue Recognition
Cable television and broadband service revenue, including service and maintenance, is recognized in the month service is provided to customers. Advance payments on cable services to be rendered are recorded as subscriber prepayments. Revenues resulting from the sale of local spot advertising are recognized when the related advertisements or commercials appear before the public.
Property and Equipment
Property and equipment are recorded at cost. Costs of additions and substantial improvements, which include materials, labor, and other indirect costs associated with the construction of cable transmission and distribution facilities, are capitalized. Indirect costs include employee salaries and benefits, travel and other costs. These costs are estimated based on historical information and analysis.NCP-Eight performs evaluations of these estimates as warranted by events or changes in circumstances.
In accordance with SFAS No. 51, “Financial Reporting by Cable Television Companies,”NCP-Eight also capitalizes costs associated with initial customer installations. The costs of disconnecting service or reconnecting service to previously installed locations is expensed in the period incurred. Costs for repairs and maintenance are also charged to operating expense, while equipment replacements, including the replacement of drops, are capitalized.
On July 5, 2007,NCP-Eight executed a asset purchase agreement to sell the operating assets and franchise rights of its remaining cable systems serving the communities of Aliceville, Alabama and Swainsboro, Georgia to Green River Media and Communications, LLC, an unaffiliated third party. The transaction is expected to close by the end of March 2008, and is subject to customary closing conditions and the approval of a majority in interest ofNCP-Eight’s limited partners. Closing of this transaction would result in the liquidation ofNCP-Eight. As limited partners’ approval is required prior to the closing of the transaction, management does not have the authority to approve the sale of these assets, which precludes such assets to be classified as “held for sale,” as defined in Statement of Financial Accounting Standards No. 144,“Accounting for the Impairment or Disposal of Long-Lived Assets.”
Intangible Assets
In accordance with the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets,”NCP-Eight does not amortize goodwill or any other intangible assets determined to have indefinite lives.NCP-Eight has determined that its franchises meet the definition of indefinite lived assets.NCP-Eight tests these assets for impairment on an annual basis during the fourth quarter, or on an interim basis if an event occurs or circumstances change that would reduce the fair value of the assets below its carrying value.
Management believes the franchises have indefinite lives because the franchises are expected to be used byNCP-Eight for the foreseeable future as determined based on an analysis of all pertinent factors, including changes in legal, regulatory or contractual provisions and effects of obsolescence, demand and competition. In addition, the level of maintenance expenditures required to obtain the future cash flows expected from the franchises is not material in relation to the carrying value of the franchises. While the franchises have defined lives based on the franchising authority, renewals are routinely granted, and management expects them to continue to be granted. This expectation is supported by management’s experience withNCP-Eight’s franchising authorities and the franchising authorities ofNCP-Eight’s affiliates.
Economic Conditions
Historically, the effects of inflation have been considered in determining to what extent rates will be increased for various services provided. It is expected that the future rate of inflation will continue to be a significant variable in determining rates charged for services provided, subject to the provisions of the 1996 Telecom Act. Because of the deregulatory nature of the 1996 Telecom Act,NCP-Eight does not expect the future rate of inflation to have a material adverse impact on operations.
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Transactions with the General Partner and Affiliates
Management Fees
The general partner receives a fee for managingNCP-Eight equal to 5% of the gross revenues ofNCP-Eight, excluding revenues from the sale of cable television systems or franchises. Management fees charged to continuing operations by the general partner were $176,644, $170,343, and $169,678 for 2006, 2005, and 2004, respectively. Management fees charged to discontinued operations by the general partner were $7,333 and $34,622 for 2005 and 2004, respectively. Management fees are included as a component of general and administrative expenses in the accompanying statements of operations.
Reimbursements
The general partner provides or causes to be provided certain centralized services toNCP-Eight and other affiliated entities. The general partner is entitled to reimbursement fromNCP-Eight for various expenses incurred by it or its affiliates on behalf ofNCP-Eight allocable to its management ofNCP-Eight, including travel expenses, pole and site rental, lease payments, legal expenses, billing expenses, insurance, governmental fees and licenses, headquarters’ supplies and expenses, pay television expenses, equipment and vehicle charges, operating salaries and expenses, administrative salaries and expenses, postage, and office maintenance.
The amounts billed toNCP-Eight are based on costs incurred by the general partner in rendering the services. The costs of certain services are charged directly toNCP-Eight, based upon the personnel time spent by the employees rendering the service. The cost of other services is allocated toNCP-Eight and affiliates based upon relative size and revenue. Management believes that the methods used to allocate costs toNCP-Eight are reasonable. Amounts charged to continuing operations for these services were $194,511, $200,140, and $217,247 for 2006, 2005, and 2004, respectively. There were no amounts charged to discontinued operations for these services in 2005 and 2004, respectively.
NCP-Eight has entered into operating management agreements with certain affiliates managed by the general partner. Under the terms of these agreements,NCP-Eight or an affiliate serves as the managing agent for certain cable television systems and is reimbursed for certain operating and administrative expenses.NCP-Eight’s continuing operations include $95,698, $91,635, and $110,947, net of payments received, under the terms of these agreements during 2006, 2005, and 2004, respectively.NCP-Eight’s discontinued operations include $8,664 and $42,068, net of payments received under the terms of these agreements during 2005 and 2004, respectively.
Northland Cable Service Corporation (“NCSC”), an affiliate of the general partner, was formed to provide billing system support to cable systems owned and managed by the general partner. In addition NCSC provides technical support associated with the build out and upgrade of Northland affiliated cable systems. In 2006, 2005, and 2004,NCP-Eight’s continuing operations include $42,488, $52,529, and $92,236, respectively, for these services. Of this amount, $0 and $37,830 were capitalized in 2006 and 2005, respectively, related to the build out and upgrade of cable systems.NCP-Eight’s discontinued operations include $689 and $0 in 2005 and 2004, respectively, for these services. None of these amounts were capitalized. Cable Ad Concepts (“CAC”), a subsidiary of NCSC, has managed local advertising sales as well as billing for commercial advertisements to be cablecast on certain ofNCP-Eight’s cable systems. Prior to 2004,NCP-Eight recorded gross advertising revenues and related expenses on its statement of operations. Beginning in 2004,NCP-Eight and CAC modified their agreement such that CAC retains all the credit risks associated with the advertising activities and a net fixed percentage of the related revenues are remitted toNCP-Eight, which are recorded as net advertising revenues. Recently,NCP-Eight terminated its relationship with CAC in regards to advertising sales on certain of its systems and engaged an unrelated third party for such advertising sales activities.
Certain Business Relationships
John E. Iverson, a Director and Secretary of the general partner, is a member of the law firm of Ryan, Swanson & Cleveland, PLLC, which has rendered and is expected to continue to render legal services to the general partner andNCP-Eight.
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The selected data presented below for the three-month periods ended September 30, 2007, June 30, 2007 and March 31, 2007, are derived from the unaudited Consolidated Financial Statements ofNCP-Eight that are included elsewhere in this proxy statement.
Quarters Ended | ||||||||||||||||||||||||||||
September 30, | June 30, | March 31, | December 31, | September 30, | June 30, | March 31, | ||||||||||||||||||||||
2007 | 2007 | 2007 | 2006 | 2006 | 2006 | 2006 | ||||||||||||||||||||||
SUMMARY OF OPERATIONS: | ||||||||||||||||||||||||||||
Service revenues | 931,862 | $ | 949,070 | $ | 915,667 | $ | 878,475 | $ | 879,529 | $ | 896,864 | $ | 878,019 | |||||||||||||||
Operating income (loss) | 109,199 | 141,054 | 130,501 | 99,030 | 80,229 | 109,295 | 114,838 | |||||||||||||||||||||
Income (loss) from continuing operations | (63,248 | ) | 100,126 | 90,234 | 56,438 | 37,892 | 67,556 | 76,995 | ||||||||||||||||||||
Income (loss) from discontinued operations(1) | — | — | — | — | — | — | — | |||||||||||||||||||||
Net income (loss) | $ | (63,248 | ) | $ | 100,126 | $ | 90,234 | $ | 56,438 | $ | 37,892 | $ | 67,556 | $ | 76,995 | |||||||||||||
Net income (loss) from continuing operations per limited partner unit | $ | (3 | ) | $ | 5 | $ | 5 | $ | 2 | $ | 2 | $ | 4 | $ | 4 | |||||||||||||
Net income (loss) from discontinued operations per limited partner unit | — | — | — | — | — | — | — | |||||||||||||||||||||
Net income (loss) per limited partner unit | $ | (3 | ) | $ | 5 | $ | 5 | $ | 2 | $ | 2 | $ | 4 | $ | 4 | |||||||||||||
Quarters Ended | ||||||||||||||||
December 31, | September 30, | June 30, | March 31, | |||||||||||||
2005 | 2005 | 2005 | 2005 | |||||||||||||
SUMMARY OF OPERATIONS: | ||||||||||||||||
Service revenues | $ | 843,417 | $ | 836,765 | $ | 846,075 | $ | 880,610 | ||||||||
Operating income (loss) | 88,610 | 42,738 | (99,835 | ) | 128,479 | |||||||||||
Income (loss) from continuing operations | 50,089 | 8,540 | (132,413 | ) | 125,130 | |||||||||||
Income (loss) from discontinued operations(1) | — | — | — | 799,736 | ||||||||||||
Net income (loss) | $ | 50,089 | $ | 8,540 | $ | (132,413 | ) | $ | 924,866 | |||||||
Net income (loss) from continuing operations per limited partner unit | $ | 3 | $ | — | $ | (7 | ) | $ | 7 | |||||||
Net income (loss) from discontinued operations per limited partner unit | (1 | ) | — | — | 42 | |||||||||||
Net income (loss) per limited partner unit | $ | 3 | $ | — | $ | (7 | ) | $ | 48 | |||||||
(1) | On March 11, 2003, June 30, 2005, and August 1, 2005,NCP-Eight sold the operating assets and franchise rights of its Washington, Bay City and Brenham systems, respectively. The results of operations and the sales of these systems are presented as discontinued operations in this filing and the accompanying financial statements. |
NCP-Eight is a Washington limited partnership with no directors or officers.
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The general partner ofNCP-Eight is Northland Communications Corporation, a Washington corporation.
The principal business of Northland Communications Corporation historically has been locating cable television systems, negotiating for their acquisition, forming limited partnerships to own the systems, arranging for the sale of limited partnership interests to investors, managing limited partnerships, includingNCP-Eight, and liquidating partnership assets upon dissolution. Northland Communications Corporation is a wholly-owned subsidiary of Northland Telecommunications Corporation, a Washington corporation. The address and telephone number of the principal executive offices of each of Northland Communications Corporation and Northland Telecommunications Corporation is 101 Stewart Street, Suite 700, Seattle, Washington 98101,(206) 621-1351.
Beneficial Ownership
Security ownership of management inNCP-Eight as of September 30, 2007 is as follows:
Amount and Nature | ||||||||
of Beneficial | ||||||||
Name and Address of Beneficial Owner | Percent of Title of Class | Ownership | ||||||
Northland Communications Corporation | General Partner’s Interest(1 | ) | See(1 | ) | ||||
101 Stewart Street Suite 700 Seattle, WA 98101 |
(1) | Northland Communications Corporation has a 1% interest in the limited partnership, which increases to a 20% interest in the limited partnership at such time as the limited partners have received 100% of their aggregate cash contributions plus a preferred return. The natural person who exercises votingand/or investment control over these interests is John S. Whetzell. |
Changes in Control
Northland Communications Corporation has pledged its ownership interest as general partner ofNCP-Eight toNCP-Eight’s lender as collateral pursuant to the terms of the revolving credit and term loan agreement.
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Included with this proxy statement, starting on the following page, areNCP-Eight’s unaudited financial statements for the nine and three months ended as of September 30, 2007 and 2006 and audited balance sheets as of December 31, 2006 and 2005, and the related statements of operations, changes in partners’ capital (deficit), and cash flows for each of the years in the three-year period ended as of December 31, 2006. Financial statements for prior years and periods have previously been distributed to the limited partners on an ongoing basis.
If a limited partner desires any additional information regarding financial statements, please contact the general partner ofNCP-Eight, Northland Communications Corporation.
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NORTHLAND CABLE PROPERTIES EIGHT LIMITED PARTNERSHIP
CONDENSED BALANCE SHEETS — (UNAUDITED)
(Prepared by the General Partner)
September 30, | December 31, | |||||||
2007 | 2006 | |||||||
ASSETS | ||||||||
Cash | $ | 273,826 | $ | 95,896 | ||||
Accounts receivable, net | 80,201 | 81,844 | ||||||
Due from affiliates | 9,285 | 2,333 | ||||||
Prepaid expenses | 84,972 | 48,555 | ||||||
Property and equipment, net of accumulated depreciation of $8,598,997 and $8,253,030, respectively | 2,710,054 | 2,967,972 | ||||||
Franchise agreements, net of accumulated amortization of $1,907,136 | 3,152,204 | 3,152,204 | ||||||
Loan fees, net of accumulated amortization of $87,246 and $81,781, respectively | 5,379 | 10,844 | ||||||
Total assets | $ | 6,315,921 | $ | 6,359,648 | ||||
LIABILITIES AND PARTNERS’ CAPITAL (DEFICIT) | ||||||||
Accounts payable and accrued expenses | $ | 394,723 | $ | 359,906 | ||||
Due from General Partner and affiliates | 44,243 | 76,462 | ||||||
Deposits | 4,850 | 6,050 | ||||||
Subscriber prepayments | 177,712 | 209,053 | ||||||
Term loan | 2,052,872 | 2,193,768 | ||||||
Total liabilities | 2,674,400 | 2,845,239 | ||||||
Partners’ capital (deficit): | ||||||||
General Partner: | ||||||||
Contributed capital, net | 1,000 | 1,000 | ||||||
Accumulated deficit | (44,621 | ) | (45,892 | ) | ||||
(43,621 | ) | (44,892 | ) | |||||
Limited Partners: | ||||||||
Contributed capital, net | 8,102,518 | 8,102,518 | ||||||
Accumulated deficit | (4,417,376 | ) | (4,543,217 | ) | ||||
3,685,142 | 3,559,301 | |||||||
Total partners’ capital | 3,641,521 | 3,514,409 | ||||||
Total liabilities and partners’ capital | $ | 6,315,921 | $ | 6,359,648 | ||||
The accompanying notes are an integral part of these statements.
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NORTHLAND CABLE PROPERTIES EIGHT LIMITED PARTNERSHIP
CONDENSED STATEMENTS OF OPERATIONS — (UNAUDITED)
For the Nine Months Ended September 30, | ||||||||
2007 | 2006 | |||||||
Service revenues | $ | 2,796,599 | $ | 2,654,411 | ||||
Expenses: | ||||||||
Operating (including $39,077 and $51,023 to affiliates in 2007 and 2006, respectively), excluding depreciation and amortization shown below | 288,898 | 312,687 | ||||||
General and administrative (including $304,806 and $309,979 to affiliates in 2007 and 2006, respectively) | 717,649 | 731,355 | ||||||
Programming (including $4,157 and $3,034 from affiliates in 2007 and 2006, respectively) | 998,848 | 907,865 | ||||||
Depreciation | 410,449 | 398,144 | ||||||
Gain on disposal of assets | (1,750 | ) | — | |||||
2,414,094 | 2,350,051 | |||||||
Income from operations | 382,505 | 304,360 | ||||||
Other income (expense): | ||||||||
Interest expense and amortization of loan fees | (124,320 | ) | (124,108 | ) | ||||
Interest income and other, net | (131,073 | ) | 2,151 | |||||
(255,393 | ) | (121,957 | ) | |||||
Net income | $ | 127,112 | $ | 182,403 | ||||
Allocation of net income: | ||||||||
General Partner | $ | 1,271 | $ | 1,824 | ||||
Limited Partners | $ | 125,841 | $ | 180,579 | ||||
Net income per limited partnership unit: | ||||||||
(19,087 units) | $ | 7 | $ | 10 | ||||
The accompanying notes are an integral part of these statements.
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NORTHLAND CABLE PROPERTIES EIGHT LIMITED PARTNERSHIP
CONDENSED STATEMENTS OF OPERATIONS — (UNAUDITED)
For the Three Months Ended September 30, | ||||||||
2007 | 2006 | |||||||
Service revenues | $ | 931,862 | $ | 879,529 | ||||
Expenses: | ||||||||
Operating (including $13,338 and $17,186 to affiliates in 2007 and 2006, respectively), excluding depreciation and amortization shown below | 102,114 | 99,855 | ||||||
General and administrative (including $101,509 and $104,811 to affiliates in 2007 and 2006, respectively) | 244,273 | 247,845 | ||||||
Programming (including $1,413 and $1,110 from affiliates in 2007 and 2006, respectively) | 338,709 | 317,863 | ||||||
Depreciation | 137,567 | 133,737 | ||||||
822,663 | 799,300 | |||||||
Income from operations | 109,199 | 80,229 | ||||||
Other income (expense): | ||||||||
Interest expense and amortization of loan fees | (40,426 | ) | (44,039 | ) | ||||
Interest income and other, net | (132,021 | ) | 1,702 | |||||
(172,447 | ) | (42,337 | ) | |||||
Net income | $ | (63,248 | ) | $ | 37,892 | |||
Allocation of net income: | ||||||||
General Partner | $ | (632 | ) | $ | 379 | |||
Limited Partners | $ | (62,616 | ) | $ | 37,513 | |||
Net income per limited partnership unit: | ||||||||
(19,087 units) | $ | (3 | ) | $ | 2 | |||
The accompanying notes are an integral part of these statements.
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CONDENSED STATEMENTS OF CASH FLOWS — (UNAUDITED)
For the Nine Months | ||||||||
Ended September 30, | ||||||||
2007 | 2006 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net income | $ | 127,112 | $ | 182,403 | ||||
Adjustments to reconcile net income to cash provided by operating activities: | ||||||||
Depreciation | 410,449 | 398,144 | ||||||
Amortization of loan fees | 5,465 | 4,269 | ||||||
Gain on sale of assets | (1,750 | ) | — | |||||
(Increase) decrease in operating assets: | ||||||||
Accounts receivable | 1,643 | 5,255 | ||||||
Proceeds from related party insurance fund | — | 44,063 | ||||||
Due from affiliates | (6,952 | ) | (5,331 | ) | ||||
Prepaid expenses | (36,417 | ) | (27,981 | ) | ||||
Increase (decrease) in operating liabilities: | ||||||||
Accounts payable and accrued expenses | (34,817 | ) | (143,079 | ) | ||||
Due to General Partner and affiliates | (32,219 | ) | (16,299 | ) | ||||
Subscriber prepayments and deposits | (32,541 | ) | (26,486 | ) | ||||
Net cash provided by operating activities | 469,607 | 414,958 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Purchase of property and equipment | (155,037 | ) | (362,890 | ) | ||||
Proceeds from sale of assets | 4,256 | 30,871 | ||||||
Net cash used in investing activities | (150,781 | ) | (332,019 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Principal payments on borrowings | (140,896 | ) | (100,000 | ) | ||||
Loan fees | — | (6,236 | ) | |||||
Net cash used in financing activities | (140,896 | ) | (106,236 | ) | ||||
INCREASE IN CASH | 177,930 | (23,297 | ) | |||||
CASH, beginning of period | 95,896 | 63,349 | ||||||
CASH, end of period | $ | 273,826 | $ | 40,052 | ||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | ||||||||
Cash paid during the period for interest | $ | 119,755 | $ | 156,727 | ||||
The accompanying notes are an integral part of these statements.
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NORTHLAND CABLE PROPERTIES EIGHT LIMITED PARTNERSHIP
NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS
(1) | Basis of Presentation |
These unaudited financial statements are being filed in conformity withRule 10-01 ofRegulation S-X regarding interim financial statement disclosure and do not contain all of the necessary footnote disclosures required for a full presentation of the balance sheets, statements of operations and statements of cash flows in conformity with accounting principles generally accepted in the United States of America. However, in the opinion of management, these statements include all adjustments, consisting only of normal recurring adjustments, necessary to present fairlyNCP-Eight’s financial position at September 30, 2007, its statements of operations for the nine and three months ended September 30, 2007 and 2006, and its statements of cash flows for the nine months ended September 30, 2007 and 2006. Results of operations for these periods are not necessarily indicative of results to be expected for the full year. These financial statements and notes should be read in conjunction withNCP-Eight’s Annual Report onForm 10-K for the year ended December 31, 2006.
On July 5, 2007,NCP-Eight executed a asset purchase agreement to sell the operating assets and franchise rights of its remaining cable systems serving the communities of Aliceville, Alabama and Swainsboro, Georgia to Green River Media and Communications, LLC, an unaffiliated third party. The transaction is expected to close by the end of March 2008, and is subject to customary closing conditions and the approval of a majority in interest ofNCP-Eight’s limited partners. Closing of this transaction would result in the liquidation ofNCP-Eight.
(2) | Intangible Assets |
In accordance with the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets,”NCP-Eight does not amortize goodwill or any other intangible assets determined to have indefinite lives.NCP-Eight has determined that its franchises meet the definition of indefinite lived assets.NCP-Eight tests these assets for impairment on an annual basis during the fourth quarter, or on an interim basis if an event occurs or circumstances change that would reduce the fair value of a reporting unit below its carrying value.
Loan fees are being amortized using the straight-line method, which approximates the effective interest rate method. Future amortization of loan fees is expected to be approximately as follows:
2007 (6 Months) | 1,362 | |||
2008 | 1,785 | |||
2009 | 1,785 | |||
2010 | 447 | |||
$ | 5,379 | |||
(3) | Term Loan |
In September 2006,NCP-Eight agreed to certain terms and conditions with its existing lender and amended its credit agreement. The terms of the amendment extend the maturity date of the loan to March 31, 2010 and modify the principal repayment schedule and the Funded Debt to Cash Flow Ratio. The term loan is collateralized by a first lien position on all present and future assets ofNCP-Eight. Interest rates are based on LIBOR and include a margin paid to the lender based on overall leverage, and may increase or decrease asNCP-Eight’s leverage fluctuates. Principal payments plus interest are due quarterly until maturity on March 31, 2010. In connection with the credit amendment,NCP-Eight paid approximately $6,400 in additional loan fees, which are being amortized over the extended term of the loan. All previously capitalized loan fees remained capitalized. As of September 30, 2007, the balance of the term loan agreement was $2,052,872.
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NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS — (Continued)
Annual maturities of the term loan after September 30, 2007 are as follows:
2007 | 40,000 | |||
2008 | 220,000 | |||
2009 | 260,000 | |||
2010 | 1,532,872 | |||
$ | 2,052,872 | |||
Under the terms of the amended loan agreement,NCP-Eight has agreed to restrictive covenants which require the maintenance of certain ratios, including a Funded Debt to Cash Flow Ratio of no more than 2.75 to 1 decreasing over time to 2.00 to 1, a Cash Flow Coverage Ratio of no less than 1.10 to 1, and a limitation on the maximum amount of annual capital expenditures of $700,000, among other restrictions. The General Partner submits quarterly debt compliance reports toNCP-Eight’s creditor under this agreement. As of September 30, 2007,NCP-Eight was in compliance with the terms of its loan agreement.
As of September 30, 2007, the balance under the credit facility is $2,052,872 at a LIBOR based interest rate of 7.25%. This interest rate expires during the fourth quarter of 2007, at which time a new rate will be established.
(4) | Litigation |
In March 2005, Northland filed a complaint against one of its programming networks seeking a declaration that a December 2004 contract between Northland and the programmer was an enforceable contract related to rates Northland would pay for its programming and damages for breach of that contract. The programmer counter-claimed, alleging copyright infringement and breach of contract.
On September 14, 2006 Northland and the programmer entered into a Settlement Agreement, under which, (i) the parties mutually released each other from and against all claims, (ii) the parties agreed to dismiss the lawsuit, and (iii) the parties set forth the definitive terms of carriage of the programmers services for the period commencing December 1, 2004, through December 31, 2007.
In addition, under the terms of the Settlement Agreement, Northland shall make payment in full of all license fees from all Northland affiliates, including NCP-8, for the period of December 1, 2004, through July 31, 2006, all of which have been previously accrued. In addition, Northland agreed to pay the programmer, in four installments, a Supplemental License fee, approximately $45,000 of which will be allocated to NCP-8.NCP-Eight recorded a charge of $30,000 in expense associated with this supplemental license fee for the period ended December 31, 2006, and approximately $11,000 and $4,000 in expense during the nine and three months ended September 30, 2007, respectively, which has been classified as programming expense. The remaining $4,000 will be paid and recorded on a pro rata basis over the remaining contract period.
NCP-Eight is party to ordinary and routine litigation proceedings that are incidental toNCP-Eight’s business. Management believes that the outcome of all pending legal proceedings will not, individually or in the aggregate, have a material adverse effect onNCP-Eight, its financial statements, prospects or debt service abilities.
(5) | Potential Sale of Systems |
On July 5, 2007,NCP-Eight executed a asset purchase agreement to sell the operating assets and franchise rights of its remaining cable systems serving the communities of Aliceville, Alabama and Swainsboro, Georgia to Green River Media and Communications, LLC, an unaffiliated third party. The transaction is expected to close by the end of March 2008, and is subject to customary closing conditions and
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NOTES TO UNAUDITED CONDENSED FINANCIAL STATEMENTS — (Continued)
the approval of a majority in interest ofNCP-Eight’s limited partners. Closing of this transaction would result in the liquidation ofNCP-Eight. As limited partners approval is required prior to the closing of the transaction, management does not have the authority to approve the sale of these assets, which precludes such assets to be classified as “held for sale,” as defined in Statement of Financial Accounting Standards No. 144,“Accounting for the Impairment or Disposal of Long-Lived Assets.”
The terms of the asset purchase agreement included a sales price of $8,100,000, which may be adjusted based on subscription revenue generated prior to closing, and require that approximately ten percent of the gross proceeds be placed in escrow to secure compliance with representations and warranties, to be released toNCP-Eight eighteen months from the closing of the transaction. Net proceeds to be received upon closing will be used to pay all remaining liabilities ofNCP-Eight, including transaction costs and amounts outstanding underNCP-Eight’s Term Loan Agreement (with a balance of $2,052,872 as of September 30, 2007) and to make liquidating distributions to the limited partners. Limited partners will receive a final distribution eighteen months from the closing date when the escrow proceeds are released.
On October 10, 2007, NCP-Eight filed with the Security and Exchange Commission a proxy statement to solicit limited partner approval (i) to authorize the sale of substantially all the assets of NCP-Eight to Green River Media and Communications, LLC, or its assignee with NCP-Eight’s consent, (ii) to authorize the alternative sale of substantially all of NCP-Eight’s assets to Northland Communications Corporation, its general partner, or one or more affiliates of Northland Communications Corporation, if the Green River transaction is not consummated by March 31, 2008, or such later date mutually agreed upon by NCP-Eight and Green River, or in the event that the Green River transaction is otherwise terminated prior to such date, and (iii) to authorize an amendment to the Amended and Restated Agreement of Limited Partnership of Northland Cable Properties Eight Limited Partnership dated August 10, 1989, to exclude the alternative sale transaction from the independent appraisal procedures that would otherwise be required by the NCP-Eight partnership agreement. The purchase agreement that would be entered into with respect to the alternative sale transaction would contain substantially the same terms and conditions as provided in the Green River purchase agreement, except that the general partner’s obligation to close will be subject to the general partner’s ability to secure satisfactory financing. If such condition has not been met within 90 days after the agreement for the alternative sale transaction becomes effective, the general partner would have the right to terminate the alternative purchase agreement without penalty. The alternative sale transaction will not be entered into unless the proposal to amend the NCP-Eight partnership agreement is approved by a majority of the outstanding units of limited partnership interest (excluding units held by the general partner or its affiliates).
Pursuant to the terms of the NCP-Eight partnership agreement, the limited partnership will be dissolved upon the sale of all, or substantially all of NCP-Eight’s assets, and the general partner will wind up the business and affairs of NCP-Eight without requiring any further consent or vote by the partners. Accordingly, if either the Green River transaction or the alternative sale transaction closes as planned, the general partner will commence the dissolution and winding up of NCP-Eight during the first half of 2008.
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KPMG LLP
Suite 900
801 Second Avenue
Seattle, WA 98104
Report of Independent Registered Public Accounting Firm
The Partners
Northland Cable Properties Eight Limited Partnership:
We have audited the accompanying balance sheets of Northland Cable Properties Eight Limited Partnership (a Washington limited partnership) as of December 31, 2006 and 2005, and the related statements of operations, changes in partners’ capital (deficit), and cash flows for each of the years in the three year period ended December 31, 2006. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Northland Cable Properties Eight Limited Partnership as of December 31, 2006 and 2005, and the results of its operations and its cash flows for each of the years in the three year period ended December 31, 2006 in conformity with U.S. generally accepted accounting principles.
Seattle, Washington
March 30, 2007
KPMG LLP, a U.S. limited liability partnership, is the U.S.
member firm of KPMG International a Swiss cooperative.
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NORTHLAND CABLE PROPERTIES
EIGHT LIMITED PARTNERSHIP
EIGHT LIMITED PARTNERSHIP
Balance Sheets
December 31, 2006 and 2005
2006 | 2005 | |||||||
ASSETS | ||||||||
Cash | $ | 95,896 | 63,349 | |||||
Accounts receivable, net | 81,844 | 51,613 | ||||||
Insurance reimbursement receivable from fund managed by related party | — | 44,063 | ||||||
Due from affiliates | 2,333 | 8,783 | ||||||
Prepaid expenses | 48,555 | 35,218 | ||||||
Investment in cable television properties: | ||||||||
Property and equipment | 11,221,002 | 10,751,327 | ||||||
Less accumulated depreciation | (8,253,030 | ) | (7,735,370 | ) | ||||
2,967,972 | 3,015,957 | |||||||
Franchise agreements (net of accumulated amortization of $1,907,136 in 2006 and 2005) | 3,152,204 | 3,152,204 | ||||||
Total investment in cable television properties | 6,120,176 | 6,168,161 | ||||||
Loan fees (net of accumulated amortization of $81,781 and $75,690 in 2006 and 2005, respectively) | 10,844 | 10,540 | ||||||
Total assets | $ | 6,359,648 | 6,381,727 | |||||
LIABILITIES AND PARTNERS’ CAPITAL (DEFICIT) | ||||||||
Liabilities: | ||||||||
Accounts payable and accrued expenses | $ | 359,906 | 465,406 | |||||
Due to General Partner and affiliates | 76,462 | 87,918 | ||||||
Deposits | 6,050 | 4,800 | ||||||
Subscriber prepayments | 209,053 | 215,415 | ||||||
Term loan | 2,193,768 | 2,318,768 | ||||||
Total liabilities | 2,845,239 | 3,092,307 | ||||||
Commitments and contingencies | ||||||||
Partners’ capital (deficit): | ||||||||
General Partner: | ||||||||
Contributed capital | 1,000 | 1,000 | ||||||
Accumulated deficit | (45,892 | ) | (48,280 | ) | ||||
(44,892 | ) | (47,280 | ) | |||||
Limited partners: | ||||||||
Contributed capital, net (19,087 units) | 8,102,518 | 8,116,370 | ||||||
Accumulated deficit | (4,543,217 | ) | (4,779,670 | ) | ||||
3,559,301 | 3,336,700 | |||||||
Total liabilities and partners’ capital (deficit) | $ | 6,359,648 | 6,381,727 | |||||
See accompanying notes to financial statements.
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NORTHLAND CABLE PROPERTIES
EIGHT LIMITED PARTNERSHIP
Statements of Operations
Years Ended December 31, 2006, 2005, and 2004
EIGHT LIMITED PARTNERSHIP
Statements of Operations
Years Ended December 31, 2006, 2005, and 2004
2006 | 2005 | 2004 | ||||||||||
Revenue | $ | 3,532,887 | 3,406,867 | 3,393,246 | ||||||||
Expenses: | ||||||||||||
Operating (including $67,434, $73,224, and $71,491, net, paid to affiliates in 2006, 2005, and 2004, respectively), excluding depreciation and amortization expense recorded | 411,008 | 428,017 | 384,621 | |||||||||
General and administrative (including $410,644, $404,138, and $426,381, net, paid to affiliates in 2006, 2005, and 2004, respectively) | 970,896 | 1,080,212 | 931,234 | |||||||||
Programming (including $53,713 and $545, net, received from and $51,993, net, paid to affiliates in 2006, 2005, and 2004, respectively | 1,215,248 | 1,116,463 | 1,059,169 | |||||||||
Depreciation | 533,843 | 621,324 | 882,064 | |||||||||
(Gain) loss on disposal of assets | (1,500 | ) | 859 | 1,518 | ||||||||
Operating income | 403,392 | 159,992 | 134,640 | |||||||||
Other income (expense): | ||||||||||||
Interest expense and amortization of loan fees | (167,665 | ) | (135,779 | ) | (112,774 | ) | ||||||
Interest income and other, net | 3,114 | 27,133 | 2,786 | |||||||||
Income from continuing operations | 238,841 | 51,346 | 24,652 | |||||||||
Discontinued operations (note 11) Income from operations of Marion and Eutaw systems, net (including gain on sale of systems of $756,130 in 2005) | — | 799,736 | 96,450 | |||||||||
Net income | $ | 238,841 | 851,082 | 121,102 | ||||||||
Allocation of net income: | ||||||||||||
General Partner | $ | 2,388 | 8,511 | 1,211 | ||||||||
Limited partners | 236,453 | 842,571 | 119,891 | |||||||||
Net income per limited partnership unit | 12 | 44 | 6 | |||||||||
Net income from continuing operations per limited partnership unit | 12 | 3 | 1 | |||||||||
Net income from discontinued operations per limited partnership unit | — | 41 | 5 |
See accompanying notes to financial statements.
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NORTHLAND CABLE PROPERTIES
EIGHT LIMITED PARTNERSHIP
EIGHT LIMITED PARTNERSHIP
Statements of Changes in Partners’ Capital (Deficit)
Years Ended December 31, 2006, 2005, and 2004
General | Limited | |||||||||||
Partner | Partners | Total | ||||||||||
Balance, December 31, 2003 | $ | (57,002 | ) | 2,378,688 | 2,321,686 | |||||||
Net income | 1,211 | 119,891 | 121,102 | |||||||||
Balance, December 31, 2004 | (55,791 | ) | 2,498,579 | 2,442,788 | ||||||||
Net income | 8,511 | 842,571 | 851,082 | |||||||||
Distribution declared to Limited Partners for income taxes | — | (4,450 | ) | (4,450 | ) | |||||||
Balance, December 31, 2005 | (47,280 | ) | 3,336,700 | 3,289,420 | ||||||||
Net income | 2,388 | 236,453 | 238,841 | |||||||||
Distribution declared to Limited Partners for income taxes | — | (13,852 | ) | (13,852 | ) | |||||||
Balance, December 31, 2006 | $ | (44,892 | ) | 3,559,301 | 3,514,409 | |||||||
See accompanying notes to financial statements.
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NORTHLAND CABLE PROPERTIES
EIGHT LIMITED PARTNERSHIP
EIGHT LIMITED PARTNERSHIP
Statements of Cash Flows
Years Ended December 31, 2006, 2005, and 2004
2006 | 2005 | 2004 | ||||||||||
Cash flows from operating activities: | ||||||||||||
Net income | $ | 238,841 | 851,082 | 121,102 | ||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
Depreciation expense | 533,843 | 623,009 | 1,029,889 | |||||||||
Amortization of loan fees | 6,091 | 5,499 | 5,550 | |||||||||
(Gain) loss on disposal of assets | (1,500 | ) | (755,271 | ) | 1,518 | |||||||
Changes in certain assets and liabilities: | ||||||||||||
Accounts receivable | (30,231 | ) | (46,911 | ) | 23,881 | |||||||
Proceeds from related party insurance fund | 44,063 | — | — | |||||||||
Due from affiliates | 6,450 | (2,110 | ) | (6,673 | ) | |||||||
Prepaid expenses | (13,337 | ) | 4,873 | (10,239 | ) | |||||||
Accounts payable and accrued expenses | (82,033 | ) | 54,379 | 13,191 | ||||||||
Due to General Partner and affiliates | (11,456 | ) | 20,115 | (10,900 | ) | |||||||
Deposits | 1,250 | (350 | ) | 150 | ||||||||
Subscriber prepayments | (6,362 | ) | 99,637 | (33,384 | ) | |||||||
Net cash provided by operating activities | 685,619 | 853,952 | 1,134,085 | |||||||||
Cash flows from investing activities: | ||||||||||||
Purchase of property and equipment | (510,055 | ) | (831,341 | ) | (631,211 | ) | ||||||
Proceeds from sale of system | — | 978,950 | 194,871 | |||||||||
Proceeds from sale of assets | 6,680 | 9,502 | — | |||||||||
Net cash (used in) provided by investing activities | (503,375 | ) | 157,111 | (436,340 | ) | |||||||
Cash flows from financing activities: | ||||||||||||
Principal payments on term loan | (125,000 | ) | (1,168,950 | ) | (969,978 | ) | ||||||
Distribution on behalf of limited partners for tax purposes | (18,302 | ) | — | — | ||||||||
Loan fees | (6,395 | ) | — | — | ||||||||
Net cash used in financing activities | (149,697 | ) | (1,168,950 | ) | (969,978 | ) | ||||||
Increase (decrease) in cash | 32,547 | (157,887 | ) | (272,233 | ) | |||||||
Cash, beginning of year | 63,349 | 221,236 | 493,469 | |||||||||
Cash, end of year | $ | 95,896 | 63,349 | 221,236 | ||||||||
Supplemental disclosure of cash flow information: | ||||||||||||
Cash paid during the year for interest | $ | 198,090 | 117,866 | 129,130 | ||||||||
Distribution declared to Limited Partners for income taxes | — | (4,450 | ) | — |
See accompanying notes to financial statements.
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NORTHLAND CABLE PROPERTIES
EIGHT LIMITED PARTNERSHIP
Notes to Financial Statements
December 31, 2006 and 2005
EIGHT LIMITED PARTNERSHIP
Notes to Financial Statements
December 31, 2006 and 2005
(1) | Organization and Partners’ Interests |
(a) | Formation and Business |
NCP-Eight, a Washington limited partnership, was formed on September 21, 1988, and began operations on March 8, 1989. NCP-Eight was formed to acquire, develop and operate cable television systems. Currently, NCP-Eight owns systems serving the cities of Aliceville, Alabama and certain surrounding areas, and Swainsboro, Georgia and certain surrounding areas. NCP-Eight has 11 nonexclusive franchises to operate these cable systems for periods, which will expire at various dates through 2019.
On March 21, 2005, NCP-Eight sold the operating assets and franchise rights of its cable systems in and around Marion and Eutaw, Alabama, which served approximately 1,500 subscribers. The accompanying financial statements present the results of operations and sale of the Marion and Eutaw systems as discontinued operations.
Northland Communications Corporation (the General Partner or Northland) is the General Partner of NCP-Eight. Certain affiliates of NCP-Eight also own and operate other cable television systems. In addition, Northland manages cable television systems for another limited partnership and an LLC for which it serves as general partner and managing member, respectively.
NCP-Eight is subject to certain risks as a cable television operator. These include competition from alternative technologies (i.e., satellite), requirements to renew its franchise agreements, availability of capital and compliance with term loan covenants.
(b) | Contributed Capital, Commissions, and Offering Costs |
The capitalization of NCP-Eight is set forth in the accompanying statements of changes in partners’ capital (deficit). No limited partner is obligated to make any additional contribution.
Northland contributed $1,000 to acquire its 1% interest in NCP-Eight.
Pursuant to the NCP-Eight partnership agreement, brokerage fees of $1,004,693 paid to an affiliate of the General Partner and other offering costs of $156,451 paid to the General Partner were recorded as a reduction of limited partners’ capital upon formation of NCP-Eight.
(2) | Basis of Presentation |
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
(3) | Summary of Significant Accounting Policies |
(a) | Acquisition of Cable Television Systems |
Cable television system acquisitions are accounted for as purchase transactions and their cost is allocated to the estimated fair market value of net tangible assets acquired and identifiable intangible assets, including franchise agreements. Any excess is allocated to goodwill.
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EIGHT LIMITED PARTNERSHIP
Notes to Financial Statements — (Continued)
EIGHT LIMITED PARTNERSHIP
Notes to Financial Statements — (Continued)
(b) | Accounts Receivable |
Accounts receivable consist primarily of amounts due from customers for cable television or advertising services provided by NCP-Eight, and are net of an allowance for doubtful accounts of $3,200 at December 31, 2006 and $4,200 at December 31, 2005.
(c) | Property and Equipment |
Property and equipment are recorded at cost. Costs of additions and substantial improvements, which include materials, labor and indirect costs associated with the construction of cable transmission and distribution facilities, are capitalized. Indirect costs include employee salaries and benefits, travel, and other costs. These costs are estimated based on historical information and analysis. NCP-Eight performs evaluations of these estimates as warranted by events or changes in circumstances.
In accordance with Statement of Financial Accounting Standards (SFAS) No. 51,Financial Reporting by Cable Television Companies, NCP-Eight also capitalizes costs associated with initial customer installations. The costs of disconnecting service or reconnecting service to previously installed locations are charged to operating expense in the period incurred. Costs for repairs and maintenance are also charged to operating expense, while equipment replacements, including the replacement of drops, are capitalized.
At the time of retirements, sales, or other dispositions of property, the original cost, and related accumulated depreciation are removed from the respective accounts, and the gains and losses are included in the statements of operations.
Depreciation of property and equipment is calculated using the straight-line method over the following estimated service lives:
Buildings | 20 years | |||
Distribution plant | 10 years | |||
Other equipment | 5-20 years |
NCP-Eight evaluates the depreciation periods of property and equipment to determine whether events or circumstances warrant revised estimates of useful lives.
NCP-Eight recorded depreciation expense within continuing operations of $533,843, $621,324, and $882,064 in 2006, 2005, and 2004, respectively, and depreciation expense within discontinued operations of $1,685 and $147,825 in 2005 and 2004, respectively.
SFAS No. 144,Accounting for Impairment or Disposal of Long-Lived Assets, provides a single accounting model for long-lived assets to be disposed of. SFAS No. 144 also changes the criteria for classifying an asset as held for sale; and broadens the scope of businesses to be disposed of that qualify for reporting as discontinued operations and changes the timing of recognizing losses on such operations. NCP-Eight adopted SFAS No. 144 on January 1, 2002.
In accordance with SFAS No. 144, long-lived assets, such as property and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount or fair value less costs to sell, and no longer depreciated.
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EIGHT LIMITED PARTNERSHIP
Notes to Financial Statements — (Continued)
EIGHT LIMITED PARTNERSHIP
Notes to Financial Statements — (Continued)
The assets and liabilities of a disposed group classified as held for sale would be presented separately in the appropriate asset and liability sections of the balance sheets.
(d) | Intangible Assets |
Effective January 1, 2002, NCP-Eight adopted SFAS No. 142,Goodwill and Other Intangible Assets. SFAS No. 142 required that NCP-Eight cease amortization of goodwill and any other intangible assets determined to have indefinite lives, and established a new method of testing these assets for impairment on an annual basis or on an interim basis if an event occurs or circumstances change that would reduce the fair value of a reporting unit below its carrying value or if the fair value of intangible assets with indefinite lives falls below their carrying value. NCP-Eight determined that its franchise agreements met the definition of indefinite lived assets due to the history of obtaining franchise renewals, among other considerations. Accordingly, amortization of these assets also ceased on December 31, 2001.NCP-Eight tested these intangibles for impairment during the fourth quarter of 2006 and determined that the fair value of the assets exceeded their carrying value.NCP-Eight determined that there are no conditions such as obsolescence, regulatory changes, changes in demand, competition, or other factors that would change their indefinite life determination.NCP-Eight will continue to test these assets for impairment annually, or more frequently as warranted by events or changes in circumstances.
(e) | Loan Fees |
Loan fees are being amortized using the straight-line method over periods of one to five years (current weighted average remaining useful life of 1.47 years).NCP-Eight recorded amortization expense attributable to continuing operations of $6,091, $5,117, and $4,215 in 2006, 2005, and 2004, respectively. Amortization expense attributable to discontinued operations was $382 and $1,335 in 2005 and 2004, respectively. Future amortization of loan fees is expected to be as follows:
2007 | $ | 6,827 | ||
2008 | 1,786 | |||
2009 | 1,786 | |||
2010 | 445 | |||
$ | 10,844 | |||
(f) | Self Insurance |
NCP-Eight began self-insuring for aerial and underground plant in 1996. Beginning in 1997,NCP-Eight began making quarterly contributions into an insurance fund maintained by an affiliate which covers all Northland entities and would defray a portion of any loss shouldNCP-Eight be faced with a significant uninsured loss. To the extentNCP-Eight’s losses exceed the fund’s balance,NCP-Eight would absorb any such loss. IfNCP-Eight were to sustain a material uninsured loss, such reserves could be insufficient to fully fund such a loss. The capital cost of replacing such equipment and physical plant could have a material adverse effect onNCP-Eight, its financial condition, prospects and debt service ability.
Amounts paid to the affiliate, which maintains the fund forNCP-Eight and its affiliates, are expensed as incurred and are included in the statements of operations. To the extent a loss has been incurred related to risks that are self-insured,NCP-Eight records an operating loss, net of any amounts to be drawn from the fund. Management suspended contributions throughout 2002 based on its assessment that the current balance would be sufficient to meet potential claims. In 2006, 2005 and 2004,NCP-Eight was required to make contributions and was charged $7,661, $2,826 and $930, respectively, by the fund. As of December 31, 2006 and 2005, the fund (related to all Northland entities) had a balance of $215,124 and $202,270, respectively.
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(g) | Revenue Recognition |
Cable television and broadband service revenue, including service and maintenance, is recognized in the month service is provided to customers. Advance payments on services to be rendered are recorded as subscriber prepayments. Revenues resulting from the sale of local spot advertising are recognized when the related advertisements or commercials appear before the public. Local spot advertising revenues earned in continuing operations were $130,980, $122,703, and $110,707 in 2006, 2005, and 2004, respectively. There were no local spot advertising revenues earned in discontinued operations in 2005 or 2004.
(h) | Advertising Costs |
NCP-Eight expenses advertising costs as they are incurred. Advertising costs attributable to continuing operations were $41,580, $41,085, and $35,329 in 2006, 2005, and 2004, respectively. There were no advertising costs attributable to discontinued operations in 2005 or 2004.
(i) | Segment Information |
NCP-Eight follows SFAS No. 131,Disclosures About Segments of an Enterprise and Related Information.NCP-Eight manages its business and makes operating decisions at the operating segment level. Following the operating segment aggregation criteria in SFAS No. 131,NCP-Eight reports business activities under a single reporting segment, telecommunications services. Additionally, all of its activities take place in the United States of America.
(j) | Concentration of Credit Risk |
NCP-Eight is subject to concentrations of credit risk from cash investments on deposit at various financial institutions that at times exceed insured limits by the Federal Deposit Insurance Corporation. This exposesNCP-Eight to potential risk of loss in the event the institution becomes insolvent.
(k) | Fair Value of Financial Instruments |
Financial instruments consist of cash and a term loan. The fair value of cash approximates its carrying value. The fair value of the term loan approximates its carrying value because of its variable interest rate nature (note 8).
(4) | Income Allocation |
As defined in theNCP-Eight partnership agreement, the general partner is allocated 1% and the limited partners are allocated 99% of partnership net income, net losses, deductions and credits until such time as the limited partners receive aggregate cash distributions equal to their aggregate capital contributions, plus the limited partners’ preferred return. Thereafter, the general partner will be allocated 20% and the limited partners will be allocated 80% of partnership net income, net losses, deductions, and credits. Cash distributions will be allocated in accordance with the net income and net loss percentages then in effect. Prior to the general partner receiving cash distributions for any year, the limited partners must receive cash distributions in an amount equal to the lesser of (i) 50% of the limited partners’ allocable share of net income for such year or (ii) the federal income tax payable on the limited partners’ allocable share of net income on the then highest marginal federal income tax rate applicable to such net income.
The limited partners’ total initial contributions to capital were $9,568,500 ($500 per limited partnership unit), offset by $1,435,180 in offering costs. As of December 31, 2006,NCP-Eight has repurchased $12,500 of units of limited partnership interest (50 units at $250 per unit).
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(5) | Transactions with the General Partner and Affiliates |
(a) | Management Fees |
The general partner receives a fee for managingNCP-Eight equal to 5% of the gross revenues ofNCP-Eight, excluding revenues from the sale of cable television systems or franchises. Management fees charged to continuing operations by the general partner were $176,644, $170,343, and $169,678 for 2006, 2005, and 2004, respectively. Management fees charged to discontinued operations by the general partner were $7,333 and $34,622 for 2005 and 2004, respectively. Management fees are included as a component of general and administrative expenses in the accompanying statements of operations.
(b) | Reimbursements |
The general partner provides or causes to be provided certain centralized services toNCP-Eight and other affiliated entities. The general partner is entitled to reimbursement fromNCP-Eight for various expenses incurred by it or its affiliates on behalf ofNCP-Eight allocable to its management ofNCP-Eight, including travel expenses, pole and site rental, lease payments, legal expenses, billing expenses, insurance, governmental fees and licenses, headquarters’ supplies and expenses, pay television expenses, equipment and vehicle charges, operating salaries and expenses, administrative salaries and expenses, postage, and office maintenance.
The amounts billed toNCP-Eight are based on costs incurred by the general partner in rendering the services. The costs of certain services are charged directly toNCP-Eight, based upon the personnel time spent by the employees rendering the service. The cost of other services is allocated toNCP-Eight and affiliates based upon relative size and revenue. Management believes that the methods used to allocate costs toNCP-Eight are reasonable. Amounts charged to continuing operations for these services were $194,511, $200,140, and $217,247 for 2006, 2005, and 2004, respectively. There were no amounts charged to discontinued operations for these services in 2005 and 2004, respectively.
NCP-Eight has entered into operating management agreements with certain affiliates managed by the general partner. Under the terms of these agreements,NCP-Eight or an affiliate serves as the managing agent for certain cable television systems and is reimbursed for certain operating and administrative expenses.NCP-Eight’s continuing operations include $95,698, $91,635, and $110,947, net of payments received, under the terms of these agreements during 2006, 2005, and 2004, respectively.NCP-Eight’s discontinued operations include $8,664 and $42,068, net of payments received under the terms of these agreements during 2005 and 2004, respectively.
Northland Cable Service Corporation (NCSC), an affiliate of the General Partner, was formed provide billing system support to cable systems owned and managed by the General Partner. In addition NCSC provides technical support associated with the build out and upgrade of Northland affiliated cable systems. In 2006, 2005, and 2004,NCP-Eight’s continuing operations include $42,488, $52,529, and $92,236, respectively, for these services. Of this amount, $0 and $37,830 were capitalized in 2006 and 2005, respectively, related to the build out and upgrade of cable systems.NCP-Eight’s discontinued operations include $689 and $0 in 2005 and 2004, respectively, for these services. None of these amounts were capitalized. Cable Ad Concepts (CAC), a subsidiary of NCSC, manages the development of local advertising as well as billing for video commercial advertisements to be cablecast on Northland affiliated cable systems. Prior to 2004, Partnership recorded gross advertising revenues and related expenses on its statement of operations Beginning in 2004,NCP-Eight and CAC modified their agreement such that CAC retains all the credit risks associated with the advertising activities and a net fixed percentage of the revenues are remitted toNCP-Eight, which are recorded as net advertising revenues.
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(c) | Due from Affiliates |
The receivable from affiliates as of December 31, 2006 and 2005 consists of $2,333 and $8,783, respectively, in reimbursable operating costs.
(d) | Due to General Partner and Affiliates |
The payable to the General Partner and affiliates consists of the following:
December 31, | ||||||||
2006 | 2005 | |||||||
Management fees | $ | (1,051 | ) | 15,086 | ||||
Reimbursable operating costs | 24,545 | 75,059 | ||||||
Other amounts due from General Partner and affiliates, net | 52,968 | (2,227 | ) | |||||
$ | 76,462 | 87,918 | ||||||
(6) | Property and Equipment |
Property and equipment consists of the following:
December 31, | ||||||||
2006 | 2005 | |||||||
Land and buildings | $ | 84,015 | 84,015 | |||||
Distribution plant | 10,606,239 | 10,093,245 | ||||||
Other equipment | 530,748 | 491,348 | ||||||
Construction in progress | — | 82,719 | ||||||
11,221,002 | 10,751,327 | |||||||
Accumulated depreciation | (8,253,030 | ) | (7,735,370 | ) | ||||
Property and equipment, net of accumulated depreciation | $ | 2,967,972 | 3,015,957 | |||||
(7) | Accounts Payable and Accrued Expenses |
Accounts payable and accrued expenses consists of the following:
December 31, | ||||||||
2006 | 2005 | |||||||
Accounts payable | $ | 14,149 | 37,183 | |||||
Program license fees | 132,027 | 184,542 | ||||||
Pole rental | 107,649 | 100,551 | ||||||
Franchise fees | 33,230 | 30,619 | ||||||
Property taxes | 26,031 | — | ||||||
Copyright fees | 6,958 | 13,514 | ||||||
Interest | 899 | 37,415 | ||||||
Other | 38,963 | 61,582 | ||||||
$ | 359,906 | 465,406 | ||||||
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(8) | Term Loan |
In September 2006,NCP-Eight agreed to certain terms and conditions with its existing lender and amended its credit agreement. The terms of the amendment extend the maturity date and modify the principal repayment schedule and certain financial covenants (described below). The term loan is collateralized by a first lien position on all present and future assets ofNCP-Eight. Interest rates are based on LIBOR and include a margin paid to the lender based on overall leverage, and may increase or decrease asNCP-Eight’s leverage fluctuates. The interest rate was 7.38% as of December 31, 2006. Principal payments plus interest are due quarterly until maturity on March 31, 2010. In connection with the credit amendment,NCP-Eight capitalized an additional $6,395 in loan fees which are being amortized over the term of the new agreement. As of December 31, 2006 and 2005, the balance of the term loan agreement was $2,193,768 and $2,318,768, respectively.
Annual maturities of the term loan after December 31, 2006 are as follows:
2007 | $ | 160,000 | ||
2008 | 220,000 | |||
2009 | 260,000 | |||
2010 | 1,553,768 | |||
$ | 2,193,768 | |||
Under the terms of the amended loan agreement,NCP-Eight has agreed to restrictive covenants which require the maintenance of certain ratios, including a Funded Debt to Cash Flow Ratio of no more than 2.75 to 1 decreasing over time to 2.00 to 1, a Cash Flow Coverage Ratio of no less than 1.10 to 1, and a limitation on the maximum amount of annual capital expenditures of $700,000, among other restrictions. The General Partner submits quarterly debt compliance reports toNCP-Eight’s creditor under this agreement. As of December 31, 2006,NCP-Eight was in compliance with the terms of the amended loan agreement.
(9) | Income Taxes |
Income taxes payable have not been recorded in the accompanying financial statements because they are obligations of the partners. The federal and state income tax returns ofNCP-Eight are prepared and filed by the General Partner.
The tax returns, the qualification ofNCP-Eight as such for tax purposes, and the amount of distributable partnership income or loss are subject to examination by federal and state taxing authorities. If such examinations result in changes with respect toNCP-Eight’s qualification or in changes with respect to the income or loss, the tax liability of the partners would likely be changed accordingly.
The Limited Partners were allocated taxable income in 2006 and 2005. State income taxes to be paid byNCP-Eight on behalf of the Limited Partners have been recorded as a reduction of Limited Partner’s capital. There was no taxable income allocated to the limited partners in 2004. Generally, subject to the allocation procedures discussed in the following paragraph, taxable income allocated to the limited partners is different from that reported in the statements of operations principally due to differences in depreciation and amortization expense allowed for tax purposes and the amount recognizable under accounting principles generally accepted in the United States of America. Traditionally, there are no other significant differences between taxable income and net income (loss) reported in the statements of operations.
TheNCP-Eight Partnership Agreement provides that tax losses may not be allocated to the Limited Partners if such loss allocation would create a deficit in the Limited Partners’ Capital Account. Such excess losses are reallocated to the General Partner (Reallocated Limited Partner Losses). In subsequent years, 100%
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ofNCP-Eight’s net income is allocated to the General Partner until the General Partner has been allocated net income in amounts equal to the Reallocated Limited Partner Losses.
Under current federal income tax laws, a partner’s allocated share of tax losses from a partnership is allowed as a deduction on their individual income tax return only to the extent of the partner’s adjusted basis in their partnership interest at the end of the tax year. No losses will be allocated to limited partners with negative basis.
In addition, current tax law does not allow a taxpayer to use losses from a business activity in which they do not materially participate (a passive activity, e.g., a limited partner in a limited partnership) to offset other income such as salary, active business income, dividends, interest, royalties, and capital gains However, such losses can be used to offset income from other passive activities. In addition, disallowed losses can be carried forward indefinitely to offset future income from passive activities. Disallowed losses can be used in full when the taxpayer recognizes gain or loss upon the disposition of their entire interest in the passive activity.
(10) | Commitments and Contingencies |
(a) | Lease Arrangements |
NCP-Eight leases certain office facilities and other sites under leases accounted for as operating leases. Rental expense attributable to continuing operations, related to these leases was $13,200, $13,050, and $12,350 in 2006, 2005, and 2004, respectively. There was no rental expense attributable to discontinued operations, related to these leases in 2005 or 2004. Minimum lease payments through the end of the lease terms are as follows:
2007 | $ | 16,400 | ||
2008 | 7,400 | |||
2009 | 4,600 | |||
2010 | 4,600 | |||
2011 | 4,600 | |||
Thereafter | 27,500 | |||
$ | 65,100 | |||
NCP-Eight also rents utility poles in its operations. Generally, pole rentals are cancelable on short notice, butNCP-Eight anticipates that such rentals will recur. Rent expense incurred for pole rentals attributable to continuing operations for the years ended December 31, 2006, 2005, and 2004 was $111,608, $87,467, and $95,590. Rent expense incurred for pole rentals attributable to discontinued operations for the years ended December 31, 2005 and 2004 was $4,017 and $17,041, respectively.
(b) | Effects of Regulation |
The operation of a cable system is extensively regulated at the federal, local, and, in some instances, state levels. The Cable Communications Policy Act of 1984, as amended, the Cable Television Consumer Protection and Competition Act of 1992 (the 1992 Cable Act), and the 1996 Telecommunications Act (the 1996 Telecom Act, and, collectively, the Cable Act) establish a national policy to guide the development and regulation of cable television systems. The Federal Communications Commission (FCC) has principal responsibility for implementing the policies of the Cable Act. Many aspects of such regulation are currently the subject of judicial proceedings and administrative or legislative proposals. Legislation and regulations continue to change.
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Cable Rate Regulation — Although the FCC established the rate regulatory scheme pursuant to the 1992 Cable Act, local municipalities, commonly referred to as local franchising authorities, are primarily responsible for administering the regulation of the lowest level of cable service called the basic service tier. The basic service tier typically contains local broadcast stations, public, educational, and government access channels and various entertainment and home shopping channels. Before a local franchising authority begins basic service rate regulation, it must certify to the FCC that it will follow applicable federal rules. Many local franchising authorities have voluntarily declined to exercise their authority to regulate basic service rates. In a particular effort to ease the regulatory burden on small cable systems, the FCC created special rate rules applicable for systems with fewer than 15,000 subscribers owned by an operator with fewer than 400,000 subscribers. The special rate rules allow for a simplified cost-of-service showing for basic service tier programming. All of Northland’s systems are eligible for these simplified cost-of-service rules, and have calculated rates in accordance with those rules.
Cable Entry into Internet — The U.S. Supreme Court recently ruled that cable television systems may deliver high-speed Internet access and remain within the protections of Section 703 of the Telecommunications Act of 1996 (the Pole Attachment Act). National Cable & Telecommunications Assoc. v. Gulf Power Co., Nos.00-832 and00-843, 534 U.S. (January 16, 2002). The Court reversed the Eleventh Circuit’s decision to the contrary and sustained the FCC decision that applied the Pole Attachment Act’s rate formula and other regulatory protections to cable television systems’ attachments over which commingled cable television and cable modem services are provided. The data services business, including Internet access, is largely unregulated at this time apart from federal, state and local laws and regulations applicable to businesses in general. Some federal, state, local and foreign governmental organizations are considering a number of legislative and regulatory proposals which could include legislation with respect to Internet user privacy, infringement, pricing, quality of products and services and intellectual property ownership. It is uncertain how existing laws will be applied to the Internet in areas such as property ownership, copyright, trademark, trade secret, obscenity and defamation. Additionally, some jurisdictions have sought to impose taxes and other burdens on providers of data services, and to regulate content provided via the Internet and other information services. Northland expects that proposals of this nature will continue to be debated in Congress and state legislatures in the future. Additionally, the FCC is now considering a proposal to impose obligations on some or all providers of Internet access services to contribute to the cost of federal universal service programs, which could increase the cost of Internet access. Currently, Federal court rulings and FCC order provide that cable modem revenue be excluded from gross revenues for purposes of franchise fee calculations. Cable Modem Services have been classified as an “interstate information service,” which has historically meant that limited regulations apply to the provision of this service. However, there is likely to be continuing uncertainty about the classification and regulation of cable modem services.
Electric Utility Entry into Telecommunications and Cable Television — The 1996 Telecom provides that registered utility holding companies and subsidiaries may provide telecommunications services, including cable television, notwithstanding the Public Utility Holding Company Act. Electric utilities must establish separate subsidiaries, known as “exempt telecommunications companies” and must apply to the FCC for operating authority. Like telephone companies, electric utilities have substantial resources at their disposal, and could be formidable competitors to traditional cable systems. Several of these utilities have been granted broad authority to engage in activities that could include the provision of video programming.
Must Carry and Retransmission Consent — The 1992 Cable Act contains broadcast signal carriage requirements. Broadcast signal carriage is the transmission of broadcast television signals over a cable system to cable customers. These requirements, among other things, allow local commercial television broadcast stations to elect once every three years between “must carry” status or “retransmission consent” status. Less popular stations typically elect must carry, which is the broadcast signal carriage rule that allows local commercial television broadcast stations to require a cable system to carry the station. Must carry requests can
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dilute the appeal of a cable system’s programming offerings because a cable system with limited channel capacity may be required to forego carriage of popular channels in favor of less popular broadcast stations electing must carry. More popular stations, such as those affiliated with a national network, typically elect retransmission consent, which is the broadcast signal carriage rule that allows local commercial television broadcast stations to negotiate terms (such as mandating carriage of an affiliated cable network or a digital broadcast signal) for granting permission to the cable operator to carry the stations. Retransmission consent demands may require substantial payments or other concessions. The FCC has an on-going administrative proceeding in which it has evaluated various proposals for mandatory carriage of digital television signals. In its initial decision the FCC, in part, (i) declined to order the carriage of both the analog and digital signals of television stations; (ii) determined that a television broadcast station licensee that is operating only on its authorized digital channeland/or that has surrendered its analog broadcast channel has mandatory cable carriage rights within the broadcaster’s local service area for only the “primary video” programming stream of the broadcaster’s digital broadcast channel and does not have the right to require the cable operator to carry multiple digital programming streams, commonly called “multicasting”. In February 2005, the FCC reaffirmed its earlier decision not to impose (i) a dual carriage regulation, and (ii) denial of any “multicast” requirement. The broadcast industry trade association and several broadcasters have announced that they will challenge the FCC’s ruling and will lobby Congress for favorable legislation. The FCC may evaluate additional modifications to its digital broadcast signal carriage requirements in the future. Northland cannot predict the ultimate outcome of this proceeding, or the impact any new carriage requirements may have on the operation of its cable systems. The President has signed into law legislation establishing February 2009 as the deadline to complete the broadcast transition to digital spectrum and to reclaim analog spectrum. Cable operators may need to take additional operational steps at that time to ensure that customers not otherwise equipped to receive digital programming, retain access to broadcast programming.
Access Channels — Local franchising authorities can include franchise provisions requiring cable operators to set aside certain channels for public, educational and governmental access programming. Federal law also requires cable systems to designate a portion of their channel capacity, up to 15% in some cases, for commercial leased access by unaffiliated third parties. The FCC has adopted rules regulating the terms, conditions, and maximum rates a cable operator may charge for commercial leased access use.
Access to Programming —The Communications Act and the FCC’s “program access” rules generally prevent satellite video programmers affiliated with cable operators from favoring cable operators over competing multichannel video distributors, such as DBS, and limit the ability of such programmers to offer exclusive programming arrangements to cable operators. The FCC has extended the exclusivity restrictions through October 2007. Given the heightened competition and media consolidation, it is possible that we will find it increasingly difficult to gain access to popular programming at favorable terms. Such difficulty could adversely impact our business.
Copyright —Cable systems are subject to federal copyright licensing covering carriage of television and radio broadcast signals. The possible modification or elimination of this compulsory copyright license is the subject of continuing legislative review and could adversely affect our ability to obtain desired broadcast programming. Moreover, the Copyright Office has not yet provided any guidance as to the how the compulsory copyright license should apply to newly offered digital broadcast signals. Copyright clearances for non-broadcast programming services are arranged through private negotiations. Cable operators also must obtain music rights for locally originated programming and advertising from the major music performing rights organizations. These licensing fees have been the source of litigation in the past, and we cannot predict with certainty whether license fee disputes may arise in the future.
State and Local Regulation — Cable television systems generally are operated pursuant to nonexclusive franchises granted by a municipality or other state or local government entity in order to cross public rights-
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of-way. Federal law now prohibits local franchising authorities from granting exclusive franchises or from unreasonably refusing to award additional or renew existing franchises.
Cable franchises generally are granted for fixed terms and in many cases include monetary penalties for noncompliance and may be terminable if the franchisee fails to comply with material provisions. The specific terms and conditions of franchises vary materially among jurisdictions. Each franchise generally contains provisions governing cable operations, service rates, franchising fees, system construction and maintenance obligations, system channel capacity, design and technical performance, customer service standards, and indemnification protections. Several of the states in which Northland conducts business have centralized the jurisdiction over franchising with state governmental agencies, rather than with municipalities. Several other states are also considering regulating cable franchises at the state governmental level. The effect of such legislation is to simplify and expedite entrance of new competitive providers of video, data and voice services into the market. Northland anticipate that this trend to wards simplified entrance into the market will continue. Although state and local franchising authorities have considerable discretion in establishing franchise terms, there are certain federal limitations. For example, local franchising authorities cannot insist on franchise fees exceeding 5% of the system’s gross cable-related revenues, cannot dictate the particular technology used by the system, and cannot specify video programming other than identifying broad categories of programming.
Federal law contains renewal procedures designed to protect incumbent franchisees against arbitrary denials of renewal. Even if a franchise is renewed, the local franchising authority may seek to impose new and more onerous requirements, such as significant upgrades in facilities and service or increased franchise fees as a condition of renewal. Historically, most franchises have been renewed and transfer consents granted to cable operators that have provided satisfactory services and have complied with the terms of their franchise.
Phone Service — The 1996 Telecom Act, which amended the Communications Act, created a more favorable regulatory environment for us to provide telecommunications services. In particular, it limited the regulatory role of local franchising authorities and established requirements ensuring that we could interconnect with other telephone companies to provide a viable service. Many implementation details remain unresolved, and there are substantial regulatory changes being considered that could impact, in both positive and negative ways, our primary telecommunications competitors and our own entry into the field of phone service. The FCC and state regulatory authorities are considering, for example, whether common carrier regulation traditionally applied to incumbent local exchange carriers should be modified. The FCC has concluded that alternative voice technologies, like certain types of VoIP, should be regulated only at the federal level, rather than by individual states. A legal challenge to that FCC decision is pending. While the FCC’s decision appears to be a positive development for VoIP offerings, it is unclear whether and how the FCC will apply certain types of common carrier regulations, such as intercarrier compensation and universal service obligations to alternative voice technology. The FCC has already determined that providers of phone services using Internet Protocol technology must comply with traditional 911 emergency service obligations (E911) and it has extended requirements for accommodating law enforcement wiretaps to such providers. It is unclear how these regulatory matters ultimately will be resolved and how they will affect our potential expansion into phone service.
The foregoing summary does not purport to describe all present and proposed federal, state and local regulations and legislation affecting the cable or telephony industries. Other existing federal regulations, copyright licensing and, in many jurisdictions, state and local franchise requirements currently are the subject of a variety of judicial proceedings, legislative hearings, and administrative and legislative proposals that could alter, in varying degrees, the manner in which cable or information service systems operate. Northland cannot predict at this time the outcome of these proceedings or their impact upon the industry or upon Northland’s business and operations.
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(11) | System Sales |
On March 21, 2005,NCP-Eight sold the operating assets and franchise rights of its cable systems in and around the communities of Marion and Eutaw, Alabama. The Marion and Eutaw systems served approximately 1,500 subscribers, and were sold at a price of $978,950, net of working capital adjustments, all of whichNCP-Eight received at closing. The sales price was adjusted at closing for the proration of certain revenues and expenses and substantially all of the proceeds were used to pay down amounts outstanding underNCP-Eight’s term loan agreement.
The sale was made pursuant to an offer by Sky Cablevision of Greene County, which was formalized in a Asset purchase agreement dated March 10, 2005. Based on the offer made by Sky Cablevision of Greene County, management determined that acceptance would be in the best economic interest ofNCP-Eight, and that the sale was not a result of declining or deteriorating operations nor was it necessary to create liquidity or reduce outstanding debt. It is the opinion of management thatNCP-Eight could have continued existing operations and met all obligations as they became due.
The revenue, expenses and other items attributable to the operations of the Marion and Eutaw systems for the years ended December 31, 2005 and 2004 have been reported as discontinued operations in the accompanying statements of operations, and include the following:
2005 | 2004 | |||||||
Service revenues | $ | 146,662 | 692,208 | |||||
Expenses: | ||||||||
Operating (including $0 and $9,533 paid to affiliates in 2005 and 2004, respectively) | 8,535 | 49,788 | ||||||
General and administrative (including $16,153, and $67,137 paid to affiliates in 2005, and 2004, respectively) | 34,045 | 162,715 | ||||||
Programming (including $0 paid to affiliates in 2005 and 2004) | 47,580 | 199,735 | ||||||
Depreciation and amortization | 1,685 | 147,825 | ||||||
Income from operations | 54,817 | 132,145 | ||||||
Other income (expense): | ||||||||
Interest expense and amortization of loan fees | (11,211 | ) | (35,695 | ) | ||||
Gain on sale of systems | 756,130 | — | ||||||
Income from operations of Marion and Eutaw systems, net | $ | 799,736 | 96,450 | |||||
In accordance withEITF 87-24,Allocation of Interest to Discontinued Operations,NCP-Eight allocated interest expense to discontinued operations using the historic weighted average interest rate applicable toNCP-Eight’s term loan and approximately $970,000 in principal payments related to the sale of the Marion and Eutaw systems, which were applied to the term loan as a result of the system sale.
(12) | Solicitation of Interest from Potential Buyers |
The General Partner is currently working with a nationally recognized brokerage firm to solicit interests from potential buyers forNCP-Eight’s cable systems. The General Partner is currently evaluating letters of interest received during the fourth quarter of 2006, however, no assurances can be given as to the likelihood that any sale or sales will ultimately be consummated. It is Management’s experience, after many years in the cable television industry, that it is difficult to forecast the likelihood of completing a sales transaction with a financially viable purchaser at any specific time.
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Notes to Financial Statements — (Continued)
(13) | Litigation |
In March 2005, Northland filed a complaint against one of its programming networks seeking a declaration that a December 2004 contract between Northland and the programmer was an enforceable contract related to rates Northland would pay for its programming and damages for breach of that contract. The programmer counter-claimed, alleging copyright infringement and breach of contract.
On September 14, 2006 Northland and the programmer entered into a Settlement Agreement, under which, (i) the parties mutually released each other from and against all claims, (ii) the parties agreed to dismiss the lawsuit, and (iii) the parties set forth the definitive terms of carriage of the programmers services for the period commencing December 1, 2004, through December 31, 2007.
In addition, under the terms of the Settlement Agreement, Northland made payment in full of all license fees from all Northland affiliates, including NCP-8, for the period of December 1, 2004, through July 31, 2006, all of which had been previously accrued. In addition, Northland shall pay to the programmer, in four installments, a Supplemental License fee, approximately $45,000, or 3.6%, of which will be remitted byNCP-8.NCP-Eight recorded a charge of $30,000 in expense associated with this supplemental license fee during the 2006, which has been classified as programming expense. The remaining $15,000 will be recorded on a pro rata basis over the remaining contract period. The unpaid total balance by all Northland entities relative to this Supplemental License Fee was $500,000 as of December 31, 2006. Based on Management’s analysis all related Northland affiliates, includingNCP-8, have adequate liquidity to meet the remaining Supplemental License Fee obligation without impairing its ability to meet its future obligations in the ordinary course of business and payment of this obligation will not result in the violation of any financial covenant under its loan agreement.
In August of 2005,NCP-Eight settled a legal claim made by a former employee. Under the settlement,NCP-Eight paid the employee $75,000 in damages, fees and costs. In addition,NCP-Eight incurred approximately $110,000 in legal fees associated with the defense of this claim.NCP-Eight has recorded both the settlement to the employee and the associated legal fees as general and administrative expenses of continuing operations in the accompanying financial statements.
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PROXY CARD
NORTHLAND CABLE PROPERTIES EIGHT LIMITED PARTNERSHIP
The undersigned hereby acknowledges receipt of a proxy statement and an accompanying letter relating to the Special Meeting of limited partners of NORTHLAND CABLE PROPERTIES EIGHT LIMITED PARTNERSHIP(“NCP-Eight”), each dated December 19, 2007 (“Proxy Materials”). The undersigned appoints John S. Whetzell and Richard I. Clark, or either of them, as proxies, each with full power to appoint his substitute. The undersigned represents that he or she holds of record as of December 14, 2007 the number of units of limited partnership interest inNCP-Eight set forth below and authorizes the proxies to represent and to vote, as designated below, all of such interest at the special meeting of limited partners to be held on February 27, 2008 and at any postponements or adjournments thereof.This proxy is being solicited by the general partner ofNCP-Eight.
The undersigned directs the proxies to vote on the following proposals as follows:
Proposal No. 1
To authorizeNCP-Eight and its general partner to consummate the sale of substantially all ofNCP-Eight’s assets to Green River Media and Communications, LLC, as described in the Proxy Materials and to take any and all steps necessary to complete such sale.
APPROVE o | DISAPPROVE o | ABSTAIN o |
Proposal No. 2
To authorizeNCP-Eight and its general partner to consummate the sale of substantially all ofNCP-Eight’s assets to Northland Communications Corporation, its general partner, or one or more of its affiliates, if the sale of assets to Green River Media and Communications, LLC is not consummated by March 31, 2008, or such later date mutually agreed upon byNCP-Eight and Green River or in the event that the Green River transaction is otherwise terminated prior to such date, pursuant to the alternative purchase agreement described in the Proxy Materials, which incorporates substantially the same terms and conditions provided in the Green River purchase agreement, and to take any and all steps necessary to complete such alternative asset sale. The transaction described in this Proposal No. 2 will not be entered into if Proposal No. 3 is not approved by a majority of the outstanding units of limited partnership interest.
APPROVE o | DISAPPROVE o | ABSTAIN o |
Proposal No. 3
To authorize an amendment to the Amended and Restated Agreement of Limited Partnership of Northland Cable Properties Eight Limited Partnership dated August 10, 1989, which we refer to sometimes as the“NCP-Eight partnership agreement”, to permitNCP-Eight to sell its assets to Northland Communications Corporation,NCP-Eight’s general partner, or one or more of its affiliates, on substantially the same terms and conditions of the alternative purchase agreement without following the independent appraisal procedures that would otherwise be required by theNCP-Eight partnership agreement. The transaction described in Proposal No. 2 will not be entered into if this Proposal No. 3 is not approved by a majority of the outstanding units of limited partnership interest.
APPROVE o | DISAPPROVE o | ABSTAIN o |
This proxy will be voted as directed by the undersigned. The above-referenced proposals are independent of one another. Therefore, a vote for or against one of the three proposals does not dictate how a limited partner must vote for the other proposal. Notwithstanding, limited partners may not vote for or against individual elements of either proposal, but must vote either for or against each proposal in its entirety.
If this proxy is executed and returned and no direction is indicated, this proxy will be voted to approve all of the above-referenced proposals. Similarly, if this proxy is executed and returned and direction is indicated as to only one of the three proposals, this proxy will be voted to approve the proposal or proposals for which no direction is indicated.
When limited partner interests are held by joint tenants, both should sign. When signing as attorney, executor, administrator, trustee or guardian, give full title as such. A corporation should sign in full corporate name by its president or other authorized officer, and a partnership should sign in full partnership name by its authorized representative.
Dated: , 200
Number of $500 Units of Limited Partnership Interest
Held:
(Signature)
(Signature, if held jointly)
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ASSET PURCHASE AGREEMENT
BETWEEN
NORTHLAND CABLE PROPERTIES EIGHT LIMITED PARTNERSHIP
AND
GREEN RIVER MEDIA AND COMMUNICATIONS, LLC
DATED
JULY 5, 2007
ASSET PURCHASE AGREEMENT
THIS ASSET PURCHASE AGREEMENT is dated July 5, 2007 by and between and NORTHLAND CABLE PROPERTIES EIGHT LIMITED PARTNERSHIP, a Washington limited partnership (“Seller” or “NCP-8”), and GREEN RIVER MEDIA AND COMMUNICATIONS, LLC or its assignee, a North Carolina limited liability company (“Buyer”).
RECITALS:
A. Seller owns and operates cable television systems serving certain communities as set forth more particularly in Schedule 1.27 and,
B. Seller desires to sell, and Buyer wishes to buy, all of Seller’s assets solely to the extent such assets are used or useful in the operation of the Systems, as such term is defined in Section 1.3, and the business related thereto (collectively the “Broadband Business”) for the price and on the terms and conditions set forth in this Agreement.
AGREEMENTS:
In consideration of the above recitals and the covenants and agreements contained herein, Buyer and Seller agree as follows:
1. | DEFINED TERMS |
The following terms shall have the following meanings in this Agreement:
1.1. “Accounts Receivable” means the rights of Seller to receive payment for services rendered by Seller (including, without limitation, those billed to subscribers of the Systems and those for services and advertising time provided by Seller) which have been unpaid as of the Closing Date
1.2. “Agreement” means this Asset Purchase Agreement.
1.3. “Assets” means all the tangible and intangible assets owned, leased or licensed by Seller and used in connection with the Broadband Business, but excluding those specified in Section 2.2.
1.4. “Cable Act” means Title VI of the Communications Act of 1934, as amended, 47 U.S.C. § 151 et seq., and all other provisions of the Cable Communications Policy Act of 1984, Pub. L.No. 98-549, and the Cable Television Consumer Protection and Competition Act of 1992, Pub. L.No. 102-385, and the Telecommunications Act of 1996, Pub. L.No. 104-104, as such statutes may be amended from time to time, and the rules and regulations promulgated thereunder, as in effect from time to time.
1.5. “Closing” means the consummation of the transactions contemplated by this Agreement in accordance with the provisions of Section 7.
1.6. “Closing Date” means the date of the Closing specified in Section 7.
1.7. “Code” means the Internal Revenue Code of 1986, as amended, and the regulations thereunder, or any subsequent legislative enactment thereof, as in effect from time to time.
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1.8. “Compensation Arrangement” means any written plan or compensation arrangement other than an Employee Plan or a Multiemployer Plan that provides to employees of Seller employed in the Broadband Business any compensation or other benefits, whether deferred or not, in excess of base salary or wages and excluding overtime pay, including, but not limited to, any bonus or incentive plan, deferred compensation arrangement, stock purchase plan, severance pay plan and any other perquisites and employee fringe benefit plan.
1.9. “Consents” means the consents, permits or approvals of governmental authorities and other third parties (including Seller’s lenders) listed in Schedule 3.8.
1.10. “Contracts” means the agreements listed in Schedule 3.7, subscription agreements with customers for the cable services provided by the Systems, miscellaneous service agreements terminable by Seller at will without penalty, agreements involving liabilities less than or equal to $10,000 (in the aggregate), agreements involving material non-monetary obligations, and agreements entered into by Seller in the ordinary course of business of the Systems between the date hereof and the Closing Date in accordance with the provisions hereof.
1.11. “Employee Plan” means any written pension, retirement, profit sharing, deferred compensation, vacation, severance, bonus, incentive, medical, vision, dental, disability, life insurance or other employee benefit plan as defined in Section 3(3) of ERISA (other than a Multiemployer Plan) to which Seller contributes or which Seller sponsors or maintains or by which Seller otherwise is bound, that provides benefits to employees of Seller employed in the Broadband Business.
1.12. “Environmental Laws” shall mean the following: (a) Clean Air Act (42 U.S.C. § 7401, et seq.); (b) Clean Water Act (33 U.S.C. § 1251 et seq.); (c) Resource Conservation and Recovery Act (42 U.S.C. § 6901, et seq.); (d) Comprehensive Environmental Response, Compensation and Liability Act of 1980 (42 U.S.C. § 9601, et seq.; (e) Safe Drinking Water Act (42 U.S.C. § 300f et seq.); (f) Toxic Substances Control Act (15 U.S.C. § 2601, et seq.); (g) Rivers and Harbors Act of 1899 (33 U.S.C. § 401, et seq.); (h) Endangered Species Act of 1973 (16 U.S.C. § 1531, et seq.); (i) Occupational Safety and Health Act of 1970 (29 U.S.C. § 651, et seq.);and (j) other federal, state or local laws related to the environment; all as amended.
1.13. “ERISA” means the Employee Retirement Income Security Act of 1974, as amended, and the regulations thereunder, as in effect from time to time.
1.14. “FAA” means the Federal Aviation Administration.
1.15. “FCC” means the Federal Communications Commission.
1.16. “Franchises” means all franchises, and franchise applications (if any), granted to Seller by any Franchising Authorities, including all amendments thereto and modifications thereof.
1.17. “Franchising Authorities” means all governmental authorities which have issued franchises relating to the operation of the Systems or before which are pending any franchise applications filed by Seller relating to the operation of the Systems
1.18. “Knowledge of Seller” means the actual knowledge of a particular matter of any of the executive officers of Seller’s general partner, after due inquiry or reasonable investigation.
1.19. “Material Adverse Effect” means any change, development, event or occurrence that has, or is reasonably expected to have within the 120 days following Closing, a material adverse effect on the operations, assets or financial condition of any of the Systems, other than (a) matters affecting the cable television industry generally (including, without limitation, legislative, regulatory or litigation matters), (b) matters relating to or arising from local or national economic conditions (including, without limitation, financial and capital markets) and (c) any changes resulting from or relating to the taking of any action contemplated by this Agreement.
1.20. “Multiemployer Plan” means a plan, as defined in ERISA Section 3(37) or Section 4001(a)(3), to which Seller or any trade or business which would be considered a single employer with Seller under
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Section 4001(b)(1) of ERISA contributed within the last six years, contributes or is required to contribute that provides benefits to employees of Seller employed at the Systems.
1.21. “Permitted Encumbrances” means any of the following liens or encumbrances: (a) landlord’s liens and liens for current taxes, assessments and governmental charges not yet due or being contested in good faith by appropriate proceedings; (b) statutory liens or other encumbrances that are minor or technical defects in title that do not individually or in the aggregate materially affect the value, marketability or utility of the Assets as presently utilized; (c) such liens, liabilities or encumbrances as are Assumed Liabilities; (d) leased interests in property leased to others and disclosed on Schedule 3.5; (e) restrictions set forth in, or rights granted to Franchising Authorities as set forth in the Franchises or applicable laws relating thereto; (f) zoning, building or similar restrictions, easements, rights of way, reservations of rights, conditions or other restrictions relating to or affecting the Real Property, that do not materially interfere with the use of such Real Property in the operation of the Systems as presently conducted; (g) as to Real Property, all matters disclosed in Schedule 3.5 other than mortgages; and (h) any other liens or encumbrances that are described in Section 3.5and/or that relate to liabilities and obligations that are to be discharged in full at Closing or that will be removed prior to or at Closing.
1.22. “Personal Property” means all of the machinery, equipment, tools, vehicles, furniture, leasehold improvements, office equipment, plant, inventory, spare parts, supplies and other tangible and intangible personal property, including, without limitation, the Franchises, the Contracts, the Accounts Receivable, computer hardware and peripherals, and computer software programs, that are owned, licensed or leased by Seller and used, useful or held for use as of the date hereof in the conduct of the business or operations of the Systems, plus such additions thereto and deletions therefrom arising in the ordinary course of business and permitted by this Agreement between the date hereof and the Closing Date, but in all cases only to the extent such Personal Property is used or useful in the Broadband Business or operations of the Systems. The following items of material Personal Property are listed onSchedule I; the identification and approximate number of items of headend equipment (excluding assets that are part of the cable distribution plant) and the approximate number of set top boxes (STB’s), cable modems and multimedia terminal adaptors (MTA’s) in inventory and not deployed.
1.23. “Real Property” means all of the real property interests of Seller, including, without limitation, fee interests in real estate (together with the buildings and other improvements located thereon), leasehold interests in real estate, easements, licenses, rights to access, rights of way and other real property interests that are (a) leased by Seller and used as of the date hereof in the business or operations of the Systems, or (b) owned by Seller and used as of the date hereof in the business or operations of the Systems, plus such additions thereto and deletions therefrom arising in the ordinary course of business and permitted by this Agreement between the date hereof and the Closing Date, but in all cases only to the extent such Real Property is used solely in the Broadband Business or operations of the Systems.
1.24. Intentionally Left Blank
1.25. “Subscriber” means an Active Customer (as hereinafter defined) of the Systems who subscribes for video, dataand/or voice services in a single household (excluding “second connections” and any account duplication), commercial establishment or multiple dwelling unit (“MDU”) (including motels and hotels); provided, that the number of customers in an MDU or commercial establishment that obtains service on a “bulk-rate” basis shall be determined by dividing the gross bulk-rate revenue for basic cable service or expanded basic service (but not revenues from tier or premium services, installation or converter rental) attributable to such MDU or commercial establishment in the Systems by Seller’s standard rate for that level of basic service in the System. For purposes hereof, an “Active Customer” means a customer whose account does not have an outstanding balance (other than an amount of $5.00 or less) more than sixty (60) days past due (with an account being past due one day after the first day of the period to which the applicable billing relates), does not have a disconnect pending, has not been obtained by offers or promotions, other than offers or promotions conducted by Seller in the ordinary course, or does not come within the definition of “Subscriber” because such account (or any part thereof) has been compromised or written off other than in the ordinary course consistent with past practices.
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1.26 “Person” means an individual, a partnership, a corporation, a limited liability company, an association, joint stock company, a trust, a joint venture or other business entity, or a governmental entity (or any department, agency, or political subdivision thereof).
1.27. “Systems” means those cable television systems owned and operated by Seller and listed by headend and community on Schedule 1.27.
1.28. List of Additional Definitions. The following is a list of some additional terms used in this Agreement and a reference to the Section hereof in which such term is defined:
Term | Section | |||
Acquisition Agreement | 5.18 | |||
Acquisition Proposal | 5.18 | |||
Assumed Liabilities | 2.6 | |||
Broadband Business | Recital B | |||
Buyer’s 401(k) Plan | 5.10.5 | |||
Claimant | 9.4.1 | |||
Copyright Act | 3.18.2 | |||
Deductible | 9.5.1 | |||
Deposit | 2.3 | |||
Escrow Agreement | 2.3 | |||
Downwards Adjusted Purchase Price | 2.5.6 | |||
Escrow Agent | 2.3 | |||
Excluded Assets | 2.2 | |||
Final Report | 2.5.8 | |||
Floor | 6.2.6 | |||
Force Majeure | 2.5.6 | |||
Holdback | 2.4.2 | |||
Indemnifying Party | 9.4.1 | |||
MDU | 1.25 | |||
Monthly Reporting Date | 5.17 | |||
Notice of Superior Proposal | 5.18 | |||
Preliminary Report | 2.5.7 | |||
Purchase Price | 2.4 | |||
Purchase Price Floor | 2.5.6 | |||
Purchase Price Ceiling | 2.5.6 | |||
Seller’s 401(k) Plan | 5.10.5 | |||
Seller’s Financial Statements | 3.10 | |||
Seller Recommendation Change | 5.18 | |||
Superior Proposal | 5.18 | |||
Taxes | 3.13 | |||
Transaction Document | 10.16.1 | |||
Transferred Employees | 5.10.1 | |||
Upwards Adjusted Purchase Price | 2.5.6 |
2. | SALE AND PURCHASE OF ASSETS |
2.1. Agreement to Sell and Purchase. Subject to the terms and conditions set forth in this Agreement, Seller hereby agrees to sell, transfer and deliver to Buyer on the Closing Date, and Buyer agrees to purchase from Seller on the Closing Date, all of the Assets, free and clear of any claims, liabilities, mortgages, liens,
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pledges, conditions, charges or encumbrances of any nature whatsoever except for Permitted Encumbrances, which Assets include the following:
2.1.1. the Personal Property;
2.1.2. the Real Property;
2.1.3. the Franchises;
2.1.4. the Contracts, only to the extent they relate to the Broadband Business or operations of the Systems;
2.1.5. the Accounts Receivable;
2.1.6. all payments and sums deposited or advanced by Seller to a landlord, utility, governmental agency or any other party as a security deposit or in exchange for initiation of a service, other than performance bonds.
2.1.7 subject to Section 2.2, copies of all books and records solely relating to the business or operations of the Systems, customer records and all records required by the Franchising Authorities to be kept.
2.2. Excluded Assets. The Assets shall exclude the following assets (the “Excluded Assets”):
2.2.1. Seller’s cash on hand, (other than petty cash for which an adjustment shall be made under Section 2.5), as of the Closing Date and all other cash in any of Seller’s bank or savings accounts, including, without limitation, subject to Section 2.5.6, customer advance payments and deposits; any and all bonds, surety instruments, insurance policies and all rights and claims thereunder, letters of credit or other similar items and any cash surrender value in regard thereto, and any stocks, bonds, certificates of deposit and similar investments;
2.2.2. Any books and records that Seller is required by law to retain and any correspondence, memoranda, books of account, tax reports and returns and the like related to the Systems other than those described in Section 2.1.7, subject to the right of Buyer to have access to and to copy for a reasonable period, not to exceed three years from the Closing Date, and Seller’s partnership books and records and other books and records related to internal partnership matters and financial relationships with Seller’s lenders and affiliates;
2.2.3. Any claims, rights and interest in and to any refunds of federal, state or local franchise, income or other taxes or fees of any nature whatsoever for periods prior to the Closing Date including, without limitation, fees paid to the U.S. Copyright Office or any causes of action relating to such refunds;
2.2.4. All programming agreements. All retransmission consent agreements of Seller, except as specifically identified on Schedule 3.7 as included in the Assets.
2.2.5. All trademarks, trade names, service marks, service names, logos and similar proprietary rights of Seller or its affiliates, whether or not used in the business of the Systems;
2.2.6. Except as specifically set forth herein, any Employee Plan, Compensation Arrangement or Multi-employer Plan;
2.2.7. All rights to receive fees or services from any affiliate of Seller other than fees for services, if any, rendered by Buyer after Closing;
2.2.8. Any and all assets and rights of Seller unrelated to the System;
2.2.9 All equipment, software, licenses and agreements related to Seller’s customer billing system;
2.2.10. Any contracts, agreements or other arrangements between Seller and any affiliate of Seller;
2.2.11 All choses in action of Seller; and,
2.2.12 The assets listed on Schedule 2.2.
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2.3. Earnest Money Deposit. Upon execution and delivery of this Agreement by Seller and Buyer, Buyer shall deliver to U.S. Bank National Association (the “Escrow Agent”) the amount of SEVENTY FIVE THOUSAND AND 00/100 DOLLARS ($75,000.00) (the “Deposit”) to secure the obligations of Buyer to close under this Agreement. The Deposit shall be held in an account and applied pursuant to the terms of that certain Escrow Agreement, substantially in the form attached hereto as Exhibit A (“Escrow Agreement”), to be executed concurrently herewith by Buyer, Seller and Escrow Agent. Upon the Closing, the amount of the Deposit, together with interest thereon, shall be delivered to Seller and credited against the Purchase Price. In the event of a termination of this Agreement, the Deposit together with interest therein shall be paid in accordance with Section 8.2 hereof.
2.4. Purchase Price. The purchase price for the Assets shall be EIGHT MILLION ONE HUNDRED THOUSAND AND 00/100 DOLLARS ($8,100,000.00) (the “Purchase Price”), and shall be paid by Buyer to Seller at the Closing as follows:
2.4.1. Release to Seller of the Deposit together with the interest thereon in accordance with the provisions of the Escrow Agreement; and
2.4.2 Buyer shall deliver to the Escrow Agent for deposit into an escrow account an amount equal to TEN PERCENT (10%) of the Purchase Price, as adjusted per Section 2.5.6 (the “Holdback”), to secure Seller’s obligations under Section 9.2. The Holdback shall be held in an escrow account and applied pursuant to the terms of that certain Escrow Agreement, substantially in the form attached hereto as Exhibit A. On the eighteen month anniversary of Closing, the Holdback, together with interest thereon, then remaining in the escrow account less any payments due to Buyer or pending claims made by Buyer pursuant to Section 9.4 together with interest attributable thereto, shall be delivered to Seller.
2.4.3. Subject to credits for the Deposit and the Holdback, together with interest thereon, and subject to adjustments and prorations set forth in Section 2.5 below, by wire transfer of the balance of the Purchase Price in immediately available funds to Seller.
2.5. Adjustments and Prorations.
2.5.1. The Purchase Price shall be adjusted such that all revenues, expenses and other liabilities arising from the Systems up until midnight on the day prior to the Closing Date, including subscriber and advertising revenues, franchise fees, pole and other rental charges payable with respect to cable television service, utility charges, real and personal property taxes and assessments levied against the Assets, salesperson advances, property and equipment rentals, applicable copyright or other fees, sales and service charges, taxes (except for taxes arising from the transfer of the Assets hereunder), and similar prepaid and deferred items, shall be prorated between Buyer and Seller in accordance with the principle that Seller shall be responsible for all expenses, costs and liabilities and entitled to all revenues allocable to the conduct of the business or operations of the Systems for the period prior to the Closing Date, and Buyer shall be responsible for all expenses, costs and obligations and entitled to all revenues allocable to the conduct of the business or operations of the Systems on the Closing Date and for the period thereafter, all of which shall be determined in accordance with generally accepted accounting principles.
2.5.2. At Closing, the Purchase Price shall be increased by an amount equal to (a) 87.5% of the face amount of all cable service customer Accounts Receivable that are outstanding on the Closing Date and have been outstanding for 30 days or less from the first day of the period to which any outstanding bill relates, and (b) 75% of the face amount of all cable service customer Accounts Receivable that are outstanding on the Closing Date and have been outstanding more than 30 but fewer than 61 days from the first day of the period to which any outstanding bill relates.
2.5.3. RESERVED
2.5.4. At Closing, the Purchase Price shall be increased by an amount equal to 100% of the face amount of all payments and sums deposited or advanced by Seller to a landlord, utility, governmental agency or any other party as a security deposit or in exchange for initiation of a service and which will inure to the benefit of Buyer.
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2.5.5 The Purchase Price shall be reduced by an amount equal to (a) any customer advance payments (i.e., customer payments received by Seller prior to the Closing but relating to service to be provided by Buyer after the Closing) and deposits (including any interest owing thereon), (b) except as set forth in Section 2.5.4, above, any other advance payments (e.g., advertising payments received by Seller prior to the Closing but relating to service to be provided by Buyer after the Closing)
2.5.6. Adjustment of Purchase Price Based on Subscriber Revenue.
(a) In the event that Subscriber Revenue (as defined below) at Closing falls below ninety -nine percent (99%) of $266,295.00 (the “Subscriber Revenue Threshold Amount”), the Purchase Price shall be reduced by an amount equal to the percentage difference between the Subscriber Revenue Threshold Amount and the Subscriber Revenue less one percent (1%) (the “Downwards Adjusted Purchase Price”), provided however, that in no event shall the Downwards Adjusted Purchase Price be less than ninety-three percent (93%) of the Purchase Price, excluding the effect of the Purchase Price adjustments under Sections 2.5.1, 2.5.2, 2.5.3, 2.5.4, and 2.5.5 (the “Purchase Price Floor”). In the event the above calculations would result in an Downwards Adjusted Purchase Price that is less than the Purchase Price Floor, Buyer may elect, in Buyer’s sole and absolute discretion, to set the Purchase Price at the Purchase Price Floor, or, if Buyer does not so elect, Seller may elect, in Seller’s sole and absolute discretion, to delay Closing for up to ninety (90) days to remediate the event or circumstances resulting in the reduction of the Purchase Price below the Purchase Price Floor, or terminate this Agreement and return the Deposit to Buyer.
(b) In the event that Subscriber Revenue at Closing exceeds one hundred and two and one-half percent (102.5%) of the Subscriber Revenue Threshold Amount, the Purchase Price shall be increased by an amount equal to the percentage difference between the Subscriber Revenue Threshold Amount and the Subscriber Revenue less two and one-half percent (2.5%) (the “Upwards Adjusted Purchase Price”), provided however, that in no event shall the Upwards Adjusted Purchase Price be more than one hundred and four percent (104%) of the Purchase Price, excluding the effect of the Purchase Price adjustments under Sections 2.5.1, 2.5.2, 2.5.3, 2.5.4, and 2.5.5 (the “Purchase Price Ceiling”). In the event the above calculations would result in an Upwards Adjusted Purchase Price that is greater than the Purchase Price Ceiling, Seller may elect, in Seller’s sole and absolute discretion, to set the Purchase Price at the Purchase Price Ceiling, or, if Seller does not so elect, Buyer may elect, in Buyer’s sole and absolute discretion, to terminate this Agreement and receive the return of the Deposit.
(c) In the event that the Subscriber Revenue for the most recent billing cycle prior to the Closing Date cannot accurately be determined as of the Closing Date, then any adjustments for Subscriber Revenue as of the date of Closing will be estimated using the Subscriber Revenue for the billing cycle that is as close to the date of Closing as practicable, and a final adjustment shall be made within fifteen (15) days after Closing, which adjustment shall be conclusive on all parties to this Agreement and not subject to dispute or judicial review. It is the intent of the Buyer and Seller to determine Subscriber Revenue in a manner consistent with that used in establishing the Subscriber Revenue Threshold Amount.
(d) Subscriber Revenue shall mean the gross amounts billed to Active Customers for the most recent billing cycle prior to the date of Closing for each of the following services: (i) basic service revenue, (ii) bulk basic service revenue, (iii) digital service revenue, (iv) premium service revenue, (v) bulk pay revenue (vi) digital converter revenue, (vii) telephony service revenue and (viii) internet service revenue. It is the intent of the Buyer and Seller to determine Subscriber Revenue in a manner consistent with that used in establishing the Subscriber Revenue Threshold Amount
(e) Notwithstanding the foregoing provisions of this Section 2.5.6, if Subscriber Revenue as of the Closing is negatively impacted in an amount of $25,000 or more and such impact can be directly attributed to a Force Majeure Event, Seller may delay Closing up to thirty (30) days to engage in attempts to remediate the event(s) or circumstances that result in the decrease in Subscriber Revenue. For purposes of this Section 2.5.6(e), “Force Majeure Event” shall mean fire, earthquake, flood, labor disputes, utility curtailments, power failures, explosions, civil disturbances, hurricanes, tropical storms, tornadoes, and other similar events that are outside of the control of Seller.
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2.5.7. At least ten 10 business days prior to the Closing, Seller will deliver to Buyer a report with respect to the Systems (the “Preliminary Report”), showing in detail the preliminary estimates of the adjustments referred to in this Section 2.5, calculated in accordance with such Section as of the Closing Date (or as of any other date(s) agreed to by the parties) together with any documents substantiating the determination of the adjustments to the Purchase Price proposed in the Preliminary Report. The Preliminary Report will include a Schedule setting forth advance payments and deposits made to or by Seller, as well as Accounts Receivable information relating to the Systems (showing sums due and their respective aging as of the Closing Date). The parties shall negotiate in good faith to resolve any dispute and to reach an agreement prior to the Closing Date on such estimated adjustments as of the Closing Date or thereafter in accordance with Section 2.5.8 below. The adjustment shown in the Preliminary Report, as adjusted by agreement of the parties, will be reflected as an adjustment to the Purchase Price payable at the Closing.
2.5.8. Except for adjustments to Subscriber Revenue, which shall have been made either at Closing or pursuant to Section 2.5.6(c) within 15 days thereafter, within ninety (90) days after the Closing Date, Buyer shall deliver to Seller a report with respect to the Systems (the “Final Report”), showing in detail the final determination of any adjustments which were not calculated as of the Closing Date and containing any corrections to the Preliminary Report, together with any documents substantiating the final calculation of the adjustments proposed in the Final Report. If Seller shall conclude that the Final Report does not accurately reflect the adjustments and prorations to be made to the Purchase Price in accordance with this Section 2.5, other than under Section 2.5.6, Seller shall, within thirty (30) days after its receipt of the Final Report, provide to Buyer its written statement of any discrepancies believed to exist. Buyer and Seller shall use good faith efforts to jointly resolve the discrepancies within fifteen (15) days of Buyer’s receipt of Seller’s written statement of discrepancies, which resolution, if achieved, shall be binding upon all parties to this Agreement and not subject to dispute or judicial review. If Buyer and Seller cannot resolve the discrepancies to their mutual satisfaction within such15-day period, Buyer and Seller shall, within the following ten (10) days, shall jointly designate a mutually agreeable accounting firm (the “Accountants”) to review the Final Report together with Seller’s discrepancy statement and any other relevant documents. The Accountants shall report their conclusions as to adjustments pursuant to this Section 2.5 which shall be conclusive on all parties to this Agreement and not subject to dispute or judicial review. If, after adjustment as appropriate with respect to the amount of the aforesaid adjustments paid or credited at the Closing, Buyer or Seller is determined to owe an amount to the other, the appropriate party shall pay such amount thereof to the other, within three days after receipt of such determination. The cost of retaining the Accountants shall be split equally between Buyer and Seller.
2.6. Assumption of Liabilities and Obligations. As of the Closing Date, Buyer shall assume and pay, discharge and perform the following (collectively, the “Assumed Liabilities”): (a) all obligations and liabilities of Seller under the Franchises and the Contracts solely to the extent such obligations and liabilities arise on or after the Closing Date (other than any obligations or liabilities arising out of a breach or violation of any Contract or Franchise that occurred prior to the Closing Date);(b) all obligations and liabilities of Seller to all customers and advertisers of the Systems for any advance payments or deposits for which Buyer shall have received a credit pursuant to the adjustments under Section 2.5; (c) all obligations and liabilities arising out of the conduct of the business or operations of the Systems by the Buyer following the Closing Date; and (d) the obligations and liabilities listed on Schedule 2.6. All other obligations and liabilities of Seller shall remain and be the obligations and liabilities solely of Seller.
3. | REPRESENTATIONS AND WARRANTIES OF SELLER |
Seller represents and warrants to Buyer as of the date of this Agreement and as of the Closing Date, as follows:
3.1. Organization, Standing and Authority. Seller is a limited partnership duly organized and validly existing under the laws of the State of Washington, and is qualified to conduct business in each jurisdiction in which the property owned, leased or operated by it requires it to be so qualified, except where the failure to so qualify would not have a Material Adverse Effect. Seller has the requisite
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partnership power and authority (a) to own, lease and use the Assets as presently owned, leased and used by it, and (b) to conduct the business and operations of the Systems as presently conducted by it.
3.2. Authorization and Binding Obligation. Seller has the partnership power and authority to execute and deliver this Agreement and to carry out and perform all of its other obligations under the terms of this Agreement. Except for the approval of a majority in interest of the limited partners of Seller, all partnership action by Seller necessary for the authorization, execution, delivery and performance by it of this Agreement has been taken. This Agreement has been duly executed and delivered by Seller and this Agreement constitutes the valid and legally binding obligation of Seller, enforceable against it in accordance with its terms, except (a) as rights to indemnity, if any, thereunder may be limited by federal or state securities laws or the public policies embodied therein, (b) as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws from time to time in effect affecting the enforcement of creditors’ rights generally, and (c) as the remedy of specific performance and injunctive and other forms of equitable relief may be subject to equitable defenses and to the discretion of the court before which any proceeding therefor may be brought.
3.3. Absence of Conflicting Agreements. Subject to obtaining the Consents listed on Schedule 3.8 and approval of a majority in interest of the limited partners of Seller, other than as identified on Schedule 3.3, the execution, delivery and performance of this Agreement by Seller will not: (a) violate the certificate of limited partnership and limited partnership agreement, as amended, of Seller; (b) violate any law, judgment, order, ordinance, injunction, decree, rule or regulation of any court or governmental instrumentality applicable to Seller with respect to the Assets; or (c) conflict with, constitute grounds for termination of, result in a breach of, constitute a default under, accelerate or permit the acceleration of any performance required by the terms of, any Contract.
3.4. Franchises. Schedule 3.4 lists all Franchises that are held for use in connection with the operations of the Systems, and includes the parties thereto, the execution date thereof, and the expiration date thereof. True and complete copies of such Franchises (together with any and all amendments thereto) have been delivered to Buyer. Each of the Franchises listed on Schedule 3.4 is valid and in full force and effect in accordance with its terms. Except for legislation that may be pending before any federal or state legislative body, no proceedings are pending or, to the Knowledge of Seller, threatened, to revoke, terminate or cancel any of the Franchises. Except as listed on Schedule 3.4, or as otherwise disclosed in writing to Buyer, the Seller and the operations of the Systems by Seller are in material compliance with the terms and conditions of the Franchises.
3.5. Real Property. Schedule 3.5 lists all Real Property related to the System and owned by Seller and all leases of Real Property related to the System and to which Seller is a party (but excluding easements, rights of way and similar interests in real property) and for each lease provides the parties thereto, the execution date thereof, the expiration date thereof. As to the Real Property which is designated in Schedule 3.5 as being owned by Seller, except as set forth in Schedule 3.5, Seller has good and marketable title in fee simple to such premises and all buildings, improvements and fixtures thereon, free and clear of all claims, liabilities, mortgages, liens, pledges, conditions, charges or encumbrances of any nature whatsoever, except for Permitted Encumbrances. Seller has delivered to Buyer true and correct copies of each lease and any title opinions, surveys and appraisals relating to such Real Property included in the sale that are in Seller’s possession or under its control and of all title insurance policies currently in effect with respect to any such parcel of Real Property.
3.6. Personal Property. Except as set forth in Schedule 3.6, Seller has, or will have on the Closing Date, good title to all Personal Property owned by Seller, and as of the Closing Date none of the Personal Property will be subject to any claims, liabilities, mortgages, liens, pledges, conditions, charges or encumbrances of any nature whatsoever, except for Permitted Encumbrances. Schedule 3.6 sets forth all vehicles (listing make, model and vehicle identification number) included in the Personal Property. Except as set forth in Schedule 3.6, the Personal Property is in reasonable operating condition and repair.
3.7. Agreements. Schedule 3.7 lists all pole attachment and conduit agreements, railway crossing agreements, easements, rights of way and similar interests in Real Property, licenses, permits,
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governmental authorizations (other than franchises set forth on Schedule 3.4), retransmission consent agreements and other agreements, written or oral (including any amendments and other modifications thereto), to which Seller is a party and that relate solely to the Assets or the Broadband Business or operations of the Systems (other than the Franchises, programming agreements and any contracts that are Excluded Assets) in existence as of the date hereof except for: (a) subscription agreements with customers for the cable services provided by the Systems; (b) oral employment contracts and miscellaneous service contracts terminable by Seller at will without material penalty; and (c) any contracts involving liabilities less than or equal to $10,000. Schedule 3.7 includes, for each agreement listed, the parties thereto, and the execution date thereof. Seller has delivered to Buyer true and complete copies of all written agreements disclosed in Schedule 3.7. All of the agreements listed on Schedule 3.7 are valid and binding and to the Knowledge of Seller are in full force and effect and legally enforceable in accordance with their terms upon the other parties thereto. There is to the Knowledge of Seller no material breach or default by Seller or by any other party thereto under any of the agreements listed on Schedule 3.7.
3.8. Consents. Except for the Consents described in Schedule 3.8, Seller is not required to obtain any consent, approval, permit or authorization of, or declaration to or filing with any governmental or regulatory authority, or any other third party to consummate this Agreement and the transactions contemplated hereby.
3.9. Information on Systems.
3.9.1. Schedule 3.9 lists as of June 30, 2007 (unless a different date is specified on Schedule 3.9): (a) the approximate number of miles of energized cable plant (aerial and underground and the approximate number of dwellings passed); (b) the total number of Subscribers in the Systems; (c) the bandwidth capacity of the Systems specified in MHz; and (d) the number of channels activated throughout the Systems.
3.9.2. Schedule 3.9 sets forth as of June 30, 2007: (a) the standard rates charged as of the date of this Agreement to customers for each class of service.
3.9.3. Seller has obtained all required FCC clearances for the operation of the Systems in all necessary aeronautical frequency bands.
3.9.4 Seller has attached hereto as Schedule 3.9.4 (a) true and complete copies of the most recent proof of performance tests and cumulative leakage index reports for each System, (b) true and complete copies of Seller’s channelline-ups for each System, including a designation of which stations are carried under retransmission consent agreements and pursuant to must-carry elections, and (c) a true and complete list of each free courtesy account.
3.10. Financial Statements. Schedule 3.10 contains true and complete copies of the audited financial statements of the Seller with respect to the Systems for the period ending December 31, 2005 and December 31, 2006, plus unaudited financial statements for the months of January, February, March and April of 2007 (collectively, the “Financial Statements”). The Seller’s unaudited Financial Statements have been prepared in accordance with generally accepted accounting principles consistently applied, except for the absence of footnotes and statements of cash flows and subject to normal year-end adjustments. The Seller’s Financial Statements are in accordance with the books and records of Seller and present fairly in all material respects the results of operations for the periods then ended.
3.11. Employee Benefit Plans.
3.11.1. All of Seller’s material Employee Plans and Compensation Arrangements providing benefits to employees of the Seller who work at the Systems as of the date of this Agreement are listed in Schedule 3.11, and copies of any such Employee Plans and Compensation Arrangements (or related insurance policies) as currently in effect have been delivered to Buyer, along with copies of any currently available employee handbooks or similar documents describing such Employee Plans and Compensation Arrangements. Except as disclosed in Schedule 3.11, there is not now in effect or to become effective after the date of this Agreement and until the Closing Date, any new Employee
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Plan or Compensation Arrangement or any amendment to an existing Employee Plan or Compensation Arrangement which will materially affect the benefits of employees or former employees of the Seller who work at the System, except to the extent necessary to bring such Employee Plans or Compensation Arrangements in compliance with applicable law.
3.11.2. Each of Seller’s Employee Plans and Compensation Arrangements has been administered and funded without material exception in compliance with its own terms and, where applicable, with ERISA, the Code, the Age Discrimination in Employment Act and any other applicable federal or state laws. None of Seller or any trade or business which is considered a single employer with Seller under Section 4001(b)(1) of ERISA has incurred or could reasonably be expected to incur material liability under Title IV of ERISA or the minimum funding requirements under Section 302 of ERISA, which such liability will not be satisfied on or prior to Closing.
3.11.3. Except as disclosed in Schedule 3.11, Seller does not contribute to and is not required to contribute to any Multiemployer Plan with respect to any employees of the Systems.
3.11.4 Each of Seller’s Employee Plans that is intended to be qualified under Section 401(a) of the Code (i) is the subject of an unrevoked favorable determination letter from the United States Internal Revenue Service (“IRS”), (ii) has remaining a period of time under the Code or applicable Treasury regulations or IRS announcements in which to request, and make any amendments necessary to obtain any letter from the IRS, or (iii) is a prototype or volume submitter plan entitled, under applicable guidance, to rely on the favorable opinion or advisory letter issued by the IRS to the sponsor of such prototype or volume submitter plan.
3.11.5 There are no pending or, to the Knowledge of Seller, threatened claims and no pending or, to the Knowledge of Seller, threatened litigation involving any Employee Plan or Compensation Arrangement (other than routine claims for benefits) by participants or beneficiaries covered thereunder.
3.12. Labor Relations. Schedule 3.12 contains a true and complete list of (a) the names and dates of hire of all persons employed by Seller at the Systems and (b) all employment, consulting, non-competition, benefit, severance and other arrangements with any current employee with respect to the Systems. Seller is not a party to or subject to any collective bargaining agreements with respect to any employees of the Systems. Seller has no written or oral contracts of employment with any employee of the Systems, other than oral employment agreements terminable by Seller at will without penalty. Seller has delivered to Buyer true and complete copies of all written agreements set forth on Schedule 3.12. Except as set forth in Schedule 3.12, Seller is not the subject of any legal proceeding relating to employment discrimination or unfair labor practices. Seller has fewer than fifty (50) employees, and compliance with the federal Worker Adjustment and Retraining Notification Act (or any comparable state law) is not required in connection with the transactions contemplated hereby after taking into account other sales transactions by Seller or its affiliates. Seller has delivered to Buyer a list of compensation payable to employees.
3.13. Taxes, Returns and Reports. All federal, state and local tax returns required to be filed by Seller through the date hereof in connection with the operation of the Systems with respect to any federal, state or local taxes (the “Taxes”) have been filed. Except as set forth in Schedule 3.13, all Taxes which are due and payable or disputed in good faith have been properly accrued or paid or are being contested in good faith by appropriate proceedings.
3.14. Claims and Legal Actions. Except as set forth in Schedule 3.14, and except for any investigations and rule-making proceedings affecting the cable industry generally, there is (a) no legal action, counterclaim, suit, arbitration or (b) no claim or governmental investigation, pending or to the Knowledge of Seller, threatened against or relating to the Assets or the business or operations of the Systems.
3.15. Environmental Matters.
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3.15.1. Except as disclosed in Schedule 3.15, to the Knowledge of Seller, Seller’s operations with respect to the Systems and the Real Property comply in all material respects with all applicable Environmental Laws. Except as described in Schedule 3.15, no underground storage tanks are located on the Real Property.
3.15.2. Seller has not released any hazardous substances, pollutants, contaminants or petroleum products, as such terms are defined in Environmental Laws, on any of the Real Property , whether inside or outside of any building, in such a manner as may require remediation under any applicable Environmental Laws. (Paul, remediation can involve not only money but interference with business operations. Buyer does not wish to be subject to a dispute about whether a remediation requirement is material or not)
3.15.3. Seller has not received written notice from any governmental authority of any violation by Seller with respect to the Systems of any Environmental Laws which violation has not been remedied or cured on or prior to the date hereof.
3.16. Compliance with Laws. Seller has complied and is in compliance with all federal, state and local laws, rules, regulations and ordinances applicable to the Systems, except for such noncompliance which would not have a Material Adverse Effect.
3.17. Conduct of Business in Ordinary Course. Since January 1, 2006, Seller has conducted the business and operations of the Systems only in the ordinary course and has not caused any changes, events or conditions that, individually or in the aggregate, have had a Material Adverse Effect. The name(s) “Northland Cable Television” and derivations thereof are the only business name(s) that have been used in the conduct of the Broadband Business and the operations of the Systems during the two (2) years preceding the date hereof.
3.18. FCC and Copyright Compliance.
3.18.1. Seller is permitted under all applicable FCC rules, regulations and orders to distribute the transmissions of video programming or other information that the Seller makes available to customers of the Systems presently being carried to the customers of and by the Systems and to utilize all carrier frequencies generated by the operations of the Systems, and are licensed to operate all the facilities required by law to be licensed, including, without limitation, any business radio and any cable television relay service system, being operated as part of the Systems. Except as provided in Schedule 3.18, Seller’s operation of the Systems and of any FCC licensed or registered facility used in conjunction with Seller’s operation of the Systems is in compliance in all material respects with the FCC’s rules and regulations and the provisions of the Cable Act, and all required reports of Seller to the FCC are true and correct and have been timely filed.
3.18.2. Seller has deposited with the U.S. Copyright Office all statements of account and other documents and instruments, and paid all royalties, supplemental royalties, fees and other sums to the U.S. Copyright Office under the Copyright Act of 1976, as amended (the “Copyright Act”), with respect to the business and operations of the Systems as are required to obtain, hold and maintain the compulsory license for cable television systems prescribed in Section 111 of the Copyright Act. The Systems are in compliance with the Copyright Act and the rules and regulations of the U.S. Copyright Office, except for such noncompliance that would not, individually or in the aggregate, have a Material Adverse Effect and except as to potential copyright liability arising from the performance, exhibition or carriage of any music on the Systems. Except as provided in Schedule 3.18, to the Knowledge of Seller there is no inquiry, claim, action or demand pending before the U.S. Copyright Office or from any other party which questions the copyright filings or payments made by Seller with respect to the Systems. All music royalty fees payable with respect to the Systems have been timely paid, and, except as disclosed in Schedule 3.18, Seller has not participated in any industry-wide settlement with BMI, ASCAP, SESAC (or any other music licensing organization) relating to liability for music royalties.
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3.18.3. All necessary FAA approvals have been obtained with respect to the height and location of towers used in connection with the operation of the Systems and are listed in Schedule 3.7. The towers are being operated in all material respects in compliance with applicable FCC and FAA rules.
3.19. Bonds, Insurance and Letters of Credit. Each insurance policy, performance bond, letter of credit, deposits and similar guarantee maintained or required to be maintained in connection with the Systems is set forth on Schedule 3.19, together with the amount thereof. Seller has delivered to Buyer true and complete copies of all such bonds and letters of credit.
3.20 Accounts Receivable. All Accounts Receivable included in the Assets are bona fide and are attributable to transactions in the ordinary course. To Seller’s knowledge, there is no contest, claim, defense or right of setoff under any Contract with any subscriber that is an account debtor of an Account Receivable relating to the amount or validity of such Account Receivable that would have, in the aggregate, a material adverse effect.
4. | REPRESENTATIONS AND WARRANTIES OF BUYER |
Buyer represents and warrants to Seller as of the date of this Agreement and as of the Closing Date, as follows:
4.1. Organization, Standing and Authority. Buyer is a North Carolina limited liability company, duly organized and validly existing under the laws of the State of North Carolina and is qualified to conduct business as a foreign limited liability company in each jurisdiction in which the property owned, leased or operated by it requires it to be so qualified, except where the failure to so qualify would not have a Material Adverse Effect. Buyer has the requisite power and authority to execute and deliver this Agreement and to perform and comply with all of the terms, covenants and conditions to be performed and complied with by Buyer hereunder.
4.2. Authorization and Binding Obligation. Buyer has the limited liability company power and authority to execute and deliver this Agreement and to carry out and perform all of its other obligations under the terms of this Agreement. All limited liability company action by Buyer necessary for the authorization, execution, delivery and performance by Buyer of this Agreement has been taken. This Agreement has been duly executed and delivered by Buyer and this Agreement constitutes the valid and legally binding obligation of Buyer, enforceable against it in accordance with its terms, except (a) as rights to indemnity, if any, thereunder may be limited by federal or state securities laws or the public policies embodied therein, (b) as enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws from time to time in effect affecting the enforcement of creditors’ rights generally, and (c) as the remedy of specific performance and injunctive and other forms of equitable relief may be subject to equitable defenses and to the discretion of the court before which any proceeding therefor may be brought.
4.3. Absence of Conflicting Agreements. Subject to obtaining the Consents listed on Schedule 3.8, the execution, delivery and performance of this Agreement by Buyer will not: (a) require the consent, approval, permit or authorization of, or declaration to or filing with any governmental or regulatory authority, or any other third party; (b) violate the governing documents of Buyer; (c) violate any material law, judgment, order, ordinance, injunction, decree, rule or regulation of any court or governmental instrumentality; or (d) conflict with, constitute grounds for termination of, result in a breach of, constitute a default under, or accelerate or permit the acceleration of any performance required by the terms of, any material agreement, instrument, license or permit to which Buyer is a party or by which Buyer may be bound, such that Buyer could not perform hereunder and acquire or operate the Assets.
4.4. Buyer Qualification. Buyer knows of no reason why it cannot become the franchisee pursuant to the Franchises, and to its knowledge has the requisite qualifications to own and operate the Systems.
4.5. Availability of Funds. Buyer will have available on the Closing Date sufficient unrestricted funds to enable it to consummate the transactions contemplated hereby.
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5. | COVENANTS OF THE PARTIES |
5.1. Conduct of the Business of the Systems. Except as contemplated by this Agreement, disclosed on Schedule 5.1 or with the prior written consent of Buyer (which consent shall not be unreasonably withheld or delayed), between the date hereof and the Closing Date, Seller shall operate the Systems in the ordinary course of business in accordance with past practices and shall as to the Systems:
(a) not enter into any contract or commitment, without the prior written consent of Buyer, which consent is not to be unreasonably withheld or delayed, which is either not terminable at on thirty days prior written without penalty to Buyer or which involves the payment of more than $10,000, and requires Buyer to assume obligation under such contract or commitment;
(b) not sell, assign, lease or otherwise dispose of any of the Assets, except for assets consumed or disposed of in the ordinary course of business, where no longer used or useful in the business or operations of the Systems or in conjunction with the acquisition of replacement property of equivalent kind and value;
(c) not create, assume or permit to exist any claim, liability, mortgage, lien, pledge, condition, charge or encumbrance upon the Assets, except for Permitted Encumbrances; and
(d) other than annual rate increases that may be implemented at Seller’s discretion on or about March 1, of each year, such increases to be consistent with past practices, and marketing activities done in the ordinary course and that do not change customer rates, Seller shall not, without Buyer’s prior written consent, such consent not to be unreasonably withheld or delayed, change customer rates for any level of service or charges for remotes or installation, or change billing or disconnect practices.
5.2. Access to Information. Seller shall allow Buyer and its authorized representatives reasonable access upon reasonable advance notice and at Buyer’s expense during normal business hours to the Assets and to all other properties, equipment, books, records, Contracts and documents relating to the Systems for the purpose of inspection, and furnish or cause to be furnished to Buyer or its authorized representatives all information ordinarily prepared by Seller and available with respect to the affairs and business of the Systems as Buyer may reasonably request, it being understood that the rights of Buyer hereunder shall not be exercised in such a manner as to interfere with the operations of Seller’s business. Buyer shall promptly disclose to Seller, in writing, any and all facts that Buyer has reason to believe may give rise to a claim under this Agreement. Buyer shall not contact or in any way communicate with Seller’s employees located at the Systems except and only to the extent expressly authorized, in writing, by Seller.
5.3. Confidentiality. Each party shall keep secret and hold in confidence for a period of three years following the date hereof, any and all information relating to the other party that is proprietary to such other party, other than the following: (a) information that has become generally available to the public other than as a result of a disclosure by such party; (b) information that becomes available to such party or an agent of such party on a non-confidential basis from a third party having no obligation of confidentiality to a party to this Agreement; (c) information that is required to be disclosed by applicable law, judicial order or pursuant to any listing agreement with, or the rules or regulations of, any securities exchange on which securities of such party or any such affiliate are listed or traded; and (d) disclosures made by any party as shall be reasonably necessary in connection with obtaining the Consents. In connection with disclosure of confidential information under (c) and (d) above, the disclosing party shall give the other party hereto timely prior notice of the anticipated disclosure and the parties shall cooperate in designing reasonable procedural and other safeguards to preserve, to the maximum extent possible, the confidentiality of such material. Upon Closing, Buyer shall have the unilateral right, as Buyer may elect, to disclose information pertaining to the Assetsand/or Systems, and such disclosure right shall in no way be limited or governed by any other portion of this Section 5.3. Buyer hereby acknowledges Seller has a public filing obligation with respect to the solicitation of the approval of a majority in interest of Seller’s limited partners to the consummation of the transactions contemplated hereby and will be required to disclose certain information regarding the Buyer.
5.4. Publicity. Prior to Closing, neither party hereto will issue any press release or otherwise make any public statement with respect to this Agreement and the transactions contemplated hereby without the prior
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written consent of the other, except (a) either party may, without the other party’s prior written consent, disclose information to its financing sources and professional advisors, including accountants, attorneys, investors, financial advisors, bankers and other experts, (b) Seller may, without Buyer’s prior written consent, make public statements with respect to this Agreement and the transactions contemplated hereby to its general and limited partners, (c) either party may make public statements or disclosures as may be required by applicable laws, including SEC requirements, and (d) Seller may make such filings with the Securities and Exchange Commission as Seller deems necessary to solicit approval of the transaction contemplated by this Agreement from Seller’s limited partners.
5.5. Consents. Following the execution hereof, Seller shall make such applications to the Franchising Authorities and other third parties for the Consents, and shall otherwise use its commercially reasonable efforts to obtain the Consents as expeditiously as possible. In no event shall Seller be required, as a condition of obtaining such Consents, to expend any monies on, before or after the Closing Date (other than expenses typically incurred in connection with the efforts to obtain such Consents), or to offer or grant any accommodations or concessions adverse to Seller or to engage in litigation or other adversarial proceedings. Buyer shall use its commercially reasonable efforts to promptly assist Seller and shall take such prompt and affirmative actions as may reasonably be necessary in obtaining such Consents and shall cooperate with Seller in the preparation, filing and prosecution of such applications as may reasonably be necessary, including, without limitation, making management and other personnel of Buyer available to assist in obtaining such Consents. The parties agree to use commercially reasonable efforts to obtain consents to (i) the transfer of the Franchises in substantially the form attached hereto asExhibit B-1, and (ii) the transfer of the leases and other Contracts in substantially the form attached hereto asExhibit B-2. Seller shall not agree to any adverse change in any Franchise or Contract as a condition to obtaining any authorization, consent, order or approval necessary for the transfer of such Franchise or Contract unless Buyer shall otherwise consent. Buyer agrees that it shall not, without the prior written consent of Seller (which may be withheld at Seller’s sole discretion), seek amendments or modifications to Franchises or Contracts before the Closing Date. To the extent reasonably practicable, Seller shall notify Buyer in advance of all meetings, conference calls and other similar events relating to any of the Consents such that Buyer will have the opportunity to attendand/or participate therein. If providing such notice is not reasonably practicable or if Buyer is unable to attend or participate in such meeting, conference call or other similar event, Seller shall, within a reasonable time period thereafter, provide Buyer with an update with respect to the matters discussed therein. Buyer shall be entitled to review the form(s) of consent and all notices and filings being submitted prior to the submission thereof. Seller shall promptly deliver to Buyer a true and correct copy of each Consent as each such Consent is obtained. Seller expressly acknowledges that nothing contained in this Agreement shall prevent Buyer, its officers, employees, Affiliates, representatives or other agents from making statements or inquiries to, making presentations to or responding to requests initiated by any person from which any Consent is sought. Buyer shall not be required to accept any consent or approval the terms of which contain any material change in the underlying instrument that would be adverse to Buyer. Buyer shall, at Seller’s request, promptly furnish Seller with copies of such documents and information with respect to Buyer, including financial information and information relating to the cable and other operations of Buyer and any of its affiliated or related companies, as Seller may reasonably request in connection with the obtaining of any of the Consents or as may be reasonably requested by any person in connection with any Consent. Notwithstanding anything to the contrary contained in this Section 5.6, Seller’s obligations hereunder with respect to pursuing any Consent shall be fully satisfied with respect to: (x) the transfer of pole attachment or conduit contracts, if Buyer, solely on its own behalf, has executed a new contract with the respective pole company or if such pole company has indicated in writing that it is willing to execute a new contract with Buyer on terms that are substantial ly the same as the terms of the existing agreement, in either case on or before Closing; and (y) the transfer of railroad crossing permits or contracts, if Buyer, solely on its own behalf, has executed a new permit or contract with the respective railroad company or if such railroad company has indicated in writing that it is willing to execute a new permit or contract with Buyer on terms that are substantially the same as the terms of the existing agreement, in either case on or before Closing.
5.6. Taxes, Fees and Expenses. Buyer and Seller shall equally split all sales, use, transfer, purchase taxes and fees, filing fees, recordation fees and application fees, if any, arising out of the transactions
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contemplated herein. Except as provided in Section 2.5.8, each party shall pay its own expenses incurred in connection with the authorization, preparation, execution and performance of this Agreement, including all fees and expenses of counsel, accountants, agents and other representatives.
5.7. Brokers. Each of Buyer and Seller represents and warrants that neither it nor any person or entity acting on its behalf has incurred any liability for any finders’ or brokers’ fees or commissions in connection with the transaction contemplated by this Agreement, except that Seller has retained Daniels & Associates, L.P. (or its successor in interest), whose fees shall be paid by Seller. Buyer agrees to defend, indemnify and hold harmless Seller against any fee, commission, loss or expense arising out of any claim by any broker or finder employed or alleged to have been employed by Buyer, and Seller agrees to defend, indemnify and hold harmless Buyer against any fee, commission, loss or expense arising out of any claim by Daniels & Associates, L.P., (or its successor in interest) or any other broker or finder employed or alleged to have been employed by Seller.
5.8. Risk of Loss. The risk of loss, damage or destruction to the Systems from fire, theft or other casualty or cause shall be borne by Seller at all times up to the Closing Date. It is expressly understood and agreed that in the event of any material loss or damage to any portion of the Assets from fire, casualty or other cause prior to the Closing Date, Seller shall promptly notify Buyer of same in writing. Such notice shall report the loss or damage incurred, the cause thereof, if known, and any insurance coverage related thereto.
5.9. Transitional Matters. For a period of sixty (60) days following the Closing, Buyer may continue to operate the System using the tradenames Northland Cable Television and related names and marks used in the System on the Closing Date, to the extent reasonably necessary, but in any event in accordance with the trademark usage guidelines attached hereto as Exhibit H; provided, however, that Buyer shall have no obligation at any time to remove or discontinue using any such name or mark that is affixed to converters or other items in or to be used in customer homes or properties or as are used in similar fashion, making such removal or discontinuation impracticable. For a period of up to one hundred eighty (180) days after the Closing, provided that on or before Closing Buyer and Seller have entered into a mutuallyagreed-upon subscriber billing transition services agreement substantially in the form attached hereto as Exhibit I, Seller shall cooperate with Buyer, prior to and after Closing, at Buyer’s sole cost and expense, including reasonable compensation for any time and assistance in excess of ten hours of transition support, to transition billing services from Seller’s billing systems to Buyer’s billing systems.
5.10. Employee Benefit Matters.
5.10.1. It is clearly understood that Buyer has no obligation to employ any of Seller’s employees employed at the Systems and that Seller shall be responsible for and shall cause to be discharged and satisfied in full all amounts owed to any employee, including, without limitation, wages, salaries, any employment, incentive, compensation or bonus agreements and all other benefits or payments due on account of termination. Buyer agrees that it will provide Seller with notice of which, if any, employees of the Systems Buyer intends to hire at least thirty (30) days before the estimated Closing Date. Such employees who accept Buyer’s offer of employment and commence employment with Buyer on the Closing Date are referred to herein as “Transferred Employees.”
5.10.2. As of the Closing Date, Seller shall terminate employment of all Transferred Employees.
5.10.3. Buyer shall offer health plan coverage to all of the full time Transferred Employees, on terms and conditions generally applicable to all of Buyer’s similarly-situated full time employees. For purposes of providing such coverage, Buyer shall waive all preexisting condition limitations for all such employees of the Systems covered by the Seller’s health care plan as of the Closing Date (other than preexisting conditions which were excluded by Seller’s health care plan) and shall provide such health care coverage effective as of the Closing Date without the application of any eligibility period for coverage. In addition, Buyer shall credit all employee payments toward deductible and co-payment obligation limits under Seller’s health care plans for the plan year which includes the Closing Date as if such payments had been made for similar purposes under Buyer’s health care plans during the plan year which includes the Closing Date, with respect to Transferred Employees.
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5.10.4. For each Transferred Employee, Buyer shall give past service credit for all crediting purposes (other than for benefit accrual under Buyer’s defined benefit plan) under each of its employee benefit plans that, on the Closing Date, provides coverage to Transferred Employees to the same extent such employment service was credited for similar purposes under Seller’s Employee Plans prior to the Closing Date.
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5.10.5. Within a reasonable period of time after the Closing, Buyer shall cause a tax-qualified defined contribution plan sponsored by Buyer (the “Buyer’s 401(k) Plan”) to accept direct rollovers of distributions from the Northland Telecommunications Corporation 401(k) Plan (the “Seller’s 401(k) Plan”) to Transferred Employees who elect such a roll over to Buyer’s 401(k) Plan. The roll over contemplated by this Section 5.10.5 shall be in cash or a combination of cash and in kind, as may be mutually agreeable to Seller and Buyer; provided, that Buyer shall be obligated to accept as a part of such transfer any promissory notes with respect to Transferred Employees that have taken participant loans from the Seller’s 401(k) Plan that are outstanding as of the Closing Date. Prior to the date of such transfer, and as a precondition thereto, Buyer shall deliver to Seller a copy of the most recently issued IRS determination letter (or other proof reasonably satisfactory to counsel for the Seller) that the Buyer’s 401(k) Plan is qualified under the Code. On or prior to the Closing Date, Seller shall deliver to Buyer a list of all Transferred Employees, indicating thereon the total amount deferred in pre tax dollars to the Seller’s 401(k) Plan by each Transferred Employee under the terms of Section 402(g) of the Code with respect to the calendar year in which the Closing occurs.
5.11. Bonds, Letters of Credit, Etc. Buyer shall take all reasonably necessary steps, and execute and deliver all reasonably necessary documents, to insure that on or before Closing, Buyer has delivered each such bonds, letters of credit, indemnity agreements and similar instruments currently maintained and in effect as set forth in Schedule 3.19 in such amounts and in favor of such Franchising Authorities and other third parties requiring the same in connection with the Franchises and the Contracts. Buyer shall not be obligated under this Section 5.11 to deliver any instrument not set forth in Schedule 3.19.
5.12. Non-competition. Seller, Seller’s general partner and each of its general partner’s affiliates, individually, and not severally, covenants and agrees that, unless Buyer shall otherwise give its prior written consent, for a period of thirty-six (36) months from Closing it will not directly or indirectly own, manage, operate, control or engage, directly or indirectly, in the business of operating a wireline video cable or wireless video television system within the boundaries of the area within which Seller is authorized to provide cable television services as of the date of Closing, pursuant to the Franchise Agreements listed on Schedule 3.4. Notwithstanding the foregoing, nothing herein shall be construed to prohibit or restrict the ownership of a company’s securities listed on a national securities exchange or the National Association of Securities Dealers Automated Quotations System, which (x) constitutes less than 5% of the outstanding voting stock of such company, (y) does not constitute control over such company and (z) is held solely for investment purposes.
5.13. Title Insurance, Surveys, Environmental.
(a) Seller shall cooperate with Buyer if Buyer elects to obtain title insurance policies or surveys (including any environmental impact statements) on any Real Property owned in fee or leased. Buyer shall have the sole responsibility for obtaining and paying for such policies and surveys. The parties agree that the obtaining of title insurance and surveys on any Real Property shall not be a condition to the obligation of Buyer to consummate the transactions contemplated hereby. If not already provided prior to signing, promptly after the execution of this Agreement, Seller shall deliver to Buyer copies of Seller’s existing title insurance policies, surveys, Phase I Reports or other environmental reports or impact statements relating to the Real Property.
(b) On or before forty-five (45) days from the date of this Agreement, Buyer, may obtain, at Buyer’s sole cost and expense, phase I environmental reports prepared by an environmental company reasonably acceptable to Seller regarding all Real Property. If Buyer is unable to obtain such phase I environmental reports within forty-five (45) days from the date of this Agreement due to causes other than acts of the Seller, the right to obtain such reports under this Section 5.13 (b) shall terminate. If such reports reflect the presence or possible presence of any hazardous or toxic substance that would result in a violation of applicable environmental laws
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or would require remediation on any of the Real Property, Buyer shall have forty-five (45) days from receipt of such report to give notice to Seller of Buyer’s exception to such results. If such exceptions are not capable of cure by the payment of a liquidated sum of less than $50,000 in the aggregate, Seller may elect to either (i) cure such conditions, or (ii) inform Buyer in writing that such exceptions will not be cured. If not cured, as Buyer’s sole and exclusive remedy, Buyer may either waive such exception or terminate this Agreement and receive the return of the Deposit, plus reimbursement of Buyer’s actual and reasonable third-party out-of-pocket costs for such environmental inspections, but in no event in an amount in excess of $10,000.00.
5.14. Lien Searches. As soon as practicable, Seller shall obtain and deliver to Buyer copies of the results of complete lien, tax and judgment searches conducted with respect to the entire System (including states and counties, and including federal tax and judgment searches) and with respect to all corporate, fictitious and assumed names used by Seller in connection with the Broadband Business during the six (6) years preceding the date hereof. Buyer and Seller shall share equally all fees and costs arising out of any lien, tax and judgment searches.
5.15. Notice. To the extent of Seller’s actual Knowledge, Seller shall promptly notify Buyer of any material adverse change relating to Seller, the Broadband Business, and of any fact, event or condition that, if existing as of the date hereof, would have been required to be disclosed in any of the Schedules hereto.
5.16. Consent of Partners. Upon mutual execution of this Agreement, Seller shall promptly proceed to complete such filings with the Securities and Exchange Commission and take such other steps as are reasonably necessary to solicit the approval of Seller’s limited partners for the consummation of the transaction contemplated by this Agreement.
5.17. Monthly Reports. Seller shall provide Buyer, following the date hereof and until Closing, on a monthly basis and within thirty (30) days after the Monthly Reporting Date (as defined hereafter): (a) the number of Subscribers in the Systems as of the Monthly Reporting Date; (b) billing reports for the Systems for the one (1) month period ending on the Monthly Reporting Date; (c) income statements for the Systems for the one (1) month period ending on the Monthly Reporting Date, as well as any other information regarding the Systems that Buyer may reasonably request. For purposes of this Agreement, the “Monthly Reporting Date” shall be the last day of each calendar month.
5.18. No Solicitation.
(a) Seller shall not, nor shall it authorize or permit any of its partners, officers or employees, or any directors, officers or employees of the general partner of the Seller to, and shall direct its investment bankers, financial advisors, attorneys, accountants or other advisors, agents or representatives (collectively, “Representatives”) retained by it not to, directly or indirectly through another Person, (i) solicit, initiate or knowingly encourage, or take any other action designed to, or which could reasonably be expected to, facilitate, any Acquisition Proposal or (ii) enter into, continue or otherwise participate in any discussions or negotiations regarding, or furnish to any Person any information, or otherwise cooperate in any way with, any Acquisition Proposal. Without limiting the foregoing, it is agreed that any violation of the restrictions set forth in the preceding sentence by any Representative of Seller shall be a breach of this Section 5.18(a) by Seller. Seller shall immediately cease and cause to be terminated all existing discussions or negotiations with any Person conducted heretofore with respect to any Acquisition Proposal. Notwithstanding the foregoing, at any time prior to obtaining the approval of this Agreement by the holders of a majority of the outstanding limited partner interests of Seller (“Seller Partner Approval), in response to a bona fide written Acquisition Proposal that the board of directors of the general partner of the Seller (the “Board”) reasonably determines (after consultation with its outside counsel and its financial advisor) constitutes or is reasonably likely to lead to a Superior Proposal, and which Acquisition Proposal was not solicited after the date hereof and was made after the date hereof and did not otherwise result from a breach of this Section 5.18(a), Seller may, subject to compliance with Section 5.18(c), (x) furnish information with respect to Seller to the Person making such Acquisition Proposal (and its Representatives) pursuant to a customary confidentiality agreement not less restrictive to such Person than the confidentiality provisions of the confidentiality agreement between the Buyer and the Seller, provided that all such information has previously been provided to the Buyer or is provided to the Buyer prior to or substantially concurrent with the time it is provided to such Person, and
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(y) participate in discussions or negotiations with the Person making such Acquisition Proposal (and its Representatives) regarding such Acquisition Proposal.
The term “Acquisition Proposal” means any inquiry, proposal or offer from any Person relating to, or that could reasonably be expected to lead to, any direct or indirect acquisition or purchase, in one transaction or a series of transactions, of the assets or businesses that constitute 25% or more of the revenues, net income or assets of Seller, or 25% or more of the equity interests of Seller, regardless of how the proposed acquisition or purchase is intended to be structured, in each case other than the transactions contemplated by this Agreement.
The term “Superior Proposal” means any bona fide offer made by a third party that if consummated would result in such Person (or its shareholders or equity owners) owning, directly or indirectly, more than 50% of the equity interests of Seller then outstanding or all or substantially all the assets of Seller, which the Board reasonably determines (after consultation with its financial advisor) to be more favorable to the limited partners of Seller from a financial point of view than the transaction contemplated by this Agreement (taking into account all the terms and conditions of such proposal and this Agreement).
(b) The Board shall not (i) (A) withdraw (or modify in a manner adverse to the Buyer), or publicly propose to withdraw (or modify in a manner adverse to the Buyer), the adoption or recommendation by the Board of this Agreement, the sale of the assets of Seller to the Buyer or the other transactions contemplated by this Agreement or (B) adopt or recommend, or propose publicly to adopt or recommend, any Acquisition Proposal (any action described in this clause (i) being referred to as a “Seller Recommendation Change”) or (ii) adopt or recommend, or publicly propose to adopt or recommend, or allow Seller to execute or enter into, any letter of intent, memorandum of understanding, agreement in principle, merger agreement, acquisition agreement, option agreement, joint venture agreement, partnership agreement or other similar contract constituting or related to, or that is intended to or could reasonably be expected to lead to, any Acquisition Proposal (other than a confidentiality agreement referred to in Section 5.18(a)) (an “Acquisition Agreement”). Notwithstanding the foregoing, at any time prior to obtaining the Seller Partner Approval and subject to Section 5.18(c), the Board may (x) make a Seller Recommendation Change if the Board determines in good faith (after consultation with its outside counsel and its financial advisor) that such action is consistent with its fiduciary duties under applicable law or (y) in response to an Acquisition Proposal that the Board reasonably determines (after consultation with its outside counsel and its financial advisor) constitutes a Superior Proposal and that was unsolicited and made after the date hereof and that did not otherwise result from a breach of this Section 5.18, (1) make a Seller Recommendation Change or (2) cause Seller to terminate this Agreement and concurrently with or after such termination enter into an Acquisition Agreement; provided, however, that Seller shall not be entitled to exercise its right to make a Seller Recommendation Change or terminate this Agreement pursuant to clause (y) until after the tenth day following receipt by the Buyer of written notice (a “Notice of Superior Proposal”) from Seller advising the Buyer that the Board intends to take such action and specifying the reasons therefor, including the material terms and conditions of any Superior Proposal that is the basis of the proposed action by the Board. In determining whether to make a Seller Recommendation Change or to cause Seller to so terminate this Agreement, the Board shall take into account any changes to the financial terms of this Agreement proposed by the Buyer in response to a Notice of Superior Proposal or otherwise. In no event shall the Board make or authorize a Seller Recommendation Change or terminate this Agreement if the Buyer matches the material terms and conditions of the Superior Proposal contained in the Notice of Superior Proposal within suchten-day period.
(c) In addition to the obligations of Seller set forth in paragraphs (a) and (b) of this Section 5.18, Seller shall promptly advise the Buyer in writing of any Acquisition Proposal, the material terms and conditions of any such Acquisition Proposal (including any material changes thereto) and the identity of the Person making any such Acquisition Proposal. Seller shall keep the Buyer informed in all material respects of the status and details (including any material change to the terms thereof) of any Acquisition Proposal.
(d) Nothing contained in this Section 5.18 shall prohibit Seller from (x) taking and disclosing to its limited partners a position contemplated byRule 14e-2(a) under the Exchange Act or making a statement required underRule 14a-9 under the Exchange Act or (y) making any disclosure to the limited partners of Seller that is required by applicable law; provided, however, that in no event shall Seller, its general partner or
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the Board take, or agree or resolve to take, any action prohibited by Section 5.18(b) (it being understood that any accurate disclosure of factual information to the limited partners of Seller that is required to be made to such limited partners under applicable federal securities laws shall not be considered a modification prohibited by clause (i)(A) of Section 5.18(b)).
(e) In the event Seller terminates this Agreement pursuant to Section 5.18(b), Buyer, as its sole and exclusive remedy, shall be entitled to the return of the Deposit and Liquidated Damages (as defined herein).
6. | CONDITIONS PRECEDENT TO OBLIGATIONS OF BUYER AND SELLER TO CLOSE |
6.1. Conditions Precedent to Obligations of Buyer to Close. The obligations of Buyer to consummate the transactions contemplated by this Agreement to occur at the Closing shall be subject to the satisfaction, on or before the Closing Date, of each and every one of the following conditions, all or any of which may be waived in writing, in whole or in part, by Buyer for purposes of consummating such transactions:
6.1.1. Representations and Warranties. The Seller’s representations and warranties set forth in Section 3 that (i) are subject to materiality qualifications shall be true and correct at and as of the Closing Date and (ii) are not subject to materiality qualifications shall be true and correct in all material respects as of the Closing Date, in each case as though then made and as though the Closing Date had been substituted for the date of this Agreement in such representations and warranties except to the extent changes in such representations and warranties are contemplated pursuant to this Agreement.
6.1.2. Covenants and Conditions. Seller shall have in all material respects performed and complied with all covenants, agreements and conditions required by this Agreement to be performed or complied with by it prior to or on the Closing Date.
6.1.3. No Injunction, Etc. No action, suit or other proceeding shall have been instituted, threatened or proposed before any court, governmental agency or legislative body to enjoin, restrain, prohibit or obtain substantial damages in respect of, or which is related to, or arising out of, this Agreement or the consummation of the transactions contemplated hereby.
6.1.4. Consents. Each of the following Consents shall have been duly obtained and delivered to or waived by Buyer: (a) the Consents of the Franchising Authorities and other third parties listed on Schedule 3.8; and (b) the Consents of the FCC, except for any FCC consent to any business radio license that Buyer reasonably expects can be obtained within 120 days after the Closing and so long as a temporary authorization is available to Buyer under FCC rules with respect thereto.
6.1.5. Deliveries. Seller shall have made or stand willing and able to make all the deliveries to Buyer set forth in Section 7.2.
6.1.6. Material Adverse Effect. No Material Adverse Effect shall have occurred after the date of this Agreement and is continuing at the Closing Date. For clarification purposes, Purchase Price adjustment in accordance with Paragraph 2.5.6 to a level at or above the Purchase Price Floor or to a level at or below Purchase Price Ceiling shall not constitute a Material Adverse Effect.
6.1.7. Discharge. Seller shall have discharged in full or removed Permitted Encumbrances as set forth in Section 1.21 (h).
6.1.8. Purchase Price Ceiling. Notwithstanding anything to the contrary set forth in Section 2.5.6, (excluding the effects of adjustments made pursuant to Sections 2.5.1, 2.5.2, 2.5.3, 2.5.4, and 2.5.5) the Purchase Price shall in no event be increased above the Purchase Price Ceiling.
6.2. Conditions Precedent to Obligations of Seller to Close. The obligations of Seller to consummate the transactions contemplated by this Agreement to occur at the Closing shall be subject to the satisfaction, on or before the Closing Date, of each and every one of the following conditions, all or any of which may be waived in writing, in whole or in part, by Seller for purposes of consummating such transactions:
6.2.1. Representations and Warranties. The Buyer’s representations and warranties set forth in Section 4 that (i) are subject to materiality qualifications shall be true and correct at and as of the Closing
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Date and (ii) are not subject to materiality qualifications shall be true and correct in all material respects as of the Closing Date, in each case as though then made and as though the Closing Date had been substituted for the date of this Agreement in such representations and warranties except to the extent changes in such representations and warranties are contemplated pursuant to this Agreement.
6.2.2. Covenants and Conditions. Buyer shall have in all material respects performed and complied with all covenants, agreements and conditions required by this Agreement to be performed or complied with by it prior to or on the Closing Date.
6.2.3. No Injunction, Etc. No action, suit or other proceeding shall have been instituted, threatened or proposed before any court, governmental agency or legislative body to enjoin, restrain, prohibit or obtain substantial damages in respect of, or which is related to, or arising out of, this Agreement or the consummation of the transactions contemplated hereby.
6.2.4. Limited Partner Approvals. A majority in interest of the limited partners of Seller shall have consented to the transactions contemplated by this Agreement in accordance with the terms of Seller’s partnership agreement and applicable securities laws.
6.2.5 Fairness Opinion. Seller shall have received a fairness opinion in form and substance acceptable to Seller in Seller’s sole and absolute discretion.
6.2.6. Purchase Price Floor. Notwithstanding anything to the contrary set forth in Section 2.5.6, (excluding the effects of adjustments made pursuant to Sections 2.5.1, 2.5.2, 2.5.3, 2.5.4, and 2.5.5), the Purchase Price shall in no event be reduced below the Purchase Price Floor.
6.2.7. Deliveries. Buyer shall have made or stand willing and able to make all the deliveries set forth in Section 7.3.
7. | CLOSING AND CLOSING DELIVERIES |
7.1. Closing. Subject to Sections 2.5.6 and 6.2.6, if practicable, the Closing will be held on the last business day of the calendar month during which the conditions set forth in Sections 6.1.4 and 6.2.4 hereof shall have been satisfied; provided, however, that if the Closing is not held on the last business day of the calendar month during which such conditions shall have been satisfied, the Closing shall be held on the last business day of the next succeeding calendar month, or on such other date as Buyer and Seller may mutually agree. The Closing shall be held at 10:00 am. local time at the Seller’s offices at 101 Steward Street, Suite 700, Seattle, WA 98101, or will be conducted by mail, electronic mail, and /or telecopies or at such other place and time as the parties may agree. Notwithstanding the foregoing, the parties agree that the Closing shall be deemed effective as of 12:01 a.m. on the Closing Date, and all references herein that relate to the date and time of the Closing, including provisions dealing with adjustments to the Purchase Price, shall refer to such effective date and time.
7.2. Deliveries by Seller. Prior to or on the Closing Date, Seller shall deliver to Buyer the following, in form and substance reasonably satisfactory to Buyer and its counsel:
7.2.1. Transfer Documents. A duly executed Bill of Sale, substantially in the form attached hereto as Exhibit G, special warranty deeds (subject to all matters of record), motor vehicle titles, assignments and other transfer documents which shall be sufficient to vest good title to the Assets in the name of Buyer or its permitted assignees, free and clear of any claims, liabilities, mortgages, liens, pledges, conditions, charges or encumbrances of any nature whatsoever except for Permitted Encumbrances;
7.2.2 Assumption Agreements. A duly executed Assignment and Assumption Agreement, substantially in the form attached hereto as Exhibit F, pursuant to which Seller shall assign the Assumed Liabilities;
7.2.3. Consents. The Consents required by Section 6.1.4;
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7.2.4. Officer’s Certificate. A certificate, dated as of the Closing Date, executed by the President or a Vice President of the general partner of Seller, certifying to his knowledge, without personal liability, that the conditions set forth in Sections 6.1.1 and 6.1.2 are satisfied;
7.2.5. Secretary’s Certificate. One or more certificates, dated as of the Closing Date, executed by the Secretary of the general partner of Seller, without personal liability: (a) certifying that the resolutions, as attached to such certificate, were duly adopted by the Board of Directors of Seller’s general partner, authorizing and approving the execution of this Agreement on behalf of Seller and the consummation of the transactions contemplated hereby and that such resolutions remain in full force and effect; (b) certifying as to the incumbency of the person signing this Agreement and any other documents on behalf of the general partner of Seller; (c) the Certificate of Formation of Seller (copies of which shall be attached to the Certificate), certified by the Secretary of State of its state of formation; and (d) the Partnership Agreement of Seller (copies of which shall be attached to the Certificate);
7.2.6. Opinions of Counsel. Opinions of Seller’s counsel dated as of the Closing Date, substantially in the forms attached hereto asExhibit C-1 andExhibit C-2;
7.2.7. Escrow Agreement. A duly executed Escrow Agreement, substantially in the form attached hereto as Exhibit A;
7.2.8. Subscriber List. A true and complete subscriber list as of the date reasonably close to (and not more than ten (10) business days preceding) the Closing Date, an updated list of subscriber deposits and prepayments and a list of disconnected subscribers for each of the six (6) months preceding the Closing; and
7.2.9. Aging Report. A true and complete Accounts Receivable aging report as of a date not more than ten (10) business days prior to the Closing Date.
7.3. Deliveries by Buyer. Prior to or on the Closing Date, Buyer shall deliver to Seller the following, in form and substance reasonably satisfactory to Seller and its counsel:
7.3.1. Purchase Price. The Purchase Price, in accordance with Sections 2.4 and 2.5, including release of the Deposit to Seller;
7.3.2. Assumption Agreements. A duly executed Assignment and Assumption Agreement, substantially in the form attached hereto as Exhibit F, pursuant to which Buyer shall assume and undertake to perform the Assumed Liabilities;
7.3.3. Officer’s Certificate. A certificate, dated as of the Closing Date, executed by an executive officer of Buyer, certifying to his knowledge, without personal liability, that the conditions set forth in Sections 6.2.1 and 6.2.2 are satisfied;
7.3.4. Secretary’s Certificate. A certificate, dated as of the Closing Date, executed by Buyer’s Secretary, without personal liability: (a) certifying that the resolutions, as attached to such certificate, were duly adopted by Buyer’s Board of Managers, authorizing and approving the execution of this Agreement and the consummation of the transactions contemplated hereby and that such resolutions remain in full force and effect; and (b) certifying as to the incumbency of the person signing this Agreement or any other documents on behalf of Buyer;
7.3.5. Opinion of Counsel. An opinion of Buyer’s counsel dated as of the Closing Date, substantially in the form attached hereto as Exhibit D;
7.3.6. Escrow Agreement. A duly executed Escrow Agreement, substantially in the form attached hereto as Exhibit A; and
7.3.7 Billing Transition Services Agreement. A duly executed billing transition services agreement in the form attached hereto as Exhibit I.
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8. | TERMINATION |
8.1. Method of Termination. Prior to Closing, this Agreement may be terminated only as follows:
8.1.1. By the mutual consent of Seller and Buyer, or by either Seller or Buyer if any condition to the Closing set forth in Section 6.1.3 or 6.2.3 is not fulfilled and the failure of such condition is not a result of a breach of warranty or nonfulfillment of a covenant or agreement by the party seeking to terminate the Agreement;
8.1.2. By Buyer, (a) if any of the conditions set forth in Section 6.1 (other than Section 6.1.3) hereof to which the obligations of Buyer are subject have not been fulfilled or waived, and provided that the failure to fulfill such condition is not a result of a breach of warranty or nonfulfillment of any covenant or agreement by Buyer contained in this Agreement, or (b) pursuant to Sections 2.5.6(b) or 5.13(b);
8.1.3. By Seller, (a) if any of the conditions set forth in Section 6.2 (other than Section 6.2.3) hereof to which the obligations of Seller are subject have not been fulfilled or waived, and provided that the failure to fulfill such condition is not a result of a breach of warranty or nonfulfillment of any covenant or agreement by Seller contained in this Agreement, (b) or pursuant to Section 2.5.6 (a) or Section 5.18(b);
8.1.4. Either Buyer or Seller may terminate this Agreement by giving notice to the other if (a) such other party has materially breached any of its representations, warranties or covenants herein such that it cannot comply with its respective conditions set forth in Sections 6 and 7, and such breach has not been cured in accordance with Section 10.15 and has not been waived by the terminating party (provided that the terminating party is not concurrently in material breach of any representation, warranty, covenant, or other agreement contained herein) or (b) the conditions to Closing have not been satisfied or waived by March 31, 2008 so long as the failure to close is not attributable to a breach hereunder or any other action or inaction by the party seeking to terminate.
8.2. Rights Upon Termination.
8.2.1. In the event of a termination of this Agreement pursuant to Section 8.1.1 or Section 8.1.4(b) hereof, as their respective sole and exclusive remedies: (a) the Buyer shall be entitled to the return of the Deposit and all interest accrued thereon; (b) Sections 5.3, 5.4, and 10 shall survive such termination; and (c) each party shall pay the costs and expenses incurred by it in connection with this Agreement, and no party (or any of its officers, directors, partners, employees, agents, representatives or stockholders) shall be liable to any other party for any cost, expense, damage or loss of anticipated profits hereunder.
8.2.2. In the event of a termination of this Agreement by Buyer pursuant to Section 8.1.2 hereof, as its sole and exclusive remedy: (a) Buyer shall be entitled to the return of the Deposit and all interest accrued thereon; and (b) Sections 5.3, 5.4, and 10 shall survive such termination
8.2.3. In the event of a termination of this Agreement by Buyer pursuant to Section 8.1.4(a) hereof, as its sole and exclusive remedy, (a) the Buyer shall be entitled to the return of the Deposit and all interest accrued thereon; and (b) Seller shall pay to Buyer Buyer’s actual and reasonable third-party legal, accounting, consulting, due diligence and other costs actually paid or incurred by Buyer to complete the transactions contemplated by this Agreement, but in no event shall such amount be greater than $250,000 in the aggregate from Seller or any Seller affiliate inclusive of Northland Cable Properties Seven Limited Partnership and Northland Cable Properties, Inc. as liquidated damages (the “Liquidated Damages”). The parties agree that damages in the event of a termination under Section 8.1.4(a) are sufficiently uncertain as of the date the Agreement that any estimation of such damages would be difficult to determine and that the Liquidated Damages amount is a reasonable approximation of any damages that Buyer might suffer under such circumstances.
8.2.4. In the event of a termination of this Agreement by Seller pursuant to Section 8.1.3(a) (other than as a result of a failure of the conditions set forth in section 6.2.6) or pursuant to Section 2.5.6(a), (a) Sections 5.3, 5.4, and 10 shall survive such termination; and (b) Seller shall be entitled to receive the Deposit and all interest accrued thereon.
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8.2.5. In the event of a termination of this Agreement by Seller pursuant to Section 5.18(b), (a) Sections 5.3, 5.4 and 10 shall survive such termination and (b) Buyer shall be entitled to the return of the Deposit, all accrued interest thereon and the payment by Seller to Buyer of Liquidated Damages.
9. | SURVIVAL OF REPRESENTATIONS AND WARRANTIES AND INDEMNIFICATION |
9.1. Representations and Warranties. All representations, warranties, covenants and agreements contained in this Agreement or in documents or instruments delivered pursuant hereto shall survive the Closing Date and eighteen months thereafter except that any claims for fraud shall survive the Closing Date until the expiration of the applicable statute of limitations.
9.2. Indemnification by Seller. Seller shall defend, indemnify and hold Buyer harmless against and with respect to, and shall reimburse Buyer for:
9.2.1. Any and all losses, liabilities or damages resulting from any untrue representation, breach of warranty or nonfulfillment of any covenant by Seller contained herein;
9.2.2. Any and all obligations of Seller not assumed by Buyer pursuant to the terms hereof;
9.2.3. Any and all losses, liabilities or damages resulting from Seller’s operation or ownership of the Systems or Assets prior to the Closing Date, including any claim for breach of Section 3.15.; and
9.2.4. Any and all actions, suits, proceedings, claims, demands, assessments, judgments, costs and expenses, including, without limitation, reasonable legal fees and expenses, incident to any of the foregoing or incurred in investigating or attempting to avoid the same or to oppose the imposition thereof, or in enforcing this indemnity.
9.3. Indemnification by Buyer. Buyer shall defend, indemnify and hold Seller harmless against and with respect to, and shall reimburse Seller for:
9.3.1. Any and all losses, liabilities or damages resulting from any untrue representation, breach of warranty or nonfulfillment of any covenant by Buyer contained herein;
9.3.2. Any and all of the Assumed Liabilities;
9.3.3. Any and all losses, liabilities or damages resulting from Buyer’s operation or ownership of the Systems or Assets on and after the Closing Date; and
9.3.4. Any and all actions, suits, proceedings, claims, demands, assessments, judgments, costs and expenses, including, without limitation, reasonable legal fees and expenses, incident to any of the foregoing or incurred in investigating or attempting to avoid the same or to oppose the imposition thereof, or in enforcing this indemnity.
9.4. Procedure for Indemnification. The procedure for indemnification shall be as follows:
9.4.1. The party claiming indemnification (the “Claimant”) shall promptly give notice to the party from whom indemnification is claimed (the “Indemnifying Party”) of any claim, whether between the parties or brought by a third party, specifying (a) the factual basis for such claim and (b) the estimated amount of the claim. If the claim relates to an action, suit or proceeding filed by a third party against Claimant, such notice shall be given by Claimant within ten business days after written notice of such action, suit or proceeding was given to Claimant; provided that failure to give such notice within such ten day period shall not bar or otherwise prejudice Claimant’s rights to indemnification with respect to such third party action, suit or proceeding unless any defense, claim, counterclaim or cross-claim of the Indemnifying Party is prejudiced thereby.
9.4.2. Following receipt of notice from the Claimant of a claim, the Indemnifying Party shall have 30 days to make such investigation of the claim as the Indemnifying Party deems necessary or desirable. For the purposes of such investigation, the Claimant agrees to make available to the Indemnifying Partyand/or its authorized representative(s) the information relied upon by the Claimant to substantiate the claim. If the Claimant and the Indemnifying Party agree at or prior to the expiration of said 30 day period
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(or any mutually agreed upon extension thereof) to the validity and amount of such claim, the Indemnifying Party shall immediately pay to the Claimant the full amount of the claim subject to the terms and in accordance with the procedures set forth herein. If the Claimant and the Indemnifying Party do not agree within said period (or any mutually agreed upon extension thereof), the Claimant may seek appropriate legal remedy.
9.4.3. With respect to any claim by a third party as to which the Claimant is entitled to indemnification hereunder, the Indemnifying Party shall have the right at its own expense, to participate in or assume control of the defense of such claim, and the Claimant shall cooperate fully with the Indemnifying Party. If the Indemnifying Party elects to assume control of the defense of any third party claim, the Claimant shall have the right to participate in the defense of such claim at its own expense. If the Indemnifying Party does not elect to assume control or otherwise participate in the defense of any third party claim, it shall be bound by the results obtained by the Claimant with respect to such claim, and the Indemnifying Party shall be responsible and shall promptly reimburse Claimant for all associated costs, fees and expenses.
9.4.4. If a claim, whether between the parties or by a third party, requires immediate action, the parties will diligently seek to reach a decision with respect thereto as expeditiously as practicable.
9.5. Limitation on Indemnification, Exclusive Remedy.
9.5.1. Seller shall not be liable under Section 9.2 for breach of representations and warranties for any losses or damages arising out of any single claim or aggregate claims until the total amount of all such losses or damages suffered or paid by Buyer exceeds TWENTY-FIVE THOUSAND DOLLARS ($25,000) (“Seller’s Basket”) in which case Seller shall, subject to the provisions of Section 9.5.2, be liable for the total amount of all such losses or damages.
9.5.2. Subject to the provisions of Sections 9.5.4, Seller’s liability under Section 9.2 shall be limited in amount to the Holdback.
9.5.3. The amount payable by Seller to Buyer with respect to Section 9.2 shall be reduced by the amount of any insurance proceeds received by Buyer with respect to losses, liabilities or damages, and each of the parties hereby agrees to use reasonable efforts to collect any and all insurance proceeds to which it may be entitled in respect to any such losses, liabilities or damages. To the extent that insurance proceeds are received after payment has been made by Seller to Buyer, Buyer shall promptly pay the proceeds to Seller up to the amount of the payment received from Seller.
9.5.4. After the Closing Date and except for fraud, the sole and exclusive remedy of any party for any misrepresentation or any breach of a warranty or covenant set forth in or made pursuant to this Agreement shall be a claim for indemnification under and pursuant to this Article 9; provided that nothing contained herein shall limit Buyer’s remedy of specific performance and other equitable relief with respect to Seller’s obligations under Section 10.7; provided further that there shall be no limitation on Buyers’ indemnity rights hereunder with respect to any and all breaches of any representations and warranties under Sections 3.1, 3.2, 3.5 and 3.6 ( solely with respect to title as to 3.5 and 3.6), 3.11, 3.13 and 3.15.
10. | MISCELLANEOUS |
10.1. Notices. All notices, demands and requests required or permitted to be given under the provisions of this Agreement shall be (a) in writing, (b) delivered by personal delivery, facsimile transmission (to be followed promptly by written confirmation mailed by certified mail as provided below) or sent by commercial delivery service or certified mail, return receipt requested, (c) deemed to have been given on the date of personal delivery, the date of transmission and receipt of facsimile transmissions, or the date set forth in the records of the delivery service or on the return receipt, and (d) addressed as follows:
If to Seller:
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c/o Northland Communications Corporation
101 Stewart Street, Suite 700
Seattle, WA 98101
Attn.: Gary Jones and Paul Milan
Facsimile No.:(206) 748-5061
101 Stewart Street, Suite 700
Seattle, WA 98101
Attn.: Gary Jones and Paul Milan
Facsimile No.:(206) 748-5061
With a copy to:
Perkins Coie LLP
1201 Third Avenue, Suite 4800
Seattle, WA 98101
Attn.: Georges Yates, Esq.
Facsimile No.:(206) 359-4402
If to Buyer:
Green River Media & Communications, LLC
4601 Six Forks Road, Suite 500
Raleigh, NC 27609
Attn.: Steven R. Hunter
Telephone No.: (919) 321 2560
Facsimile No.: (919) 882 1603
With a copy to:
Moore & Van Allen PLLC
100 N. Tryon Street, Suite 4700
Charlotte, NC28202-4003
Attn.: Barney Stewart, III and Thomas H. O’Donnell, Jr.
Facsimile: (704) 331 1029
or to any such other persons or addresses as the parties may from time to time designate in a writing delivered in accordance with this Section 10.1.
10.2. Benefit and Binding Effect. Neither party hereto may assign this Agreement without the prior written consent of the other party hereto, which consent shall not be unreasonably withheld.
10.3. Bulk Transfer. Buyer acknowledges that Seller has not and will not file any transfer notice or otherwise complied with applicable bulk transfer laws, and the parties agree to waive compliance with same.
10.4. Governing Law; Venue. This Agreement shall be governed, construed and enforced in accordance with the laws of the State of Washington without regard to the conflicts of law principles of such state. The parties consent to the exclusive jurisdiction of Federal and state courts located in Denver, Colorado for any dispute or claim arising out of or under this Agreement. The prevailing party shall be entitled to the reimbursement from the other party of all costs and expenses incurred, if any, including attorney’s fees, to enforce its rights and remedies hereunder. The parties agree that this Section 10.4 serves as a material inducement for Seller to enter into this Agreement.
10.5 Gender and Number. Words used herein, regardless of the gender and number specifically used, shall be deemed and construed to include any other gender, masculine, feminine or neuter, and any other number, singular or plural, as the context requires.
10.6. Entire Agreement. This Agreement, all schedules and exhibits hereto, and all documents and certificates to be delivered by the parties pursuant hereto collectively represent the entire understanding and agreement between Buyer and Seller with respect to the subject matter hereof. All schedules and exhibits attached to this Agreement shall be deemed part of this Agreement and incorporated herein, where applicable, as if fully set forth herein. This Agreement supersedes all prior negotiations between Buyer and Seller with respect to the transactions contemplated hereby, and all letters of intent and other writings relating to such negotiations, and cannot be amended, supplemented or modified except by an agreement in writing which makes specific reference to this Agreement or an agreement delivered pursuant hereto, as the case may be, and
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which is signed by the party against which enforcement of any such amendment, supplement or modification is sought.
10.7. Further Assurances. Each party covenants that at any time, and from time to time, after the Closing Date, it will execute such additional instruments and take such actions as may be reasonably requested by the other parties to confirm or perfect or otherwise to carry out the intent and purposes of this Agreement.
10.8. Waiver of Compliance; Consents. Except as otherwise provided in this Agreement, any failure of any of the parties to comply with any obligation, representation, warranty, covenant, agreement or condition herein may be waived by the party entitled to the benefits thereof, but such waiver or failure to insist upon strict compliance with such obligation, representation, warranty, covenant, agreement or condition shall not operate as a waiver of, or estoppel with respect to, any subsequent or other failure.
10.9. Severability. If any provision of this Agreement or the application thereof to any person or circumstance shall be invalid or unenforceable to any extent, the remainder of this Agreement and the application of such provision to other persons or circumstances shall not be affected thereby and shall be enforced to the greatest extent permitted by law; provided, however, that the economic and legal substance of the transactions contemplated by this Agreement is not affected in any manner that is materially adverse to any party affected by such invalidity or unenforceability.
10.10. Counterparts. This Agreement may be signed in any number of counterparts with the same effect as if the signature on each such counterpart were upon the same instrument, and a facsimile transmission shall be deemed to be an original signature.
10.11. No Third-Party Beneficiaries. This Agreement constitutes an agreement solely among the parties hereto, and, except as otherwise provided herein, is not intended to and will not confer any rights, remedies, obligations or liabilities, legal or equitable on any person other than the parties hereto and their respective successors or assigns, or otherwise constitute any person a third party beneficiary under or by reason of this Agreement.
10.12. Tax Consequences. Except as provided in Section 3.13 of this Agreement, no party to this Agreement makes any representation or warranty, express or implied, with respect to the tax implications of any aspect of this Agreement on any other party to this Agreement, and all parties expressly disclaim any such representation or warranty with respect to any tax consequences arising under this Agreement. Each party has relied solely on its own tax advisors with respect to the tax implications of this Agreement.
10.13. Construction. This Agreement has been negotiated by Buyer and Seller and their respective legal counsel, and legal or equitable principles that might require the construction of this Agreement or any provision of this Agreement against the party drafting this Agreement shall not apply in any construction or interpretation of this Agreement.
10.14. Timing of Notice and Performance. If the last day permitted for the giving of any notice or the performance of any act required or permitted under this Agreement falls on a day that is not a business day, the time for the giving of such notice or the performance of such act will be extended to the next succeeding business day.
10.15. Cure. For all purposes under this Agreement, the existence or occurrence of any event or circumstance that constitutes a breach of a representation or warranty or the nonfulfillment of any pre Closing covenant or agreement of Buyer or Seller contained in this Agreement (including, without limitation, the schedules hereto) on the date such representation or warranty is made or the fulfillment of such pre Closing covenant or agreement is due, shall not constitute a breach of such representation or warranty or the nonfulfillment of such pre Closing covenant or agreement if such event or circumstance is cured within 15 days of the written notice thereof.
10.16. Covenant Not To Sue and Nonrecourse to Partners.
10.16.1 Buyer agrees that notwithstanding any other provision in this Agreement, any agreement, instrument, certificate or document entered into pursuant to or in connection with this Agreement or the
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transactions contemplated herein or therein (each a “Transaction Document”) and any rule of law or equity to the contrary, to the fullest extent permitted by law, Seller’s obligations and liabilities under all Transaction Documents and in connection with the transactions contemplated therein shall be nonrecourse to all general and limited partners of Seller. As used herein, the term “nonrecourse” means that the obligations and liabilities are limited in recourse to the assets of Seller (for those purposes, any capital contribution obligations of the general and limited partners of Seller or any negative capital account balances of such partners shall not be deemed to be assets of Seller) and are not guaranteed directly or indirectly by, or the primary obligations of, any general or limited partner of Seller, and neither Seller nor any general or limited partner or any incorporator, stockholder, officer, director, partner, employee or agent of Seller or of any general or limited partner of any successor partnership or trust, either directly or indirectly, shall be personally liable in any respect for any obligation or liability of Seller under any Transaction Document or any transaction contemplated therein.
10.16.2 Buyer hereby covenants for itself, its successors and assigns that it, its successors and assigns will not make, bring, claim, commence, prosecute, maintain, cause or permit any action to be brought, commenced, prosecuted, maintained, either at law or equity, in any court of the United States or any state thereof against any general or limited partner of Seller or any incorporator, stockholder, officer, director, partner, employee or agent of Seller or of any general or limited partner of Seller for (a) the payment of any amount or the performance of any obligation under any Transaction Document or (b) the satisfaction of any liability arising in connection with any such payment or obligation or otherwise, including without limitation, liability arising in law for tort (including, without limitation, for active and passive negligence, negligent misrepresentation and fraud), equity (including, without limitation, for indemnification and contribution) and contract (including, without limitation, monetary damages for the breach of representation or warranty or performance of any of the covenants or obligations contained in any Transaction Document or with the transactions contemplated herein or therein).
10.17. Headings. The headings herein are included for ease of reference only and shall not control or affect the meaning or construction of the provisions of this Agreement.
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EXECUTED as of the date first above written.
BUYER:
GREEN RIVER MEDIA AND COMMUNICATIONS, LLC
By: | /s/ STEVE HUNTER |
Printed Name: Steve Hunter
Title: | Manager |
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SELLER:
NORTHLAND CABLE PROPERTIES EIGHT LIMITED PARTNERSHIP
By: NORTHLAND COMMUNICATIONS CORPORATION
Its: General Partner
Its: General Partner
By: | /s/ GARY JONES |
Printed Name: Gary Jones
Title: | President |
Solely for purposes of Section 5.12:
NORTHLAND COMMUNICATIONS CORPORATION
By: | /s/ GARY JONES |
Printed Name: Gary Jones
Title: | President |
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ALTERNATIVE ASSET PURCHASE AGREEMENT
THIS ALTERNATIVE ASSET PURCHASE AGREEMENT (this “Agreement”) is effective as of (the “Effective Date”) by and between Northland Cable Properties Eight Limited Partnership, a Washington limited partnership (“NCP-Eight”), and Northland Communications Corporation, a Washington corporation (“NCC”), or its assignee or assignees.
RECITALS:
A. NCP-Eight previously entered into an Asset Purchase Agreement, dated July 5, 2007, between NCP-Eight and Green River Media and Communications, LLC, a North Carolina limited liability company (“Green River”), with respect to the sale of substantially all of the assets of NCP-Eight to Green River (the “Green River Agreement”). A copy of the Green River Agreement is attached hereto as Exhibit A.
B. The Green River Agreement has been terminated as of the Effective Date, without the transactions contemplated by the Green River Agreement having been completed.
C. The parties hereto desire to make arrangements for a sale of the Assets of NCP-Eight to NCC (or one or more of its affiliates) upon substantially the same terms and conditions as provided in the Green River Agreement.
AGREEMENT:
In consideration of the above recitals and the covenants and agreements contained or incorporated herein, NCP-Eight and NCC agree as follows:
1. Subject to the provisions hereof, this Agreement incorporates by reference all of the terms and provisions of the Green River Agreement, including all of the annexes and schedules thereto. All terms used herein which are defined in the Green River Agreement shall have the same meanings as in the Green River Agreement, except that (i) the term “Buyer”, as used in the Green River Agreement, shall be deemed, where applicable and for purposes of this Agreement only, to refer to NCC, and (ii) the term “Agreement”, as used in the Green River Agreement, shall be deemed, where applicable and for purposes of this Agreement only, to refer to the Green River Agreement as amended or supplemented by this Agreement.
2. Subject to the terms and conditions set forth herein and in the Green River Agreement incorporated herein by reference, NCP-Eight agrees to sell the Assets to NCC. NCC hereby agrees to perform obligations specifically provided to be performed by Green River in the Green River Agreement in accordance with the terms of the Green River Agreement, as amended or supplemented by this Agreement, including but not limited to payment of the Purchase Price at Closing pursuant to Subsection 7.3.1 of the Green River Agreement, as adjusted pursuant to Section 2.5 of the Green River Agreement.
3. For purposes of this Agreement only, the Green River Agreement shall be amended as follows:
(a) The first sentence of Section 2.3 is amended by deleting “execution and delivery of this Agreement by Seller and Buyer” and replacing it with “satisfaction of the condition set forth in Section 6.1.10”.
(b) The first sentence of Section 4.1 is amended and restated to read as follows:
“Buyer is a Washington corporation, duly organized and validly existing under the laws of the State of Washington and is qualified to conduct business as a foreign corporation in each jurisdiction in which the property owned, leased or operated by it requires it to be so qualified, except where the failure to so qualify would not have a Material Adverse Effect.”
(c) Section 5.10.5 is deleted and replaced in its entirety with the following text: “RESERVED”.
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(d) Section 5.12 is deleted and replaced in its entirety with the following text: “RESERVED”.
(e) “March 31, 2008” in the seventh line of Section 8.1.4 is deleted and replaced with the following text: “the date which is 90 days after the Effective Date of this Agreement”.
(f) The notice address of the Buyer and its Counsel in Section 10.1 is deleted and replaced with the following:
“If to Buyer: | Northland Communications Corporation 101 Stewart Street, Suite 700 Seattle, WA 98101 Attn.: Gary Jones and Paul Milan Facsimile No.:(206) 758-5061” |
(g) Section 10.2 is amended and restated in its entirety to read as follows:
“10.2. Benefit and Binding Effect. Neither party hereto may assign this Agreement without the prior written consent of the other party hereto, which consent shall not be unreasonably withheld; except that NCC shall be permitted, in its sole discretion, to assign this Agreement to one or more affiliates of NCC without the prior written consent of NCP-Eight.”
(h) “Denver, Colorado” contained in the fourth line of Section 10.4 is amended to read “Seattle, Washington”.
(i) The following Section 6.1.10 is added immediately after Section 6.1.9:
“6.1.10. Financing. Buyer shall have obtained commitments for the financing of the transactions contemplated by this Agreement on terms satisfactory to Buyer in its sole discretion.”
(j) The following Section 8.1.5 is added immediately after Section 8.1.4:
“8.1.5. By Buyer if the condition set forth in Section 6.1.10 is not satisfied within 90 days after the effective date of this Agreement.”
(k) The following Section 8.1.6 is added immediately after Section 8.1.5:
“8.1.6. This agreement shall automatically terminate, without any action required to be taken by Seller or Buyer, in the event that closing hereunder shall not have occurred on or before the first anniversary of the termination of the Green River Agreement.”
(l) The following Section 8.2.6 is added immediately after Section 8.2.5:
“8.2.6. In the event of a termination of this Agreement pursuant to Section 8.1.5 hereof, as their respective and sole remedies: (a) Sections 5.3, 5.4 and 10 shall survive such termination; and (b) each party shall pay the costs and expenses incurred by it in connection with this Agreement, and no party (or any of its officers, directors, partners, employees, agents, representatives or stockholders) shall be liable to any other party for any cost, expense, damage or loss of anticipated profits hereunder.”
4. This Agreement shall be governed by the laws of the State of Washington.
5. This Agreement may be executed in one or more counterparts and the executed counterparts taken together shall constitute one and the same agreement.
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IN WITNESS WHEREOFthe parties hereto have caused this Agreement to be duly executed and delivered by their authorized officers or representatives as of the date first written above.
NORTHLAND CABLE PROPERTIES EIGHT
LIMITED PARTNERSHIP
LIMITED PARTNERSHIP
By: | NORTHLAND COMMUNICATIONS |
CORPORATION, Its: General Partner
By: |
Name:
Title: |
NORTHLAND COMMUNICATIONS
CORPORATION
By: |
Name:
Title: |
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September 28, 2007
General Partner
Northland Cable Properties Eight Limited Partnership
101 Stewart Street, Suite 700
Seattle, WA 98101
Dear General Partner:
Duff & Phelps, LLC (“Duff & Phelps”) has been engaged by Northland Cable Properties Eight Limited Partnership (“NCP-8” or the “Company”) to serve as independent financial advisor to the General Partner (“General Partner”) of the Company and provide an opinion (the “Opinion”) as to the fairness, from a financial point of view, of the Purchase Price (as hereinafter defined) to be received by the limited partners of the Company (“Limited Partners”) in the Proposed Transaction (as hereinafter defined) as of July 5, 2007, without giving effect to any impacts of the Proposed Transaction on any particular Limited Partner other than in its capacity as a Limited Partner.
Concurrent to the Proposed Transaction, the buyer, Green River Media and Communications, LLC (“Green River Media”), is also acquiring the assets of Northland Cable Properties Seven Limited Partnership (“NCP-7”) and certain assets of Northland Cable Properties, Inc. (“NCPI”). Duff & Phelps has been engaged by NCP-7 to serve as independent financial advisor to the General Partners of NCP-7 and provide an opinion as to the fairness of the proposed transaction, from a financial point of view, to the limited partners of NCP-7.
Duff & Phelps has not previously provided financial advisory services to NCP-8, NCP-7, NCPI or Green River Media.
Description of the Proposed Transaction
Pursuant to the Purchase Agreement dated July 5, 2007 (the “Purchase Agreement”) entered into by and among NCP-8 and Green River Media, the Company will sell its operating assets and franchise rights to Green River Media for a cash consideration (“Purchase Price”) of $8.1 million, plus cash accumulated by the Company prior to closing, less indebtedness at closing, less the Company’s transaction expenses, and other closing adjustments (together, the “Proposed Transaction”).
Scope of Analysis
In connection with this Opinion, we have made such reviews, analyses and inquiries as we have deemed necessary and appropriate under the circumstances. Our due diligence included, but was not limited to, the following:
1. Conducted meetings at the Company’s headquarters in Seattle, Washington and held multiple telephone conversations with the following members of the senior management of NCC regarding the Proposed Transaction and the history, current operations and future outlook for NCP-8:
• | Gary Jones, President | |
• | Richard Clark, Executive Vice President | |
• | Richard Dyste, Senior Vice President of Technical Services | |
• | Paul Milan, Vice President, Senior Counsel | |
• | Rick McElwee, Vice President, Controller |
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2. Held discussions with Patrick Lentz and Randy Wells of the investment banking firm Daniels & Associates regarding their sale process for the Company;
3. Reviewed audited financial statements for the Company for the fiscal years ended December 31, 2002 through 2006 and unaudited financial statements for the six-month period ended June 30, 2007 and the equivalent prior year period;
4. Reviewed management prepared earnings projections for the fiscal years ended December 31, 2007 through 2016 and held general discussions with management regarding long-term growth prospects, profitability levels, and required capital investment levels;
5. Reviewed the Purchase Agreement dated July 5, 2007, including management-provided schedules of estimated closing adjustments and aggregate proceeds distributable to Limited Partners;
6. Reviewed NCC’s Board of Directors meeting minutes from 2006 through year-to-date 2007;
7. Reviewed letters of interest and letters of intent received by the Company during 2006 and 2007;
8. Analyzed financial and market information for selected public companies and M&A transactions that we deemed relevant;
9. Reviewed other operating and financial information provided by Company management; and
10. Reviewed certain other relevant, publicly available information, including economic, industry, and investment information.
Assumptions, Qualifications and Limiting Conditions
In performing its financial analysis and rendering this Opinion with respect to the Proposed Transaction, Duff & Phelps:
1. Relied upon the accuracy, completeness, and fair presentation of all information, data, advice, opinions and representations obtained from public sources or provided to it from private sources, including Company management, and did not attempt to independently verify such information;
2. Assumed that the estimates, evaluations and projections furnished to Duff & Phelps were reasonably prepared and based upon the best currently available information and good faith judgment of the person furnishing the same;
3. Assumed that information supplied and representations made by Company management are substantially accurate regarding the Company and the Proposed Transaction;
4. Assumed that all of the conditions required to implement the Proposed Transaction will be satisfied and that the Proposed Transaction will be completed in accordance with the Purchase Agreement without any material amendments thereto or any waivers of any terms or conditions thereof that, in either case, do not affect the total consideration paid; and
5. Assumed that all governmental, regulatory or other consents and approvals necessary for the consummation of the Proposed Transaction will be obtained without any adverse effect on the Company.
In our analysis and in connection with the preparation of this Opinion, Duff & Phelps made numerous assumptions with respect to industry performance, general business, market and economic conditions and other matters, many of which are beyond our control and the control of any party involved in the Proposed Transaction. To the extent that any of the foregoing assumptions or any of the facts on which this Opinion is based prove to be untrue in any material respect, this Opinion cannot and should not be relied upon.
Duff & Phelps did not make any independent evaluation, appraisal or physical inspection of the Company’s solvency or of any specific assets or liabilities (contingent or otherwise). This Opinion should not be construed as a valuation opinion, credit rating, solvency opinion, an analysis of the Company’s credit worthiness or otherwise as tax advice or as accounting advice. In rendering this Opinion, Duff & Phelps relied upon the fact that the General Partner and the Company have been advised by counsel as to all legal matters
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with respect to the Proposed Transaction, including whether all procedures required by law to be taken in connection with the Proposed Transaction have been duly, validly and timely taken; and Duff & Phelps has not made, and assumes no responsibility to make, any representation, or render any opinion, as to any legal matter.
Duff & Phelps was not requested to and did not provide advice concerning the structure, the specific amount of the Purchase Price, or any other aspects of the Proposed Transaction, or to provide services other than the delivery of this Opinion. Duff & Phelps was not requested to and did not solicit any expressions of interest from any other parties with respect to the sale of all or any part of the Company or any other alternative transaction. Duff & Phelps did not participate in negotiations with respect to the terms of the Purchase Agreement or the Proposed Transaction. Consequently, Duff & Phelps assumed that such terms are the most beneficial terms from the Company’s perspective that could under the circumstances be negotiated among the parties to the Purchase Agreement and the Proposed Transaction. In addition, Duff & Phelps was not requested to opine as to, and this Opinion does not address: (i) the fairness of any portion or aspect of the Proposed Transaction to the holders of any class of securities, creditors or other constituencies of the Company, or any other party other than those set forth in this Opinion, or (ii) the fairness of any portion or aspect of the Proposed Transaction to any one class or group of the Company’s or any other party’s security holders vis-à-vis any other class or group of the Company’s or such other party’s security holders (including without limitation the allocation of any Purchase Price amongst or within such classes or groups of security holders).
Duff & Phelps prepared this Opinion effective as of July 5, 2007. This Opinion is necessarily based upon market, economic, financial and other conditions as they exist and can be evaluated as of such date, and Duff & Phelps disclaims any undertaking or obligation to advise any person of any change in any fact or matter affecting this Opinion which may come or be brought to the attention of Duff & Phelps after the date hereof. Notwithstanding and without limiting the foregoing, in the event that there is any change in any fact or matter affecting this Opinion after the date hereof and prior to the completion of the Proposed Transaction, Duff & Phelps reserves the right to change, modify or withdraw this Opinion.
The basis and methodology for this Opinion were designed specifically for the express purposes of the General Partner and may not translate to any other purposes. This Opinion is not a recommendation as to how any Limited Partner should vote or act with respect to any matters relating to the Proposed Transaction, or whether to proceed with the Proposed Transaction or any related transaction, nor does it indicate that the Purchase Price paid is the best possible attainable under any circumstances. Further, we were not requested to opine as to, and this Opinion does not in any manner address, the underlying business decision of the Company to engage in the Proposed Transaction or the relative merits of the Proposed Transaction as compared to any alternative business transaction or strategy. The decision as to whether to proceed with the Proposed Transaction or any related transaction may depend on an assessment of factors unrelated to the financial analysis on which this Opinion is based. This Opinion should not be construed as creating any fiduciary duty on Duff & Phelps’ part to any party.
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This Opinion may not be quoted or referred to, in whole or in part, in any written document or used for any other purpose, without the prior written consent of Duff & Phelps.
Conclusion
Based on our analysis and relying upon the accuracy and completeness of all information provided to us, it is our opinion that, as of July 5, 2007, the Purchase Price to be received by the Limited Partners of NCP-8 is fair (without giving effect to any impacts of the Proposed Transaction on any particular Limited Partner other than in its capacity as a Limited Partner) from a financial point of view to such Limited Partners.
Respectfully submitted,
Duff & Phelps, llc
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AMENDMENT TO
AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP
OF
NORTHLAND CABLE PROPERTIES EIGHT LIMITED PARTNERSHIP
AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP
OF
NORTHLAND CABLE PROPERTIES EIGHT LIMITED PARTNERSHIP
THIS AMENDMENT (the “Amendment”) to the Amended and Restated Agreement of Limited Partnership of Northland Cable Properties Eight Limited Partnership, dated September 30, 1987 (the “Partnership Agreement”), is made and entered into as of [ , 200 ] by and between Northland Communications Corporation, a Washington corporation (“Northland”), as the General Partner of Northland Cable Properties Eight Limited Partnership, a Washington limited partnership (“NCP-Eight”), and the Limited Partners of NCP-Eight.
RECITALS:
A. Pursuant to Section 19(c) of the Partnership Agreement, the Partnership Agreement may be amended by the General Partner with the consent, pursuant to a Majority Vote, of the Limited Partners to the extent that such an amendment does not convert a Limited Partner’s interest into a general partner’s interest or otherwise modify the limited liability of a Limited Partner.
B. The purpose of this Amendment is to permit NCP-Eight to sell all or substantially all of its assets to its General Partner or its Affiliates on substantially the same terms and conditions (including purchase price), except for an additional condition regarding financing, as are contained in an existing asset purchase agreement with a third party without requiring NCP-Eight to follow an appraisal procedure that would otherwise be required by the Partnership Agreement.
C. At a special meeting held on [ , 200 ], this Amendment was approved by Majority Vote of the Limited Partners of NCP-Eight.
D. Pursuant to Section 20(f)(a) of the Partnership Agreement, the Limited Partners have appointed the General Partner to be their attorney-in-fact for purposes of executing amendments to the Partnership Agreement, which may be exercised by the General Partner for each Limited Partner by executing any such amendment with a single signature as attorney-in-fact for all of them.
AGREEMENTS:
In consideration of the above recitals, the parties agree as follows:
1. Amendment Authorizing Alternative Price Determination. The Partnership Agreement is hereby amended by adding the following text immediately before the period at the end of the first sentence of the penultimate paragraph of Section 11(a):
“; provided howeverthat the Appraisal Procedure shall not be required for a sale of all or substantially all of the Partnership’s assets to the General Partner or its Affiliates if such sale is made on substantially the same terms and conditions (including purchase price), except for an additional condition regarding financing, contained in the Asset Purchase Agreement between NCP-Eight and Green River Media and Communications, LLC dated July 5, 2007”.
2. Effect of Amendment. Except as expressly amended by this Amendment, the Partnership Agreement shall remain in full force and effect.
3. Governing Law. This Agreement shall be governed by the laws of the State of Washington.
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IN WITNESS WHEREOF the parties hereto have caused this Amendment to be duly executed and delivered by their authorized officers or representatives as of the date first written above.
General Partner: | Limited Partners: | |
NORTHLAND COMMUNICATIONS CORPORATION | BY: NORTHLAND COMMUNICATIONS CORPORATION, as attorney-in-fact | |
By: | By: | |
Name: | Name: | |
Title: | Title: |
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