1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE
SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only
(as permitted by Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or
[ ] Rule 14a-12
NORTHLAND CABLE PROPERTIES SIX
LIMITED PARTNERSHIP
- --------------------------------------------------------------------------------
(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):
[ ] No Fee Required
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(4)
and 0-11
CALCULATION OF FILING FEE
======================================================================================================
PER UNIT PRICE OR
OTHER UNDERLYING
VALUE OF PROPOSED
TRANSACTION MAXIMUM
TITLE OF EACH CLASS OF AGGREGATE NUMBER OF COMPUTED PURSUANT AGGREGATE
SECURITIES TO WHICH SECURITIES TO WHICH TO EXCHANGE VALUE OF
TRANSACTION APPLIES: TRANSACTION APPLIES: ACT RULE 0-11: TRANSACTION: TOTAL FEE PAID
- ---------------------- -------------------- ------------------ ------------ --------------
L.P. UNITS 29,784 $62,250,000 $62,250,000 $12,450
======================================================================================================
[X] Fee paid previously with preliminary materials.
- --------------------------------------------------------------------------------
[ ] 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: $12,450
(2) Form, Schedule, or Registration Statement no.: Commission File
No. 000-16063
(3) Filing Party: Registrant / Partnership
(4) Date Filed: December 21, 2000
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NORTHLAND CABLE PROPERTIES SIX LIMITED PARTNERSHIP
PROXY STATEMENT
To our Limited Partners:
This proxy statement solicits your vote for two separate proposals. The
first proposal, if approved, will extend the term of Northland Cable Properties
Six Limited Partnership ("NCP-Six") for six years until December 31, 2007. The
second proposal, if approved, will provide authority for NCP-Six to sell all of
its existing assets, leading to the winding up of NCP-Six. These two proposals
are not mutually exclusive. If the term of NCP-Six is not extended, NCP-Six
could be required by its lenders to liquidate its assets in an unreasonably
short time period in order to raise proceeds to repay NCP-Six's current debt
upon its maturity date of June 30, 2001. Such time-sensitive liquidation could
result in a sales price that may not be in the best interests of the limited
partners. In order to protect against such an outcome, a limited partner is
hereby provided an opportunity to extend the term of NCP-Six.
NCP-Six is currently anticipating the sale of its Bennettsville, South
Carolina, operating system to Adelphia Communications Corporation ("Adelphia")
for a purchase price of $8,388,000, subject to certain adjustments (the
"Adelphia Transaction"). If the Adelphia Transaction is consummated, pursuant to
the second proposal for which your vote is solicited in this proxy statement
NCP-Six would sell and distribute its remaining cable television systems and
other assets to Northland Communications Corporation, managing general partner
of NCP-Six, or its assigns, in a transaction valued at $62,250,000, subject to
certain adjustments (the "Proposed Transaction"). Based on these transaction
valuations, projected cash distributions to be made to unaffiliated limited
partners over the life of the partnership (per $500 partnership unit) are as
follows:
PRIOR CASH 120 DAYS AFTER CLOSING NON-RESIDENT ONE YEAR AFTER CLOSING TWO YEARS
DISTRIBUTIONS THE PROPOSED TRANSACTION TAX THE PROPOSED TRANSACTION AFTER CLOSING TOTAL
- ------------- ------------------------ ------------ ------------------------ ------------- ------
$128 $ 709 $ 58 $211 $170 $1,276
THE AMOUNTS SET FORTH IN THE PRECEDING TABLE ARE PROVIDED ON A PRO FORMA
BASIS AS OF DECEMBER 31, 2000, AND ARE BEING PROVIDED FOR ILLUSTRATIVE PURPOSES
ONLY. IT IS CURRENTLY ANTICIPATED THAT THE PROPOSED TRANSACTION WILL CLOSE IN
JUNE 2001. ACTUAL AMOUNTS WILL VARY FROM THESE PROJECTIONS. (For details, see
"Projected Cash Available from Liquidation" on page .)
This proxy statement and the accompanying proxy card are being furnished in
connection with the solicitation of proxies for use at a special meeting of
unaffiliated limited partners to be held at 3:00 p.m. on May 31, 2001. The
special meeting, and any postponements or adjournments, will be held at the
offices of NCP-Six located at 1201 Third Avenue, Suite 3600, Seattle, Washington
98101. Only unaffiliated limited partners of record as of December 31, 2000 will
be entitled to notice of and to vote at the special meeting.
THE PROPOSED TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION. THE COMMISSION HAS NOT PASSED UPON THE
FAIRNESS OR MERITS OF THE PROPOSED TRANSACTION, NOR UPON THE ACCURACY OR
ADEQUACY OF THE INFORMATION CONTAINED IN THIS PROXY STATEMENT. ANY
REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
YOU ARE URGED TO CAREFULLY REVIEW THIS PROXY STATEMENT AND TO RETURN YOUR
PROXY CARD PROMPTLY IN ORDER FOR IT TO BE RECEIVED BY THE MANAGING GENERAL
PARTNER ON OR BEFORE MAY 30, 2001.
The date of this proxy statement is April 15, 2001. We are first mailing this
proxy statement
to unaffiliated limited partners on or about April 15, 2001.
Sincerely,
Northland Communications Corporation,
Managing General Partner of NCP-Six
By:
--------------------------------------
John S. Whetzell,
President
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NORTHLAND CABLE PROPERTIES SIX LIMITED PARTNERSHIP
1201 THIRD AVENUE, SUITE 3600
SEATTLE, WASHINGTON 98101
NOTICE OF SPECIAL MEETING OF LIMITED PARTNERS
ON MAY 31, 2001
A special meeting of the limited partners of Northland Cable Properties Six
Limited Partnership will be held at the Washington Mutual Tower, 1201 Third
Avenue, Suite 3600, Seattle, Washington, on May 31, 2001 at 3:00 p.m. local
time. The meeting is called for the following purposes:
1. To consider and vote on an amendment to the NCP-Six Partnership
Agreement extending the term of NCP-Six for an additional six years so
that its current expiration date of December 31, 2001 is changed to a
future expiration date of December 31, 2007 as further described in the
accompanying proxy statement. The complete text of the proposed
amendment to extend the term of the NCP-Six Partnership Agreement is
attached as Exhibit C to the accompanying proxy statement.
2. To consider and vote on authorizing NCP-Six and its General Partners to
consummate the Proposed Transaction as described in the accompanying
proxy statement and to take all steps necessary to complete such
transaction, including, but not limited to, amending the NCP-Six
Partnership Agreement in order to allow for the Proposed Transaction.
The complete text of the proposed amendment to authorize the Proposed
Transaction is attached as Exhibit D to the accompanying proxy
statement.
3. To transact any other business that properly comes before the special
meeting, including any adjournments or postponements of the meeting.
Only limited partners of record as of December 31, 2000 are entitled to
notice of and to vote at the special meeting and any adjournments or
postponements. Each proposal will be adopted if holders of a majority of the
outstanding limited partnership units (not including units held by us, the
General Partners, or our affiliates) vote to "APPROVE" the proposal. You are not
entitled to dissenters' appraisal rights under Washington law with respect to
the Proposed Transaction.
WE RECOMMEND THAT YOU VOTE TO "APPROVE" BOTH PROPOSED AMENDMENTS TO THE
NCP-SIX PARTNERSHIP AGREEMENT AND THE PROPOSED TRANSACTION. WE HAVE SIGNIFICANT
CONFLICTS OF INTEREST IN MAKING THIS PROPOSAL BECAUSE NORTHLAND IS THE MANAGING
GENERAL PARTNER OF NCP-SIX, AND NORTHLAND (OR ITS ASSIGNEE) WILL ACQUIRE THE
MAJORITY OF THE ASSETS OF NCP-SIX IF THE PROPOSED TRANSACTION IS CONSUMMATED.
OUR CONFLICTS OF INTEREST ARE DESCRIBED IN GREATER DETAIL IN THE ACCOMPANYING
PROXY STATEMENT, TOGETHER WITH A MORE COMPLETE DESCRIPTION OF (I) BOTH PROPOSED
AMENDMENTS TO THE NCP-SIX PARTNERSHIP AGREEMENT, AND (II) THE PROPOSED
TRANSACTION. WE URGE YOU TO READ THE FULL TEXT OF THE PROXY STATEMENT AND ITS
EXHIBITS CAREFULLY BEFORE MAKING YOUR DECISION ON THESE PROPOSALS.
Sincerely,
Northland Communications Corporation,
Managing General Partner of NCP-Six
By:
------------------------------------
John S. Whetzell,
President
Seattle, Washington
, 2001
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TABLE OF CONTENTS
PAGE
----
SUMMARY..................................................... 1
Extending the Term of NCP-Six and Proposed Amendment No. 1
(see page ).......................................... 1
The Adelphia Transaction (see page ).................... 1
The Proposed Transaction and Proposed Amendment No. 2 (see
page )............................................... 2
Fairness of the Proposed Transaction (see page )........ 3
Our Recommendation (see page ).......................... 4
Likely Consequences of Your Vote.......................... 5
Conflicts of Interest of the Managing General Partner (see
page )............................................... 6
Conflict of Interest of the Administrative General
Partner................................................ 6
Summary of Federal Income Tax Consequences of the
Transaction (see page ).............................. 7
Voting at the Special Meeting............................. 7
You Do Not Have Dissenters' Rights........................ 7
SUMMARY HISTORICAL FINANCIAL INFORMATION.................... 8
SPECIAL FACTORS (Pertaining to the Proposed Transaction).... 9
BACKGROUND AND REASONS FOR THE PROPOSED TRANSACTION......... 9
General................................................... 9
Chronology of Events Leading up to the Proposed
Transaction............................................ 10
1999 Third-Party Bid Solicitation Process.............. 12
Northland's 1999 Offer to Purchase NCP-Six Assets...... 14
Recission of Northland's 1999 Offer Due to Lack of
Acceptable Financing.................................. 16
2000 Third-Party Bid Solicitation Process.............. 17
Subsequent Events...................................... 19
Reasons for the Proposed Transaction...................... 20
Consideration of Alternatives and Approval of the Adelphia
Transaction............................................ 21
FAIRNESS OF THE PROPOSED TRANSACTION........................ 22
Our Belief as to Fairness................................. 22
Material Factors Underlying Belief as to Fairness......... 22
APPRAISAL PROCESS AND FAIRNESS OPINIONS; SUMMARY OF
REPORTS................................................... 24
Daniels & Associates Appraisal............................ 26
Communications Equity Associates Appraisal................ 28
Houlihan Lokey Fairness Opinions.......................... 30
Discounted Cash Flow Analysis.......................... 33
Comparable Transaction Analysis........................ 34
Other Considerations................................... 35
Compensation and Material Relationships................... 35
SPECIFIC TERMS OF THE ADELPHIA TRANSACTION.................. 37
SPECIFIC TERMS OF THE PROPOSED TRANSACTION.................. 37
General................................................... 37
Payment of the Purchase Price and Financing
Requirements........................................... 37
Conditions to Completion of the Proposed Transaction...... 38
Representations and Warranties............................ 39
Termination............................................... 39
Distributions to Limited Partners......................... 40
DISSOLUTION AND LIQUIDATION CONSEQUENCES OF THE PROPOSED
TRANSACTION............................................... 41
Dissolution Procedures.................................... 41
Description of Liquidating Trust.......................... 42
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PROJECTED CASH AVAILABLE FROM LIQUIDATION................... 43
Projected Cash Available if the Adelphia Transaction and
the Proposed Transaction Closings Occur................ 44
Excess of Limited Partners' Capital Contributions over
Prior Cash Distributions............................... 46
FEDERAL AND STATE INCOME TAX CONSEQUENCES OF THE PROPOSED
TRANSACTION............................................... 46
Tax Considerations........................................ 47
Tax Consequences of Disposition of the Assets and
Liquidation of NCP-Six................................. 47
Unrelated Business Taxable Income......................... 49
Tax Consequences of a Decision Not to Sell................ 49
Other Tax Law Changes..................................... 50
State Income Tax Considerations........................... 51
North Carolina......................................... 52
Mississippi............................................ 52
South Carolina......................................... 52
RISK FACTORS (Pertaining to the Proposed Transaction)....... 53
Although we believe that the total price to be received
by NCP-Six for those assets remaining after the
Adelphia Transaction represents fair value for those
assets, those assets may increase in value prior to
closing or after the Proposed Transaction closes...... 53
The Managing General Partner has significant conflicts
of interest in the Proposed Transaction............... 53
The Administrative General Partner has a conflict of
interest in the Proposed Transaction.................. 54
While we did obtain a fairness opinion with respect to
the Proposed Transaction, we did not retain an
unaffiliated, independent third party to represent
your interests in the structuring of the Proposed
Transaction........................................... 54
The Proposed Transaction has not been solicited by
unaffiliated limited partners......................... 54
You do not have any dissenters' or appraisal rights in
this transaction...................................... 55
If a majority of the holders of limited partnership
units approve the Proposed Transaction, you will be
bound by that decision, even if you vote to
"disapprove" the Proposed Transaction................. 55
The promissory note that will be issued from Northland
as partial payment of the transaction price will be an
unsecured obligation of Northland..................... 55
Northland shall have the right to off-set against its
promissory note indemnification obligations of NCP-Six
under the Northland asset purchase agreement, to the
extent those indemnification obligations exceed
NCP-Six's retained funds.............................. 55
The amount and timing of final distributions to
unaffiliated limited partners may be affected by
unanticipated or contingent liabilities, including any
potential litigation arising out of the Adelphia
Transaction and/or the Proposed Transaction........... 56
The payments to the limited partners may be subject to
review under relevant state and federal fraudulent
conveyance laws if a bankruptcy case or lawsuit is
commenced by or on behalf of unpaid creditors of
NCP-Six............................................... 56
The Proposed Transaction will be a taxable event for
U.S. federal income tax purposes. This may result in
substantial recognition of gain to you................ 57
Even if the requisite majority of the unaffiliated
limited partners of NCP-Six vote to approve the
Proposed Transaction, the Proposed Transaction may not
close due to a lack of required financing............. 57
BACKGROUND AND REASONS FOR EXTENDING THE TERM OF NCP-SIX.... 57
RISK FACTORS (Related to the Ongoing Operation of NCP-Six
and its Cable Systems).................................... 58
NCP-Six operates in a very competitive business
environment, which can affect its business and
operations............................................ 59
NCP-Six may not be able to fund the capital
expenditures necessary to keep pace with technological
developments or its customers' demand for new products
or services. This could limit its ability to compete
effectively........................................... 59
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NCP-Six operates its cable systems under franchises
that are non-exclusive. Local franchising authorities
can grant additional franchises and create competition
in market areas where none existed previously......... 59
NCP-Six's cable systems are operated under franchises
that are subject to non-renewal or termination. The
failure to renew a franchise could adversely affect
NCP-Six's business in a key market.................... 60
Local franchise authorities have the ability to impose
additional regulatory constraints on NCP-Six's
business. This can further increase expenses.......... 60
NCP-Six's business is subject to extensive governmental
legislation and regulation. The applicable laws and
regulations, and changes to them, could adversely
affect NCP-Six's business by increasing its
expenses.............................................. 60
NCP-Six may be required to provide Internet service
providers access to its networks. This could
significantly increase NCP-Six's competition and
adversely affect the upgrade of its systems or its
ability to provide new products and services.......... 60
Despite recent deregulation of expanded basic cable
programming packages, we are concerned that cable rate
increases could give rise to further regulation. This
could impair NCP-Six's ability to raise rates to cover
its increasing costs or cause NCP-Six to delay or
cancel service or programming enhancements............ 61
PROPOSED AMENDMENT NO. 1 TO THE NCP-SIX PARTNERSHIP
AGREEMENT................................................. 61
PROPOSED AMENDMENT NO. 2 TO THE NCP-SIX PARTNERSHIP
AGREEMENT................................................. 61
CONFLICTS OF INTEREST....................................... 62
Fiduciary Responsibilities................................ 62
Conflicts of Interest of the Managing General Partner..... 62
Conflict of Interest of the Administrative General Partner
and Related Matters.................................... 63
Certain Payments to the Managing General Partner.......... 63
THE SPECIAL MEETING......................................... 64
Purpose of Special Meeting................................ 64
Record Date; Limited Partners Entitled to Vote at the
Special Meeting........................................ 64
Quorum; Vote Required for Approval........................ 64
Use of Proxies at the Special Meeting..................... 64
Revocation of Proxies..................................... 65
Solicitation of Proxies................................... 65
INFORMATION ABOUT NCP-SIX................................... 65
General................................................... 65
Business.................................................. 66
The Systems............................................... 67
Starkville, Mississippi................................ 67
Philadelphia, Mississippi.............................. 67
Highlands, North Carolina.............................. 68
Barnwell, South Carolina............................... 68
Bennettsville, South Carolina.......................... 68
Employees.............................................. 68
Customers.............................................. 69
Seasonality............................................ 69
Competition............................................... 69
Regulation and Legislation................................ 70
Summary................................................ 70
Cable Rate Regulation.................................. 71
Cable Entry Into Telecommunications.................... 72
Internet Service....................................... 73
Telephone Company Entry Into Cable Television.......... 73
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Electric Utility Entry Into Telecommunications and
Cable Television...................................... 74
Ownership Restrictions................................. 74
Must Carry and Retransmission Consent.................. 74
Access Channels........................................ 75
Access to Programming.................................. 75
Inside Wiring; Subscriber Access....................... 75
Other Regulations of the Federal Communications
Commission............................................. 76
Copyright.............................................. 76
State and Local Regulation............................. 77
Legal Proceedings......................................... 78
NCP-Six's Management's Discussion and Analysis of
Financial Condition and Results of Operations.......... 78
General................................................ 78
Results of Operations for 2000 and 1999................ 78
Results of Operations for Years Ended 1999 and 1998.... 79
Selected Quarterly Financial Data...................... 80
Liquidity and Capital Resources........................ 80
Capital Expenditures and Improvements.................. 81
Recent Acquisitions and Dispositions................... 82
Affiliates of NCP-Six..................................... 82
MANAGEMENT AND BENEFICIAL OWNERSHIP OF NCP-SIX.............. 82
Management of NCP-Six..................................... 82
General................................................ 82
Officers and Directors of Northland Communications
Corporation........................................... 83
Officers and Directors of FN Equities Joint Venture.... 85
Beneficial Ownership...................................... 85
Changes in Control........................................ 85
FINANCIAL STATEMENTS........................................ 87
EXHIBIT A -- FORM OF PROXY............................................... A-1
EXHIBIT B -- AMENDED AND RESTATED CERTIFICATE AND AGREEMENT OF LIMITED
PARTNERSHIP OF NORTHLAND CABLE PROPERTIES SIX LIMITED
PARTNERSHIP................................................. B-1
EXHIBIT C -- FORM OF PROPOSED AMENDMENT NO. 1............................ C-1
EXHIBIT D -- FORM OF PROPOSED AMENDMENT NO. 2............................ D-1
EXHIBIT E -- ADELPHIA TRANSACTION ASSET PURCHASE AGREEMENT............... E-1
EXHIBIT F -- PROPOSED TRANSACTION ASSET PURCHASE AGREEMENT............... F-1
EXHIBIT G -- PROPOSED TRANSACTION PROMISSORY NOTE........................ G-1
EXHIBIT H -- APPRAISAL OF DANIELS & ASSOCIATES........................... H-1
EXHIBIT I -- APPRAISAL OF COMMUNICATIONS EQUITY ASSOCIATES............... I-1
EXHIBIT J -- FAIRNESS OPINION OF HOULIHAN LOKEY AS TO THE ADELPHIA
TRANSACTION................................................. J-1
EXHIBIT K -- FAIRNESS OPINION OF HOULIHAN LOKEY AS TO THE PROPOSED
TRANSACTION................................................. K-1
EXHIBIT L -- NCP-SIX LIQUIDATING TRUST AGREEMENT......................... L-1
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SUMMARY
This summary highlights selected information and may not contain all of the
information that is important to you. You should carefully read this entire
proxy statement and the attached exhibits for a more complete understanding of
the Proposed Transaction.
(Throughout this proxy statement, when we use "we," "us" or "our," we refer
to Northland Communications Corporation and FN Equities Joint Venture, the two
general partners of NCP-Six. When we use "Northland," we refer to Northland
Communications Corporation and its subsidiaries, or its assigns, in its capacity
as purchaser of the assets of NCP-Six in the Proposed Transaction. When we use
"Managing General Partner," we refer to Northland Communications Corporation
only in its capacity as the managing general partner of NCP-Six. Similarly when
we use "Administrative General Partner," we refer to FN Equities Joint Venture
only in its capacity as the administrative general partner of NCP-Six. When we
use "General Partners," we refer collectively to the Managing General Partner
and the Administrative General Partner.)
The following organizational chart shows the interrelationship between
NCP-Six, its general partners, and Northland and its affiliated entities as of
December 31, 2000.
[CHART]
EXTENDING THE TERM OF NCP-SIX AND PROPOSED AMENDMENT NO. 1 TO THE NCP-SIX
PARTNERSHIP AGREEMENT (SEE PAGE )
This proxy statement relates to a proposal being made to the unaffiliated
limited partners of NCP-Six to consider and vote on an amendment to the NCP-Six
Partnership Agreement that would extend the term of NCP-Six from its current
expiration date of December 31, 2001 until December 31, 2007. Without such
amendment to the NCP-Six Partnership Agreement, NCP-Six is currently scheduled
to terminate on December 31, 2001, and upon such termination, the General
Partners will be required to initiate the winding up of NCP-Six's affairs
pursuant to the terms and conditions set forth in the NCP-Six Partnership
Agreement and Washington law. Even before December 31, 2001, however, NCP-Six
will face the maturity of its current credit facility. That credit facility is
currently scheduled to mature on June 30, 2001. Based on discussions with
NCP-Six's lenders, we do not believe the maturity date can be further extended
without first extending the term of the partnership for a reasonable period of
time. As of December 31, 2000, the balance owed on the NCP-Six credit facility
was $28,215,281. Regardless of whether you vote to approve the Proposed
Transaction, we recommend that you vote to approve Proposed Amendment No. 1 to
the NCP-Six Partnership Agreement. Please refer to the section titled
"Background and Reasons for Extending the Term of NCP-Six" at page . A copy of
the NCP-Six Partnership Agreement and Proposed Amendment No. 1 are attached to
this proxy statement for your review as Exhibits B and C, respectively.
SUMMARY OF THE ADELPHIA TRANSACTION (SEE PAGE )
If consummated as currently planned, the Adelphia Transaction will result
in the sale of the entirety of NCP-Six's Bennettsville, South Carolina operating
system to Adelphia Communications Corporation, its affiliates or assigns,
(collectively, "Adelphia") for $8,388,000, subject to certain adjustments. The
Adelphia Transaction does not require the approval of unaffiliated limited
partners and is expected to close on February 28, 2001 pursuant to the terms and
conditions of the asset purchase agreement between Adelphia and NCP-Six, a copy
of which is attached to this proxy statement as Exhibit E. The net proceeds from
the Adelphia Transaction will be used to pay down the current balance owed on
the NCP-Six credit
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facility as required by the applicable loan agreement for that credit facility
between NCP-Six and its lenders.
SUMMARY OF THE PROPOSED TRANSACTION AND PROPOSED AMENDMENT NO. 2 TO THE NCP-SIX
PARTNERSHIP AGREEMENT (SEE PAGE )
This proxy statement also relates to a proposal being made to the
unaffiliated limited partners of NCP-Six to consider and vote on an amendment to
the NCP-Six Partnership Agreement that would authorize the sale and distribution
by NCP-Six of the remaining cable television systems and other assets owned by
it to Northland Communications Corporation or its assigns. This sale will only
take place following the sale of NCP-Six's Bennettsville, South Carolina
operating system to Adelphia. The Proposed Transaction is subject to the
approval of holders of a majority in interest of the units of limited
partnership of NCP-Six (excluding the 30 units held by us or our affiliates). If
completed, the Proposed Transaction will result in the following:
- All of NCP-Six's assets (excluding its Bennettsville, South Carolina
operating system) will be sold to Northland or an affiliate thereof in a
transaction valued at $62,250,000. The assets that will be acquired by
Northland will include NCP-Six's cable television franchises and cable
television systems located in Starkville, Mississippi; Philadelphia,
Mississippi; Highlands, North Carolina; and Barnwell, South Carolina.
- At closing, Northland will assume some partnership liabilities, which
will result in a downward adjustment to the purchase price, and NCP-Six
will make an in-kind distribution to Northland of assets equal in value to
Northland's partnership interest in NCP-Six.
- Northland will pay for the assets with cash and a $9,875,000 promissory
note. It is currently estimated that the total amount of cash payable by
Northland will be approximately $46,900,000. The total value of the cash
and promissory note payable by Northland and the in-kind distribution to
Northland will be $62,250,000, as adjusted for assumed liabilities and
other matters. See "Projected Cash Available From Liquidation" at page
.
- The promissory note will be due and payable in two equal installments
(the first installment on the first anniversary of closing the Proposed
Transaction and the second installment on the second anniversary of
closing the Proposed Transaction) and will be held by a liquidating trust
that we will establish (the "Liquidating Trust").
- The promissory note will bear interest at a fixed rate per annum of six
and one-half percent, will be full recourse and unsecured. The maker on
the note will be Northland and the note will be subordinated to
Northland's senior debt, of which Northland currently has senior debt in
the aggregate amount of $53,900,000.
- NCP-Six will set aside appropriate amounts for payment of liabilities not
assumed by Northland in the transaction and other partnership obligations.
This includes an aggregate amount of $750,000 to be funded from cash paid
by Northland at closing, which will also be retained by NCP-Six in the
Liquidating Trust. Amounts remaining in the Liquidating Trust following
the later of the second anniversary of closing the Proposed Transaction,
or resolution of any contingent liabilities of NCP-Six, will be
distributed to the unaffiliated limited partners and the Administrative
General Partner pursuant to their respective ownership interests in
NCP-Six.
- Net proceeds from both the Adelphia Transaction and the Proposed
Transaction remaining after the payment of NCP-Six's debt and provisions
for requirements associated with winding up the partnership will be
distributed only to the unaffiliated limited partners and to the
Administrative General Partner of NCP-Six, pursuant to their respective
interests as set forth in the NCP-Six Partnership Agreement.
- Northland, as the managing general partner of NCP-Six, will not receive a
cash distribution but will instead receive only an in-kind distribution of
its percentage interest of the assets of NCP-Six.
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The result will be that Northland will receive a credit towards the
purchase price equal to its ownership interest in the assets being
purchased. This adjustment will, however, have no impact on the
distribution to be made to unaffiliated limited partners, who will still
receive the same distribution as if a purchase price equal to $62,250,000
for the Proposed Transaction was paid by a third-party purchaser. The
NCP-Six Partnership Agreement will need to be amended to provide for the
in-kind distribution required for the Proposed Transaction. The form of
that amendment is Proposed Amendment No. 2, a copy of which is attached to
this proxy statement as Exhibit D.
- Distributions to the unaffiliated limited partners and the Administrative
General Partner over the life of the partnership per partnership unit were
estimated as of December 31, 2000 to be in the vicinity of:
INITIAL DISTRIBUTION TWO YEARS AFTER
120 DAYS AFTER ONE YEAR AFTER CLOSING CLOSING
ANTICIPATED PRIOR CASH CLOSING THE NON-RESIDENT THE PROPOSED THE PROPOSED
DISTRIBUTIONS DISTRIBUTION PROPOSED TRANSACTION TAX TRANSACTION TRANSACTION
------------- ------------ -------------------- ------------ ------------------------- --------------------
PRINCIPAL AND
ESCROWED FUNDS INTEREST PRINCIPAL INTEREST
-------------- -------- --------- --------
- - Per $500 partnership
unit................... $128 $ 709 $ 58 $191 $21 $159 $10
- - Per $1,000
investment............. $255 $1,418 $115 $382 $41 $318 $21
ANTICIPATED
DISTRIBUTIONS TOTAL
------------- ------
- - Per $500 partnership
unit................... $1,276
- - Per $1,000
investment............. $2,550
This cumulative estimate includes:
- prior cash distributions to date of $128 per partnership unit (or $255
per $1,000 investment), plus
- an initial post-closing distribution of $709 per partnership unit (or
$1,418 per $1,000 investment) from the Proposed Transaction, plus
- the first promissory note installment and Adelphia escrow distribution of
$191 per partnership unit (or $382 per $1,000 investment), plus interest
of $21 per partnership unit (or $41 per $1,000 investment), plus
- the second promissory note installment distribution of $159 per
partnership unit (or $318 per $1,000 investment), plus interest of $10 per
partnership unit (or $21 per $1,000 investment), and
- a non resident tax paid on behalf of the unaffiliated limited partners of
$58 per partnership unit (or $115 per $1,000 investment).
THE AMOUNTS SET FORTH IN THE PRECEDING TABLE ARE PROVIDED ON A PRO FORMA BASIS
AS OF DECEMBER 31, 2000, AND ARE BEING PROVIDED FOR ILLUSTRATIVE PURPOSES ONLY.
IT IS CURRENTLY ANTICIPATED THAT THE PROPOSED TRANSACTION WILL CLOSE IN JUNE
2001. ACTUAL AMOUNTS WILL VARY FROM THESE PROJECTIONS. FOR DETAILS, SEE
"PROJECTED CASH AVAILABLE FROM LIQUIDATION" ON PAGE ).
- Within 120 days after closing the Proposed Transaction, even if the term
of NCP-Six is extended, NCP-Six will be dissolved and liquidated and all
available cash will be distributed to the unaffiliated limited partners
and the Administrative General Partner, in accordance with the terms of
the NCP-Six Partnership Agreement as amended by Proposed Amendment No. 2
and the Liquidating Trust Agreement, a copy of which is attached as
Exhibit L.
FAIRNESS OF THE PROPOSED TRANSACTION (SEE PAGE )
We believe the terms of the Proposed Transaction are fair as a whole to
NCP-Six and to you. We have based our determination as to the fairness of the
Proposed Transaction on the following material factors, each of which is
described in greater detail in this proxy statement:
- the form and amount of consideration offered to you as a result of the
Proposed Transaction;
- the two independent appraisals prepared by Daniels & Associates and by
Communications Equity Associates, which were used in part in our
evaluation of the offers received in the third-party bid
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solicitation process and the Proposed Transaction price for the assets.
(See "Appraisal Process and Fairness Opinions; Summary of
Reports -- Daniels & Associates Appraisal" and "-- Communications Equity
Associates Appraisal" at pages and , respectively);
- the third-party bid solicitation process undertaken by NCP-Six to obtain
bids from third parties for the purchase of the assets of NCP-Six, which
bids were used in part in the determination of the fair market value of
the assets and in our evaluation of the Proposed Transaction price. (See
"Fairness of the Proposed Transaction," and "Background and Reasons for
the Proposed Transaction -- 1999 Third-Party Bid Solicitation Process"
and "-- 2000 Third-Party Bid Solicitation Process" at pages and ,
respectively); and
- the conclusions reached in the fairness opinions rendered by Houlihan
Lokey Howard & Zukin Financial Advisors, Inc. ("Houlihan Lokey"),
following their evaluation and analysis of the consideration to be
received separately in the Adelphia Transaction and the Proposed
Transaction (See "Appraisal Process and Fairness Opinions; Summary of
Reports -- Houlihan Lokey Fairness Opinions" at page ).
In addition, under the terms of the NCP-Six Partnership Agreement, you have
the opportunity to vote to "DISAPPROVE" the Proposed Transaction if you disagree
with the Proposed Transaction.
OUR RECOMMENDATION (SEE PAGE )
Because there is no guarantee that the Proposed Transaction will actually
close even if it is approved, we recommend that you vote to "Approve" to extend
the term of NCP-Six regardless of how you vote on the Proposed Transaction. We
have determined that the term of NCP-Six should be extended from its current
expiration date of December 31, 2001 for an additional six years through
December 31, 2007, in order to allow for continued operation of NCP-Six and
sufficient time for future disposition of its assets in the event the Proposed
Transaction does not close. If the Adelphia Transaction and Proposed Transaction
are closed prior to June 30, 2001, the entirety of the assets of NCP-Six will
have been sold and liquidation of the partnership and winding up of its affairs
will be the natural next step to pursue in bringing the activities of NCP-Six to
a close, in which case the term of NCP-Six need not be extended. If, however,
the Proposed Transaction is not closed prior to June 30, 2001, NCP-Six's current
credit facility matures on June 30, 2001, and we do not believe it will be
extended without first extending the term of NCP-Six. As of December 31, 2000,
the outstanding balance of the NCP-Six credit facility totaled $28,215,281. In
order to amortize this debt through the anticipated normal course of operations
of NCP-Six, we believe the shortest acceptable extension of the term of NCP-Six
is six years. Furthermore, even if we are successful in extending the term of
NCP-Six's credit facility maturity date, the NCP-Six Partnership Agreement
currently provides that upon expiration of the term of NCP-Six on December 31,
2001, the general partners of NCP-Six are to liquidate the assets of NCP-Six and
wind up its affairs. Either of these events would impose unnecessary time
constraints on the disposition of the assets of NCP-Six which, we believe, may
translate to a lower return on those assets, and a corresponding lower
distribution to the unaffiliated limited partners of NCP-Six upon final
dissolution. We therefore recommend that you vote to "Approve" extending the
term of NCP-Six through December 31, 2007.
After careful consideration of the Proposed Transaction and our conflicts
of interest, we have also determined that the Proposed Transaction is in your
best interests. We believe the Proposed Transaction is the most attractive
alternative currently available for providing you with the opportunity to
liquidate your investment and obtain a positive return on your investment in
NCP-Six. We therefore also recommend that you vote to "Approve" the Proposed
Transaction.
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LIKELY CONSEQUENCES OF YOUR VOTE
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 -NCP-Six will be unable to extend the term of
"DISAPPROVE" EXTENDING THE TERM OF NCP-SIX. its existing credit facility, which currently
matures on June 30, 2001.
-Unless the Proposed Transaction closes prior
to June 30, 2001, NCP-Six will have
insufficient funds to pay its existing credit
facility upon maturity, and its lenders may
force liquidation of its assets on an
expedited basis.
-Even if NCP-Six is able to extend the term of
its existing credit facility beyond its June
30, 2001 maturity date, NCP-Six is to be
wound up upon the December 31, 2001
expiration of its term pursuant to the
NCP-Six Partnership Agreement.
-If the Proposed Transaction is not closed by
the expiration of its December 31, 2001 term,
NCP-Six may have insufficient time to explore
alternative means to sell its assets for a
fair price.
-FOR THESE REASONS, THE GENERAL PARTNERS
STRONGLY RECOMMEND THAT YOU VOTE TO EXTEND THE
TERM OF NCP-SIX REGARDLESS OF HOW YOU VOTE ON
THE PROPOSED TRANSACTION IN ORDER TO AVOID
THE REAL RISK THAT NCP-SIX MAY OTHERWISE BE
REQUIRED TO SELL ITS ASSETS UNDER SIGNIFICANT
TIME CONSTRAINTS THAT MAY RESULT IN A
SIGNIFICANTLY LOWER PURCHASE PRICE THAN COULD
OTHERWISE BE OBTAINED.
- ----------------------------------------------------------------------------------------------
2. LIKELY CONSEQUENCES OF A VOTE TO "APPROVE" -The likelihood of closing the Adelphia
EXTENDING THE TERM OF NCP-SIX. Transaction and the Proposed Transaction will
not be affected.
-NCP-Six will be in a better position to seek
extension of its existing credit facility to
protect against foreclosure if the Proposed
Transaction is not closed by the credit
facility's June 30, 2001 maturity date.
-If the Proposed Transaction is not closed, we
will have sufficient time to explore other
alternatives to sell the assets of NCP-Six
for a fair price without being forced to
dispose of those assets on an expedited
basis.
-NCP-Six will be in a position to possibly
repay amounts currently outstanding under its
existing credit facility through cash
generated by operations during the six year
extension of the partnership's term if the
Proposed Transaction or suitable alternative
future sales fail to occur.
- ----------------------------------------------------------------------------------------------
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- ----------------------------------------------------------------------------------------------
3. LIKELY CONSEQUENCES OF A VOTE TO "APPROVE" -All the assets of NCP-Six remaining after
THE PROPOSED TRANSACTION. closing the Adelphia Transaction will be sold
to Northland or its assigns, subject to the
following conditions:
-The prior closing of the Adelphia
Transaction.
-Northland obtaining financing for the
Proposed Transaction.
-Northland obtaining approval for the transfer
of all required licenses and franchises
required to operate the assets.
-There shall have been no breach of the
covenants or representations and warranties
set forth in the Asset Purchase Agreement
between Northland and NCP-Six.
-After closing the Proposed Transaction,
NCP-Six will commence liquidation, and the
proceeds from liquidation will be distributed
to the limited partners and the
Administrative General Partner as outlined in
this proxy statement.
- ----------------------------------------------------------------------------------------------
4. LIKELY CONSEQUENCES OF A VOTE TO -The Adelphia Transaction will be closed,
"DISAPPROVE" THE PROPOSED TRANSACTION. subject to the conditions to closing found in
the Asset Purchase Agreement between Adelphia
and NCP-Six.
-The Proposed Transaction will be terminated
and we will explore other alternatives for the
sale of NCP-Six's remaining assets.
- ----------------------------------------------------------------------------------------------
CONFLICTS OF INTEREST OF THE MANAGING GENERAL PARTNER (SEE PAGE )
The Managing General Partner has faced and will continue to face
substantial conflicts of interest in connection with the Proposed Transaction.
These conflicts of interest arise out of its relationship with NCP-Six and the
proposed agreement with Northland to acquire the assets. The Managing General
Partner participated in the initiation and structuring of the Proposed
Transaction and expects to receive benefits as a result of its completion.
Assuming that the requisite approval of the unaffiliated limited partners is
obtained, NCP-Six will be authorized to enter into an agreement with Northland
for the disposition of the majority of its assets. The terms of the Proposed
Transaction have been set by Northland acting in its capacity as the Managing
General Partner.
CONFLICT OF INTEREST OF THE ADMINISTRATIVE GENERAL PARTNER
In contrast to Northland as the Managing General Partner, the
Administrative General Partner will have no economic or ownership interest in
the assets following the closing of the Proposed Transaction, other than its
right to receive payment with the unaffiliated limited partners of the
liquidation proceeds. Still, both the Managing General Partner and the
Administrative General Partner will receive economic benefits as a result of the
disposition of NCP-Six's assets and subsequent liquidation of the partnership.
Under the terms of the NCP-Six Partnership Agreement, the Administrative General
Partner is entitled to its respective percentage share of any distribution made
by NCP-Six. The estimated total cash proceeds (excluding interest on the note)
payable to the Administrative General Partner as a result of the Proposed
Transaction is approximately $1,480,000. See "Projected Cash Available From
Liquidation" on page for a detailed discussion of the relative distributions
expected to be made to the General Partners and the unaffiliated limited
partners.
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SUMMARY OF FEDERAL INCOME TAX CONSEQUENCES OF THE TRANSACTION (SEE PAGE )
The receipt of cash in both the Adelphia Transaction and the Proposed
Transaction will be taxable for federal income tax purposes and those
transactions may also be a taxable transaction under applicable state, local and
foreign tax laws. Accordingly, you will recognize a gain or loss on the payment
of cash on your limited partnership units to the extent of the difference
between the amount realized and your adjusted tax basis in your units. In
addition, upon closing of the Proposed Transaction and dissolution of NCP-Six,
any net losses of NCP-Six that were suspended under the passive loss rules of
the Internal Revenue Code may be used to offset income and gain from the
Adelphia Transaction and the Proposed Transaction.
VOTING AT THE SPECIAL MEETING
You are entitled to one vote at the special meeting for each unit of
limited partnership interest in NCP-Six that you own. You will receive notice of
the special meeting and will be entitled to vote at the special meeting only if
you were a holder of record of NCP-Six limited partnership units on the close of
business on December 31, 2000.
The affirmative vote of unaffiliated limited partners holding a majority of
the outstanding units is required to "APPROVE" both (i) the extension of the
term of NCP-Six from its current expiration date of December 31, 2001 until
December 31, 2007 and (ii) the Proposed Transaction. If you "ABSTAIN" from
voting, it will have the same effect as a vote to "DISAPPROVE" the proposal, or
proposals, for which you abstain.
A proxy card is included with this proxy statement, and we are asking you
to complete, date and sign the proxy card and return it in the enclosed envelope
as soon as possible. A proxy card that is properly completed, dated, signed and
returned in time for voting with a vote specified on the proxy will be voted as
requested.
As of December 31, 2000, the record date for the special meeting there were
29,784 units ($500/unit) of limited partnership interest outstanding, held by
1,795 limited partners of record. Northland and its affiliates hold 30 units,
none of which will be counted in determining whether the requisite approval has
been obtained. All abstentions shall be counted as a "no" vote. Any signed and
returned proxy cards that fail to vote on one or both of the proposed measures
will be treated as a vote to approve the proposed measure for which a vote was
not cast.
You may revoke your proxy at any time prior to the special meeting by
delivering to the Managing General Partner either an instrument revoking the
proxy or a duly executed proxy bearing a later date, or by attending the special
meeting and voting in person. Your attendance at the special meeting, by itself,
will not revoke your proxy.
YOU DO NOT HAVE DISSENTERS' RIGHTS
You are not entitled to dissenters' or appraisal rights in connection with
the Proposed Transaction, under either the NCP-Six Partnership Agreement or
Washington law.
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SUMMARY HISTORICAL FINANCIAL INFORMATION
NCP-Six is providing the following financial information to help you in
your analysis of the Proposed Transaction. You should read the following
financial information in conjunction with the Consolidated Financial Statements
of NCP-Six and related notes, and "Information About NCP-Six -- NCP-Six's
Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in this proxy statement.
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------
1995 1996 1997 1998 1999 2000
---------- ---------- ---------- ----------- ----------- -----------
HISTORICAL STATEMENT OF OPERATIONS DATA:
Revenues.................................... $8,611,947 $9,262,702 $9,644,320 $14,746,766 $15,005,218 $15,221,887
Expenses.................................... $7,488,670 $7,883,536 $7,582,824 $13,125,628 $13,692,895 13,633,998
Operating income............................ $1,123,277 $1,394,255 $2,061,496 $ 1,621,138 $ 1,312,323 $ 1,587,889
Other income (expense)...................... $ (917,104) $ (997,715) $ (845,597) $(2,990,739) $(1,213,467) $(2,914,282)
Net income (loss)........................... $ 206,173 $ 381,451 $1,215,899 $(1,369,601) $ 98,856 $(1,326,393)
Allocation of net income (loss):
General partners.......................... $ 2,062 $ 3,815 $ 12,159 $ (13,696) $ 989 $ (13,264)
Limited partners.......................... $ 204,111 $ 377,636 $1,203,740 $(1,355,905) $ 97,867 $(1,313,129)
Net income (loss) per limited partnership
unit...................................... $ 7 $ 13 $ 40 $ (46) $ 3 $ (44)
Cash distributions per limited partnership
unit(1)................................... $ 10 $ 3 $ 0 $ 0 $ 0 $ 0
AS OF DECEMBER 31,
---------------------------------------------------------------------------------
1995 1996 1997 1998 1999 2000
----------- ----------- ----------- ----------- ----------- -----------
HISTORICAL BALANCE SHEET DATA:
Total assets............................ $14,778,671 $13,253,610 $13,609,386 $32,971,969 $30,603,533 $28,528,812
Total liabilities....................... $15,196,729 $13,365,510 $12,513,387 $33,249,571 $30,786,279 $30,037,951
Partners' capital (deficit):
General partners...................... $ (131,356) $ (128,294) $ (116,135) $ (129,831) $ (128,842) $ (142,106)
Limited partners...................... $ (286,702) $ 16,394 $ 1,212,134 $ (147,771) $ (53,904) $(1,367,033)
- -------------------------
(1) Total cash distributions per limited partnership unit as of December 31,
2000 are $127.50 per partnership unit (or $255 per $1,000 investment).
8
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SPECIAL FACTORS
(PERTAINING TO THE PROPOSED TRANSACTION)
A number of special factors apply to the Proposed Transaction. You should
consider the following factors carefully in evaluating the Proposed Transaction.
You are also urged to read all of this proxy statement and all exhibits
carefully in evaluating the Proposed Transaction and NCP-Six and its business
before completing the accompanying proxy card.
BACKGROUND AND REASONS FOR THE PROPOSED TRANSACTION
GENERAL
NCP-Six was formed on January 22, 1986 and began operations in 1986 with
the acquisition of cable television systems serving several communities and
surrounding areas in Mississippi and North Carolina. In a series of transactions
since then, NCP-Six acquired and now operates the cable television systems of
five operating groups located in the following geographic areas:
- Starkville, Mississippi;
- Philadelphia, Mississippi;
- Highlands, North Carolina;
- Barnwell, South Carolina; and
- Bennettsville, South Carolina.
All of the initial acquisitions were financed through a combination of
limited partners' equity and bank loans, and the later acquisitions were
financed through a combination of partnership cash flow and bank loans. As of
December 31, 2000, the outstanding principal balance owing on NCP-Six's bank
financing was approximately $28,215,281.
When limited partners first invested in NCP-Six, the partnership's term was
scheduled to terminate on December 31, 2001. That termination date was
approximately fifteen years after most limited partners first invested in
NCP-Six. It was never anticipated that NCP-Six would be listed on a securities
exchange or quotation system. It was also never anticipated that an active
secondary trading market would develop for partnership units in NCP-Six.
Instead, it was anticipated that limited partners in NCP-Six would receive a
return on capital through one or more distributions resulting from the sale of
cable television systems developed by the partnership, and through distributions
of excess operating capital from time to time, as available.
We now believe that many investors have held their units for more than 14
years without liquidity and that a significant number of unaffiliated limited
partners desire to liquidate their investment in NCP-Six at this time. There is
no established secondary or public market in which the units are being actively
traded, although we are aware that there has been some recent private sales
activity and tender offers for NCP-Six partnership units, in addition to
transfers in connection with estate and retirement planning, by will, gift or
settlement. Pending a liquidation of NCP-Six, we believe the units will likely
remain an illiquid investment. This lack of a formal secondary market for the
units continues to restrict the ability of investors to increase or decrease
their investment in response to changing personal circumstances or the
performance of NCP-Six.
Pursuant to the terms of the NCP-Six Partnership Agreement, NCP-Six is
currently scheduled to terminate on December 31, 2001 unless the NCP-Six
Partnership Agreement is amended to extend its term. Furthermore, NCP-Six has
always incurred various degrees of borrowing to acquire, develop and operate its
cable systems. NCP-Six's current borrowings include a $33,000,000 credit
facility with a syndicated lending group led by First Union National Bank as
Administrative Agent. As of December 31, 2000, NCP-Six had outstanding
approximately $28,215,281 of borrowings from that facility, which as of last
year had a maturity date of December 31, 2000. While we have been successful in
negotiating an
9
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extension of the credit facility's maturity date until June 30, 2001, our
lenders are unwilling to further extend the facility's maturity date due to the
impending expiration of the partnership's term.
Under these circumstances, in the spring of 1999, the managing general
partner began to explore potential means to sell NCP-Six's assets in order to
provide a liquidity event for the unaffiliated limited partners through one or
more transactions that were not impacted by expedited time constraints. Our
efforts were also motivated by the length of time over which unaffiliated
limited partners have held their investment, and the belief that unaffiliated
limited partners would now welcome the opportunity to liquidate their
investment.
We have not undertaken any general solicitation or survey of the
unaffiliated limited partners to determine the desire of the unaffiliated
limited partners to liquidate their investment. However, based on unsolicited
comments and questions from unaffiliated limited partners with respect to a
liquidation of their investment, we believe that our unaffiliated limited
partners may welcome the opportunity. Furthermore, unlike today, in the late
1980's and early 1990's the market for buying and selling cable systems was
significantly constrained by the lack of available financing and the
implementation of governmental regulations capping rates for services that cable
operators were allowed to charge. Recent industry consolidation, and market
interest in cable systems due to digital programming and Internet services, as
well as the anticipated convergence of various telecommunication mediums, also
appear to us to have improved current valuations for cable systems. These
events, coupled with the impending maturity of NCP-Six's credit facility and the
expiration of the partnership's term, influenced our timing in exploring
opportunities to pursue a potential opportunity for the partners of NCP-Six to
liquidate their investment at this time.
Our actions have also been recently motivated by activity of unrelated
third parties in making tender offers and other offers to purchase units of
NCP-Six at prices which, in our opinion, do not fairly represent the underlying
value of the partnership interests of NCP-Six. These tender offers that have
come to our attention include the following:
OFFERING PARTY DATES OF OFFER OFFER AMOUNT
-------------- -------------- ---------------
(PER $500 UNIT)
Madison Liquidity Investors........................ January, 2001 $650
Everest Cable Investors LLC........................ January, 2001 $600
June - July, 2001 $500
LP Investors, LLC.................................. January, 2000 $600
Kendall Investment Partners........................ April, 2000 $685
American Partnership Board (Auction Process)....... November, 1999 - April, 2000 $801 - $908
These offers are for amounts below the currently forecasted proceeds to be
received by the unaffiliated limited partners of NCP-Six per partnership unit if
the Proposed Transaction is consummated.
CHRONOLOGY OF EVENTS LEADING UP TO THE PROPOSED TRANSACTION
Beginning in the spring of 1999, the Managing General Partner began to
explore potential proposals to sell NCP-Six's assets in order to provide a
liquidity event for the unaffiliated limited partners of NCP-Six. At that time,
representatives of the Managing General Partner contacted Cairncross &
Hempelmann, NCP-Six's legal counsel, to discuss options available to NCP-Six to
provide an opportunity for liquidity to the limited partners. Representatives of
the Managing General Partners held similar discussions with appraisal firms
(Daniels & Associates and Communications Equity Associates), and the Managing
General Partner and the Administrative General Partner engaged in general
discussions regarding a liquidity event for the unaffiliated limited partners.
Although the Managing General Partner and the Administrative General Partner are
general partners of a number of other cable television system limited
partnerships, the Administrative General Partner is independent of Northland.
See "Information About NCP-Six -- Affiliates of NCP-Six." The possibility that
Northland might acquire the assets of NCP-Six arose from the outset of these
discussions. It was recognized that John S. Whetzell and Richard I. Clark, who
are senior officers of the Managing General Partner and who are each
shareholders of Northland
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Telecommunications Corporation, the sole shareholder of the Managing General
Partner, were required to assess the opportunity presented to both NCP-Six and
Northland by the prospect of a sale or other disposition of the assets. By
virtue of their dual capacity and their ownership interest in the Managing
General Partner, Messrs. Whetzell and Clark faced a conflict of interest in
making this assessment. See "Conflicts of Interest" on page .
During the spring of 1999, the Managing General Partner and the
Administrative General Partner discussed the feasibility of soliciting offers
for the proposed sale of the assets of NCP-Six from third parties. In evaluating
the possibility of Northland or an independent third party acquiring the assets,
the General Partners' primary motivating factor was their desire to obtain
liquidity for the unaffiliated limited partners at a maximized value. The
General Partners recognized that the assets might be more attractive to
Northland than to a third party. Factors identified that could make the
acquisition more attractive to Northland included its familiarity with the
operation of the assets and the ownership by Northland of other cable television
systems in the vicinity of some of the assets. This proximity may afford
Northland the opportunity to continue benefiting from certain economies of scale
that NCP-Six has been experiencing, including centralized or regionalized
billing, management and advertising functions, existing maintenance,
installation, customer service and support personnel and utilization of existing
regional infrastructure. While other third-party cable system owners and
operators have cable systems adjacent to certain of the assets, NCP-Six is not
aware of any single entity which owns or operates cable television systems near
all or substantially all of the systems owned by NCP-Six. Accordingly, a third
party may not experience the same economies of scale as those available to
Northland. A third-party purchaser would also be forced to bear transaction
costs that Northland would not be required to bear. For example, Northland's
engineers are currently familiar with the technical aspects of the systems
comprising the assets of NCP-Six, and Northland's management is familiar with
NCP-Six's on-site operations and administrative staff. A third-party purchaser
presumably would be required to devote additional management, administrative,
human resources and technical attention to the operation of the assets while
gaining the degree of familiarity with the assets that Northland has attained.
In April 1999, the General Partners determined that it was an appropriate
time to obtain an appraisal of the fair market value of the assets.
Representatives of the Managing General Partner met with representatives of
Daniels & Associates and Communications Equity Associates, to discuss the
potential sale of NCP-Six and an appraisal of the assets. These firms are
recognized for their experience in appraising cable television systems and other
media-related businesses and were selected in large part based on their
experience in the cable television industry generally and on their research
capabilities and resources.
Between April 26, 1999 and May 5, 1999, representatives of Daniels &
Associates and Communications Equity Associates met with Richard I. Clark, Vice
President of the Managing General Partner, to perform on-site due diligence
inspections of the systems and the communities served.
On May 25, 1999, NCP-Six formally engaged Communications Equity Associates
to perform an appraisal of the fair market value of NCP-Six's assets with a
valuation date as of July 1, 1999. On June 25, 1999, NCP-Six formally engaged
Daniels & Associates to also perform an appraisal of the fair market value of
NCP-Six's assets with the same valuation date of July 1, 1999.
In early July 1999, each of Daniels & Associates and Communications Equity
Associates delivered its written appraisal to the Managing General Partner
valuing NCP-Six's assets as of July 1, 1999. The Daniels & Associates appraisal
valued the assets at $73.3 million. The Communications Equity Associates
appraisal valued the assets at $74.6 million.
Concurrently with the appraisal process, representatives of the General
Partners evaluated the possibility of obtaining third-party bids for the
purchase of the assets. Notwithstanding Northland's interest in acquiring the
assets, we determined to open the proposed sale of NCP-Six for the solicitation
of bids from interested third parties. Based on the Managing General Partner's
experience in connection with transactions involving similar sized cable
television systems, and after considering the current small, rural cable system
marketplace, the physical location of NCP-Six's systems and the cable operators
known to
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the Managing General Partner who own systems in the vicinity of NCP-Six's
systems, we concluded that soliciting a third-party purchaser for the assets
would require NCP-Six to retain a broker. In an effort to obtain the best
transaction value for the unaffiliated limited partners, we decided on a
strategy whereby we would engage a broker to identify qualified potential buyers
and to solicit the highest and best offer from each potential purchaser, after
which we would review the dollar amount of the offers and consider the other
terms and factors of each offer.
1999 THIRD-PARTY BID SOLICITATION PROCESS
Accordingly, on July 2, 1999, NCP-Six engaged Daniels & Associates to
assist in brokering the sale of NCP-Six's cable systems to a third party. During
July and early August 1999, Daniels & Associates contacted 35 potential
purchasers regarding the solicitation of bids for the sale of all or a portion
of NCP-Six's assets. The potential purchasers were selected by Daniels &
Associates based on the broker's expertise in the marketplace and connections in
the industry and belief as to purchasers that might be interested in purchasing
systems similar to NCP-Six's in those geographic areas in which such systems are
located. Daniels & Associates provided each potential purchaser that was
interested in the bidding process with an identical three-ring binder containing
information about NCP-Six and its assets, together with a form of asset purchase
agreement, which bidders were free to mark up in submitting their offers to the
general partners.
During July 1999, we discussed the formation of a special committee to
review the transaction and concluded that the expense of forming a special
committee outweighed any benefits to the unaffiliated limited partners that
might result from independent representation. As part of forming a special
committee, we would have been required to, among other things, establish a
procedure for selecting representative unaffiliated limited partners to serve on
the committee, locate unaffiliated limited partners who would be willing to
serve, incur management time and expense in educating the committee as to all
aspects of NCP-Six's business, including travel to each of the systems and
travel for committee meetings, and obtain liability and indemnification
insurance for each committee member. We believed that a special committee was
not necessary because we believe that the steps taken and to be taken
constituted sufficient safeguards for the unaffiliated limited partners'
interests, including:
- the solicitation of bids from third parties through Daniels & Associates,
an experienced broker of cable television systems; and
- the commissioning of two independent appraisals of the fair market value
of the assets to be used as a benchmark for evaluating the third-party
bids.
In addition, we believed that the submission of the proposed sale of NCP-Six's
assets to unaffiliated limited partners for their approval, as required by the
NCP-Six Partnership Agreement, provided procedural safeguards to protect your
interests.
In early August 1999, potential purchasers performed on-site due diligence
reviews of the systems under the supervision of Daniels & Associates. On August
20, 1999, the submission date for third-party bids, Daniels & Associates
received offers from three potential purchasers ("Bidder A," "Bidder B," and
"Bidder C"). Northland did not submit a bid. The offer by Bidder A proposed the
purchase of all of NCP-Six's assets for a price of $76 million. The offer
submitted by Bidder B included two options -- first, for all of the assets at a
price of $70.4 million and, secondly, for all of the Mississippi operating group
assets at a price of $46,635,000. The offer submitted by Bidder C also proposed
the purchase of a portion of the systems only, namely, the Starkville,
Mississippi system at a price of $19 million.
The following table summarizes the four bids submitted, including
identifying the NCP-Six assets subject to the bid, the total purchase price
offered and the purchase price divided by the number of
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subscribers in the systems subject to the offer (which is an accepted valuation
statistic in the cable television industry):
ESTIMATED PRICE
BID BIDDER ASSETS PURCHASE PRICE PER SUBSCRIBER
- --- -------- ------ -------------- ---------------
1 Bidder A All $76,000,000 $2,303
2 Bidder B All $70,400,000 $2,136
3 Bidder B Mississippi only $46,635,000 $2,389
4 Bidder C Starkville, Mississippi $19,000,000 $2,312
On August 30, 1999, Messrs. Whetzell, Clark, other senior officers of the
Managing General Partner and representatives of Cairncross & Hempelmann met to
review and evaluate the four offers. They reviewed the scope of the offers, the
terms and amounts of the proposed purchase prices, and other conditions to the
four offers. They discussed the terms of the offers and came up with a list of
questions and clarification points for follow-up with Bidder A.
On August 30, 1999, after a meeting of senior officers of the Managing
General Partner, NCP-Six rejected the bids of Bidder B and Bidder C. NCP-Six
rejected Bidder B's bid for all of the assets because the proposed purchase
price was significantly lower than the purchase price proposed by Bidder A.
NCP-Six also rejected Bidder B's bid for the assets of the Mississippi systems,
and rejected Bidder C's bid for the assets of the Starkville system. Those bids
were rejected because we concluded that selling only a portion of the assets of
NCP-Six without a mechanism for selling the remaining assets of NCP-Six was not
in the best interests of NCP-Six or its unaffiliated limited partners. Those
bids were also rejected because they did not provide the potential for
sufficient liquidity of unaffiliated limited partners' investments if they so
desired. Neither bid proposed a purchase price that was materially higher (on a
per subscriber basis) than the bid for all the assets submitted by Bidder A.
Moreover, given the extent of the brokerage effort undertaken by Daniels, we did
not believe any other potential purchasers would come forward to buy the other
systems. In order to negotiate what, at the time, seemed to be the bid most in
line with the interests of the unaffiliated limited partners of NCP-Six, the
General Partners focused their efforts on the offer of Bidder A.
Specifically, Bidder A's offer included the following material terms:
- an all cash purchase price of $76 million for all of the assets of
NCP-Six, exclusive of cash on hand, prepaid expenses, accounts
receivable, subscriber deposits, and current liabilities;
- a purchase price adjustment equal to $2,300 multiplied by the number of
NCP-Six subscribers under 33,000 actually delivered at closing;
- prior to closing, a $3.5 million break up fee to be secured by a letter
of credit and to serve as liquidated damages to Bidder A if NCP-Six
breached the Agreement prior to closing;
- after closing, a hold-back escrow equal to $3.5 million to secure
NCP-Six's indemnification obligations for one year from the closing date;
- an unclear position as to whether Bidder A would require financing in
order to complete the proposed purchase.
On September 3, 1999, the Managing General Partner responded by letter to
Bidder A, requesting clarification on several threshold matters concerning
Bidder A's proposal. The letter specifically requested clarification on
conditions to signing a definitive agreement, financing and the availability of
funds, and proposed remedies for breaches of the definitive agreement.
On September 9, 1999, Messrs. Whetzell, Clark, other senior officers of the
Managing General Partner and representatives of Cairncross & Hempelmann met to
discuss oral comments provided by representatives of Bidder A. We then decided
to request from Bidder A a written response to the letter of September 3, 1999,
and set a deadline of September 17, 1999 for that response.
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On September 17, 1999, Bidder A responded in writing to the letter of
September 3, 1999. The response included, among other things, a new condition
that the transaction include provision for payment of a break-up fee if the
transaction was not consummated due to the failure of the unaffiliated limited
partners to approve the transaction and the assets were subsequently sold to
another party within three years. The break-up fee payment was to be the greater
of (i) $3.8 million or (ii) fifty percent (50%) of the difference between the
actual sale price for those assets and Bidder A's offer. The response also
clarified that Bidder A would not require a financing condition to closing
because it had adequate funds available.
On September 23, 1999, Messrs. Whetzell and Clark, other senior officers of
the Managing General Partner, the Administrative General Partner and
representatives of Cairncross & Hempelmann participated in a conference call to
discuss the offer from Bidder A as revised by its letter of September 17, 1999.
The representatives of the General Partners discussed the terms of the offer,
including the break-up fee, payment terms for the purchase price and the terms
of Bidder A's proposed asset purchase agreement.
Representatives of the general partners exhaustively reviewed the terms of
Bidder A's bid for the NCP-Six assets, including holding discussions with
Daniels, who had verbal communications with representatives of Bidder A, and
reviewing the September 17, 1999 letter from Bidder A clarifying its original
bid. Finally, on September 23, 1999, NCP-Six rejected the bid of Bidder A. We
determined that the $76 million purchase price proposed by Bidder A provided
excellent value to the unaffiliated limited partners, since the proposed
purchase price exceeded the appraised value of the assets as determined by
Daniels & Associates and by Communications Equity Associates. However, we
concluded that the other terms of the purchase agreement submitted by Bidder A
under which the assets would be sold, were not as advantageous to NCP-Six and
could significantly decrease the value of the transaction to the unaffiliated
limited partners of NCP-Six, such as through a break-up fee, payment provisions
in the event of a short-fall in the number of subscribers and stringent
representations and warranties. At the time, Northland had not made an offer to
purchase the assets of NCP-Six, and our decision to reject Bidder A's offer was
not based on an expectation that Northland would subsequently attempt to make an
offer for those assets.
NORTHLAND'S 1999 OFFER TO PURCHASE NCP-SIX ASSETS
Following rejection of all the third-party bids, Northland decided to
submit an offer to acquire all of the assets of NCP-Six. While Northland was not
interested in participating in the 1999 bid process, Northland did subsequently
agree to submit an offer to purchase the assets of NCP-Six on the condition that
it could secure required financing. The Northland offer proposed a total
valuation of $76 million, an amount equal to that of Bidder A, the highest
third-party bid. The Northland offer included a $3.8 million promissory note as
partial consideration for the transaction, representing an amount substantially
equal to the hold-back amount proposed by Bidder A, the highest third-party
bidder.
After reviewing the Northland offer, we believed that Northland's 1999
offer was more favorable to NCP-Six and its limited partners than any of the
third-party bids we had received. The following is a discussion of some of the
material factors underlying our belief that Northland's 1999 offer was more
favorable than the third-party bids received in 1999.
- No Break-Up Fee. A significant difference between the terms of the
proposals that lead us to favor Northland's 1999 offer was a break-up fee
proposed by Bidder A. If the asset purchase agreement was signed with
Bidder A, but the transaction failed to close because the unaffiliated
limited partners of NCP-Six failed to approve it, then NCP-Six would have
been liable to Bidder A for its costs and expenses (including attorneys'
fees) incurred with respect to the transaction (such as due diligence
expenses and costs of negotiating the agreement). In addition, if at any
time in the subsequent three years NCP-Six were to sell the assets to
another party, NCP-Six would have been required to pay to Bidder A the
greater of $3.8 million or 50% of the amount for which the assets were
sold in excess of $76 million. We believed that these provisions
regarding payment of a break-up fee and reimbursement of costs and
attorneys' fees represented a significant potential liability to NCP-Six
had we proceeded with the transaction with Bidder A. Additionally, we
were concerned
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that this break-up fee provision may have had the negative effect of
inducing unaffiliated limited partners to approve the transaction,
regardless of its merits, merely to avoid payment of the break-up fee. In
contrast, Northland's 1999 offer did not include a break-up fee or a
reimbursement of expense provision.
- Lower Transaction Costs. The sale of the assets to Bidder A, a third
party, could have involved significant transaction costs not applicable
to Northland's 1999 proposed transaction, such as costs of due diligence
and of negotiating a definitive agreement. We expected that the
professionals' fees that NCP-Six would pay in connection with Northland's
1999 proposed transaction would be far lower than the fees that NCP-Six
would have paid in a transaction with Bidder A or another unaffiliated
third party. We estimated that we would save between $100,000 and
$250,000 in expenses in the transaction with Northland as compared to a
third party.
- Limited Representations and Warranties. Another significant difference
between Northland's 1999 offer and Bidder A's bid was the breadth of the
representations and warranties that NCP-Six would be required to make in
a transaction with a third party. It is typical in business asset
purchase agreements for the seller to make extensive representations and
warranties about the seller's business and the assets to be acquired. The
accuracy and completeness of such representations by the seller is a
condition to the buyer's obligation to close the transaction. Claims for
indemnification made by the buyer against the seller after the closing of
an asset purchase transaction are often based on the seller's
representations and warranties. In the proposed asset purchase agreement
submitted by Bidder A, NCP-Six would have been required to make extensive
representations and warranties about the systems, the subscribers, and
other aspects of its business. On the other hand, because Northland, as
managing general partner of NCP-Six, has extensive knowledge about NCP-
Six's operations, Northland required NCP-Six to make only a very limited
number of representations and warranties, relating to partnership power
and authorization matters, rather than representations about the systems
or the business. The limited number of representations requested of
NCP-Six by Northland in 1999 were the minimum required to assist
Northland with its application for financing.
- No Adjustment for Number of Equivalent Basic Subscribers. Northland's
1999 offer did not include any adjustment to the transaction price based
on the number of equivalent basic subscribers served by the systems at
closing. In contrast, the bid submitted by Bidder A included a downward
adjustment to the purchase price of $2,300 for every subscriber at
closing served by the systems fewer than a minimum of 33,000 subscribers.
We felt that this was a significant negative factor of Bidder A's bid due
to the recent historical attrition in subscriber counts experienced by
NCP-Six primarily due to increased competition from satellite delivered
services. As of July 1999, the total estimated number of equivalent basic
subscribers served by the systems was 32,597, representing an approximate
1.8% decrease in the number of these subscribers from the estimated total
of 33,183 for the prior year at July 1998. That amount as of July 1999
also represented a 1.1% decrease from the number of equivalent basic
subscribers at March 31, 1999 of 32,963. The number of subscribers at
March 31, 1999 was provided to all third-party bidders by Daniels &
Associates. Based on the number of equivalent basic subscribers at July
1999, the purchase price from Bidder A would have been adjusted downward
from $76 million to approximately $75,073,100, and it would have been
subject to further decrease if the number of subscribers at closing
declined from the July 1999 figure.
- No Post-Closing Escrow Deposit by NCP-Six. The offer received from Bidder
A included a provision requiring NCP-Six to deposit $3.5 million of the
sales proceeds into a hold-back escrow account to secure any
indemnification rights of Bidder A after closing. This post-closing
escrow would have had the effect of reducing the funds payable to the
unaffiliated limited partners at closing. Northland's 1999 offer, on the
other hand, did not require NCP-Six to deposit any amount into an escrow
account. However, the General Partners had determined that NCP-Six should
retain $750,000 from the cash paid by Northland at closing to secure
contingent liabilities and potential indemnification obligations of
NCP-Six that may arise. Regardless of whether NCP-Six were
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selling its assets to Northland or an independent third party, we would
include a reserve or escrowed funds to secure these contingent liabilities
and indemnification obligations.
- Limitation on Liability of NCP-Six. Northland's 1999 offer included a
maximum cap on NCP-Six's liability for any indemnification obligations
under the purchase agreement in an amount equal to four percent of the
total valuation price (which is approximately $3.04 million). Northland's
1999 offer also included a provision that NCP-Six would not be liable for
indemnification until the total amount of claims exceeded $250,000. The
form asset purchase agreement sent to prospective third party bidders also
contained the four percent cap on liability and the $250,000 deductible.
However, the bid and further clarification received from Bidder A
indicated that the four-percent cap was not acceptable and that the amount
of the cap and the deductible would need to be negotiated.
In addition to the favorable terms described above, we considered a variety
of factors of Northland's 1999 offer that may have been less favorable to
NCP-Six and its limited partners than the terms of Bidder A's bid.
- Terms of the Promissory Note. The $3.8 million promissory note to have
been issued by Northland at closing was to be an unsecured obligation of
Northland and was to be subordinated to Northland's senior debt (including
approximately $53 million in then current senior debt and approximately
$66.4 million in additional bank financing that Northland would have
needed to obtain in connection with the transaction proposed by
Northland's 1999 offer). Northland's promissory note was not to be
guaranteed by any other party. The note was also to bear interest at a
fixed rate of six percent per annum.
- No Earnest Money Deposit by Buyer. The form asset purchase agreement sent
to prospective third party bidders contained a provision that required the
buyer to deposit five percent of the total purchase price into an escrow
account when the asset purchase agreement was signed to secure the Buyer's
obligations to close the transaction. The offer received from Bidder A
included an agreement by Bidder A to deposit $3.8 million into an escrow
account. The Northland offer, however, did not require Northland to
deposit any amount into an escrow account either at the time the asset
purchase agreement was signed, or at any time prior to closing.
Despite these potentially less favorable terms, we felt that Northland's
offer was superior to the bids previously received from Bidder A, Bidder B and
Bidder C. We therefore, sought to pursue Northland's offer, rather than revisit
any of the previous offers received.
In October, 1999, representatives of the Managing General Partner met with
representatives of Cairncross & Hempelmann to discuss a preliminary draft of a
Proxy Statement soliciting the consent of unaffiliated limited partners to the
sale of NCP-Six's assets to Northland on the terms set forth in Northland's
offer. On December 6, 1999, the General Partners filed with the Securities and
Exchange Commission a preliminary draft of the corresponding proxy statement, as
Northland attempted to secure its necessary financing.
RECISSION OF NORTHLAND'S 1999 OFFER DUE TO LACK OF ACCEPTABLE FINANCING
In October 1999, Northland began preliminary discussions with the agent
bank of its lending group regarding the financing of its 1999 offer. In January,
2000, the lender presented to Northland financing terms that were deemed by
Northland to be unacceptable due to the overall cost of the debt, and other
terms and conditions that were required as part of the proposed loan commitment.
When Northland presented its original offer to purchase the assets of NCP-Six
for a valuation of $76 million it was clear that Northland had to secure
financing to consummate the purchase, and that at the time Northland did not
know whether it could secure such financing at an acceptable cost. Northland's
offer was therefore subject to it securing acceptable financing in Northland's
sole discretion. At the time, Northland was not aware of alternative lending
sources that were likely to provide the financing required to make the purchase
based on a $76 million valuation. As a result, Northland rescinded its 1999
offer once Northland determined that it could not secure acceptable financing.
The preliminary proxy statement filed on
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December 6, 1999 was subsequently withdrawn before being submitted to any
unaffiliated limited partners for consideration.
2000 THIRD-PARTY BID SOLICITATION PROCESS
As a result of our continuing belief that a significant number of
unaffiliated limited partners may desire to liquidate their investment in
NCP-Six, the Managing General Partner decided to institute a second round of
bids in which Northland would actively participate. At the time we continued to
be motivated by the impending maturity date of NCP-Six's credit facility, the
fast approaching expiration date of the partnership's term, and the continued
positive market environment for cable systems. The second bid solicitation
process provided for the ability to submit bids, on a system by system basis,
for the separate cable systems of NCP-Six, but the goal remained to find a means
to sell all of the systems of NCP-Six for a fair price before the expiration of
the partnership's term. Accordingly, NCP-Six once again engaged Daniels &
Associates to assist in brokering the sale of NCP-Six's cable systems.
During June and July 2000, Daniels contacted several potential purchasers
regarding the sale of NCP-Six's systems, including all of the 1999 bidders. On
July 18, 2000, Daniels also provided each of the potential purchasers who
expressed an interest in purchasing some or all of the assets with a form asset
purchase agreement and with information about NCP-Six. Bidders were instructed
to submit to Daniels, by August 8, 2000, an offer for some or all of the assets
of NCP-Six. Submitted offers were to include the bidder's highest non-negotiable
purchase price and a mark-up of the form asset purchase agreement, indicating
the terms on which the purchaser was willing to agree. NCP-Six would evaluate
and review all submitted bids, but would be under no obligation to accept any
offer. Bidders were also advised that Northland or its affiliates might bid on
some or all of the assets. In order to avoid the possibility that Northland
could learn of the specific terms of a third-party's bid before Northland's bid
submission, Daniels advised all bidders that the bids were to be marked as
"confidential" and then sent only to an independent law firm, Hubbard and
Johnson, P.C., who would hold each bid on a blind bid basis. The bid results
would then only be disclosed after the deadline for submission of bids had
passed. Similar procedural safeguards were not followed in the 1999 bidding
process because Northland did not intend to submit a bid at that time. Then, on
July 28, 2000, Daniels sent each of the potential bidders follow-up bid
instructions and advised that if any bidders submitted offers within two percent
of the top bid (as separately evaluated for each operating system), those
bidders would be invited to resubmit a second offer for each operating system
for which their bid was within the two percent threshold.
On August 8, 2000, Daniels received bids for NCP-Six assets from four
different bidders, including Northland. Of those bids, only Northland offered to
purchase all of the assets of NCP-Six. The other three bidders limited their
offers to between one and two operating systems.
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The following table summarizes the four initial bids, including identifying
the NCP-Six assets subject to each bid, the total purchase price offered, and
the purchase price divided by the number of subscribers in the systems subject
to each offer:
ESTIMATED
PURCHASE PRICE
BID BIDDER ASSETS PRICE PER SUBSCRIBER
--- --------- ------ -------------- ---------------
1 Bidder A Bennettsville, South Carolina $ 7,922,000 $1,661
Adelphia
2 Bidder B Starkville, Mississippi $26,300,000 $2,113
Philadelphia, Mississippi $13,700,000 $1,982
TOTAL FOR MISSISSIPPI SYSTEMS $40,000,000 $2,067
3 Bidder C Starkville, Mississippi $40,000,000 $2,067
Philadelphia, Mississippi
TOTAL FOR MISSISSIPPI SYSTEMS
4 Bidder D Starkville, Mississippi $32,750,000 $2,632
Northland Philadelphia, Mississippi $13,500,000 $1,953
TOTAL FOR MISSISSIPPI SYSTEMS $46,250,000 $2,389
Highlands, North Carolina $ 4,600,000 $1,767
Barnwell, South Carolina $11,400,000 $1,896
Bennettsville, South Carolina $ 7,950,000 $1,667
TOTAL FOR ALL SYSTEMS $70,200,000 $2,144
On August 9, 2000, Messrs. Whetzell, Clark, other senior officers of the
Managing General Partner, and a representative from Cairncross & Hempelmann met
to review and evaluate the four offers. They reviewed the scope of the offers,
the terms and amounts of the proposed purchase prices, and other conditions of
the four offers.
Pursuant to Daniels' follow-up bid procedures sent to bidders on July, 18,
2000 because Adelphia and Northland's bids for the Bennettsville system were
within two percent of one another, Daniels contacted both Adelphia and
Northland. Daniels informed them of their respective opportunities to submit
follow up bids for the Bennettsville system by August 15, 2000. In response,
Northland confirmed the terms of its original bid, but did not increase its
offer for Bennettsville. Adelphia instead increased its offer to $8,388,000.
Similarly, Bidder B's bid of $13,700,000 for the Philadelphia, Mississippi
system was higher than, but still within two percent of, Northland's second
highest bid for that system. As a result, both Bidder B and Northland were
invited to submit their second round bids for the Philadelphia, Mississippi
system. Northland responded by confirming its original bid without change, while
Bidder B replied that it was only interested in the Philadelphia system if it
could also acquire the Starkville, Mississippi system, and based on Northland's
combined offer for both the Starkville and Philadelphia system, Bidder B
withdrew from further consideration. After the closing of the second round of
bidding, the winning bids from Daniels' year 2000 bid solicitation process are
shown in the following table.
ESTIMATED PRICE
BIDDER ASSETS PURCHASE PRICE PER SUBSCRIBER
------ ------ -------------- ---------------
Bidder A Bennettsville, South Carolina $ 8,388,000 $1,759
Adelphia
Bidder D Starkville, Mississippi $32,750,000 $2,632
Northland Philadelphia, Mississippi $13,500,000 $1,953
TOTAL FOR MISSISSIPPI SYSTEMS $46,250,000 $2,389
Highlands, North Carolina $ 4,600,000 $1,767
Barnwell, South Carolina $11,400,000 $1,896
TOTAL NORTHLAND BID FOR SYSTEMS $62,250,000 $2,275
On August 17, after a meeting of senior officers of the General Partners,
we determined that it was in the best interest of NCP-Six to accept the offers
of Adelphia and Northland, subject to unaffiliated limited
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partner approval in the case of the Northland offer. We based our determination
to accept the Adelphia and Northland offers on our conclusion that Adelphia and
Northland submitted the highest bid for the assets covered by their respective
offers. We also believe that Adelphia and Northland's offers proposed the best
terms and conditions for consummation of their respective sales. While Adelphia
proposed a hold back escrow, which was one of the reasons we finally rejected
Bidder A's offer in the 1999 bid solicitation process, Adelphia's offer did not
include the break-up fee previously required by Bidder A. Lastly, we believe
that the sale to Northland will result in lower transaction costs due to
Northland's existing familiarity with the assets and operations proposed to be
purchased by Northland in the Proposed Transaction.
When we accepted the offer submitted by Northland in the 2000 bid
solicitation, we took into account that Northland's offer was less than its
previously rescinded offer to acquire all of the assets of NCP-Six for a
valuation of $76 million. This revised purchase price, however, reflected the
maximum amount that Northland was willing to pay for the assets in the Proposed
Transaction following Northland's prior analysis of available financing.
In the second bid solicitation process, bidders were also advised that
offers to be paid in all cash at closing would be considered more favorable than
offers that included a deferment of part of the purchase price through
promissory notes or other financing. When evaluating Northland's offer for the
Mississippi systems, we took into account that Northland's offer included a
proposed promissory note with an interest rate below what would customarily be
charged in the marketplace. We performed a present value analysis of Northland's
offer for the Mississippi systems using a discount factor for Northland's note
equal to the approximate 14.8% rate then in effect for Northland's outstanding
unsecured subordinated bond obligations. After discounting the promissory note
to present value using this rate, we determined that Northland's bid for the
Mississippi systems would be the equivalent to an all cash bid of approximately
$45,569,000. Similarly, we performed a present value analysis of Northland's
total bid using the same 14.8% discount factor, and we determined that
Northland's total bid would be equivalent to an all cash bid of approximately
$61,144,000. In either case, Northland's bid was superior to all other bids
submitted for those assets covered by Northland's bid in the 2000 bid process.
Consideration was also given to the ability of Northland to obtain
necessary financing to complete its offer. In determining the ability of
Northland to obtain financing we evaluated the outcome of previous discussions
held by Northland with prospective lenders regarding the current lending
environment and specific parameters which the lenders advised would be necessary
to finance the Proposed Transaction. These parameters included certain financial
covenants such as the ratio of overall debt to operating cash flow, the ratio of
operating cash flow to interest expense, limits on the level of capital
expenditures and the period over which the debt could reasonably be expected to
be repaid. Northland then prepared projections incorporating these parameters
and reported to NCP-Six that it had determined that the necessary financing
could most likely be obtained to support its current bid.
Furthermore, Northland's current bid will not require the level of
borrowings that would have been needed for its prior offer to purchase all of
the assets of NCP-Six for $76 million. As a result, the overall cost of debt to
Northland will be lower under its current offer. The level of bank borrowings
required has been reduced as a result of the Bennettsville system being sold to
Adelphia, an increase in the amount of the promissory note to be issued to
NCP-Six as part of the purchase price in the Proposed Transaction, and
Northland's bid for the applicable systems being lower as compared to its
earlier $76 million proposal. We feel that these factors improve the likelihood
that Northland will obtain acceptable financing for the Proposed Transaction.
SUBSEQUENT EVENTS
On May 13, 1998, the General Partners in their capacities as general
partners of Northland Cable Properties Five Limited Partnership ("NCP-Five")
distributed a proxy statement to the limited partners of NCP-Five calling a
special meeting to consider a sale of NCP-Five's assets to Northland and the
subsequent liquidation of NCP-Five. The transaction was similar to that
described in this proxy statement
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save that the assets were valued by a single appraiser and third-party bids were
not solicited. On June 3, 1998, Mr. Paul Isaac filed a class action lawsuit on
behalf of himself and a class of the limited partners of NCP-Five challenging
the proposed sale of NCP-Five's assets. On June 18, 1998, the Managing General
Partner wrote to the limited partners of NCP-Five alerting them to the lawsuit
and outlining the allegations. The special meeting of NCP-Five was held on June
25, 1998. The votes of limited partners, cast in person and by proxy, were
counted and the results indicated that the holders of 77% of the outstanding
units had voted and, of those units voted, 95% were voted in favor of the
transaction.
On August 28, 2000, a trial of the NCP-Five lawsuit commenced in King
County Superior Court, in Seattle, Washington. This litigation was subsequently
settled. On September 1, 1998, the Managing General Partner closed the purchase
and sale of the asset of NCP-Five. Nonetheless, based on issues raised in the
trial, the General Partners decided to solicit bids for the assets of NCP-Six
through a blind bid process. The General Partners also decided to engage an
independent third party to evaluate the fairness of the consideration to be
received by NCP-Six as a result of the Proposed Transaction, and to render a
formal opinion as to those findings.
On September 28, 2000, Messrs. Whetzell, Clark, other senior officers of
the Managing General Partner, and representatives of Perkins Coie LLP met to
discuss a preliminary draft of this proxy statement. Pursuant to an engagement
letter dated October 21, 2000, the Managing General Partner, on behalf of
NCP-Six, then engaged Houlihan Lokey to conduct a fairness analysis of the
consideration to be received by the partnership in the Proposed Transaction, and
separately in the Adelphia Transaction.
During November 2000, Messrs. Whetzell, Clark, and other senior officers of
the Managing General Partner discussed the utility of pursuing the sale of the
Bennettsville, South Carolina operating system to Adelphia regardless of whether
or not the sale of all of NCP-Six's assets was approved by the unaffiliated
limited partners. Following our evaluation of the impacts upon NCP-Six's ability
to continue operations without the Bennettsville system, the purchase price to
be paid by Adelphia for that system, the desire to pay down a portion of
NCP-Six's outstanding debt, and our concern that delaying the Adelphia
Transaction could result in a rescission by Adelphia of its offer to purchase
the Bennettsville system, we decided that it was in the best interests of the
unaffiliated limited partners of NCP-Six to pursue the sale to Adelphia of the
Bennettsville, South Carolina system for a purchase price of $8,388,000
regardless of whether the Proposed Transaction was consummated.
On December 20, 2000, the general partners filed with the Securities and
Exchange Commission a preliminary draft of this Proxy Statement.
On February 16, 2001 the General Partners met with Houlihan Lokey at
Northland's office for Houlihan Lokey's formal presentation of their findings
with regards to their fairness analysis.
REASONS FOR THE PROPOSED TRANSACTION
Our reason for entering into the Proposed Transaction is based on our
belief that it provides an opportunity for the efficient winding up of the
partnership near the expiration of its term for an amount that we believe
represents fair value for the partnership's assets. In reaching our conclusion
to present to the unaffiliated limited partners the Proposed Transaction, we
considered the following factors each of which we believe are relevant to a
determination as to the fairness of the Proposed Transaction and whether the
Proposed Transaction is in the best interest of the unaffiliated limited
partners of NCP-Six:
- the past and projected financial and operational performance of NCP-Six;
- the relative lack of liquidity for limited partnership units in NCP-Six;
- recent tender offer activity to purchase units at prices which, in our
opinion, do not fairly represent the underlying value of the units;
- the impending expiration of the partnership's term on December 31, 2001,
according to the NCP-Six Partnership Agreement.
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- various alternatives to the Proposed Transaction, including the
alternative of remaining as an independent active operator of the systems
and of selling portions or all of the systems to unaffiliated
third-parties;
- the two appraisals for the assets prepared by Daniels & Associates and
Communications Equity Associates;
- the fairness opinions received from Houlihan Lokey, evaluating the
fairness of the consideration to be received by NCP-Six in both the
Adelphia Transaction and the Proposed Transaction;
- the terms of the proposed asset purchase agreement presented by
Northland; and
- the relative lesser costs and shorter time-line involved in connection
with selling the assets to Northland, compared with the potential
protracted period of negotiations and due diligence and increased
transaction costs resulting from sale of the assets to one or more
unaffiliated third-party purchasers.
We gave each of these factors equal weight in our analysis, with two
exceptions. First, we gave the Houlihan Lokey fairness opinions more weight than
the earlier appraisals of Daniels & Associates and Communication Equity
Associates. Our emphasis on the Houlihan Lokey opinions over the earlier
appraisals was due to those opinions being more current than the appraisals that
were completed over a year prior to Northland's 2000 offer. Second, we placed
more emphasis on the bids received in the 1999 and 2000 bidding processes, than
we did on the appraisals. Our emphasis on the bids received was due to our
belief that those bids reflected the actual amount a purchaser was willing to
pay for the assets, as opposed to a hypothetical valuation established through
financial analysis.
We also considered a variety of risks and potentially negative factors in
deliberations concerning the Proposed Transaction with Northland. In particular,
we considered the following:
- the possibility that the value of the systems and assets might increase
from the Proposed Transaction valuation prior to or following closing of
the Proposed Transaction;
- conflicts of interest facing the Managing General Partner in structuring
and implementing the Proposed Transaction;
- terms of the promissory note proposed by Northland as part of the
purchase price to be delivered in the Proposed Transaction, including its
six and one-half percent interest rate and that it will be unsecured debt
of Northland and junior to all current and future senior debt of
Northland;
- the tax impact of the Proposed Transaction on unaffiliated limited
partners; and
- the costs of the Proposed Transaction and the effect of transaction
expenses and other known and contingent liabilities on the net amount to
be distributed to unaffiliated limited partners.
Following our analysis of the factors considered, we concluded that the
anticipated benefits of the Proposed Transaction to the unaffiliated limited
partners of NCP-Six outweighed the possible drawbacks.
Northland is in the business of operating, developing and acquiring cable
television systems. Northland's reasons for entering into the Proposed
Transaction, separate and apart from its role as Managing General Partner of
NCP-Six, is to acquire additional cable assets for a suitable price in
geographic locations that are complimentary to Northland's existing operations.
CONSIDERATION OF ALTERNATIVES AND APPROVAL OF THE ADELPHIA TRANSACTION
In addition to the Proposed Transaction, we considered alternatives,
including the continued management of NCP-Six as currently structured and the
liquidation of NCP-Six through sales of all or portions of the systems remaining
after the closing of the Adelphia Transaction to third-party purchasers. As
described in more detail in this proxy statement, except for the Adelphia
Transaction, we rejected each of the alternative purchase offers in favor of the
Proposed Transaction. We did, however, feel that the terms of the Adelphia
Transaction were favorable to NCP-Six regardless of whether the Proposed
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Transaction is ever consummated. We also felt that the price to be paid by
Adelphia for those assets being acquired in the Adelphia Transaction exceeded
both the price Northland was willing to pay for those assets, as well as the
price of any other third-party that was contacted in connection with the
applicable bid process. Finally, we have determined that if the Proposed
Transaction is not consummated by the expiration of NCP-Six's current term on
December 31, 2001, that the best alternative for NCP-Six is to still consummate
the Adelphia Transaction in order to raise proceeds to pay down debt, and to
then extend the partnership's life until December 31, 2007, during which time
additional options may be considered.
We have also considered the possibility of obtaining liquidity for the
limited partners of NCP-Six through a refinancing aimed at borrowing sufficient
funds to allow for significant short term distributions. We have concluded,
however, that lenders will not currently support such transactions, and that the
only viable option to generate sufficient available funds for sizeable
distributions to the limited partners of NCP-Six is to complete the sale of the
majority of the partnership's assets through one or more transactions.
FAIRNESS OF THE PROPOSED TRANSACTION
OUR BELIEF AS TO FAIRNESS
We considered the issues of fairness of the Proposed Transaction. In
analyzing the fairness issue, discussions focused on appropriate valuation of
the assets and conflicts of interest faced by the Managing General Partner. We
determined at the outset that concurrence by the Administrative General Partner
would be required with respect to decisions made regarding the Proposed
Transaction, because the Administrative General Partner is not subject to
conflicts in the Proposed Transaction to the same extent as the Managing General
Partner.
We, the Managing General Partner and the Administrative General Partner,
both believe that the terms of the Proposed Transaction are reasonable and fair
to you. This determination of fairness, as well as the decision to recommend
that unaffiliated limited partners vote to "Approve" the Proposed Transaction,
was unanimous among our management personnel.
MATERIAL FACTORS UNDERLYING BELIEF AS TO FAIRNESS
The following is a discussion of the material factors underlying our belief
that the Proposed Transaction is fair to you. Each of these factors were
considered by both the Administrative General Partner, the Managing General
Partner, and Messrs. Whetzell and Clark in their capacities as officers and
directors of the Managing General Partner. There were no specific factors that
did not support our belief that the Proposed Transaction is fair to you. In
reaching our conclusion as to the fairness of the Proposed Transaction, we
weighed each of the following factors equally, except for the Houlihan Lokey
fairness opinions, which we gave more weight in our analysis than the earlier
appraisals of Daniels & Associates and Communication Equity Associates. Our
emphasis on the Houlihan Lokey opinions over the earlier appraisals was due to
those opinions being more current than the appraisals that were completed over a
year prior to Northland's 2000 offer. While we adopted the methodology of each
of Daniels & Associates, Communication Equity Associates, and Houlihan Lokey as
sound in the performance of their respective assessments, we did not adopt that
analysis as our own, but instead considered it as relevant factors in reaching
our own independent conclusions as to the fairness of the Proposed Transaction.
Consideration Offered. We believe that the transaction valuation of
$62,250,000 for those assets that are not included in the Adelphia Transaction,
constitutes fair value. In reaching this conclusion, we considered the
appraisals of the fair market value of the assets prepared by Daniels &
Associates and by Communications Equity Associates, the bids solicited from
independent third parties through Daniels & Associates, and the favorable
fairness opinion of Houlihan Lokey.
Independent Appraisals. In concluding that the Proposed Transaction is fair
to you, we considered the appraisals of the fair market value of the assets
assembled by Daniels & Associates and by
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Communications Equity Associates. See "-- Appraisal Process; Summary of
Appraisals" below. Daniels & Associates concluded that the fair market value of
the entirety of the NCP-Six assets was $73.3 million, and Communications Equity
Associates concluded that the fair market value of those assets was $74.6
million. Each appraisal valued those assets as of July 1, 1999. The assets
valued in both of those appraisals included the combined assets to be conveyed
in both the Adelphia Transaction and the Proposed Transaction.
You should note that in November 1999 we were made aware of an additional
overbuild situation facing one of NCP-Six's systems in Highlands, North
Carolina. This potential second overbuild in the Highlands system may have a
negative impact on the present or future value or revenues of that system. This
second overbuild situation was not present at the time of either of the
appraisals or at the time of the 1999 third-party bid solicitation process and
could not be considered in either process. We cannot predict whether or to what
extent this second overbuild situation would have affected the results of either
appraisal or the 1999 third-party bids we received.
You should also note that the combined purchase price for NCP-Six's assets
pursuant to the Adelphia Transaction and Proposed Transaction totals
$70,638,000. This combined amount is less than the appraised value for those
assets of $73.3 million by Daniels & Associates, and $74.6 million by
Communications Equity Associates. While we believe that the third-party bid
process established a fair actual value for the assets and that it provided
evidence of what a third-party was willing to pay for those assets, we also feel
the difference between the appraised value for those assets and the purchase
prices obtained in the third-party bid process from Adelphia and Northland may
also reflect market fluctuations in values for cable systems between the date of
the appraisals and the actual date of obtaining the third-party bids from
Adelphia and Northland. We have not, however, reviewed actual comparable sales
information or other industry market analysis to support such a conclusion.
Third-Party Bid Solicitation. In concluding the Proposed Transaction is
reasonable to you, we have also considered the bids solicited from third parties
by Daniels & Associates. Daniels & Associates first contacted 35 potential
purchasers to solicit bids for some or all of the assets of NCP-Six in July and
August of 1999. Ultimately, two bids for some of the assets and two bids for all
of the assets were submitted. One bid for all of the assets offered an amount of
$76 million, and the other offered an amount of $70.4 million. The two bids for
portions of the assets offered an amount, on a per subscriber basis, that did
not differ materially from the higher bid for all the assets. We rejected all of
the third party bids for reasons explained in "Background and Reasons for the
Proposed Transaction -- Chronology of Events Leading Up to the Proposed
Transaction" above. We then had Daniels solicit bids a second time from
interested third parties between June and August, 2000. Daniels received four
bids in response, with Northland submitting the highest bid for all of NCP-Six's
cable systems, except Bennettsville, South Carolina, for which Adelphia offered
a higher purchase price.
Fairness Opinion. We have also considered and reviewed the favorable
fairness opinions of Houlihan Lokey with respect to both the Adelphia
Transaction and Proposed Transaction. Those fairness opinions were dated as of
, 2000, and concluded that the consideration to be received by
the unaffiliated limited partners of NCP-Six in both the Adelphia Transaction
and Proposed Transaction is fair from a financial point of view.
Consent Procedures and Procedural Safeguards. The Proposed Transaction can
take place only if unaffiliated limited partners holding a majority of the
limited partnership units (not including units held by us or our affiliates)
approve of the Proposed Transaction. If holders of a majority of those units
vote to disapprove the Proposed Transaction, we will not proceed with the
Proposed Transaction. In addition, even if the Proposed Transaction is approved,
it must close within 180 days after the special meeting. If the Proposed
Transaction does not close within this time period, or if at any time prior to
closing we determine that cumulative distributions to unaffiliated limited
partners from the Proposed Transaction may be reduced by more than $622,500 from
the estimated distribution projections (an amount that represents one percent of
the total Proposed Transaction price), NCP-Six will not sell those assets to
Northland, any affiliate of Northland, or any third party without again
obtaining approval of the unaffiliated limited
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partners. We believe that these approval requirements provide you with
additional procedural safeguards in the Proposed Transaction.
Prior Purchase of Barnwell, South Carolina system in 1998. NCP-Six acquired
its Barnwell, South Carolina cable systems in January, 1998 for a price of
$11,372,483, reflecting a price per subscriber of $1,856. The purchase price to
be paid by Northland in the Proposed Transaction for the Barnwell system totals
$11,400,000, or approximately $1,949 per subscriber determined as of December
31, 2000. While we did not place any emphasis on these comparisons in concluding
the Proposed Transaction is fair, we do believe that the price paid for Barnwell
is in line with the price for which it is to be sold in the Proposed
Transaction. Furthermore, Northland's offer to purchase Barnwell was only part
of its overall bid to purchase all of the systems to be included in the Proposed
Transaction. No party, except Northland, bid in either the 1999 or 2000 bid
procedures to separately purchase the Barnwell system. As a result, we did not
feel that the comparison of the price paid for Barnwell to the price for which
it is proposed to be sold deserves as much importance in reaching our decision
as to fairness as the other factors we considered.
In addition to the material factors just described, we considered a variety
of potentially negative factors relating to the Proposed Transaction. We discuss
these potentially negative factors more thoroughly in this proxy statement at
"RISK FACTORS (Pertaining to the Proposed Transaction)" below.
- Although we believe that the Proposed Transaction price represents the
fair market value of the assets as of the date we received third-party
bids for those assets, the assets may appreciate in value prior to, or
after, the date that the Proposed Transaction closes.
- We, and in particular the Managing General Partner, have substantial
conflicts of interest in the Proposed Transaction.
- Although we believe that unaffiliated limited partners are interested in
a means of liquidating their investment, the Proposed Transaction has not
been solicited by unaffiliated limited partners.
- We did not retain an unaffiliated, independent third party to represent
your interests in structuring the Proposed Transaction.
- In determining the value of the systems, we did not consider current
market prices or historical market prices for limited partnership units
in NCP-Six due to the absence of an established public market in which
units of limited partnership interests are being traded. Notwithstanding,
we did consider those recent tender offers for limited partner units in
NCP -- Six that have been brought to our attention as further discussed
under "BACKGROUND AND REASONS FOR THE PROPOSED TRANSACTION -- Reasons for
the Proposed Transaction," above.
Following our analysis of the factors considered, we concluded that that these
negative factors were not sufficient to outweigh the advantages of the Proposed
Transaction.
APPRAISAL PROCESS AND FAIRNESS OPINIONS; SUMMARY OF REPORTS
In May 1999, NCP-Six retained Communications Equity Associates, a
nationally recognized cable brokerage, appraisal and investment banking firm to
appraise the fair market value of the entirety of NCP-Six's assets at that time,
which comprise the combined assets covered by the Adelphia Transaction, and the
Proposed Transaction. In June 1999, NCP-Six also retained Daniels & Associates,
a nationally recognized cable brokerage, appraisal and investment banking firm
to conduct a second appraisal of the fair market value of those assets. Given
Daniels & Associates' and Communications Equity Associates' experience, we did
not at that time retain any other outside experts to conduct appraisals of the
NCP-Six assets. Subsequently, however, we retained Houlihan Lokey to render an
opinion as to the fairness of the consideration to be received by NCP-Six in
both the Adelphia Transaction and the Proposed Transaction from a financial
point of view as discussed in greater detail later in the proxy statement under
"Houlihan Lokey Fairness Opinions" at page . Based on our prior working
relationship with both Communication Equity Associates and Daniels & Associates,
at the time we retained them to conduct their appraisals we
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felt that they were the most knowledgeable and best suited to appraise the
assets of NCP-Six due to their expertise and knowledge of the cable industry.
NCP-Six instructed both Daniels & Associates and Communications Equity
Associates to prepare appraisals on the basis that the assets were to be sold to
an independent third party on the open market. Daniels & Associates and
Communications Equity Associates were advised at the time of the engagement that
Northland would be a potential buyer of the assets. Daniels & Associates
delivered a written report in July 1999 that the fair market gross asset value
of the entirety of NCP-Six's assets as of July 1, 1999 was $73.3 million.
Communications Equity Associates delivered a written report in July 1999 that
the fair market gross asset value of those assets as of July 1, 1999 was $74.6
million.
Daniels & Associates and Communications Equity Associates each relied on a
discounted cash flow analysis based on the projected operating results of the
systems over a ten-year period, and applied a factor for the residual value of
the assets at the end of that ten-year period. Daniels & Associates and
Communications Equity Associates also each undertook a comparable private market
transaction multiples analysis, to correlate and validate the findings of the
discounted cash flow analysis. This methodology involved a review of other cable
system sales that have occurred in the recent past, and a comparison of the
value-per-subscriber and multiple of cash flows for those system sales with the
same statistics for NCP-Six.
Upon completion of the second third-party bid process and determination of
the winning bids, we wanted to obtain an independent third-party evaluation as
to whether the consideration to be received by NCP-Six as a result of the
Adelphia Transaction, and separately the Proposed Transaction, was fair from a
financial point of view. Our desire to obtain independent review of the fairness
of each of those transactions was further motivated by our recognition that the
prior appraisals of both Daniels and Associates, and Communication Equity
Associates, each valued the assets of NCP-Six as of July 1, 1999. Rather than
update those appraisals, we concluded that it would be more beneficial to
NCP-Six if we obtained a fairness opinion that not only evaluated the assets to
be sold in each transaction, but that further evaluated whether the
consideration to be received by NCP-Six was fair from a financial point of view.
Following our investigation of investment banking firms and financial advisory
services that are recognized to have expertise in valuing assets and
transactions in our industry, we concluded that Houlihan Lokey was the most
suitable third-party to evaluate the fairness of both the Adelphia Transaction
and the Proposed Transaction.
Neither Daniels & Associates or Communication Equity Associates were
provided with any financial projections or forecasts as background for their
appraisals. The Managing General Partner did provide Houlihan Lokey with a copy
of NCP-Six's long term capital expenditure plans, but otherwise Houlihan Lokey
was similarly not provided with any financial projections or forecasts by
NCP-Six or the Managing Partners. Instead, each report was developed based on
independent information obtained by Daniels & Associates, Communication Equity
Associates, and Houlihan Lokey, respectively. We intentionally refrained from
providing additional materials to these professionals because we wanted their
analysis to remain independent from our internal forecasts, and we wanted them
to develop their own forecasts for comparison based on each professional's
extensive knowledge in the cable market-place.
Neither of the appraisals placed a value on any individual assets or cable
systems of NCP-Six. Instead, they valued the assets of NCP-Six as a whole. We
did not, however, feel that a separate valuation for each system was necessary
since it was our goal to negotiate one or more sales which combined would result
in the sale of all of the assets of NCP-Six. The fairness opinions, on the other
hand, separately evaluated the fairness of the consideration to be received by
NCP-Six in the Proposed Transaction and the Adelphia Transaction. While we still
do not feel that individual assets need to be appraised for purposes of
determining the fairness of the Proposed Transaction, we did feel that the
fairness of the Proposed Transaction should be evaluated by Houlihan Lokey on a
stand alone basis.
The following summaries are qualified by, and should be read in conjunction
with, the Daniels & Associates appraisal, the Communications Equity Associates
appraisal and the Houlihan Lokey fairness opinions. You are encouraged to review
the appraisals prepared by Daniels & Associates and
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Communications Equity Associates which are attached to this proxy statement as
Exhibits H and I, respectively. You are also encouraged to review Houlihan
Lokey's fairness opinions which are attached to this proxy statement as exhibits
J and K, respectively.
DANIELS & ASSOCIATES APPRAISAL
General. Daniels & Associates was engaged by NCP-Six to appraise the
entirety of NCP-Six's assets comprising the cable television systems serving
seven communities in Mississippi, South Carolina and North Carolina. Daniels
delivered a written summary, based upon the review, analysis, scope and
limitations described in its written summary, as to the fair market value of
these systems as of July 1, 1999. The material assumptions, qualifications,
limitations and methods used in the Daniels appraisal are described below.
Summary of Methodology. Daniels evaluated each system on a going-concern
basis, in conformance with standard appraisal techniques, utilizing a ten-year
discounted net cash flow analysis and applying relevant market and economic
factors.
In valuing the assets, Daniels relied on a discounted operating cash flow
analysis based on the projected operating results of the assets over a ten-year
period and applied a factor for the residual value of the assets at the end of
that ten-year period. The discounted cash flow analysis is also correlated and
validated by a review of private market transactions in cable systems that have
occurred in the recent past. The market transaction approach applies the value
per subscriber and operating cashflow multiples from the private market sales to
the respective statistics of NCP-Six's assets. According to Daniels, both the
discounted cashflow analysis and the comparable private market transaction
multiple analysis are standard valuation methodologies used in the cable
television industry.
In the course of performing the valuation, Daniels engaged in discussions
with employees of the Managing General Partner's corporate office and local
system offices, made due diligence visits to substantially all of the operating
systems comprising the assets, reviewed and evaluated materials and information
provided by the Managing General Partner and local cable system management,
researched demographic information relating to the various communities served by
NCP-Six, analyzed forecasted financial and operating information, and drew upon
its own general knowledge about the cable television industry. On the basis of
this information and these efforts, Daniels prepared summaries of relevant
operating, technical, financial and demographic characteristics of NCP-Six's
operating systems.
Thereafter, in order to assess the fair market value of NCP-Six's assets,
Daniels prepared detailed operating and financial forecasts for each of
NCP-Six's cable system operating systems, taking into account operating revenues
and expenses as well as capital expenditure requirements. These financial
forecasts formed the basis for determining a discounted cash flow for each cable
system operating system. The combined values for each cable system operating
system constituted the value of the cable operating assets for NCP-Six on a
discounted cash flow basis. In addition to this methodology, Daniels used the
comparable private market transaction multiple methodology to derive an
aggregate value for NCP-Six by analyzing the value per subscriber and operating
cash flow multiples obtained in private sales of comparable systems. These
multiples were compared to similar multiples for the assets obtained using the
value arrived at for the assets by the discounted cash flow methodology.
Informed by the results of both of these methodologies, Daniels then determined
a final appraised value for NCP-Six's assets.
Assumptions. In performing its discounted cash flow analysis of the value
of the assets, Daniels assumed the assets have been and will continue to be
operated as efficiently as comparable cable systems, and that the franchises and
asset leases used by NCP-Six in the operation of the assets will be renewed
indefinitely as needed without material change except to reflect any upgrade or
rebuild of the assets. In addition, Daniels assumed, in evaluating future
capital expenditures and cash flows, that the various systems comprising the
assets will be upgraded within three to five years. You should note that events
occurring after July 1, 1999, and before the effective date of the Proposed
Transaction could affect the properties or assumptions used in preparing the
appraisals. Daniels will not deliver any additional written
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summary of the analysis and will not prepare an update to its appraisal closer
to the time of closing the Proposed Transaction.
Discounted Cash Flow Valuation. The discounted cash flow valuation
methodology measures the present value of the assets' forecasted free cash flow
from operations, which is defined as earnings before interest, taxes,
depreciation and amortization ("EBITDA"), less capital expenditures including
all rebuild or upgrade costs. Daniels determined forecasted free cash flows by
creating ten-year operating forecasts for each of the operating systems
comprising the assets, each of which took into account detailed projections of
revenue and expense components. Daniels then calculated the projected residual
value of the assets assuming a sale of each system at the end of the ten-year
period. This terminal enterprise value was based on a multiple of EBITDA which
Daniels determined to be reasonable in light of comparable private market
transaction multiples of EBITDA.
Daniels' revenue forecasts were based on its forecasts of the number of
homes passed and the subscriber penetration levels and rates for each system
operating system, plus an analysis of non-subscriber based revenue sources. Its
expense forecast was based on assumed rates of inflation over the forecast
period, adjusted to reflect the particular growth characteristics of each system
operating system. The capital expenditure forecasts were based upon costs
associated with new construction of cable plant, plant maintenance, and rebuild
or upgrade requirements. Daniels believes that the opportunity of the systems
comprising the assets to provide ancillary telecommunications and data services
are limited and costs uncertain, and thus Daniels did not include telephony or
data service revenue, expenses or capital costs in its projections. Daniels did
include residential data services revenue and expenses where appropriate. All
information provided to the Managing General Partner relating to Daniels'
operating revenue and expense forecasts and the assumptions underlying these
forecasts is contained in the Daniels appraisal. We did not receive, nor did we
request that additional information or analysis be included in the Daniels
appraisal because we looked to Daniels to develop the appraisal methodology they
deemed appropriate in their professional judgement. We did not want to otherwise
influence the appraisal performed by Daniels by requiring any changes to their
prepared methodology.
Once Daniels had arrived at a forecast of cash flows and terminal
enterprise values, it discounted these values back to the present at a discount
rate representing the weighted average cost of capital for various entities
within the cable television industry that are capable of consummating a sale
similar in size to the acquisition of the assets. Daniels described the weighted
average cost of capital as the rate of return required by an entity on its
investment in order to satisfy the expectations of the entity's debt and equity
investors. After some analysis, Daniels assumed that the prime rate on July 1,
1999 (7.5%) was a fair estimate of the cost of debt. It determined the cost of
equity by sampling the estimated private market cost of equity for cable
television investments and blended this cost with the equity return objectives
for large publicly traded companies. Daniels determined the cost of equity to be
22.5%. Daniels arrived at a weighted cost of capital of 13.50%.
Applying the discount rate to its cash flow forecasts, Daniels arrived at a
valuation of $73.3 million for NCP-Six's assets, representing a value equal to
10.9 times annualized free cash flow and $2,200 per equivalent basic subscriber.
Comparable Transactions Valuation. In addition to the discounted cashflow
methodology, Daniels used the comparable private market transaction multiple
methodology. Daniels describes this as another generally accepted valuation
methodology for correlating and validating the findings of the discounted cash
flow analysis with private market realities. Under this methodology, Daniels
compared selected market multiples reported in the sales of cable television
systems of similar size, situated in similar markets, and of similar technical
condition to the assets. In these transactions, the purchase prices paid ranged
from 9.0 to 14.0 times operating cash flow, with a weighted average of 10.0.
Prices per subscriber ranged from $1,500 to $2,732, with a weighted average of
$1,940. All information provided to the managing general partner relating to the
basis for Daniels' selection of comparable transactions is contained in the
Daniels appraisal.
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Valuation. Based on its analysis using these two methodologies, Daniels
arrived at an estimated fair market value for NCP-Six's cable television system
assets as of July 1, 1999 of $73.3 million, representing 10.9 times the
estimated operating cash flow and a value per equivalent basic subscriber of
$2,200. This cash flow multiple is slightly higher than the weighted average
multiple for comparable transactions and equal to the multiple derived from the
discounted cash flow analysis. The value per subscriber is higher than the
weighted average value per subscriber derived from the comparable transaction
analysis and equal to the value per subscriber derived from the discounted
cashflow analysis.
COMMUNICATIONS EQUITY ASSOCIATES APPRAISAL
General. Communications Equity Associates ("CEA") was also engaged by
NCP-Six to appraise the entirety of NCP-Six's assets comprising the cable
television systems serving seven communities in Mississippi, South Carolina and
North Carolina. CEA delivered a written summary, based upon the review,
analysis, scope and limitations described in its written summary, as to the fair
market value of these systems as of July 1, 1999. Some of the material
assumptions, qualifications, limitations and methods used in the CEA appraisal
are described below.
Summary of Methodology. CEA evaluated each system based on a going-concern
basis, in conformance with standard appraisal techniques, utilizing a ten-year
discounted net cash flow analysis and applying relevant market and economic
factors. In valuing the assets, CEA relied on a discounted cash flow analysis
and market approach. The discounted cash flow approach is based on the projected
operating results of the assets over a ten-year period and applies a factor for
the residual value of the assets at the end of that ten-year period. The market
transaction approach reviews and compares recent private market transactions
involving comparable assets. The market approach provides a comparison of (1)
the multiple of cash flow represented by the purchase price of such other
systems with the multiple of NCP-Six's cash flow represented by the appraised
value for the assets, and (2) the value-per-subscriber of such other system
sales with the value-per-subscriber valuation of the assets. According to CEA,
both the discounted cashflow analysis and the comparable private market
transaction multiple analysis are generally accepted valuation methodologies for
cable television systems.
In the course of performing the valuation, CEA engaged in discussions with
employees of the managing general partner's corporate office and local system
offices, made due diligence visits to substantially all of the operating systems
comprising the assets, reviewed and evaluated materials and information provided
by the managing general partner and local cable system management, researched
demographic information relating to the various communities served by NCP-Six,
analyzed forecasted financial and operating information, and drew upon its own
general knowledge about the cable television industry. On the basis of this
information and these efforts, CEA prepared summaries of relevant operating,
technical, financial and demographic characteristics of NCP-Six's operating
systems.
In order to assess the fair market value of NCP-Six's assets, CEA prepared
detailed operating and financial forecasts for each of the cable system
operating systems, taking into account operating revenues and expenses as well
as capital expenditure requirements. These financial forecasts formed the basis
for determining a discounted cashflow for each cable system operating system.
The combined value for each cable system operating group constituted the value
of the cable operating assets for NCP-Six on a discounted cashflow basis. In
addition to this methodology, CEA used the comparable private market transaction
multiple methodology to derive an aggregate value for NCP-Six by analyzing the
value per subscriber and operating cash flow multiples obtained in private sales
of comparable systems. These multiples were compared to similar multiples for
the assets obtained using the value arrived at for the assets by the discounted
cash flow methodology. Informed by the results of both of these methodologies,
CEA then determined a final appraised value for NCP-Six's assets.
Assumptions. In performing its discounted cash flow analysis of the value
of the assets, CEA assumed the assets have been and will continue to be operated
as efficiently as comparable cable systems, and that the franchises and asset
leases used by NCP-Six in the operation of the assets will be renewed
indefinitely as needed without material change, other than upgrade and/or
rebuild requirements. CEA
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further assumed that the systems were in material compliance with all franchise,
regulatory and FCC requirements. CEA relied substantially on financial
statements and operational information provided by the Managing General Partner
and CEA did not independently verify the information. You should note that
events occurring after July 1, 1999, and before the effective date of the
transaction could affect the properties or assumptions used in preparing the
appraisals. CEA will not deliver any additional written summary of the analysis
and will not prepare an update to its appraisal closer to the time of closing
the Proposed Transaction.
Discounted Cash Flow Approach. The discounted cashflow approach measures
the present value of the assets' forecasted free cashflow from operations less
capital expenditures including all rebuild or upgrade costs. CEA determined
forecasted cash flows by creating ten-year operating forecasts for each of the
operating systems comprising the assets, each of which took into account
detailed projections of revenue and expense components. CEA then calculated the
projected residual value of the assets at the end of the ten-year period. This
terminal value was calculated by multiplying the projected free cash flow by a
multiple which CEA determined to be reasonable in light of its experience in the
cable system transaction market. All information provided to the managing
general partner relating to CEA's operating revenue and expense forecasts and
the assumptions underlying these forecasts is contained in the CEA appraisal. We
did not receive, nor did we request that additional information or analysis be
included in the CEA appraisal because we looked to CEA to develop the appraisal
methodology they deemed appropriate in their professional judgment. We did not
want to otherwise influence the appraisal performed by CEA by requiring any
changes to their prepared methodology.
Once CEA had arrived at a forecast of cash flows and terminal enterprise
values, it discounted these values back to the present at a discount rate
representing the weighted average cost of capital for cable television system
operators. CEA described the weighted average cost of capital as the rate of
return likely required by equity and debt investors in order to satisfy the
expectations of the investors. CEA assumed, based on its experience in raising
debt financing for cable operators, that a lender would likely charge an
interest rate of 8% for debt financing. It determined the cost of equity, based
on its experience in the cable system transaction market, as being a 25% return
on investors' equity. Applying these rates, CEA arrived at a weighted cost of
capital of 14.8%.
Applying the discount rate to its cash flow forecasts, CEA arrived at a
total present valuation of $74.6 million for NCP-Six's assets, representing a
value equal to 11.1 times the estimated operating cash flow and a price of
$2,263 per basic subscriber.
Comparable Market Approach. In addition to the discounted cash flow
methodology, CEA used the comparable market transaction approach. CEA describes
this as another generally accepted valuation methodology for valuing businesses
and for correlating and validating the findings of the discounted cash flow
analysis with private market realities. CEA noted in its appraisal that there
has been significant consolidation activity in the cable industry during the
first six months of 1999. CEA observed that although there had been dramatic
increases in the prices paid for large cable systems, due in part to the size
and location of the systems and the introduction of cable Internet services,
there have been fewer transactions involving cable systems of comparable size
and markets as NCP-Six's assets and that the prices paid these smaller systems
have not seen dramatic increases.
Under the market transaction methodology, CEA evaluated and compared
transactions occurring during the first six months of 1999 involving cable
systems of similar size and markets as NCP-Six's assets. In these transactions,
the purchase prices paid ranged from 9.2 to 12.7 times operating cash flow, with
a weighted average of 10.8 and a median of 11.3. Prices per subscriber ranged
from $1,500 to $2,755, with a weighted average of $2,313 and a median of $2,134.
Based on CEA's experience in the cable system transaction market, it determined
that a cash flow multiple of 11.0 was appropriate to value the systems. CEA
applied this multiple to the annualized cash flow of $6,731,196 resulting in a
valuation of $74,043,156, representing a per subscriber price of $2,246.
Valuation. Based on its analysis using these two methodologies, CEA arrived
at an estimated fair market value for NCP-Six's cable television system
operation assets as of July 1, 1999 of $74.6 million,
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which represents a value equal to 11.1 times the estimated operating cash flow
and a price of $2,263 per basic subscriber. This cash flow multiple of 11.1 is
slightly higher than the weighted average multiple for comparable market
transactions and is equal to the multiple derived from the discounted cash flow
analysis. The value per subscriber of $2,263 is slightly higher than the
weighted average value per subscriber for comparable market transactions and is
equal to the value per subscriber derived from the discounted cash flow
analysis.
HOULIHAN LOKEY FAIRNESS OPINIONS
Pursuant to an engagement letter dated October 24, 2000, the Managing
General Partner on behalf of NCP-Six engaged Houlihan Lokey to render opinions
as to the fairness of the consideration to be paid to NCP-Six, from a financial
point of view, in both the Adelphia Transaction and the Proposed Transaction.
Houlihan Lokey did not assist the General Partners in any of the negotiations
leading to the agreement of the principle terms of the Adelphia Transaction or
the Proposed Transaction.
On February 16, 2001, at a meeting of the General Partners, Houlihan Lokey
delivered to the Managing General Partner and the Administrative General Partner
a presentation as to Houlihan Lokey's findings and drafts of separate opinions
as to the fairness of each of the Adelphia Transaction and the Proposed
Transaction. Based on the assumptions, qualifications, and limitations stated in
those opinions, the opinions concluded that the consideration to be received by
NCP-Six in both the Adelphia Transaction and the Proposed Transaction is fair,
from a financial point of view as of the date of each opinion.
The full text of the Houlihan Lokey opinions in connection with the
Adelphia Transaction and the Proposed Transaction, which set forth, among other
things, assumptions made, matters considered and limitations on the review
undertaken, are attached to this proxy statement as Exhibits J and K,
respectively. We urge you to read the Houlihan Lokey opinions in their entirety.
The Houlihan Lokey opinions were prepared for the benefit and the use of the
Managing General Partner and the Administrative General Partner of NCP-Six in
connection with their evaluation of the Adelphia Transaction and the Proposed
Transaction and do not constitute a recommendation to the unaffiliated limited
partners of NCP-Six as to how they should vote on matters presented in this
proxy statement.
The Houlihan Lokey opinions are also limited to whether the consideration
to be received by NCP-Six is fair from a financial point of view, and do not
make a separate determination as to the fairness of the consideration to be
received by the unaffiliated limited partners of NCP-Six upon liquidation of the
partnership.
The Houlihan Lokey opinions do not address the underlying business
decisions of the general partners of NCP-Six to proceed with the Adelphia
Transaction or the Proposed Transactions. Instead, the Houlihan Lokey opinions
are limited to Houlihan Lokey's independent evaluation of whether the
consideration to be received in each of the Adelphia Transaction and the
Proposed Transaction was fair as of the date of those opinions.
In connection with the preparation of the Houlihan Lokey opinions, Houlihan
Lokey, among other things:
1. held discussions with:
- John S. Whetzell: Founder, President, CEO and Chairman of the Board of
Directors, Northland Telecommunications Corporation;
- Gary Jones: Vice President and Chief Financial Officer, Northland
Telecommunications Corporation;
- Richard Dyste: Vice President of Technical Services, Northland
Telecommunications Corporation;
- Laura Williams: Vice President and Senior Counsel, Northland
Communications Corporation;
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- Richard Clark: Vice President, Treasurer and Director, Northland
Telecommunications Corporation;
- H. Lee Johnson: Divisional Vice President, Northland Telecommunications
Corporation;
- Richard Belland: System Manager, Starkville, MS system;
- Ricky Mooneyham: Regional Manager, Philadelphia and Forest, MS system;
- Toby Ellington: South East Operations Analyst, Northland Communications
Corporation;
- Bill Staley: Regional Manager, Aiken, SC area systems;
- Bob Sturm: System Technician, Barnwell, SC system;
- Shirley McCormick: Business Manager, Bennettsville, SC system;
- Leroy Hendricks: System Technician, Bennettsville, SC system; and
- Randy Wells: Senior Vice President, Daniels and Associates, L.P.
2. visited the following cable system operations representing approximately
92% of NCP-Six's subscribers:
- Starkville, MS;
- Philadelphia, MS;
- Barnwell, SC; and
- Bennettsville, SC.
3. reviewed the following documents:
- Northland Telecommunications Corporation 1999 Annual Report;
- Northland Cable Properties Six Limited Partnership Prospectus dated
July 10, 1986;
- Amended and Restated Certificate and Agreement of Limited Partnership
of Northland Cable Properties Six Limited Partnership, executed on
November 3, 1986;
- Northland Cable Properties Six Limited Partnership First Supplement to
Prospectus dated October 23, 1986;
- Northland Cable Properties Six Limited Partnership Second Supplement to
Prospectus dated December 1, 1986;
- Northland Cable Properties Six Limited Partnership Third Supplement to
Prospectus dated January 26, 1987;
- Audited Financial Statements for the years ended December 31, 1988 and
1987;
- Audited Financial Statements for the years ended December 31, 1996 and
1995;
- Audited Financial Statements for the years ended December 31, 1997 and
1996;
- Northland Cable Properties Six Limited Partnership 10-K for the fiscal
year ended December 31, 1997;
- Northland Cable Properties Six Limited Partnership 8-K dated January 2,
1998;
- Northland Cable Properties Six Limited Partnership 10-K/A for the
fiscal year ended December 31, 1998;
- Northland Cable Properties Six Limited Partnership 10-Q for the
quarterly period ended June 30, 1999;
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- Northland Cable Properties Six Limited Partnership 10-K for the fiscal
year ended December 31, 1999;
- Northland Cable Properties Six Limited Partnership 10-Q for the
quarterly period ended June 30, 2000;
- Unaudited detailed financial statements for each operating group for
the year-to-date period ended December 31, 2000;
- Draft audited financial statements for Northland Cable Properties Six
Limited Partnership for the two fiscal years ended December 31, 2000
and 1999;
- Northland Cable Properties Six Limited Partnership Appraisal Analysis
Summary as of July 1, 1999 prepared by Daniels & Associates, L.P.;
- Northland Cable Properties Six Limited Partnership Asset Valuation
Analysis as of July 1, 1999 prepared by Communications Equity
Associates;
- Northland Cable Properties Six Limited Partnership Confidential
Memorandum prepared by Daniels & Associates, L.P., dated July 1999;
- Northland Cable Properties Six Limited Partnership Bid Instructions
Letters, dated August 6, 1999 from Daniels & Associates, L.P.;
- Northland Cable Properties Six Limited Partnership Buyer List, prepared
by Daniels & Associates, dated August 20, 1999;
- Northland Cable Properties Six Limited Partnership Bid Summary, Dated
August 20, 1999;
- NCP-Six Draft Proxy Statement dated December 9, 1999;
- Northland Cable Properties Six Limited Partnership Confidential
Memorandum prepared by Daniels & Associates, L.P., dated June, 2000;
- Northland Cable Properties Six Limited Partnership Bid Instructions
Letters, dated July 27, 2000 from Daniels & Associates, L.P.;
- Bid Procedures Letter from Daniels & Associates, L.P., dated July 18,
2000 and Proposed Asset Purchase Agreement;
- Northland Cable Properties Six Limited Partnership Prospective Buyers
List, prepared by Daniels & Associates, dated July 28, 2000;
- Northland Cable Properties Six Limited Partnership Updated Bid Book,
dated August 16, 2000;
- Follow-up Bid Instruction Letters to Scott Johnson at Adelphia
Communications from Daniels & Associates, L.P., dated July 28, 2000 and
August 3, 2000;
- Affidavits from Hubbard & Johnson, P.C., signed August 10, 2000 and
August 17, 2000;
- Purchase and Sale Agreement By and Between Northland Cable Properties
Six Limited Partnership and Adelphia Communications Corporation, dated
February , 2001;
- Asset Purchase Agreement between Northland Cable Properties Six Limited
Partnership and Northland Communications Corporation, or its Affiliates
or Assigns, dated February , 2001;
- Northland Cable Properties Six Limited Partnership Preliminary Proxy
Statement filed with the Securities Exchange Commission on December 21,
2000;
- Northland Cable Properties Six Limited Partnership Subscriber History
from January 1998 to September 2000, dated October 25, 2000;
- Northland Cable Properties Six Limited Partnership Subscriber
Report -- End of Month Subs as of December 2000;
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- Summary of Secondary Trading for units in NCP-Six from inception to
February 6, 2001 from Bloomberg L.P.;
- Franchise Renewal Docket;
- Listing of Property Leases;
- Channel Line-up, printed October 25, 2000;
- NCP-Six Company Summary Three Year Capital Plan dated January 22, 2001;
- Organization Chart for Northland Telecommunications Corporation; and
- publicly available information on the industry, NCP-Six and comparable
companies and transactions.
4. performed appraisals of the assets proposed to be sold to Northland and
separately to Adelphia, which included, among other things, the following
analyses:
- Analysis of comparable transactions;
- Analysis of all previous purchases and sales of cable systems by
NCP-Six;
- Analysis of comparable public companies;
- Discounted cash flow analysis;
- Review of the returns to the original limited partners and limited
partners from secondary trading;
- Review of the historical and projected financial performance of the
systems;
- Review of the historical subscriber performance of the systems;
- Review of the historical and projected capacity and other technical
aspects of the systems;
- Review of the implied multiples from the Proposed Transactions; and
- Analysis of the change in valuations of cable systems over time.
The following is a summary of the material financial analyses performed by
Houlihan Lokey in connection with rendering the Houlihan Lokey opinion related
to the Proposed Transaction. Although a similar analysis was performed by
Houlihan Lokey with respect to the Adelphia Transaction, the following
discussion describes the process followed by Houlihan Lokey specific to the
Proposed Transaction.
DISCOUNTED CASH FLOW ANALYSIS:
The discounted cash flow approach values a company on a going-concern
basis. The discounted cash flow approach determines the present risk-adjusted
value of the expected future cash flow stream, with expected growth incorporated
into the projections. There are three steps involved in using the discounted
cash flow approach as follows:
- determination of cash flow projections that are supportable in light of
historical performance, industry performance and industry expectations,
and reasonable future expectations of the partnership;
- determination of the "Terminal Value" of the partnership at the end of
the projection period; and
- determination of the appropriate discount rate to be used to discount the
projected cash flows.
In its analysis of NCP-Six, Houlihan Lokey used forecasts and projections
for the years ended December 31, 2000 through 2005. Projected capital
expenditures for 2001 to 2003 were based on NCP-Six's detailed Three-Year
Capital Plan. Debt-free cash flows are generally defined as representative
debt-free earnings less capital expenditures plus depreciation and amortization
less increases in net working capital. Houlihan Lokey discounted the value of
the debt-free cash flow streams to present values using
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discount rates ranging from 11% to 15%. Houlihan Lokey selected the discount
rates by estimating the weighted average cost of capital for the combined
operating units of NCP-Six associated with the Proposed Transaction. The
weighted average costs of capital was primarily based on the cost of capital for
publicly traded cable companies.
In order to determine the terminal value of the assets at the end of the
projection period, Houlihan Lokey utilized a capitalization of operating cash
flow approach. This approach was utilized by applying a 10.0x multiple to 2005
operating cash flow. The terminal multiple of 10.0 was based on the average
multiple for similar transactions. Houlihan Lokey then discounted the terminal
value of the assets associated with the Proposed Transaction to the present
using the same discount rate range as the interim cash flows. Houlihan Lokey
added together the present value of the interim cash flows and the present value
of the terminal value to arrive at a total enterprise value range of $51.9
million to $60.0 million for the assets associated with the Proposed
Transaction.
COMPARABLE TRANSACTION ANALYSIS:
Using publicly available information, Houlihan Lokey analyzed the
consideration offered and the implied transaction value multiples paid in the
following selected acquisition transactions in the cable system industry:
DATE BUYER SELLER
---- ----- ------
June 2000.................... Adelphia Tri-Lakes
June 2000.................... Cable One Telepartners
June 2000.................... Charter Communications Inc. Enstar 6-B
June 2000.................... Gans Multimedia Enstar
July 2000.................... Mediacom Spirit Lake CATV
July 2000.................... Mediacom So. KY Service Corp.
July 2000.................... Omega Rifkin Acquisition Partners
August 2000.................. Gans Multimedia Enstar
October 2000................. Mediacom Illinet Cable Systems
October 2000................. Time Warner Lewis County Cable and
Henderson Cable
November 2000................ Mediacom Satellite Cable Services
In analyzing these comparable transactions, Houlihan Lokey compared the
total consideration paid in such transactions as a multiple of the number of
subscribers as well as the latest twelve months and estimated calendar 2000 cash
flows, where available.
The transactions above were relied upon more heavily than other
transactions analyzed because they were closer in time to the Proposed
Transaction, similar in size to the Proposed Transaction and the companies that
were acquired were located in similar rural communities. The average multiple of
operating cash flows for these transactions was 9.7 and the median was 9.4. The
average multiple of subscribers was $2,024 and the median was $1,949.
After reviewing the composite range of multiples indicated for the
comparable transactions, Houlihan Lokey arrived at a multiple range for the
NCP-Six operating groups to be transferred in the Proposed Transaction of:
2000 Cash Flow Multiple Range........................ 9.5 to 10.0
Subscriber Multiple Range............................ 2,000 to 2,200
After applying these ranges of multiples to NCP-Six's respective
representative values, Houlihan Lokey arrived at a valuation range from this
approach of $56.3 million to $60.5 million.
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OTHER CONSIDERATIONS
In addition to the analyses mentioned above, Houlihan Lokey:
- performed an analysis of all previous purchases and sales of cable
systems by NCP-Six. Houlihan Lokey reviewed previous sales and
acquisitions of cable systems made by NCP-Six including its acquisition
of the Bennettsville and Barnwell operating systems in 1998 at $1,817 per
subscriber and the sale of the Bennettsville operating system in February
of 2001 at $1,800 per subscriber.
- performed an analysis of Classic Cable, a comparable public company,
analyzing its financial performance, size, growth, plant quality and cash
flow and subscriber multiples.
- reviewed the returns to the partnership's unaffiliated limited partners
from secondary trading.
- analyzed the change in valuations of U.S. cable systems since the date of
the previous appraisals by Daniels and Communication Equity Associates.
The market price for public cable companies has decreased 9% between
February 1, 2001 and July 1, 1999, the date of the previous appraisals by
Daniels and Communication Equity Associates. The average appraisal value
from Daniels and Communication Equity Associates was $73.95 million as of
July 1, 1999. Applying a 9% decrease implies a value of $67.29 million as
of February 16, 2001 for the combined assets associated with the Proposed
Transaction and the Adelphia Transaction. In addition, the number of
total NCP-Six subscribers has decreased from 32,617 at the end of June
1999 to 31,633 at the end of December 2000, a 3% decrease. This also puts
downward pressure on the current valuation as compared to July 1999.
- reviewed the implied multiples for the Proposed Transaction. The implied
multiple per subscriber from the Proposed Transaction is $2,276. The
implied operating cash flow multiple from the Proposed Transaction is
10.0. These multiples were calculated based on an adjusted purchase
price. The adjusted purchase price of $61.6 million was determined by
adding the expected proceeds to NCP-Six on the closing date to the
present value of the principal and interest payments to be paid over the
next two years.
- held discussions with Daniels and Associates regarding the sale
procedures and bid processes followed in connection with the sale of the
assets of NCP-Six.
After applying the various approaches and considering the factors mentioned
above, Houlihan Lokey arrived at a valuation range of $54.8 million to $60.3
million. This range is below the adjusted purchase price of $61.6 million
calculated for the Proposed Transaction as of February 16, 2001. As a result,
Houlihan Lokey has concluded that the Proposed Transaction is fair to NCP-Six,
from a financial point of view.
COMPENSATION AND MATERIAL RELATIONSHIPS
NCP-Six paid Daniels & Associates and Communications Equity Associates
$50,000 each plus out-of-pocket expenses for their appraisal services. If either
the Adelphia Transaction, or the Proposed Transactions are consummated, NCP-Six
will also pay Daniels & Associates $83,880 and $622,500, for each respective
transaction that closes, as a brokerage fee for its efforts in soliciting bids
for the assets from independent third parties.
NCP-Six retained Daniels & Associates and Communications Equity Associates
based upon each company's experience and expertise as a nationally recognized
cable brokerage, appraisal and investment banking firm. Each firm, as part of
its investment banking business, is continuously engaged in the valuation of
cable businesses and securities in connection with mergers and acquisitions,
competitive biddings, private placements and valuations. We decided not to
retain appraisers other than Daniels & Associates and Communication Equity
Associates, because we believed they were the best available and had the best
understanding and expertise in the rural cable television system market in which
NCP-Six's systems are located. Our belief as to the qualifications of Daniels &
Associates and Communication Equity Associates is based on our years of
experience working in the cable television industry. Our experiences
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have included: negotiating numerous transactions for cable assets; valuing
systems for both operation, purchase, and sale; attending numerous trade shows
and industry events; maintaining relationships with various parties that work in
the cable industry, including parties that are known to customarily appraise
cable assets; and keeping abreast of industry developments through trade
publications and various news sources. Both Daniels & Associates and
Communications Equity Associates are independent of Northland and NCP-Six and
neither firm has any ownership interest in or management control over Northland
or NCP-Six, although we are aware of one individual at Communications Equity
Associates who owns 8 units of limited partnership interest in NCP-Six (out of
29,784 units outstanding). This individual has agreed not to vote his units at
the special meeting. In the past, Daniels & Associates has provided brokerage
and appraisal services to NCP-Six, including assisting in brokering the sale of
the Sandersville, Mississippi system in April 1999. In addition, both Daniels &
Associates and Communications Equity Associates have previously provided
brokerage and appraisal services to Northland and affiliates of Northland and it
is expected that they may provide similar services in the future. In all cases,
each firm has received customary fees for the rendering of these services. Both
Daniels & Associates and Communication Equity Associates have consented to the
use of their appraisals in conjunction with this proxy statement.
NCP-Six has also paid Houlihan Lokey a fee of $125,000 plus out-of-pocket
expenses for its services in connection with rendering opinions as to the
fairness of the consideration to be received by NCP-Six in both the Adelphia
Transaction and the Proposed Transaction. The amounts to be paid to Houlihan
Lokey were not conditioned upon the outcome of their fairness opinions and were
negotiated prior to Houlihan Lokey's evaluation of any of the assets of NCP-Six.
NCP-Six retained Houlihan Lokey to evaluate the assets of NCP-Six and the
consideration to be received in both the Adelphia Transaction and the Proposed
Transaction due to Houlihan Lokey's experience and reputation in evaluating
transactions and rendering fairness opinions for various companies in various
industries, including companies operating in the telecommunications sector.
Prior to this engagement, neither Northland, nor any of its affiliates had
entered into a relationship with Houlihan Lokey, and to our knowledge Houlihan
Lokey does not own any interest in, or have any management control over,
Northland or NCP-Six. Houlihan Lokey has also consented to the use of its
fairness opinions in conjunction with this proxy statement.
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SPECIFIC TERMS OF THE ADELPHIA TRANSACTION
The Adelphia Transaction is to be made pursuant to the terms and conditions
of the Adelphia asset purchase agreement, a copy of which is attached as Exhibit
E. Adelphia's offer for NCP-Six's Bennettsville, South Carolina operating system
is for a purchase price of $8,388,000 subject to two possible adjustments.
First, the purchase price shall be adjusted dollar for dollar for any net
liabilities of the Bennettsville operating system assumed by Adelphia at the
closing of the Adelphia Transaction. Second, the purchase price shall be
adjusted in the event the Bennettsville operating system serves less than 4,660
basic subscribers on the date of closing the Adelphia Transaction, in which
case, the purchase price shall be reduced by $1,800 for each basic subscriber
under 4,660. The entire adjusted purchase price for the Adelphia Transaction is
to be paid at closing with $1,000,000 of the adjusted purchase price to be
deposited in an escrow account to secure contingent liabilities and
indemnification obligations of NCP-Six potentially arising out of the Adelphia
Transaction. The balance of any amounts remaining in the escrow are to be
released on the first anniversary of closing the Adelphia Transaction.
SPECIFIC TERMS OF THE PROPOSED TRANSACTION
GENERAL
The Proposed Transaction with Northland is to be made pursuant to the terms
and conditions of the Northland asset purchase agreement, a copy of which is
attached as Exhibit F. If the Proposed Transaction is approved, NCP-Six will be
authorized to enter into an agreement with Northland under which Northland will
acquire the entirety of the assets of NCP-Six that are not included in the
Adelphia Transaction in a transaction valued at $62,250,000. The agreement will
specifically provide for the following:
- the sale to Northland of the undivided portion of the assets that is
attributable to the unaffiliated limited partners' and the Administrative
General Partner's interest in NCP-Six; and
- the distribution in-kind to Northland of the undivided portion of the
assets that is attributable to the Managing General Partner's interest in
NCP-Six.
PAYMENT OF THE PURCHASE PRICE AND FINANCING REQUIREMENTS
Northland's offer to acquire all of the assets of NCP-Six, except for the
Bennettsville system to be sold to Adelphia, is for a total purchase price
valuation of $62,250,000. The purchase price includes $9,875,000 to be paid
pursuant to a promissory note from Northland to NCP-Six.
The promissory note will have the following provisions:
- a term of two years;
- two equal payments of principal and accrued interest, due in full on the
first and second anniversaries of closing;
- a fixed interest rate of six and one-half percent per annum;
- full recourse and unsecured; and
- subordinated to Northland's senior debt.
Northland currently has debt and other obligations in the approximate
amount of $53,900,000 that would be senior to the note. The note which will be
prepayable at any time, will be an unsecured obligation of Northland. Northland
expects that it will assign its rights under the Proposed Transaction asset
purchase agreement to an affiliate of Northland to purchase the assets to be
conveyed in the Proposed Transaction. In such event, Northland expects that such
affiliate will incur bank debt in order to finance the acquisition, and
Northland may be required to be a guarantor on such debt. Northland's
obligations under any such guarantee would be senior to the note. In addition,
the note will be
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subordinated to any other senior debt of Northland that may be incurred by
Northland in the future. The note will bear interest at a fixed rate that may be
lower than rates on debt instruments that may be perceived to have comparable or
lower risks than the note. The interest rate on the note is currently less than
the prime rate in effect as of the date of this proxy statement. In addition,
there is no guarantee that Northland, or its assignee, will not default on the
note. The interest rate on the note is not intended to represent the interest
rate which would be charged to Northland by an unaffiliated third-party lender
or to provide a rate of return on the note equal to that which the unaffiliated
limited partners could have received had the Proposed Transaction price been
paid in full in cash at closing. The fixed six and one-half percent interest
rate instead reflects the economic terms under which Northland is willing to
undertake the Proposed Transaction.
At closing, Northland will acquire the unaffiliated limited partners'
interest and the administrative general partner's interest in the assets from
NCP-Six by payment of the following:
- by making an initial payment to NCP-Six equal to that amount that, after
retiring partnership liabilities attributable to the unaffiliated limited
partners' interest and the administrative general partner's interest and
withholding the required state income taxes, will enable NCP-Six to
distribute to the unaffiliated limited partners an amount forecasted to
equal $709 for each partnership unit ($500/unit) in NCP-Six; and
- delivering to NCP-Six the promissory note in the principal amount of
$9,875,000.
Northland estimates it will require approximately $46,900,000 of debt
financing at closing to complete the acquisition. This amount represents the
valuation price of $62,250,000 plus financing costs estimated to be $1,000,000
less:
- an amount equal to the value of the distribution in-kind to Northland for
its undivided portion of the assets attributable to the Managing General
Partner's interest in NCP-Six;
- certain liabilities of NCP-Six assumed by Northland; and
- the principal amount of the promissory note.
Based on preliminary discussions with its lenders as of the date of this proxy
statement, Northland expects to obtain the necessary financing, although no
formal commitment has been received.
CONDITIONS TO COMPLETION OF THE PROPOSED TRANSACTION
The obligation of Northland to consummate the Proposed Transaction is
subject to the satisfaction, at the closing, of a number of conditions,
including, among others:
- the Proposed Transaction and the corresponding approval of Proposed
Amendment No. 2 to the NCP-Six Partnership Agreement which must be
approved by the holders of a majority of the outstanding unaffiliated
limited partnership units;
- the representations and warranties of NCP-Six in the asset purchase
agreement with Northland must be true and correct in all material
respects at the closing;
- NCP-Six must have complied with its covenants and obligations in the
asset purchase agreement in all material respects through the closing;
- there must be no action, suit or other proceeding pending or threatened
to prevent or otherwise restrict the Proposed Transaction that would have
a material adverse effect;
- the Hart-Scott-Rodino waiting period must have expired or terminated;
- NCP-Six must have received consents from all franchising authorities and
from the FCC relating to the systems;
- Northland must have obtained its necessary financing;
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- there must have been no material change in the financial condition of
NCP-Six; and
- the Adelphia Transaction must have already closed.
Even if the Proposed Transaction is approved, Northland will have no
obligation to consummate the transaction, unless each of these closing
conditions are satisfied.
REPRESENTATIONS AND WARRANTIES
NCP-Six is being asked to make a limited number of representations and
warranties in the Northland asset purchase agreement regarding facts pertinent
to the Proposed Transaction. These representations include the following:
- organization, qualification to do business and partnership power;
- authorization of the purchase agreement by NCP-Six;
- enforceability of the purchase agreement against NCP-Six; and
- third-party consents required to consummate the transaction.
Northland is making a number of representations and warranties in the asset
purchase agreement regarding facts pertinent to the transaction. These
representations include the following:
- organization, qualification to do business and corporate power;
- authorization of the purchase agreement by Northland;
- third-party consents required to consummate the transaction.
- the effect of the transaction on Northland and its assets and under
applicable law;
- Northland's ability to obtain adequate financing for the transaction by
closing; and
- Northland's qualifications to own and operate the systems under the cable
franchises.
TERMINATION
The Northland asset purchase agreement may be terminated at any time before
completion of the Proposed Transaction under the circumstances described below:
- NCP-Six and Northland may terminate the purchase agreement by mutual
consent;
- Either NCP-Six or Northland may terminate the purchase agreement if:
- the Federal Trade Commission or the Department of Justice notifies
either party of its intent to enjoin the transaction; or
- any action, suit or other proceeding is pending or threatened to prevent
or otherwise restrict the proposed transaction that would have a
material adverse effect;
- Northland may terminate the purchase agreement if any of the conditions
to its closing obligations are not satisfied or waived, unless the
failure to fulfill the condition is a result of a breach of the purchase
agreement by Northland;
- NCP-Six may terminate the purchase agreement if any of the conditions to
its closing obligations are not satisfied or waived, unless the failure
to fulfill the condition is a result of a breach of the purchase
agreement by NCP-Six; or
- The agreement will terminate without action by either party if closing
does not occur within 180 days after the date of the special meeting.
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DISTRIBUTIONS TO LIMITED PARTNERS
The Proposed Transaction contemplates that NCP-Six will dispose of the
entirety of its assets by June, 2001 at a valuation of $8,388,000 for the
Adelphia Transaction and $62,250,000 for the Proposed Transaction, resulting in
a combined total valuation of $70,638,000. Due to the fluctuating nature of
"non-system" assets of NCP-Six, including cash, accounts receivable and prepaid
sums, the value of these partnership assets and the amount of partnership
liabilities as of the date of dissolution are incapable of definitive
calculation at this time. The actual net proceeds distributed and federal income
tax consequences to unaffiliated limited partners thus will vary from the
estimated amounts set forth in this proxy statement.
A vote to approve the Proposed Transaction described in this proxy
statement shall be deemed to constitute consent to any variation in the
distributed proceeds. Notwithstanding the foregoing, if at any time prior to
closing we determine that the cumulative distribution to unaffiliated limited
partners may be reduced by more than $622,500 from the current projected
distributions (an amount that represents one percent of the total Proposed
Transaction price), we will not sell the assets to Northland, any of its
affiliates or any third party without again obtaining approval of the
unaffiliated limited partners. See "Projected Cash Available From Liquidation."
Because Northland is the acquiring entity, the undivided portion of the
assets attributable to the Managing General Partner's interest will be
distributed to the Managing General Partner in-kind, rather than sold for cash.
As a consequence of the in-kind distribution to the Managing General Partner,
net proceeds from the sale of the assets will be distributed solely to the
limited partners and to the Administrative General Partner, ratably in
accordance with the requirements of the NCP-Six Partnership Agreement, subject
to certain adjustments. This procedure reduces the amount of cash required by
the acquiring entity, in that the cash price payable for the assets is reduced
by the value of the Managing General Partner's interest in the assets.
In determining the net amount distributable to the unaffiliated limited
partners, the Proposed Transaction valuation of $62,250,000 will be adjusted as
follows:
- it will be decreased by the value of advance payments and deposits, which
represent current liabilities to be assumed by Northland;
- it will be increased by any other partnership assets not sold to
Northland (such as cash on hand and accounts receivable); and
- it will be decreased by expenses and liabilities attributable to the
assets being sold, including the following:
- the costs of the fairness opinions and broker expenses;
- costs related to the proposed transaction, including costs in
connection with this proxy solicitation;
- partnership administrative costs;
- amounts to repay outstanding debt obligations to NCP-Six's lender,
management fees and other allocated operating costs, accounts
payable, accrued expenses and other partnership liabilities; and
- the amount of $750,000, to secure payment of any contingent or
unknown liabilities and indemnification obligations.
The net amount distributable to the unaffiliated limited partners and the
General Partners will be distributed as provided in the NCP-Six Partnership
Agreement. The NCP-Six Partnership Agreement requires that distributions be made
in the following order:
- first, until the unaffiliated limited partners receive cumulative
distributions equal to their capital contributions, 99% to the
unaffiliated limited partners and 1% to the Managing General Partner; and
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- thereafter, 75% to the unaffiliated limited partners, 5% to the
Administrative General Partner, and 20% to the Managing General Partner.
The Managing General Partner will receive its distribution as an in-kind
distribution of assets. The unaffiliated limited partners and Administrative
General Partner will receive their respective distributions in cash within 120
days after closing and on the first and second anniversaries of the closing upon
payment of the two equal annual installments called for in the promissory note
to be delivered by Northland at the closing of the Proposed Transaction. The
aggregate amount distributable to unaffiliated limited partners will be
allocated among the unaffiliated limited partners based on the number of units
held by each. See "Projected Cash Available from Liquidation -- Projected Cash
Available If Closing Occurs" and the subsequent notes.
Distributions to unaffiliated limited partners will be made in three
installments. The first estimated distribution of $1,418 per $1,000 investment
will be made within 120 days after the date of closing the Proposed Transaction.
We currently anticipate that the first distribution will occur in June 2001. The
balance of the distribution to be made to the unaffiliated limited partners will
be made in two separate installments as and when payments are made by Northland
to NCP-Six pursuant to the promissory note, and upon release of those funds
deposited in the holdback escrow as required by the Adelphia Transaction
purchase agreement. We anticipate the amount of the first distribution
consisting of the first installment under the note and the escrow proceeds from
the Adelphia Transaction to approximate a total of $382 per $1,000 investment
plus interest of $41 per $1,000 investment. We further estimate the amount of
the second of the two distributions under the note to approximate a total of
$318 per $1,000 investment plus interest of $21 per $1,000 investment.
These distribution estimates take into account the payment of all known or
anticipated partnership liabilities attributable to the unaffiliated limited
partners' interest in NCP-Six, including any liquidation expenses and any claims
against NCP-Six of which we are aware. These estimates also include $750,000 to
be funded from cash paid by Northland at closing, to secure contingent and
unknown liabilities and indemnification obligations of NCP-Six. If NCP-Six
incurs any unanticipated liabilities or expenses which arise from operations of
NCP-Six prior to or on the date of closing or becomes liable for an
indemnification obligation under the asset purchase agreements with Adelphia or
Northland or under the NCP-Six Partnership Agreement, either of which exceeds
amounts set aside for the payment of known and anticipated current liabilities
or contingent liabilities, these liabilities and expenses could reduce the
amount of cash available for distribution to the unaffiliated limited partners.
Following closing of the Proposed Transaction, NCP-Six will remain liable
for post-closing adjustments, claims, liquidation expenses and unknown and
contingent liabilities, as well as any indemnification obligation under the
asset purchase agreements with Adelphia and Northland and the NCP-Six
Partnership Agreement. All liabilities, including liabilities owing to Northland
arising out of the disposition of the assets or otherwise, will be shared by the
unaffiliated limited partners and General Partners ratably in accordance with
the NCP-Six Partnership Agreement. See "PROJECTED CASH AVAILABLE FROM
LIQUIDATION."
DISSOLUTION AND LIQUIDATION CONSEQUENCES OF THE PROPOSED TRANSACTION
DISSOLUTION PROCEDURES
If the Proposed Transaction closes, we will proceed with the distribution
of proceeds in accordance with the provisions of the NCP-Six Partnership
Agreement regarding dissolution, winding-up and termination.
NCP-Six anticipates winding up its business in the fourth quarter of 2001.
Until NCP-Six has wound up its affairs it will continue to file periodic reports
with the Securities and Exchange Commission under the Securities Exchange Act of
1934. In the event winding up the partnership takes longer than anticipated,
NCP-Six will continue to file its reports until the dissolution has occurred.
Upon its
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dissolution NCP-Six will file a Certification and Notice of Termination on Form
15 with the SEC, and will thereafter no longer be subject to the Securities
Exchange Act and will cease filing periodic reports with the SEC. However, as
discussed below under "-- Description of Liquidating Trust," the trust will
continue to provide annual financial information to the unaffiliated limited
partners until the proceeds of Northland's promissory note are paid to the
unaffiliated limited partners.
DESCRIPTION OF LIQUIDATING TRUST
After NCP-Six is wound up and a certificate of cancellation is filed with
the Washington Secretary of State, the Northland's promissory note will be
assigned to a liquidating trust created and maintained for the benefit of the
unaffiliated limited partners. The liquidating trust will be governed by the
NCP-Six Liquidating Trust Agreement, a copy of which is attached as Exhibit L.
In addition to the Northland note, NCP-Six's rights to the $1,000,000 hold-back
escrow required in the Adelphia Transaction will be transferred to the trust.
NCP-Six will also deposit $750,000 from the cash received upon closing the
Proposed Transaction with the trust to secure any contingent or unknown
liabilities of NCP-Six during the partnership's winding up and dissolution.
The trust will permit NCP-Six to dissolve after it ceases operations and
will facilitate administration and distribution of the proceeds of the note to
the unaffiliated limited partners. Interests in the trust will be
non-transferable. The trust will not engage in any business activities other
than those incident to the distribution of proceeds of the note to the
unaffiliated limited partners and will be terminated once the final proceeds of
the note have been paid to the unaffiliated limited partners, which is
anticipated to occur on or about the second anniversary of closing the Proposed
Transaction. The trust is prohibited from conducting a trade or business and
from making investments (other than short-term investments in demand or time
deposits or other temporary investments) and will not hold itself out as an
investment company. The trust will terminate the sooner of the date upon which
the trustee has disbursed all the proceeds of the note to the unaffiliated
limited partners or December 31, 2004.
Income and expenses of the trust will be allocated among the unaffiliated
limited partners as beneficiaries of the trust according to their percentage
interest in NCP-Six. The trust is designed as a "spendthrift trust" and
expressly precludes voluntary transfer of a beneficiary's interests in the
trust, whether by assignment or otherwise. Although the terms of the trust also
prohibit involuntary transfer of beneficial interests in the trust, whether by
creditors, judgement or operation of law, there can be no assurance that these
provisions will be enforceable in all circumstances. Subject to the restrictions
on the trust's actions as described above, the trustee of the trust has all
rights and authorities granted to trustees generally under Washington law.
The trust will not be required to file periodic reports with the SEC.
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PROJECTED CASH AVAILABLE FROM LIQUIDATION
If closing of the Proposed Transaction occurs, the unaffiliated limited
partners are expected to receive the same amount of cash they would receive if
the assets were sold for a proposed purchase price of $62,250,000 to an
unaffiliated third-party. However, a sale to a third-party could involve
additional transaction costs, which would result in lower net proceeds to the
unaffiliated limited partners. For example, legal and accounting fees incurred
by NCP-Six, including assisting in the extensive business, legal, engineering,
technical and financial due diligence review customarily undertaken by
third-party purchasers, as well as preparation and negotiation of transaction
documentation, would likely exceed the estimated transaction costs set forth on
the following page. These expenses would be further compounded if multiple
purchasers were involved in the sale of all of NCP-Six's assets. We are not
aware of any material costs undertaken by NCP-Six in this Proposed Transaction
that would not also be incurred in a sale to an unaffiliated third-party. If the
assets were to be sold to an independent third-party at a price in excess of the
purchase price, such a sale might result in net proceeds to unaffiliated limited
partners sufficiently higher to offset transaction costs. In any event, if
closing of the Proposed Transaction occurs, the amount of cash distributed to
you will not be less than the amount you would receive if the assets of NCP-Six
remaining after the Adelphia Transaction were sold to an unaffiliated
third-party at a purchase price of $62,250,000, pursuant to the terms of the
Northland asset purchase agreement.
The following table sets forth the amount of cash projected for
distribution to you assuming that NCP-Six closes the Adelphia Transaction and
disposes of its remaining assets in the Proposed Transaction based on the
Proposed Transaction's valuation of $62,250,000 and fully liquidates. The
estimated total cash distributions to you over the life of the partnership are
approximately $1,245 per partnership unit, or $2,488 per $1,000 investment
(excluding aggregate interest payments of approximately $31 per unit, or $62 per
$1,000 investment). The projected net cash available assumes that both the
Adelphia Transaction and the Proposed Transaction occur on December 31, 2000,
and thus reflects payments of principal and interest on partnership indebtedness
and certain accrued receipts and costs as of December 31, 2000. The current
estimated total expenses in the Proposed Transaction are approximately
$1,100,000, excluding administrative costs of dissolution and winding up
NCP-Six. As discussed in the preceding paragraph, expenses of this proxy
solicitation, including legal and accounting costs, could be materially
different if the Proposed Transaction involved the sale of the assets to a
third-party. See "Fairness of the Transaction -- Comparison of Northland's Offer
to Highest Third-Party Bid -- Lower Transaction Costs." Although these expenses
will vary depending on the timing and structure of the sales transaction, the
expenses incurred would likely be equal to or greater than those set forth in
the table. Other expenses, such as partnership administrative costs and
miscellaneous costs represent expenses that would be incurred by NCP-Six
regardless of the parties to or structure of a sale of NCP-Six's assets. The
estimated expenses include an aggregate amount of $750,000 which will be held by
NCP-Six in the liquidating trust to secure contingent or unknown liabilities and
indemnification obligations of NCP-Six. Regardless of whether NCP-Six were
selling its remaining assets to Northland or to an independent third-party, we
would require this reserve to secure these contingent liabilities and
indemnification obligations. Additionally, pursuant to the terms of the Adelphia
Transaction purchase agreement, $1,000,000 of the purchase price to be received
in the Adelphia Transaction will be held in escrow to secure contingent
liabilities and indemnification obligations arising out of the Adelphia
Transaction for a period of one year from the closing of the Adelphia
Transaction. It is assumed that these proceeds will be distributed in full along
with the first installment payment from Northland's promissory note that is to
be issued as part of the purchase price for the Proposed Transaction. The table
also indicates projected net cash available for distribution based on both a
per-partnership unit basis and an initial $1,000 capital contribution by a
limited partner.
THESE AMOUNTS SET FORTH ON THE FOLLOWING TABLE ARE PROVIDED ON A PRO FORMA
BASIS AS OF DECEMBER 31, 2000, AND ARE BEING PROVIDED FOR ILLUSTRATIVE PURPOSES
ONLY. WE CURRENTLY ANTICIPATE CLOSING OF THE PROPOSED TRANSACTION TO OCCUR IN
JUNE 2001. ACTUAL AMOUNTS WILL VARY FROM THE PROJECTIONS INCLUDED ON THE
FOLLOWING TABLE. THE AMOUNT OF CASH ACTUALLY DISTRIBUTED TO YOU WILL ALSO VARY
FROM THESE PROJECTIONS. THE AMOUNT OF THE VARIANCE WILL DEPEND UPON A VARIETY OF
FACTORS, INCLUDING BUT NOT LIMITED TO THE ACTUAL DATE OF CLOSING, THE RESULTS OF
OPERATIONS OF NCP-SIX PRIOR TO SUCH DATE, AND THE EXTENT OF
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ANY CURRENTLY UNKNOWN LIABILITIES CONCERNING THE ASSETS AND OPERATIONS OF THE
PARTNERSHIP ARISING ON OR PRIOR TO THE DATE OF CLOSING THAT ACCRUE PRIOR TO SUCH
DATE. IN ANY EVENT, THE AMOUNT OF THE VARIANCE COULD BE SIGNIFICANT. IF AT ANY
TIME WE BELIEVE THAT THE AMOUNT OF CASH TO BE DISTRIBUTED TO YOU MAY BE REDUCED
BY MORE THAN $622,500 FROM THESE PROJECTIONS (AN AMOUNT THAT REPRESENTS ONE
PERCENT OF THE TOTAL PROPOSED TRANSACTION PRICE), THE PROPOSED TRANSACTION WILL
NOT PROCEED AND CLOSING WILL NOT OCCUR WITHOUT AGAIN OBTAINING APPROVAL OF THE
UNAFFILIATED LIMITED PARTNERS.
The figures presented take into account, where applicable, the projected
costs associated with the proposed disposition of the assets, including proxy
solicitation expenses, and estimated general and administrative and operating
expenses. Those assets of NCP-Six that are not included in the assets to be sold
to Northland in the Proposed Transaction or to Adelphia in the Adelphia
Transaction (which include cash on hand and accounts receivable) have been
included in the table in computing the projected net cash available. Although
the figures are presented on a pro forma basis as if the Adelphia Transaction
and the Proposed Transaction occurred on December 31, 2000, we do not currently
anticipate that any events will occur between December 31, 2000 and the closing
date of either of these transactions that will materially affect the figures.
PROJECTED CASH AVAILABLE IF THE ADELPHIA TRANSACTION AND THE PROPOSED
TRANSACTION CLOSINGS OCCUR
PARTNERSHIP PROJECTED CASH VALUE:
Gross Valuation for Proposed Transaction Assets........... $ 62,250,000
Gross Valuation for Adelphia Transaction Assets........... 8,388,000
Adjustments to Gross Valuation:
Current Liabilities Assumed by Northland(1)............... 466,376
Current Liabilities Assumed by Adelphia(1)................ 23,252
Combined Adjusted Gross Valuation......................... 70,148,372
Plus (Less) Partnership Liabilities and Other Assets:
Receivables and Other Assets(2)........................ 810,629
Cash on Hand.............................................. 1,281,380
Appraisals and Broker Expenses(3)......................... (706,380)
Transaction and Proxy Costs(4)............................ (400,000)
Partnership Administrative Costs(5)....................... (100,000)
Debt Repayment to Others(6)............................... (29,534,475)
Other Costs; Contingencies(7)............................. (750,000)
Projected Net Cash Value(8)(9)............................ 40,749,526
Limited Partners' Projected Cash Available(9)............... 33,251,730
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PER $500
PARTNERSHIP
PER $1,000 UNIT
INVESTMENT (ROUNDED)
---------- -----------
Initial distribution from closing the Adelphia
Transaction and the Proposed Transaction............ $1,418 $ 709
Distribution from the first note payment and the
$1,000,000 Adelphia holdback escrow, excluding
interest............................................ 382 191
Distributions from the second note payment, excluding
interest............................................ 318 159
Previously received cash distributions................ 255 128
North Carolina, South Carolina, and Mississippi
non-resident tax paid on behalf of the unaffiliated
limited partners -- (Treated as a Cash Distribution)
(Applies only to North Carolina, South Carolina, and
Mississippi Non-Resident Limited Partners)(9)....... 115 58
Aggregate interest on first and second note
payments............................................ 62 31
------ ------
Total overall potential return over the life of the
partnership (including interest).................... $2,550 $1,276
====== ======
- -------------------------
(1)Consists of advance subscriber payments and deposits.
(2)Consists of NCP-Six's (i) accounts receivable of $725,123 and (ii) prepaid
expenses of $85,506, all of which were determined as of December 31, 2000.
(3)Under its agreement with Daniels & Associates, NCP-Six is obligated to pay
Daniels & Associates a fee equal to $706,380 for its brokerage services which
amount represents one percent of the gross valuation of the assets being
sold.
(4)Estimated costs of this proxy solicitation and closing of the Adelphia
Transaction and the Proposed Transaction, including legal fees and expenses
of approximately $150,000, fees and costs associated with the issuance of
separate fairness opinions for the Adelphia Transaction and the Proposed
Transaction of approximately $150,000, printing costs of approximately
$75,000, mailing expenses of approximately $15,000, and SEC filing fees of
approximately $10,000. NCP-Six will be responsible for all of these costs. No
significant auditing or solicitation costs are expected to be incurred in
connection with the Proposed Transaction.
(5)General and administrative, auditing, accounting, legal, reporting and other
costs have been estimated through the final distribution, which is assumed to
occur in June, 2003. It is estimated that approximately $50,000 of this
amount will be payable to the Managing General Partner for its services in
the dissolution and winding up of NCP-Six. Services provided by the managing
general partner will include ongoing accounting and legal services as well as
administrative and investor relations services during the dissolution and
winding up of NCP-Six. The amount to be paid to the managing general partner
represents an estimate of the actual cost incurred by the managing general
partner to provide these services to NCP-Six.
(6)Consists of (i) notes payable of $28,215,281 to NCP-Six's lender, (ii)
management fees and other allocated operating costs of $21,349 payable to the
Managing General Partner and affiliates, and (iii) accounts payable, accrued
expenses and other liabilities of $1,297,584, all of which were determined as
of December 31, 2000.
(7)Estimated amount to be set aside to cover contingent liabilities that may
exist at closing of the Proposed Transaction.
(8)"Projected Net Cash Value" includes the partners' distributive share of cash
and the value of Northland's in-kind distribution of assets.
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(9)The difference between "Projected Net Cash Value" and "Limited Partners'
Projected Cash Available" represents the projected value of (i) the assets
distributed to Northland in-kind, plus the managing general partner's share
of non-system assets, less the managing general partner's share of
liabilities, and (ii) the projected cash available for distribution to the
administrative general partner, all as the general partners' shares are
determined after the unaffiliated limited partners receive 100% return on
their aggregate capital contributions. The tables below are illustrative:
EXCESS OF LIMITED PARTNERS' CAPITAL CONTRIBUTIONS OVER PRIOR CASH DISTRIBUTIONS:
PER $1,000
PER UNIT INVESTMENT AGGREGATE
-------- ---------- -----------
Original Capital Contribution............................. $500.00 $1,000 $14,892,000
Prior Cash Distributions.................................. 127.50 255 3,797,460
------- ------ -----------
Excess.................................................... $372.50 $ 745 $11,094,540
======= ====== ===========
Projected Net Cash Value.................................... $40,749,526
Distribution to the general partners equal to 1% until
Limited Partners receive 100% of capital contributions
pursuant to Section 16(d)(iii)............................ (112,066)
Projected value of assets distributed to the general
partners less share of liabilities as determined after the
unaffiliated limited partners receive 100% return on their
aggregate capital contributions pursuant to Section
16(d)(iv)................................................. (7,385,730)
-----------
Limited Partners Projected Cash Available................... $33,251,730
===========
GENERAL LIMITED
DISTRIBUTION OF PROJECTED NET CASH VALUE: PARTNERS PARTNERS TOTAL
----------------------------------------- ---------- ----------- -----------
Section 16(d)(iii):
Distributions to unaffiliated limited partners equal
to the excess of capital contributions over prior
cash distributions................................. $ $11,094,540 $11,094,540
($372.50 per limited partnership unit)
Distributions to the general partners equal to 1%
until Limited Partners receive 100% of capital
contributions................................... 112,066 -- 112,066
Section 16(d)(iv):
Balance distributed 75% to the unaffiliated limited
partners and 25% to the general partners........... 7,385,730 22,157,190 29,542,920
---------- ----------- -----------
Distribution of Projected Net Cash Value............. $7,497,796 $33,251,730 $40,749,526
========== =========== ===========
FEDERAL AND STATE INCOME TAX CONSEQUENCES OF THE PROPOSED TRANSACTION
The following constitutes a general summary of the financial income tax
consequences of a disposition of partnership assets as applicable to NCP-Six.
This summary is based upon the Internal Revenue Code of 1986 (the "Code"), as
amended by various subsequent tax acts (collectively referred to as the "Tax
Acts"). It is not possible to discuss all of the provisions of the Code and Tax
Acts applicable to a limited partner's investment in this proxy statement.
Moreover, in many areas the Code and Tax Acts specifically authorize the
Treasury Department to promulgate regulations to govern certain transactions and
it is not known what positions any of the regulations not yet issued will take.
In addition, since the proposed transaction is not expected to close until June
2001, Congress could pass further legislation that could significantly change
the tax consequences of the Proposed Transaction from that discussed below. The
following constitutes a general summary of some of the provisions of the Code
and Tax Acts. The following discussion of tax consequences represents our best
knowledge and belief, based upon our experience in reporting the tax
consequences of transactions similar to the disposition of assets described in
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this proxy statement to various tax authorities. We have not sought, nor will we
receive, a legal opinion as to the matters discussed below.
YOU ARE STRONGLY ENCOURAGED TO REVIEW THE CODE, THE TAX ACTS, AND THIS
SECTION OF THE PROXY STATEMENT WITH YOUR PERSONAL TAX ADVISORS.
TAX CONSIDERATIONS
There are certain material tax consequences to you resulting from the
Proposed Transaction. In order to avoid the additional expense, NCP-Six has not
obtained a tax opinion in connection with either the Proposed Transaction or the
Adelphia Transaction. The table below sets forth certain estimated federal
income tax consequences per $1,000 investment if both the Proposed Transaction
and the Adelphia Transaction close as contemplated. The table relates only to
persons who purchased units in the initial offering, and have an initial tax
basis of $500 per unit. The table does not reflect estimated federal income tax
consequences for those persons who received their interests through transfer
from other unaffiliated limited partners or have tax basis adjustments to their
interest in NCP-Six arising from transactions other than the operations of
NCP-Six.
The table below sets forth the amount of long-term capital gain and
ordinary income that is expected to result from the disposition of the assets
and the liquidation of NCP-Six. For this purpose it is assumed that the entire
amount of Section 1231 gain allocated by NCP-Six to the unaffiliated limited
partners will be treated as long-term capital gain income on their individual
tax returns. The dollar amounts reflect allocations as required pursuant to the
limited partnership agreement. As of December 31, 2000, there were 29,784 units
($500/unit) of limited partnership interest outstanding.
ALL FIGURES SET FORTH IN THE TABLE ARE NECESSARILY IMPRECISE AND REPRESENT
ONLY OUR ESTIMATE OF CERTAIN TAX EFFECTS, assuming that the unaffiliated limited
partners have no other capital gains or passive activity transactions. Actual
tax consequences will depend on the individual limited partner's tax situation.
All unaffiliated limited partners are strongly encouraged to review the
following table, this section of the proxy statement, and their individual tax
situations with their personal tax advisors.
TAX RESULTS FROM DISPOSITION OF THE ASSETS AND RESULTING LIQUIDATION
(Per $1,000 Investment)
Overall Ordinary Income per $1,000 Investment(1)(2)......... $1,559
Overall Long-Term Capital Gain per $1,000
Investment(2)(3).......................................... $ 531
- -------------------------
(1)Assumes that depreciation recapture per $1,000 investment will be equal to
$1,559.
(2)If available, current or suspended passive activity losses from other passive
activities (other than suspended tax basis losses) may also be used to offset
income or gain.
(3)Aggregate of capital gain and loss from the disposition of assets and
liquidation of NCP-Six. Assumes that the unaffiliated limited partners'
remaining basis in NCP-Six may be used upon termination of NCP-Six to offset
capital gain from the disposition of the assets of $145 per $1,000
investment.
TAX CONSEQUENCES OF DISPOSITION OF THE ASSETS AND LIQUIDATION OF NCP-SIX
Upon the disposition of the assets, taxable income will be recognized by
NCP-Six to the extent that the amount realized from the disposition exceeds the
adjusted tax basis of the assets disposed of. The taxable gain from the sale
will be allocated among the partners in accordance with the NCP-Six Partnership
Agreement. The allocation of gain to the unaffiliated limited partners will
increase your adjusted tax basis in NCP-Six and increase your "amount at risk"
with respect to NCP-Six's activity. Suspended or current passive activity losses
from your other passive activities may be used to offset gain from the
disposition of the assets. See "-- Tax Consequences of a Decision Not to Sell"
below for a discussion of passive activity loss limitations and suspended
losses. We believe that these allocations will
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have "substantial economic effect," as required by regulations issued by the
Treasury Department. In the event the Internal Revenue Service ("IRS") should
prevail in any contention that the taxable gain from the sale should be
allocated differently from the manner reported by the general partners, the
amounts of capital gain (or loss) and ordinary income (or loss) of the
unaffiliated limited partners would be adjusted in equal offsetting amounts.
The majority of assets being sold by NCP-Six will be treated as "Section
1231 assets." Section 1231 assets are general defined as depreciable and
amortizable assets used in a trade or business, which have been held by the
taxpayer for more than one year. The assets comprising the distribution systems
of NCP-Six, including franchise rights and associated intangible assets, are
section 1231 assets. Your share of gain or loss on the sale of the assets
(excluding ordinary income depreciation recapture, discussed below) will be
combined with any other Section 1231 gain or loss you incur in that taxable year
and your net Section 1231 gain or loss will be taxed as capital gain or ordinary
loss, as the case may be. However, Section 1231 gain will be converted into
ordinary income to the extent you have net Section 1231 losses in the five most
recent tax years ("non-recaptured net Section 1231 losses"). The tax treatment
of Section 1231 gains will depend on your tax situation. In addition, cost
recovery deductions which have been taken with respect to certain assets will be
subject to recapture as ordinary income upon the sale to the extent of gain on
the sale, and you will be allocated a share of this ordinary income depreciation
recapture in proportion to the cumulative net losses previously allocated to you
under the NCP-Six Partnership Agreement. It is estimated that ordinary income of
$779 per partnership unit (or $1,559 per $1,000 investment) will be allocated to
the limited partners. You will also recognize gain or loss upon the liquidation
of NCP-Six following the disposition of the assets to the extent that the cash
distributed in the liquidation exceeds or is less than your adjusted tax basis
in your partnership interest. See "-- Other Tax Law Changes" below for a
discussion of the applicable tax rates for ordinary income and capital gains.
Neither NCP-Six nor any partner is allowed to deduct or to amortize the
amounts paid for syndication expenses, that is, amounts which were paid or
incurred by NCP-Six in connection with the issuance and marketing of the units
of limited partnership interest, including sales commission costs. Upon
liquidation of NCP-Six, the Treasury Regulations provide that NCP-Six may not
deduct the capitalized syndication expenses. However, there is uncertainty in
the law concerning whether you may claim a capital loss for the remaining
portion of your tax basis in NCP-Six, which is attributable to the capitalized
syndication costs. For purposes of the calculations presented in the "Tax
Results from Disposition of the Assets and Resulting Liquidation" table above,
the general partners have assumed that the unaffiliated limited partners'
remaining basis in NCP-Six may be used upon the termination of NCP-Six to offset
capital gain from the sale of the assets. The IRS may contend, however, that the
unaffiliated limited partners are not entitled to claim a capital loss because
they should have reduced their basis in their partnership interests for the
syndication fees, as expenditures of NCP-Six which are not deductible in
computing its taxable income and not properly chargeable to capital accounts,
and the IRS may, in fact, contend that the unaffiliated limited partners should
recognize an additional amount of capital gain. YOU SHOULD CONSULT WITH YOUR
INDIVIDUAL TAX ADVISOR WITH RESPECT TO YOUR TREATMENT OF SYNDICATION COSTS UPON
TERMINATION OF NCP-SIX.
If the IRS were to argue successfully that the allocations of taxable
income among the partners should differ from the allocations that would be
reported on NCP-Six tax returns, the amounts of ordinary income and loss and
capital gain and loss you report would change. The managing general partner
believes this change would not have a material adverse effect on you.
There will be no federal tax consequences to NCP-Six relating to the
Proposed Transaction. All federal tax consequences are instead imposed on the
partners of NCP-Six. Northland Communications Corporation, as Managing General
Partner, will not recognize taxable gain or loss on the Proposed Transaction,
but rather will receive its proportionate interest in NCP-Six as a distribution
in-kind of cable system assets. FN Equities Joint Venture, as Administrative
General Partner, will recognize taxable income to the extent of its share of
proceeds from the Proposed Transaction, as determined under the NCP-Six
Partnership Agreement. In general, FN Equities Joint Venture will receive five
percent (5%) of the proceeds after the limited partners have been returned the
balance of their capital contributions.
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UNRELATED BUSINESS TAXABLE INCOME
Unrelated business taxable income ("UBTI") will be generated by the sale of
the assets and allocated to unaffiliated limited partners that are qualified
retirement plans and tax exempt trusts ("Plans") as defined by the Code and
subject to the Employment Retirement Income Security Act of 1974 (i.e., IRAs,
Keoghs, Pension Plans, etc.).
Generally, partnership allocations of ordinary income, Section 1231 gains,
and capital gains will result in UBTI to Plans and generate an unrelated
business income tax. The Code allows an exempt entity a specific deduction for
UBTI of up to $1,000 per year and thus, the annual UBTI generated by the Plan
will be taxed to the extent it exceeds $1,000. In addition, should the Plan have
net operating loss and suspended basis loss carryovers, the UBTI may be reduced
by these carryover losses first.
To illustrate the impact of UBTI to Plans as the result of the proposed
sale of assets, the following is an analysis which assumes that a $5,000 IRA
investment is the sole UBTI investment of the IRA. It also assumes that a
limited partner has properly reported and is carrying over net operating losses
generated in the early years of NCP-Six.
INITIAL NCP-SIX IRA INVESTMENT -- $5,000
Cash distributions received over the life of NCP-Six,
excluding interest payments in 2002 and 2003 ($62 per
$1,000 investment)........................................ $12,455
UBTI tax liability in 2001.................................. (1,922)
-------
Net cash after taxes to IRA Investor........................ $10,533
=======
This analysis indicates that due to loss carryovers and the annual UBTI
exemption referred to above, an IRA investor would not be subject to UBTI tax
until the year of sale (2001). In addition, should the IRA be able to utilize a
capital loss in 2001, the remaining basis in NCP-Six in the year of termination
(2001) would result in a $725 tax deduction due to the capital loss (not shown).
TAX CONSEQUENCES OF A DECISION NOT TO SELL
The general consequences of a decision not to sell and to continue to
operate as a partnership are that you will continue to be allocated your share
of NCP-Six's income, deduction, gain and loss, and will be distributed your
share of cash available for distribution, as determined under the NCP-Six
Partnership Agreement. In general, income or loss from operations of NCP-Six
constitute ordinary income or loss, and are allocated to unaffiliated limited
partners in accordance with the NCP-Six Partnership Agreement. Cash
distributions to unaffiliated limited partners are not taxable unless they
exceed the adjusted tax basis of the limited partner's partnership interest.
Further, you may not deduct losses allocated to you to the extent the losses
exceed the adjusted tax basis of your partnership interest. These unused losses
may be carried forward and utilized in future years, subject to the same
limitation based on the tax basis of your NCP-Six interest.
With respect to the deductibility of partnership losses by a limited
partner, the Code does not allow a taxpayer to use losses and credits from a
business activity in which he or she does not materially participate (e.g., a
limited partner in a limited partnership) to offset other income such as salary,
active business income, dividends, interest, royalties and investment capital
gains. However, passive activity losses can be used to offset passive activity
taxable income from another passive activity. In addition, disallowed losses and
credits from one tax year may be suspended and carried forward by a taxpayer and
used to offset income from passive activities in the future. The disallowed
losses will also be allowed in full when the taxpayer recognizes gain or loss
upon a taxable disposition of his or her entire interest in the passive
activity. You should also note that the Treasury Department prescribed
regulations that will recharacterize certain income as "portfolio" income and
restrict the offset of that income by losses from a passive activity. These
regulations could impact the use of passive activity losses or income from
NCP-Six. For
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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 the
limited partners will be subject to the passive loss rules discussed above.
Unless the limited partner has income from other passive activities, the losses
allocated by NCP-Six 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 ALSO NOTE THAT THE EFFECT OF PASSIVE ACTIVITY LOSS LIMITATIONS
MAY VARY FROM ONE TAXPAYER TO ANOTHER DEPENDING UPON YOUR INDIVIDUAL TAX
SITUATION. THEREFORE, YOU SHOULD CONSULT YOUR PROFESSIONAL TAX ADVISOR WITH
RESPECT TO THE APPLICATION OF THE PASSIVE ACTIVITY LOSS LIMITATIONS TO YOUR
PARTICULAR TAX SITUATION.
With respect to the recovery of capital expenditures, eligible personal
property placed in service after December 31, 1986 is assigned to a three-year
class, five-year class, seven-year class, ten-year class, or twenty-year class.
The depreciation method applicable to the three-year, five-year, seven-year and
ten-year classes is the 200 percent declining balance method. The cost of
non-residential real property is recovered using the straight-line method over
39 years. Partnership equipment that is placed in service after December 31,
1986 is classified as seven-year or five-year property and the purchase price
for that equipment is depreciated over the applicable period.
The Code has eliminated the investment tax credit for all property placed
in service after December 31, 1985, subject to certain transitional rules that
do not currently apply to NCP-Six.
OTHER TAX LAW CHANGES
The discussion below relates primarily to individual taxpayers. Different
tax rules may apply to other taxpayers (e.g. corporations, estates, trusts,
etc.). The Code and Tax Acts generally provides for five taxable income brackets
and five tax rates (15%, 28%, 31%, 36%, and 39.6%) for years after 1992. The
benefits of certain itemized deductions and personal exemptions are phased out
for certain higher income taxpayers. Capital gain income, including net Section
1231 gains treated as capital gains, may receive favorable tax treatment as
discussed below.
Capital gains from sales of certain property held more than one year are
now taxed at maximum tax rates that vary from 10% to 28%, depending on the type
of property sold, the taxpayer's marginal tax rate, and the holding period of
the property. In summary, capital gain assets held for more than one year
("long-term gains") are taxed at a maximum tax rate of 20% for taxpayers
otherwise in the 28% or higher tax bracket. The maximum tax rate is 10% for
these gains that would otherwise be taxed at the taxpayer's 15% tax bracket.
Capital gain assets held for one year or less continue to be taxed at the
taxpayer's ordinary income tax rate, as was the case under prior law. Long-term
capital gain arising from the sale of certain designated assets (works of art,
antiques, gems, coins and other collectibles) are taxed at a maximum rate of
28%. Finally, long-term capital gains from the sale of depreciable real estate
are taxed at a maximum tax rate of 25% to the extent the gain is attributable to
prior depreciation deductions not recaptured as ordinary income under the
depreciation recapture rules discussed above.
The large majority of NCP-Six's assets will have been held by NCP-Six for
more than one year at the time of the proposed transaction. None of NCP-Six's
assets are collectibles. Therefore the capital gain income (including the
Section 1231 gains) recognized by the unaffiliated limited partners will
constitute long-term gains eligible for the 20% or 10% tax rates, as applicable.
As discussed above, to the extent that you have non-recaptured net Section 1231
losses, your Section 1231 gain will be treated as ordinary income and will not
receive the favorable capital gain tax rates. Also as discussed above, gain
attributable to prior depreciation and amortization deductions on personal
property will be taxed as ordinary income under the depreciation recapture
rules. Finally, a small portion of NCP-Six gain may be attributable to
depreciable real estate that would be subject to the 25% tax rate.
The Tax Acts increased the alternative minimum tax rate from 24% to 26% and
28%, depending on the level of the alternative minimum taxable income. The
favorable capital gain tax rates discussed above
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also apply for alternative minimum tax purposes. The Tax Acts also expanded the
tax preference items included in the alternative minimum tax calculation.
Accelerated depreciation on all property placed in service after 1986 is a
preference to the extent different from alternative depreciation (using the 150
percent declining balance method, and using longer lives for personal property
placed in service before 1999). Certain other tax preferences also have been
modified and new preference items added. The alternative minimum tax exemption
amount is increased to $45,000 for joint filers and $33,750 for unmarried
individuals. However, the exemption amount is phased out once a taxpayer's
alternative minimum taxable income exceeds certain threshold amounts. A taxpayer
paying alternative minimum tax after 1986 is allowed a tax credit for the
alternative minimum tax liability attributable to timing differences. In
general, this minimum tax credit can be carried forward and used against the
taxpayer's regular tax liability to the extent the taxpayer's regular tax
liability exceeds his or her minimum tax liability. Upon the sale of NCP-Six's
assets, unaffiliated 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. It is estimated this amount will be $23 per
limited partnership unit (or $46 per $1,000 investment).
An individual taxpayer generally is not allowed a deduction for investment
interest expense in excess of net investment income. Net investment income
generally includes interest, dividends, annuities, royalties and short-term
capital gains, less expenses attributable to the production of the income.
Long-term capital gains from investment property are not generally included in
net investment income, however a taxpayer may elect to forego the favorable tax
rates available for long-term gains and include them in net investment income.
Long-term gains from business property (such as NCP-Six's assets) are not
included in net investment income. 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 an unaffiliated limited partner incurred to acquire their units in
NCP-Six is treated as a passive activity deduction, and not investment interest.
Personal interest is not deductible except for interest expense for debt
incurred on a taxpayer's principal or second residence, subject to certain
restrictions. In Notice 89-35, the IRS ruled that, in general, the character of
debt incurred by a partnership to make distributions to partners would be
determined by the use of the distributed proceeds by the partners unless NCP-Six
elects to allocate the distributed debt and related interest expense to one or
more partnership expenditures made during the year of the distribution. The
election is not available to the extent the distributed debt proceeds exceed
partnership expenditures during the year. When applicable NCP-Six has made the
election under Notice 89-35.
See "-- Tax Consequences of a Decision Not to Sell" above for discussion of
passive activity loss limitations, changes in depreciation and elimination of
investment tax credit.
STATE INCOME TAX CONSIDERATIONS
In addition to the federal income tax considerations outlined above, the
Proposed Transaction has state income tax consequences. Partners who are
residents of states imposing income taxes should consult their tax advisors or
their own state law to determine the state tax consequences and their state's
filing requirements. The following is only a brief summary of the potential
state tax considerations of the proposed transaction for nonresidents of North
Carolina, Mississippi and South Carolina. You should consult your own tax
advisors concerning the application of each state's income tax laws and other
state and local laws to your specific situation.
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NORTH CAROLINA
The State of North Carolina, where certain of NCP-Six's assets are located,
imposes an income tax on the net income earned by nonresident partners from
property located in North Carolina or from a business operation conducted in the
state of North Carolina. This includes property owned or a business conducted
through a partnership. This state tax will apply to you.
NCP-Six is responsible for reporting each nonresident partner's share of
the income derived from North Carolina, and is required to compute and pay the
tax due for each nonresident partner. The tax will be based on the income
generated by NCP-Six's operations, including the income to be generated by the
Proposed Transaction, as apportioned to North Carolina under state law. The
North Carolina personal income tax rates increase on a graduated scale,
beginning at 6% up to a maximum marginal tax rate of 7.75%. NCP-Six anticipates
making the required tax calculations on your behalf when the North Carolina
partnership income tax return is prepared. The tax paid on your behalf will be
reported on your Schedule K-1 for 2001, and will be treated for federal income
tax purposes as cash distributed to you.
A nonresident individual partner is not required to file a North Carolina
income tax return when the only income from North Carolina sources is the
nonresident's share of income from a partnership doing business in North
Carolina, and the partnership pays the tax due for the nonresident partner.
Payment of the tax due by the partnership on behalf of corporations,
partnerships, trusts or estates does not relieve the person from filing a North
Carolina return. Accordingly, nonresident unaffiliated limited partners who are
not corporations will not be required to file a North Carolina income tax return
unless they have North Carolina income from sources other than partnerships
which have paid the requisite tax on their behalf. However, you may file a North
Carolina income tax return if you so choose. If you choose to file in North
Carolina, the tax paid by NCP-Six on your behalf may be claimed as a credit
towards the North Carolina tax liability.
MISSISSIPPI
The State of Mississippi, where certain of NCP-Six's assets are located,
imposes an income tax on the net income earned by nonresident partners from
property located in Mississippi or from a business operation conducted in the
State of Mississippi. This includes property owned or a business conducted
through a partnership. This state tax will apply to you.
NCP-Six is responsible for reporting each non-resident partner's share of
the income derived from Mississippi, and will withhold 5% of the net gain or
profit allocated to each non-resident partner and remit it to the State Tax
Commission. The tax will be based on the income generated by NCP-Six's
operations, including the income to be generated by the Proposed Transaction, as
apportioned to Mississippi under state law. The Mississippi personal income tax
rates increase on a graduated scale, beginning at 3% up to a maximum marginal
tax rate of 5%.
The Mississippi tax paid on your behalf will be reported on your Schedule
K-1 for 2001, and will be treated for federal income tax purposes as cash
distributed to you. You should claim the amount withheld as estimated tax paid
on your Mississippi individual tax return for the year of withholding.
SOUTH CAROLINA
The State of South Carolina, where certain of NCP-Six's assets are located,
imposes an income tax on the net income earned by nonresident partners from
property located in South Carolina or from a business operation conducted in the
State of South Carolina. This includes property owned or a business conducted
through a partnership. This state tax will apply to you.
South Carolina tax will be based on the income generated by NCP-Six's
operations, including the income to be generated by the Proposed Transaction, as
apportioned to South Carolina under state law. South Carolina allows individuals
a deduction equal to 44% of net capital gains with a two year holding period
reported as South Carolina income on the South Carolina tax return. The South
Carolina personal income tax rates increase on a graduated scale, beginning at
2.5%, up to a maximum marginal tax rate of
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7%. NCP-Six is required to withhold 5% of the South Carolina taxable income of
partners who are nonresidents of South Carolina, and remit it to the South
Carolina Department of Revenue.
The South Carolina tax paid on your behalf will be reported on your
Schedule K-1 for 2001, and will be treated for federal income tax purposes as
cash distributed to you. You should claim the amount withheld as estimated tax
paid on your South Carolina individual income tax return for the year of
withholding.
RISK FACTORS
(PERTAINING TO THE PROPOSED TRANSACTION)
While we believe the Proposed Transaction is fair to NCP-Six and its
limited partners, our deliberations have made us aware of certain risks
associated with the Proposed Transaction. In order to apprise you of these
risks, we wish to draw your attention to the following factors.
ALTHOUGH WE BELIEVE THAT THE TOTAL PRICE TO BE RECEIVED BY NCP-SIX FOR
THOSE ASSETS REMAINING AFTER THE ADELPHIA TRANSACTION REPRESENTS FAIR VALUE
FOR THOSE ASSETS, THOSE ASSETS MAY INCREASE IN VALUE PRIOR TO CLOSING OR
AFTER THE PROPOSED TRANSACTION CLOSES.
We believe that the Proposed Transaction is fair to you and we have taken
steps to structure the Proposed Transaction in a manner which we believe
provides you with fair value for those assets, through the two independent
appraisals and the third-party bid process, as well as the fairness opinion of
Houlihan Lokey providing some confirmation as to the fairness of the
consideration to be received from the Proposed Transaction. Although we believe
that the total transaction price offered by Northland represents the fair value
of those assets covered by the Proposed Transaction, we cannot predict whether
the fair value of those systems will increase prior to closing or after the
Proposed Transaction closes. You should be aware that we do not intend to obtain
an updated appraisal from either Daniels & Associates or Communications Equity
Associates, nor do we intend to resolicit third-party bids prior to closing. As
a result, assuming the Proposed Transaction closes in June 2001, at closing
those two appraisals will be more than 23 months out of date and the closing
will take place almost 10 months after receipt of the most recent third-party
bid. We are choosing not to update the appraisals because we relied on the
appraisals primarily as a benchmark to evaluate the offers received in the
third-party bid solicitation process and because we have since obtained a more
recent fairness opinion endorsing the price to be paid in the Proposed
Transaction. That fairness opinion is dated as of , 2000. We also
believe that the better measure of the fair value of the assets is the price
that an unrelated third party would be willing to pay, and accordingly we have
relied more heavily on the third-party solicitation process in establishing fair
value. We are not resoliciting third-party offers prior to closing because we
believe the Proposed Transaction value is fair to you and because a
resolicitation would require additional expense and would further delay closing.
We are aware that there has been recent consolidation activity in the cable
television industry generally; however, we cannot predict whether the market for
small, rural cable television systems such as those owned and operated by
NCP-Six will be impacted by this activity. In the event that the Proposed
Transaction is approved and the fair value increases prior to closing, Northland
would be acquiring the assets at a price lower than the then-current market
value.
THE MANAGING GENERAL PARTNER HAS SIGNIFICANT CONFLICTS OF INTEREST IN THE
PROPOSED TRANSACTION.
The Managing General Partner initiated and participated in the structuring
of the Proposed Transaction and has conflicts of interest with respect to its
completion. Northland, the managing general partner of NCP-Six, or its affiliate
will be acquiring those assets that are not included in the Adelphia Transaction
from NCP-Six and will own and continue to operate those cable television systems
following closing in the same way as currently being operated. In return,
Northland will receive operating income from the systems. The Managing General
Partner will also receive economic benefits as a result of the disposition of
NCP-Six's assets and subsequent liquidation of the partnership. Under the terms
of the NCP-Six Partnership Agreement, as the Managing General Partner, and to
the extent Northland holds
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any limited partner units, Northland is entitled to its respective percentage
share of any distribution made by NCP-Six. The Managing General Partner will be
receiving its share by an in-kind distribution of an undivided portion of
NCP-Six's assets, at the same time that initial cash distributions are made to
the Administrative General Partner and the unaffiliated limited partners. See
"Projected Cash Available from Liquidation" for a detailed discussion of the
relative distributions expected to be made to the general partners and the
unaffiliated limited partners. In addition, the Managing General Partner and
certain affiliates of NCP-Six are entitled to receive payment of management and
other fees from NCP-Six for its services and for cost reimbursements prior to
closing of the Proposed Transaction. The estimated amounts payable to the
Managing General Partner and affiliates as of December 31, 2000 is $21,349. In
addition, it is estimated that the in-kind distribution to be received by the
Managing General Partner upon consummation of the Proposed Transaction will
equal approximately $6,021,000.
THE ADMINISTRATIVE GENERAL PARTNER HAS A CONFLICT OF INTEREST IN THE
PROPOSED TRANSACTION.
Unlike Northland, the Administrative General Partner will have no economic
or ownership interest in the assets following the closing of the Proposed
Transaction, other than its right to receive payment with the unaffiliated
limited partners of the liquidation proceeds. Still, both the Managing General
Partner and the Administrative General Partner will receive economic benefits as
a result of the disposition of NCP-Six's assets and subsequent liquidation of
the partnership. Under the terms of the NCP-Six Partnership Agreement, and to
the extent the Administrative General Partner holds any limited partner units,
the Administrative General Partner is entitled to its respective percentage
share of any distribution made by NCP-Six. The Managing General Partner will be
receiving its share by an in-kind distribution of an undivided portion of
NCP-Six's assets, and the Administrative General Partner will receive cash at
the same time that distributions are made to unaffiliated limited partners. The
estimated total cash proceeds (excluding interest on the note) payable to the
Administrative General Partner as a result of the Proposed Transaction is
approximately $1,480,000. See "Projected Cash Available from Liquidation" for a
detailed discussion of the relative distributions expected to be made to the
general partners and the unaffiliated limited partners.
WHILE WE DID OBTAIN A FAIRNESS OPINION WITH RESPECT TO THE PROPOSED
TRANSACTION, WE DID NOT RETAIN AN UNAFFILIATED, INDEPENDENT THIRD PARTY TO
REPRESENT YOUR INTERESTS IN THE STRUCTURING OF THE PROPOSED TRANSACTION.
In implementing and structuring the Proposed Transaction, we did not retain
an unaffiliated independent third party to represent the interests of the
unaffiliated limited partners. Had we retained an independent third party to
represent your interests, that party may have been able to negotiate, on your
behalf, a more favorable transaction structure or more favorable terms. However,
we believe that the procedural steps taken and to be taken, as described in
"Fairness of the Transaction -- Our Belief as to Fairness" above, and the
confirmation provided by the fairness opinion we have obtained constitute
sufficient safeguards for your interests. We have commissioned two independent
appraisals of the systems, undertaken an extensive sealed bid third-party bid
solicitation process, secured a favorable fairness opinion and are submitting
the Proposed Transaction to you for your approval. We believe that the steps
taken and to be taken constitute sufficient safeguards for your interests with
respect to the Proposed Transaction.
THE PROPOSED TRANSACTION HAS NOT BEEN SOLICITED BY UNAFFILIATED LIMITED
PARTNERS.
Although we believe that unaffiliated limited partners are interested in a
means of liquidating their investment in NCP-Six, no limited partner in NCP-Six
has solicited the sale or other disposition of the partnership's assets. We have
not taken any survey of the unaffiliated limited partners to determine their
desire to liquidate their investment. However, based on unsolicited comments and
questions from unaffiliated limited partners with respect to a liquidation of
their investment, the lack of a public market for the units of limited
partnership and the 14-year duration of NCP-Six, we believe that unaffiliated
limited partners may welcome the opportunity to liquidate their investment at
this time. We have not
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solicited or received comments from any unaffiliated limited partners regarding
any alternative investment strategies or liquidation proposals.
YOU DO NOT HAVE ANY DISSENTERS' OR APPRAISAL RIGHTS IN THIS TRANSACTION.
You are not entitled to dissenters' appraisal rights under either the
NCP-Six Partnership Agreement or Washington law with respect to the Proposed
Transaction, or the subsequent liquidation of NCP-Six. We will not voluntarily
afford you with any similar rights in connection with the Proposed Transaction.
Therefore, even if you disagree with the value of the assets being sold and you
vote to "DISAPPROVE" the Proposed Transaction but the Proposed Transaction is
nevertheless approved, you will not be able to demand that the assets be
re-appraised to determine fair value for your units.
IF A MAJORITY OF THE HOLDERS OF LIMITED PARTNERSHIP UNITS APPROVE THE
PROPOSED TRANSACTION, YOU WILL BE BOUND BY THAT DECISION, EVEN IF YOU VOTE
TO "DISAPPROVE" THE PROPOSED TRANSACTION.
Under NCP-Six's Partnership Agreement and Washington law, NCP-Six may
proceed with the Proposed Transaction if its general partners and a majority in
interest of its unaffiliated limited partners approve the Proposed Transaction.
If this majority approval is obtained, you will be bound by the decision of the
majority, even if you vote to disapprove the Proposed Transaction or abstain
from voting.
THE PROMISSORY NOTE THAT WILL BE ISSUED FROM NORTHLAND AS PARTIAL PAYMENT
OF THE TRANSACTION PRICE WILL BE AN UNSECURED OBLIGATION OF NORTHLAND.
Assuming completion of the Proposed Transaction, Northland will issue a
promissory note for $9,875,000 as partial payment for the transaction price. The
promissory note will be payable in two equal installments on the first and
second anniversary of closing the Proposed Transaction and will bear interest at
a fixed rate per annum of six and one-half percent. The note, which will be
prepayable at any time, will be an unsecured obligation of Northland and will be
subordinated to Northland's senior debt. Northland currently has senior debt in
the approximate amount of $53,900,000. Northland expects that it will assign its
rights under the asset purchase agreement to an affiliate of Northland to
consummate the Proposed Transaction. In such event, Northland expects that such
affiliate will incur bank debt in order to finance the acquisition, and
Northland may be required to be a guarantor on such debt, which is currently
estimated to equal approximately $46,900,000 of new borrowings. Northland's
obligations under any such guarantee would be senior to the note. In addition,
the note would be subordinated to any other senior debt that may be incurred in
the future by Northland.
The note will bear interest at a fixed rate that may be lower than rates on
other debt instruments that may be perceived as having comparable or lower risks
than the note. The interest rate on the note is below the prime rate in effect
as of the date of this proxy statement. In addition, there is no guarantee that
Northland will not default on the note. The interest rate on the note is not
intended to represent the rate which would be charged to Northland by an
unaffiliated third-party lender or to provide a rate of return on the note equal
to that which the unaffiliated limited partners could have received had the
Proposed Transaction purchase been paid all in cash at closing. Instead, the
fixed six and one-half percent interest rate of the note reflects the economic
terms under which Northland is willing to undertake the Proposed Transaction.
NORTHLAND SHALL HAVE THE RIGHT TO OFF-SET AGAINST ITS PROMISSORY NOTE
INDEMNIFICATION OBLIGATIONS OF NCP-SIX UNDER THE NORTHLAND ASSET PURCHASE
AGREEMENT, TO THE EXTENT THOSE INDEMNIFICATION OBLIGATIONS EXCEED NCP-SIX'S
RETAINED FUNDS.
NCP-Six plans to retain $750,000 from amounts paid by Northland at the
closing of the Proposed Transaction in order to have available funds to satisfy
expenses and liabilities associated with winding up the partnership. Such
potential liabilities include indemnification obligations under either the
Adelphia asset purchase agreement, or the Northland asset purchase agreement. In
the event the costs and liabilities associated with winding up the partnership
exceed the partnership's retained funds, Northland shall have
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the right to off-set indemnification amounts owed to Northland by NCP-Six from
payments owed by Northland under its promissory note.
THE AMOUNT AND TIMING OF FINAL DISTRIBUTIONS TO UNAFFILIATED LIMITED
PARTNERS MAY BE AFFECTED BY UNANTICIPATED OR CONTINGENT LIABILITIES,
INCLUDING ANY POTENTIAL LITIGATION ARISING OUT OF THE ADELPHIA TRANSACTION
AND/OR THE PROPOSED TRANSACTION.
We have included in the estimate of cumulative cash distributions to
unaffiliated limited partners from the Adelphia Transaction and the Proposed
Transaction payment of all known or anticipated liabilities of NCP-Six,
including any liquidation expense and any claims against NCP-Six of which we are
currently aware. We have also provided that an aggregate of $750,000 from the
cash proceeds will be retained by NCP-Six in a liquidating trust to secure any
contingent or unknown liabilities and indemnification obligations of NCP-Six. To
the extent that unanticipated liabilities or expenses arise which exceed the
amounts set aside, those liabilities could reduce the amount of cash available
for distribution to you. In addition, to the extent any such liabilities or
expenses continue post-closing, any final distribution to you of these amounts
held back may be delayed pending final resolution of the liabilities. You should
be aware that the NCP-Six Partnership Agreement provides that NCP-Six will
indemnify the general partners from liabilities in connection with NCP-Six, to
the extent permitted by the NCP-Six Partnership Agreement. You should also be
aware that Northland serves, and has served, as managing general partner of
other limited partnerships involved in the cable television industry. In June
1998, the unaffiliated limited partners of one such limited partnership,
Northland Cable Properties Five Limited Partnership, voted by a 74% majority
vote to approve the disposition of the partnership assets to Northland and the
subsequent liquidation of that partnership. A class action lawsuit was
subsequently filed against that partnership and its general partners alleging
various claims, including that the purchase price paid did not represent fair
value and breaches of fiduciary duties in the transaction. That action was
ultimately settled and dismissed. If the unaffiliated limited partners of
NCP-Six vote to approve the Proposed Transaction and the Proposed Transaction
closes, and if a similar lawsuit is brought against NCP-Six, such a lawsuit will
have the effect of delaying payment of or reducing the amount of cumulative
distributions.
THE PAYMENTS TO THE LIMITED PARTNERS MAY BE SUBJECT TO REVIEW UNDER
RELEVANT STATE AND FEDERAL FRAUDULENT CONVEYANCE LAWS IF A BANKRUPTCY CASE
OR LAWSUIT IS COMMENCED BY OR ON BEHALF OF UNPAID CREDITORS OF NCP-SIX.
Under bankruptcy and fraudulent conveyance laws, the court may subordinate
payments to be made under Northland's promissory note to presently existing and
future indebtedness of NCP-Six, direct the repayment of any amounts paid to the
limited partners to NCP-Six's creditors or take other action detrimental to the
limited partners if the court were to find that, after giving effect to the
disposition of NCP-Six's assets and the subsequent liquidation of NCP-Six,
either:
- NCP-Six sold its assets and liquidated with intent of hindering, delaying
or defrauding creditors; or
- NCP-Six received less than reasonable equivalent value or consideration
in the disposition of its assets, and:
- was insolvent or rendered insolvent by reason of the disposition of the
assets and its subsequent liquidation;
- was engaged in a business or transaction for which the assets remaining
with NCP-Six constituted unreasonable small capital; or
- intended to incur, or believed that it would incur debts beyond its
ability to pay its debts as they matured.
The measure of insolvency for purposes of determining whether a transfer is
avoidable as a fraudulent transfer varies depending on the law of the
jurisdiction in which it is being applied. Generally, however, a debtor would be
considered insolvent if the sum of all its liabilities, including contingent
liabilities, were greater than the value of all its property at a fair
valuation, or if the present fair saleable value of the
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debtor's assets were less than the amount required to repay its probable
liabilities on its debts, including contingent liabilities, as they become
absolute and matured.
NCP-Six believes that it will receive equivalent value of the assets. This
belief is further supported by the favorable fairness opinion of Houlihan Lokey.
In addition, NCP-Six does not believe that, after giving effect tot he sale and
distribution of the assets and its subsequent liquidation, it:
- is or will be insolvent or rendered insolvent;
- is or will be engaged in a business or transaction for which its
remaining assets constituted unreasonably small capital; or
- intends or intended to incur, or believes or believed that it will or
would incur, debts beyond its ability to pay its debts as they mature.
These beliefs are based on the fact that NCP-Six believes it is receiving
equivalent value for its assets, the fact that NCP-Six will be discharging all
of its liabilities prior to distributing the balance of the proceeds of the sale
of the assets to the limited partners and the Administrative General Partner,
and that NCP-Six will not be conducting operations or incurring indebtedness
after the distributions to limited partners are made.
THE PROPOSED TRANSACTION WILL BE A TAXABLE EVENT FOR U.S. FEDERAL INCOME
TAX PURPOSES. THIS MAY RESULT IN SUBSTANTIAL RECOGNITION OF GAIN TO YOU.
The receipt of cash in the Proposed transaction will be a taxable
transaction for federal income tax purposes and may also be a taxable
transaction under applicable state, local and foreign tax laws. Accordingly, you
will recognize a gain or loss on the payment of cash on your limited partnership
units to the extent of the difference between the amount realized and your
adjusted tax basis in your units. In addition, upon closing of the Proposed
Transaction and dissolution of NCP-Six, any net losses of NCP-Six that were
suspended under the passive loss rules of the Internal Revenue Code may be used
to offset income and gain in the transaction.
EVEN IF THE REQUISITE MAJORITY OF THE UNAFFILIATED LIMITED PARTNERS OF
NCP-SIX VOTE TO APPROVE THE PROPOSED TRANSACTION, THE PROPOSED TRANSACTION
MAY NOT CLOSE DUE TO A LACK OF REQUIRED FINANCING.
Northland's offer to consummate the Proposed Transaction is subject to
Northland obtaining financing on terms satisfactory to Northland. As of the date
of this proxy statement, Northland has yet to enter into a binding commitment
for financing, or to otherwise waive its financing contingency. Therefore, even
if the requisite majority of the unaffiliated limited partners of NCP-Six vote
to approve the Proposed Transaction, the Proposed Transaction may not close due
to a lack of required financing.
BACKGROUND AND REASONS FOR EXTENDING THE TERM OF NCP-SIX
NCP-Six was formed as a limited partnership in 1986 by the filing of its
certificate and agreement of limited partnership with the State of Washington.
At the time of formation of NCP-Six, it was contemplated that the partnership
term would expire 15 years after its formation, as set forth in Article 7 of the
NCP-Six Partnership Agreement. That expiration date is December 31, 2001.
In order to finance its operations beyond amounts received by NCP-Six from
its investors, NCP-Six has entered into credit facility loan agreements from
time to time. Such financing arrangements are customary in the industry, and are
also customarily secured by the assets of the borrower. In the case of NCP-Six,
its current credit facility is secured by a first lien on the entirety of the
assets of NCP-Six.
NCP-Six's current credit facility, as amended in 1997, was originally
entered into with a maturity date of December 31, 2000. While lenders are
willing to loan funds to limited partnerships, provided the lender is satisfied
that the limited partnership is an acceptable credit risk, lenders become less
willing to extend such credit as the expiration date of the partnership grows
near. In the case of NCP-Six, its lenders
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have agreed to extend the NCP-Six credit facility until June 30, 2001, but they
have also expressed an unwillingness to further extend NCP-Six's debt maturity
beyond June 30, 2001 if the term of NCP-Six is not first extended for a period
of time sufficient to amortize NCP-Six's existing debt through currently
forecasted operations. While we believe, based on our discussions with NCP-Six's
lenders, that they continue to feel that NCP-Six is an acceptable credit risk
and as such are willing to continue to extend credit to NCP-Six, it has been
made clear to us that a condition to obtaining such an extension is that the
term of NCP-Six must first be extended for a reasonable period of time.
As of December 31, 2000, the outstanding balance of the NCP-Six credit
facility was $28,215,281. In order to amortize that debt through the anticipated
normal course of operations of NCP-Six, we believe that the shortest acceptable
extension for the term of NCP-Six is six years. As a result, as set forth in
this proxy statement, we are soliciting your approval of Proposed Amendment No.
1 to the NCP-Six Partnership Agreement that will result in extending the term of
NCP-Six through December 31, 2007.
If, instead, the term of NCP-Six is not extended, and the Proposed
Transaction is not closed by June 30, 2001, we believe NCP-Six will be unable to
pay its debts when they become due upon the maturity of the NCP-Six credit
facility on June 30, 2001. The consequences will be that NCP-Six's lenders would
have the right to foreclose upon the assets of NCP-Six in order to raise
proceeds to pay off NCP-Six's credit facility. We believe that a sale of those
assets under the time constraints imposed by pressures from NCP-Six lenders may
result in a materially negative impact on the price received for those assets,
which could correspond to a materially lower return to the unaffiliated limited
partners of NCP-Six upon liquidation of the partnership.
Even if we were successful in extending NCP-Six's credit facility until
NCP-Six's current December 31, 2001 expiration date, NCP-Six would be faced with
the same situation at the end of 2001. Furthermore, pursuant to the terms of the
NCP-Six Partnership Agreement, if the term of NCP-Six is not extended, we will
be required to commence liquidation of NCP-Six upon the partnership's December
31, 2001 expiration. Again, we believe that either of these events may result in
a materially negative impact on the price received for the assets of NCP-Six
because those assets may have to be sold under significant time constraints,
which could correspond to a materially lower return to the unaffiliated limited
partners of NCP-Six upon liquidation of the partnership. In order to avoid these
potential adverse consequences, we are proposing that the unaffiliated limited
partners of NCP-Six approve Proposed Amendment No. 1, which will result in
extending the term of NCP-Six for an additional six years until December 31,
2007. Even if you approve of the Proposed Transaction, we cannot provide
assurance that the Proposed Transaction will close by the current June 30, 2001
maturity date of the existing NCP-Six credit facility. We therefore recommend
that you vote to approve the extension of the partnership term regardless of how
you vote on the Proposed Transaction. Then, if the partnership's term is
approved, and the Proposed Transaction is either not approved, or is not closed
after being approved, we will be able to explore other opportunities for you to
liquidate your investment in NCP-Six for what we feel is a fair price, without
being required to sell those assets under significant time constraints that we
believe may negatively impact the proceeds received by NCP-Six and by you upon
its liquidation.
RISK FACTORS
(RELATED TO THE ONGOING OPERATION OF NCP-SIX AND ITS CABLE SYSTEMS)
We do not intend to operate NCP-Six through December 31, 2007 if the term
of the partnership is extended as requested herein. Instead, we are recommending
that the term of NCP-Six be extended to place NCP-Six in a position to extend
its credit facility for a reasonable period of time, during which we will
explore alternatives for the future liquidation of NCP-Six if the Proposed
Transaction does not close. Notwithstanding, if the Proposed Transaction does
not close and the term of NCP-Six is extended, there are certain risks
associated with the ongoing operation of NCP-Six and its cable systems that you
should be aware of.
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NCP-SIX OPERATES IN A VERY COMPETITIVE BUSINESS ENVIRONMENT, WHICH CAN
AFFECT ITS BUSINESS AND OPERATIONS.
The industry in which NCP-Six operates is highly competitive, and NCP-Six
faces competition from many sources. In some instances NCP-Six competes against
companies with fewer regulatory burdens, easier access to financing, greater
personnel resources, greater brand name recognition and long-standing
relationships with regulatory authorities. Mergers, joint ventures and alliances
among cable television operators, regional telephone companies, long distance
telephone service providers, electric utilities, local exchange carriers (which
are local phone companies that provide local area telephone services and access
to long distance services to customers), providers of cellular and other
wireless communications services and others may result in providers capable of
offering cable television and other telecommunications services in direct
competition with NCP-Six.
NCP-Six also faces competition from companies distributing television
broadcast signals without a subscription fee and from other communications and
entertainment media, including conventional off-air television and radio
broadcasting services, direct-to-home satellite broadcasting services,
newspapers, movie theaters, the Internet, live sports events and home video
products. Federal legislation was recently passed that will give direct-to-home
satellite broadcasting services the authority to transmit local television
broadcast signals to their subscribers. We believe this may enhance the
attractiveness of satellite broadcasting services and could make program
offerings more competitive. NCP-Six also experiences competition from
overbuilders which are parties who have been given permits to build duplicate
cable systems in a geographic area where an operational cable system already
exists. In order to maintain competitiveness, NCP-Six anticipates incurring
significant capital expenditures to upgrade its systems. We cannot assure you
that NCP-Six will upgrade its systems in a timely manner or at all or that
upgrading NCP-Six's cable systems will allow NCP-Six to compete effectively.
Additionally, as NCP-Six expands and introduces new and enhanced services,
including additional telecommunications services, NCP-Six will be subject to
competition from other telecommunications providers. We cannot predict the
extent to which this competition may affect NCP-Six's business and operations in
the future.
NCP-SIX MAY NOT BE ABLE TO FUND THE CAPITAL EXPENDITURES NECESSARY TO KEEP
PACE WITH TECHNOLOGICAL DEVELOPMENTS OR ITS CUSTOMERS' DEMAND FOR NEW
PRODUCTS OR SERVICES. THIS COULD LIMIT ITS ABILITY TO COMPETE EFFECTIVELY.
The cable business is characterized by rapid technological change and the
introduction of new products and services. We cannot assure you that NCP-Six
will be able to fund the capital expenditures necessary to keep pace with
technological developments, or that NCP-Six will successfully anticipate the
demand of its customers for products or services requiring new technology. This
type of rapid technological change could adversely affect NCP-Six's plans to
upgrade or expand its systems and respond to competitive pressures. NCP-Six's
inability to upgrade, maintain and expand its systems and provide enhanced
services in a timely manner, or to anticipate the demands of the marketplace,
could adversely affect its ability to compete. Consequently, NCP-Six's growth,
results of operations and financial condition could suffer materially.
NCP-SIX OPERATES ITS CABLE SYSTEMS UNDER FRANCHISES THAT ARE NON-EXCLUSIVE.
LOCAL FRANCHISING AUTHORITIES CAN GRANT ADDITIONAL FRANCHISES AND CREATE
COMPETITION IN MARKET AREAS WHERE NONE EXISTED PREVIOUSLY.
NCP-Six's cable systems are operated under franchises granted by local
franchising authorities. These franchises are non-exclusive. Consequently, these
local franchising authorities can grant additional franchises to competitors in
the same geographic area. As a result, competing operators may build systems in
areas in which NCP-Six holds franchises. The existence of more than one cable
system operating in the same territory is referred to as an "overbuild."
Overbuilds can adversely affect NCP-Six's operations. We are currently facing
overbuild situations in two of NCP-Six's systems. Additional overbuild
situations may occur in other systems.
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NCP-SIX'S CABLE SYSTEMS ARE OPERATED UNDER FRANCHISES THAT ARE SUBJECT TO
NON-RENEWAL OR TERMINATION. THE FAILURE TO RENEW A FRANCHISE COULD
ADVERSELY AFFECT NCP-SIX'S BUSINESS IN A KEY MARKET.
NCP-Six's cable systems operate pursuant to non-exclusive franchises,
permits or licenses granted by a municipality or other state or local government
controlling the public rights-of-way. Many franchises establish comprehensive
facilities and service requirements, as well as specific customer service
standards and establish monetary penalties for non-compliance. In many cases,
franchises are terminable if the franchisee fails to comply with material
provisions set forth in the franchise agreement governing system operations.
Franchises are generally granted for fixed terms and must be periodically
renewed. Local franchising authorities may resist granting a renewal if either
past performance or the prospective operating proposal is considered inadequate.
Franchise authorities often demand concessions or other commitments as a
condition to renewal, which may result in costs to NCP-Six that are
unreasonable. We cannot assure you that NCP-Six will be able to renew these or
other franchises in the future. In the future, a sustained and material failure
to renew a franchise could adversely affect NCP-Six's business in the affected
geographic area.
LOCAL FRANCHISE AUTHORITIES HAVE THE ABILITY TO IMPOSE ADDITIONAL
REGULATORY CONSTRAINTS ON NCP-SIX'S BUSINESS. THIS CAN FURTHER INCREASE
EXPENSES.
In addition to franchises, cable authorities have also adopted in some
jurisdictions cable regulatory ordinances that further regulate the operation of
cable systems. This additional regulation could increase the expenses of
operating NCP-Six's business. We cannot assure you that the local franchising
authorities will not impose new and more restrictive requirements.
NCP-SIX'S BUSINESS IS SUBJECT TO EXTENSIVE GOVERNMENTAL LEGISLATION AND
REGULATION. THE APPLICABLE LAWS AND REGULATIONS, AND CHANGES TO THEM, COULD
ADVERSELY AFFECT NCP-SIX'S BUSINESS BY INCREASING ITS EXPENSES.
Regulation of the cable industry has increased the administrative and
operational expenses and limited the revenues of cable systems. Cable operators
are subject to, among other things:
- limited rate regulation;
- requirements that, under specified circumstances, a cable system must
carry all local broadcast stations or obtain consent to carry a local or
distant broadcast station;
- rules for franchise renewals and transfers; and
- other requirements covering a variety of operational areas such as equal
employment opportunity, technical standards and customer service
requirements.
Additionally, many aspects of this regulation are currently the subject of
judicial proceedings and administrative or legislative proposals. We expect
further regulatory efforts, but cannot predict whether any of the states or
localities in which NCP-Six now operates will expand regulation of its cable
systems in the future or how they will do so.
NCP-SIX MAY BE REQUIRED TO PROVIDE INTERNET SERVICE PROVIDERS ACCESS TO ITS
NETWORKS. THIS COULD SIGNIFICANTLY INCREASE NCP-SIX'S COMPETITION AND
ADVERSELY AFFECT THE UPGRADE OF ITS SYSTEMS OR ITS ABILITY TO PROVIDE NEW
PRODUCTS AND SERVICES.
There are proposals before the United States Congress and the Federal
Communications Commission to require all cable operators to make a portion of
their cable systems' bandwidth available to Internet service providers, such as
America Online. Some local franchising authorities are considering or have
already approved these "open access" requirements. A federal district court in
Portland, Oregon recently upheld the legality of an open access requirement.
Recently, a number of companies, including telephone companies and Internet
service providers, have requested local authorities and the FCC to require cable
operators to provide access to cable's broadband infrastructure, which allows
cable to deliver a multitude of
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channels and/or services, so that these companies may deliver Internet services
directly to customers over cable facilities. Broward County, Florida recently
granted "open access" as a condition to a cable operator's transfer of its
franchise for cable service. The cable operator has commenced legal action at
the district level. Allocating a portion of NCP-Six's bandwidth capacity to
other Internet service providers may impair its ability to use its bandwidth in
ways that would generate maximum revenues. In addition, if NCP-Six were required
to provide access, it may adversely impact NCP-Six's profitability in many ways,
including significantly increasing competition; increasing the expenses NCP-Six
incurs to maintain its systems; and increasing the expense of upgrading or
expanding its systems.
DESPITE RECENT DEREGULATION OF EXPANDED BASIC CABLE PROGRAMMING PACKAGES,
WE ARE CONCERNED THAT CABLE RATE INCREASES COULD GIVE RISE TO FURTHER
REGULATION. THIS COULD IMPAIR NCP-SIX'S ABILITY TO RAISE RATES TO COVER ITS
INCREASING COSTS OR CAUSE NCP-SIX TO DELAY OR CANCEL SERVICE OR PROGRAMMING
ENHANCEMENTS.
On March 31, 1999, the pricing guidelines of expanded basic cable
programming packages were deregulated, permitting cable operators to set their
own rates. This deregulation was not applicable to basic services. However, the
FCC and the United States Congress continue to be concerned that cable rate
increases are exceeding inflation. It is possible that either the FCC or the
United States Congress will again restrict the ability of cable television
operators to implement rate increases. Should this occur, it would impede
NCP-Six's ability to raise its rates. If NCP-Six is unable to raise its rates in
response to increasing costs, its financial condition and results of operations
could be materially adversely affected.
PROPOSED AMENDMENT NO. 1 TO THE NCP-SIX PARTNERSHIP AGREEMENT
In order to extend the term of NCP-Six, the NCP-Six Partnership Agreement
must be amended. Proposed Amendment No. 1 to the NCP-Six Partnership Agreement,
if approved by the requisite majority of the outstanding units of limited
partnership interest (excluding the 30 units held by us or our affiliates), will
extend the term of NCP-Six for an additional six years from its current
expiration date of December 31, 2001 through a new expiration date of December
31, 2007. If both the Adelphia Transaction and the Proposed Transaction are
consummated prior to December 31, 2001, all of the assets of NCP-Six will have
been sold and pursuant to the terms of the NCP-Six Partnership Agreement NCP-Six
will be wound up and final distributions to its partners will be made pursuant
to the terms of the NCP-Six Partnership Agreement. If, however, the Adelphia
Transaction or the Proposed Transaction fail to close by December 31, 2001,
NCP-Six will continue to own at least one cable system operating system as of
the currently scheduled date for expiration of NCP-Six, and its term will only
be extended past December 31, 2001 if Proposed Amendment No. 1 is approved. See
"Background and Reasons for Extending the Term of NCP-Six" above. A copy of
Proposed Amendment No. 1 is attached to these proxy materials as Exhibit C. If
you vote to approve extending the term of NCP-Six, you will be voting to approve
Proposed Amendment No. 1.
PROPOSED AMENDMENT NO. 2 TO THE NCP-SIX PARTNERSHIP AGREEMENT
The NCP-Six Partnership Agreement must also be amended in order to
consummate the Proposed Transaction. Proposed Amendment No. 2 to the NCP-Six
Partnership Agreement contains provisions that authorize NCP-Six to enter into
an agreement with Northland for the sale of the undivided portion of the assets
which are attributable to the collective interests of the unaffiliated limited
partners and the Administrative General Partner in NCP-Six, excluding those
assets to be included in the Adelphia Transaction. The amendment modifies the
allocation provisions in the NCP-Six Partnership Agreement for purposes of
allowing the cash payments in the Proposed Transaction to be allocated solely to
the unaffiliated limited partners and the Administrative General Partner in
accordance with their undivided interest in NCP-Six, and to permit an in-kind
distribution to Northland of the undivided portion of the assets attributable to
the Managing General Partner's interest. The effect to the unaffiliated limited
partners is to allocate to them the same gain as a result of the Proposed
Transaction as would result were
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the assets to be sold to a third party for $62,250,000 pursuant to the Northland
asset purchase agreement and all proceeds were distributed in cash. The overall
effect of Proposed Amendment No. 2 is that it will provide Northland a credit
towards the purchase price in the Proposed Transaction in an amount equal to
Northland's ownership interest in NCP-Six. Rather than receiving a cash
distribution equal to the portion of the purchase price attributable to
Northland's partnership interest upon liquidation of NCP-Six, Northland will
instead receive an in-kind distribution of NCP-Six assets equal in value to the
cash that would otherwise be distributed to Northland. While the effect of
Proposed Amendment No. 2 may have a beneficial tax impact for Northland in the
Proposed Transaction, it will have no negative impact on the unaffiliated
limited partners of NCP-Six. As a result of Proposed Amendment No. 2, and based
on the valuations of the Adelphia Transaction and the Proposed Transaction, the
value of the projected in-kind distribution to Northland would be approximately
$6,021,000. This amount will reduce cash due from Northland at the closing of
the Proposed Transaction. For details, see "Projected Cash Available from
Liquidation" above. A copy of Proposed Amendment No. 2 is attached to these
proxy materials as Exhibit D. If you vote to approve the Proposed Transaction,
you will be voting to approve Proposed Amendment No. 2.
CONFLICTS OF INTEREST
FIDUCIARY RESPONSIBILITIES
As general partners, we are accountable to NCP-Six as fiduciaries and
consequently must exercise good faith in the resolution of any conflicts of
interest and in handling NCP-Six's business. These fiduciary duties arise out of
state law. The extent of a general partner's fiduciary responsibilities is a
changing area of the law, and unaffiliated limited partners who have questions
concerning these responsibilities should consult with their own counsel. In
discharging their obligations to NCP-Six, the General Partners must take into
account the specific duties, obligations and limitations imposed upon them by
the NCP-Six Partnership Agreement.
CONFLICTS OF INTEREST OF THE MANAGING GENERAL PARTNER
The Managing General Partner is subject to substantial conflicts of
interest arising out of its relationship with NCP-Six and the Proposed
Transaction.
For example, assuming that the requisite approval of unaffiliated limited
partners is obtained, Northland will be granted the right to acquire a majority
of the assets of NCP-Six. The terms of the Proposed Transaction have been
determined by Northland as the Managing General Partner. The Managing General
Partner has faced a substantial conflict of interest in determining these terms.
In addition, the Managing General Partner faced a significant conflict of
interest in proposing that it acquire the assets itself, after retaining experts
to appraise the assets and soliciting bids to sell the assets through a broker
to an unaffiliated third party.
The fair market value and net cash flow of the assets may increase over
time. It is possible that unaffiliated limited partners would receive a greater
return on their investment if NCP-Six continues to own and operate the assets,
instead of consummating the Proposed Transaction. Similarly, if the assets are
acquired by Northland, Northland may experience a rate of return on its
investment in excess of that experienced by NCP-Six. Northland currently owns
other cable television systems in the vicinity of all but one of the systems
comprising the assets, which will afford Northland the opportunity to take
advantage of certain economies of scale and potentially make the assets a more
valuable asset to Northland. Alternatively, it is possible that, at any time
prior to or subsequent to the closing, Northland may receive a bid from one or
more third parties that exceeds the price to be paid in the Proposed
Transaction.
Although neither Daniels & Associates, nor Communications Equity
Associates, the appraisers of the assets, is affiliated with the general
partners or NCP-Six, Northland and its affiliates have entered into material
contracts with each of Daniels & Associates and Communications Equity Associates
for the purchase or sale of cable television systems in transactions where such
firm or its affiliates acted either as
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broker or as principal. Recently, in April 1999, Daniels assisted as a broker in
the sale of NCP-Six's cable system located in Sandersville, Mississippi. In
addition, we expect that Northland and its affiliates may enter into similar
transactions with Daniels & Associates or Communications Equity Associates or
their affiliates in the future. Because the unaffiliated limited partners have
not participated in either the appraisal process or the selection of Daniels &
Associates and Communications Equity Associates as the two appraisers, there can
be no assurance that a different appraisal procedure or different appraisers
would not generate a higher valuation of the assets. Notwithstanding, we felt
that Communication Equity Associates, and Daniels & Associates, were the best
suited parties to appraise the assets of NCP-Six at the time. Our belief was
based on our prior first hand experiences with both firms and our knowledge of
their understanding and familiarity with the cable television industry.
CONFLICT OF INTEREST OF THE ADMINISTRATIVE GENERAL PARTNER AND RELATED MATTERS
In contrast to Northland's involvement as Managing General Partner of
NCP-Six, neither the Administrative General Partner nor any affiliate of the
Administrative General Partner will be acquiring any interest in any assets of
NCP-Six as a result of either the Adelphia Transaction or the Proposed
Transaction.
The 30 units of limited partnership interest held by us and our affiliates
will not be included in determining whether the requisite approval has been
obtained. Both general partners will receive substantial distributions (in cash
or in-kind) upon consummation of the Proposed Transaction. See "Projected Cash
Available from Liquidation."
We have not retained and do not intend to retain an unaffiliated
representative to act on behalf of the unaffiliated limited partners for the
purpose of negotiating the terms of the proposed transaction. We have, however,
retained the services of Houlihan Lokey who have rendered favorable opinions
from a financial point of view as to the consideration to be received by the
unaffiliated limited partners of NCP-Six in both the Adelphia Transaction, and
the Proposed Transaction, respectively.
CERTAIN PAYMENTS TO THE MANAGING GENERAL PARTNER
In connection with the Proposed Transaction, the managing general partner
estimates that approximately $50,000 will be payable to it for partnership
administrative costs, for its services in the dissolution and winding up of
NCP-Six. Services provided by the Managing General Partner will include ongoing
accounting and legal services as well as administrative and investor relations
services during the dissolution and winding up of NCP-Six. The amount to be paid
to the managing general partner represents an estimate of the actual cost
incurred by the managing general partner to provide these services to NCP-Six.
In addition, in connection with the payment of NCP-Six's liabilities from the
proceeds of the Proposed Transaction, the Managing General Partner will be paid
accrued but unpaid management fees that may exist as of the closing date. See
"Projected Cash Available from Liquidation" and notes thereto.
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THE SPECIAL MEETING
This proxy statement is being furnished to you in connection with the
solicitation by the General Partners of NCP-Six of proxies for use at the
special meeting of limited partners. The special meeting will be held on May 31,
2001 at 3:00 p.m., local time, at the office of NCP-Six at 1201 Third Avenue,
Suite 3600, Seattle, Washington 98101, and at any adjournment or postponement of
the meeting.
You are invited to attend the special meeting and are urged to submit a
proxy even if you will be able to attend the special meeting. The approximate
date of mailing this proxy statement and the accompanying proxy card to you is
April 15, 2001.
PURPOSE OF SPECIAL MEETING
The purpose of the meeting is to vote regarding two proposals, which
include:
- extending the term of NCP-Six for an additional six years, from its
current expiration date of December 31, 2001, until December 31, 2007, in
order to allow for extension of NCP-Six's current credit facility; and
- approval of the Proposed Transaction, as described in this proxy
statement.
RECORD DATE; LIMITED PARTNERS ENTITLED TO VOTE AT THE SPECIAL MEETING
Only persons who are unaffiliated limited partners of record of NCP-Six at
the close of business on December 31, 2000 will be entitled to notice of and to
vote at the special meeting and at any adjournment or postponement of the
meeting. As of the record date for the special meeting, there were 29,784 units
of limited partnership interest outstanding, held by 1,795 limited partners of
record. We and our affiliates hold 30 units, none of which will be voted or
counted in determining whether the requisite approval has been obtained. Limited
partners will be entitled to one vote on each matter presented for approval at
the special meeting for each unit of limited partnership held on the record
date.
QUORUM; VOTE REQUIRED FOR APPROVAL
Pursuant to the NCP-Six Partnership Agreement, the presence in person or by
proxy of holders of limited partnership units representing a majority of the
votes entitled to be cast at the special meeting constitutes a quorum for the
transaction of business at the special meeting. Abstentions are included in the
calculation of the number of votes represented at a meeting for purposes of
determining whether a quorum has been achieved. The approval of either of the
proposals require the affirmative vote of the holders of a majority of the
outstanding units of unaffiliated limited partnership interest. We and our
affiliates hold 30 units, none of which will be voted or counted in determining
whether the requisite approval has been obtained. A failure to submit a proxy
card (or to vote in person at the special meeting) will have the same effect as
a vote to "Disapprove" both amendments.
USE OF PROXIES AT THE SPECIAL MEETING
We will assure that all properly executed proxies that we receive before
the special meeting are voted at the special meeting as you instruct on the
proxy. Limited partners who abstain from voting will be considered to have voted
against the proposal(s) for which they have abstained. Also, any signed and
returned proxy cards that fail to vote on one or both of the proposals will be
treated as a vote to approve the proposal for which a vote was not cast. All
questions as to the validity, form, eligibility, time of receipt, and acceptance
of any proxies will be determined by the managing general partner in its sole
discretion, which determination will be final and binding.
We know of no matters that will be presented for a vote at the special
meeting other than the matters identified in this proxy statement and on the
proxy card. If any other matters are properly presented, the persons designated
as proxies on the enclosed proxy card intend to vote on the matters in
accordance with their judgment.
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A form of the proxy being solicited is included as Exhibit A to this proxy
statement. An actual, execution-ready proxy card accompanies this proxy
statement. By submitting a completed and executed proxy, you will be appointing
each of John S. Whetzell and Richard I. Clark as your attorney-in-fact to vote
your interest at the special meeting with respect to approval or disapproval, as
you specify on the proxy card, of the disposition and related actions described
in the proxy. Messrs. Whetzell and Clark serve as President and Vice
President/Assistant Treasurer, respectively, of the Managing General Partner. We
request that you complete, date and sign the accompanying proxy card and return
it promptly in the enclosed postage-paid envelope, even if you are planning to
attend the special meeting.
REVOCATION OF PROXIES
Once you submit a signed proxy, you may change your vote only by (1)
delivering to the Managing General Partner before the special meeting either a
signed notice of revocation or a signed proxy dated subsequent to the date of
the proxy previously given, or (2) personally appearing at the special meeting
and, prior to the commencement of the meeting, delivering to the Managing
General Partner notice in writing that the proxy already given is being revoked.
Attendance at the special meeting, by itself, will not revoke a proxy.
SOLICITATION OF PROXIES
This proxy statement is being furnished to the unaffiliated limited
partners of NCP-Six by the Managing General Partner, whose principal executive
offices are located at 1201 Third Avenue, Suite 3600, Seattle, Washington 98101
and whose telephone number is (206) 621-1351. The principal executive offices
and telephone number of NCP-Six are the same.
In addition to use of the mail, proxies may be solicited by telephone or
personally by the general partners and any of our directors, officers, partners
and employees. We will not pay any additional compensation to any of these
people for their services in this regard. The expenses of the solicitation will
be borne by NCP-Six.
NCP-Six will bear the cost of solicitation of proxies for the special
meeting. Solicitation may be in person, by telephone, mail, facsimile or other
means. The General Partners and their directors, officers, partners and
employees may solicit the vote of unaffiliated limited partners. These persons
will receive no additional compensation for their assistance in soliciting
proxies.
INFORMATION ABOUT NCP-SIX
GENERAL
NCP-Six is a Washington limited partnership consisting of two general
partners and approximately 1,807 unaffiliated limited partners as of December
31, 2000. Northland Communications Corporation, a Washington corporation, is the
managing general partner of NCP-Six. FN Equities Joint Venture, a California
general partnership, is the administrative general partner of NCP-Six.
Northland was initially formed in March 1981. Northland is principally
involved in the ownership and management of cable television systems. Northland
currently manages the operations and serves as the general partner for cable
television systems owned by four limited partnerships. Northland is also the
parent company of Northland Cable Properties, Inc., which was formed in February
1995 and is principally involved in direct ownership of cable television
systems. Northland Cable Properties, Inc. is the managing member of Northland
Cable Ventures, LLC. Northland Telecommunications Corporation is Northland's
parent company. Other direct and indirect subsidiaries of Northland
Telecommunications Corporation include:
- Northland Cable Television, Inc. -- formed in October 1985 and
principally involved in the direct ownership of cable television systems;
sole shareholder of Northland Cable News, Inc.
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- Northland Cable News, Inc. -- formed in May 1994 and principally involved
in the production and development of local news, sports and informational
programming.
- Northland Cable Services Corporation -- formed in August 1993 and
principally involved in the development and production of computer
software used in billing and financial record keeping for
Northland-affiliated cable systems; sole shareholder of Cable
Ad-Concepts.
- Cable Ad-Concepts, Inc. -- formed in November 1993 and principally
involved in the sale, development and production of video commercial
advertisements that are cablecast on Northland-affiliated cable systems.
- Northland Media, Inc. -- formed in April 1995 as a holding company. Sole
shareholder of the following two entities:
- Statesboro Media, Inc. -- formed in April 1995 and principally involved
in operating an AM radio station serving the community of Statesboro,
Georgia and surrounding areas.
- Corsicana Media, Inc. -- purchased in September 1998 from an affiliate
and principally involved in operating an AM radio station serving the
community of Corsicana, Texas and surrounding areas.
BUSINESS
NCP-Six was formed on January 22, 1986 and began operations in 1986 with
the acquisition of cable television systems serving several communities and the
surrounding areas in Mississippi and North Carolina. In a series of transactions
since then, NCP-Six acquired and now operates cable television systems through
five operating groups located in the following geographic areas:
- Starkville, Mississippi;
- Philadelphia, Mississippi;
- Highlands, North Carolina;
- Barnwell, South Carolina; and
- Bennettsville, South Carolina.
All of the initial acquisitions were financed through a combination of
limited partners' equity and bank loans and the later acquisitions were financed
through a combination of partnership cash flow and bank loans. As of December
31, 2000, the outstanding principal balance owing on NCP-Six's bank financing
was approximately $28,215,281. In addition, NCP-Six owed the managing general
partner and affiliates an aggregate of approximately $21,300 for unreimbursed
operating expenses.
NCP-Six's revenues are derived primarily from monthly payments received
from cable television subscribers. Subscribers are divided into three
categories: basic subscribers, tier subscribers and premium subscribers. "Basic
subscribers" are households that subscribe to the basic level of service, which
generally provides access to the four major television networks (ABC, NBC, CBS
and Fox), a few independent local stations, PBS (the Public Broadcasting System)
and certain satellite programming services, such as ESPN, CNN or The Discovery
Channel. "Tier subscribers" are households that subscribe to an additional level
of programming services the content of which varies from system to system.
"Premium subscribers" are households that subscribe to one or more "pay
channels" in addition to the basic service. These pay channels include services
as Showtime, Home Box Office, Cinemax or The Movie Channel.
As of December 31, 2000, the total number of basic subscribers served by
NCP-Six's systems was approximately 31,633, and NCP-Six's penetration rate
(basic subscribers as a percentage of the total number of estimated homes passed
by NCP-Six's cable distribution system) was approximately 62%. NCP-Six's
properties are located in rural areas, which to some extent, do not offer
consistently acceptable off-air network signals. This factor, combined with the
existence of fewer entertainment alternatives than in large markets contributes
to a larger proportion of the population in rural areas than in larger, more
urban areas subscribing to cable television (higher penetration).
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NCP-Six has 38 non-exclusive franchises to operate its systems. These
franchises, which will expire at various dates through the year 2017, have been
granted by local, county, state and other governmental authorities in the areas
in which NCP-Six's systems currently operate. Annual franchise fees are paid to
the granting governmental authorities. These fees vary between 2% and 5% of the
respective gross revenues of the system derived from its operations in a
particular community. The franchises may be terminated for failure to comply
with their respective conditions.
THE SYSTEMS
NCP-Six operates five groups of "clusters" of cable systems serving the
communities and surrounding areas of Starkville, Kosciusko, Philadelphia and
Forest, Mississippi; Highlands, North Carolina; and Barnwell and Bennettsville,
South Carolina. The following is a description of these operating groups.
STARKVILLE, MISSISSIPPI
The Starkville operating group serves the communities and surrounding areas
of Starkville and Kosciusko, Mississippi. The City of Starkville is the home of
Mississippi State University with an enrollment of approximately 12,000
students. The university's 10 colleges and schools comprise 58 departments that
offer more than 120 majors. Mississippi State is also the largest employer in
Starkville, with nearly 1,300 faculty members or professionals and 1,450 support
staff. Also located in Starkville is the Mississippi Research and Technology
Park, which is a long-range economic development project initiated through the
joint efforts of the City of Starkville, Oktibbeha County, Mississippi State
University and the local business community. The Park is located on
approximately 220 acres across from the entrance to the university and will
enhance high-technology research for application to the economic sector. The
developers and businesses that comprise the Park intend to work hand in hand
with research efforts at the university, and companies that locate in the Park
will have the benefit of university facilities and faculty.
The following provides subscriber information regarding the Starkville,
Mississippi operating group as of December 31, 2000:
Basic Subscribers........................................... 11,961
Tier Subscribers............................................ 6,063
Premium Subscribers......................................... 4,010
Estimated Homes Passed...................................... 16,525
PHILADELPHIA, MISSISSIPPI
The Philadelphia operating group serves the communities and surrounding
areas of Philadelphia and Forest, Mississippi. The systems are located in
central Mississippi in an area where the local economies are based primarily in
manufacturing. The region has excellent highway and railroad transportation, a
year-round mild climate, and the availability of a trained, cost-effective labor
force. One of the main industries in the area is poultry. Nearly two million
birds are dressed weekly in the city of Forest, which ranks as the
second-largest producer of broilers in the nation. Other industries in the area
include apparel, ready mix concrete, frozen food products, lumber, small
appliances, electronic assembly, steel and meat processing.
The following provides subscriber information regarding the Philadelphia,
Mississippi operating group as of December 31, 2000:
Basic Subscribers........................................... 6,677
Tier Subscribers............................................ 2,971
Premium Subscribers......................................... 2,690
Estimated Homes Passed...................................... 8,910
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HIGHLANDS, NORTH CAROLINA
Located on a high plateau of the Blue Ridge Mountains where the corners of
Georgia, North Carolina and South Carolina meet, Highlands has long offered a
cool and beautiful summer retreat for the affluent families from such southern
cities as Atlanta, New Orleans and Tampa. The Highlands region is almost
encircled by the 200,000 acres of the End National Forest, and boasts a lush
mixture of hardwoods and evergreens because of an abundant rainfall. Highlands
has an average altitude of over 4,000 feet, and thus maintains a temperate
summer climate. The influx of tourists increases Highland's year-round
population of approximately 2,000 to over 20,000 between May and October.
The Highlands area is perhaps best known for its exclusive golf clubs.
There are three beautiful golf courses in the Highlands area, the oldest being
the Highlands Country Club. About half the land in the Highlands area is under
private ownership; the rest is part of the End National Forest, and is open for
hiking, fishing, hunting, camping and other outdoor activities. The private land
near the golf courses consists largely of exclusive housing developments, many
of which feature rambling, ranch-style vacation homes with values ranging from
$200,000 to $500,000. The Great Smokey Mountains National Park and the Blue
Ridge Parkway are within easy driving distance of Highlands. Several lakes in
the area offer swimming, boating, skiing, fishing and other water sports.
Rafting is also popular in the area due to the close proximity of the Chattooga
and Cullasaja Rivers.
The following provides subscriber information regarding the Highlands
system as of December 31, 2000:
Basic Subscribers........................................... 2,664
Premium Subscribers......................................... 582
Estimated Homes Passed...................................... 4,190
BARNWELL, SOUTH CAROLINA
Barnwell, Bamberg and Allendale are located approximately sixty miles south
of Columbia, South Carolina. The economy is based primarily on agricultural and
manufacturing activities.
The following provides subscriber information regarding the Barnwell system
as of December 31, 2000:
Basic Subscribers........................................... 5,849
Premium Subscribers......................................... 3,767
Estimated Homes Passed...................................... 12,125
BENNETTSVILLE, SOUTH CAROLINA
The City of Bennettsville is located approximately 100 miles northeast of
Columbia, South Carolina and serves as the county seat of Marlboro County. The
economy is primarily driven by agriculture and manufacturing: three of the
largest employers are Mohawk Carpet, United Technologies Automotive and
Willamette Industries.
The following provides subscriber information regarding the Bennettsville
system as of December 31, 2000:
Basic Subscribers........................................... 4,482
Premium Subscribers......................................... 2,953
Estimated Homes Passed...................................... 9,090
EMPLOYEES
NCP-Six had 48 employees as of December 31, 2000. Management of these
systems is handled through offices located in the towns of Starkville, Forest,
Kosciusko and Philadelphia, Mississippi; Highlands, North Carolina; and Barnwell
and Bennettsville, South Carolina.
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CUSTOMERS
The business of NCP-Six is not dependent upon a single customer or a few
customers, so the loss of any one or more customers would not have a material
adverse effect on its business. No customer accounts for 10% or more of
revenues. No material portion of NCP-Six's business is subject to renegotiation
of profits or termination of contracts or subcontracts at the election of any
governmental unit, except that franchise agreements may be terminated or
modified by the local franchising authorities. See "-- Regulation and
Legislation" below. During the last fiscal year, NCP-Six did not engage in any
research and development activities.
SEASONALITY
NCP-Six's cable television business is generally not seasonal, with the
exception of the Highlands Systems, which is subject to seasonal fluctuations in
the number of subscribers, which affects revenues and results of operations.
COMPETITION
NCP-Six currently experiences competition from several sources, including
broadcast television (digital and analog); cable overbuilds by cable operators,
municipalities, private electric utilities and telephone companies; direct
broadcast satellite services; private cable; and multichannel multipoint
distribution service systems. NCP-Six is also in competition in various degrees
with other communications and entertainment media, including motion pictures,
home video cassette recorders (including digital video recorders that have the
capability to pause live television programs and digitally record television
shows without the use of videotape), Internet data delivery and Internet video
delivery. The following provides a summary description of these sources of
competition.
Broadcast Television. NCP-Six has traditionally competed with broadcast
television, which consists of television signals that the viewer is able to
receive directly on his television without charge using an "off-air" antenna.
The extent of this competition is dependent in part upon the quality and
quantity of signals available by antenna reception as compared to the services
provided by the local cable system. Accordingly, we have found it less difficult
to obtain higher penetration rates in rural areas (where signals available
off-air are limited) than in metropolitan areas where numerous, high quality
off-air signals are often available without the aid of cable television systems.
Licensing of digital spectrum by the FCC has provided incumbent broadcast
licensees with the ability to deliver high definition television pictures and
multiple digital-quality program streams, as well as advanced digital services
such as subscription video.
Overbuilds. NCP-Six's franchises are not exclusive, so that more than one
cable television system may be built in the same area. This is known as an
"overbuild." Overbuilds have the potential to result in loss of revenues to the
operator of the original cable television system. Constructing and developing a
cable television system is a capital intensive process, and it is often
difficult for a new cable system operator to create a marketing edge over the
existing system. Generally, an overbuilder would be required to obtain
franchises from the local governmental authorities, although in some instances,
the overbuilder could be the local government itself. In any case, an
overbuilder would be required to obtain programming contracts and, in most
cases, would have to build a complete cable system such as headends, trunk lines
and drops to individual subscriber's homes throughout the franchise areas.
Federal cross-ownership restrictions historically limited entry by local
telephone companies into the cable television business. The 1996 Telecom Act
eliminated this cross-ownership restriction. (See "Regulation and Legislation"
below.) It is therefore possible for companies with considerable resources to
overbuild existing cable operators and enter the business. Several telephone
companies have secured cable television franchises from local governmental
authorities and constructed cable television systems, although those efforts
recently have declined. NCP-Six cannot predict at this time the extent of
telephone company competition that will emerge in areas served by NCP-Six's
cable television systems. The entry of telephone companies as direct
competitors, however, is likely to continue over the next several years and
could adversely affect the profitability and market value of NCP-Six's systems.
The entry of electric utility
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companies into the cable television business, as now authorized by the 1996
Telecom Act, could have a similar adverse effect on NCP-Six future
competitiveness.
Direct Broadcast Satellite ("DBS") Service. High powered direct-to-home
satellites have made possible the wide-scale delivery of programming (including
Internet services) to individuals throughout the United States using small
roof-top or wall-mounted antennas. The two leading DBS providers have
experienced dramatic growth over the last several years and together now serve
over 13 million customers nationwide. These developments have the potential to
impact NCP-Six's existing subscriber base. Companies offering DBS service use
video compression technology to increase channel capacity of their systems to
more than 100 channels and to provide packages of movies, satellite networks and
other program services which are competitive to those of cable television
systems. DBS companies historically faced significant legal and technological
impediments to providing popular local broadcast programming to their customers.
Recent federal legislation reduced this competitive disadvantage. Nevertheless,
technological limitations still affect DBS companies, and it is expected that
DBS companies will offer local broadcast programming only in the top 50 to 100
U.S. markets for the foreseeable future. The same legislation reduced the
compulsory copyright fees paid by DBS companies and allowed them to continue
offering distant network signals to rural customers. In addition to emerging
high-powered DBS competition, cable television systems face competition from
several low-powered providers, whose service requires use of much larger home
satellite dishes. The availability of DBS equipment at reasonable prices, and
the relative attractiveness of the programming options offered by the cable
television industry and DBS competitors will impact the ability of DBS service
providers to compete successfully with NCP-Six and its fixed line cable systems.
Private Cable. NCP-Six is also susceptible to competition provided by
private cable television systems, known as satellite master antenna television,
serving multi-unit dwellings such as condominiums, apartment complexes, and
private residential communities. These private cable systems may enter into
exclusive agreements with apartment owners and homeowners associations, which
may preclude operators of franchised systems from serving residents of these
private complexes. Operators of private cable, which do not cross public rights
of way, are free from the federal, state and local regulatory requirements
imposed on franchised cable television operators. In addition, recent FCC and
Circuit Court rulings suggest that private cable operators can lease
distribution capacity from local telephone companies that cross public rights of
way and provide service without obtaining a cable franchise.
Multichannel, Multipoint Distribution Service ("MMDS") Systems. NCP-Six
also competes with wireless program distribution services such as MMDS systems,
commonly called wireless cable, which are licensed to serve specific areas. MMDS
systems use low-power microwave frequencies to transmit television programming
over-the-air to paying subscribers. MMDS is less capital intensive than the
cable television industry, and it is therefore more practical to construct
systems using this technology in areas of lower subscriber penetration.
REGULATION AND LEGISLATION
SUMMARY
The following summary addresses the key regulatory developments and
legislation affecting NCP-Six and its cable systems. Other existing federal
legislation and regulations, copyright licensing and, in many jurisdictions,
state and local franchise requirements are currently the subject of a variety of
judicial proceedings, legislative hearings and administrative and legislative
proposals, which could change, in varying degrees, the manner in which NCP-Six
must operate. Neither the outcome of these proceedings nor their impact upon the
cable television industry or NCP-Six can be predicted at this time.
NCP-Six expects to adapt its business to adjust to the changes that may be
required under any scenario of regulation. At this time, NCP-Six cannot assess
the effects, if any, that present regulation may have on NCP-Six's operations
and potential appreciation of its Systems. There can be no assurance that the
final form of regulation will not have a material adverse impact on NCP-Six's
operations.
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The operation of a cable system is extensively regulated at the federal,
local and, in some instances, state levels. The Cable Communications Policy Act
of 1984, the Cable Television Consumer Protection and Competition Act of 1992
(the "1992 Cable Act"), and the 1996 Telecommunications Act (the "1996 Telecom
Act", and, collectively, the "Cable Act") establish a national policy to guide
the development and regulation of cable television systems. The Federal
Communications Commission ("FCC") has principal responsibility for implementing
the policies of the Cable Act. Many aspects of such regulation are currently the
subject of judicial proceedings and administrative or legislative proposals.
Legislation and regulations continue to change, and NCP-Six cannot predict the
impact of future developments on the cable television industry. Future
regulatory and legislative changes could adversely affect NCP-Six's operations.
CABLE RATE REGULATION
The 1992 Cable Act imposed an extensive rate regulation regime on the cable
television industry, which limited the ability of cable companies, including
NCP-Six, to increase subscriber fees. Under that regime, all cable systems are
subject to rate regulation, unless they face "effective competition" in their
local franchise area. Federal law now defines "effective competition" on a
community-specific basis as requiring satisfaction of conditions rarely
satisfied in the current marketplace.
Although the FCC established the underlying regulatory scheme, local
government units, commonly referred to as local franchising authorities, are
primarily responsible for administering the regulation of the lowest level of
cable service called the basic service tier. The basic service tier typically
contains local broadcast stations and public, educational, and government access
channels. Local franchising authorities also have primary responsibility for
regulating cable equipment rates. Under federal law, charges for various types
of cable equipment must be unbundled from each other and from monthly charges
for programming services. Before a local franchising authority begins basic
service rate regulation, it must certify to the FCC that it will follow
applicable federal rules. Many local franchising authorities have voluntarily
declined to exercise their authority to regulate basic service rates.
As of December 15, 2000, approximately 14% of NCP-Six's local franchising
authorities were certified to regulate basic service tier rates. The 1992 Cable
Act permits communities to certify and regulate rates at any time, so that it is
possible that additional localities served by the systems may choose to certify
and regulate rates in the future.
The FCC itself historically administered rate regulation of cable
programming service tiers, which represent the expanded level of non-"basic" and
non-"premium", programming services. The 1996 Telecom Act, however, provided
immediate rate relief for small cable operators offering cable programming
service tiers. All of NCP-Six's systems qualified for this cable programming
service tier deregulation. The elimination of cable programming service tier
regulation afforded NCP-Six substantially greater pricing flexibility.
Under the rate regulations of the FCC, most cable systems were required to
reduce their basic service tier and cable programming service tier rates in 1993
and 1994, and have since had their rate increases governed by a complicated
price cap scheme that allows for the recovery of inflation and certain increased
costs, as well as providing some incentive for expanding channel carriage. The
FCC has modified its rate adjustment regulations to allow for annual rate
increases and to minimize previous problems associated with regulatory lag.
Operators also have the opportunity to bypass this "benchmark" regulatory scheme
in favor of traditional "cost-of-service" regulation in cases where the latter
methodology appears favorable. Cost of service regulation is a traditional form
of rate regulation, under which a utility is allowed to recover its costs of
providing the regulated service, plus a reasonable profit.
In a particular effort to ease the regulatory burden on small cable
systems, the FCC created special rate rules applicable for systems with fewer
than 15,000 subscribers owned by an operator with fewer than 400,000
subscribers. The special rate rules allow for a simplified cost-of-service
showing. All of NCP-Six's systems are eligible for these simplified
cost-of-service rules, and have calculated rates generally in accordance with
those rules.
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Under the FCC's rate rules, premium cable services offered on a per-channel
or per-program basis remain unregulated, as do affirmatively marketed packages
consisting entirely of new programming product. However, federal law requires
that the basic service tier be offered to all cable subscribers and limits the
ability of operators to require purchase of any cable programming service tier
if a customer seeks to purchase premium services offered on a per-channel or
per-program basis, subject to a technology exception which sunsets in 2002. The
1996 Telecom Act also relaxes existing "uniform rate" requirements by specifying
that uniform rate requirements do not apply where the operator faces "effective
competition," and by exempting bulk discounts to multiple dwelling units,
although complaints about predatory pricing still may be made to the FCC.
Regulation by the FCC of cable programming service tier rates for all
systems, regardless of size, sunset pursuant to the 1996 Telecom Act on March
31, 1999. Certain legislators, however, have called for new rate regulations.
Should this occur, all rate deregulation, including that applicable to small
operators like NCP-Six, could be jeopardized.
CABLE ENTRY INTO TELECOMMUNICATIONS
The 1996 Telecom Act creates a more favorable environment for NCP-Six to
provide telecommunications services beyond traditional video delivery. It
provides that no state or local laws or regulations may prohibit or have the
effect of prohibiting any entity from providing any interstate or intrastate
telecommunications service. A cable operator is authorized under the 1996
Telecom Act to provide telecommunications services without obtaining a separate
local franchise. States are authorized, however, to impose "competitively
neutral" requirements regarding universal service, public safety and welfare,
service quality, and consumer protection. State and local governments also
retain their authority to manage the public rights-of-way and may require
reasonable, competitively neutral compensation for management of the public
rights-of-way when cable operators provide telecommunications service.
The favorable pole attachment rates afforded NCP-Six under federal law can
be gradually increased by utility companies owning the poles, beginning in 2001,
if the operator provides telecommunications services, as well as cable services,
over its plant. The FCC recently clarified that a cable operator's favorable
pole rates are not endangered by the provision of Internet services, but the
U.S. Court of Appeals for the 11th Circuit recently ruled in Gulf Power Co. v.
FCC, 208 F.3d 1263 (11th Cir. 2000) ("Gulf Power") that the FCC has no authority
to regulate pole rents for cable systems providing Internet services (because,
the court ruled, Internet services are not telecommunications services or cable
services). The court subsequently stayed the issuance of the mandate in Gulf
Power pending the filing of and final action on a petition for writ of
certiorari seeking review of the Gulf Power decision in the U.S. Supreme Court.
The stay allows for the orderly review of the decision in the U.S. Supreme
Court. In the interim, the FCC may continue to process pending pole attachment
complaints under its existing rules and procedures. If the 11th Circuit decision
goes into effect, it could significantly increase pole attachment rates and
adversely impact cable operators.
Cable entry into telecommunications will be affected by the regulatory
landscape now being fashioned by the FCC and state regulators. One critical
component of the 1996 Telecom Act to facilitate the entry of new
telecommunications providers (including cable operators) is the interconnection
obligation imposed on all telecommunications carriers. The Supreme Court
effectively upheld most of the FCC interconnection regulations, but recently the
8th Circuit Court of Appeals vacated other portions of the FCC's rules on
slightly different grounds. More recently, the 9th Circuit Court of Appeals
ruled in the FCC's favor on these same rules, creating a split in authority that
may be resolved by the Supreme Court. Although these regulations should enable
new telecommunications entrants to reach viable interconnection agreements with
incumbent carriers, many issues, including which specific network elements the
FCC can mandate that incumbent carriers make available to competitors, remain
unresolved.
Similarly, if another FCC decision requiring that incumbent telephone
companies permit colocation of competitors' equipment on terms more favorable to
competitors is sustained on administrative and judicial
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appeal, this decision, too, would make it easier for new entrants, including
NCP-Six, to provide telecommunications service.
INTERNET SERVICE
There is at present no significant federal regulation of NCP-Six's ability
to deliver Internet services. Furthermore, the FCC recently issued several
reports finding no immediate need to impose this type of regulation. However,
this situation may change as cable systems expand their broadband delivery of
Internet services. In particular, proposals have been advanced at the federal
level that would require cable operators to provide access to unaffiliated
Internet-service providers and online service providers. In one instance, the
Federal Trade Commission is considering whether and to what extent to impose, as
a condition of Time Warner's merger with America Online, certain "open access"
requirements on Time Warner's cable systems, thereby allowing unaffiliated
Internet-service providers access to Time Warner's broadband distribution
infrastructure.
Some local franchising authorities unsuccessfully tried to impose mandatory
Internet access or "open access" requirements as part of cable franchise
renewals or transfers. In AT&T Corp. v. City of Portland, No. 99-35609 (9th
Cir., June 22, 2000), the federal Court of Appeals for the Ninth Circuit
overturned a federal district court in Portland, Oregon's ruling that local
franchising authorities have the lawful authority to impose these type of
conditions. The lower court had ruled that the City of Portland had inherent
authority to require, as a condition of the City's consent to the transfer of
TCI's cable franchise to AT&T, that AT&T provide "open access" to the "cable
modem platform" of the Excite@Home Internet service. On appeal, the Court of
Appeals rejected the City's attempt to impose "open access" conditions on AT&T's
delivery of Internet service over the cable system because that service,
according to the Court, is not a cable service, but a "telecommunications
service." The potential regulatory state and federal implications of this
rationale are unclear, given the various regulatory requirements for the
provision of telecommunications services. There have been at least two
additional court rulings that have rejected local imposition of "open access"
conditions on cable-provided Internet access, but those rulings have employed
very different legal reasoning. A federal court in Virginia found that Internet
service was a cable service, but as such was exempt from local "open access"
regulation. Another federal court in Florida even more recently ruled that "open
access" could not be imposed on local operators because doing so would violate
the First Amendment. Other local authorities have imposed or may impose
mandatory Internet access requirements on cable operators. These developments
could, if they become widespread, burden the capacity of cable systems and
complicate any plans NCP-Six may have or develop for providing Internet service.
TELEPHONE COMPANY ENTRY INTO CABLE TELEVISION
The 1996 Telecom Act allows telephone companies to compete directly with
cable operators by repealing the historic telephone company/cable
cross-ownership ban. Local exchange carriers, including the regional telephone
companies, can now compete with cable operators both inside and outside their
telephone service areas with certain regulatory safeguards. Because of their
resources, local exchange carriers could be formidable competitors to NCP-Six.
Various local exchange carriers currently are providing video programming
services within their telephone service areas through a variety of distribution
methods, including both the deployment of broadband wire facilities and the use
of wireless transmission.
Under the 1996 Telecom Act, local exchange carriers providing video
programming should be regulated as a traditional cable operator, subject to
local franchising and federal regulatory requirements, unless the local exchange
carrier elects to deploy its plant as an open video system. To qualify for
favorable open video system status, the competitor must reserve two-thirds of
the system's activated channels for unaffiliated entities. The Fifth Circuit
Court of Appeals reversed certain of the FCC's open video system rules,
including its preemption of local franchising. The FCC recently revised its OVS
rules to eliminate this general preemption, thereby leaving franchising
discretion to local and state authorities. It is unclear what effect this ruling
will have on the entities pursuing open video system operation.
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Although local exchange carriers and cable operators can now expand their
offerings across traditional service boundaries, the general prohibition remains
on local exchange carrier buyouts of co-located cable systems. Cable operator
buyouts of co-located local exchange carrier systems, and joint ventures between
cable operators and local exchange carriers in the same market also are
prohibited. The 1996 Telecom Act provides a few limited exceptions to this
buyout prohibition, including a carefully circumscribed "rural exemption." The
1996 Telecom Act also provides the FCC with the limited authority to grant
waivers of the buyout prohibition.
ELECTRIC UTILITY ENTRY INTO TELECOMMUNICATIONS AND CABLE TELEVISION
The 1996 Telecom Act provides that registered utility holding companies and
subsidiaries may provide telecommunications services, including cable
television, notwithstanding the Public Utility Holding Company Act. Electric
utilities must establish separate subsidiaries, known as "exempt
telecommunications companies" and must apply to the FCC for operating authority.
Like telephone companies, electric utilities have substantial resources at their
disposal, and could be formidable competitors to traditional cable systems.
Several of these utilities have been granted broad authority to engage in
activities which could include the provision of video programming.
OWNERSHIP RESTRICTIONS
The 1996 Telecom Act eliminates statutory restrictions on broadcast/cable
cross-ownership, including broadcast network/cable restrictions, but leaves in
place existing FCC regulations prohibiting local cross-ownership between
co-located television stations and cable systems. The 1996 Telecom Act leaves in
place existing restrictions on cable cross-ownership with satellite master
antenna television and multichannel multipoint distribution service facilities,
but lifts those restrictions where the cable operator is subject to effective
competition. FCC regulations permit cable operators to own and operate satellite
master antenna television systems within their franchise area, provided that
their operation is consistent with local cable franchise requirements.
Pursuant to the 1992 Cable Act, the FCC adopted rules precluding a cable
system from devoting more than 40% of its activated channel capacity to the
carriage of affiliated national video program services. Although the 1992 Cable
Act also precluded any cable operator from serving more than 30% of all U.S.
domestic cable subscribers, this provision is still subject to judicial review.
MUST CARRY AND RETRANSMISSION CONSENT
The 1992 Cable Act contains broadcast signal carriage requirements.
Broadcast signal carriage is the transmission of broadcast television signals
over a cable system to cable customers. These requirements, among other things,
allow local commercial television broadcast stations to elect once every three
years between "must carry" status or "retransmission consent" status. Less
popular stations typically elect must carry, which is the broadcast signal
carriage rule that allows local commercial television broadcast stations to
require a cable system to carry the station. Must carry requests can dilute the
appeal of a cable system's programming offerings because a cable system with
limited channel capacity may be required to forego carriage of popular channels
in favor of less popular broadcast stations electing must carry. More popular
stations, such as those affiliated with a national network, typically elect
retransmission consent, which is the broadcast signal carriage rule that allows
local commercial television broadcast stations to negotiate terms (such as
mandating carriage of an affiliated cable network) for granting permission to
the cable operator to carry the stations. Retransmission consent demands may
require substantial payments or other concessions.
NCP-Six has been able to reach agreements with all of the broadcasters who
elected retransmission consent. To date, compliance with the "retransmission
consent" and "must carry" provisions of the 1992 Cable Act has not had a
material effect on NCP-Six, although these provisions may affect the operations
of NCP-Six in the future, depending on factors as market conditions, the
introduction of digital broadcasts, channel capacity and similar matters when
these arrangements are negotiated or renegotiated.
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The burden associated with must carry may increase substantially if
broadcasters proceed with planned conversion to digital transmission and the FCC
determines that cable systems must carry all analog and digital broadcasts in
their entirety. This burden would reduce capacity available for more popular
video programming and new Internet and telecommunications offerings. The
broadcast industry continues to press the FCC on the issue of digital must
carry. A rulemaking regarding must carry obligations during the transition from
analog to digital broadcasting remains pending at the FCC. It remains unclear
when a final decision will be released.
ACCESS CHANNELS
Local franchising authorities can include franchise provisions requiring
cable operators to set aside certain channels for public, educational and
governmental access programming. Federal law also requires cable systems to
designate a portion of their channel capacity, up to 15% in some cases, for
commercial leased access by unaffiliated third parties. The FCC has adopted
rules regulating the terms, conditions and maximum rates a cable operator may
charge for commercial leased access use. We believe that requests for commercial
leased access carriage to date have been relatively limited.
ACCESS TO PROGRAMMING
To spur the development of independent cable programmers and competition to
incumbent cable operators, the 1992 Cable Act imposed restrictions on the
dealings between cable operators and cable programmers. Of special significance
from a competitive business posture, the 1992 Cable Act precludes video
programmers affiliated with cable companies from favoring their cable operators
over new competitors and requires these programmers to sell their
satellite-delivered programming to other multichannel video distributors. This
provision limits the ability of vertically integrated cable programmers to offer
exclusive programming arrangements to cable companies. There also has been
interest expressed in further restricting the marketing practices of cable
programmers, including subjecting programmers who are not affiliated with cable
operators or programmers who deliver their service by terrestrial means (rather
than by satellite) to the program access requirements. These changes should not
have a dramatic impact on NCP-Six, but would limit potential competitive
advantages NCP-Six enjoys.
INSIDE WIRING; SUBSCRIBER ACCESS
In an order issued in 1997, the FCC established rules that require an
incumbent cable operator upon expiration of a multiple dwelling unit service
contract to sell, abandon, or remove "home run" wiring that was installed by the
cable operator in a multiple dwelling unit building. These inside wiring rules
are expected to assist building owners in their attempts to replace existing
cable operators with new programming providers who are willing to pay the
building owner a fee, where this fee is permissible. The FCC has also proposed
abrogating all exclusive multiple dwelling unit service agreements held by
incumbent operators.
With limited exceptions, existing FCC regulations prohibit any state or
local law or regulation, or private covenant, private contract, lease provision,
homeowners' association rule or similar restriction, impairing the installation,
maintenance or use of certain video reception antennas on property within the
exclusive control of a tenant or property owner.
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OTHER REGULATIONS OF THE FEDERAL COMMUNICATIONS COMMISSION
In addition to the FCC regulations noted above, there are other FCC
regulations to which NCP-Six is subject covering such areas as:
- equal employment opportunity,
- subscriber privacy,
- programming practices, including, among other things,
- syndicated program exclusivity,
- network program nonduplication,
- local sports blackouts,
- indecent programming,
- lottery programming,
- political programming,
- sponsorship identification,
- children's programming advertisements, and
- closed captioning,
- registration of cable systems and facilities licensing,
- maintenance of various records and public inspection files,
- aeronautical frequency usage,
- lockbox availability,
- antenna structure notification,
- tower marking and lighting,
- consumer protection and customer service standards,
- technical standards,
- consumer electronics equipment compatibility, and
- emergency alert systems.
The FCC recently ruled that all cable customers, including NCP-Six, must be
allowed to purchase cable converters from third parties and established a
multi-year phase-in during which security functions, which would remain in the
operator's exclusive control, would be unbundled from basic converter functions,
which could then be satisfied by third party vendors.
The FCC has the authority to enforce its regulations through the imposition
of substantial fines, the issuance of cease and desist orders and/or the
imposition of other administrative sanctions, such as the revocation of FCC
licenses needed to operate certain transmission facilities used in connection
with cable operations.
COPYRIGHT
NCP-Six is also subject to federal copyright licensing covering carriage of
television and radio broadcast signals. In exchange for filing certain reports
and contributing a percentage of their revenues to a federal copyright royalty
pool, NCP-Six can obtain blanket permission to retransmit copyrighted material
included in broadcast signals. Effective July 1, 2000, the federal Copyright
Office increased the cable compulsory license rates used to calculate cable
systems' copyright payments under the cable compulsory
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license. The possible modification or elimination of this compulsory copyright
license is the subject of continuing legislative review and could adversely
affect NCP-Six's ability to obtain desired broadcast programming. We cannot
predict the outcome of this legislative activity. Copyright clearances for
nonbroadcast programming services are arranged through private negotiations.
Cable operators distribute locally originated programming and advertising
that use music controlled by the two principal major music performing rights
organizations, the American Society of Composers, Authors and Publishers (ASCAP)
and Broadcast Music, Inc. (BMI). The cable industry has had a long series of
negotiations and adjudications with both organizations. A prior voluntarily
negotiated settlement with BMI has now expired, and is subject to further
proceedings. The governing rate court recently set retroactive and prospective
cable industry rates for ASCAP music based on the previously negotiated BMI
rate. Although we cannot predict the ultimate outcome of these industry
proceedings or the amount of any license fees NCP-Six may be required to pay for
past and future use of association-controlled music, we do not believe these
license fees will be significant to NCP-Six's business and operations.
STATE AND LOCAL REGULATION
NCP-Six's cable television systems generally are operated pursuant to
nonexclusive franchises granted by a municipality or other state or local
government entity in order to cross public rights-of-way. Federal law now
prohibits local franchising authorities from granting exclusive franchises or
from unreasonably refusing to award additional or renew existing franchises.
Cable franchises generally are granted for fixed terms and in many cases
include monetary penalties for non-compliance and may be terminable if the
franchisee fails to comply with material provisions. The specific terms and
conditions of franchises vary materially among jurisdictions. Each franchise
generally contains provisions governing cable operations, service rates,
franchising fees, system construction and maintenance obligations, system
channel capacity, design and technical performance, customer service standards,
and indemnification protections. A number of states subject cable systems to the
jurisdiction of centralized state governmental agencies, some of which impose
regulation of a character similar to that of a public utility. Although local
franchising authorities have considerable discretion in establishing franchise
terms, there are certain federal limitations. For example, local franchising
authorities cannot insist on franchise fees exceeding 5% of the system's gross
cable-related revenues, cannot dictate the particular technology used by the
system, and cannot specify video programming other than identifying broad
categories of programming.
Federal law contains renewal procedures designed to protect incumbent
franchisees against arbitrary denials of renewal. Even if a franchise is
renewed, the local franchising authority may seek to impose new and more onerous
requirements, such as significant upgrades in facilities and service or
increased franchise fees as a condition of renewal. Similarly, if a local
franchising authority's consent is required for the sale of a cable system or
franchise, the local franchising authority may attempt to impose more burdensome
or onerous franchise requirements in connection with a request for consent. The
Cable Act requires franchising authorities to act on any franchise transfer
request within 120 days after receipt by the franchising authority of all
information required by FCC regulations. Approval is deemed to be granted if the
franchising authority fails to act within such 120-day period. Historically,
most of NCP-Six's franchises have been renewed and transfer consents granted.
Under the 1996 Telecom Act, local franchising authorities are prohibited
from limiting, restricting, or conditioning the provision of competitive
telecommunications services except for certain "competitively neutral"
requirements necessary to manage public rights of way. In addition, local
franchising authorities may not require NCP-Six to provide any
telecommunications service or facilities, other than institutional networks
under certain circumstances, as a condition of an initial cable franchise grant,
franchise renewal, or franchise transfer. The 1996 Telecom Act also provides
that franchising fees are limited to an operator's cable-related revenues and do
not apply to revenues that a NCP-Six derives from providing new
telecommunications services.
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LEGAL PROCEEDINGS
NCP-Six is not subject to any material legal proceedings.
NCP-SIX'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The Proposed Transaction is not a result of insufficient working capital or
declining results of operations. NCP-Six has historically generated significant
net losses due, in part, to non-cash charges to income for depreciation and
amortization. Prior to the deduction for these non-cash items, NCP-Six has
generated sufficient operating income to service its debt and achieve certain
levels of cash distributions to unaffiliated limited partners in prior years.
Although quarterly cash distributions are not currently being made to
unaffiliated limited partners, it is anticipated that quarterly distributions
could possibly be reinstated in the future if the Proposed Transaction is not
consummated and certain amendments to NCP-Six's bank loan agreement can be
negotiated. The amounts and timing of any future distributions are dependent in
part on NCP-Six's ability to increase cash flow from operations.
NCP-Six's current revolving credit and term loan facility matures on June
30, 2001 with a projected outstanding principal balance of approximately
$28,215,000 due and payable on that date. Should NCP-Six continue its operations
beyond this date an amendment to the existing loan agreement would be required
to extend the loan maturity and revise certain financial covenants. An agreement
was reached with NCP-Six's lenders to extend the loan maturity to June 30, 2001
to allow sufficient time to close the Adelphia Transaction and the Proposed
Transaction. It is probable that any agreement by the lenders to further extend
the loan maturity beyond June 30, 2001 would be conditioned upon an amendment to
the NCP-Six Partnership Agreement to extend the life of NCP-Six, which currently
expires on December 31, 2001. Proposed Amendment No. 2 to the NCP-Six
Partnership Agreement is aimed at effectuating such an extension, and if
approved by the requisite majority of limited partner interests will result in
extending the life of NCP-Six for six additional years until December 31, 2007.
If the Adelphia Transaction and Proposed Transaction are closed, Proposed
Amendment No. 1 will be ineffective since NCP-Six will have sold all of its
operating assets which will lead to dissolution of the partnership pursuant to
the NCP-Six Partnership Agreement. In our opinion, subject to the extension of
the term of the partnership, amendments to the loan agreement could be obtained
from the lenders at a cost and on terms that would not adversely affect
NCP-Six's ability to continue operating as a going concern.
RESULTS OF OPERATIONS FOR 2000 AND 1999
Total Revenue. Revenues totaled $15,221,887 for the year ended December
31, 2000, representing an increase of approximately 1% over the same period in
1999. Of these revenues, $11,025,826 (72%) was derived from basic service
charges, $1,379,913 (9%) from premium services, $948,969 (6%) from tier
services, $331,125 (2%) from installation charges, $397,470 (3%) from service
maintenance contracts, $581,281 (4%) from advertising, and $557,303 (4%) from
other sources. The April 1999 disposition of the Sandersville System decreased
revenues approximately $189,000 or 1%. Assuming the Sandersville System was
disposed of at the beginning of each of the respective periods, revenues would
have increased approximately 2%. The growth in revenue is attributable to rate
increases implemented in the Partnership's systems.
Operating Expenses. Operating expenses totaled $1,161,419 for the year
ended December 31, 2000, representing a decrease of approximately 12% over the
same period in 1999. Excluding the impact of the Sandersville System
disposition, operating expenses would have decreased approximately 10% for the
year ended December 31, 2000. This is primarily due to decreased operating
salaries, regional management expense, system maintenance costs offset by
increased vehicle operating expenses.
General and Administrative Expenses. General and administrative expenses
totaled $4,035,555 for the year ended December 31, 2000, representing a decrease
of approximately 1% over the same period in 1999. Excluding the impact of the
Sandersville System disposition, general and administrative expenses
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would have increased approximately 1.3% for the year ended December 31, 2000.
This increase is primarily attributable to: (i) increases in salary and benefit
costs due to cost of living adjustments; (ii) increases in revenue based
expenses such as management fees and franchise fees as well as increased
property taxes.
Programming Expenses. Programming expenses totaled $3,968,492 for the year
ended December 31, 2000, representing a 1% increase over the same period in
1999. Adjusting for the Sandersville System disposition, programming expenses
would have increased approximately 4% for the year ended December 31, 2000
compared to the same period in 1999. This is mainly due to higher costs charged
by various program suppliers offset by reduced local programming expense.
Depreciation and Amortization Expenses. Depreciation and amortization
expenses totaled $4,468,532 for the year ended December 31, 2000, representing a
2% increase over the same period in 1999. This is mainly due to depreciation on
plant and equipment acquired during the last year offset by assets becoming
fully depreciated during the year.
Interest Expense. Interest expense for the year ended December 31, 2000
increased approximately 5% over the same period in 1999. The average bank debt
decreased from $30,169,000 in 1999 to $28,590,000 during 2000, and the
Partnership's effective interest rate increased from 8.18% in 1999 to 8.59% in
2000.
RESULTS OF OPERATIONS FOR YEARS ENDED 1999 AND 1998
Total Revenue. Total revenue reached $15,005,218 for the year ended
December 31, 1999, representing an increase of approximately 2% over 1998. Of
the 1999 revenue, $10,781,941 (72%) is derived from subscriptions to basic
services, $1,509,949 (10%) from subscriptions to premium services, $846,215 (6%)
from subscriptions to tier services, $507,932 (3%) from advertising, $384,380
(3%) from service maintenance revenue, $367,300 (2%) from installation charges
and $607,501 (4%) from other sources. The increase in revenue is attributable
primarily to rate increases placed into effect in August 1999 as well as new
product services introduced in 1999. In April 1999, the Partnership sold the
cable television system and assets relating to its Sandersville, Mississippi
system, resulting in the disposition of approximately 1,400 subscribers and
decreased revenues approximately $200,000 or 2%. Assuming the Sandersville,
Mississippi system was disposed of at the beginning of each of the respective
periods, revenues would have increased approximately 4%.
The following table displays historical average rate information for
various services offered by the Partnership's systems (amounts per subscriber
per month):
1999 1998 1997 1996 1995
------ ------ ------ ------ ------
Basic Rate.................................... $26.50 $24.20 $23.00 $22.24 $21.53
Tier Rate..................................... 8.50 7.65 6.90 6.35 5.95
HBO Rate...................................... 10.25 10.50 11.35 11.25 11.10
Cinemax Rate.................................. 7.70 7.30 8.70 8.50 8.25
Showtime Rate................................. 7.95 6.30 4.50 8.45 8.45
Movie Channel Rate............................ 6.00 6.60 -- -- 7.00
Disney Rate................................... 6.50 6.20 5.10 6.00 6.75
Encore Rate................................... 1.50 1.50 -- -- --
Starz Rate.................................... 8.50 8.50 -- -- --
Service Contract Rate......................... 2.30 2.35 2.60 2.65 2.65
Operating Expenses. Operating expenses totaled $1,320,255 for the year
ended December 31, 1999, representing an increase of approximately 5% over the
same period in 1998. Excluding the impact of the disposition of the
Sandersville, Mississippi system, operating expenses would have increased
approximately 9% for the year. This is primarily due to increased operating
salaries and pole rental expense offset by decreased system maintenance expenses
and drop materials. Salary and benefit costs are a major component of operating
expenses. Employee wages are reviewed annually and, in most cases, increased
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based on cost of living adjustments and other factors. Therefore, management
expects operating expenses to increase in future years.
General and Administrative Expenses. General and administrative expenses
totaled $4,064,866 for the year ended December 31, 1999, representing an
increase of approximately 7% over the same period in 1998. Excluding the impact
of the Sandersville, Mississippi system disposition, general and administrative
expenses would have increased approximately 10% compared to the same period in
1998. This is due to higher revenue based expenses such as management fees and
franchise fees as well as increased utilities, legal expenses, property taxes
and bad debt expense offset by reduced billing expenses, marketing expense and
copyright fees. Significant general and administrative expenses are based on
revenues. As the Partnership's revenue increases the trend of increased
administrative expenses is expected to continue.
Programming Expenses. Programming expenses totaled $3,915,701 for the year
ended December 31, 1999, representing an increase of approximately 3% over 1998.
Adjusting for the Sandersville, Mississippi system disposition, programming
expenses would have increased approximately 6% compared to the same period in
1998. This is mainly due to higher costs charged by various program suppliers as
well as increased advertising expenses and production expense. Programming
expenses consist mainly of payments made to the suppliers of various cable
programming services. Since these costs are based on the number of subscribers
served, future subscriber increases will cause the trend of increasing
programming costs to continue. Additionally, rate increases from program
suppliers, as well as new fees associated with the launch of additional channels
will also contribute to increased programming costs.
Depreciation and Amortization Expenses. Depreciation and amortization
expenses totaled $4,392,073 for the year ended December 31, 1999, representing
an increase of approximately 2% over the same period in 1998. This increase is
due to depreciation and amortization on purchases of plant and equipment in 1999
offset by assets becoming fully depreciated.
Interest Expense. Interest expense for the 1999 decreased approximately 7%
over 1998. The average bank debt decreased from $31,373,000 during 1998 to
$30,169,000 during 1999, offset by an increase to the Partnership's effective
interest rate from 7.88% in 1998 to 8.18% in 1999.
SELECTED QUARTERLY FINANCIAL DATA
The following unaudited selected quarterly financial data for each of the
four quarters ending in years 2000 and 1999 have been prepared by the Managing
General Partner.
QUARTERS ENDED
-------------------------------------------------------------------------------------
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30,
2000 2000 2000 2000 1999 1999
------------ ------------- ---------- ---------- ------------ -------------
Revenue.................. $3,852,433 $3,812,503 $3,803,536 $3,753,415 $3,798,006 $3,709,213
Operating income......... $ 188,723 $ 477,807 $ 465,645 $ 455,714 $ 93,778 $ 429,065
Gain (loss) on retirement
of assets.............. $ (162,743) $ (108,898) $ -- $ 4,708 $ (273,689) $ (58,045)
Net income (loss)........ $ (636,562) $ (309,847) $ (195,891) $ (184,093) $ (795,894) $ (261,347)
Net income (loss) per
limited partner unit
(weighted average)..... $ (21) $ (10) $ (7) $ (6) $ (26) $ (9)
QUARTERS ENDED
-----------------------
JUNE 30, MARCH 31,
1999 1999
---------- ----------
Revenue.................. $3,765,208 $3,732,791
Operating income......... $ 441,461 $ 348,019
Gain (loss) on retirement
of assets.............. $1,662,267 $ --
Net income (loss)........ $1,467,256 $ (311,159)
Net income (loss) per
limited partner unit
(weighted average)..... $ 49 $ (10)
LIQUIDITY AND CAPITAL RESOURCES
The Partnership's primary sources of liquidity are cash flow provided from
operations and availability under an $8,000,000 revolving credit line, of which
approximately $5,650,000 was outstanding as of December 31, 2000. Based on
management's analysis, the Partnership's cash flow from operations and amounts
available for borrowing under the Partnership's loan agreement are sufficient to
cover operating costs and planned capital expenditures up to the expected
liquidation date of the Partnership. Under the terms of the Partnership's
revolving credit and term loan agreement, as extended, all amounts outstanding
under the note payable become due and payable on June 30, 2001. The
Partnership's continuing operations will not provide
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sufficient liquidity to satisfy this obligation at its stated maturity.
Alternatives available to the Partnership include a sale of a portion or all of
its assets to generate proceeds sufficient to repay the outstanding debt or to
renegotiate the terms of the credit agreement with its lenders to extend the
maturity date. Management believes agreement by the lenders to extend the
maturity date would be contingent upon the approval of the unaffiliated limited
partners to extend the expiration of the NCP-Six, which currently expires on
December 31, 2001.
The General Partners are currently formulating a proposal to liquidate the
assets of the partnership, which, in the opinion of the Managing General
Partner, would provide sufficient proceeds to retire all the Partnership's
obligations. Such a proposal would require approval by a majority in interest of
unaffiliated limited partners. It is anticipated this liquidation would occur in
2001. Based on preliminary discussions with the lenders currently providing
NCP-Six with its existing credit, management and those lenders believe it is not
unreasonable that NCP-Six could arrange financing to continue its operations if
necessary, assuming no deterioration in its operations and the bank credit
markets remain open.
During the year ended December 31, 2000, NCP-Six's primary source of
liquidity was cash provided from operations. The Partnership generates cash on a
monthly basis through the monthly billing of subscribers for cable services.
Losses from uncollectible accounts have not been material. During the year ended
December 31, 2000, cash generated from monthly billings was sufficient to meet
the Partnership's needs for working capital, capital expenditures and scheduled
debt service.
Under the terms of NCP-Six's loan agreement with its syndicated lending
group led by First Union National Bank as Administrative Agent, NCP-Six has
agreed to restrictive covenants which require the maintenance of certain ratios
including a senior debt to annualized operating cash flow ratio of no more than
5.25 to 1.00, and an annual operating cash flow to interest expense ratio of not
less than 2.25 to 1.00. As of December 31, 2000, NCP-Six was in compliance with
its required financial covenants.
As of the date of this filing, the balance under NCP-Six's loan agreement
is $28,215,281. Certain fixed rate agreements expired during the third quarter
of 2000. As of the date of this filing, interest rates on the loan were as
follows: $28,215,281 fixed at Libor based rate of 8.5% expiring March 28, 2001.
The above includes a margin paid to the lender based on overall leverage, and
may increase or decrease as the Partnership's leverage fluctuates.
CAPITAL EXPENDITURES AND IMPROVEMENTS
Cable television systems require continuous upgrades and maintenance to
remain competitive.
NCP-Six does not, however, have any current plans to accelerate any maintenance
or improvements to its systems. Instead, all currently scheduled capital
improvements are within the ordinary course of NCP-Six's standard operations. As
of February 1, 2001, those currently scheduled improvements included digital
programming equipment for the Starkville, Philadelphia and Highlands Systems at
an estimated cost of $863,000.
During the year ended December 31, 2000, NCP-Six incurred approximately
$2,054,000 of capital expenditures. Those expenditures included ongoing upgrades
to the Starkville and Forest, Mississippi, and Barnwell, South Carolina systems,
and the launch of digital programming services in Starkville, Mississippi.
During 1999, the Partnership incurred approximately $2,660,000 in capital
expenditures. These expenditures included the ongoing system upgrade to 550 MHz
and a vehicle replacement in the Starkville System, the completion of a system
upgrade to 450 MHz in the Koscuisko System, the continued system upgrade to 450
MHz, a vehicle replacement and channel additions in the Philadelphia System, the
continued deployment of fiber in the Highlands System, a vehicle replacement and
a standby generator in the Bennettsville System and a vehicle replacement and
continued system upgrade to 450 MHz in the Barnwell System, as well as various
line extensions in all of the systems.
During 1998, NCP-Six incurred approximately $2,820,000 in capital
expenditures. These expenditures included the continued construction of a fiber
backbone in the Starkville System, the continuation of a
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system upgrade to 450 MHz in the Kosciusko System, vehicle replacements and a
continued system upgrade to 450 MHz in the Philadelphia System, the continued
deployment of fiber in the Highlands System, computer hardware and software
upgrades in the Bennettsville System and the purchase of a new office building
and system upgrade to 450 MHz in the Barnwell System, as well as various line
extensions in all of the systems.
RECENT ACQUISITIONS AND DISPOSITIONS
On April 30, 1999, NCP-Six sold the assets of its cable television system
serving approximately 1,400 subscribers in and around the communities of
Sandersville, Mississippi. The sales price for the system was $1.9 million, and
the net proceeds were utilized to reduce outstanding debt. NCP-Six determined to
sell the Sandersville system due to the significant "overbuild" situation facing
the system and the surrounding geographic area. Due to the overbuild and lack of
other interested purchasers for the system, NCP-Six sold the Sandersville system
to the overbuilder.
On January 2, 1998, NCP-Six purchased cable television systems serving
approximately 11,200 subscribers in and around the communities of Allendale,
Bamberg, Barnwell and Bennettsville, South Carolina. The purchase price of these
systems was $20.5 million. NCP-Six borrowed approximately $20.47 million under
an amended and restated revolving credit and term loan agreement with its
lending group, of which First Union National Bank acts as agent, to finance the
acquisition of the South Carolina cable systems.
AFFILIATES OF NCP-SIX
NCP-Six is a Washington limited partnership with no directors or officers.
The managing general partner of NCP-Six is Northland Communications Corporation,
a Washington corporation. The administrative general partner of NCP-Six is FN
Equities Joint Venture, a California general partnership. To the best of our
knowledge, as of December 31, 2000, no person owned more than five percent of
any class of NCP-Six's voting securities. We and our affiliates collectively own
less than one percent of the outstanding units of limited partnership of
NCP-Six.
MANAGEMENT AND BENEFICIAL OWNERSHIP OF NCP-SIX
MANAGEMENT OF NCP-SIX
GENERAL
NCP-Six is a Washington limited partnership with no directors or officers.
The managing general partner of NCP-Six is Northland Communications Corporation,
a Washington corporation. The administrative general partner of NCP-Six is FN
Equities Joint Venture, a California joint venture.
The sole partners of the administrative general partner are FN Equities,
Inc., FN Network Partners, Ltd., a California limited partnership, and John
Simmers, the sole owner of FN Equities. The principal business of each of the
administrative general partner and FN Equities is to provide administrative
services as administrative general partner of cable television limited
partnerships. FN Network Partners is an investment partnership. The address of
the principal executive offices of each of the administrative general partner,
FN Equities, FN Network Partners and John Simmers is 2780 Sky Park Drive, Suite
300, Torrance, California 90505.
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OFFICERS AND DIRECTORS OF NORTHLAND COMMUNICATIONS CORPORATION
The following table sets forth information about the executive officers and
directors of Northland Communications Corporation:
NAME AGE POSITION
---- --- --------
John S. Whetzell........................... 59 Board Chairman and President
Richard I. Clark........................... 43 Director, Vice President, Assistant
Treasurer and Assistant Secretary
John E. Iverson............................ 64 Director and Secretary
Gary S. Jones.............................. 43 Vice President and Chief Financial Officer
Richard J. Dyste........................... 55 Vice President, Technical Services
H. Lee Johnson............................. 57 Divisional Vice President
R. Gregory Ferrer.......................... 45 Vice President and Treasurer
Matthew J. Cryan........................... 36 Vice President, Budgets and Planning
Laura N. Williams.......................... 33 Vice President and Senior Counsel
JOHN S. WHETZELL is the founder of Northland Communications Corporation and
has been President since its inception and a Director since March 1982. Mr.
Whetzell became Chairman of the Board of Directors in December 1984. He also
serves as President and Chairman of the Board of Northland Telecommunications
Corporation and each of its subsidiaries. He has been involved with the cable
television industry for over 26 years. Between March 1979 and February 1982, he
was in charge of the Ernst & Whinney national cable television consulting
services. Mr. Whetzell first became involved in the cable television industry
when he served as the Chief Economist of the Cable Television Bureau of the FCC
from May 1974 to February 1979. He provided economic studies to support the
deregulation of cable television both in federal and state arenas. He
participated in the formulation of accounting standards for the industry and
assisted the FCC in negotiating and developing the pole attachment rate formula
for cable television. His undergraduate degree is in economics from George
Washington University, and he has an MBA degree from New York University.
RICHARD I. CLARK, an original incorporator of Northland Communications
Corporation, serves as Vice President, Assistant Secretary and Assistant
Treasurer of Northland Communications Corporation. He also serves as Vice
President, Assistant Secretary and Treasurer of Northland Telecommunications
Corporation. Mr. Clark has served on the Board of Directors of both Northland
Communications Corporation and Northland Telecommunications Corporation since
July 1985. In addition to his other responsibilities, Mr. Clark is responsible
for the administration and investor relations activities of Northland, including
financial planning and corporate development. From July 1979 to February 1982,
Mr. Clark was employed by Ernst & Whinney in the area of providing cable
television consultation services and has been involved with the cable television
industry for nearly 22 years. He has directed cable television feasibility
studies and on-site market surveys. Mr. Clark has assisted in the design and
maintenance of financial and budget computer programs, and he has prepared
documents for major cable television companies in franchising and budgeting
projects through the application of these programs. In 1979, Mr. Clark graduated
cum laude from Pacific Lutheran University with a Bachelor of Arts degree in
accounting.
JOHN E. IVERSON is the Secretary of Northland Communications Corporation
and has served on the Board of Directors since December 1984. He also is the
Secretary and serves on the Board of Directors of Northland Telecommunications
Corporation and each of its subsidiaries. He is currently a member in the law
firm of Ryan, Swanson & Cleveland P.L.L.C. He is a member of the Washington
State Bar Association and American Bar Association and has been practicing law
for more than 38 years. Mr. Iverson is the past president and a Trustee of the
Pacific Northwest Ballet Association. Mr. Iverson has a Juris Doctor degree from
the University of Washington.
GARY S. JONES is Vice President and Chief Financial Officer for Northland
Communications Corporation. Mr. Jones joined Northland in March 1986 as
Controller and has been Vice President of Northland Telecommunications
Corporation and each of its subsidiaries since October 1986. Mr. Jones is
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responsible for cash management, financial reporting and banking relations for
Northland and is involved in the acquisition and financing of new cable systems.
Prior to joining Northland, Mr. Jones was employed by the Certified Public
Accounting firm of Laventhol & Horwath from 1980 to 1986. Mr. Jones received his
Bachelor of Arts degree in Business Administration with a major in accounting
from the University of Washington in 1979.
RICHARD J. DYSTE has served as Vice President -- Technical Services of
Northland Telecommunications Corporation and each of its subsidiaries since
April 1987. Mr. Dyste is responsible for planning and advising all Northland
cable systems with regard to technical performance as well as system upgrades
and rebuilds. He is a past president and current member of the Society of Cable
Telecommunications Engineers, Inc. Mr. Dyste joined Northland in 1986 as an
engineer and served as Operations Consultant to Northland Communications
Corporation from August 1986 until April 1987. From 1977 to 1985, Mr. Dyste
owned and operated Bainbridge TV Cable. He is a graduate of Washington
Technology Institute.
H. LEE JOHNSON has served as Divisional Vice President for Northland
Communications Corporation's Statesboro, Georgia regional office since March
1994. He is responsible for the management of systems serving subscribers in
Alabama, Georgia, Mississippi, North Carolina and South Carolina. Prior to his
association with Northland he served as Regional Manager for Warner
Communications, managing four cable systems in Georgia from 1968 to 1973. Mr.
Johnson has also served as President of Sunbelt Finance Corporation and was
employed as a System Manager for Statesboro CATV when Northland purchased the
system in 1986. Mr. Johnson has been involved in the cable television industry
for over 32 years and is a current member of the Society of Cable Television
Engineers. He is a graduate of Swainsboro Technical Institute and has attended
numerous training seminars, including courses sponsored by Jerrold Electronics,
Scientific Atlanta, The Society of Cable Television Engineers and CATA.
R. GREGORY FERRER joined Northland Communications Corporation in March 1984
as Assistant Controller and serves as Vice President and Treasurer of Northland
Communications Corporation. Mr. Ferrer also serves as Vice President and
Assistant Treasurer of Northland Telecommunications Corporation. Mr. Ferrer is
responsible for coordinating all of Northland's property tax filings, insurance
requirements and system programming contracts as well as interest rate
management and other treasury functions. Prior to joining Northland, he was a
Certified Public Accountant at Benson & McLaughlin, a local public accounting
firm, from 1981 to 1984. Mr. Ferrer received his Bachelor of Arts in Business
Administration from Washington State University with majors in marketing in 1978
and accounting and finance in 1981.
MATTHEW J. CRYAN is Vice President -- Budgets and Planning and has been
with Northland Communications Corporation since September 1990. Mr. Cryan is
responsible for the development of current and long-term operating budgets for
all Northland entities. Additional responsibilities include the development of
financial models used in support of acquisition financing, analytical support
for system and regional managers, financial performance monitoring and reporting
and programming analysis. Prior to joining Northland, Mr. Cryan was employed as
an analyst with NKV Corp., a securities litigation support firm located in
Redmond, Washington. Mr. Cryan graduated from the University of Montana in 1988
with honors and holds a Bachelor of Arts in Business Administration with a major
in finance.
LAURA N. WILLIAMS is Vice President and Senior Counsel for Northland
Communications Corporation and has served in this role since August 2000. Prior
to this time, she served as Associate Counsel for each of the Northland entities
from August 1995. She is a member of the Washington State Bar Association,
American Bar Association and Women in Telecommunications. Ms. Williams received
her B.S. in Business Administration with a major in finance and an M.B.A. from
California State University, Long Beach, and has a Juris Doctor degree from
Seattle University School of Law.
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OFFICERS AND DIRECTORS OF FN EQUITIES JOINT VENTURE
The following table sets forth information about the executive officers and
directors of FN Equities:
NAME AGE POSITION
---- --- --------
Miles Z. Gordon................ 52 President and Director
John S. Simmers................ 49 Vice President, Secretary and Director
MILES Z. GORDON is President of FN Equities and President and Chief
Executive Officer of Financial Network Investment Corporation (FNIC), and has
held those positions since 1983. From 1979 through April 1983 he was President
of University Securities Corporation. In 1978, Mr. Gordon was engaged in the
private practice of law, and from 1973 through 1978, he was employed by the
Securities and Exchange Commission. He presently serves as Chairman of the
Securities Industry Association Independent Contractor Firms Committee. Mr.
Gordon was also Chairman and a member of the NASD District Business Conduct
Committee and a former member of the NASD Board of Governors. He is past
president of the California Syndication Forum and has also served on several
committees for the Securities Industry Association.
JOHN S. SIMMERS is Vice President and Secretary of FN Equities and
Executive Vice President and Chief Operating Officer of Financial Network
Investment Corporation and has held those positions since 1983. From June 1980
through April 1983, he was Executive Vice President of University Securities
Corporation, Vice President of University Capital Corporation, and Vice
President of University Asset Management Group. From 1974 through May 1980, he
was employed by the National Association of Securities Dealers.
BENEFICIAL OWNERSHIP
Security ownership of management in NCP-Six as of September 30, 2000 is as
follows:
PERCENT OF AMOUNT AND NATURE OF
NAME AND ADDRESS OF BENEFICIAL OWNER TITLE OF CLASS BENEFICIAL OWNERSHIP
- ------------------------------------ -------------- --------------------
Northland Communications Corporation General Partner's Interest (See Note A)
1201 Third Avenue (See Note A)
Suite 3600
Seattle, WA 98101
FN Equities Joint Venture General Partner's Interest (See Note B)
2780 Skypark Dr. (See Note B)
Suite 300
Torrance, CA 90505
- -------------------------
Note A: Northland has a 1% interest in NCP-Six, which increases to a 20%
interest in NCP-Six when the unaffiliated limited partners have received
100% of their aggregate cash contributions. The natural person who
exercises voting and/or investment control over these interests is John
S. Whetzell.
Note B: FN Equities Joint Venture has no interest in NCP-Six until the
unaffiliated limited partners have received 100% of their aggregate cash
contributions, at which time FN Equities Joint Venture will have a 5%
interest in NCP-Six. The natural person who exercises voting and/or
investment control over these interests is John S. Simmers.
CHANGES IN CONTROL
Northland has pledged its ownership interest as managing general partner of
NCP-Six to NCP-Six's lender as collateral pursuant to the terms of the term loan
agreement between NCP-Six and its lender.
The principal business of Northland historically has been locating cable
television systems, negotiating for their acquisition, forming limited
partnerships to own the systems, arranging for the sale of limited
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partnership interests to investors, managing NCP-Six, and liquidating
partnership assets upon dissolution. Northland is a wholly-owned subsidiary of
Northland Telecommunications Corporation, a Washington corporation. The address
of the principal executive offices of each of Northland and Northland
Telecommunications Corporation is 1201 Third Avenue, Suite 3600, Seattle,
Washington 98101.
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FINANCIAL STATEMENTS
Included with this proxy statement, starting on the following page, are
NCP-Six's audited financial statements for fiscal years ending as of December
31, 2000, 1999 and 1998. Financial statements for prior years and periods have
previously been distributed to the unaffiliated limited partners on an ongoing
basis. In addition, following the partnership's audited financial statements is
selected quarterly financial data, as well as pro-forma financial reports
prepared as of December 31, 2000 by the Managing General Partner based on the
anticipated effects of the Adelphia Transaction.
If you desire any additional information regarding financial statements,
please contact the Managing General Partner.
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NORTHLAND CABLE PROPERTIES SIX LIMITED PARTNERSHIP
AUDITED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDING AS OF DECEMBER 31, 2000, AND 1999
TOGETHER WITH AUDITORS' REPORT
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of
Northland Cable Properties Six Limited Partnership:
We have audited the accompanying balance sheets of Northland Cable
Properties Six Limited Partnership (a Washington limited partnership) as of
December 31, 2000 and 1999, and the related statements of operations, changes in
partners' deficit and cash flows for each of the three years in the period ended
December 31, 2000. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Northland Cable Properties
Six Limited Partnership as of December 31, 2000 and 1999, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States.
Seattle, Washington
January 26, 2001
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NORTHLAND CABLE PROPERTIES SIX LIMITED PARTNERSHIP
BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
2000 1999
------------ ------------
ASSETS
Cash........................................................ $ 1,281,380 $ 556,962
Accounts receivable, including $14,109 and $24,885 due from
affiliates in 2000 and 1999, respectively................. 739,232 806,712
Prepaid expenses and other assets........................... 85,506 78,012
Investment in cable television properties:
Property and equipment.................................... 30,285,589 28,912,812
Less -- Accumulated depreciation.......................... (16,325,363) (14,639,656)
------------ ------------
13,960,226 14,273,156
Franchise agreements (net of accumulated amortization of
$15,438,907 and $13,309,803 in 2000 and 1999,
respectively)............................................. 11,788,486 13,917,591
Acquisition costs (net of accumulated amortization of
$154,766 and $107,709 in 2000 and 1999, respectively)..... 82,806 129,862
Loan fees and other intangibles (net of accumulated
amortization of $1,067,714 and $911,862 in 2000 and 1999,
respectively)............................................. 591,176 841,238
------------ ------------
Total investment in cable television properties...... 26,422,694 29,161,847
------------ ------------
Total assets......................................... $ 28,528,812 $ 30,603,533
============ ============
LIABILITIES AND PARTNERS' DEFICIT
Liabilities:
Accounts payable.......................................... $ 188,372 $ 607,156
Other current liabilities................................. 1,109,212 719,404
Due to general partner and affiliates..................... 35,458 46,388
Deposits.................................................. 29,590 35,422
Subscriber prepayments.................................... 460,038 412,628
Note payable.............................................. 28,215,281 28,965,281
------------ ------------
Total liabilities.................................... 30,037,951 30,786,279
------------ ------------
Commitments and Contingencies (Note 8)
Partners' Deficit:
General partners --
Contributed capital, net............................... (37,565) (37,565)
Accumulated deficit.................................... (104,541) (91,277)
------------ ------------
(142,106) (128,842)
------------ ------------
Limited partners --
Contributed capital, net -- 29,784 units in 2000 and
1999................................................. 8,982,444 8,982,444
Accumulated deficit.................................... (10,349,477) (9,036,348)
------------ ------------
(1,367,033) (53,904)
------------ ------------
Total liabilities and partners' deficit.............. $ 28,528,812 $ 30,603,533
============ ============
The accompanying notes are an integral part of these balance sheets.
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NORTHLAND CABLE PROPERTIES SIX LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
2000 1999 1998
----------- ----------- -----------
REVENUE............................................. $15,221,887 $15,005,218 $14,746,766
----------- ----------- -----------
Expenses:
Operating (including $270,067, $286,365 and
$285,212, net, paid to affiliates in 2000, 1999
and 1998, respectively)........................ 1,161,419 1,320,255 1,262,672
General and administrative (including $1,505,136,
$1,575,500 and $1,632,936, net, paid to
affiliates in 2000, 1999 and 1998,
respectively).................................. 4,035,555 4,064,866 3,790,975
Programming (including $95,703, $233,163 and
$241,521, net, paid to affiliates in 2000, 1999
and 1998, respectively)........................ 3,968,492 3,915,701 3,784,358
Depreciation and Amortization Expense............. 4,468,532 4,392,073 4,287,623
----------- ----------- -----------
Operating income............................... 1,587,889 1,312,323 1,621,138
Other Income (Expense):
Interest income................................... 45,351 26,668 17,932
Interest expense.................................. (2,495,892) (2,379,744) (2,566,743)
(Loss) gain on disposal of assets................. (266,933) 1,330,533 (229,940)
Amortization of loan fees and other............... (196,808) (190,924) (211,988)
----------- ----------- -----------
Net (loss) income.............................. $(1,326,393) $ 98,856 $(1,369,601)
=========== =========== ===========
Allocation of Net (Loss) Income:
General partners.................................. $ (13,264) $ 989 $ (13,696)
=========== =========== ===========
Limited partners.................................. $(1,313,129) $ 97,867 $(1,355,905)
=========== =========== ===========
Net (Loss) Income Per Limited Partnership Unit...... $ (44) $ 3 $ (46)
=========== =========== ===========
The accompanying notes are an integral part of these statements.
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NORTHLAND CABLE PROPERTIES SIX LIMITED PARTNERSHIP
STATEMENTS OF CHANGES IN PARTNERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
GENERAL LIMITED
PARTNERS PARTNERS TOTAL
--------- ----------- -----------
BALANCE, December 31, 1997........................... $(116,135) $ 1,212,134 $ 1,095,999
Repurchase of limited partnership units............ -- (4,000) (4,000)
Net loss........................................... (13,696) (1,355,905) (1,369,601)
--------- ----------- -----------
BALANCE, December 31, 1998........................... (129,831) (147,771) (277,602)
Repurchase of limited partnership units............ -- (4,000) (4,000)
Net income......................................... 989 97,867 98,856
--------- ----------- -----------
BALANCE, December 31, 1999........................... (128,842) (53,904) (182,746)
Net loss........................................... (13,264) (1,313,129) (1,326,393)
--------- ----------- -----------
BALANCE, December 31, 2000........................... $(142,106) $(1,367,033) $(1,509,139)
========= =========== ===========
The accompanying notes are an integral part of these statements.
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NORTHLAND CABLE PROPERTIES SIX LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
2000 1999 1998
----------- ----------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income................................ $(1,326,393) $ 98,856 $ (1,369,601)
Adjustments to reconcile net (loss) income to net
cash provided by operating activities:
Depreciation and amortization expense......... 4,468,532 4,392,073 4,287,623
Amortization of loan costs.................... 196,808 190,923 182,859
Loss (gain) on disposal of assets............. 266,933 (1,330,533) 229,940
Changes in certain assets and liabilities
Accounts receivable........................... (122,520) 131,092 (278,190)
Prepaid expenses and other assets............. (7,494) (120,998) 153,371
Accounts payable and other current
liabilities................................. (28,976) 144,817 224,658
Due to general partner and affiliates......... (10,930) (121,243) (12,090)
Deposits...................................... (5,832) (21,635) (35,036)
Subscriber prepayments........................ 47,410 (82,549) 85,225
----------- ----------- ------------
Net cash provided by operating
activities............................. 3,477,538 3,280,803 3,468,759
----------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment............... (2,054,270) (2,659,141) (2,820,143)
Acquisition of cable system...................... -- -- (20,500,000)
Proceeds from disposal of assets................. 202,700 1,726,026 500
Purchase of intangibles.......................... (151,550) (59,887) (77,199)
----------- ----------- ------------
Net cash used in investing activities.... (2,003,120) (993,002) (23,396,842)
----------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable...................... -- -- 20,473,427
Principal payments on notes payable.............. (750,000) (2,407,567) --
Repurchase of limited partnership units.......... -- (4,000) (4,000)
Loan fees and other costs........................ -- (26,179) (7,471)
----------- ----------- ------------
Net cash (used in) provided by financing
activities............................. (750,000) (2,437,746) 20,461,956
----------- ----------- ------------
Increase (Decrease) in Cash........................ 724,418 (149,945) 533,873
Cash, beginning of year............................ 556,962 706,907 173,034
----------- ----------- ------------
Cash, end of year.................................. $ 1,281,380 $ 556,962 $ 706,907
=========== =========== ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest........... $ 2,489,075 $ 2,373,440 $ 2,562,492
=========== =========== ============
The accompanying notes are an integral part of these statements.
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NORTHLAND CABLE PROPERTIES SIX LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2000
1. ORGANIZATION AND PARTNERS' INTERESTS:
Formation and Business
Northland Cable Properties Six Limited Partnership (the Partnership), a
Washington limited partnership, was formed on January 22, 1986. The Partnership
was formed to acquire, develop and operate cable television systems. The
Partnership began operations on November 3, 1986 by acquiring a cable television
system in Mississippi. Subsequently, additional cable television systems were
acquired in Mississippi, North Carolina and South Carolina. The Partnership has
35 nonexclusive franchises to operate cable systems for periods, which will
expire at various dates through 2017.
Northland Communications Corporation is the Managing General Partner (the
General Partner or Northland) of the Partnership. Certain affiliates of the
Partnership also own and operate other cable television systems. In addition,
the General Partner manages cable television systems for other limited
partnerships for which it is General Partner.
FN Equities Joint Venture, a California joint venture, is the
Administrative General Partner of the Partnership.
Contributed Capital, Commissions and Offering Costs
The capitalization of the Partnership is set forth in the accompanying
statements of changes in partners' deficit. No limited partner is obligated to
make any additional contribution.
The general partners purchased their 1% interest in the Partnership by
contributing $1,000 to Partnership capital.
Pursuant to the Partnership Agreement, brokerage fees paid to an affiliate
of the Administrative General Partner and other offering costs paid to the
General Partner were recorded as a reduction of limited partners' capital. The
Administrative General Partner received a fee for providing certain
administrative services to the Partnership.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Property and Equipment
Property and equipment are stated at cost. Replacements, renewals and
improvements are capitalized. Maintenance and repairs are charged to expense as
incurred.
Depreciation of property and equipment is provided using the straight-line
method over the following estimated service lives:
Buildings................................................... 20 years
Distribution plant.......................................... 10 years
Other equipment and leasehold improvements.................. 5 - 20 years
The Partnership periodically reviews the carrying value of its long-lived
assets, including property, equipment and intangible assets, whenever events or
changes in circumstances indicate that the carrying value may not be
recoverable.
Allocation of Cost of Purchased Cable Television Systems
The Partnership allocated the total contract purchase price of cable
television systems acquired as follows: first, to the estimated fair value of
net tangible assets acquired; then, to the franchise and other determinable
intangible costs; then any excess is allocated to goodwill.
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NORTHLAND CABLE PROPERTIES SIX LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
Intangible Assets
Costs assigned to franchise agreements, loan fees, acquisition costs and
other intangibles are being amortized using the straight-line method over the
following estimated useful lives:
Franchise agreements........................................ 10 - 20 years
Acquisition costs........................................... 5 years
Loan fees and other intangibles............................. 1 - 10 years
Revenue Recognition
Cable television service revenue, including service maintenance, is
recognized in the month service is provided to customers. Installation revenue
is recognized to the extent of direct selling costs when the installation is
complete. Advance payments on cable services to be rendered are recorded as
subscriber prepayments. Revenues resulting from the sale of local spot
advertising are recognized when the related advertisements or commercials appear
before the public. Local spot advertising revenues earned were $581,280,
$507,932 and $456,007, respectively, in 2000, 1999 and 1998.
Derivatives
The Partnership has only limited involvement with derivative financial
instruments and does not use them for trading purposes. They are used to manage
well-defined interest rate risks. The Partnership periodically enters into
interest rate swap agreements with major banks or financial institutions
(typically its bank) in which the Partnership pays a fixed rate and receives a
floating rate with the interest payments being calculated on a notional amount.
Gains or losses associated with changes in fair values of these swaps and the
underlying notional principal amounts are deferred and recognized against
interest expense over the terms of the agreement in the Partnership's statement
of operations.
Recently Issued Accounting Pronouncements
Statement of Financial Accounting Standards (SFAS) No. 133 -- In June 1998,
the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," and in June 2000 issued SFAS
138, "Accounting for Certain Derivative Instruments and Hedging Activities," an
amendment of SFAS 133. The statement establishes accounting and reporting
standards requiring that every derivative instrument (including certain
derivative instruments embedded in other contracts) be recorded in the balance
sheet as either an asset or liability measured at its fair value. The statement
requires that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. Special accounting
for qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the statement of operations, and requires that a
company must formally document, designate, and assess the effectiveness of
transactions that are subject to hedge accounting.
Pursuant to SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities -- Deferral of the Effective Date of FASB No. 133 -- an
Amendment to FASB Statement No. 133" the effective date of SFAS No. 133 has been
deferred until fiscal years beginning after January 15, 2000. SFAS No. 133
cannot be applied retroactively. SFAS No. 133 must be applied to (a) derivative
instruments and (b) certain derivative instruments embedded in hybrid contracts
that were issued, acquired, or substantively modified after December 31, 1998
(and, at the company's election, before January 1, 1999).
The Partnership had no outstanding interest rate swaps or other derivative
financial instruments at December 31, 2000.
94
102
NORTHLAND CABLE PROPERTIES SIX LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
Estimates Used in Financial Statement Presentation
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
3. TRANSACTIONS WITH GENERAL PARTNER AND AFFILIATES:
Management Fees
The General Partner receives a fee for managing the Partnership equal to 6%
of the gross revenues of the Partnership, excluding revenues from the sale of
cable television systems or franchises. The amount of management fees charged by
the General Partner was $913,313, $900,313 and $884,806 in 2000, 1999 and 1998,
respectively.
Income Allocation
All items of income, loss, deduction and credit are allocated 99% to the
limited partners and 1% to the general partners until the limited partners have
received aggregate cash distributions in an amount equal to aggregate capital
contributions. Thereafter, the general partners receive 25% and the limited
partners are allocated 75% of partnership income and losses. Prior to the
general partners receiving a distribution in any year, the limited partners must
receive distributions equal to at least 50% of their allocable share of net
income for such year, based on projections by the Managing General Partner of
the net income of the Partnership for the year. If cash distributions to the
general partners are deferred because of this 50% limitation, those deferred
cash distributions will be paid to the general partners in subsequent years or
upon liquidation of the Partnership. Any distributions other than from cash
flow, such as from the sale or refinancing of a system or upon dissolution of
the Partnership, will be determined according to contractual stipulations in the
Partnership Agreement.
The limited partners' total initial contributions to capital were
$15,000,000 ($500 per partnership unit). As of December 31, 2000, $3,817,997
($127.50 per partnership unit) has been distributed to the limited partners, and
the Partnership has repurchased $100,475 of limited partnership units (173 units
at $500 per unit and 43 units at $325 per unit).
Reimbursements
The General Partner provides or causes to be provided certain centralized
services to the Partnership and other affiliated entities. The General Partner
is entitled to reimbursement from the Partnership for various expenses incurred
by it or its affiliates on behalf of the Partnership allocable to its management
of the Partnership, including travel expenses, pole and site rental, lease
payments, legal expenses, billing expenses, insurance, governmental fees and
licenses, headquarters' supplies and expenses, pay television expenses,
equipment and vehicle charges, operating salaries and expenses, administrative
salaries and expenses, postage and office maintenance.
The amounts billed to the Partnership are based on costs incurred by
affiliates in rendering the services. The costs of certain services are charged
directly to the Partnership, based upon the personnel time spent by the
employees rendering the service. The cost of other services is allocated to the
Partnership and affiliates based upon relative size and revenue. Management
believes that the methods used to allocate services to the Partnership are
reasonable. Amounts charged for these services were $769,480, $719,456 and
$663,191 for 2000, 1999 and 1998, respectively.
95
103
NORTHLAND CABLE PROPERTIES SIX LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
In 2000, 1999 and 1998, the Partnership paid installation charges and
maintenance fees for billing system support provided by an affiliate, amounting
to $75,798, $73,965 and $79,590, respectively.
The Partnership has entered into operating management agreements with
affiliates managed by the General Partner. Under the terms of these agreements,
the Partnership or an affiliate serves as the executive managing agent for
certain cable television systems and is reimbursed for certain operating and
administrative expenses. The Partnership paid $25,788, $160,722 and $290,147,
net, under the terms of these agreements during 2000, 1999 and 1998,
respectively.
The Partnership pays monthly program license fees to Northland Cable News,
Inc. (NCN), an affiliate of the General Partner, for the rights to distribute
programming developed and produced by NCN. Total license fees paid to NCN during
2000, 1999 and 1998 were $0, $178,797 and $165,147, respectively.
Cable Ad Concepts, Inc. (CAC), an affiliate of the General Partner, was
formed in 1993 and began operations in 1994. CAC was organized to assist in the
development of local advertising markets and management and training of local
sales staff. CAC billed the Partnership $85,895, $69,752 and $57,611 in 2000,
1999 and 1998, respectively, for these services.
Due to General Partner and Affiliates
DECEMBER 31,
------------------
2000 1999
------- -------
Reimbursable operating costs and other................... 25,534 12,417
Other amounts due to affiliates, net..................... 9,924 33,971
------- -------
$35,458 $46,388
======= =======
4. PROPERTY AND EQUIPMENT:
DECEMBER 31,
--------------------------
2000 1999
----------- -----------
Land and buildings................................ $ 880,611 $ 858,198
Distribution plant................................ 27,278,014 26,230,081
Other equipment................................... 1,775,523 1,738,465
Leasehold improvements............................ 43,020 40,550
Construction in progress.......................... 308,421 45,518
----------- -----------
$30,285,589 $28,912,812
=========== ===========
5. OTHER CURRENT LIABILITIES:
DECEMBER 31,
----------------------
2000 1999
---------- --------
Programmer license fees.............................. $ 317,339 $ 52,159
Accrued property taxes............................... 263,174 133,728
Accrued franchise fees............................... 261,775 253,003
Other................................................ 266,924 280,514
---------- --------
$1,109,212 $719,404
========== ========
96
104
NORTHLAND CABLE PROPERTIES SIX LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
6. NOTE PAYABLE:
The Partnership's note payable consisted of a revolving credit and term
loan agreement, collateralized by a first lien position on all present and
future assets of the Partnership. The note's fair value is approximate to its
book value. Interest rates vary based on certain financial covenants; currently
8.50%. The maturity of the note has been extended to June 30, 2001 at which time
it is due in full.
Under the terms of the revolving credit and term loan agreement, the
Partnership has agreed to restrictive covenants which require the maintenance of
certain ratios, including an Annual Operating Cash Flow to Interest Expense
Ratio greater than 2.25 to 1, and a Senior Debt to Annualized Operating Cash
Flow Ratio of no more than 5.25 to 1, amongst others. The General Partner
submits quarterly debt compliance reports to the Partnership's creditor under
this agreement. As of December 31, 2000, the Partnership was in compliance with
the terms of the loan agreement.
7. INCOME TAXES:
Income taxes payable have not been recorded in the accompanying financial
statements because they are obligations of the partners. The federal and state
income tax returns of the Partnership are prepared and filed by the General
Partner.
The tax returns, the qualification of the Partnership as such for tax
purposes, and the amount of distributable partnership income or loss are subject
to examination by federal and state taxing authorities. If such examinations
result in changes with respect to the Partnership's qualification or in changes
with respect to the income or loss, the tax liability of the partners would
likely be changed accordingly.
There was no taxable income to the limited partners in any of the three
years in the periods ended December 31, 2000. Generally, subject to the
allocation procedures discussed in the following paragraph, taxable income to
the limited partners is different from that reported in the statements of
operations principally due to differences in depreciation and amortization
expense allowed for tax purposes and the amount recognizable under generally
accepted accounting principles. Traditionally, there are no other significant
differences between taxable income and net income reported in the statements of
operations.
The Partnership agreement provides that tax losses may not be allocated to
the Limited Partners if such loss allocation would create a deficit in the
Limited Partners' Capital Account. Such excess losses are reallocated to the
General Partner ("Reallocated Limited Partner Losses"). In general, in
subsequent years, 100% of the Partnership's net income is allocated to the
General Partner until the General Partner has been allocated net income in
amounts equal to the Reallocated Limited Partner Losses.
In general, under current federal income tax laws, a partner's allocated
share of tax losses from a partnership is allowed as a deduction on 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. Any excess losses over
adjusted basis may be carried forward to future tax years and are allowed as a
deduction to the extent the partner has an increase in his adjusted basis in the
Partnership through either an allocation of partnership income or additional
capital contributions to the Partnership.
In addition, the current tax law does not allow a taxpayer to use losses
from a business activity in which 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.
97
105
NORTHLAND CABLE PROPERTIES SIX LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
8. COMMITMENTS AND CONTINGENCIES:
Lease Arrangements
The Partnership leases certain tower sites, office facilities and pole
attachments under leases accounted for as operating leases. Rental expense
included in operations amounted to $231,248, $214,581 and $209,627 in 2000, 1999
and 1998, respectively. Minimum lease payments through the end of the lease
terms are as follows:
2001....................................................... $12,431
2002....................................................... 3,133
2003....................................................... 1,083
2004....................................................... 283
2005....................................................... 283
Thereafter................................................. 1,671
-------
$18,884
=======
Effects of Regulation
On February 8, 1996, the Telecommunications Act of 1996 (the 1996 Act) was
enacted. This act dramatically changed federal telecommunications laws and the
future competitiveness of the industry. Many of the changes called for by the
1996 Act will not take effect until the Federal Communications Commission (FCC)
issues new regulations which, in some cases, may not be completed for a few
years. Because of this, the full impact of the 1996 Act on the Partnership's
operations cannot be determined at this time. A summary of the provisions
affecting the cable television industry, more specifically those affecting the
Partnership's operations, follows.
Cable Programming Service Tier Regulation. FCC regulation of rates for
cable programming service tiers has been eliminated for small cable systems
owned by small companies. Small cable systems are those having 50,000 or fewer
subscribers which are owned by companies with fewer than 1% of national cable
subscribers (approximately 600,000) and having no more than $250 million in
annual revenue. The Partnership qualifies as a small cable company and all of
the Partnership's cable systems qualify as small cable systems. Basic tier rates
remain subject to regulations by the local franchising authority under most
circumstances until effective competition exists. The 1996 Act expands the
definition of effective competition to include the offering of video programming
services directly to subscribers in a franchised area served by a local
telephone exchange carrier, its affiliates or any multichannel video programming
distributor which uses the facilities of the local exchange carrier. The FCC has
not yet determined the penetration criteria that will trigger the presence of
effective competition under these circumstances.
Telephone Companies. The 1996 Act allows telephone companies to offer
video programming services directly to customers in their service areas
immediately upon enactment. They may provide video programming as a cable
operator fully subject to any provision of the 1996 Act, or a radio-based
multichannel programming distributor not subject to any provisions of the 1996
Act, or through nonfranchised "open video systems" offering nondiscriminatory
capacity to unaffiliated programmers, subject to select provisions of the 1996
Act. Although management's opinion is that the probability of competition from
telephone companies in rural areas is unlikely in the near future, there are no
assurances that such competition will not materialize.
The 1996 Act encompasses many other aspects of providing cable television
service including prices for equipment, discounting rates to multiple dwelling
units, lifting of anti-trafficking restrictions, cable-
98
106
NORTHLAND CABLE PROPERTIES SIX LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
telephone cross ownership provisions, pole attachment rate formulas, rate
uniformity, program access, scrambling and censoring of Public, Educational and
Governmental and leased access channels.
Self-Insurance
The Partnership began self-insuring for aerial and underground plant in
1996. Beginning in 1997, the Partnership began making quarterly contributions
into an insurance fund maintained by an affiliate which covers all Northland
entities and defrays a portion of any loss should the Partnership be faced with
a significant uninsured loss. To the extent the Partnership's losses exceed the
fund's balance, the Partnership absorbs any such loss. If the Partnership were
to sustain a material uninsured loss, such reserves could be insufficient to
fully fund such a loss. The capital cost of replacing such equipment and
physical plant, could have a material adverse effect on the Partnership, its
financial condition, prospects and debt service ability.
Amounts paid to the affiliate, which maintains the fund for the Partnership
and its affiliates, are expensed as incurred and are included in the statements
of operations. To the extent a loss has been incurred related to risks that are
self-insured, the Partnership records an expense and an associated liability for
the amount of the loss, net of any amounts to be drawn from the fund. For 2000,
1999 and 1998, respectively, the Partnership was charged $19,456, $20,197 and
$20,878 by the fund. As of December 31, 2000, the fund had a balance of
$509,135.
9. ACQUISITION OF SYSTEMS AND DISPOSITION OF ASSETS:
On January 2, 1998, the Partnership purchased cable television systems
located in and around the communities of Allendale, Bamberg, Barnwell and
Bennettsville, all in the state of South Carolina. The purchase price of these
systems was $20,500,000. The systems are operated from four headends and serve
11,200 subscribers.
The Partnership borrowed an additional $20,473,427 under an amended and
restated revolving credit and term loan agreement with its lender to finance the
acquisition of the South Carolina cable systems.
On April 30, 1999, the Partnership sold cable television systems serving
approximately 1,400 subscribers in and around the communities of Sandersville,
Heidelberg and Laurel, Mississippi. The system was sold at a sales price of
$1,900,000 of which the Partnership received $1,710,000. The remaining balance
of $190,000 was held in escrow for one year from the date of sale. The
Partnership used net proceeds of $1,540,000 to pay down the existing bank debt.
Pro Forma operating results of the Partnership for 1999 and 1998, assuming
the disposition described above had been completed as of the beginning of 1998
follows:
FOR THE YEAR ENDED
DECEMBER 31,
--------------------------
1999 1998
----------- -----------
(UNAUDITED) (UNAUDITED)
Revenue........................................... $14,183,800 $14,183,431
=========== ===========
Net loss.......................................... $(1,482,272) $(1,271,034)
=========== ===========
Net loss per limited partnership unit............. $ (50) $ (43)
=========== ===========
99
107
NORTHLAND CABLE PROPERTIES SIX LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
10. SUBSEQUENT EVENT:
The Partnership has filed a Preliminary Proxy Statement (Proxy) with the
Securities and Exchange Commission (SEC) which solicits votes for two separate
proposals. Upon clearance from the SEC, the Proxy will be delivered to the
limited partners for their vote. A vote of more than 50% of the outstanding
limited partnership units is required to approve each proposal. The first
proposal is to extend the term of the Partnership for six years until December
31, 2007. The second proposal will provide authority to sell all of its existing
assets, excluding the Bennettsville system, which is being sold to a third-party
in a separate transaction, to the Managing General Partner, or its affiliates,
for an aggregate price of $62,250,000. The Partnership's current revolving
credit and turn loan facility matures on June 30, 2001. Should the Partnership
continue its operations beyond this date, an amendment to the existing loan
agreement would be required to extend the loan maturity and revise certain
financial covenants. In the event the sale is not approved, management believes
it will be able to renegotiate the terms of the note payable, at a cost and on
terms that would not adversely affect the Partnership's ability to continue
operating as a going concern, as long as the limited partners have approved the
extension of the partnership term. It is management's opinion that the
likelihood that both of these proposals would not be approved by a majority of
the limited partners is remote.
Once the sale proposal is approved, the financial statement disclosure
thereafter will be on the liquidation basis.
100
108
PRO FORMA FINANCIAL DATA
The following unaudited pro forma balance sheet as of December 31, 2000
reflects the historical accounts of the Partnership as of that date adjusted to
give pro forma effect to the Bennettsville System sale as if the transaction had
occurred as of December 31, 2000.
NORTHLAND CABLE PROPERTIES SIX LIMITED PARTNERSHIP
PRO FORMA BALANCE SHEET
AS OF DECEMBER 31, 2000
(UNAUDITED)
COMPANY
PRO FORMA
DISPOSITION FOR THE
COMPANY ADJUSTMENTS DISPOSITION
----------- ----------- -----------
Cash............................................... 1,281,380 29,909(f) 1,311,289
Accounts receivable................................ 739,232 (53,161)(f) 686,071
Prepaids and other................................. 85,506 -- 85,506
Property and equipment, net........................ 13,960,226 (1,927,900)(a) 12,032,326
Franchise agreements, net.......................... 11,788,486 (4,532,713)(a) 7,255,773
Acquisition costs, net............................. 82,806 (34,295)(a) 48,511
Loan fees and other intangibles, net............... 591,176 (84,965)(a) 506,211
----------- ----------- -----------
Total investment in cable television
properties............................. 26,422,694 (6,579,873)(a) 19,842,821
Cash held in escrow................................ 1,000,000(b) 1,000,000
Total assets............................. 28,528,812 (5,603,125) 22,925,687
Accounts payable and other current liabilities..... 1,297,584 232,809(d) 1,530,393
Due to affiliates.................................. 35,458 -- 35,458
Deposits........................................... 29,590 (11,650)(f) 17,940
Subscriber prepayments............................. 460,038 (11,602)(f) 448,436
Note payable....................................... 28,215,281 (7,388,000)(c) 20,827,281
----------- ----------- -----------
Total liabilities........................ 30,037,951 (7,178,443) 22,859,508
General partners --
Contributed capital, net......................... (37,565) -- (37,565)
Accumulated deficit.............................. (104,541) 15,753(e) (88,788)
----------- ----------- -----------
(142,106) 15,753 (126,353)
Limited partners --
Contributed capital, net......................... 8,982,444 -- 8,982,444
Accumulated deficit.............................. (10,349,477) (1,559,565)(e) (8,789,912)
----------- ----------- -----------
(1,367,033) 1,559,565 192.532
Total liabilities and partners'
deficit................................ 28,528,812 (5,603,125) 22,925,687
- -------------------------
(a)Reflects asset that will be sold and includes liabilities that will be
assumed by the buyer in connection with the proposed sale of Bennettsville to
Adelphia.
(b)Reflects portion of purchase price to be held in escrow to secure contingent
liabilities and indemnification obligations arising out of the proposed
transaction for a period of one year from the closing of the proposed sale.
(c)Reflects sales proceeds received upon closing from the proposed transaction
used to pay down outstanding debt balances, as required by debt facility.
(d)Reflects transaction costs associated with the proposed sale.
101
109
(e)Estimated book loss resulting from the proposed sale calculated as follows:
Gross Proceeds.............................................. $ 8,388,000
Net book value of assets sold............................... (6,579,873)
Transaction costs........................................... (232,809)
------------
Book gain................................................... $ 1,575,318
(f)Reflects settlement of net working capital balances.
102
110
The following unaudited pro forma statement of operations for the year
ended December 31, 2000, reflects the historical accounts of the Partnership for
that period, adjusted to give pro forma effect to the Bennettsville System sale
as if the transaction had occurred at the beginning of the period.
NORTHLAND CABLE PROPERTIES SIX LIMITED PARTNERSHIP
PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2000
(UNAUDITED)
COMPANY
PRO FORMA
DISPOSITION FOR THE
COMPANY ADJUSTMENTS(F) DISPOSITION
----------- -------------- -----------
Revenue............................................ $15,221,887 $(2,086,264) $13,135,623
Operating Expenses:
Operating........................................ 1,161,419 (162,009) 999,410
General and administrative....................... 4,035,555 (640,170) 3,395,385
Programming...................................... 3,968,492 (585,971) 3,382,521
Depreciation and amortization.................... 4,468,532 (1,724,753) 2,743,779
----------- ----------- -----------
Total operating expenses................. 13,633,998 (3,112,903) 10,521,095
Income (loss) from operations...................... 1,587,889 1,026,639 2,614,528
Interest Income.................................. 45,351 45,351
Interest expense................................. (2,495,892) 644,962 (1,850,930)
Gain (loss) on disposal of assets................ (266,933) (266,933)
Other expense.................................... (196,808) (196,808)
Net loss........................................... $(1,326,393) $ 1,671,601 $ 345,208
=========== =========== ===========
(f)Elimination of revenue, operating, general and administrative, programming,
depreciation/amortization and interest expense related to the proposed sale
of Bennettsville.
103
111
EXHIBIT A
PROXY CARD
NORTHLAND CABLE PROPERTIES SIX LIMITED PARTNERSHIP
The undersigned hereby acknowledges receipt of the Notice of Special
Meeting of limited partners of NORTHLAND CABLE PROPERTIES SIX LIMITED
PARTNERSHIP ("NCP-Six") and accompanying Proxy Statement, each dated April 15,
2001 ("Proxy Materials"). The undersigned appoints John S. Whetzell and Richard
I. Clark, or either of them, as proxies, each with full power to appoint his
substitute. The undersigned represents that he or she holds of record as of
December 31, 2000 the number of units of limited partnership interest in NCP-Six
set forth below and authorizes the proxies to represent and to vote, as
designated below, all of such interest at the special meeting of limited
partners to be held on May 31, 2001 and at any postponements or adjournments
thereof. THIS PROXY IS BEING SOLICITED ON BEHALF OF THE MANAGING GENERAL PARTNER
OF NCP-SIX.
The undersigned directs the proxies to vote on the following proposals as
follows:
PROPOSED AMENDMENT NO. 1
To authorize the extension of the term of NCP-Six for an additional six
years so that its current expiration date of December 31, 2001 is changed to a
future expiration date of December 31, 2007 as described in the Proxy Materials
in order to protect against the possibility of foreclosure upon the current June
30, 2001 maturity date of NCP-Six's senior debt.
APPROVE [ ] DISAPPROVE [ ] ABSTAIN [ ]
PROPOSED AMENDMENT NO. 2
To authorize NCP-Six and its general partners to consummate the Proposed
Transaction as described in the Proxy Materials and to take any and all steps
necessary to complete such transaction.
APPROVE [ ] DISAPPROVE [ ] ABSTAIN [ ]
This proxy will be voted as directed by the undersigned. The
above-referenced proposals are independent of one another. Therefore, a vote for
or against one of the two proposals does not dictate how a limited partner must
vote for the other proposal. Notwithstanding, limited partners may not vote for
or against individual elements of either proposal, but must vote either for or
against the proposed amendment in its entirety. IF THIS PROXY IS EXECUTED AND
RETURNED AND NO DIRECTION IS INDICATED, THIS PROXY WILL BE VOTED TO APPROVE BOTH
OF THE ABOVE-REFERENCED PROPOSALS. SIMILARLY, IF THIS PROXY IS EXECUTED AND
RETURNED AND DIRECTION IS INDICATED AS TO ONLY ONE OF THE TWO PROPOSALS, THIS
PROXY WILL BE VOTED TO APPROVE THE PROPOSAL FOR WHICH NO DIRECTION IS INDICATED.
When limited partner interests are held by joint tenants, both should sign.
When signing as attorney, executor, administrator, trustee or guardian, give
full title as such. A corporation should sign in full corporate name by its
president or other authorized officer, and a partnership should sign in full
partnership name by its authorized representative.
Dated: , 2001
Number of Limited Partnership $500 Units Held:
------------
X
--------------------------------------
--------------------------------------
(SIGNATURE)
X
--------------------------------------
--------------------------------------
(SIGNATURE, IF HELD JOINTLY)
PLEASE COMPLETE, SIGN, DATE AND RETURN PROMPTLY
IN THE ENCLOSED ENVELOPE.
A-1
112
EXHIBIT B
AMENDED AND RESTATED
CERTIFICATE AND AGREEMENT OF LIMITED PARTNERSHIP
OF
NORTHLAND CABLE PROPERTIES SIX LIMITED PARTNERSHIP
THIS AMENDED AND RESTATED CERTIFICATE AND AGREEMENT OF LIMITED PARTNERSHIP
(the "Agreement") is made and entered into by and between NORTHLAND
COMMUNICATIONS CORPORATION ("Northland"), a Washington corporation, FN EQUITIES
JOINT VENTURE ("FNEJV"), a California joint venture (Northland and FNEJV
collectively referred to herein as the "General Partners"), RICHARD I. CLARK
(the "Original Limited Partner"), and remaining parties who now or hereafter
from time to time are accepted by the Managing General Partner as Limited
Partners (the "Limited Partners") of NORTHLAND CABLE PROPERTIES SIX LIMITED
PARTNERSHIP (the "Partnership"). Northland shall be the managing general partner
("Managing General Partner") and FNEJV shall be the administrative general
partner ("Administrative General Partner") of the Partnership. This Agreement
amends and restates the Certificate and Agreement of Limited Partnership of
Northland Cable Properties Six Limited Partnership filed with the office of the
Secretary of State of the State of Washington on January 22, 1986, as amended as
of the date hereof.
The Partnership is formed pursuant to the Washington Uniform Limited
Partnership Act.
1. Formation of Limited Partnership. The parties do hereby agree to operate
as a limited partnership pursuant to the Washington Uniform Limited Partnership
Act on the terms and conditions set forth in this Agreement. The General
Partners will cause this Agreement to be duly recorded forthwith in the office
of the Secretary of the State of Washington, in accordance with the provisions
of the Washington Uniform Limited Partnership Act, and will qualify the
Partnership as a limited partnership in other jurisdictions, as required, where
the Partnership shall do business. The General Partners shall not be required to
deliver or -- mail a copy of the "filed" Agreement to the Limited Partners.
2. Name. The name under which the Partnership business shall be con-ducted
is NORTHLAND CABLE PROPERTIES SIX LIMITED PARTNERSHIP. The General Partners will
cause, wherever necessary or appropriate, the execution of a fictitious business
name statement and cause such statement to be published and filed where
appropriate.
3. Office and Principal Place of Business. The office and principal place
of business for the Partnership shall be 3500 One Union Square Building,
Seattle, Washington 98101, or at such other place or places as the Managing
General Partner may from time to time determine. The Managing General Partner
may establish and maintain such other offices and places of business of the
Partnership, either in the state of Washington or elsewhere, as the Managing
General Partner may from time to time determine.
4. Agent for Service. The agent of the Partnership for service of process
in the state of Washington shall be Northland Communications Corporation, a
Washington corporation having its principal place of business at 3500 One Union
Square Building, Seattle, Washington 98101. The agent of the Partnership for
service of process in any other state requiring an agent shall be as designated
by the Managing General Partner.
5. Purpose and Nature of Business. The purpose and primary business of the
Partnership is (a) to acquire, develop and operate cable television systems in
the United States, (b) to provide any or all services and products related to
that business, (c) to own, lease or otherwise acquire, encumber and dispose of
any or all assets and services related to such business, and (d) to do any other
act necessary or convenient in connection therewith.
6. Definitions. The defined terms used in this Agreement shall, unless the
context otherwise requires, have the meanings specified in this Article 6.
B-1
113
"Administrative General Partner" means FN Equities Joint Venture, or its
successors as designated in accordance with the terms of this Agreement.
"Affiliate" of another person means (a) any person directly or indirectly
owning, controlling, or holding with power to vote 10% or more of the
outstanding voting securities of such other person; (b) any person 10% or more
of whose outstanding voting securities are directly or indirectly owned,
controlled, or held with power to vote, by such other person; (c) any person
directly or indirectly controlling such other person; (d) any officer, director
or partner of such other person; and (e) if such other person is an officer,
director or partner, any company for which such person acts in any such
capacity.
"Agreement" means this Amended and Restated Certificate and Agreement of
Limited Partnership, as amended, modified or supplemented from time to time.
"Capital Account" means the account established and maintained on the books
of the Partnership for each Partner pursuant to Article 10.
"Capital Contribution" means all cash actually contributed (but not loans)
to the Partnership by a Partner.
"Cash Available for Distribution" means cash funds of the Partnership in
excess of amounts reasonably required for the repayment of Partnership
borrowings, interest thereon, other liabilities, Partnership working capital and
reserves which the Managing General Partner deems to be reasonably required or
appropriate for the proper operation of the business of the Partnership.
"Cash Distributions" shall include cash and property, at its net fair
market value, distributed to the Partners.
"Cash Flow" means Gross Revenues for a given period less all operating and
other expenses actually incurred and related to the Gross Revenues for such
period.
"Code" means Internal Revenue Code of 1954, as amended.
"General Partners" means Northland Communications Corporation, a Washington
corporation; FN Equities Joint Venture, a California joint venture; and any
other person or entity which is subsequently admitted to the Partnership as a
General Partner in accordance with the terms of this Agreement.
"Gross Revenues" means all revenues and receipts actually received from the
service of providing secondary transmissions of primary broadcast transmitters
and from related activities including, but not limited to the full amount of
monthly (or other periodic) service fees for any and all basic and pay services
or tiers of basic and pay services, additional set fees, converter fees,
installation (including connection, relocation, disconnection or reconnection)
fees, separate charges for security, alarm or facsimile services, charges for
late payments, charges for program origination services and advertising
revenues.
"Limited Partner" means any person or entity accepted by the General
Partners as a limited partner of the Partnership pursuant to the terms of this
Agreement and who is named on Schedule A hereto.
"Majority Vote of the Limited Partners" means a vote by Limited Partners
who collectively hold of record more than 50% of the Units.
"Managing General Partner" means Northland Communications Corporation, or
its successor as duly designated in accordance with the terms of this Agreement.
"Net Income and Net Losses" means the amount of the aggregate Partnership
taxable income or loss (including items requiring separate computation under
Section 702 of the Code) as determined for federal income tax purposes.
"Noncash Additions" means the sum of all increases to a Partner's Capital
Account other than increases for the contribution of money or property to the
Partnership.
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"Noncash Reductions" means the sum of all reductions to a Partner's Capital
Account other than reductions for the distribution of cash or property to such
Partner.
"Offering and Organization Costs" means the costs of offering and marketing
the Units and organizing the Partnership (not including sales commissions or due
diligence fees), including printing costs and legal, accounting and other
professional fees incurred in connection with any offering documents and this
Agreement, and related filing and recordation costs, and the registration, or
application for exemption therefrom, of the Units under applicable federal and
state securities laws.
"Partners" means, collectively, the Limited Partners, as constituted from
time to time, and the General Partners.
"Partnership" means Northland Cable Properties Six Limited Partnership, a
Washington limited partnership.
"Substitute Limited Partner" means a transferee of a limited partnership
interest who has been admitted to the Partnership in accordance with the terms
of this Agreement.
"Systems" means, collectively, the cable television systems which will be
owned, directly or indirectly, by the Partnership.
"Units" means participation interests in the Partnership owned by Limited
Partners. Each Unit represents a $500 Capital Contribution.
7. Term of the Partnership. The Partnership commenced as of the date of
filing and recording the original certificate of limited partnership of the
Partnership and shall continue until the date of the first of the following
events:
(a) December 31, 2001; or
(b) Dissolution as provided in Article 16 of this Agreement.
8. Capital Contributions.
(a) Contributions by General Partners. The Managing General Partner shall
contribute $1,000 as the collective Capital Contribution of the General Partners
to the Partnership. The General Partners shall have no further obligation to
make any Capital Contributions to the Partnership, except as may be required by
paragraph (e) of Article 16.
(b) Contribution by Original Limited Partner. The Original Limited Partner
shall contribute $100 to the Partnership as his Capital Contribution. Upon
admission of additional Limited Partners, the Original Limited Partner shall
withdraw from the Partnership and his Capital Contribution shall then be
refunded to him; provided, however, that he may again become a Limited Partner
in accordance with the provisions of paragraph (d) below. Notwithstanding the
provisions of Articles 15 and 16 and other provisions of this Agreement to the
contrary, the interest of the Original Limited Partner, as such, in income,
gain, loss, deduction, credit distributions or capital shall not exceed one
percent of the total of any of such amount and the balance shall be allocated or
distributed to, or owned by, the General Partners.
(c) Offering and Organization Costs. The Managing General Partner, or any
agent thereof, is hereby authorized to take any and all actions as may in its
judgment be necessary or advisable in order to raise the capital authorized in
this Article, including, without limitation, the filing of such documents or
instruments as are necessary or advisable to claim exemption from the
registration requirements of federal or state securities laws, the registration
and/or qualification of the Units under federal and state securities laws, the
qualification of the Partnership as a foreign limited partnership in any
jurisdiction wherein the Partnership does business, the engagement of legal
counsel, accountants, or any other experts necessary for the preparation of any
documents required in connection with the Units, or the engagement of one or
more broker-dealers to assist with the offering of the Units. The Partnership
will pay all Offering and Organization Costs up to a maximum of 3.5% of the
aggregate Capital Contributions from Limited
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Partners. All Offering and Organization Costs in excess of 3.5% of aggregate
Capital Contributions from Limited Partners shall be borne by the General
Partners.
The Partnership shall also pay Financial Network Investment Corporation, an
Affiliate of the Administrative General Partner, a selling commission and due
diligence fee equal in the aggregate to 10.5% of aggregate Capital Contributions
from Limited Partners, provided, however, that no such commission or fee shall
be payable with respect to Units purchased by the Managing General Partner or
its Affiliates, officers, directors, employees or agents.
(d) Limited Partners. The Partnership shall offer 30,000 Units, at $500 per
Unit, to be subscribed for by the Limited Partners to be admitted subsequent to
the original formation of the Partnership. The minimum purchase is eight Units
($4,000). The Managing General Partner reserves the right, however, in its sole
discretion, to accept subscriptions for less than eight Units but not less than
four Units ($2,000) from Individual Retirement Accounts (IRAs) or HR-10 (Keogh)
plans. The Managing General Partner does not intend to accept subscriptions for
more than twenty percent (20%) of the Units from IRAs, Keogh plans or other
"tax-exempt entities", as defined in Section 168(j)(4) of the Code, or from any
pass-thru entities (as defined in Code Section 267(e)(2) in which a tax-exempt
entity has an interest. The General Partners may purchase Units of limited
partnership interest on the same basis as other investors and hold such Units as
a Limited Partner. Such Limited Partners as subscribe for Units shall be
admitted to the Partnership in accordance with paragraph (f) below upon the
conditions contained herein. No Limited Partners shall be admitted pursuant to
this paragraph (d) unless subscriptions for at least 2,000 Units have been
received and accepted by the Managing General Partner by July 31, 1987.
Limited Partners shall make their Capital Contributions to the Partnership
in cash at the time of subscription.
(e) Withdrawal of Capital Contributions. No Partner shall have the right to
withdraw or reduce the amount of his or her Capital Contribution, except to the
extent that any such withdrawal or reduction may be required or expressly
permitted by this Agreement. In addition, no part of any Capital Contribution
shall be withdrawn until all obligations and liabilities of the Partnership
(except such as may be due to the General Partners and to the Limited Partners
on account of their Capital Contributions) have been paid or unless, in the
opinion of the Managing General Partner, sufficient assets for the payment of
such obligations and liabilities have been set aside and designated for that
purpose.
(f) Acceptance of Subscriptions. Acceptance of each subscription for Units
shall be discretionary with the Managing General Partner, and the Managing
General Partner may reject any subscription for any reason it deems appropriate.
Upon acceptance of a Limited Partner's subscription and the release from the
escrow account of his or her subscription funds to the Partnership or the direct
deposit of such subscription funds in the Partnership's general business
account, the Managing General Partner shall file an amendment to this Agreement
in accordance with the Washington Uniform Limited Partnership Act together with
a list of the names, addresses and interests of the newly-admitted Limited
Partners pursuant to paragraph (d) of Article 19.
(g) Additional Capital. The General Partners are authorized to raise at any
time additional capital for the Partnership, in addition to that authorized by
paragraph (d) above, by selling additional limited partnership interests upon
terms and conditions and for such prices as the Managing General Partner may
determine; provided, however, that the General Partners must first offer such
interests to the then current Limited Partners in proportion to their then
current ownership upon such terms and conditions and for such price as the
Managing General Partner proposes to sell such interests to third parties. Any
person who is not a then current Limited Partner and who acquires an interest in
the Partnership which has been offered in accordance with the provisions of this
paragraph (g) shall be admitted to the Partnership as a new Limited Partner upon
acceptance by the Managing General Partner, and no further consent to such
admission by the then current Partners or any execution of documents by them
shall be required.
(h) Initial Investment. Pending initial investment of its funds, or to
provide a source from which to meet contingencies, the Partnership may
temporarily invest its funds in short-term, highly liquid
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investments that provide appropriate safety of principal, such as bank
certificates of deposit, money market funds, short-term debt obligations and
interest-bearing accounts.
(i) Priority and Return of Capital. Except as expressly provided by the
provisions of this Agreement, no Partner shall have priority over any other
Partner, either as to the return of Capital Contributions or as to net income,
net losses or Cash Distributions. No Partner shall be entitled to the return of
any amount contributed by such Partner to the capital of the Partnership out of
any assets other than the assets of the Partnership and then only in accordance
with the provisions of this Agreement.
9. Advances by General Partners. A General Partner, or any Affiliate
thereof, may in its discretion advance monies to the Partnership for use in
acquiring the Systems or other assets or funding Partnership operations when the
Partnership is in need of such monies. The aggregate amount of such advances
shall become an obligation of the Partnership to such General Partner or
Affiliate, and shall be paid with interest; provided, that the interest rate or
other finance charges and fees with respect to any such loan shall be payable at
a per annum rate not greater than the average interest rate charged, from time
to time, to such General Partner or Affiliate by the financial institution which
principally finances the activities and affairs of such entity or, if the source
of the loan funds is an unaffiliated third-party lender that has loaned such
funds to such General Partner or Affiliate, the per annum rate charged, from
time to time, with respect to such funds by such unaffiliated lender to such
General Partner or Affiliate; and provided, further, that no repayment charge or
penalty shall be imposed with respect to any such loan, except to the extent
that such prepayment charge or penalty is attributable to an underlying
encumbrance.
10. Capital Accounts.
(a) Establishment of Capital Accounts. The Partnership shall establish and
maintain a Capital Account for each Partner in accordance with Treasury
Regulations promulgated under Code Section 704(b).
(b) Adjustments to Capital Accounts. The Capital Account of each Partner
shall be increased to reflect (i) such Partner's cash contributions, (ii) the
fair market value of property contributed by such Partner (net of liabilities
securing such contributed property that the Partnership is considered to assume
or take subject to under Code Section 752), (iii) the Partner's share of the Net
Income (including all gain as calculated pursuant to Section 1001 of the Code)
of the Partnership, (iv) such Partner's share of income and gain exempt from
tax, and (v) such Partner's share of any basis increase pursuant to Code Section
48(q)(2). The Capital Account of each Partner shall be reduced to reflect (i)
the amount of money distributed to such Partner, (ii) the fair market value of
property distributed to such Partner (net of liabilities securing such
distributed property that such Partner is considered to assume or take subject
to under Section 752), (iii) such Partner's share of noncapitalized expenditures
not deductible by the Partnership in computing its taxable income as determined
under Code Section 705(a)(2)(B), (iv) such Partner's share of the amount of any
basis adjustment pursuant to Code Sections 48(q)(1) and 48(q)(3), (v) such
Partner's share of Net Losses, and (vi) such Partner's share of amounts paid or
incurred to organize the Partnership or to promote the sale of Partnership Units
to the extent that an election under Code Section 709(b) has not properly been
made for such amounts. The Managing General Partner shall determine the fair
market value of all Partnership property which is distributed in kind, and the
Capital Accounts of the Partners shall be adjusted on the basis of such fair
market value determination by the Managing General Partner as though the
property had been sold for its fair market value and the proceeds (net of
liabilities) had been distributed to the Partner receiving the property in kind.
In the event of a contribution or distribution of property with a fair market
value which is not equal to its adjusted basis (as determined for federal income
tax purposes), the Partnership shall maintain both "tax" and "book" capital
accounts in accordance with the rules prescribed in Treasury Regulations
promulgated under Code Section 704.
11. Management of Partnership Activities and Indemnification. The General
Partners shall conduct, direct and exercise full control over all the activities
of the Partnership. The Limited Partners shall have no power over the conduct of
the affairs of the Partnership except as specifically set forth herein.
Notwithstanding anything in this Agreement to the contrary, in the event of a
dispute between the
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Managing General Partner and the Administrative General Partner, the Managing
General Partner shall control.
(a) General Powers of the General Partners. Subject to the provisions of
paragraphs (b) and (c) of Article 12, and in addition to the powers granted to
general partners of a limited partnership under the laws of the State of
Washington, or which are granted to the General Partners under other provisions
of this Agreement, and within the limitations of the purposes for which the
Partnership has been formed, the General Partners shall have full power to do
all things deemed necessary, appropriate or desirable by them to conduct the
business of the Partnership, including, but not limited to:
(i) The making of expenditures and the incurring of any obligations
they deem necessary or desirable to implement the purposes of the
Partnership; the employment of such personnel as they deem desirable for
the conduct of such activities, including permanent, temporary, or
part-time employees, themselves, and outside consultants or contractors,
and the determination of their compensation and other terms of employment;
provided, however, that any contract for services with the General Partners
or their Affiliates may be cancelled upon a Majority Vote of the Limited
Partners.
(ii) Subject only to any express limitations contained in this
Agreement, the acquisition and the disposition, exchange, mortgage, or
other hypothecation of any or all of Assets of the Partnership, including
the Systems, the borrowing of monies, and the use of the revenues or
borrowing proceeds of the Partnership for any purpose and on any terms the
General Partners see fit, including, without limitation, the financing of
the activities of the Partnership (with or without the pledge of the
Partnership's revenues or other assets), the repayment of borrowings, the
lease or purchase of properties and equipment, and the conduct of
additional activities by the Partnership, provided that assets and revenues
attributable to the interests of the Limited Partners shall not be pledged
or used for the benefit of the General Partners or their Affiliates, and
provided that (except upon dissolution of the Partnership) a Majority Vote
of the Limited Partners shall be required for the sale or hypothecation of
all, or substantially all, of the Partnership's assets in connection with
any transaction not in the normal and ordinary course of Partnership
business, and provided further that no lender shall be required to look to
the application of proceeds hereunder and shall be entitled to rely on the
representations of the General Partners as to their authority to enter into
financing arrangements and shall be entitled to deal with the General
Partners as if they were the sole party in interest therein, both legally
and beneficially.
Notwithstanding any other provisions herein limiting the General Partners'
power to borrow on behalf of the Partnership or hypothecate all or substantially
all of the Partnership's assets in connection with such borrowing, the General
Partners may, on behalf of the Partnership, borrow and secure said borrowings
with Partnership assets for the express purpose of providing funds to the
Partnership for Cash Distributions to the Partners in accordance with Article
15.
No creditor who makes a non-recourse loan to the Partnership shall have or
acquire at any time as a result of making such loan any direct or indirect
interest in the profits, capital, or property of the Partnership other than as a
secured creditor.
The amount of Partnership cash flow used in any calendar year to acquire
Systems will in no event exceed 50% of the Net Income before depreciation
allocated to Limited Partners for that year.
(iii) The negotiation and execution on any terms deemed desirable by
them of all necessary agreements, or other instruments required or deemed
beneficial to implement the powers granted under this Agreement.
(iv) The formation of any further limited or general partnerships,
joint ventures, or other relationships which they deem desirable, provided
that the Partnership shall not invest in any other partnership or joint
venture or engage in any other relationship except for the purpose of
operating the Systems and unless it has a controlling interest in such
venture or partnership; and provided that neither the General Partner nor
any Affiliate shall receive any fees or compensation from such venture
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or partnership; and provided that all Systems owned by the Partnership
shall be owned directly, and not indirectly through an ownership interest
in any limited or general partnership, joint venture or other entity.
(v) The execution of operating, management or agency agreements with
any parties selected by them to supervise or assist in the operation of any
activities undertaken by the Partnership and the making of agreements for
the conduct of operations, or the furnishing of facilities, services and
personnel.
(vi) The lease or sale of any assets of the Partnership for any
Partnership purpose, including but not limited to franchises or similar
operating authorizations of any portion of the Systems, except to the
General Partners or their Affiliates and subject to the limitations in
subparagraph (ii) above; provided, however, that notwithstanding anything
else herein, upon a Majority Vote of the Limited Partners approving the
terms of the transaction, all or any portion of the Partnership's assets
may be sold to the Managing General Partner or its Affiliates; and
provided, further, no Majority Vote of the Limited Partners shall be
required for the sale to the Managing General Partner or its Affiliates of
a System previously acquired by the Partnership if (a) the Managing General
Partner or its Affiliates had advanced funds to the Partnership in order to
enable the Partnership to acquire the System and an amount equal to at
least 50% of the funds so advanced remains an outstanding obligation of the
Partnership to the Managing General Partner or its Affiliates at the time
of the proposed acquisition of the System by the Managing General Partner
or its Affiliates and (b) the purchase price to be paid to the Partnership
by the Managing General Partner or its Affiliates is equal to or in excess
of the purchase price originally paid by the Partnership for the System.
(vii) The exercise on behalf of the Partnership, in such manner as
they in their sole judgment deem appropriate, of all rights, elections, and
obligations granted to or imposed upon the Partnership by agreements
entered into by it, including but not limited to elections permitted the
Partnership by any taxing authority.
(viii) The establishment and maintenance of bank accounts on behalf of
the Partnership, provided that the General Partners will employ all funds
and assets of the Partnership for the Partnership's sole benefit and use
and will not commingle the Partnership's funds with the funds of any other
person.
(ix) The control of any matters affecting the rights and obligations
of the Partnership or its Partners, including the employment of attorneys
and others, the incurring of legal expenses and the prosecution, defense,
compromise, arbitration or settlement of claims and litigation.
Any transaction which the General Partners are authorized hereby to enter
into on behalf of the Partnership, including but not limited to the acquisition,
disposition, exchange, mortgage or other hypothecation of Partnership assets and
revenues, the borrowing of monies, the formation of general or limited
partnerships, joint ventures, or other relationships, and the making of
operating, agency, management or other agreements for the conduct of operations
or the furnishing of goods, facilities, services or personnel, may be entered
into by the Partnership with the General Partners or their Affiliates provided
that (a) the fees and prices charged are in accordance with paragraph (d) of
Article 12 herein, if applicable, and competitive with the fees, prices and
compensation of any other person who is rendering comparable services or selling
or leasing comparable goods which could reasonably be made available to the
Partnership, and (b) any such agreement may be terminated upon a Majority Vote
of the Limited Partners without penalty upon 60 days' notice. Further, the
General Partners will not engage in any practices such as rebates, give-ups or
reciprocal arrangements in connection with providing such services or goods. The
General Partners also may subcontract and delegate all or any part of their
duties hereunder to any agency chosen by them, including an Affiliate, but such
delegation by them shall not relieve them of their responsibilities hereunder.
In no event will a General Partner or its Affiliates engage in any real estate
transactions with the Partnership where such General Partner or Affiliate is a
principal without an affirmative Majority Vote of the Limited Partners, unless
the General Partner or Affiliate is selling such real estate to the Partnership
at cost and on identical terms.
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(b) Other Activities of the General Partners. The General Partners shall
devote such part of their time as they, in their sole discretion, deem necessary
to carry out the operations contemplated under this Agreement and shall make
available at reasonable times their respective offices, organizations and
facilities to carry out the purposes of the Partnership. Each of the parties
hereto may engage in whatever other activities it chooses. It is specifically
recognized that the General Partners and their Affiliates will each engage in
the cable television business both for their own account and for others, and
nothing contained herein shall be deemed to prevent such parties from engaging
in such activities individually, jointly with others, or as a partner of any
other partnership, joint venture, or other entity to which they are or may
become a party, in any locale, fields or areas of operation, including those in
which the Partnership may likewise be active, or from dealing with the
Partnership as independent parties or through any other entity in which they may
be interested, including the sale or lease of goods and equipment to, and the
performance of accounting, technical and management services for, the
Partnership at a profit, nor as requiring them to permit the Partnership or any
Partner thereof to participate in any such operations in which they may be
interested, except as indicated herein. Neither the General Partners nor their
Affiliates shall be obligated to present any particular investment opportunity
to the Partnership or the Partners even if such opportunity is of a character
which, if presented to the Partnership, could be taken by the Partnership, and
each of the General Partners shall have the right to take such investment for
his or its own account (individually or on behalf of others) or to recommend to
others any particular investment opportunity. A Limited Partner, because of his
or her interest in the Partnership, shall not acquire any rights or interest in
any other partnership managed, operated or otherwise affiliated with the General
Partners or their Affiliates. Nothing in this paragraph (b) shall be deemed to
diminish the General Partners' fiduciary obligations nor waive any rights that
the Partnership or the Limited Partners may have against the General Partners.
(c) Indemnification. Neither the General Partners nor any director,
officer, partner, employee, agent or Affiliate thereof shall be liable,
responsible or accountable in damages or otherwise to the Partnership or any of
the Partners for, and the Partnership and any receivers and/or trustees thereof
shall hold harmless, indemnify and defend the General Partners and such other
persons from and against, any claim, liability, loss, damage or expense
(including, without limitation, reasonable attorneys' fees) suffered by the
General Partners or such other persons by virtue of any act performed or omitted
to be performed in connection with the Partnership's activities, provided that
if such claim, liability or expense arises out of any action or inaction by a
General Partner or such other persons, the Managing General Partner must have
determined, in good faith, that such course of conduct was carried out in a
manner reasonably believed to be in the best interest of the Partnership, and
that such course of conduct did not constitute fraud, negligence or breach of
fiduciary duty by the General Partners. All judgments against the Partnership,
the General Partners, or such other persons, wherein the General Partners or
such other persons are entitled to indemnification, must first be satisfied from
Partnership assets before the General Partners or such other persons are
responsible for obligations.
Notwithstanding anything herein to the contrary, the General Partners and
their Affiliates, shareholders, directors, officers or other employees shall not
be indemnified for liability imposed or expenses incurred in connection with any
claim arising out of a violation of the Securities Act of 1933, as amended, with
respect to the offer and sale of the Units, unless: (1) the General Partners are
successful in defending such action; or (2) a final adjudication that such
indemnification is contrary to public policy as expressed in said Act has not
been made by a court of appropriate jurisdiction.
Subject to the above, expenses incurred by a General Partner or any
Affiliate, shareholder, partner, director, officer, agent or other employee, in
defending any claim with respect to which such General Partner or such other
person may be entitled to indemnification by the Partnership hereunder, may be
advanced by the Partnership prior to the final disposition of such claim, upon
receipt of an undertaking by or on behalf of such General Partner or other
person to repay the advanced amount of such expenses unless it is determined
ultimately that such General Partner or other person is entitled to
indemnification by the Partnership under this paragraph (c).
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Any indemnification hereunder shall be made only to the extent of the
Partnership's assets, and no Partner shall be personally liable on such
indemnification; provided, however, that nothing contained in this paragraph (c)
shall be deemed to excuse any General Partner from liability to the other
General Partner with respect to any claim described herein, where such General
Partner would otherwise be so liable in the absence of the indemnification
contained in this paragraph (c).
(d) Failure to Take Action. Except in the event of any act for which they
would not be entitled to indemnification under paragraph (c) above, the General
Partners and their Affiliates, shareholders, directors, partners, officers,
agents and other employees will not be liable to any of the Limited Partners for
failure to take any action on behalf of the Partnership (including, but not
limited to, any action which may prevent the foreclosure of all or any portion
of the assets of the Partnership) due to the Partnership's lack of sufficient
funds for the payment of its debts, provided the General Partners give the
Limited Partners prior notice thereof, so that the Limited Partners may, but
shall not be obligated to, contribute such funds if they then desire that such
action be taken. Moreover, in the event that after such notice is given funds
are not contributed to the Partnership by the Limited Partners, the General
Partners shall have the power, but shall not be obligated, to (1) sell all or
any portion of the assets of the Partnership in order to raise such funds, or
(2) cause the dissolution of the Partnership or the abandonment of all or any
portion of its assets, or both.
(e) Tax Matters Partner. For the purpose of Code Section 6223(a), Northland
Communications Corporation, the Managing General Partner, is hereby designated
as "Tax Matters Partner" ("TMP"). In the event that at any time the TMP
determines that it cannot act as the TMP, it shall notify all Partners and
unless another General Partner is designated by the General Partners as the TMP
a meeting shall be called pursuant to the provisions of paragraph (g) of Article
20 herein for the purpose of the Limited Partners appointing a Partner as the
new TMP. The TMP, if notified by the Internal Revenue Service of a "final
partnership administrative adjustment" ("FPAA"), shall inform the Limited
Partners and provide them with a copy of such notice within fifteen (15) days of
its receipt. Within ninety (90) days after the day on which such FPAA notice is
received by the TMP, the TMP shall notify the Limited Partners of the position
that the TMP is taking in connection with such notice or that it is taking no
position. The General Partners shall not be liable to the Partnership or the
Limited Partners for any act performed or omitted to be performed by the TMP in
connection with its position as TMP with respect to the federal income tax
consequences of Partnership transactions, unless the TMP was grossly negligent
or failed to act in good faith with respect to such tax matters.
12. General Partners' Duties, Management Fees and Partnership Expenses.
(a) Acquisition Fee. Northland shall receive an acquisition fee equal to
6.5% of the Capital Contributions from Limited Partners pursuant to the offering
described in paragraph (d) of Article 8 herein as compensation for investigating
the acquisition of the Systems and for initial management services rendered by
the executive officers of the Managing General Partner to the Partnership. Such
fee shall be paid when and as such Capital Contributions are released to the
Partnership, and is in addition to the management fee payable pursuant to
paragraph (b) below and reimbursable amounts payable pursuant to paragraph (d)
below.
(b) Managing General Partner's Duties and Management Fees. The Managing
General Partner shall be responsible for the overall management of the
Partnership, including:
(i) Determination and implementation of Partnership policies;
(ii) Review of Partnership budget, surveys, cash flow and working
capital requirements;
(iii) Review and approval of Partnership reports and financial
statements, including those filed with regulatory agencies and including
those prepared and distributed pursuant to paragraph (f) of Article 16 and
paragraphs (b) through (g) of Article 18; and
(iv) Supervision of professionals and others employed by the
Partnership in connection with the above.
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For the services of the executive officers of the Managing General Partner
in connection with such supervision and management, the Managing General Partner
shall also receive a management fee equal to 6% of the gross revenues of the
Partnership, not including revenues from the sale or refinancing of the Systems
or any portion thereof. Such fee shall be calculated and paid monthly. This fee
is in addition to reimbursable amounts payable pursuant to paragraph (d) below.
(c) Administrative General Partner's Duties and Management Fees. The
Administrative General Partner shall have responsibility for overall
administration of the Partnership in all respects and in all matters, and shall
make administrative decisions. In return for the compensation described below,
the Administrative General Partner shall actively engage in ongoing consultation
with and shall provide assistance to the Managing General Partner regarding
operations of the Partnership, including, but not limited to, acquisition of
properties, financing, analysis of System demographics and System planning. In
addition, the Administrative General Partner shall have responsibility to
perform, or cause to be performed, the following services:
(i) Establishment of books of account, record and payment procedures,
including individual Capital Accounts of the Partners;
(ii) Provision of bookkeeping and other related services for the
Partnership;
(iii) Disbursement of the original Capital Contributions of the
Partners for the purposes set forth in this Agreement;
(iv) Disbursement of all receipts and the making of all necessary
payments and expenditures in accordance with the terms of this Agreement;
(v) Making of all reports to the Limited Partners required by this
Agreement or by law;
(vi) Admission of an assignee of a Limited Partner's interest as a
Substitute Limited Partner, without the consent of any Limited Partner; and
(vii) To the extent that funds of the Partnership are, in the Managing
General Partner's judgment, not required for the conduct of the
Partnership's business, the temporary investment of the excess funds in the
manner set forth in paragraph (h) of Article 8.
For its services in connection with such administration, the Administrative
General Partner shall receive an administrative fee equal to 1% of the Capital
Contributions from Limited Partners pursuant to the offering of Units described
in paragraph (d) of Article 8, payable when and as the Limited Partners' Capital
Contributions are released to the Partnership. This fee is in addition to
reimbursable amounts payable pursuant to paragraph (d) below.
(d) Partnership Expenses; Reimbursement of Expenses Incurred on Behalf of
the Partnership. The Partnership shall pay or reimburse the General Partners and
their Affiliates for expenses of every kind incurred, including expenses
involved in the acquisition of the Systems. Such expenses to be paid or
reimbursed by the Partnership include, but are not limited to: (i) all costs of
personnel employed by the Partnership, and all personnel employed by the
Managing General Partner and its Affiliates who perform accounting, marketing
and engineering services for the Partnership, for which personnel the
Partnership will reimburse the Managing General Partner and its Affiliates for
salaries and other employment costs of such personnel; (ii) all costs of
borrowed money, taxes, insurance, and assessments against Partnership assets or
applicable to the Partnership or its assets; (iii) legal, appraisal, audit,
accounting, brokerage and other fees; (iv) printing, engraving and other
expenses and taxes incurred in connection with the transfer, issuance,
registration and recording of documents evidencing ownership of an interest in
the Partnership or in connection with the business of the Partnership; (v) costs
for goods and materials, whether purchased by the Partnership directly or by the
General Partners or their Affiliates, on behalf of the Systems or the
Partnership; (vi) expenses of revising, amending, converting, modifying or
terminating the Partnership; (vii) expenses in connection with distributions
made by the Partnership to, and communications and bookkeeping work necessary in
maintaining relations with, Limited Partners, including the cost of printing and
mailing to such persons reports of meetings of the Partnership, and of
preparation of proxy statements
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and solicitations of proxies in connection therewith; (viii) expenses in
connection with preparing and mailing reports required to be furnished to
Limited Partners for investor, tax reporting or other purposes, or other reports
which the Managing General Partner deems to be in the best interest of the
Partnership; (ix) costs of any accounting, statistical or bookkeeping equipment
necessary for the maintenance of the books and records of the Partnership; (x)
the cost of preparation and dissemination of the informational material and
documentation relating to the Partnership; (xi) costs of any computer services
or equipment or services of personnel used for or by the Partnership; (xii)
expenses in connection with the disposition, replacement, alteration, repair,
remodeling, refurbishment, leasing, refinancing, operation and expansion of the
Systems and of maintenance of the Systems; (xiii) costs of any litigation in
which the Partnership is involved, as well as costs of any examination,
investigation, or other proceeding conducted by any regulatory agency in
connection with the Partnership, including legal and accounting fees incurred in
connection therewith; and (xiv) expenses of professionals employed by the
Partnership in connection with any of the foregoing, including attorneys,
accountants, computer specialists, engineers, brokers and appraisers. With
respect to Offering and Organization Costs, such reimbursement shall not exceed
3.5% of the Capital Contributions from Limited Partners; to the extent Offering
and Organization Costs exceed 3.5% of the aggregate Capital Contributions from
Limited Partners, the Managing General Partner shall be responsible for the
difference.
In addition, the Partnership will reimburse the Managing General Partner
and its Affiliates for all ordinary and necessary expenses incurred on the
Partnership's behalf, including expenses listed above which are advanced by the
Managing General Partner or its Affiliates, which shall not include charges for
overhead (except for centralized billing [if applicable], bookkeeping, telephone
and postage, copy and computer charges, which shall be reimbursed at the lower
of competitive price or cost, including allocation for overhead). All charges
for expenses and fees, whether charged by the Managing General Partner, its
Affiliates or any other party, will be billed directly to the Partnership.
13. Limited Partners.
(a) Rights and Obligations of the Limited Partners. No Limited Partner
shall be personally liable for any debts, liabilities or obligations of the
Partnership beyond the amount of his or her Capital Contribution plus his or her
share of undistributed income and the amount of any distribution (including the
return of any Capital Contribution) made to him or her that must be returned to
the Partnership pursuant to the Washington Uniform Limited Partnership Act or
other applicable state law, nor shall he or she be obligated to restore the
capital of the Partnership or repay to the Partnership any distribution made to
such person as a Limited Partner except as may be required by law. No Limited
Partner, as such, shall take part in the control of the Partnership's business
or transact any business for the Partnership.
(b) Names and Addresses of Limited Partners. The General Partners shall
keep at the principal place of business of the Partnership a list containing the
name, address and interest of each Limited Partner. Within thirty (30) days
after the admission of any Limited Partner or the receipt by the Partnership of
a written notice of change of address or transfer of interest (pursuant to
Article 14) from any Limited Partner, the General Partners shall cause such list
to be corrected to reflect such admission, transfer or change of address. Within
fifteen (15) days after receiving a written request therefor from any Limited
Partner or his or her representative, the Partnership shall send a copy of such
list to such Limited Partner; provided, however, that the Partnership may charge
for such copy its cost of reproducing the same. Any Limited Partner or his or
her representative shall have the right to inspect and copy (at his or her own
cost) at the Partnership's principal place of business the names, addresses and
interests of the Limited Partners.
(c) General Partner as Limited Partner. A General Partner, or any Affiliate
of a General Partner, may at any time invest in or acquire Limited Partner
interest in the Partnership and thereby acquire the same rights and obligations
as other Limited Partners.
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14. Transfer of Limited Partner Units.
(a) Assignment of Limited Partner Units. Following payment in full of cash
for his or her Units, a Limited Partner shall have the right to assign any or
all of the Units held by such Limited Partner, and the Partnership shall
recognize any such assignment, subject to the following conditions:
(i) In the event an assignor makes an assignment of less than all of
his or her interest in the Partnership, then, after such assignment,
neither the assignor nor the assignee shall hold less than one full Unit
except for assignments by gift, inheritance, intra-family assignments and
family dissolutions;
(ii) Such assignment shall not violate any applicable federal or state
securities law or regulation, including, without limitation, any
restriction imposed thereby with respect to the financial suitability of,
or minimum purchase requirements by, any transferee for consideration;
(iii) Such assignment is made by written instrument of assignment,
executed by the assignor, the terms of which do not contravene any of the
terms of this Agreement;
(iv) Notice of such assignment, including an executed copy of such
instrument of assignment, the name, address and taxpayer identification
number of the assignee and the number of Units assigned, has been delivered
to the Partnership.
(v) Such assignment does not jeopardize the status of the Partnership
for federal income tax purposes nor cause a termination of the Partnership
for federal income tax purposes as determined under Section 708 of the
Code; and
(vi) The assignee of such interest in the Partnership is not a
tax-exempt entity, as such term is defined in Section 168(j)(4) of the
Code, and is not a pass-thru entity, as defined in Section 267(e)(2) of the
Code, in which a tax-exempt entity holds an interest, unless the original
subscriber for such Unit was a tax-exempt entity, provided, however, that
in no event will tax-exempt entities own in the aggregate more than 20% of
the Partnership Units.
An assignment of Units satisfying the conditions specified in this
paragraph (a) shall, subject to the provisions of paragraph (d) below, entitle
the assignee to receive all Cash Distributions and allocations of Net Income and
Net Losses made with respect to the assigned Units after the "Acceptance Date,"
as defined in paragraph (c) below, but shall not entitle such assignee to any of
the other rights and privileges of a Limited Partner hereunder unless such
assignee becomes a Substitute Limited Partner in accordance with paragraph (h)
below. In the event the Partnership or its counsel determines that an assignment
does not satisfy the conditions specified in this paragraph (a), the General
Partners shall promptly notify the assignor of such determination; provided,
however, nothing contained in this paragraph (a) shall obligate the General
Partners or their counsel to make any independent examination or investigation
to determine whether such conditions have been satisfied.
(b) Transfers of Limited Partner Units by Operation of Law. Upon any
transfer of Units by operation of law (including, without limitation, transfers
at death, whether testamentary or otherwise), either the transferee or
transferor (or the transferor's personal representative) shall promptly give the
Partnership written notice of such transfer, stating by what means it occurred.
The Partnership shall recognize any such transfer of which it receives such
notice, provided such transfer also satisfies the condition set forth in clause
(ii) of paragraph (a) above. A transferee of Units satisfying the conditions
specified in this paragraph (b) shall, in accordance with paragraph (d) below,
be entitled to receive all Cash Distributions and all allocations of Net Income
and Net Losses made with respect to the transferred Units after the Acceptance
Date for such transfer, but shall not be entitled to any of the other rights and
privileges of a Limited Partner hereunder unless such transferee becomes a
Substitute Limited Partner in accordance with paragraph (h) below.
(c) Acceptance Date for Assignments and Other Transfers. The "Acceptance
Date" for any assignment or other transfer of Units satisfying the conditions
set forth in paragraph (a) or (b) above, and paragraph (d) below, of this
Article shall mean the first day of the calendar month succeeding the month in
which the Partnership receives written notice of such assignment or other
transfer (in accordance with
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the provisions of paragraph (a) or (b) above). If an assignment does not comply
with paragraph (a) above because such assignment would cause a termination of
the Partnership for federal income tax purposes under Section 708 of the Code,
then such assignment shall be deferred until the day after the last day of the
next ensuing calendar month during which such acceptance would not risk such a
termination for tax purposes. If, at any time, more than one such assignment or
other transfer is so deferred, the deferred assignments and transfers shall
subsequently be recognized (to the extent all of them cannot be recognized in
the same calendar month) in the same order as the Partnership received written
notice thereof. Whenever the Partnership determines that it will not recognize
an assignment or other transfer of Units for the reasons set forth in this
paragraph (c), the General Partners shall promptly give written notice thereof
to all of the Limited Partners.
(d) Rights and Obligations of Assignees or Transferees. Any assignee or
transferee of a Limited Partner interest hereunder shall be bound by the
provisions of this Agreement. Prior to recognizing any assignment of a Limited
Partner's interest that has been transferred in accordance with this Article,
the General Partners, at their sole discretion, may require the transferring
Limited Partner to execute and acknowledge a written instrument of assignment in
form and substance satisfactory to the General Partners, may require an opinion
of counsel satisfactory to the General Partners that such transfer will not be
in violation of the various securities laws or otherwise adversely affect the
Partnership or the Limited Partners, and may require the assignee to execute an
amendment to the Agreement and to assume all obligations of the assigning
Limited Partner. Any assignee who is not an existing Partner at the time of an
assignment in accordance with paragraph (a) or (b) of this Article shall be
entitled to the allocations and distributions attributable to the interest
assigned to it and to transfer and assign such interest in accordance with the
terms of this Agreement; provided, however, such assignee shall not be entitled
to the other rights of a Limited Partner unless and until it becomes a
Substitute Limited Partner in accordance with paragraph (h) below.
Notwithstanding the above, the Partnership and the General Partners shall incur
no liability for allocations and distributions made in good faith to the
transferring Limited Partner until the written instrument of assignment has been
received by the Partnership and recorded on its books and the Acceptance Date of
the assignment has passed. In the event of any transfer which shall result in
multiple ownership of the transferring Limited Partner's aggregate interest, the
General Partners may require one or more trustees or nominees to be designated
to represent the entire interest for the purpose of receiving all notices which
may be given and all payments which may be made under this Agreement and
exercising all rights which such transferees have pursuant to this Agreement.
(e) Assignees Not Limited Partners. No assignee of a Limited Partner's
interest is entitled to become a Substitute Limited Partner, except as set forth
in paragraph (h) below.
(f) Continuation of Obligations After Transfer. No transfer of an interest
by a Limited Partner, including a transfer of less than all its rights hereunder
or the transfer of all its rights hereunder to more than one party, shall
relieve such Limited Partner of his or her obligations hereunder arising prior
to such transfer, or unless the transferee(s) become(s) a Substitute Limited
Partner(s) pursuant to paragraph (h) below, arising subsequent to such transfer.
(g) Termination of Rights Upon Transfer. At the time of a transfer of a
Limited Partner's interest in accordance with this Article, all the rights
possessed as a Limited Partner in connection with the transferred interest,
which rights otherwise would be held either by the transferor or the transferee,
shall terminate unless the transferee is admitted to the Partnership as a
Substitute Limited Partner pursuant to the provisions of paragraph (h) below,
except that such transferee shall be entitled to receive the economic rights
described in paragraph (e) above.
(h) Admission of Substitute Limited Partners. An assignee or transferee of
Units recognized under this Article may become a Substitute Limited Partner in
place of his or her assignor or transferor, to the extent of the Units assigned
or transferred, only if:
(i) The written and executed instrument of assignment delivered to the
Partnership with respect to such assignment sets forth the intention of the
assignor that the assignee become a Substitute Limited Partner in his or
her place, to the extent of the Units assigned;
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(ii) The assignee or transferee of such Units executes, acknowledges
and delivers to the Partnership a written agreement to become a party to
and be bound by the provisions of this Agreement, in a form satisfactory to
the General Partners, as well as such other instruments as the General
Partners may deem necessary or appropriate with respect to the admission of
such assignee or transferee as a Substitute Limited Partner;
(iii) Such assignee or transferee tenders to the Partnership a
transfer fee, in an amount determined by the General Partners in their sole
discretion sufficient to cover all reasonable expenses incurred by the
Partnership in connection with admission of a Substitute Limited Partner;
and
(iv) The Managing General Partner gives its written consent to the
admission of such assignee or transferee as a Substitute Limited Partner,
which consent may be given or arbitrarily withheld in the sole discretion
of the Managing General Partner (except that, without limiting the
foregoing, the Managing General Partner shall not consent to any such
admission which, in its opinion, would jeopardize the status of the
Partnership as a partnership for federal income tax purposes or would cause
a termination of the Partnership within the meaning of Section 708(b) of
the Code).
It is expressly understood that the Managing General Partner's absolute
discretion to consent or to refuse to consent to the admission of an assignee or
transferee of Units as a Substitute Limited Partner is granted to the Managing
General Partner for the benefit of the Limited Partners in order to negate the
corporate characteristic of free transferability of interests and that exercise
of such discretion is not subject to any standard, including, without
limitation, any standard based on lack of arbitrariness, consistency,
reasonableness, fairness or the best interests of any assignor/transferor or
assignee/transferee of Units. No consent of any of the Limited Partners shall be
required to effect the admission of such an assignee or transferee as a
Substitute Limited Partner except (in the case of an assignment) the consent of
the Limited Partner making such assignment (which shall be evidenced as provided
in clause (i) of paragraph (h) above). The admission date for any Substitute
Limited Partner shall be the last day of the calendar quarter in which the
Managing General Partner gives written consent to the admission of such
Substitute Limited Partner, and on or within 30 days after such admission date
the Managing General Partner shall cause the Agreement to be amended and, as so
amended, filed to reflect the admission of such Substitute Limited Partner.
(i) Allocations of Cash Distributions, Net Income and Net Losses between
Transferors and Transferees. Any assignment or transfer shall be deemed to be
effective as of the first day of the calendar month succeeding the month in
which all of the requirements of this Article are met. Distributions to Limited
Partners allocable to any month shall be paid, with respect to any Unit, to the
person shown on the Partnership's books as holding such Unit on the first day of
such month. Net Income and Net Losses for any period of the Partnership during
which any Unit is assigned or otherwise transferred shall be allocated between
the assignor/transferor and assignee/transferee of such Unit in proportion to
the number of days during such period that each was recognized as the holder of
such Unit, except that extraordinary, nonrecurring items shall be allocated
entirely to the Partners recognized as holding the interest as of the date such
extraordinary event occurs. The Partnership shall not have any obligation to
make payment of any Cash Distributions or allocation of any Net Income or Net
Losses to any assignee or other transferee of Units until and unless such
transfer is recognized by the Partnership in accordance with the provisions of
paragraph (a) or (b) and paragraph (d) above.
(j) Redemptions. Upon the written request of a Limited Partner, the
Partnership may, at the sole discretion of the Managing General Partner, redeem
all or a portion of the Units held by such Limited Partner at a redemption price
equal to the original issuance price, i.e., $500 per Unit.
15. Allocation of Net Income and Net Losses and Cash Distributions.
(a) Allocation of Net Income and Net Losses from Operations.
(i) For all purposes of this Agreement, Net Income and Net Losses
shall be calculated utilizing the method of accounting and depreciation
utilized by the Partnership for federal income tax purposes. Except as
specifically provided in paragraphs (d), (e), (f), (g), (h) and (i) of this
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Article 15 and paragraph (c) of Article 16, Net Income and Net Losses from
operations shall be allocated as follows:
(1) First, the General Partners shall be allocated 1% and the
Limited Partners shall be allocated 99% of Partnership Net Income, Net
Losses, other Noncash Reductions, other Noncash Additions and credits
until such time as the Limited Partners have received aggregate Cash
Distributions in an amount equal to 100% of their aggregate Capital
Contributions; and
(2) Thereafter, the General Partners shall be allocated 25%, and
the Limited Partners shall be allocated 75% of Partnership Net Income,
Net Losses, other Noncash Reductions, other Noncash Additions and
credits from operations.
(ii) As between the General Partners, they shall share in the 1%
allocation pursuant to clause (1) above in the following ratio: the entire
1% to the Managing General Partner. Subject to paragraph (c) of Article 17,
the General Partners shall share in the 25% allocation pursuant to clause
(2) above in the following ratio: one-fifth, or 5%, to the Administrative
General Partner and four-fifths, or 20%, to the Managing General Partner.
(b) Allocations and Election for Tax Purposes. With respect to Partnership
tax years beginning on or after January 1, 1988, Net Income, Net Losses, other
Noncash Reductions, other Noncash Additions and credits for any year shall be
prorated among the Partners on a daily basis, based upon the number of days in
such Partnership tax year that each Partner has been recognized as such by the
Managing General Partner, except that all extraordinary, nonrecurring items
shall be allocated entirely to the Partners recognized as holding the interests
as of the date such extraordinary event occurs.
With respect to the Partnership tax years ending on December 31, 1986 and
December 31, 1987, each Partner's varying interest in the Partnership's Net
Income, Net Losses, other Noncash Reductions, other Noncash Additions and
credits for each year shall be determined by an interim closing of the
Partnership books as of each date that any new Partners are recognized as
Partners by the Managing General Partner during the year. Partners who are
admitted on or before the last day of any calendar month in 1986 and 1987 shall
be recognized as Partners by the Managing General Partner as of the first day of
such month.
All allocations set forth in this Agreement of Net Income, Net Losses and
other items shall govern the reporting of such by the Partnership for federal
income tax purposes. The Partnership shall also be permitted to prepare
financial statements in accordance with generally accepted accounting
principles. For purposes of such financial statements, the Managing General
Partner may provide for such allocation of income and losses as it deems
appropriate and shall not be bound by the tax allocations set forth herein,
except that such financial statements shall not materially distort the financial
interests in and ownership of the Partnership.
Except as set forth in paragraphs (d), (e), (f), (g), (h) and (i) of this
Article and paragraph (c) of Article 16, all items of special tax significance,
whether or not entering into taxable income, including but not limited to gains,
losses and tax credits, shall be allocated in accordance with the Net Income
percentages then in effect under paragraph (a) above.
No election shall be made by the Partnership, the General Partners or any
Limited Partner for the Partnership to be excluded from the application of the
provisions of Subchapter K of the Code.
In the event of the transfer of an interest in the Partnership or upon the
death of an individual party hereto, or in the event of the distribution of
property to any party hereto, the Partnership, if it is deemed by the Managing
General Partner to be in the best interest of a majority of the Limited Partners
or if the Managing General Partner in its sole discretion otherwise determines
to do so, may file an election, in accordance with applicable Treasury
regulations, to cause the basis of the Partnership assets to be adjusted for
federal income tax purposes as provided in Sections 734 and 743 of the Code.
(c) Cash Distributions. The Managing General Partner will determine at
least annually the amount of Cash Available for Distribution, if any, after
payment of all Partnership expenses, current debt service and the establishment
of such reserves as it reasonably deems to be appropriate. Subject to paragraph
(c)
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of Article 16, Cash Available for Distribution will be paid to the Limited
Partners and the General Partners in accordance with the allocation of Net
Losses then in effect, as set forth in paragraph (a) above, without regard to
paragraphs (d), (e), (f), (g), (h) and (i) of this Article. Notwithstanding
anything in this Agreement to the contrary, prior to the General Partners
receiving Cash Distributions for any year, the Limited Partners must receive
Cash Distributions equal to at least 50% of the Limited Partners' allocable
share of the Net Income for such year, based on projections by the Managing
General Partner of the Net Income of the Partnership for such year. If Cash
Distributions would be made to the General Partners except for the limitation in
the preceding sentence, such deferred Cash Distributions shall be made to the
General Partners as soon as possible in subsequent years from the Cash Available
for Distribution for those years (subject to the 50% limitation for such years)
or from the distribution of assets upon liquidation. This payment of the
deferred Cash Distributions shall be in addition to Cash Distributions otherwise
payable to the General Partners in such subsequent years or the amount of assets
which would otherwise be distributed to the General Partners upon liquidation.
(d) Installment Sales. In the event of a sale of all or any portion of the
Partnership assets where payment of a portion of the sales price is deferred and
the Partnership uses the installment sale method to report such gain, the
Capital Accounts of the Partners shall be fully adjusted upon closing of the
sale in accordance with paragraph (a) of this Article or paragraph (c) of
Article 16, as applicable, as though the full sales price had been received by
the Partnership in cash at closing. Upon ultimate receipt of such deferred sales
proceeds, gain shall be allocated among the Partners in proportion to the amount
of the excess, if any, of the gain credited to each Partner's Capital Account at
the time of the sale over the amount of gain recognized for federal income tax
purposes at the time of such sale, but such allocation of gain upon receipt of
proceeds shall not increase (again) the Partners' Capital Accounts. Interest
income earned or accrued by the Partnership on an installment obligation
subsequent to the closing of an installment sale shall be allocated among the
Partners in proportion to their relative positive Capital Account balances after
adjustment of such accounts in accordance with this paragraph (d) and as
reduced, from time to time, for Cash Distributions made by the Partnership to
the Partners.
(e) Recapture Amounts. Notwithstanding anything to the contrary, in the
case of ordinary income upon disposition of Partnership assets resulting from
the application of Section 1245 or 1250 of the Code, for purposes of paragraph
(a) of this Article and paragraph (c) of Article 16, such ordinary income shall
be allocated as follows:
(i) first, to each of the Partners proportionately in an amount equal
to the excess, if any, of the cumulative Net Losses allocated to such
Partner pursuant to this Article over the cumulative Net Income allocated
to such Partner pursuant to this Article; and
(ii) thereafter, 75% to the Limited Partners and 25% to the General
Partners.
(f) Negative Capital Account Limitation. No Partner shall be allocated Net
Losses or other Noncash Reductions if such allocation would cause a deficit
balance in such Partner's Capital Account unless the Capital Account balances of
all other Partners are equal to zero. Capital Account balances for the purposes
of this paragraph shall be treated as having been reduced for (i) allocations of
losses and deductions which are reasonably expected to be made as of the end of
the taxable year to such Partner pursuant to Code Section 704(e)(2), Code
Section 706(d) and Treas. Reg. Sec. 1.751-l(b)(2)(ii), and (ii) for
distributions which at the end of the taxable year are reasonably expected to be
made to such Partner to the extent that said distributions exceed offsetting
increases to such Partner's Capital Account that are reasonably expected to
occur during (or prior to) the taxable years in which such distributions are
reasonably expected to be made. Net Losses and other Noncash Reductions which
are subject to the limitation of this paragraph shall be reallocated among the
Partners with positive Capital Account balances until such time as all Partners
have zero balances in their Capital Accounts and, thereafter, Net Losses and
other Noncash Reductions will be allocated among the Partners pursuant to
paragraph (a) of this Article to the extent such allocations are permitted under
paragraph (g) of this Article. For purposes of this paragraph and paragraph (h)
of this Article, each Partner shall be treated as having already contributed any
amount for which such Partner has a mandatory contribution obligation (including
the
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amount of any Capital Account deficit such Partner is obligated to restore upon
liquidation) provided that such contribution must be made in all events within
90 days of liquidation of the Partnership ("Mandatory Obligation").
(g) Cumulative Loss Allocations.
(i) Notwithstanding anything contained in this Article to the contrary,
cumulative allocations of Net Losses to any Limited Partner shall not exceed the
cumulative sum of the following amounts determined as of the end of each taxable
year of the Partnership: (a) the amount of such Limited Partner's Capital
Contribution determined pursuant to Article 8 plus the amount of such Limited
Partner's uncontributed Mandatory Obligation less the amount of any cash or
property distributed to such Limited Partner; and (b) such Limited Partner's
cumulative share of Net Income or other Noncash Allocations. To the extent the
foregoing limitation results in non-allocation to a Limited Partner of
Partnership Net Losses which would otherwise be allocated to him, such Net
Losses shall be allocated pro rata to other Limited Partners to the extent each
such other Limited Partner may be allocated further Net Losses under the
foregoing limitation, and any remaining Net Losses for the taxable year in
question shall be allocated to the General Partners.
(ii) To the extent the foregoing limitation in clause (i) immediately above
results in a non-allocation to the Limited Partners of Partnership Net Losses
and in an allocation of such Net Losses to the General Partners ("Reallocated
Limited Partners' Losses"), the General Partners shall be allocated, in
subsequent taxable years, all Partnership Net Income until such time as they
have been allocated Net Income in an amount equal to the Reallocated Limited
Partners' Losses plus the Net Income the General Partners would have otherwise
been allocated notwithstanding this clause (ii).
(iii) Notwithstanding the limitation in clause (i) above, the Managing
General Partner may elect to have Net Losses continue to be allocated 99% to the
Limited Partners and 1% to the General Partners, provided that the Managing
General Partner obtains an opinion from tax counsel that such an allocation is a
reasonable interpretation of the requirements of Section 704(b) of the Code and
Treasury Regulations promulgated thereunder, provided that if Net Losses
otherwise subject to the limitation of clause (i) above are subsequently
disallowed and reallocated to the General Partners; the General Partners shall
then be allocated all future Partnership Net Income until such time as they have
been allocated additional future Net Income equal to such disallowed and
reallocated Net Losses.
(h) Qualified Income Offset. Notwithstanding anything contained in this
Article to the contrary, there shall be reallocated to each Limited Partner with
a negative balance in his or her Capital Account (determined after the
allocation of income, gain and loss under this Article for such year) each item
of Partnership gross income (unreduced by any deductions) and gain until such
time as the deficit in his or her Capital Account is eliminated. In the event
that for any taxable year Partnership gross income or gain is less than the
deficit balances of all the Limited Partners, such gross income or gain shall be
allocated in proportion to the relative deficit balances of the respective
Limited Partners.
(i) Modifications to Partnership Allocations. It is the intent of the
Partners that each Partner's distributive share of income, gain, loss,
deduction, or credit (or items thereof) shall be determined and allocated in
accordance with this Article and Article 16 to the fullest extent permitted by
Section 704(b) of the Code. In order to preserve and protect the determinations
and allocations provided for in this Article and Article 16, the Managing
General Partner shall be, and hereby is, authorized and directed, upon receipt
of an opinion of counsel, to allocate income, gain, loss, deduction, or credit
(or items thereof) arising in any year different from the manner otherwise
provided for in this Article and Article 16 if, and to the extent that,
allocating income, gain, loss, deduction, or credit (or items thereof) in the
manner provided for in this Article and Article 16 would cause the determination
and allocation of each Partner's distributive share of income, gain, loss,
deduction, or credit (or items thereof) not to be permitted by Section 704(b) of
the Code and Treasury Regulations promulgated thereunder ("Treasury
Regulations"). Any allocation made pursuant to this paragraph (i) (including all
three clauses thereof) shall be deemed to be a complete substitute for any
allocation otherwise provided for in this Article and Article 16 and no
amendment of this Agreement or approval of any Partner shall be required.
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16. Dissolution and Winding Up of the Partnership.
(a) Dissolution. The Partnership shall be dissolved at the expiration of
the term of the Partnership as set forth in Article 7 unless sooner terminated
upon any of the events as hereinafter set forth:
(i) A Majority Vote of the Limited Partners to dissolve and wind up;
or
(ii) The adjudication of bankruptcy, incompetency, removal, withdrawal
(which withdrawal shall take effect sixty (60) days after written notice
thereof is given to all other Partners), or termination of the existence of
a General Partner, unless (a) at the time there is at least one other
General Partner who consents to carry on the business, or (b) within ninety
(90) days after the occurrence of any such event all the Limited Partners
agree in writing to continue the business of the Partnership and to the
appointment of a substitute General Partner. In the event of removal or
withdrawal of the Administrative General Partner, the Managing General
Partner may, in its sole discretion, elect a substitute Administrative
General Partner without the consent of the Limited Partners.
Subject to paragraph (c) of Article 17, a General Partner may not
assign its interest as a General Partner in the Partnership without the
consent of a majority in interest of the Limited Partners; provided,
however nothing herein shall prohibit a General Partner from substituting
another corporation or entity as a General Partner and assigning its
interest in the Partnership to such other corporation or entity in
connection with an acquisition by or merger with such corporation or entity
so long as such corporation or entity assumes all the obligations of such
General Partner with regard to the Partnership; provided, further, nothing
herein shall prohibit a General Partner from pledging or otherwise
assigning its interest (but not its right to manage the Partnership) as
collateral for any loan;
(iii) The Partnership becomes insolvent or bankrupt;
(iv) The disposition, sale or abandonment of all or substantially all
of the assets of the Partnership other than in the ordinary course of
business; or
(v) The occurrence of any event that makes it unlawful for the
business of the Partnership to be continued.
(b) Winding Up. Upon the occurrence of an event causing the termination
and/or dissolution of the Partnership, the General Partners shall wind up the
business and affairs of the Partnership. In the event there is no remaining
General Partner because of bankruptcy, incompetency, withdrawal, removal,
resignation or termination of the existence of both General Partners, the
Limited Partners shall elect, by Majority Vote of the Limited Partners, a
trustee to wind up the business and affairs of the Partnership and shall
determine such trustee's compensation.
(c) Allocation of Gain and Loss. Upon sale or other disposition of the
Partnership's assets other than in the ordinary course of business, including by
reason of dissolution, involuntary conversion or condemnation, the gain or loss
of the Partnership attributable to such disposition shall be determined and loss
shall be allocated pro rata to those Partners having positive Capital Account
balances in proportion to and to the extent of such positive balances, and
thereafter to the General Partners, and gain shall be allocated as follows:
(i) First, to those Partners having negative Capital Account balances
in proportion to such negative balances until such negative balances are
eliminated and the balances are restored to zero. In determining the size
of the negative balance in a Partner's Capital Account and the amount of
the gain that needs to be allocated to restore said account to zero,
distributions of sale proceeds resulting from the transaction that produced
the gain and any allocations made pursuant to the remaining provisions of
this paragraph (c) shall be disregarded;
(ii) Second, 99% to the Limited Partners and 1% to the General
Partners until such time as the Limited Partners' aggregate Capital Account
balances equal the excess, if any, of their aggregate Capital Contribution
over the sum of the aggregate Cash Distributions made by the Partnership to
the
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Limited Partners prior to the sale or other disposition (such excess, if
any, shall be referred to as the "Limited Partners' Unreturned Capital
Contributions");
(iii) Third, to the General Partners until such time as the General
Partners' aggregate Capital Account balances equal the sum of 1.01% of the
Limited Partners' Unreturned Capital Contributions plus one-third ( 1/3) of
the excess, if any, of the Limited Partners' aggregate Capital Account
balances over the Limited Partners' Unreturned Capital Contributions;
(iv) Finally, the balance of the remaining portion of gain shall be
allocated among the General Partners and Limited Partners in accordance
with the Net Income allocation percentages set forth in clause (a)(i)(2) of
Article 15.
(d) Distribution of Assets Upon Liquidation and Winding Up of the
Partnership. Upon the sale of all or substantially all of the Partnership's
assets and/or the dissolution and winding up of the Partnership, the cash and
unsold assets of the Partnership, if any, shall be distributed in the following
order of priority (after the allocations of gains and losses to the Partners'
Capital Accounts are made pursuant to paragraph (c) of this Article):
(i) First, to payment of all loans and obligations of the Partnership,
including loans made by a General Partner and any Affiliates of the General
Partners and any deferred management fees not previously paid;
(ii) Second, to the setting up of any reserves which the Managing
General Partner in its sole discretion deems reasonably necessary for any
contingent liabilities or obligations of the Partnership or of the General
Partners arising out of or in connection with the Partnership. Such
reserves shall be placed in escrow by the Managing General Partner to be
held for the purpose of disbursing such reserves in payment of any such
contingencies, and, at the expiration of such period as the Managing
General Partner in its sole discretion deems advisable, distributing the
remaining balance in the manner hereinafter provided;
(iii) Third, to the Partners pro rata in the amount of their positive
Capital Account balances after such balances have been fully adjusted in
accordance with paragraph (c) of this Article and Article 15; and
(iv) Finally, the balance, if any, to the Partners in proportion to
the Net Income allocation percentages as set forth in clause (a)(i)(2) of
Article 15.
(e) Deficit Capital Accounts at Liquidation. It is understood and agreed
that one purpose of the provisions of Articles 15 and 16 is to ensure that none
of the Partners has a negative Capital Account balance after liquidation and to
ensure that all allocations under Article 15 will be respected by the Internal
Revenue Service. The Partners and the Partnership do not intend nor expect that
any Partner will have a negative Capital Account balance after liquidation, and
the provisions of this Agreement shall be construed and interpreted to give
effect to such intention. However, except as provided below, no Partner shall
have any obligation upon dissolution of the Partnership or at any other time to
restore a negative Capital Account balance other than to contribute any amounts
required under Article 8 that remain uncontributed. Notwithstanding the
foregoing sentence, upon dissolution of the Partnership the General Partners
shall be obligated to make a Capital Contribution to the Partnership equal to
the lesser of (i) the negative aggregate balances in the General Partners'
Capital Accounts after such accounts have been fully adjusted for all
Partnership items pursuant to Article 15 and paragraph (c) of this Article, and
(ii) the excess of 1.01% of the total Capital Contributions made by all Partners
to the Partnership over the total of all Capital Contributions made to date by
the General Partners.
(f) Responsibility of the General Partners or Trustee in Liquidating and
Winding Up the Partnership. Upon dissolution and winding up of the Partnership,
the General Partners or trustee, as the case may be, shall have a certified
public accountant complete a review of the books and prepare an unaudited
statement which shall be furnished to all Partners. The Limited Partners shall
look solely to the assets of the Partnership and not to the General Partners or
the trustee for the return of any portion of their capital.
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17. Limited Partners' Removal of a General Partner.
(a) Election to Remove.
(i) Limited Partners holding 10% of the Units of the Partnership may
request, in writing to the General Partners, a vote for the purpose of
removing a General Partner and/or cancelling any contract for services with
it or its Affiliates, or for adding a new General Partner(s).
(ii) Within 10 days of the General Partners' receipt of such request,
the General Partners shall furnish the Limited Partners with a written
ballot to vote on whether to take such action. The ballot will require that
it be received by the General Partners within 30 days after the date of
mailing as specified in the ballot in order to be valid and counted; and
(iii) The affirmative Majority Vote of the Limited Partners to take
such action, including Units held by Limited Partners who do not vote or
whose ballots were invalid, shall be necessary to remove a General Partner
and/or to cancel any contract for services with it or its Affiliates, or to
add a new General Partner(s).
(b) General Partners' Interest Upon Removal.
(i) In the event a General Partner is removed pursuant to this
Article, it shall be relieved of any and all liabilities as permitted under
the Washington Uniform Limited Partnership Act.
(ii) Upon removal, the General Partner shall be entitled to the fair
market value of its interest at the time of removal as determined by an
independent appraiser. The fair market value shall include prospective
values under Article 15 and paragraphs (c) and (d) of Article 16, to the
extent appropriate. The independent appraiser shall be mutually agreed upon
by the removed Genera} Partner and a Majority Vote of the Limited Partners
or a representative thereof elected by a Majority Vote of the Limited
Partners. In the event the Partners cannot within 15 days of such removal
agree on an appraiser, then the valuation of the removed General Partner's
interest shall be submitted to arbitration in accordance with paragraph (j)
of Article 20; and
(iii) Upon removal, the removed General Partner shall be paid the
value of its interest, as determined in subparagraph (b)(ii) above, in cash
or by the issuance of a promissory note bearing interest at 12% per annum
to be paid in five equal annual installments beginning with the end of the
first fiscal year during which such removal occurs.
(c) Withdrawal of Administrative General Partner. Notwithstanding anything
else in this Agreement to the contrary, in the event (a) John S. Simmers
withdraws as a joint venture partner of FN Equities Joint Venture and is not
replaced by Miles Z. Gordon or another individual or entity satisfactory to the
Managing General Partner in its sole discretion, or (b) John S. Simmers and
Miles Z. Gordon no longer serve as directors of FN Equities, Inc., then, at the
request of the Managing General Partner: (i) FN Equities Joint Venture shall
immediately withdraw without compensation as Administrative General Partner of
the Partnership, and shall no longer have any rights or interest in the
Partnership; (ii) all compensation, all allocations of Net Income, Net Losses,
other Noncash Reductions, other Noncash Additions, credits, net gains and net
losses, and all Cash Available for Distribution and other distributions to which
the Administrative General Partner would otherwise be entitled (including but
not limited to all amounts allocable pursuant to subparagraph (a)(ii) of Article
15) (collectively, "FNEJV Compensation") shall be allocated and distributed to
the Managing General Partner from the date the Managing General Partner
requested that the Administrative General Partner withdraw; and (iii) the
Managing General Partner shall assume all duties, responsibilities and authority
previously granted to the Administrative General Partner; provided, however,
that the Managing General Partner may, in its sole discretion, grant all or any
portion of the FNEJV Compensation to any individual or entity, including but not
limited to Messrs. Simmers or Gordon or FN Equities Joint Venture, in return for
which such individual or entity shall render administrative services to the
Partnership.
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18. Records and Reports.
(a) Books and Records. The books and records of the Partnership shall be
maintained in accordance with the method determined by the General Partners in
their sole discretion to be in the best interests of the Partnership.
(b) Quarterly Reports. The Limited Partners will receive quarterly reports
for the first two years of Partnership operations. Such reports shall set forth
all fees received by the General Partners and their Affiliates during the
quarter period.
(c) Semi-Annual Reports. The Limited Partners will receive, in addition to
the quarterly reports indicated above, within sixty (60) days after the
Partnership's first six-month period of operations and each six-month period
following the end of the Partnership's fiscal year, an unaudited balance sheet,
statement of income and cash flow statement covering such period.
(d) Annual Report. Within one hundred twenty (120) days after the end of
the Partnership's fiscal year, the General Partners shall prepare and cause to
be distributed to each Limited Partner an audited statement of the Partnership's
operations for such year, including a balance sheet as of the end of the fiscal
year and statements of income, partners' equity and changes in financial
position, a cash flow statement for such year and a report of the activities of
the Partnership during such year. Said statements will be audited either
according to generally accepted accounting principles and will be accompanied by
an auditor's report containing an opinion of independent certified public
accountants.
(e) Additional Reports. The General Partners may distribute to Limited
Partners such additional reports as they believe, in their sole discretion, are
appropriate.
(f) Tax Information. Within 75 days after the end of the Partnership's
fiscal year, the General Partners shall furnish each Limited Partner such
information as is necessary for the proper preparation of the Limited Partner's
federal income tax returns.
(g) Filings with Regulatory Authorities. All reports required by regulatory
authorities shall be filed within a reasonable time period, including such of
the above reports as are required pursuant to the rules and regulations of any
applicable state securities authority.
19. Amendment of the Certificate and Agreement of Limited Partnership.
(a) Amendments by General Partners Without Consent of Limited Partners. The
General Partners may amend this Agreement, without the consent of any of the
Limited Partners, to (i) admit any Limited Partner, Substitute Limited Partner
or additional Limited Partner in accordance with the provisions of Article 8 or
14, (ii) change the name and/or principal place of business of the Partnership,
or (iii) cure any ambiguity, or correct or supplement any provision hereof which
may be inconsistent with any other provision hereof, or to make amendments with
respect to any matter or question arising under this Agreement so long as such
additional provision is not inconsistent herewith; provided, however, that no
amendment shall be adopted pursuant to this Article unless the adoption thereof
(i) is for the benefit of or not adverse to the interests of the Limited
Partners, (ii) does not alter, adversely to the Limited Partners or any of them,
the allocations of Cash Distributions, Net Income or Net Losses among the
Limited Partners or between the Limited Partners and the General Partners, and
(iii) does not affect the limited liability of the Limited Partners or the
status of the Partnership as a partnership for federal income tax purposes.
(b) Amendment by Majority Vote of the Limited Partners Without Consent of
the General Partners. The Limited Partners may amend this Agreement pursuant to
a Majority Vote of the Limited Partners without the consent of the General
Partners, except that the Limited Partners may not so amend:
(i) Any provision of this Agreement that affects the rights of or
payments, allocations, compensation and reimbursements to the General
Partners without the consent of the General Partners; and
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(ii) Any provision of this Agreement so as to convert a Limited
Partner's interest into a General Partner's interest or otherwise modify
the limited liability of Limited Partners without the consent of each
Limited Partner adversely affected thereby; provided, further, that this
paragraph (b) may be amended only by the consent of all of the Partners.
(c) Amendments by General Partners with a Majority Vote of the Limited
Partners. In addition to any amendment otherwise authorized herein, this
Agreement may be amended by the General Partners with the consent, pursuant to a
Majority Vote, of the Limited Partners; provided, however, that this Agreement
may not be amended so as to convert a Limited Partner's interest into a General
Partner's interest or otherwise modify the limited liability of a Limited
Partner without the consent of each Limited Partner adversely affected thereby;
provided further that this paragraph (c) may be amended only by the consent of
all of the Partners.
(d) Execution and Recording of Amendments. Any amendment to this Agreement
adopted in accordance with the provisions of this Article or in accordance with
any other provisions of this Agreement shall be executed by the Managing General
Partner for itself and as attorney-in-fact for the other Partners pursuant to
the power of attorney contained in paragraph (f) of Article 20 (except that any
such amendment requiring the consent of a Limited Partner under paragraph (b) or
(c) above, other than the consent of a Limited Partner to the admission of an
assignee of any of his or her Units as a Substitute Limited Partner, shall be
executed by such Limited Partner personally, or by the Managing General Partner
as attorney-in-fact for such Limited Partner under a power of attorney given
expressly with respect to such amendment). After the execution of such
amendment, the General Partners shall prepare and record or file any certificate
or other document which may be required to be recorded or filed with respect to
such amendment; either under the Washington Uniform Limited Partnership Act or
under the law of any other applicable jurisdiction.
20. Miscellaneous Provisions.
(a) Notices. All notices or statements required to be given under this
Agreement by any party to any other party shall be in writing, sent by telegram
or certified mail and, if to the Limited Partners, addressed as shown opposite
the signature on the Signature Page and Power of Attorney to the Subscription
Agreement; if to the General Partners, addressed as follows:
Managing General Partner:
Northland Communications Corporation
3500 One Union Square Building
Seattle, Washington 98101
Administrative General Partner:
FN Equities Joint Venture
3858 Carson Street, Suite 300
Torrance, California 99503
Notices shall be given and any applicable time shall run from the date such
notice is placed in the mails or delivered to the telegraph company as to any
notice given by a General Partner, and when received as to any notice given by
any other party.
Any notice to a party other than the General Partners, including a notice
requiring concurrence or nonconcurrence, shall be effective, and any failure to
respond binding, irrespective of whether or not such notice is actually
received, and irrespective of any disability or death on the part of the notice,
whether or not known to the party giving such notice.
The address of any party hereto may be changed by written notice to the
Limited Partners in the event of a change of address by the General Partners, or
to the General Partners in the event of change of address by a Limited Partner;
provided, that in the event of a transfer of interest hereunder, no notice to
any such transferee shall be required, nor shall such transferee have any rights
hereunder, until notice
B-22
134
thereof shall have been given to the General Partners. Any transfer of interests
hereunder shall not increase the duty to give notice, and in the event of a
transfer of less than all of a party's interest hereunder or the transfer of
interest hereunder to more than one party, notice to any owner of any portion of
such transferred interests shall be notice to all owners thereof.
(b) Applicable Law. Notwithstanding the place where this Agreement may be
executed by any of the parties hereto, the parties expressly agree that all the
terms and provisions hereof shall be construed under the internal laws of the
State of Washington and that the Washington Uniform Limited Partnership Act as
now adopted or as may be hereafter amended shall govern the partnership aspects
of this Agreement.
(c) Captions. Headings used herein are for reference purposes only and do
not affect the meaning or interpretation of this Agreement.
(d) Execution in Counterparts. This Agreement may be executed in any number
of counterparts with the same effect as if the parties hereto had all signed the
same document, and all of such counterparts shall constitute one and the same
document.
(e) Successors in Interest. Subject to the restrictions against assignment
as herein contained, this Agreement shall inure to the benefit of and shall be
binding upon successors in interest, personal representatives, estates, heirs,
or assignees hereto.
(f) Power of Attorney. Each Partner, including the Administrative General
Partner, hereby makes, constitutes and appoints the Managing General Partner,
with full power of substitution and resubstitution, his or her true and lawful
attorney-in-fact, for him or her and in his or her name, place and stead and for
his or her use and benefit, to sign, acknowledge, file and record: (a) this
Agreement, as well as amendments thereto, under the laws of the State of
Washington or the laws of any other state in which such Agreement or amendment
is required to be filed; (b) any other instrument or document which may be
required to be filed by the Partnership under the laws of any state or of any
governmental agency, or which the General Partners deem it advisable to file;
(c) any instruments or documents which may be required to effect the
continuation of the Partnership, or the dissolution and termination of the
Partnership, provided such continuation or dissolution and termination are in
accordance with the terms of this Agreement; (d) any instrument or documents
relating to the acquisition of Partnership properties, including, but not
limited to, purchase and sale agreements and loan documents relating to the
financing of the acquisition of Partnership properties; (e) any instruments or
documents relating to operating, management or agency agreements; (f) contracts,
instruments, agreements or other documents with utilities, franchise or similar
operating authorities; and (g) all agreements or other instruments required or
deemed beneficial to implement the power granted to the General Partners under
this Agreement.
Each of the Partners, including the Administrative General Partner, does
hereby further agree, whenever requested to do so, personally to sign, swear or
affirm under oath, acknowledge and deliver any such instrument or document
provided for under this paragraph (f), and to sign, swear or affirm under oath,
acknowledge and deliver whatever further documents or instruments may be
required by the Managing General Partner.
The power of attorney granted hereunder to the Managing General Partner:
(i) Is a special power of appointment coupled with an interest, is
irrevocable, and shall (to the extent permitted by applicable law) survive
the death or disability of the Partner;
(ii) Shall survive the delivery of an assignment by a Limited Partner
of all or any portion of his or her Units; except where the assignee
thereof has been approved by the Managing General Partner for admission to
the Partnership as a Substitute Limited Partner, the power of attorney
shall survive the delivery of such assignment for the sole purpose of
enabling the Managing General Partner to execute, acknowledge and file any
instrument necessary to effect such substitution; and
B-23
135
(iii) May be exercised by the Managing General Partner for each
Partner by a facsimile signature or by listing all of the Partners
executing any instrument with a single signature as attorney-in-fact for
all of them.
(g) Meetings. At any time, or from time to time, Limited Partners owning
ten percent (10%) or more of the Units may require, by written notice to the
General Partners specifying in general terms the subjects to be considered, the
General Partners to call, or the General Partners may on their own motion call,
a special meeting of the Limited Partners; and the General Partners, within ten
(10) days after any such notice is received, shall give notice of such special
meeting to all Limited Partners whose addresses are on record with the
Partnership, including in such notice a copy of the notice requiring the call.
Meetings may be held within or without the state of Washington and not sooner
than five nor more than twenty days after the giving of such notice, and votes
at such meetings may be accomplished either in person or by proxy.
(h) Gender and Headings. The use of any gender herein shall be deemed to be
or include the other and the use of the singular herein shall be deemed to be or
include the plural (and vice versa) wherever appropriate.
(i) Arbitration. Any controversy between the parties hereto arising out of
this Agreement shall be submitted to arbitration before any arbitrator or
arbitrators chosen in accordance with the rules of the American Arbitration
Association. Such arbitration shall take place in Seattle, Washington unless the
parties mutually agree otherwise.
(j) No Third Party Beneficiaries. Unless explicitly stated to the contrary
herein, there shall be no third party beneficiaries to this Agreement.
21. Addresses. The addresses of the General Partners, the Original Limited
Partner and the additional Limited Partners are as follows:
Managing General Partner
Northland Communications Corporation
3500 One Union Square Building
Seattle, Washington 98101
Administrative General Partner:
FN Equities Joint Venture
3858 Carson Street, Suite 300
Torrance, California 90503
Original Limited Partner:
Richard I. Clark
3500 One Union Square Building
Seattle, Washington 98101
Limited Partners:
(Set forth on attached Schedule A)
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136
DATED as of the 3rd day of
November, 1986.
Managing General Partner: NORTHLAND COMMUNICATIONS
CORPORATION
By
-----------------------------------
John S. Whetzell, President
Administrative General Partner: FN EQUITIES JOINT VENTURE
By: FN Equities, Inc., General
Partner
----------------------------------
By
-----------------------------------
Its Executive Vice President
Original Limited Partner,
hereby withdrawing: ------------------------------------
Richard I. Clark
By: NORTHLAND COMMUNICATIONS
CORPORATION,
as attorney-in-fact
Limited Partners (as set
forth on the attached
Schedule A): By
-----------------------------------
John S. Whetzell, President
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137
EXHIBIT C
PROPOSED AMENDMENT NO. 1 TO THE AMENDED AND RESTATED AGREEMENT OF
LIMITED PARTNERSHIP OF
NORTHLAND CABLE PROPERTIES SIX LIMITED PARTNERSHIP
This amendment to the Amended and Restated Agreement of Limited Partnership
(the "Amendment") of Northland Cable Properties Six Limited Partnership, a
Washington limited partnership ("NCP-Six"), is entered into by and between
Northland Communications Corporation, a Washington corporation, as the managing
general partner of NCP-Six, and a majority in interest of all of the limited
partners of NCP-Six. The parties agree as follows:
1. Amendment. The Amended and Restated Agreement of Limited
Partnership of Northland Cable Properties Six Limited Partnership, dated
November 3, 1986 (the "Agreement"), is hereby amended by replacing Article
7 in its entirety with the following new Article 7:
"7. Term of Partnership. The Partnership commenced as of the date
of filing and recording the original certificate of limited partnership
of the Partnership and shall continue until the date of the first of the
following events:
(a) December 31, 2007; or
(b) Dissolution as provided in Article 16 of this Agreement."
2. Effect of Amendment. Except as expressly amended by this Amendment,
the Agreement shall remain in full force and effect.
DATED this day of , 2001.
NORTHLAND COMMUNICATIONS CORPORATION,
as both managing general partner of
Northland Cable Properties Six Limited
Partnership, and as attorney-in-fact
for a majority in interest of the
limited partners of Northland Cable
Properties Six Limited Partnership.
By:
------------------------------------
John S. Whetzell, President
C-1
138
EXHIBIT D
PROPOSED AMENDMENT NO. 2 TO THE AMENDED AND RESTATED AGREEMENT OF
LIMITED PARTNERSHIP OF
NORTHLAND CABLE PROPERTIES SIX LIMITED PARTNERSHIP
This amendment to the Amended and Restated Agreement of Limited Partnership
(the "Amendment") of Northland Cable Properties Six Limited Partnership, a
Washington limited partnership ("NCP-Six"), is entered into by and between
Northland Communications Corporation, a Washington corporation ("Northland"), as
the managing general partner of NCP-Six, and a majority in interest of all of
the limited partners of NCP-Six. The parties agree as follows:
1. Amendment. The Amended and Restated Agreement of Limited
Partnership of Northland Cable Properties Six Limited Partnership, dated
November 3, 1986 (the "Agreement"), is hereby amended by adding a new
Article 22 as follows:
"22. Sale and Distribution to Northland Communications Corporation.
"(a) Authority for Agreement. The Partnership is hereby
authorized to enter into an agreement (the "Northland Agreement")
with Northland Communications Corporation or its assigns
("Northland") to (i) sell to Northland the undivided portion of the
franchises and operating assets of the Partnership (collectively, the
"Assets") that are attributable to the Limited Partners' collective
interest in the Partnership, and (ii) distribute in kind to Northland
the undivided portion of the Assets that are attributable to the
general partner's interest in the Partnership. The terms and
conditions of the Northland Agreement shall be substantially as
described in the proxy statement of the Partnership dated April 15,
2001 (the "Proxy Statement"). This Article 22 relates only to the
acquisition of the Assets by Northland and shall not, in any respect,
restrict or otherwise affect the authority of the general partner to
sell or otherwise dispose of the Assets to unaffiliated third parties
in accordance with Article 11.
"(b) Allocation of Gain and Cash Distributions. Gain from the
sale by the Partnership to Northland of the undivided portion of the
Assets that are attributable to the Limited Partners' collective
interest in the Partnership shall be allocated solely to the Limited
Partners in accordance with paragraph 16(c) of this Agreement.
Distributions on and following the Closing Date shall be made in
accordance with paragraph 16(d) of this Agreement, except that any
liquidating distributions to the general partner shall be in kind and
shall include the in-kind distribution to Northland of the undivided
portion of the Assets that are attributable to the general partner's
interest in the Partnership, and any liquidating distributions to the
Limited Partners shall be monetary and shall include the net proceeds
from the sale to Northland. The promissory note to be paid by
Northland as part of the purchase price for the Assets shall be
distributed to a liquidating trust as set forth in the Proxy
Statement. All other allocations of income, gain or loss and
distributions of cash shall be made to all the Partners in accordance
with this Agreement.
"(c) Reports. The general partner shall not be obligated to
furnish quarterly, semi-annual or annual reports pursuant to
paragraph 18(b), (c) or (d) of this Agreement for the year in which
such liquidation occurs."
2. Amendment. Paragraph 16(f) of the Agreement is further amended, to
be consistent with new Article 22 above, to read in its entirety as
follows:
"(f) Responsibility of the General Partner or Trustee in
Liquidating and Winding Up the Partnership. The Limited Partners
shall look solely to the assets of the Partnership and not to the
General Partner or the trustee, as the case may be, for the return of
any portion of their capital.
D-1
139
Notwithstanding anything else in this Agreement to the contrary,
except as provided in and in accordance with Article 22 below, no assets
of the Partnership will be distributed in kind to the Partners in
liquidation unless a liquidating trust or similar vehicle is used in
connection with such distribution."
3. Authorization of General Partner. The general partner is authorized
to take all other and further action deemed by it necessary or appropriate
to effect the foregoing, including but not limited to the creation of a
liquidating trust for purposes of collecting note payments, taking all
other actions generally described in the Proxy Statement, and carrying on
other appropriate business following dissolution of NCP-Six.
4. Effect of Amendment. Except as expressly amended by this Amendment,
the Agreement shall remain in full force and effect.
DATED this day of , 2001.
NORTHLAND COMMUNICATIONS CORPORATION,
as both managing general partner of
Northland Cable Properties Six Limited
Partnership, and as attorney-in-fact
for a majority in interest of the
limited partners of Northland Cable
Properties Six Limited Partnership.
By:
------------------------------------
John S. Whetzell, President
D-2
140
EXHIBIT E
ADELPHIA TRANSACTION
ASSET PURCHASE AGREEMENT
PURCHASE AND SALE AGREEMENT
THIS AGREEMENT, made this day of February, 2001, by and between
NORTHLAND CABLE PROPERTIES SIX LIMITED PARTNERSHIP, a Washington limited
partnership ("Seller"), and ADELPHIA COMMUNICATIONS CORPORATION, a Delaware
corporation ("Buyer").
RECITALS
WHEREAS, Seller owns and operates the community antenna television ("CATV")
systems in and around Bennettsville, South Carolina (the "Acquired System"); and
WHEREAS, Buyer desires to purchase from Seller, and Seller desires to sell
to Buyer, on the terms and conditions hereinafter set forth, substantially all
of the assets of Seller used in the operation of the Acquired System, except the
Excluded Assets (as defined in Section 1.3).
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein set forth and each act done pursuant hereto, the parties hereto,
intending to be legally bound, do represent, warrant, covenant and agree as
follows:
1. PURCHASE AND SALE OF ASSETS.
1.1 Transfer of Assets.
On the Closing Date, as defined in Section 2.1, Seller shall sell, convey,
transfer and assign to Buyer, and Buyer shall purchase from Seller, all of the
assets of Seller of every kind and character, real, personal, tangible,
intangible or mixed, used by, or held for use by, Seller in connection with the
operation of, the Acquired System in existence on the Closing Date (the "Assets
to be Acquired"), which shall include, but not be limited to, the following:
(a) All items of tangible personal property owned or leased and used
by Seller in connection with the operation of the Acquired System,
including all equipment associated with receiving and distributing signals
at the head-end sites, and all other antennas and down leads and all
electronic equipment, head-end amplifiers and associated equipment, line
amplifiers, aerial and underground trunk and feeder line cable,
distribution plant, programming signal decoders for each satellite service
which scrambles its signal, converters, housedrops, including disconnected
housedrops, installed subscriber devices, utility poles (if owned by
Seller), local origination equipment (wherever located), test equipment,
machinery, spare equipment and parts inventory, housedrop equipment
inventory, system design and engineering maps and drawings, supplies,
vehicles and trailers (to be transferred under fee title and not under
lease), furnishings and other personal property of any nature, and all
leasehold and rights-of-way in real property, buildings and improvements
and construction-in-progress, towers, fixtures, vaults and pedestals and
all assets of Seller used in connection with the Acquired System.
(b) All of the rights of Seller to, in and under any and all (i)
subscription contracts with subscribers for CATV service in the Acquired
System; except as provided in Section 1.3, all instruments and agreements
for the purchase, sale or other receipt or distribution of programming,
news, data and microwave relay signals set forth on Schedule 1.1(b); and
(ii) all of the Franchises (as herein defined) and any franchise
applications; (iii) all of the Pole Attachment Agreements (as herein
defined) and all retransmission consent agreements set forth on Schedule
1.1(b); all variances, easements, right-of-way agreements, licenses,
registrations, copyright notices, signal registration and other statements,
construction and other permits, leases, including leases of all head-end
sites, and all
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other contracts or agreements used in the ownership or operation of the
Acquired System set forth on Schedule 1.1(b) ((i), (ii) and (iii)
collectively, the "Assumed Contracts").
(c) All refundable deposits from subscribers for converters, encoders,
decoders and any related equipment, all prepaid service charges and any
prepaid income items; all goodwill; all subscriber accounts receivable
outstanding at the Closing Date and subsequent to Closing; and except as
provided in Section 1.3, all books and records which relate to and are
maintained by Seller in the ordinary course of the operation of the
Acquired System (including, without limitation, subscriber records, vendor
records, accounting records, accounts payable records, accounts receivable
records, general ledgers and any other documents reasonably necessary to
support a regulatory filing), subject to the right of Seller to have such
books and records made available to Seller for a period of three years from
the Closing Date.
1.2 Assumed Liabilities.
On the Closing Date, Buyer shall assume, by instruments of assumption
reasonably satisfactory to counsel for Seller, and discharge at the Closing or
as they become due and payable, the following liabilities and obligations of
Seller and no others (the "Assumed Liabilities"):
(a) All obligations of the Seller arising after the Closing Date under
the Assumed Contracts and any other agreements, consents, permits and other
instruments relating to the Acquired System and in existence on the Closing
Date and entered into in the ordinary course of business to the extent
included in the Assets to be Acquired;
(b) All liabilities of Seller as to which Seller has accrued a
liability with respect thereto which are included as a liability in the Net
Liabilities Adjustment (as defined below);
(c) All liabilities and obligations arising out of events occurring
after the Closing Date related to Buyer's ownership of the Assets to be
Acquired or its conduct of the business or operation of the Acquired
System; and
(d) All obligations and liabilities relating to the customer deposits
and prepayments included in the Assets to be Acquired.
Buyer shall assume only those Assumed Liabilities specifically stated in this
Section 1.2 and no others. Without limiting the foregoing, Buyer shall not
assume or become liable for (i) any income, profits, franchise, sales, use,
occupation, property, excise, ad valorem or any other tax to which the Assets to
be Acquired are subject prior to the Closing Date or to which Seller is subject,
and Buyer shall not assume or become liable for any liability or tax due as a
result of any contest, audit or other tax proceeding involving Seller or the
Assets to be Acquired for any taxable period ending on or prior to the Closing
Date, except as otherwise provided herein, (ii) any liabilities relating to the
Excluded Assets, (iii) any liability for franchise fees, pole attachment fees,
leasehold rentals, any obligation for wages, commissions, overtime, vacation and
holiday pay, sick pay, bonuses, other employee benefits or any pension
withdrawal liability, any on-going workers' compensation benefits for any
accident arising prior to the Closing Date, or any obligation under any
employment agreement or employment-at-will relationship other than obligations
arising from and after the Closing Date, or (iv) any liability or obligation
under any collective bargaining agreement, regardless of whether the liability
or obligation arises prior to or after the Closing Date.
1.3 Excluded Assets.
Notwithstanding the foregoing, it is specifically agreed that the following
assets are excluded from the Assets to be Acquired (collectively, the "Excluded
Assets"):
(a) cash on hand or in the bank or other accounts of Seller including,
without limitation, customer advance payments and deposits, any and all
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;
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(b) the satellite programming agreements and agreements which Seller
maintains with any of its respective suppliers of programming and any
retransmission consents, must carry or will carry agreements which Seller
maintains (collectively, the "Programming Agreements"), except those set
forth on Schedule 1.1(b) (the "Acquired Programming Agreements");
(c) all documents relating to the legal existence of the Seller;
(d) insurance policies, surety instruments and bonds and all rights
and claims thereunder;
(e) all claims, rights and interest in and to any refunds for 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 United States Copyright Office and any causes
of action relating to such refunds;
(f) 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 Acquired System, subject to the right of Buyer
to have access to and to copy those related to the Acquired System for a
reasonable period, not to exceed three years from the Closing Date upon
reasonable notice from Buyer to Seller and at Buyer's expense, and all
other books, records, and documents relating to internal company matters
and financial relationships with Seller's lenders or affiliates;
(g) all trademarks, trade names, service marks, service names, logos
and similar proprietary rights of Seller whether or not used in the
business of the Acquired System; provided, however, that Buyer may use
Seller's trademarks and trade names in the ordinary course of business in
connection with its operation of the Acquired System for a period not to
exceed 60 days after the Closing Date;
(h) all rights to receive fees or services from any affiliate of
Seller;
(i) any and all assets, agreements, rights or property owned or leased
by Seller that is not used or held for use in connection with its operation
of the Acquired System;
(j) any contracts, agreements or other arrangements between Seller and
any affiliate of Seller;
(k) all choses in action of Seller whether or not relating to the
Acquired System;
(l) the assets listed on Schedule 1.3; and
(m) all equipment, software and agreements related to Seller's
customer billing system, if applicable.
2. CLOSING DATE; PURCHASE PRICE, PAYMENT AND ADJUSTMENTS.
2.1 Closing; Date and Location.
The consummation of the transfer and delivery of the Assets to be Acquired
to Buyer and the receipt of the consideration therefor by Seller shall
constitute the "Closing." Unless otherwise mutually agreed to by the parties,
the Closing shall take place at 10:00 a.m., local time, at the offices of
Buchanan Ingersoll Professional Corporation, One Oxford Centre, 301 Grant
Street, Pittsburgh, Pennsylvania 15219. The parties will endeavor to conduct the
Closing by facsimile and express mail. The parties agree to close the
transactions contemplated by this Agreement on the last day of the month in
which all of the conditions to Closing set forth in Sections 6 and 7 have been
satisfied or waived or at such other time as may be agreed upon by Buyer and
Seller. Notwithstanding the foregoing, in the event the Equivalent Basic
Subscribers (as hereinafter defined) of the Acquired System is less than 4325 on
the proposed Closing Date (as hereinafter defined), Seller may unilaterally
delay the Closing Date until the Equivalent Basic Subscribers equal or exceed
4325, at which time the Seller shall notify the Buyer that the Equivalent Basic
Subscribers equal or exceed 4325 and the Closing Date shall occur on the last
day of the month during which such notice was given; provided, however, that in
the event the Equivalent Basic Subscribers do not equal or exceed 4325 within
two (2) weeks prior to the Termination Date (as hereinafter defined), Buyer
shall select the Closing Date which shall be no later than the Termination Date.
The date of the Closing
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shall constitute the "Closing Date." The effective date of the sale of the
Acquired System shall be at the close of business on the Closing Date and all
prorations and allocations provided for hereunder shall be made as of the close
of business on the Closing Date, except as otherwise agreed in writing by the
parties. Notwithstanding the foregoing, this Agreement may be terminated
pursuant to Section 12 hereof if the Closing has not occurred by December 31,
2001 (the "Termination Date"); provided, however, if Closing cannot occur
because the consents or approvals from third parties identified on Schedule 3.2
have not yet been obtained, and the parties are using commercially reasonable
efforts to obtain such consents or approvals, then the parties may mutually
agree to extend the Termination Date to a date that is no more than forty-five
(45) business days after the Termination Date.
2.2 Purchase Price.
Buyer shall acquire and accept the Assets to be Acquired from Seller and
shall pay to Seller the aggregate amount of Eight Million Three Hundred
Eighty-Eight Thousand Dollars ($8,388,000) for the Assets to be Acquired (the
"Purchase Price"), subject to adjustment pursuant to the provisions of Section
2.5.
2.3 Payment of the Purchase Price.
On the Closing Date, Buyer will pay an aggregate amount equal to the
Purchase Price, as adjusted at Closing pursuant to the provisions of Section
2.5, in the following manner:
(a) One Million Dollars ($1,000,000) in cash payable in immediately
available funds by wire transfer to a financial institution designated in
writing by Buyer, as escrow agent (the "Escrow Agent"), pursuant to the
terms of an Escrow Agreement substantially in the form of Exhibit A
attached hereto (the "Indemnity Escrow Agreement").
(b) The balance of the Purchase Price in cash payable in immediately
available funds by wire transfer to Seller.
2.4 Allocation of Purchase Price.
The Purchase Price shall be allocated among the Assets to be Acquired as
set forth on Schedule 2.4. Buyer and Seller agree to take no position
inconsistent with such allocation and to file all returns and reports in respect
of the transactions herein contemplated, including all federal, state and local
tax returns, on the basis of such allocation.
2.5 Adjustments to the Purchase Price; Prorations.
(a) The Purchase Price shall be: (i) decreased by an amount equal to the
Net Liabilities Adjustment (as hereinafter defined) to the extent such Net
Liabilities Adjustment is a positive amount as of the Closing Date; or (ii)
increased by an amount equal to the Net Liabilities Adjustment to the extent
such Net Liabilities Adjustment is a negative amount as of the Closing Date. For
purposes hereof, the Net Liabilities Adjustment shall be the number equal to (x)
the sum of all liabilities of Seller with respect to the Acquired System (as
defined and determined in accordance with generally accepted accounting
principles ("GAAP") except as otherwise mutually agreed to in writing by the
parties (but without duplication of any such liabilities) and except that any
liabilities of the Acquired System to any affiliate of Seller shall not be
included as a liability) on the Closing Date which constitute Assumed
Liabilities, less (y) the sum of the current assets of Seller with respect to
the Acquired System (as defined and determined in accordance with GAAP except as
otherwise mutually agreed to in writing by the parties and except that
receivables payable from any affiliate of the Acquired System shall not be
included as a current asset and except that inventory shall not be included as a
current asset) on the Closing Date which are included within the Assets to be
Acquired. The "Net Liabilities Adjustment" shall be determined in accordance
with GAAP except as otherwise mutually agreed to in writing by the parties.
Attached hereto as Schedule 2.5(a) is an example calculation of the Net
Liabilities Adjustment for illustrative purposes only, prepared on the basis of
good faith estimates of the current assets of Seller and the liabilities of
Seller, each with respect to the Acquired System, made by Seller as if the
Closing Date were December 31, 2000.
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Without limiting the foregoing, in connection with the determination of the
Net Liabilities Adjustment:
(i) the amount of service charges of Seller for periods after the
Closing Date that have been prepaid by subscribers shall be a liability;
(ii) the amount of unpaid pole rentals of Seller, if any, for periods
on or before the Closing Date shall be a liability;
(iii) the amount of prepaid pole rentals of Seller for periods after
the Closing Date transferred to Buyer, if any, shall be a current asset;
(iv) the amount of franchise fees of Seller payable by Buyer after
Closing covering periods on or before the Closing Date shall be a
liability, and the current portion of all other accrued but unpaid
liabilities for periods on or before the Closing Date under all agreements
which constitute Assets to be Acquired shall be liabilities;
(v) rentals, utility charges, water and sewer charges, municipal
garbage and rubbish removal charges, rents and other customarily portable
items of Seller (relating to the Assets to be Acquired) shall be pro rated
between Buyer and Seller in accordance with the principle that Seller shall
be responsible for such charges relating to periods on or before the
Closing Date and Buyer shall be responsible for such charges relating to
periods after the Closing Date;
(vi) the amount of all refundable deposits from subscribers of Seller
for converters, encoders, decoders and any related equipment, and any other
item prepaid by subscribers shall be a liability;
(vii) the amount of all prepaid expenses of Seller for periods after
the Closing Date which are part of the Assets to be Acquired (except for
prepaid expenses related to the Excluded Assets and any insurance or bonds)
shall be current assets;
(viii) the amount Buyer shall be required to pay in order to obtain
fee title to all leased vehicles of Seller which constitute Assets to be
Acquired shall be liabilities;
(ix) the copyright royalty payments to be paid after the Closing Date
shall be pro rated between Buyer and Seller in accordance with the
principle that Seller shall be responsible for such charges relating to
periods on or before the Closing Date and Buyer shall be responsible for
such charges relating to periods after the Closing Date;
(x) the amount of any accrued but unpaid real estate taxes of Seller
for periods on or before the Closing Date, as determined in accordance with
Section 9 of this Agreement, shall be a liability;
(xi) the prorated amount of any payments received by Seller for
carriage of programming services ("Launch Support") on or before the
Closing Date and which relate to continued carriage or other obligations
after the Closing Date shall be a liability to the extent of the remaining
life of the applicable contract. Seller agrees that Schedule 2.5(a)(xi)
sets forth as of the date hereof all contracts relating to such payments;
(xii) the amount of any liabilities assumed by Buyer which relate to
accrued overtime, sick pay, vacation pay and holiday pay or other employee
benefits for periods on or before the Closing Date for employees hired by
Buyer pursuant to the provisions of Section 5.15 hereof shall be a
liability;
(xiii) the amount of accounts receivable, less applicable reserves,
shall be a current asset; and
(xiv) the amount Buyer shall be required to pay in order to terminate
the Digital Billing Agreement referenced in Schedule 1.1(b) shall be a
liability.
(b) The Purchase Price shall be decreased by the Subscriber Shortfall (as
hereinafter defined). As used herein, the term "Subscriber Shortfall" shall mean
the amount equal to (i) the number by which the total number of Equivalent Basic
Subscribers (as defined in Section 3.3(c)) of the Acquired System as of
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the Closing Date is less than 4,660, multiplied by (ii) $1,800.00. In no event
can the Subscriber Shortfall cause an increase in the Purchase Price.
(c) (i) At least three business days prior to the Closing Date, Seller
shall deliver to Buyer a certificate setting forth a good faith estimated
calculation of the adjustments to the Purchase Price calculated as of the
Closing Date pursuant to subparagraphs (a) and (b) above (the "Estimated
Adjustment"), together with such supporting documentation as the Buyer may
reasonably request. The Estimated Adjustment shall be used to determine the
estimated adjustment to the Purchase Price pursuant to subparagraphs (a) and (b)
above on the Closing Date.
(ii) On or before 60 days after the Closing Date, Seller shall deliver to
Buyer a final calculation of the adjustments calculated as of the Closing Date
(the "Final Adjustment"), together with such supporting documentation as Buyer
may reasonably request, which shall evidence in reasonable detail the nature and
extent of each adjustment. Seller shall cooperate with Buyer and provide
reasonable access to the necessary personnel and records of Seller to review the
Final Adjustment.
(iii) Should Buyer dispute Seller's Final Adjustment, Buyer shall promptly,
but in no event later than 45 days after receipt of the Final Adjustment (the
"Grace Period"), deliver to Seller written notice describing in reasonable
detail the dispute, together with Buyer's determination as to the Final
Adjustment in reasonable detail. If the dispute is not resolved by the parties
within 10 business days from the date of receipt by Seller of written notice
from Buyer, the parties agree to engage promptly a national independent
accounting firm mutually acceptable to Seller and Buyer, which shall be a firm
that is not regularly engaged by either Buyer or Seller (the "Independent
Accountant") to resolve the dispute within 30 days after such engagement. The
Independent Accountant's determination shall be final and binding on the
parties.
(iv) The Buyer, on the one hand, or Seller, on the other hand, shall make
appropriate payment to the other of the difference between the Final Adjustment
amount and the Estimated Adjustment amount within five (5) business days
following either the resolution of the dispute by the parties or the receipt of
the Independent Accountant's final determination, as the case may be; provided,
that any amount which is not in dispute and which is payable based upon the
Final Adjustment delivered by Seller hereunder shall be paid before resolution
of the dispute by the parties or receipt of the Independent Accountant's final
determination. All fees and costs of the Independent Accountant shall be borne
pro rata by the Buyer and by the Seller in proportion to the difference between
the Independent Accountant's determination of the Final Adjustment and each of
the Seller's and the Buyer's determination of such adjustment divided by the sum
of the two differences. If Buyer fails to notify Seller prior to the expiration
of the Grace Period that it disputes Seller's Final Adjustment, Seller's Final
Adjustment shall be deemed to be accepted by Buyer and shall be final and
binding on the parties.
2.6 Non-Competition Agreement.
In consideration of the payment of $2,000.00 by Buyer and the transactions
contemplated herein, Seller and Northland Communications Corporation, its
Managing Partner, shall each execute and deliver to Buyer, on the Closing Date,
a non-competition agreement, covering only Marlboro County, South Carolina for a
term of not more than two years, substantially in the form of Exhibit B attached
hereto (the "Non-Competition Agreement").
3. REPRESENTATIONS, WARRANTIES AND COVENANTS OF SELLER.
Seller represents and warrants to Buyer as follows:
3.1 Company Standing.
Seller is a limited partnership duly organized and validly existing under
the laws of the State of Washington. Seller has all of the requisite power and
authority to own or lease all of its material assets, to own and operate the
Acquired System owned and operated by it, to carry on its business as now
conducted, to enter into this Agreement and to perform the terms of this
Agreement. Seller is duly
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qualified or licensed to do business as a foreign limited partnership in the
State of South Carolina. For purposes of this Agreement, a "Material Adverse
Effect" means a material adverse effect (whether or not covered by insurance) on
the assets, liabilities, business, operations, condition (financial or
otherwise), or results of operations of the Acquired System taken as a whole;
provided that, notwithstanding anything to the contrary herein, a Material
Adverse Effect shall not include events, changes or effects relating to or
caused by (i) the transaction contemplated by this Agreement, (ii) a general
economic downturn, or (iii) changes affecting the cable television or
communications industries generally.
3.2 Authorization.
(a) Except for the approval of a majority interest of the limited partners
of Seller, Seller has taken all necessary action to authorize and approve this
Agreement and the Seller Transaction Documents (as defined in Section 3.2(b)
below), the consummation of the transactions contemplated hereby and thereby and
the performance by Seller of all the terms and conditions hereof and thereof to
be performed by Seller. The execution and delivery of this Agreement and of the
Seller Transaction Documents by Seller, the consummation of the transactions
contemplated hereby and thereby and fulfillment of and compliance with the terms
and provisions hereof and thereof do not and will not: (i) violate any provision
of any judicial or administrative order, award, judgment or decree applicable to
Seller or the Assets to be Acquired, or any of them; (ii) conflict with or
violate any of the provisions of the certificate of limited partnership or
limited partnership agreement and as amended of Seller; or (iii) conflict with,
result in a breach of or constitute a default under any Assumed Contracts,
subject to obtaining required consents from, or giving notices to, third parties
and, excluding from the foregoing clauses (i) and (iii) such violations,
conflicts, breaches and defaults which in the aggregate would not have a
Material Adverse Effect. Schedule 3.2 sets forth the name of any governmental
authority or other third party from whom consent must be obtained or to whom
notice must be given in order for Seller to validly and lawfully perform its
obligations hereunder and under the Seller Transaction Documents except where
the failure to obtain any such consents or give any such notice would not have a
Material Adverse Effect.
(b) This Agreement has been, and each and every other agreement,
instrument, certificate or other document to which Seller is a party that is to
be executed, delivered and performed by Seller pursuant hereto (collectively,
"Seller Transaction Documents"), when executed and delivered by Seller, will
have been, duly executed and delivered by Seller and constitutes, or, when
executed and delivered by Seller will constitute, legal, valid and binding
obligations of Seller, enforceable against it in accordance with their terms,
except as may be limited by applicable bankruptcy, insolvency or similar laws
affecting creditor's rights generally or by general principles of equity.
3.3 Financial Statements.
(a) True, complete and correct copies of the audited financial statements
of Seller and unaudited statements of operations for the Acquired System for the
two years ended December 31, 1998 and 1999 are attached as Schedule 3.3(a) (the
"Financial Statements"). The Financial Statements in all material respects
present fairly all of (i) the cash flows, income, expenses, liabilities,
operations, equity and assets of Seller and (ii) the cash flows, income and
expenses of the Acquired System at the respective dates, subject to normal
year-end audit adjustments with respect to the unaudited statements and
operations for the Acquired System. All of the assets reflected in the Financial
Statements and all assets acquired by the Seller since the date of the Financial
Statements and, in each case, which assets are used in connection with the
Acquired System, are included within the Assets to be Acquired, except the
Excluded Assets and such assets as have been consumed, replaced or sold in the
normal course of business or as have been destroyed by fire, act of God or other
occurrence beyond the control of Seller prior to the date hereof. The Financial
Statements, including the notes thereto, if any: (a) are in accordance with the
respective books and records of Seller; (b) are true and correct and present
fairly the financial condition of Seller as of the dates of such financial
statements and its respective results of operations and cash flows for the
respective periods then ended; and (c) except as indicated in the notes to such
financial statements, have been prepared in accordance with GAAP, consistently
applied with prior periods, and can be reconciled with the financial records
maintained, and the accounting methods applied, by Seller for tax purposes. Also
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attached hereto as Schedule 3.3(a) are (i) copies of a subscriber report and
accounts receivable aging for the Acquired System as of the month-end
immediately preceding the date of this Agreement, which are true and correct in
all material respects; and (ii) a schedule of liabilities of the Seller for the
Acquired System at the month-end immediately preceding the date of this
Agreement, which is true and correct in all material respects.
(b) At December 31, 1999, the gross operating revenues of the Acquired
System for the twelve months ended December 31, 1999 were not less than
$2,093,000, calculated as set forth on Schedule 3.3(b). Schedule 3.3(b) sets
forth information which is true and complete in all material respects, as of the
month-end immediately preceding the date of this Agreement with respect to the
number of Equivalent Basic Subscribers served in each Franchise area.
(c) The term "Equivalent Basic Subscribers" shall mean the number obtained
by adding (i) the number of first outlet residential non-seasonal subscribers
for basic CATV service of the Acquired System who have paid the applicable
connection and installation fee and have made at least one monthly payment for
service at the normal monthly rate for basic service and whose accounts are not
more than sixty (60) days past due from the first day of the month for which
service was rendered (or, if more than 60 days past due, who owe less than
$10.00) to (ii) the result obtained by dividing the aggregate of the gross
monthly billing (excluding installation, connection, relocation and
disconnection fees and miscellaneous rental charges for equipment such as remote
control devices and converters) from bulk subscribers of the Acquired System who
have paid the applicable connection fee and who have made at least one monthly
payment for service at Seller's standard monthly rate of the Acquired System and
whose accounts are not more than sixty (60) days past due from the first day of
the month for which such service was rendered, by $21.40, which represents the
average monthly service charge in effect for a first outlet residential
connection for standard basic CATV service of the Acquired System. Any
subscriber who has requested prior to the Closing Date that his CATV service be
disconnected shall be excluded from the definition of Equivalent Basic
Subscribers.
3.4 Title to Assets.
Except as set forth on Schedule 3.4 attached hereto, Seller has good title
to all of the Assets to be Acquired, free and clear of all mortgages, liens,
pledges, security interests, liens, restrictions, encumbrances or other charges
of any nature whatsoever (collectively, "Liens"), except for (i) Liens for taxes
that are not yet due and payable or that are being contested in good faith by
appropriate proceedings; (ii) as to leased assets, interests of the lessors
thereof and Liens affecting the interests of the lessors thereof; (iii) as to
any parcel of real property, building restrictions, deed restrictions, rights of
subsurface and mineral owners, and other Liens that are reflected in the public
record and that do not, individually or in the aggregate, have a Material
Adverse Effect on the merchantability of title thereto or the use thereof; and
(iv) Liens to be released in connection with Closing (collectively, "Permitted
Liens"). The Assets to be Acquired, whether owned or leased, constitute all of
the assets used in connection with the Acquired System as presently conducted,
except for the Excluded Assets.
3.5 The Acquired System.
(a) To Seller's knowledge, based on information provided by Seller's
predecessor: (i) the information as to the mileage of trunk and feeder plant of
the Acquired System, the channel and megahertz capacity of the Acquired System
and the dwelling units passed by the Acquired System plant set forth on Schedule
3.5 attached hereto are true and correct in all material respects; and (ii)
there are no less than 167 miles of energized cable plant and approximately
9,090 dwelling units passed by the Acquired System. Seller has not itself, nor
have any of Seller's partners, affiliates, agents or any of its employees
(except to the extent that payment was made for CATV services received by them
at their own dwelling), paid any of Seller's accounts receivable from
subscribers of the Acquired System. Except as set forth on Schedule 3.5, since
December 31, 1999 to the date of this Agreement, Seller has not changed the
channel lineup of the Acquired System set forth on Schedule 3.5; added
additional channels to the Acquired System; increased its subscriber rates and
services set forth on Schedule 3.5; or conducted any extraordinary or unusual
marketing programs, including any amnesty programs.
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(b) Except as set forth on Schedule 3.5,
(i) Seller has complied with all notification and reporting provisions
and all other provisions of the rules and regulations of the Federal
Communications Commission ("FCC") applicable to the Acquired System; the
Acquired System has been and is being operated in compliance with the
Communications Act of 1934, as amended through the date hereof, including
the amendments effected by the Cable Communications Policy Act of 1984, the
Cable Television Consumer Protection and Competition Act of 1992, and the
provisions of the Telecommunications Act of 1996 (collectively the "Cable
Act") and the Copyright Act of 1976, as amended (the "Copyright Act"), and
with all Rules and Regulations of the FCC and the U.S. Copyright Office.
Without limiting the generality of the foregoing, each of the communities
served by the Acquired System has been registered with the FCC; except as
set forth on Schedule 3.5, the Acquired System has been and is being
operated in compliance with the equal employment opportunity ("EEO")
requirements of the FCC, and has received FCC certificates and EEO
compliance for each year from 1992 through the present; all of the
semi-annual and annual performance tests on the Acquired System described
in Section 76.601 of the FCC Rules and Regulations have been made by
Seller; the Acquired System currently meets the technical standards set
forth in the FCC Rules and Regulations, including the leakage limits
contained in Section 76.605(a)(11); and Seller has delivered to Buyer a
copy of the most recent FCC Forms 320 filed with the FCC (Basic Signal
Leakage Performance Report) for the Acquired System. Copies of the most
recent signal leakage tests conducted in accordance with Section 76.611 of
the FCC Rules and copies of the most recent "proof of performance" tests on
the Acquired System will be made available to Buyer by Seller prior to the
Closing (the "Proof of Performance Tests"). Each of the most recent signal
leakage tests and the most recent Proof of Performance Test was conducted
in accordance with the testing procedures set forth in Sections 76.601 and
76.609 of the Rules and Regulations of the FCC and evidence that the
Acquired System meet or exceed in all material respects all of the
technical standards set forth in Section 76.605 of the Rules and
Regulations of the FCC. The Acquired System is being operated in compliance
with the provisions of Sections 76.610 through 76.619 of the FCC Rules and
Regulations (midband and superband signal carriage); appropriate
authorization from the FCC has been obtained for the use of all
aeronautical frequencies in use in the Acquired System; the Acquired System
is presently being operated in compliance with such authorization; Seller
has provided privacy notices to subscribers of the Acquired System in
accordance with the requirements of Section 631(a)(1) of the 1984 Act; and
the Acquired System is in compliance with the requirements of Sections
76.92 (Network Non-Duplication Protection) and 76.151 (Syndicated Program
Exclusivity) of the FCC Rules and Regulations.
(ii) As of the date hereof, the monthly rates charged by Seller for
each service provided by Seller to subscribers of the Acquired System are
set forth on Schedule 3.5. Such rates were calculated in good faith in
accordance with the FCC Rules and Regulations to comply with the FCC Rules
and Regulations as of the date hereof and will continue to be in compliance
with the applicable FCC Rules and Regulations through the Closing Date.
Seller has not received any notice that it has any obligation or liability
to refund any portion of the revenue received by it from the subscribers of
the Acquired System.
(iii) There is no legal action or governmental proceeding pending or,
to Seller's knowledge, any investigation or proceeding threatened (nor any
basis therefor of which it is aware) for the purpose of modifying,
revoking, terminating, suspending, canceling or reforming any of Seller's
FCC licenses or other FCC authorizations or permits, or which might have an
adverse effect upon, or cause disruption to, the operation of the Acquired
System.
(iv) The Acquired System is currently operated and maintained in
accordance with the National Electrical Safety Code in all material
respects and the material terms and conditions of all pole attachment
agreements between Seller and any public utility, municipality or other
authority which has granted such authorization.
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(v) Seller holds all FCC licenses, permits and authorizations
necessary or used in connection with the operation of the Acquired System.
Each such FCC license, permit and authorization is listed on Schedule 3.5,
is in full force and effect, has been validly issued or assigned to Seller,
accurately lists the current parameters of the facility licensed and is not
subject to any special conditions or limitations. All licensed facilities
owned or operated by Seller are being operated in accordance with the
operating parameters of the relevant FCC license. As of the Closing Date,
Seller will have obtained all required FCC consents to the assignment of
all such FCC licenses to Buyer. The TVRO earth station antennas used by the
Acquired System are registered with the FCC to afford protection from
interference.
(vi) Each employment unit covering the Acquired System and operated by
Seller complies in all material respects with the equal employment
opportunity requirements contained in the Cable Act.
(vii) All broadcast television signals carried on the Acquired System
are being carried in accordance with the requirements of the Communications
Act of 1934, as amended, and FCC regulations promulgated thereunder. Seller
has entered into a retransmission consent agreement with each broadcaster
of television signals so identified on Schedule 3.5. Seller is carrying,
pursuant to a "must-carry" request, each broadcaster of television signals
so identified on Schedule 3.5. Except as set forth on Schedule 3.5, Seller
has not received any notice that any broadcaster of television signals has
complained regarding its channel positioning on the Acquired System.
(c) Appropriate registration of the Acquired System has been made with the
United States Copyright Office, and the Acquired System is in compliance with
respect to all notices, filings and payments of copyright fees required by
Section 111 of the Copyright Act and the United States Copyright Office
regulations. The copyright fees shown to be due on all Statements of Account (as
amended by any required filings and/or any other corrective supplements) have
been calculated in accordance with the regulations of the United States
Copyright Office promulgated pursuant to the Copyright Act. Seller has not
received any notices with regard to the Acquired System from the United States
Copyright Office or any other person or entity either questioning any copyright
filing or payment or the failure to make any copyright filing or payment, or
threatening to bring suit for copyright infringement, which have not been
settled and resolved.
(d) The Acquired System is being operated in compliance in all material
respects with the Rules and Regulations of the Federal Aviation Administration
("FAA"). Schedule 3.5 lists all of the existing towers of the Acquired System.
Without limiting the generality of the foregoing, the existing towers of the
Acquired Systems are obstruction marked and lighted in accordance with the Rules
and Regulations of the FAA and FCC or are exempt from such requirements. All
required authorizations, including, but not limited to, Hazard to Air Navigation
determinations, for such towers have been issued by and pursuant to the Rules
and Regulations of the FAA, except where the failure to have any such
authorization would not have a Material Adverse Effect. Except as shown on
Schedule 3.5, Seller does not lease space on such towers to any third party.
Copies of all FAA documents and correspondence relating to such towers have been
delivered to Buyer.
(e) Except as set forth in Schedule 3.5, and except for claims arising in
the ordinary course of business, none of which, individually or in the
aggregate, would reasonably be expected to have a Material Adverse Effect, there
are no claims pending or, to Seller's knowledge, threatened against Seller with
respect to the operation of the Acquired System.
(f) Except as set forth on Schedule 3.5, there are no unfulfilled promises
or commitments for capital improvements, whether or not legally binding, which
Seller has made in connection with the Acquired System, and Seller has described
therein all construction and improvement programs in progress. There are no
obligations or liabilities to subscribers or to other users of Seller's CATV
services which are material to the business of the Acquired System, except: (i)
with respect to deposits made by such subscribers or such other users; and (ii)
the obligation to supply services to subscribers in the ordinary course of
business, pursuant to the Franchises. Seller is not in default in respect of any
material provisions of any Franchise governing relations with subscribers or
other users of Seller's CATV services with respect to the
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Acquired System, and no notice of any such default has been received by Seller.
To Seller's knowledge, after due inquiry, no complaints have been made to Seller
by subscribers of the Acquired System that, individually or in the aggregate,
could have a Material Adverse Effect.
(g) The Acquired System are in compliance in all material respects with
engineering standards generally accepted in the CATV industry.
(h) Except as set forth on Schedule 3.5, there is no free service liability
to subscribers existing with respect to the Acquired System. Except with respect
to deposits for converters, encoders, decoders and related equipment, and any
other prepaid income item which Buyer is to receive a credit for pursuant to
Section 2.5, Seller has no obligation or liability for the refund of monies to
its subscribers.
(i) Except as set forth on Schedule 3.5, with respect to the Acquired
System, Seller has not made a commitment to any franchising authority to
maintain a local office in any location. Further, Seller has not made any
commitment to any of the municipalities served by the Acquired System to pay
franchise fees to any such municipality in excess of the amounts set forth on
Schedule 3.5.
(j) Except as set forth on Schedule 3.5 and to Seller's knowledge, there is
no overbuild of the Acquired System (or any part thereof) at present, nor any
overbuild pending, and there is no overbuild threatened. In addition, except as
set forth on Schedule 3.5, there is no multipoint distribution system ("MDS") or
multichannel MDS ("MMDS") providing signals to the areas served by the Acquired
System, nor any such MDS or MMDS service pending, and there is no MDS or MMDS
service threatened.
3.6 Franchises.
(a) Listed and identified on Schedule 3.6 attached hereto are all of the
existing governmental authorizations, and pending renewal proposals of such
authorizations, for construction, upgrade, maintenance and operation of the
Acquired System (individually, a "Franchise" and collectively, the "Franchises")
presently held by Seller, and the political entity or authority which has
granted each Franchise. All governmental authorizations necessary or required
for the construction, maintenance and operation of the Acquired System have been
obtained by Seller, and all material governmental authorities are listed and
identified in Schedule 3.6. Each of the Franchises expires on the dates set
forth on Schedule 3.6 attached hereto. Except as set forth on Schedule 3.6, none
of the political entities or authorities which have granted a Franchise have
been, or have applied to be, certified to regulate the CATV rates charged by
Seller pursuant to the Cable Act and the FCC Rules and Regulations.
(b) Except as set forth on Schedule 3.6,
(i) The Franchises are validly existing, legally enforceable
obligations of Seller and, to Seller's knowledge, are validly existing,
legally enforceable obligations of the other parties thereto, in accordance
with their terms.
(ii) Seller is validly and lawfully operating the Acquired System
under the provisions of the Franchises and applicable law.
(iii) Seller has complied with all of the terms and conditions of the
Franchises and has not done or performed any act which would invalidate or
impair in any material respect its rights under, or give to the granting
authority the right to terminate, the Franchises.
(iv) There is no pending assertion or claim that operations pursuant
to any Franchise have been improperly conducted or maintained, or, to
Seller's knowledge, any facts or circumstances that could reasonably be
expected to give rise to any such assertion or claim.
(v) All construction of distribution plant required by any of the
Franchises to be completed by the date of this Agreement has been completed
in all material respects in accordance with the terms of such Franchises.
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(c) True, complete and correct copies of the Franchises, all amendments,
assignments and consents thereto and the latest rate change approval, if any, to
the date hereof will be delivered by Seller to Buyer within seven (7) business
days of the date hereof.
3.7 Pole Attachment Agreements.
(a) Schedule 3.7 lists each of the agreements, ordinances, resolutions,
licenses or permits granting or relating to each pole attachment agreement or
similar authorization (individually, a "Pole Attachment Agreement" and
collectively, the "Pole Attachment Agreements") presently held by Seller and all
amendments, assignments and consents thereto of the Acquired System. Each of the
Pole Attachment Agreements and their amendments, assignments and consents
thereto have been furnished by Seller to Buyer. To the knowledge of Seller, all
of the Pole Attachment Agreements are validly existing, legally enforceable
obligations of the parties thereto in accordance with their terms, and Seller is
validly and lawfully operating the Acquired System under the Pole Attachment
Agreements and has CATV pole attachment rights under each Pole Attachment
Agreement. Except as would not cause a Material Adverse Effect, Seller has
complied with all of the terms and conditions of the Pole Attachment Agreements
to which it is a party, and has not done or performed any act which would
invalidate or impair its rights under the Pole Attachment Agreements. To the
knowledge of Seller, there is no pending assertion or claim against Seller that
operations pursuant to any Pole Attachment Agreement have been improperly
conducted or maintained. To the knowledge of Seller, there have been no audits
or investigations conducted by any of the parties to the Pole Attachment
Agreements during the one year preceding the date of this Agreement. All fees
due and payable under the Pole Attachment Agreements have been paid or Seller
has accrued a liability with respect thereto which will be included as a
liability in the computation of the Net Liabilities Adjustment.
(b) All rearrangement work on the poles and/or all pole changeout work
requested of Seller prior to the date hereof by any grantor of a Pole Attachment
Agreement has been completed or, if in progress, will be completed by the
Closing Date, or if not completed, an adequate reserve has been accrued therefor
by the Seller.
3.8 Head-end Sites and Office Locations.
(a) All of the real property owned and utilized by Seller is described on
Schedule 3.8 attached hereto. Except as otherwise described on Schedule 3.8,
Seller has good and marketable title in fee simple to all such real property,
free and clear of all Liens, except for minor exceptions to title which do not
affect the use of, or merchantability of title to, the property in the Acquired
Systems and except for Permitted Liens. A copy of the deeds pursuant to which
Seller acquired such real property and any title insurance policies related
thereto, if any, have been furnished by Seller to Buyer.
(b) All real property leases and material rights of way (other than rights
of way of franchising authorities, governmental authorities, utilities and
easements dedicated for "compatible uses", as such term is defined under the
Cable Act) used by Seller in the operations of the Acquired System are listed on
Schedule 3.8 (the "Leases and Rights of Way"). Except as set forth on Schedule
3.8, Seller has a valid and subsisting lease for and leasehold interest in and
right of way to all of the real property not owned by Seller, and used as
head-end sites or office locations for the Acquired System. In addition, except
as set forth on Schedule 3.8 or where the failure to do so would not have a
Material Adverse Effect, Seller has a valid and subsisting right-of-way
agreement, whether public or private, for all of the real property crossed by
its CATV plant. Except as disclosed on Schedule 3.8 attached hereto, (i) all
Leases and Rights of Way are fully assignable by Seller, and (ii) all written
Leases or memoranda of leases with respect thereto are in recordable form. True,
correct and complete copies of each of such Leases, written Rights of Way, all
amendments, assignments and consents thereto have been furnished by Seller to
Buyer, and each of such Leases and Rights of Way is described on Schedule 3.8.
Seller has duly complied in all material respects with all of the terms and
conditions of such Leases and Rights of Way and has not done or performed or
failed to perform any act which would impair in any material respect its rights
under such Leases or Rights of Way.
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3.9 Other Material Contracts and Leases.
Schedule 3.9 sets forth each contract, agreement, lease, permit, license,
fiber lease, microwave agreement or commitment, including pole line agreements,
whether written or oral, affecting or relating to the Acquired System and
requiring payments by or to Seller in the aggregate annual amount in excess of
$10,000, other than the Excluded Assets, the Franchises, the Pole Attachment
Agreements, the Leases and the Rights of Way as set forth on Schedule 3.9 (the
"Agreements"). Each of the Agreements is in full force and effect in accordance
with its terms. Without limiting the foregoing, the Acquired System and all
equipment and real property used in connection therewith are now being utilized,
operated and maintained in conformity in all material respects with the
provisions of the Agreements, and in compliance with all other applicable laws
and regulations (including zoning regulations) and the orders, rules and
regulations of the FCC and of any government or governmental agency or authority
having jurisdiction with respect thereto except where any such failure would not
cause a Material Adverse Effect. Seller has not in any material respect failed
to so utilize, operate and maintain the Acquired System in a manner which could
now or hereafter result in cancellation or termination of, or liability for
damages under, the Agreements, nor is Seller in default in any material respect.
Seller is not in default in the performance of one or more of its obligations
pursuant to the Agreements except where any such default would not have a
Material Adverse Effect.
3.10 Agreements with Employees.
(a) Except as set forth on Schedule 3.10, Seller is not a party to any
employment agreement, written or oral, with respect to any employee of the
Acquired System which cannot be terminated at will by Seller, and, except for
standard medical and dental insurance, and except as set forth on Schedule 3.10,
Seller has not had and currently does not have any pension or profit sharing or
other employee benefit plan for employees of the Acquired System. True, correct
and complete copies of all agreements and plans listed on Schedule 3.10 have
heretofore been delivered by Seller to Buyer.
(b) The names, titles and rates of compensation of all of the employees of
the Acquired System will be made available to Buyer at least sixty (60) days
prior to the Closing.
(c) Seller's policy with respect to the amount of vacation time earned by
employees of the Acquired System is set forth on Schedule 3.10.
3.11 Litigation or Judgments.
Except as set forth on Schedule 3.11, and except for any investigations or
rule making proceedings affecting the cable industry generally, there is no
litigation, at law or in equity, or any proceedings before any commission,
agency or other governmental authority, pending or, to Seller's knowledge,
threatened against the Acquired System or the Seller, which could give rise to a
Material Adverse Effect, and, to Seller's knowledge, no facts or circumstances
exist which could reasonably be expected to give rise to any such litigation or
proceedings.
3.12 Tax Returns and Payments.
Seller has timely and properly filed or caused to be filed all tax returns
which it is or has been required to file on or prior to the date hereof in
connection with the operation of the Acquired System, by any jurisdiction to
which it is or has been subject, all such tax returns were true, correct and
complete in all material respects at the time of filing. All income,
unemployment, social security, franchise, property and other taxes levied,
assessed or imposed upon Seller in connection with the operation of the Acquired
System by the United States, or any state, or governmental sub-division of
either, to the extent due and payable, have been paid to date, and no liability
exists for deficiencies, except for any such taxes that are being contested in
good faith. Except as set forth on Schedule 3.12 attached hereto, there are no
tax audits pending nor any outstanding agreements or waivers extending the
statutory period of limitations applicable to any federal, state or local income
tax return of Seller in connection with the operation of the Acquired System for
any period. To Seller's knowledge, no tax deficiencies have been determined, nor
proposed tax assessments charged, against Seller in connection with the
operation of the Acquired System (nor is there
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any reasonable basis therefor). Seller has made or caused to be made all
withholdings of taxes required to be made in connection with the operation of
the Acquired System, and such withholdings have either been paid to the
appropriate governmental agency or set aside in appropriate accounts for such
purpose.
3.13 Compliance with Laws.
Seller is in material compliance with all applicable federal, state and
local laws, rules, regulations, orders, writs, injunctions, ordinances or
decrees of any governing authority, federal, state or local court, or of any
municipal or governmental department, commission, board, bureau, agency or
municipality having jurisdiction over it or the Acquired System (or any part
thereof) in connection with the operation of the Acquired System, except where
the failure to be in compliance would not have a Material Adverse Effect.
3.14 Adverse Developments.
Since December 31, 1999, no event or condition has occurred which:
(a) would reasonably be expected to have a Material Adverse Effect; or
(b) has resulted in any material damage, destruction, loss or other
casualty to the Acquired System, however arising and whether or not covered
by insurance.
3.15 Condition of Assets to be Acquired and Insurance.
(a) The Assets to be Acquired are in working condition, reasonable wear and
tear excepted. To Seller's knowledge, none of the cable used in the Acquired
System requires any rearrangement or "make ready" costs other than those costs
accrued for as a liability in the Net Liabilities Adjustment. The Assets to be
Acquired include such spare parts as are reasonably necessary in order to permit
the operation of the Acquired System without material interruption for a thirty
(30) day period. The Assets to be Acquired are and have been insured or
self-insured, and any such insurance policies are in full force and effect, are
on an "occurrence" basis, and are in terms and scope and amounts which are
customary in accordance with industry standards for CATV systems of comparable
size. Copies of any such policies will be delivered to Buyer upon written
request. Seller has not received any notice of cancellation with respect
thereto. During the past one year, no application by Seller for insurance with
respect to the Assets to be Acquired has been denied for any reason.
(b) Seller has taken reasonable action to assess whether the Seller Systems
(as defined below) are designed, developed and implemented in such a manner that
such Seller Systems will not generate invalid and/or incorrect date-related
results or cause any of the problems commonly referred to as "Year 2000
problems." During the period commencing on the date hereof and ending on the
Closing Date, Seller will continue to take such action and use its commercially
reasonable efforts to remediate all such results and problems. As used herein,
"Seller Systems" means all of the software, hardware, embedded chips,
communications and similar systems used in connection with the operation of the
Acquired System and included in the Assets to be Acquired, whether owned or
licensed by Seller.
3.16 Patents, Trademarks and Copyrights.
Seller does not possess any patent, patent right, trademark or copyright,
nor is it a party to any license or royalty agreement with respect to any
patent, trademark or copyright, except for licenses and consents respecting
program material and obligations under the Copyright Act applicable to CATV
systems generally, which licenses are all of the intellectual property rights
(other than Excluded Assets) necessary to conduct the business of the Acquired
System.
3.17 Labor Relations.
Seller is not a party to any collective bargaining agreement in connection
with the operation of the Acquired System. This Agreement and the transactions
contemplated hereunder shall not obligate Buyer to recognize any union or to
assume any collective bargaining agreement that applies to Seller's employees.
There currently are not, nor in the past five (5) years have there been, any
grievances, unfair labor practice claims, disputes or controversies with any
union, or threats of strikes, work stoppages or any
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pending demands for collective bargaining by any union in connection with the
operation of the Acquired System. Seller has received no notice of any
grievances, unfair labor practice claims, disputes or controversies with any
other organization of Seller's employees, or threats of strikes, work stoppages
or any pending demands for collective bargaining by any such organization in
connection with the operation of the Acquired System.
3.18 Right of First Refusal.
Except as set forth on Schedule 3.18, no person or entity has any option,
warrant or right of first refusal to purchase either the Acquired System (or any
part thereof) or any of the Assets to be Acquired.
3.19 Environmental Matters.
Except as set forth on Schedule 3.19, Seller has been and is in compliance
with all applicable federal, state and local laws, regulations and ordinances
relating to protection of human health and safety and the environment
("Environmental Laws"), including those related to hazardous substances, wastes,
discharges, emissions, disposals, dumping, burial or other forms of disposal,
except where the failure to be in compliance would not have a Material Adverse
Effect. There are no current or pending claims, administrative proceedings,
judgments, declarations or orders relating to violations of Environmental Laws
or to the presence of Hazardous Substances (as defined by the Environmental
Laws) on, in or under the owned or, to the knowledge of Seller, leased real
property of Seller of the Acquired System. No hazardous waste in quantities that
violate any Environmental Laws has been dumped, buried, discharged or disposed
of on, in or under the owned or leased real property of Seller of the Acquired
System by Seller or, to the knowledge of Seller (including the knowledge of
Seller's general managers), by any other person or entity. Neither Seller nor,
to Seller's knowledge, any third party has installed or placed on, under or in
the owned real property or the leased real property constituting a part of the
Assets to be Acquired: (i) any treatment, storage, recycling or disposal
facility for any hazardous waste as that term is defined under 40 CFR Part 261
or any state equivalent; (ii) any underground storage tanks, in use or
abandoned; or (iii) any polychlorinated biphenyls (PCBs) in any hydraulic oils,
transformers, capacitors or other electrical equipment.
3.20 Restoration.
No material restoration, repaving, repair or other work is required to be
made by Seller to any street, sidewalk or abutting or adjacent area pursuant to
the requirements of any ordinance, code, permit, easement or contract relating
to the installation, construction or operation of the Acquired System. No
property of any person or entity has been damaged, destroyed, disturbed or
removed in the process of construction or maintenance of the Acquired System
which has not been, or will not be, prior to Closing, repaired, restored or
replaced, or, if not repaired, restored or replaced, for which an adequate
reserve has not been accrued by the Seller prior to Closing.
3.21 Disclosure.
No representation or warranty by Seller in this Agreement or any Schedule
or Exhibit, or any statement, list or certificate furnished or to be furnished
by Seller pursuant hereto, or in connection with the transactions contemplated
hereby, contains or will contain any untrue statement of a material fact, or
omits or will omit to state a material fact required to be stated therein or
necessary to make the statements contained therein not misleading.
3.22 No WARN Obligation.
No notices to employees of Seller are required under the Federal Worker
Adjustment and Retraining Notification Act as a result of the transactions
contemplated hereby.
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4. REPRESENTATIONS, WARRANTIES AND COVENANTS OF BUYER.
Buyer represents and warrants to Seller that the following representations
and warranties are true and correct as of the date hereof and will also be true
and correct on the Closing Date:
4.1 Status, Power and Authority.
Buyer is a corporation duly organized, validly existing and in good
standing under the laws of its jurisdiction of incorporation and has the power
and authority to own and lease its properties and to conduct its business as
currently conducted and to enter into this Agreement and to perform the terms of
this Agreement. Buyer is duly qualified or licensed to do business and is in
good standing in the State of Delaware, and Buyer or its assignee will be, at
the appropriate time, qualified or licensed to do business as a foreign
corporation in the State of South Carolina.
4.2 Authorization of Agreement.
(a) Buyer has taken all necessary action to authorize and approve this
Agreement and the Buyer Transaction Documents (as defined in this Section
4.2(a)), the consummation of the transactions contemplated hereby and the
performance by Buyer of all of the terms and conditions hereof and thereof on
the part of Buyer to be performed. The execution and delivery by Buyer of this
Agreement and each and every other agreement, instrument, certificate or
document to which Buyer is a party that is to be executed, delivered and
performed by Buyer pursuant thereto (collectively, "Buyer Transaction
Documents"), and the consummation of the transactions contemplated hereby, do
not and will not: (i) violate any provisions of any judicial or administrative
order, award, judgment or decree applicable to Buyer, or (ii) conflict with any
of the provisions of the charter documents of Buyer, or (iii) conflict with,
result in a breach of or constitute a default under any material agreement or
instrument to which Buyer is a party or by which it is bound.
(b) This Agreement and the Buyer Transaction Documents, when executed and
delivered by Buyer, will have been duly authorized, executed and delivered by
Buyer, and this Agreement constitutes, and the Buyer Transaction Documents, when
executed and delivered by Buyer, will constitute, legal, valid and binding
obligations of Buyer, enforceable against Buyer in accordance with their
respective terms.
4.3 Litigation.
There is no litigation, at law or in equity, or any proceedings before any
commission or other governmental authority, pending or, to the knowledge of
Buyer, threatened against Buyer which could reasonably be expected to impair the
ability of Buyer to consummate the transactions contemplated by this Agreement.
4.4 Disclosure.
No representation and warranty by Buyer in this Agreement or any Schedule
hereto contains or will contain any untrue statement of a material fact, or
omits or will omit to state a material fact required to be stated therein or
necessary to make the statements contained therein not misleading.
4.5 Sufficient Funds.
Buyer has available and will have available on the Closing Date sufficient
unrestricted funds to enable it to consummate the transactions contemplated
hereby.
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5. CONDUCT OF BUSINESS OF ACQUIRED SYSTEM PENDING CLOSING AND
ADDITIONAL COVENANTS.
Seller and Buyer covenant and agree that from the date hereof to and
including the Closing Date:
5.1 Maintenance of Business. Except as otherwise contemplated by this
Agreement, disclosed on Schedule 5.1 or with the prior written consent of Buyer:
(a) Seller shall continue to operate and maintain the Acquired System
and the Assets to be Acquired (including the maintaining of a level of
inventory of spare equipment and parts which is adequate for the continued
operation of the Acquired System for a 30-day period and the making of
capital expenditures (other than those relating to repairs, rebuilds and
upgrades)), and shall keep all of its business books, records and files,
all in the ordinary course of business in accordance with past practices
consistently applied. Seller shall not sell, transfer or assign any of the
Assets to be Acquired except in the ordinary course of business and for
full and fair value.
(b) Seller shall not permit the creation of any Lien on any of its
assets that would survive the Closing other than Permitted Liens. Seller
shall not initiate or otherwise cause any other person to initiate any
action to amend or cancel, and shall use its commercial reasonable efforts
not to permit any other person to take any action to amend or cancel, any
of the Franchises, the Pole Attachment Agreements or the Assumed Contracts
without the prior written consent of Buyer, except that, without such
consent, Seller may conclude pending Franchise renewals on terms
substantially similar to pending renewal proposals.
(c) Promptly after becoming aware thereof, Seller shall notify Buyer
of any action taken or proposed to be taken by a person other than Seller
to amend or cancel any of the Franchises, the Pole Attachment Agreements or
the Assumed Contracts. Seller shall not enter into any contract or
commitment nor incur any indebtedness or other liability or obligation of
any kind relating to the Acquired System for which Buyer will have any
liability after the Closing which is not in the ordinary course of business
in accordance with past practices without the prior written consent of
Buyer.
(d) Seller shall not permit any of its general partners, agents,
employees or affiliates to pay any of Seller's accounts receivable from
subscribers of the Acquired System outstanding on the date hereof.
Notwithstanding the foregoing, such persons shall be permitted to make
payment for CATV services received by them at their own dwellings.
(e) Without the prior written consent of Buyer, which consent shall
not be unreasonably withheld, delayed or conditioned, Seller shall not,
except as otherwise required by law (including the requirement to comply
with must-carry requests): (i) change the channel lineup of the Acquired
System; (ii) add additional channels to the Acquired System, except for
channels added at the request of a franchising authority as part of the
process of renewing a Franchise (in which event, Seller shall give Buyer
written notice of the addition of such channels); (iii) change its
subscriber rates (provided, however, that if Seller is required to change
its subscriber rates pursuant to a regulatory order, Seller may do so
without the consent of Buyer upon 30 days' prior written notice); or (iv)
conduct any extraordinary or unusual marketing or collection programs,
including, without limitation, any amnesty programs, or any extraordinary
collection practices which might adversely affect customer relationships.
(f) Seller shall comply in all material respects with all laws, rules
and regulations of federal, state, city and local governments. Seller shall
not violate the terms of any lease or contract connected with the operation
of the Acquired System or with the utilization of the Assets to be
Acquired. Seller shall not grant any increase in the rate of wages,
salaries, bonuses or other remuneration of any employee of the Acquired
System, except as consistent with past practice.
5.2 Insurance.
Seller shall maintain in full force and effect until Closing any existing
insurance policies or comparable replacements to cover and protect the Assets to
be Acquired against damage or destruction.
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5.3 Organization.
Seller shall use commercially reasonable efforts consistent with sound
business judgment to preserve intact its present business and organization, to
retain the services of its present employees, to preserve its relationships with
subscribers, suppliers and others having business relationships with it and to
maintain the goodwill enjoyed within the municipalities serviced by the Acquired
System.
5.4 Access for Investigation.
Upon reasonable advance notice and at Buyer's expense, Seller shall afford
Buyer and its representatives reasonable access during normal business hours to
the properties, plant and equipment and to the books and records of Seller
relating to the Acquired System in order that Buyer shall have full opportunity
to investigate the business affairs of the Acquired System.
5.5 Notice.
(a) Promptly upon Seller becoming aware of the occurrence of, or the
impending or threatened occurrence of, any event which would cause any of the
representations or warranties of Seller contained herein, or in any Schedule or
Exhibit, to be inaccurate in any material respect, Seller shall give detailed
written notice thereof to Buyer and shall use its commercially reasonable
efforts to prevent or promptly remedy the same.
(b) Seller shall refrain from knowingly taking, and shall use its
commercially reasonable efforts to refrain from knowingly suffering or
permitting, any action which would render untrue in any material respect any of
the representations or warranties of Seller contained herein.
5.6 Consummation of Agreement.
Seller and Buyer each shall use commercially reasonable efforts to perform
and fulfill all obligations and conditions on their respective parts to be
performed and fulfilled under this Agreement, to the end that the transactions
contemplated by this Agreement shall be fully carried out.
5.7 Cooperation.
Seller and Buyer shall cooperate with each other, to the extent not
inconsistent with their respective obligations hereunder, in apprising the
municipalities serviced by the Acquired System and the utility companies which
have issued the Pole Attachment Agreements of the sale of the Acquired System to
Buyer in such manner as to preserve the goodwill of such municipalities and
utility companies.
5.8 Accounts List.
Prior to the Closing Date, Seller shall deliver to Buyer a list of all
persons to whom Seller makes recurring periodic payments in connection with the
business and operations of the Acquired System (the "Accounts List"), except for
persons to whom Seller makes recurring periodic payments in connection with any
Excluded Asset. Each individual entry set forth on the Accounts List shall list
the name and address of each account creditor and the approximate average amount
and approximate frequency of the recurring periodic payments paid to each such
account creditor. Seller shall use its reasonable efforts to ensure the accuracy
and completeness of the Accounts List in all material respects.
5.9 FCC Approval.
Seller shall make application to the FCC for the consent and approval of
the FCC to the transfer of the ownership and operation of any FCC licenses of
the Acquired System from Seller to Buyer.
5.10 Certificates.
On or before the Closing Date, Seller shall deliver to Buyer a Certificate
of Existence issued by the Secretary of State of Washington as to Seller's
existence in such state and a Certificate of Existence issued by the Secretary
of State of South Carolina as to Seller's existence in such state.
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5.11 Programming Agreements.
Seller shall take all reasonably necessary actions to cancel and terminate
the Programming Agreements or those portions of the Programming Agreements that
relate to the Acquired System effective as of the Closing Date, except those
Programming Agreements listed on Schedule 1.1(b). Buyer and Seller shall prepare
a joint notice to be sent to one or more programmers with whom Seller has
entered into a Programming Agreement with respect to the Acquired System (the
"Programming Notices"); provided, however, that Programming Notices need not be
sent to those programmers listed on Schedule 5.11, each of which do not require
such Programming Notices.
5.12 Third-Party Consents.
(a) As soon as practicable, but not later than 21 days after the date of
this Agreement, Buyer and Seller shall each make any and all filings that are
required under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as
amended (the "HSR Act"), with respect to the transactions contemplated hereby.
The filing fees required by the HSR Act shall be shared equally by Buyer and
Seller. The parties shall each furnish the other such necessary information and
reasonable assistance as the other may request in connection with its
preparation of the necessary filings or submission pursuant to the HSR Act. If
the Federal Trade Commission ("FTC") or the Department of Justice ("DOJ")
requests additional information from the parties or imposes any condition upon
the transactions contemplated hereby, the parties will cooperate with each
other, the FTC and the DOJ.
(b) Seller, at its sole cost and expense, shall make such applications to
the Franchise authorities and other third parties identified on Schedule 3.2
whose consent or approval is required for the consummation of the transactions
contemplated hereby, and shall otherwise use its commercially reasonable efforts
to obtain such consents and approvals prior to the Closing. 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 assist Seller and shall take such actions as may
reasonably be necessary in obtaining such consents and approvals and shall
cooperate with Seller in the preparation, filing and prosecution of such
applications. The parties agree to use commercially reasonable efforts to obtain
such consents and approvals in writing and in form and substance reasonably
acceptable to Buyer, including a provision permitting Buyer to transfer the
underlying Franchise or agreement to an affiliate of Buyer and to collaterally
assign the Franchise or agreement to Buyer's lenders; provided, however, that
(i) such affiliate agrees in writing to be bound by any obligations in
connection therewith, and (ii) the inclusion of either of such provisions does
not otherwise cause such consent or approval to otherwise be withheld, delayed
or otherwise conditioned. Seller shall not agree to any materially adverse
change in any Franchise as a condition to obtaining any consent or approval
necessary for the transfer of such Franchise unless Buyer shall otherwise
consent in writing. Buyer agrees that it shall not, without prior written
consent of Seller (which consent will not be unreasonably delayed, withheld or
conditioned), seek amendments or modifications to Franchises or agreements.
Buyer shall furnish Seller with copies of such documents and information with
respect to Buyer, including financial information and information relating to
cable and other operations of Buyer and its affiliated or related companies, as
Seller may reasonably request in connection with obtaining any of such consents
or approvals or as may be reasonably requested by any Franchise authority or
other third party in connection with obtaining any consent or approval. Seller's
obligations hereunder with respect to obtaining any consent or approval shall be
satisfied if Buyer has executed a new franchise or contract with the respective
Franchise authority or other third party or if such Franchise authority or other
third party has indicated in writing that it is willing to execute a new
franchise or contract with Buyer.
5.13 FCC and Other Regulatory Compliance.
Seller shall consult with Buyer prior to implementing any subscriber rate
changes in connection with the Acquired System relating to the implementation of
any FCC regulations, except as otherwise provided
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in Section 5.1 hereof. On the Closing Date, the Acquired System shall be in
material compliance with all requirements of the FCC rules and regulations.
5.14 Approval of Lessors.
Seller shall use its commercially reasonable efforts to obtain the consent
of each lessor of real property relating to the Acquired System listed on
Schedule 3.2 as being required to consent to the assignment to Buyer of any
lease. Seller shall use its commercially reasonable efforts to obtain a
certificate from the lessor under each lease for real property relating to the
Acquired System to which Seller is a party and which is listed on Schedule 3.8
certifying that: (a) the lease is validly existing and in full force and effect;
and (b) all payments under the lease due and payable prior to the date of such
certificate have been paid in full.
5.15 Employees.
Seller shall terminate all of its employees of the Acquired System that
Buyer notifies Seller it intends to offer employment, effective immediately
prior to Closing. Seller shall remain solely responsible for any termination
benefits to which any of the employees is entitled by reason of such termination
whether or not such person is subsequently employed by Buyer. Buyer shall have
no obligation to offer employment to any of the employees of Seller. Buyer shall
notify Seller at least fifteen (15) days prior to the Closing Date of those
employees to whom Buyer intends to offer employment and Buyer shall notify each
such employee at least five days prior to the Closing Date. Seller shall refrain
from making any statements or communications to its employees regarding
subsequent employment by Buyer or Buyer's employment policies without Buyer's
prior written consent.
5.16 Rights-of-Ways.
On or before the Closing Date, Seller shall deliver to Buyer valid and
subsisting written right-of-way agreements listed on Schedule 5.16 and necessary
to conduct business as currently conducted.
5.17 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.
5.18 Title Insurance.
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 included as part of the Assets to be Acquired.
Buyer shall have the sole responsibility for obtaining and paying for such
policies and surveys.
6. CONDITIONS TO CLOSING -- BUYER.
6.1 Conditions to Obligations of Buyer.
The obligations of Buyer to consummate the transactions contemplated by
this Agreement at Closing shall be subject to the satisfaction of the following
conditions precedent, except to the extent waived by Buyer in writing:
(a) All of the representations and warranties of the Seller contained
in this Agreement shall be true and correct in all material respects at and
as of the Closing Date as though such representations and warranties were
made at and as of such time (except for individual representations or
warranties that expressly provide therein that they are made at and as of a
certain date), and Seller shall have performed and be in compliance in all
material respects with all of the covenants, agreements, terms and
provisions set forth herein on its part to be observed or performed.
(b) Since the date of this Agreement, there shall not have occurred
any Material Adverse Effect.
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(c) The consents required from all governmental agencies and other
third parties to Buyer's acquisition of the Acquired System identified on
Schedule 3.2 shall have been granted or obtained, except where the failure
to obtain any such consent would not have a Material Adverse Effect.
(d) On the Closing Date, no suit or action or other proceeding shall
be pending or threatened before any court or other governmental agency
against Seller or Buyer in which the consummation of the transactions
contemplated by this Agreement are sought to be enjoined.
(e) All notification and report forms required to be filed on behalf
of the parties to this Agreement with the FTC and the DOJ under the HSR Act
and rules shall have been filed, and the waiting period required to expire
under the HSR Act and rules, including any extension thereof, shall have
expired or early termination of the waiting period shall have been granted.
(f) The total number of Equivalent Basic Subscribers of the Acquired
System as of the Closing Date shall not be less than 4325.
(g) Seller shall have delivered to Buyer:
(i) the Indemnity Escrow Agreement duly executed by Seller;
(ii) the Non-Competition Agreement duly executed by Seller and
Northland Communications Corporation;
(iii) an opinion of Cairncross & Hempelmann, P.S., counsel for
Seller, dated the Closing Date and substantially in the form of Exhibit
C attached hereto;
(iv) an opinion of Cole, Raywid & Braverman, FCC counsel for
Seller, dated the Closing Date and substantially in the form of Exhibit
D attached hereto;
(v) One or more Officer Certificates, dated as of the Closing Date,
in form and substance reasonably satisfactory to Buyer, certifying:
(A) that the conditions set forth in each of the provisions of
Section 6.1(a), (b) and (c) of this Agreement have been satisfied in
full;
(B) that the resolutions of the General Partner (a copy of
which shall be attached to the Certificate) authorizing the
execution, delivery and performance of the Seller Transaction
Documents and the sale of the Assets to be Acquired and the
transactions contemplated hereby have been approved and adopted;
(C) the Certificate of Formation of Seller (a copy of which
shall be attached to the Certificate), certified by the Secretary of
State of the State of Washington;
(D) the Bylaws of the Seller (a copy of which shall be attached
to the Certificate);
(E) a Certificate of Existence of Seller from the State of
Washington and from the State of South Carolina (a copy of each which
shall be attached to the Certificate and which shall not be dated
more than thirty (30) days prior to Closing) as set forth in Section
5.10; and
(F) a certificate of incumbency executed by the secretary and
each of the officers of Seller executing this Agreement and the
documents delivered hereunder.
(vi) at Seller's expense, at least two (2) weeks prior to the
Closing Date, as they relate to the Acquired System, lien searches dated
not more than forty (40) days prior to the Closing Date showing all
UCC-1 financing statements filed with any filing offices wherein Seller
is named a debtor, all federal, state or local tax liens filed against
the Seller, all recorded mortgages naming Seller as a mortgagor, all
unsatisfied judgments naming Seller as a judgment debtor and all pending
litigation in which Seller is a defendant, all of which shall be
released or terminated prior to or at the Closing;
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(vii) the Programming Notices described in Section 5.11, duly
executed by Seller;
(viii) a commitment or commitments for owner's title insurance with
respect to real estate owned by Seller as part of the Assets to be
Acquired, issued by a nationally reputable entity, in form reasonably
satisfactory to Buyer, dated not more than sixty (60) days prior to the
Closing Date (provided that any insurance shall be obtained at Buyer's
cost);
(ix) the matters described in Section 8 hereof or any documents or
other items required to be delivered hereunder to Buyer at or prior to
Closing shall have been delivered; and
(x) financial statements of Seller for the six (6) month period
ended June 30, 2000.
7. CONDITIONS TO CLOSING -- SELLER.
7.1 Conditions to Obligations of Seller.
The obligations of the Seller to consummate the transactions contemplated
by this Agreement at Closing shall be subject to the satisfaction of the
following conditions precedent, except to the extent waived by Seller in
writing:
(a) All of the representations and warranties of Buyer contained in
this Agreement shall be true and correct in all material respects at and as
of the Closing Date as though such representations and warranties were made
at and as of such time (except for individual representations and
warranties that expressly provide therein that they are made at and as of a
certain date), and Buyer shall have performed and be in compliance in all
material respects with all of the covenants, agreements, terms and
provisions set forth herein on its part to be observed and performed.
(b) On the Closing Date, no suit or action or other proceeding shall
be pending or threatened before any court or other governmental agency
against Seller or Buyer in which the consummation of the transactions
contemplated by this Agreement are sought to be enjoined.
(c) All notification and report forms required to be filed on behalf
of the parties to this Agreement with the FTC and the DOJ under the HSR Act
and rules thereunder shall have been filed, and the waiting period required
to expire under the HSR Act and rules thereunder, including any extension
thereof, shall have expired or early termination of the waiting period
shall have been granted.
(d) At a time mutually agreed to by Buyer and Seller, Buyer, directly
and through its representatives, shall be afforded an opportunity to
conduct such financial, legal, operating and managerial due diligence
review of Seller as Buyer deems appropriate. In connection thereto,
Seller's personnel, auditors and counsel shall use its reasonable best
efforts to cooperate with this due diligence review. The results of such
due diligence review, however, will not be a condition to Seller's
obligations to close.
(e) Buyer shall have delivered to Seller:
(i) One or more Officer Certificates, dated as of the Closing Date,
in form and substance reasonably satisfactory to Seller, certifying:
(A) to the effect that the conditions set forth in Section
7.1(a) of this Agreement have been satisfied in full;
(B) that the resolutions of the Buyer's board of directors (a
copy of which shall be attached to the Certificate) authorizing the
execution, delivery and performance of the Buyer Transaction
Documents and the purchase of the Assets to be Acquired and the
transactions contemplated hereby have been approved and adopted;
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(C) a Certificate of Good Standing of Buyer from the State of
Delaware (a copy of which shall be attached to the Certificate and
which shall not be dated more than thirty (30) days prior to
Closing); and
(D) a certificate of incumbency executed by the secretary and
each of the officers of Buyer executing this Agreement and the
documents delivered hereunder.
(ii) the Purchase Price, as adjusted in accordance with Section
2.5;
(iii) an opinion from counsel for Buyer, dated the Closing Date and
substantially in the form of Exhibit E attached hereto;
(iv) assumption documents in form and substance reasonably
satisfactory to Seller pursuant to which Buyer shall have assumed the
Assumed Liabilities;
(v) the Programming Notices described in Section 5.11, duly
executed by Buyer; and
(vi) The Indemnity Escrow Agreement duly executed by Buyer.
(f) A majority of 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, if determined necessary by Seller in its sole discretion.
8. ACTION TO BE TAKEN AT AND AFTER CLOSING.
8.1 Action to be Taken at and after Closing.
(a) At Closing, Seller shall deliver to Buyer:
(i) Such bills of sale, endorsements, assignments, special warranty
deeds and other good and sufficient instruments of transfer and
conveyance as shall be reasonably deemed necessary by Buyer to vest in
or confirm to Buyer good title to all of the assets and properties
constituting the Assets to be Acquired free and clear of any Liens
except for Permitted Liens;
(ii) A complete itemized list of all of Seller's subscriber
accounts receivable relating to the Acquired System as of a date no
later than thirty (30) days prior to the Closing Date, showing sums due
and their respective aging for the period ending on the Closing Date;
(iii) A true, accurate and complete schedule as of the Closing Date
of monetary obligations owed by Seller and not yet paid, items billed to
Seller and not yet paid, items charged to or claimed against Seller and
not yet paid, whether or not disputed, under each of the Franchises,
Pole Attachment Agreements and Agreements to be assumed by Buyer under
the terms of this Agreement;
(iv) Actual possession and operating control of the Acquired
System;
(v) The documents and instruments required to be delivered by
Seller to Buyer pursuant to the terms of Section 6; and
(vi) All of the consents and approvals indicated on Schedule 3.2 as
being required for the Closing.
(b) At Closing, Buyer shall deliver to Seller:
(i) The Purchase Price, as adjusted in accordance with Section 2.3;
and
(ii) The documents and instruments required to be delivered by
Buyer to Seller pursuant to the terms of Section 7.
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(c) After Closing, Seller shall deliver to Buyer, as received from
time to time:
(i) any cash or other property that it may receive in respect to
subscriber accounts receivable received after the Closing Date relating
to the business and operations of the Acquired System arising prior to
or subsequent to the Closing Date;
(ii) any Assets to be Acquired not effectively transferred to Buyer
at the Closing; and
(iii) from time to time at the request of Buyer and without further
consideration, such further instruments of conveyance, transfer and
assignment as Buyer may reasonably request in order to convey more
effectively the transfer to Buyer of any of the Assets to be Acquired,
and Seller shall assist Buyer in the reduction to possession of any such
assets, possession of which was not delivered to Buyer at Closing. Buyer
shall be responsible for the preparation of all of the documents
incidental to such conveyance, transfer and reduction to possession.
9. REAL ESTATE PRORATION AND ADJUSTMENT ITEMS.
Water and sewer charges, municipal garbage and rubbish removal charges,
rents, interest, real estate taxes, utilities and other charges of an annual or
recurrent nature assessed against or paid in conjunction with the ownership or
operation of any real property owned by Seller to be transferred to Buyer
hereunder shall be prorated as of the Closing Date. Real estate taxes shall be
prorated as of the Closing Date. Real estate taxes for the calendar year of
Closing shall be prorated based upon real estate taxes levied or estimated to be
levied in that year by each taxing body (without regard to the date of levy or
the fiscal year of the taxing body); provided, however, if any of such real
estate taxes have not yet been levied as of the Closing Date for the calendar
year in which the Closing Date occurs, the tax proration shall be based upon the
prior year's tax levy, taking into account any adjustments in real estate tax
assessments which may have been made. Upon final levy of the real estate taxes,
Seller and Buyer agree that a final proration will be made as of the Closing
Date, and if it is determined that either party shall owe the other based upon a
discrepancy between the amounts included in the Final Adjustment and the final
proration, then the owing party shall make payment to the other within thirty
(30) days of final settlement thereof.
10. DAMAGE TO PROPERTY AND RISK OF LOSS.
(a) The risk of any loss or damage to the Assets to be Acquired and the
Acquired System resulting from fire, theft or any other casualty (but excluding
any loss or damage attributable to reasonable wear and tear) ("Damage") shall be
borne by Seller at all times prior to the Closing. In the event that any such
Damage shall be sufficiently substantial so as to preclude and prevent
resumption of normal operations of all or any portion of the Acquired System
within twenty (20) days from the occurrence of the event resulting in such loss
or damage, Seller shall immediately notify Buyer in writing of its inability to
resume normal operations or to replace or restore the lost or damaged property,
and Buyer, at any time within ten (10) days after receipt of such notice, may
elect either (a) to waive such defect and proceed toward consummation of the
transaction in accordance with the terms of this Agreement, or (b) to terminate
this Agreement. If Buyer elects to terminate this Agreement pursuant to this
Section, the parties hereto shall stand fully released and discharged of any and
all obligations hereunder.
(b) If Buyer shall elect to consummate this transaction notwithstanding
such Damage and does so, or in the event of damage to the Acquired System which
is not material damage to the Acquired System, there shall be no diminution of
the Purchase Price, and all insurance proceeds received by Seller attributable
to any damaged Assets to be Acquired as a result of the occurrence of the event
resulting in the Damage shall be delivered to Buyer, or the rights thereto shall
be assigned to Buyer if not yet paid over to Seller, and Seller shall pay to
Buyer the amount of any deductible associated with the insurance claim.
(c) Notwithstanding the provisions of this Section 10, in the event of
Damage to the Acquired System which is not material damage (i.e., less than
$50,000) to the Acquired System and such Damage
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is not covered by insurance, Seller shall have the full responsibility for the
completion of all necessary repair and/or restoration work with respect to such
damage, whether or not such work is capable of being completed prior to the
Closing Date, and shall promptly and with due diligence, in a prudent and
workmanlike manner, proceed with such work, time being of the essence.
11. SURVIVAL OF REPRESENTATIONS AND WARRANTIES; INDEMNIFICATION.
11.1 Survival of Representations and Warranties.
All representations, warranties, covenants, stipulations, certifications,
indemnities and agreements contained herein or in any document delivered
pursuant hereto shall survive the consummation of the transactions provided for
in this Agreement and shall expire and be extinguished twelve (12) months after
the Closing Date, and Buyer's and Seller's rights to make claims based thereon
shall likewise expire and be extinguished on such date.
11.2 Indemnification.
(a) Seller shall defend, indemnify and hold Buyer harmless from and against
any and all claims, liabilities, damages, losses, deficiencies and expenses
(including reasonable attorneys' fees and expenses and costs of suit, including,
but not limited to, travel expenses and discovery costs for such matters as
transcripts, photocopying, subpoenas and telecopies) (individually, a "Loss" and
collectively, "Losses") arising out of or relating to (i) any and all inaccurate
representations and warranties, and out of any and all breaches of covenants,
agreements and certifications made by or on behalf of Seller in this Agreement
or in any document delivered hereunder, (ii) any failure to comply with any
applicable bulk transfer acts, or (iii) any and all liabilities and obligations
of Seller (except for the Assumed Liabilities). Buyer shall not be entitled to
be indemnified by Seller for any Losses under this Section 11.2(a) (other than
Losses relating to tax matters) arising out of any single claim or aggregate
claims until the total amount of all such Losses suffered or paid by Buyer
exceeds $40,000 ("Seller's Basket"). Buyer shall then be entitled to be
indemnified for all Losses under this Section 11.2(a) arising out a single claim
or aggregate claims up to an aggregate indemnification of One Million Dollars
($1,000,000) ("Seller's Cap"). Buyer's sole recourse for any indemnification
claims shall be to proceed against the escrow amount in accordance with the
terms of the Indemnity Escrow Agreement.
(b) Buyer shall defend, indemnify and hold Seller harmless from and against
any and all Losses arising out of or relating to (i) any and all inaccurate
representations, and out of any and all breaches of covenants, warranties,
stipulations, agreements and certifications made by or on behalf of Buyer in
this Agreement or in any document delivered by Buyer hereunder; (ii) the Assumed
Liabilities; (iii) all debts, liabilities or claims owing by or against Buyer
subsequent to the Closing Date or arising out of the business activities of
Buyer subsequent thereto; and (iv) any claims under the Programming Agreements
resulting from the transactions contemplated hereby, including, without
limitation, the termination thereof, the failure to obtain any consents to the
assignment thereof, or claims for repayment of Launch Support.
11.3 Indemnification with Respect to Third-Party Claims.
(a) Definitions. As used herein, a "Third-Party Claim" means a Loss or
potential Loss for which indemnification is claimed by Buyer or Seller (the
"Indemnitee") under the provisions of this Article 11 and which is consequent to
a claim against the Indemnitee by a person, corporation, association,
partnership or other business organization, or an individual, or a government,
any political subdivision thereof or a governmental agency by commencement
against the Indemnitee of a legal action or proceeding or receipt by the
Indemnitee of an assertion of a claim for which indemnification is provided
pursuant to this Article 11 by Buyer or Seller, as the case may be (the
"Indemnitor").
(b) Notice of Claim. The Indemnitee will give notice of a Third-Party Claim
to the Indemnitor, together with, if such Third-Party Claim is subject to
arbitration pursuant to Section 14 hereof, demand for arbitration, stating the
nature thereof and enclosing copies of any complaint, summons, written assertion
of such Third-Party Claim or similar document. No claim for indemnification on
account of a
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Third-Party Claim shall be made and no indemnification therefor shall be
available under this Article 11 until the Indemnitee shall have given initial
written notice of its claim to the Indemnitor.
(c) Retention of Counsel by the Indemnitor. Except as hereinafter provided
(including, but not limited to, Section 11.3(d)(ii) hereof), the Indemnitor
shall engage counsel to defend a Third-Party Claim, and shall provide notice to
the Indemnitee not later than 15 business days following delivery by the
Indemnitee to the Indemnitor of a notice of a Third-Party Claim, such notice to
include an acknowledgment by the Indemnitor that it will be liable in full to
the Indemnitee for any Losses in connection with such Third-Party Claim. The
Indemnitee will fully cooperate with such counsel. The Indemnitor will cause
such counsel to consult with the Indemnitee as appropriate as to the defense of
such claim, and the Indemnitee may, at its own expense, participate in such
defense, assistance or enforcement, but the Indemnitor shall control such
defense, assistance or enforcement. The Indemnitor will cause such counsel
engaged by the Indemnitor to keep the Indemnitee informed at all times of the
status of such defense, assistance or enforcement.
(d) Employment of Counsel by the Indemnitee.
(i) Notwithstanding the provisions of Section 11.3(c), the Indemnitee shall
have the right to engage counsel and to control the defense of a Third-Party
Claim if the Indemnitor shall not have notified the Indemnitee of its
appointment of counsel and control of the defense of a Third-Party Claim
pursuant to Section 11.3(c) within the time period therein provided and
Indemnitee is materially prejudiced by such failure to notify.
(ii) Notwithstanding the engagement of counsel by the Indemnitor, the
Indemnitee shall have the right, at its own expense, to engage counsel to
participate jointly with the Indemnitor in, and to control jointly with the
Indemnitor, the defense of a Third-Party Claim if (x) the Third-Party Claim
involves remedies other than monetary damages and such remedies, in the
Indemnitee's reasonable judgment, could have an effect on the conduct of the
Indemnitee's business, or (y) the Third-Party Claim relates to acts, omissions,
conditions, events or other matters occurring after the Closing Date as well as
to acts, omissions, conditions, events or other matters occurring prior to the
Closing Date, or (z) the claims involve monetary damages which could exceed
Seller's Cap.
(iii) If the Indemnitee chooses to exercise its right to appoint counsel
under this Section 11.3(d), the Indemnitee shall deliver written notice thereof
to the Indemnitor setting forth in reasonable detail why it believes that it has
such right and the name of the counsel it proposes to employ. The Indemnitee may
deliver such notice at any time that the conditions to the exercise of such
right appear to be fulfilled, it being recognized that in the course of
litigation, the scope of litigation and the amount at stake may change. The
Indemnitee shall thereupon have the right to appoint such counsel.
(iv) The reasonable fees and expenses of counsel and any accountants,
experts or consultants engaged by the Indemnitee in accordance with the
provisions of Section 11.3(d)(i) in connection with defending a Third-Party
Claim shall be paid by the Indemnitor in accordance with the provisions of this
Article 11. If the Indemnitee's employment of counsel is for a Third-Party Claim
of the type described in subdivision (ii)(y) or (ii)(z) of this Section 11.3(d),
then subject to the provisions of Section 11.3(e), the amount of fees and
expenses so payable by the Indemnitor shall be that fraction of the aggregate of
such fees and expenses, the numerator of which is the portion of the amount of
any judgment on, or settlement of, such Third-Party Claim for which the
Indemnitee is indemnified pursuant to this Article 11 and the denominator of
which is the total amount of such judgment or settlement, but provided further,
if such defense of a Third-Party Claim is successful (in the sense that as a
consequence thereof, there is no Loss (other than such fees and expenses) for
which the Indemnitee is indemnified pursuant to this Article 11), the Indemnitee
and the Indemnitor will attempt in good faith to reach an agreement on the
amount of such fees and expenses so payable by the Indemnitor.
(e) Settlement of Third-Party Claims.
(i) The Indemnitor may settle any Third-Party Claim solely involving
monetary damages only if the amount of such settlement is to be paid entirely by
the Indemnitor pursuant to this Article 11.
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(ii) The Indemnitor will not enter into a settlement of a Third-Party Claim
which involves a non-monetary remedy or which will not be paid entirely by the
Indemnitor pursuant to this Article 11 without the written consent of the
Indemnitee (which consent shall not be unreasonably withheld, delayed or
conditioned).
(iii) Indemnitee will not enter into a settlement of a Third-Party Claim
without the written consent of the Indemnitor, which consent shall not be
unreasonably withheld, under the circumstances described in subdivision (i) of
Section 11.3(d), if the Indemnitor has accepted all or any portion of the
liability for such Third-Party Claim. Otherwise, the Indemnitee shall be free to
compromise, defend and settle Third-Party Claims without prejudice to any of its
rights hereunder or under applicable law and without prejudice to its right to
assert a claim that such claim is not valid.
(iv) As to any Third-Party Claim of the type described in subsection
(ii)(y) or subsection (ii)(z) of Section 11.3(d), the Indemnitee and the
Indemnitor shall consult as to any proposed settlement. If the Indemnitee
notifies the Indemnitor that it wishes to accept a proposed settlement and the
Indemnitor is unwilling to do so, if the amount for which the Third-Party Claim
is ultimately resolved is greater than the amount for which the Indemnitee
desired to settle, then (x) the Indemnitee shall be liable only for the amount,
if any, which it would have paid had the Third-Party Claim been settled as
proposed by the Indemnitee, and (y) all reasonable attorneys' fees and expenses
and costs of suit incurred by the Indemnitee subsequent to the time of the
proposed settlement shall be paid or reimbursed by the Indemnitor.
(v) In determining whether to accept or reject any settlement proposal,
each party shall act in good faith and with due regard for the reasonable
commercial and financial interests of the other.
(f) Claims as to Which Indemnification is Partially
Payable. Notwithstanding the foregoing, in the event of any settlement of, or
final judgment with respect to, a Third-Party Claim which relates to acts,
omissions, conditions, events or other matters occurring both before and after
the Closing Date, the Indemnitee and the Indemnitor shall negotiate in good
faith as to the portion of such Third-Party Claim as to which such
indemnification is payable.
(g) Cooperation, etc. The Indemnitee and the Indemnitor shall cooperate
with one another in good faith in connection with the defense, compromise or
settlement of any claim or action. Without limiting the generality of the
foregoing, the party controlling the defense or settlement of any matter shall
take steps reasonably designed to ensure that the other party and its counsel
are informed at all times of the status of such matter. Neither party shall
dispose of, compromise or settle any claim or action in a manner that is not
reasonable under the circumstances and in good faith. The Indemnitor and
Indemnitee shall enter into such confidentiality and other non-disclosure
agreements as the Indemnitee or Indemnitor, as the case may be, shall reasonably
request in order to protect trade secrets and other confidential or proprietary
information of the Indemnitee or Indemnitor, as the case may be.
11.4 Covenant Not to Sue and Nonrecourse to Partners.
(a) Buyer agrees that notwithstanding any other provision in this
Agreement, any agreement, instrument, certificate or document entered into
pursuant to or in connection with this Agreement or the transactions
contemplated herein or therein (each a "Transaction Document") and any rule of
law or equity to the contrary, to the fullest extent permitted by law, Seller's
obligations and liabilities under all Transaction Documents and in connection
with the transactions contemplated therein shall be nonrecourse to all general
and limited partners of Seller. As used herein, the term "nonrecourse" means
that the obligations and liabilities are limited in recourse solely to the
assets of Seller (for those purposes, any capital contribution obligations of
the general and limited partners of Seller or any negative capital account
balances of such partners shall not be deemed to be assets of Seller) and are
not guaranteed directly or indirectly by, or the primary obligations of, any
general or limited partner of Seller, and neither Seller nor any general or
limited partner or any incorporator, stockholder, officer, director, partner,
employee or agent of Seller or of any general or limited partner of any
successor partnership, either directly or indirectly, shall
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be personally liable in any respect for any obligation or liability of Seller
under any Transaction Document or any transaction contemplated therein.
(b) Buyer hereby covenants for itself, its successors and assigns that it,
its successors and assigns will not make, bring, claim, commence, prosecute,
maintain, cause or permit any action to be brought, commenced, prosecuted,
maintained, either at law or equity, in any court of the United States or any
state thereof against any general or limited partner of Seller or any
incorporator, stockholder, officer, director, partner, employee or agent of
Sellers or of any general or limited partner of Seller for (i) the payment of
any amount or the performance of any obligation under any Transaction Document
or (ii) the satisfaction of any liability arising in connection with any such
payment or obligation or otherwise, including without limitation, liability
arising in law for tort (including, without limitation, for active and passive
negligence, negligent misrepresentation and fraud), equity (including, without
limitation, for indemnification and contribution) and contract (including,
without limitation, monetary damages for the breach of representation or
warranty or performance of any of the covenants or obligations contained in any
Transaction Document or with the transactions contemplated herein or therein).
12. TERMINATION.
12.1 Termination by Mutual Agreement.
This Agreement may be terminated prior to Closing (i) by mutual agreement
of Seller and Buyer or (ii) by Buyer in the event of a substantial loss under
Section 10. In such event, this Agreement shall terminate and neither Buyer nor
Seller shall have any further obligation or liability to the other hereunder,
except that Sections 15, 17.5, 17.6 and 17.7 of the Agreement shall survive and
continue in full force and effect notwithstanding such termination.
12.2 Buyer's Default.
In the event that the transactions contemplated by this Agreement are not
consummated on the Closing Date (if and as extended) due to Buyer's failure or
refusal to close, and all of the conditions specified in Section 6 (other than
deliveries to be made at the Closing) shall have been satisfied or tendered,
this Agreement shall be automatically terminated, and Seller shall be entitled
to pursue any and all of its equitable and legal causes of action against Buyer
either the remedy of specific performance, or to seek monetary damages.
12.3 Seller's Default.
In the event that the transactions contemplated by this Agreement are not
consummated on the Closing Date (if and as extended) due to Seller's failure or
refusal to close, and all of the conditions specified in Section 7 (other than
deliveries to be made at the Closing) shall have been satisfied or tendered,
this Agreement shall be automatically terminated, and Buyer shall be entitled to
pursue any and all of its equitable and legal causes of action against Seller.
12.4 Termination by Buyer or Seller.
Subject to extension of the Termination Date under Section 2.1, this
Agreement may be terminated by Buyer or Seller at any time after the Termination
Date in the event that any condition to the terminating party's obligations set
forth in Sections 6 or 7 hereof (other than deliveries to be made at the
Closing) has not been (i) satisfied or tendered by the party owing performance
or (ii) waived by the terminating party (provided that the failure of such
condition is not due to the breach of the terminating party), and upon such
termination, neither Buyer nor Seller shall have any further obligation or
liability to the other hereunder, except that Sections 15, 17.5, 17.6 and 17.7
of this Agreement shall survive and continue in full force and effect
notwithstanding such termination.
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13. NOTICE.
All notices and other communications hereunder shall be in writing and
delivered by one of the following methods of delivery: (i) personally, (ii) by
registered or certified mail, return receipt requested, postage prepaid, (iii)
by overnight courier, or (iv) by legible facsimile transmission, in all cases
addressed as follows:
To Buyer:
Adelphia Communications Corporation
One North Main Street
Coudersport, PA 16915
Attention: Colin Higgin
Telecopy: (814) 274-6586
With a copy to:
Buchanan Ingersoll Professional Corporation
One Oxford Centre
301 Grant Street, 20th Floor
Pittsburgh, PA 15219
Attention: Bruce I. Booken, Esq.
Telecopy: (412) 562-1041
To Seller:
Northland Communications Corporation
1201 Third Avenue, Suite 3600
Seattle, WA 98101
Attention: Laura N. Williams
Facsimile: (206) 623-8034
With a copy to:
Cairncross & Hempelmann, P.S.
701 Fifth Avenue, 70th Floor
Seattle, WA 98104
Attention: Timothy M. Woodland
Facsimile: (206) 587-2308
or to such address as such party may indicate by a notice delivered to the other
parties hereto. Notice shall be deemed received the same day (when delivered
personally), five (5) days after mailing (when sent by registered or certified
mail) or the next business day (when sent by facsimile transmission or when
delivered by overnight courier). Any party to this Agreement may change its
address to which all communications and notices may be sent hereunder by
addressing notices of such change in the manner provided.
14. DISPUTE RESOLUTION.
(a) Any controversy, dispute or claim arising out of or relating to this
Agreement, or any modification, amendment or extension to this Agreement or to
any collateral document, or any modification, amendment or extension thereto, or
the breach thereof, including any claim to rescind or set aside any of the same
(individually, a "Claim" and collectively, "Claims"), shall be settled by
arbitration conducted in Wilmington, Delaware in accordance with the provisions
of this Section 14 and in accordance with the Commercial Arbitration Rules of
the American Arbitration Association ("AAA"). To the extent that any of the
Commercial Arbitration Rules of the AAA conflict with the provisions of this
Agreement, the provisions of this Agreement shall take precedence. The parties
retain the right to seek and obtain interim relief pending receipt of an award
in accordance with the terms of this Section for the sole purpose
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of maintaining and preserving the status quo. The award rendered by the
Arbitration Panel (as hereafter defined) shall be final and binding as between
the parties hereto and their heirs, executors, administrators, successors and
assigns, and judgment on the award may be entered by any court having
jurisdiction thereof.
(b) The parties hereto agree that notwithstanding, and in addition to, the
rights and remedies available hereunder, each of the Buyer, on the one hand, and
Seller, on the other hand, reserves the right to seek and obtain temporary
restraining orders or other emergency temporary or preliminary equitable
injunctive relief from a court in the State of Delaware situate in New Castle
County or the federal courts situate in District of Delaware, solely to preserve
the status quo by enjoining or restraining a party hereto pending final and
binding arbitration hereunder, and the parties hereto acknowledge and agree to
the right to seek such relief. The parties hereto expressly agree and
acknowledge that no judicial proceeding relating to the subject matter of the
arbitration shall be deemed a waiver of any party's right to arbitrate nor shall
the existence or exercise of such right be deemed to be an adequate remedy at
law in connection therewith.
(c) Claims, shall be heard and decided, and awards rendered on such Claims,
by a panel of three (3) arbitrators (the "Arbitration Panel") appointed in
accordance with the provisions hereof. The decision of a majority of the
arbitrators comprising the Arbitration Panel shall govern on any matter and be
the decision of the Arbitration Panel. In case of any question arising as to the
interpretation of these arbitration provisions or the AAA Commercial Rules of
Arbitration applicable to any arbitration effected hereunder, the decision of a
majority of the members of the Arbitration Panel shall be accepted by the
parties as final and conclusive, except that no decision or input of or notice
to the Arbitration Panel shall be required in order for either of the parties to
request and obtain the interim relief set forth in Section 14(b) hereof. In the
event of the death or disability of any arbitrator pending final resolution of
the Claim, a replacement arbitrator shall be chosen by the party who originally
designated such arbitrator within fifteen (15) days following notice of such
death or disability.
(d) If any party hereto has a Claim and desires to arbitrate such Claim,
such party (the "Claimant") shall give written notice (the "Notice") of the
Claim and of its intention to arbitrate to the other party (the "Respondent"),
and simultaneously with the giving of the Notice to the Respondent, the Claimant
shall file, at the regional office of the AAA located in Wilmington, Delaware
(or, should such regional office no longer exist, at the regional office of the
AAA located closest to Wilmington, Delaware), (i) three (3) copies of the Notice
or demand for arbitration, (ii) three (3) copies of this Section 14 of this
Agreement, and (iii) the appropriate administrative fee as provided in the
Administrative Fee Schedule of the AAA. The Notice shall contain a brief
statement setting forth the nature of the dispute, the amounts involved, if any,
and the remedy sought, and shall designate one arbitrator chosen by the Claimant
who shall be on the AAA approved list of arbitrators in Wilmington, Delaware.
(e) Within twenty (20) days following delivery of the Notice to the
Respondent, the Respondent may file an answering statement (the "Answering
Statement"), in duplicate, with the AAA. In the event the Respondent elects to
file an Answering Statement with the AAA, the Respondent shall, at the same
time, deliver a copy of the Answering Statement to the Claimant. If a
counterclaim is asserted, the Answering Statement shall contain a statement
setting forth the nature of the counterclaim, the amount involved, if any, and
the remedy sought, and the appropriate fee as provided in the Administrative Fee
Schedule of the AAA shall be delivered to the AAA when the Answering Statement
is filed. If no Answering Statement is filed within the twenty (20) day period
following receipt of the Notice by the Respondent, it shall be deemed as a
denial by Respondent of the Claim and, further, shall be deemed a complete
waiver of any counterclaim. Failure to file an Answering Statement shall not
operate to delay the arbitration.
(f) Within thirty (30) days following delivery of the Notice to the
Respondent, the Respondent shall choose one (1) arbitrator who shall be on the
AAA approved list of arbitrators in the location where the notice was filed. If
the Respondent shall fail to choose an arbitrator within such thirty (30) day
period, then the AAA shall, within thirty (30) days following receipt of notice
of such fact by the Claimant,
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select one (1) arbitrator on behalf of Respondent from its National Panel of
Commercial Arbitrators to serve on the Arbitration Panel and further shall
choose the third arbitrator to serve on the Arbitration Panel from its National
Panel of Commercial Arbitrators. If the Respondent names an arbitrator in
compliance with this Subsection (f) within such thirty (30) day period, then the
AAA shall, within thirty (30) days following receipt of notice of such
appointment from either Claimant or Respondent, select one arbitrator from its
National Panel of Commercial Arbitrators to serve as the third arbitrator on the
Arbitration Panel.
(g) The Arbitration Panel, when duly appointed, shall investigate the facts
and shall hold a hearing within sixty (60) days following such appointment, and,
at such hearing, shall permit the parties to this Agreement to present evidence
and arguments. In connection therewith, the parties agree that each may conduct
discovery to the extent and in the manner allowed by the Federal Rules of Civil
Procedure within the confines of the expedited procedures provided for herein
and, further, that any discovery conducted during the emergency or temporary
equitable relief or injunctive proceedings permitted hereby may be utilized by
the parties in the arbitration proceeding. The arbitrators selected shall, as a
condition of appointment, agree to hear the case within sixty (60) days of
appointment and on consecutive days until concluded. The award shall be rendered
by the Arbitration Panel not later than sixty (60) days from the date of the
closing of the hearing.
(h) Except as otherwise provided herein, the fees and expenses of the AAA
and the Arbitration Panel shall be borne equally by the parties in accordance
with the applicable provisions of the Commercial Arbitration Rules of the AAA.
Each party shall bear its own attorneys' fees and expenses and the fees and
expenses of other experts or professionals utilized by such party in connection
with the arbitration provided for herein.
(i) Each of the parties hereto hereby irrevocably consents and submits to
the exclusive personal jurisdiction of United States District Courts for the
Western District of Pennsylvania (or, in the event such court lacks subject
matter jurisdiction, the courts of the State of Delaware situate in New Castle
County) over any suit, action or proceeding to compel arbitration in accordance
with the provisions of this Section 14, and irrevocably agrees that all claims
with respect thereto may be heard and determined in either such court. Service
of process in any such suit, action or proceeding may be made in the manner
hereinabove set forth for the giving of notices and the same shall constitute
valid personal service for all purposes, each party hereby waiving personal
service by other means.
15. BROKERAGE COMMISSION.
Buyer and Seller each represent and warrant that all negotiations relative
to this Agreement and the transactions contemplated hereby have been carried on
by each directly with the other without intervention of any person, except that
Seller has retained the services of Daniels & Associates. The parties agree that
Seller shall pay the costs and expenses of Daniels & Associates under its
agreement with Daniels & Associates. Each party to this Agreement indemnifies
the other and holds it harmless against and in respect of any claim against the
other for brokerage or other commissions relative to this Agreement and the
transactions contemplated hereby by the indemnifying party's employees, agents
or consultants.
16. LAWS GOVERNING.
The construction, interpretation and enforcement of this Agreement and the
rights of the parties hereunder shall be governed by the laws of the State of
Delaware without regard to any jurisdiction's conflicts of law provisions.
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17. MISCELLANEOUS.
17.1 Counterparts; Telecopy.
This Agreement may be executed in one or more counterparts, each of which
shall be deemed an original, but all of which when taken together shall
constitute one and the same instrument. Delivery of executed signature pages
hereof by facsimile transmission shall constitute effective and binding
execution and delivery hereof.
17.2 Assignment.
This Agreement may not be assigned by any party hereto without the prior
written consent of the other parties; provided, however, that Buyer may assign
this Agreement to one or more of the subsidiaries or affiliates of Buyer, upon
prior written consent of Seller, which consent shall not be unreasonably
withheld, provided Buyer remains primarily liable to fully perform the terms of
this Agreement; provided, further that such assignment does not cause any
consent or approval required to be obtained hereunder to be withheld, delayed or
otherwise conditioned.
17.3 Entire Agreement.
This Agreement is an integrated document, contains the entire agreement
between the parties, wholly cancels, terminates and supersedes any and all
previous and/or contemporaneous oral agreements, negotiations, commitments and
writings between the parties hereto with respect to such subject matter. No
change, modification, termination, notice of termination, discharge or
abandonment of this Agreement or any of the provisions hereof, nor any
representation, promise or condition relating to this Agreement, shall be
binding upon the parties hereto unless made in writing and signed by the parties
hereto, except that termination or notices of termination which may be effected
pursuant to the terms of this Agreement by either party to the Agreement shall
be binding if made in writing and signed by the applicable party.
17.4 Interpretation.
Article titles and headings to Sections herein are inserted for convenience
of reference only and are not intended to be a part of or to affect the meaning
or interpretation of any of the provisions of this Agreement. All references to
Sections, subsections, Schedules or Exhibits contained in this Agreement are
references to the Sections and subsections of this Agreement and the Schedules
or Exhibits described on the list immediately following the signature page
hereto and attached hereto. All references to the word "including" shall have
the meaning represented by the phrase "including without limitation."
17.5 Expenses.
Except as otherwise expressly provided herein, Seller and Buyer each will
pay all costs and expenses, including any and all legal and accounting fees, of
its performance and compliance with all agreements and conditions contained
herein on its part to be performed or complied with. Seller and Buyer agree to
share equally any sales and transfer taxes, recording fees or other similar
costs payable in connection with the transfer of the Assets to be Acquired.
17.6 Confidentiality.
Any and all information obtained by Buyer from Seller in connection with
the transactions contemplated by this Agreement which is confidential in nature
(collectively, the "Evaluation Material") shall be kept strictly confidential by
Buyer prior to the Closing Date; provided, however, that any Evaluation Material
may be disclosed to agents, employees, officers, directors, investors, advisors
and other representatives of Buyer who need to know such Evaluation Material (it
being agreed that such representative shall be informed by Buyer of the
confidential nature of such Evaluation Material and shall be directed to deal
with such Evaluation Material confidentially) and, further, may be disclosed to
the extent required by law, including applicable securities laws, or by written
or oral question or request for information or documents in legal proceedings,
interrogatories, subpoenas, civil investigative demands or similar processes.
For purposes of this Agreement, the term "Evaluation Material" does not include
information which (i) becomes generally available to the public other than as a
result of disclosure by Buyer or any Buyer representative in violation
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of the terms hereof, (ii) was available on a non-confidential basis prior to
disclosure to Buyer by Seller or any of its directors, officers, employees,
agents or representatives, or (iii) becomes available to Buyer on a
non-confidential basis from a source (other than Seller or any of its directors,
officers, employees, agents or representatives) which is not bound by a
confidentiality agreement with Seller.
17.7 Public Announcements.
Neither Buyer nor Seller shall, without the approval of the other party
(which may not be unreasonably withheld), make any press release or other public
announcement concerning the transactions contemplated by this Agreement, except
as and to the extent that such party shall be so obligated by law (including any
legal obligation imposed on Buyer in connection with its status as a
publicly-held corporation), in which case the other party shall be advised and
Buyer and Seller shall use their reasonable efforts to cause a mutually
agreeable release or announcement to be issued. Notwithstanding the foregoing,
Buyer acknowledges and agrees that, and hereby agrees to cooperate with Seller,
this agreement and the transactions contemplated hereby may be disclosed in a
proxy statement and other materials filed by Seller with the SEC.
17.8 Waivers.
Any term or provision of this Agreement may be waived, or the time for its
performance may be extended, by the party or parties entitled to the benefit
thereof, but any such waiver must be in writing and must comply with the notice
provisions contained in Section 13. The failure of any party hereto to enforce
at any time any provision of this Agreement shall not be construed to be a
waiver of such provision, nor in any way to affect the validity of this
Agreement or any part hereof or the right of any party thereafter to enforce
each and every such provision. No waiver of any breach of this Agreement shall
be held to constitute a waiver of any other or subsequent breach.
17.9 Partial Invalidity.
Wherever possible, each provision hereof shall be interpreted in such a
manner as to be effective and valid under applicable law, but in case any one or
more of the provisions contained herein shall, for any reason, be held to be
invalid, illegal or unenforceable in any respect, such invalidity, illegality or
unenforceability shall not affect any other provisions of this Agreement, and
this Agreement shall be construed as if such invalid, illegal or unenforceable
provisions had never been contained herein, unless the deletion of such
provision or provisions would result in such a material change as to cause the
completion of the transactions contemplated hereby to be unreasonable.
17.10 Incorporation by Reference.
Any and all Schedules, Exhibits or Recitals referred to herein or attached
hereto are incorporated herein by reference thereto as though fully set forth at
the point referred to in this Agreement.
17.11 Acquired System's Financial Statements.
Seller hereby consents to the inclusion by Buyer of the Acquired System's
financial statements, if required to be so included by Buyer, in any report
required to be filed by Buyer following the Closing Date with the Securities and
Exchange Commission ("SEC"), National Association of Securities Dealers'
Automated Quotations ("NASDAQ") System or any stock exchange pursuant to
applicable law, rule or regulation, including the Securities Act of 1933, as
amended, or the Securities Exchange Act of 1934, as amended. All accounting
costs and fees and other expenses and costs incurred by reason of the
reformatting of the Acquired System's financial statements in connection with
the inclusion by Buyer of the Acquired System's financial statements in any such
report shall be borne by Buyer. Upon the request of Buyer, Seller agrees to
promptly prepare (not later than thirty (30) days after the date of such
request) such financial statements relating to the Acquired System as may be
required to be filed by Buyer with SEC, NASDAQ or any stock exchange. All
accounting costs and fees and other expenses and costs incurred by reason of the
preparation of such financial statements shall be borne by Buyer. Seller agrees
to request the consent of the independent public accountants of Seller to the
inclusion of the Acquired System's financial statements in any report required
to be filed by Buyer with the SEC, NASDAQ System or stock exchange.
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18. INDEX TO DEFINITIONS.
"AAA" shall have the meaning set forth in Section 14(a).
"Accounts List" shall have the meaning set forth in Section 5.8.
"Acquired Programming Agreements" shall have the meaning set forth in
Section 1.3(b).
"Acquired System" shall have the meaning set forth in the recitals to this
Agreement.
"Agreements" shall have the meaning set forth in Section 3.9.
"Answering Statement" shall have the meaning set forth in Section 14(e).
"Arbitration Panel" shall have the meaning set forth in Section 14(c).
"Assets to be Acquired" shall have the meaning set forth in Section 1.1.
"Assumed Contracts" shall have the meaning set forth in Section 1.1(b).
"Assumed Liabilities" shall have the meaning set forth in Section 1.2.
"Buyer" shall have the meaning set forth in the preamble to this Agreement.
"Buyer Transaction Documents" shall have the meaning as set forth in
Section 4.2(a).
"CATV" shall have the meaning set forth in the Recitals to this Agreement.
"Cable Act" shall have the meaning set forth in Section 3.5(b)(i).
"Claim" shall have the meaning set forth in Section 14(a).
"Claimant" shall have the meaning set forth in Section 14(d).
"Closing" shall have the meaning set forth in Section 2.1.
"Closing Date" shall have the meaning set forth in Section 2.1.
"Copyright Act" shall have the meaning set forth in Section 3.5(b)(i).
"DOJ" shall have the meaning set forth in Section 5.12(a).
"Damage" shall have the meaning set forth in Section 10(a).
"Environmental Laws" shall have the meaning set forth in Section 3.19.
"Equivalent Basic Subscriber" shall have the meaning set forth in Section
3.3(c).
"Escrow Agent" shall have the meaning set forth in Section 2.3(a).
"Estimated Adjustment" shall have the meaning set forth in Section
2.5(b)(ii).
"Evaluation Material" shall have the meaning set forth in Section 17.6.
"Excluded Assets" shall have the meaning set forth in Section 1.3.
"FAA" shall have the meaning set forth in Section 3.5(d).
"FCC" shall have the meaning set forth in Section 3.5(b)(i).
"FTC" shall have the meaning set forth in Section 5.12(a).
"Final Adjustment" shall have the meaning set forth in Section 2.5(c)(ii).
"Financial Statements" shall have the meaning set forth in Section 3.3(a).
"Franchise" shall have the meaning set forth in Section 3.6(a).
"GAAP" shall have the meaning set forth in Section 2.5(a).
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"Grace Period" shall have the meaning set forth in Section 2.5(c)(iii).
"HSR Act" shall have the meaning set forth in Section 5.12(a).
"Indemnitee" shall have the meaning set forth in Section 11.3(a).
"Indemnitor" shall have the meaning set forth in Section 11.3(a).
"Indemnity Escrow Agreement" shall have the meaning set forth in Section
2.3(a).
"Independent Accountant" shall have the meaning set forth in Section
2.5(c)(iii).
"Launch Support" shall have the meaning set forth in Section 2.5(a)(xi).
"Leases and Rights of Way" shall have the meaning set forth in Section
3.8(b).
"Liens" shall have the meaning set forth in Section 3.4.
"Loss" shall have the meaning set forth in Section 11.2(a).
"MDS" shall have the meaning as set forth in Section 3.5(j).
"MMDS" shall have the meaning as set forth in Section 3.5(j).
"Material Adverse Effect" shall have the meaning set forth in Section 3.1.
"NASDAQ" shall have the meaning set forth in Section 17.11.
"Net Liabilities Adjustment" shall have the meaning as set forth in Section
2.5(a).
"Non-Competition Agreement" shall have the meaning set forth in Section
2.6.
"Notice" shall have the meaning set forth in Section 14(d).
"Permitted Liens" shall have the meaning set forth in Section 3.4.
"Pole Attachment Agreements" shall have the meaning set forth in Section
3.7(a).
"Programming Agreements" shall have the meaning set forth in Section
1.3(b).
"Programming Notices" shall have the meaning set forth in Section 5.11.
"Proof of Performance Test" shall have the meaning set forth in Section
3.5(b)(i).
"Purchase Price" shall have the meaning set forth in Section 2.2.
"Respondent" shall have the meaning set forth in Section 14(d).
"SEC" shall have the meaning set forth in Section 17.11.
"Seller" shall have the meaning set forth in the preamble to this
Agreement.
"Seller Systems" shall have the meaning set forth in Section 3.15(b).
"Seller Transaction Documents" shall have the meaning set forth in Section
3.2(b).
"Seller's Basket" shall have the meaning set forth in Section 11.2(a).
"Seller's Cap" shall have the meaning set forth in Section 11.2(a).
"Subscriber Shortfall" shall have the meaning set forth in Section 2.5(b).
"Termination Date" shall have the meaning set forth in Section 2.1.
"Third Party Claim" shall have the meaning set forth in Section 11.3(a).
"Year 2000 Problems" shall have the meaning set forth in Section 3.15(b).
[INTENTIONALLY LEFT BLANK.]
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized corporate officers on the day and year first
above written.
ADELPHIA COMMUNICATIONS CORPORATION
By:
-------------------------------------
Name:
-------------------------------------
Title:
-------------------------------------
NORTHLAND CABLE PROPERTIES SIX LIMITED
PARTNERSHIP
By: Northland Communications
Corporation, its
managing general partner
By:
-------------------------------------
Name:
-------------------------------------
Title:
-------------------------------------
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EXHIBIT F
PROPOSED TRANSACTION
ASSET PURCHASE AGREEMENT
ASSET PURCHASE AGREEMENT
THIS ASSET PURCHASE AGREEMENT is dated , 2000, by and
between and Northland Cable Properties Six Limited Partnership, a Washington
limited partnership ("Seller"), and Northland Communications Corporation, a
Washington corporation, or its affiliates or assigns ("Buyer").
RECITALS:
A. Seller owns and operates cable television systems in the following
communities: (a) Starkville, Maben, Philadelphia, Kosciusko, Carthage, Forest
and Raleigh, Mississippi; (b) Barnwell, Allendale and Bamberg, South Carolina;
and (c) Highlands, North Carolina (collectively referred to as the "Systems");
B. Seller desires to sell, and Buyer wishes to buy, substantially all of
Seller's assets used in the operation of the Systems and the cable television
business related thereto for the price and on the terms and conditions set forth
in this Agreement.
AGREEMENTS:
In consideration of the above recitals and the covenants and agreements
contained herein, Buyer and Seller agree as follows:
1. DEFINED TERMS
The following terms shall have the following meanings in this Agreement and
additional terms shall have the meanings as defined elsewhere in this Agreement:
1.1 "Accounts Receivable" means the rights of Seller to payment for
services provided for and billed by Seller (including, without limitation, those
billed to subscribers of the Systems and those for services and advertising time
provided by Seller) and unpaid prior to the Closing Date as reflected on the
billing records of Seller relating to the Systems.
1.2 "Agreement" means this Asset Purchase Agreement.
1.3 "Assets" means all the tangible and intangible assets owned by
Seller and used solely in connection with the conduct of the business or
operations of the Systems, including, without limitation, those specified in
detail in Section 2.1 but excluding those specified in Section 2.2.
1.4 "Closing" means the consummation of the transactions contemplated
by this Agreement in accordance with the provisions of Section 7.
1.5 "Closing Date" means the date of the Closing specified in Section
7.
1.6 "Compensation Arrangement" means any written plan or compensation
arrangement other than an Employee Plan or a Multi-employer Plan that provides
to employees of Seller employed at the Systems any compensation or other
benefits, whether deferred or not, in excess of base salary or wages and
excluding overtime pay, including, but not limited to, any bonus or incentive
plan, deferred compensation arrangement, stock purchase plan, severance pay plan
and any other perquisites and employee fringe benefit plan.
1.7 "Consents" means the consents, permits or approvals of governmental
authorities and other third parties.
1.8 "Contracts" means all pole attachment and conduit agreements,
railway crossing agreements, leases, easements, rights of way and similar
interests in Real Property, retransmission consent
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agreements, subscription agreements with customers for the cable services
provided by the Systems, miscellaneous service agreements, agreements involving
material non-monetary obligations, agreements entered into by Seller in the
ordinary course of business of the Systems between the date hereof and the
Closing Date, and other agreements, written or oral (including any amendments
and other modifications thereto), to which Seller is a party and that relate to
the Assets or the business or operations of the Systems.
1.9 "Distributed Assets" means the undivided portion of the Assets
attributable to the interest of the managing general partner of Seller pursuant
to and in accordance with the limited partnership agreement of Seller, as
amended.
1.10 "Employee Plan" means any written pension, retirement,
profit-sharing, deferred compensation, vacation, severance, bonus, incentive,
medical, vision, dental, disability, life insurance or any other employee
benefit plan as defined in Section 3(3) of the Employee Retirement Income
Security Act of 1974, as amended, and the regulations thereunder, (other than a
Multi-employer Plan) to which Seller contributes or which Seller sponsors or
maintains or by which Seller otherwise is bound, that provides benefits to
employees of Seller employed at the Systems.
1.11 "FCC" means the Federal Communications Commission, or its
successor agency.
1.12 "Franchises" means all municipal and county franchises, and
franchise applications (if any), granted to Seller by any Franchising
Authorities, including all amendments thereto and modifications thereof.
1.13 "Franchising Authorities" means all governmental authorities,
which have issued cable franchises relating to the operation of the Systems or
before which are pending any franchise applications filed by Seller relating to
the operation of the Systems.
1.14 "Material Adverse Effect" means a material adverse effect on the
operations, assets or financial condition of the Systems, taken as a whole,
other than (a) matters affecting the cable television industry generally
(including, without limitation, legislative, regulatory or litigation matters),
(b) matters relating to or arising from local or national economic conditions
(including, without limitation, financial and capital markets) and (c) any
changes resulting from or relating to the taking of any action contemplated by
this Agreement.
1.15 "Multi-Employer Plan" means a plan, as defined in ERISA Section
3(37) or Section 4001(a)(3), to which Seller or any trade or business which
would be considered a single employer with Seller under Section 4001(b)(1) of
ERISA contributed, contributes or is required to contribute that provides
benefits to employees of Seller employed at the Systems.
1.16 "Permitted Encumbrances" means any of the following liens or
encumbrances: (a) landlord's liens and liens for current taxes, assessments and
governmental charges not yet due or being contested in good faith by appropriate
proceedings; (b) statutory liens or other encumbrances that are minor or
technical defects in title that do not in the aggregate materially affect the
value, marketability or utility of the Assets as presently utilized; (c) such
liens, liabilities or encumbrances as are Assumed Liabilities; (d) leased
interests in property leased to others; (e) restrictions set forth in, or rights
granted to Franchising Authorities as set forth in, the Franchises or applicable
laws relating thereto; (f) zoning, building or similar restrictions, easements,
rights-of-way, reservations of rights, conditions or other restrictions or
encumbrances relating to or affecting the Real Property, that do not materially
interfere with the use of such Real Property in the operation of the Systems as
presently conducted; (g) as to Real Property, all matters of record as of the
date hereof other than mortgages; and (h) any other liens or encumbrances that
relate to liabilities and obligations that are to be discharged in full at
Closing or that will be removed prior to or at Closing.
1.17 "Personal Property" means all of the machinery, equipment, tools,
vehicles, furniture, leasehold improvements, office equipment, plant, inventory,
spare parts, supplies and other tangible and intangible personal property,
including, without limitation, the Franchises, the Contracts and the Accounts
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Receivable, that are owned or leased by Seller and used, useful or held for use
as of the date hereof solely in the conduct of the business or operations of the
Systems, plus such additions thereto and deletions therefrom arising in the
ordinary course of business and as permitted by this Agreement between the date
hereof and the Closing Date.
1.18 "Purchased Assets" means the undivided portion of the Assets
attributable to the collective interest of the limited partners and the
administrative general partner of Seller pursuant to and in accordance with the
limited partnership agreement of Seller, as amended.
1.19 "Real Property" means all of the real property interests of
Seller, including, without limitation, fee interests in real estate (together
with the buildings and other improvements located thereon), leasehold interests
in real estate, easements, licenses, rights to access, rights-of-way and other
real property interests that are (a) leased by Seller and used as of the date
hereof solely in the business or operations of the Systems, or (b) owned by
Seller and used as of the date hereof solely in the business or operations of
the Systems, plus such additions thereto and deletions therefrom arising in the
ordinary course of business and as permitted by this Agreement between the date
hereof and the Closing Date.
2. SALE AND PURCHASE OF ASSETS
2.1 Agreement to Sell and Purchase. Subject to the terms and conditions
set forth in this Agreement, on the Closing Date Seller hereby agrees to (i)
sell, transfer and deliver to Buyer, and Buyer agrees to purchase from Seller,
all of the Purchased Assets, and (ii) make an in-kind distribution to Buyer of
all of the Distributed Assets. The Assets shall be, on the Closing Date, free
and clear of any claims, liabilities, mortgages, liens, pledges, conditions,
charges or encumbrances of any nature whatsoever except for Permitted
Encumbrances, which Assets include the following:
2.1.1 the Personal Property;
2.1.2 the Real Property;
2.1.3 the Franchises;
2.1.4 the Contracts;
2.1.5 all of Seller's proprietary information, technical information
and data, machinery and equipment warranties, maps, computer discs and tapes,
plans, diagrams, blueprints and schematics, including filings with the
Franchising Authorities and the FCC relating solely to the Systems (other than
the materials described in Section 2.2 hereof);
2.1.6 all payments and sums deposited or advanced by Seller to a
landlord, utility, governmental agency or any other party as a security deposit
or in exchange for initiation of a service;
2.1.7 subject to Section 2.2, all books and records relating to the
business or operations of the Systems, customer records and all records required
by the Franchising Authorities to be kept, subject to the right of Seller to
have such books and records made available to Seller for a period of three years
from the Closing Date; and
2.1.8 the going concern value and any of Seller's other intangible
assets, if any, with respect to the Systems.
2.2 Excluded Assets. The Assets shall exclude the following assets
("Excluded Assets"):
2.2.1 Seller's cash on hand as of the Closing Date and all other
cash in any of Seller's bank or savings accounts, including, without limitation,
customer advance payments and deposits; any and all bonds, surety instruments,
insurance policies and all rights and claims thereunder, letters of credit or
other similar items and any cash surrender value in regard thereto, and any
stocks, bonds, certificates of deposit and similar investments;
2.2.2 Any books and records that Seller is required by law to retain
and any correspondence, memoranda, books of account, tax reports and returns and
the like related to the Systems
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other than those described in Section 2.1.7, subject to the right of Buyer to
have access to and to copy for a reasonable period, not to exceed three years
from the Closing Date, and Seller's partnership books and records and other
books and records related to internal partnership matters and financial
relationships with Seller's lenders and affiliates;
2.2.3 Any claims, rights and interest in and to any refunds of
federal, state or local franchise, income or other taxes or fees of any nature
whatsoever for periods prior to the Closing Date including, without limitation,
fees paid to the U.S. Copyright Office or any causes of action relating to such
refunds;
2.2.4 Except as specifically set forth herein, any Employee Plan,
Compensation Arrangement or Multi-employer Plan;
2.2.5 All rights to receive fees or services from any affiliate of
Seller;
2.2.6 Any contracts, agreements or other arrangements between Seller
and any affiliate of Seller;
2.2.7 All choices in action of Seller whether or not relating to the
Systems; and
2.2.8 The Accounts Receivable.
2.3 Purchase Price.
2.3.1 The purchase price for the Purchased Assets ("Purchase Price")
shall be (i) $62,250,000, (ii) as adjusted pursuant to Section 2.4 below, and
(iii) reduced by an amount equal to the portion of the Assets represented by the
Distributed Assets.
2.3.2 The Purchase Price shall be paid by Buyer to Seller at the
Closing as follows:
(a) By a promissory note in the principal amount of $9,875,000,
to be paid in two equal annual installments from the Closing Date and bearing
interest at an annual interest rate of 6.5%; and
(b) Subject to the principal amount of the promissory note
described in Section 2.3.2(a), adjustments and prorations set forth in Section
2.4 below, and the reductions set forth in Section 2.3.1(iii) above, by wire
transfer of the balance of the Purchase Price in immediately available funds to
Seller.
2.3.3 All Purchase Price proceeds shall be distributable to the
limited partners of Seller pursuant to and in accordance with the limited
partnership agreement of Seller, as amended. Buyer shall not be entitled to
receive any payments described in Section 2.3.2.
2.4 Adjustments and Prorations.
2.4.1 All income, expenses and other liabilities arising from the
Systems up until midnight on the day prior to the Closing Date, including
franchise fees, pole and other rental charges payable with respect to cable
television service, utility charges, real and personal property taxes and
assessments levied against the Assets, salesperson advances, property and
equipment rentals, applicable copyright or other fees, sales and service
charges, taxes (except for taxes arising from the transfer of the Assets
hereunder), and similar prepaid and deferred items, shall be prorated between
Buyer and Seller in accordance with the principle that Seller shall receive the
benefit of all income and shall be responsible for all expenses, costs and
liabilities allocable to the conduct of the business or operations of the
Systems for the period prior to the Closing Date, and Buyer shall receive the
benefit of all income and shall be responsible for all expenses, costs and
obligations allocable to the conduct of the business or operations of the
Systems on the Closing Date and for the period thereafter. All such pro rations
shall be determined in accordance with generally accepted accounting principles.
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2.4.2 The Purchase Price shall be increased by an amount equal to
100% of the face amount of all payments and sums deposited or advanced by Seller
to a landlord, utility, governmental agency or any other party as a security
deposit or in exchange for initiation of a service.
2.4.3 The Purchase Price shall be reduced by an amount equal to (a)
any customer advance payments (i.e., customer payments received by Seller prior
to the Closing but relating to service to be provided by Buyer after the
Closing) and deposits (including any interest owing thereon), and (b) any other
advance payments (i.e., advertising payments received by Seller prior to the
Closing but relating to service to be provided by Buyer after the Closing).
2.4.4 At least ten business days prior to the Closing, Seller will
prepare a report with respect to the Systems (the "Preliminary Report"), showing
in detail the preliminary determination of the adjustments referred to in this
Section 2.4, calculated in accordance with such Section as of the Closing Date
(or as of any other date(s) agreed to by the parties) together with any
documents substantiating the determination of the adjustments to the Purchase
Price proposed in the Preliminary Report. The adjustment shown in the
Preliminary Report, as adjusted by agreement of the parties, will be reflected
as an adjustment to the Purchase Price payable at the Closing.
2.4.5 Within 90 days after the Closing Date, Buyer shall prepare a
report with respect to the Systems (the "Final Report"), showing in detail the
final determination of any adjustments which were not calculated as of the
Closing Date and containing any corrections to the Preliminary Report, together
with any documents substantiating the final calculation of the adjustments
proposed in the Final Report. If Seller shall conclude that the Final Report
does not accurately reflect the adjustments and prorations to be made to the
Purchase Price in accordance with this Section 2.4, Seller shall, within 30 days
after its receipt of the Final Report, provide to Buyer its written statement of
any discrepancies believed to exist. Buyer and Seller shall use good faith
efforts to jointly resolve the discrepancies within 15 days of Buyer's receipt
of Seller's written statement of discrepancies, which resolution, if achieved,
shall be binding upon all parties to this Agreement and not subject to dispute
or judicial review. If Buyer and Seller cannot resolve the discrepancies to
their mutual satisfaction within such 15-day period, Buyer and Seller shall,
within the following 10 days, jointly designate a national independent public
accounting firm to be retained to review the Final Report together with Seller's
discrepancy statement and any other relevant documents. Such firm shall report
its conclusions as to adjustments pursuant to this Section 2.4 which shall be
conclusive on all parties to this Agreement and not subject to dispute or
judicial review. If, after adjustment as appropriate with respect to the amount
of the aforesaid adjustments paid or credited at the Closing, Buyer or Seller is
determined to owe an amount to the other, the appropriate party shall pay such
amount thereof to the other, within three days after receipt of such
determination. The cost of retaining such independent public accounting firm
shall be borne by Buyer; provided, however, that if such independent public
accounting firm concludes that the Final Report as proposed by Buyer is accurate
and that the discrepancies noted by Seller are inaccurate, then Seller shall
bear the cost of retaining such independent public accounting firm.
2.5 Assumption of Liabilities and Obligations. As of the Closing Date
and subject to applicable pro rations and adjustments set forth in Section 2.4,
Buyer shall assume and pay, discharge and perform the following (collectively,
the "Assumed Liabilities"): (a) all obligations and liabilities of Seller under
the Franchises and the Contracts; (b) all obligations and liabilities of Seller
to all customers and advertisers of the Systems for any advance payments or
deposits; and (c) all obligations and liabilities arising out of events
occurring on or after the Closing Date related to Buyer's ownership of the
Assets or its conduct of the business or operations of the Systems. All other
obligations and liabilities of Seller shall remain and be the obligations and
liabilities solely of Seller.
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3. REPRESENTATIONS AND WARRANTIES OF SELLER
Seller represents and warrants to Buyer as of the date of this Agreement
and as of the Closing Date, as follows:
3.1 Organization, Standing and Authority. Seller is a limited
partnership duly organized and validly existing under the laws of the State of
Washington, and is qualified to conduct business in each jurisdiction in which
the property owned, leased or operated by it requires it to be so qualified,
except where the failure to so qualify would not have a Material Adverse Effect.
Seller has the requisite partnership power and authority (a) to own, lease and
use the Assets as presently owned, leased and used by it, and (b) to conduct the
business and operations of the Systems as presently conducted by it.
3.2 Authorization and Binding Obligation. Seller has the partnership
power and authority to execute and deliver this Agreement and to carry out and
perform all of its other obligations under the terms of this Agreement. Except
for the approval of a majority in interest of the limited partners of Seller,
all partnership action by Seller necessary for the authorization, execution,
delivery and performance by it of this Agreement has been taken. This Agreement
has been duly executed and delivered by Seller and this Agreement constitutes
the valid and legally binding obligation of Seller, enforceable against it in
accordance with its terms, except (a) as rights to indemnity, if any, thereunder
may be limited by federal or state securities laws or the public policies
embodied therein, (b) as enforceability may be limited by bankruptcy,
insolvency, reorganization, moratorium or similar laws from time to time in
effect affecting the enforcement of creditors' rights generally, and (c) as the
remedy of specific performance and injunctive and other forms of equitable
relief may be subject to equitable defenses and to the discretion of the court
before which any proceeding therefor may be brought.
3.3 Absence of Conflicting Agreements. Subject to obtaining the
Consents described in Section 3.4 and approval of a majority in interest of the
limited partners of Seller, the execution, delivery and performance of this
Agreement by Seller will not: (a) violate the certificate of limited partnership
and limited partnership agreement, as amended, of Seller; (b) violate any law,
judgment, order, ordinance, injunction, decree, rule or regulation of any court
or governmental instrumentality applicable to Seller with respect to the Assets;
or (c) conflict with, constitute grounds for termination of, result in a breach
of, constitute a default under, accelerate or permit the acceleration of any
performance required by the terms of, any Contract or Franchise, excluding from
the foregoing clauses (b) and (c) such violations, conflicts, terminations,
breaches and defaults, which in the aggregate would not have a Material Adverse
Effect, and such conflicts, terminations, breaches and defaults which would
occur as a result of the specific legal or regulatory status of Buyer.
3.4 Consents. Except for (a) the Consents of Franchising Authorities
that are required by the Franchises prior to Closing, (b) the Consents of
landlords of leased headend or office sites required prior to Closing, (c) the
Consents of the FCC, other than any FCC consent to any business radio license or
any microwave transmit or receive license that Seller reasonably expects can be
obtained within 120 days after the Closing and so long as temporary
authorization is available to Buyer under FCC rules with respect thereto, and
(d) Consents which if not obtained would not have a Material Adverse Effect, no
consent, approval, permit or authorization of, or declaration to or filing with
any governmental or regulatory authority, or any other third party is required
to consummate this Agreement and the transactions contemplated hereby.
4. REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer represents and warrants to Seller as of the date of this Agreement
and as of the Closing Date, as follows:
4.1 Organization, Standing and Authority. Buyer is a corporation, duly
organized and validly existing under the laws of the State of Washington and is
qualified to conduct business as a foreign corporation in each jurisdiction in
which the property owned, leased or operated by it requires it to be so
qualified, except where the failure to so qualify would not have a Material
Adverse Effect. Buyer has the
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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 corporate power
and authority to execute and deliver this Agreement and to carry out and perform
all of its other obligations under the terms of this Agreement. All corporate
action by Buyer necessary for the authorization, execution, delivery and
performance by Buyer of this Agreement has been taken. This Agreement has been
duly executed and delivered by Buyer and this Agreement constitutes the valid
and legally binding obligation of Buyer, enforceable against it in accordance
with its terms, except (a) as rights to indemnity, if any, thereunder may be
limited by federal or state securities laws or the public policies embodied
therein, (b) as enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium or similar laws from time to time in effect affecting
the enforcement of creditors' rights generally, and (c) as the remedy of
specific performance and injunctive and other forms of equitable relief may be
subject to equitable defenses and to the discretion of the court before which
any proceeding therefor may be brought.
4.3 Absence of Conflicting Agreements. Subject to obtaining the
Consents listed in Section 3.4, the execution, delivery and performance of this
Agreement by Buyer will not: (a) require the consent, approval, permit or
authorization of, or declaration to or filing with any governmental or
regulatory authority, or any other third party, except where if not obtained
would not have a Material Adverse Effect; (b) violate the governing documents of
Buyer; (c) violate any material law, judgment, order, ordinance, injunction,
decree, rule or regulation of any court or governmental instrumentality; or (d)
conflict with, constitute grounds for termination of, result in a breach of,
constitute a default under, or accelerate or permit the acceleration of any
performance required by the terms of, any material agreement, instrument,
license or permit to which Buyer is a party or by which Buyer may be bound, such
that Buyer could not perform hereunder and acquire or operate the Assets.
4.4 Buyer Qualification. Buyer knows of no reason why it cannot become
the franchisee pursuant to the Franchises, and to its knowledge has the
requisite qualifications to own and operate the Systems.
4.5 Availability of Funds. Buyer will have available on the Closing
Date sufficient unrestricted funds to enable it to consummate the transactions
contemplated hereby.
5. COVENANTS OF THE PARTIES
5.1 Consents. Following the execution hereof, Seller shall make such
applications to the Franchising Authorities and other third parties for the
Consents, and shall otherwise use its commercially reasonable efforts to obtain
the Consents as expeditiously as possible. In no event shall Seller be required,
as a condition of obtaining such Consents, to expend any monies on, before or
after the Closing Date (other than expenses typically incurred in connection
with the efforts to obtain such Consents), or to offer or grant any
accommodations or concessions adverse to Seller or to engage in litigation or
other adversarial proceedings. Buyer shall use its commercially reasonable
efforts to promptly assist Seller and shall take such prompt and affirmative
actions as may reasonably be necessary in obtaining such Consents and shall
cooperate with Seller in the preparation, filing and prosecution of such
applications as may reasonably be necessary, including, without limitation,
making management and other personnel of Buyer available to assist in obtaining
such Consents. The parties agree to use commercially reasonable efforts to
obtain consents to the transfer of the Franchises. Seller shall not agree to any
materially adverse change in any Franchise as a condition to obtaining any
authorization, consent, order or approval necessary for the transfer of such
Franchise unless Buyer shall otherwise consent; provided, however, that Buyer,
and not Seller, shall bear the cost and expense of any conditions imposed by
Franchising Authorities on Franchise transfers to which Buyer has consented.
Buyer acknowledges that Franchising Authorities and third parties to Contracts
may impose bond, letter of credit, indemnity and insurance requirements and may
modify or impose penalty provisions and other similar provisions to the
appropriate Franchise or Contract as a condition to giving their consent to
assignment or transfer thereof. Notwithstanding anything to the contrary
contained in this Section 5.1, Buyer shall be obligated to accept any such
conditions as long as
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the requirements are reasonable and customary in the industry for similarly
situated cable system operators in terms of size and financial and operating
qualifications. Buyer agrees that it shall not, without the prior written
consent of Seller (which may be withheld at Seller's sole discretion), seek
amendments or modifications to Franchises or Contracts. Buyer shall, at Seller's
request, promptly furnish Seller with copies of such documents and information
with respect to Buyer, including financial information and information relating
to the cable and other operations of Buyer and any of its affiliated or related
companies, as Seller may reasonably request in connection with the obtaining of
any of the Consents or as may be reasonably requested by any person in
connection with any Consent. Notwithstanding anything to the contrary contained
in this Section 5.1, Seller's obligations hereunder with respect to pursuing any
Consent shall be fully satisfied with respect to: (a) the transfer of pole
attachment or conduit contracts, if Buyer has executed a new contract with the
respective pole company or if such pole company has indicated in writing that it
is willing to execute a new contract with Buyer; and (b) the transfer of
railroad crossing permits or contracts, if Buyer has executed a new permit or
contract with the respective railroad company or if such railroad company has
indicated in writing that it is willing to execute a new permit or contract with
Buyer.
5.2 Taxes, Fees and Expenses. Buyer shall pay all sales, use, transfer,
purchase taxes and fees, filing fees, recordation fees and application fees, if
any, arising out of the transactions contemplated herein. Each party shall pay
its own expenses incurred in connection with the authorization, preparation,
execution and performance of this Agreement, including all fees and expenses of
counsel, accountants, agents and other representatives.
5.3 Brokers. Each of Buyer and Seller represents and warrants that
neither it nor any person or entity acting on its behalf has incurred any
liability for any finders' or brokers' fees or commissions in connection with
the transaction contemplated by this Agreement, except that Seller has retained
Daniels & Associates, L.P., whose fees shall be paid by Seller. Buyer agrees to
defend, indemnify and hold harmless Seller against any fee, commission, loss or
expense arising out of any claim by any broker or finder employed or alleged to
have been employed by Buyer.
5.4 Risk of Loss. The risk of loss, damage or destruction to the
Systems from fire, theft or other casualty or cause shall be borne by Seller at
all times up to completion of the Closing. It is expressly understood and agreed
that in the event of any material loss or damage to any material portion of the
Assets from fire, casualty or other cause prior to the Closing, Seller shall
promptly notify Buyer of same in writing. Such notice shall report the loss or
damage incurred, the cause thereof, if known, and any insurance coverage related
thereto.
5.5 Bonds, Letters of Credit, Etc. Buyer shall take all reasonably
necessary steps, and execute and deliver all reasonably necessary documents, to
insure that on the Closing Date Buyer has delivered such bonds, letters of
credit, indemnity agreements and similar instruments in such amounts and in
favor of such Franchising Authorities and other third parties requiring the same
in connection with the Franchises and the Contracts.
5.6 Accounts Receivable. Buyer shall have the sole right and obligation
to collect, on behalf of Seller, outstanding Accounts Receivable after Closing.
Buyer shall remit to Seller in cash all amounts collected by Buyer in
satisfaction of Accounts Receivable on and up to 90 days after the Closing Date.
All Accounts Receivable that remain outstanding 90 days after the Closing Date
shall be automatically assigned from Seller to Buyer without further action, and
all amounts collected by Buyer in satisfaction of Accounts Receivable more than
90 days after the Closing Date shall be retained by Buyer. Buyer shall use
reasonable efforts to collect the Accounts Receivable on behalf of Seller. Buyer
shall be entitled to compromise, discount or otherwise make concessions to
account debtors as Buyer may reasonably determine in order to collect the
Accounts Receivable. Seller shall reimburse Buyer for any costs Buyer incurs to
collect Accounts Receivable, which costs shall be offset against the remittances
to be made by Buyer to Seller.
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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. All representations and
warranties of Seller contained in this Agreement shall be true and complete in
all material respects at and as of the Closing Date as though such
representations and warranties were made at and as of such time except to the
extent changes are permitted or contemplated pursuant to this Agreement.
6.1.2 Covenants and Conditions. Seller shall have in all material
respects performed and complied with all material covenants, agreements and
conditions required by this Agreement to be performed or complied with by it
prior to or on the Closing Date.
6.1.3 No Injunction, Etc. No action, suit or other proceeding shall
have been instituted, threatened or proposed before any court, governmental
agency or legislative body to enjoin, restrain, prohibit or obtain substantial
damages in respect of, or which is related to, or arising out of, this Agreement
or the consummation of the transactions contemplated hereby which if successful
would have a Material Adverse Effect.
6.1.4 Consents. Each of the following Consents shall have been duly
obtained and delivered to Buyer: (a) the Consents of the Franchising
Authorities; and (b) the Consents of the FCC, except for any FCC consent to any
business radio license or any microwave transmit or receive license that Seller
reasonably expects can be obtained within 120 days after the Closing and so long
as a temporary authorization is available to Buyer under FCC rules with respect
thereto.
6.1.5 Deliveries. Seller shall have made or stand willing and able
to make all the deliveries to Buyer set forth in Section 7.2.
6.1.6 Material Adverse Change. Between the date of this Agreement
and the Closing Date, there shall have been no material adverse change in the
financial condition of the Systems, taken as a whole, other than matters
affecting the cable television industry generally (including, without
limitation, legislative, regulatory or litigation matters) and matters relating
to or arising from local or national economic conditions (including financial
and capital markets).
6.2 Conditions Precedent to Obligations of Seller to Close. The
obligations of Seller to consummate the transactions contemplated by this
Agreement to occur at the Closing shall be subject to the satisfaction, on or
before the Closing Date, of each and every one of the following conditions, all
or any of which may be waived in writing, in whole or in part, by Seller for
purposes of consummating such transactions:
6.2.1 Representations and Warranties. All representations and
warranties of Buyer contained in this Agreement shall be true and complete in
all material respects at and as of the Closing Date as though such
representations and warranties were made at and as of such time except to the
extent changes are permitted or contemplated pursuant to this Agreement.
6.2.2 Covenants and Conditions. Buyer shall have in all material
respects performed and complied with all material covenants, agreements and
conditions required by this Agreement to be performed or complied with by it
prior to or on the Closing Date.
6.2.3 No Injunction, Etc. No action, suit or other proceeding shall
have been instituted, threatened or proposed before any court, governmental
agency or legislative body to enjoin, restrain, prohibit or obtain substantial
damages in respect of, or which is related to, or arising out of, this Agreement
or the consummation of the transactions contemplated hereby.
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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 Deliveries. Buyer shall have made or stand willing and able to
make all the deliveries set forth in Section 7.3.
7. CLOSING AND CLOSING DELIVERIES
7.1 Closing. If practicable, the Closing will be held on the last
business day of the calendar month during which the conditions set forth in
Sections 6.1.5 and 6.2.5 hereof shall have been satisfied; provided, however,
that if the Closing is not held on the last business day of the calendar month
during which such conditions shall have been satisfied, the Closing shall be
held on the last business day of the next succeeding calendar month, or on such
other date as Buyer and Seller may mutually agree ("Closing Date"). The Closing
shall be held at 10:00 a.m. local time at the Seller's offices at 1201 Third
Ave., Suite 3600, Seattle, WA 98101, or will be conducted by mail or at such
other place and time as the parties may agree. Notwithstanding the foregoing,
the parties agree that the Closing shall be deemed effective as of 12:01 a.m. on
the Closing Date, and all references herein that relate to the date and time of
the Closing, including provisions dealing with adjustments to the Purchase
Price, shall refer to such effective date and time.
7.2 Deliveries by Seller. Prior to or on the Closing Date, Seller shall
deliver to Buyer the following, in form and substance reasonably satisfactory to
Buyer and its counsel:
7.2.1 Transfer Documents. A duly executed bill of sale, limited or
special (but not general) warranty deeds (subject to all matters of record),
motor vehicle titles, assignments and other transfer documents which shall be
sufficient to vest good title to the Assets in the name of Buyer or its
permitted assignees, free and clear of any claims, liabilities, mortgages,
liens, pledges, conditions, charges or encumbrances of any nature whatsoever
except for Permitted Encumbrances; and
7.2.2 Consents. The original of each Consent required by Section
6.1.4;
7.3 Deliveries by Buyer. Prior to or on the Closing Date, Buyer shall
deliver to Seller the following, in form and substance reasonably satisfactory
to Seller and its counsel:
7.3.1 Purchase Price. The Purchase Price, subject to any adjustments
and reductions in accordance with Section 2.3 and Section 2.4; and
7.3.2 Assumption Agreements. A duly executed assignment and
assumption agreement pursuant to which Buyer shall assume and undertake to
perform the Assumed Liabilities.
8. TERMINATION
8.1 Method of Termination. This Agreement constitutes the binding and
irrevocable agreement of the parties to consummate the transactions contemplated
hereby, subject to and in accordance with the terms hereof, the consideration
for which is (a) the covenants, representations, warranties and agreements set
forth in this Agreement; and (b) the expenditures and obligations incurred and
to be incurred by Buyer on the one hand, and by Seller, on the other hand, in
respect of this Agreement, and this Agreement may be terminated or abandoned
only as follows:
8.1.1 By the mutual consent of Seller and Buyer, or by either Seller
or Buyer in the event of the notification by the Federal Trade Commission or the
Department of Justice of the intent of either agency to seek to enjoin the
transactions contemplated by this Agreement or if any condition to the Closing
set forth in Section 6.1.3 or 6.2.3 is not fulfilled and the failure of such
condition is not a result of a breach of warranty or nonfulfillment of any
covenant or agreement by Buyer or Seller contained in this Agreement;
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8.1.2 By Buyer, if any of the conditions set forth in Section 6.1
hereof to which the obligations of Buyer are subject (other than the conditions
set forth in Section 6.1.3) have not been fulfilled or waived, and provided that
the failure to fulfill such condition is not a result of a breach of warranty or
nonfulfillment of any covenant or agreement by Buyer contained in this
Agreement; or
8.1.3 By Seller, if any of the conditions set forth in Section 6.2
hereof to which the obligations of Seller are subject (other than the conditions
set forth in Section 6.2.3) have not been fulfilled or waived, and provided that
the failure to fulfill such condition is not a result of a breach of warranty or
nonfulfillment of any covenant or agreement by Seller contained in this
Agreement.
8.2 Rights upon Termination.
8.2.1 In the event of a termination of this Agreement pursuant to
Section 8.1.1 hereof, each party shall pay the costs and expenses incurred by it
in connection with this Agreement, and no party (or any of its officers,
directors, partners, employees, agents, representatives or stockholders) shall
be liable to any other party for any cost, expense, damage or loss of
anticipated profits hereunder.
8.2.2 In the event of a termination of this Agreement pursuant to
Section 8.1.2 hereof, if Seller is in material breach of this Agreement, Buyer
shall have the right to seek all remedies available to it as provided hereunder
or at law or equity, including the remedy of specific performance. In the event
of any action to enforce this Agreement, Seller hereby waives the defense that
there is an adequate remedy at law.
8.2.3 In the event of a termination of this Agreement pursuant to
Section 8.1.3 hereof, if Buyer is in material breach of this Agreement by Buyer,
Seller shall have the right to seek all remedies available to it as provided
hereunder or at law or equity, including the remedy of specific performance. In
the event of any action to enforce this Agreement, Buyer hereby waives the
defense that there is an adequate remedy at law.
9. SURVIVAL OF REPRESENTATIONS AND WARRANTIES AND INDEMNIFICATION
9.1 Representations and Warranties. All representations, warranties,
covenants and agreements contained in this Agreement or in documents or
instruments delivered pursuant hereto shall be deemed continuing
representations, warranties, covenants and agreements, and shall survive the
Closing Date for a period ending on the one-year anniversary of the Closing
Date.
9.2 Indemnification by Buyer. Buyer shall defend, indemnify and hold
Seller harmless against and with respect to, and shall reimburse Seller for:
9.2.1 Any and all losses, liabilities or damages resulting from any
untrue representation, breach of warranty or nonfulfillment of any covenant by
Buyer contained herein;
9.2.2 Any and all of the Assumed Liabilities;
9.2.3 Any and all losses, liabilities or damages resulting from
Buyer's operation or ownership of the Systems or Assets on and after the Closing
Date; and
9.2.4 Any and all actions, suits, proceedings, claims, demands,
assessments, judgments, costs and expenses, including, without limitation,
reasonable legal fees and expenses, incident to any of the foregoing or incurred
in investigating or attempting to avoid the same or to oppose the imposition
thereof, or in enforcing this indemnity.
9.3 Procedure for Indemnification. The procedure for indemnification
shall be as follows:
9.3.1 The party claiming indemnification ("Claimant") shall promptly
give notice to the party from whom indemnification is claimed ("Indemnifying
Party") of any claim, whether between the parties or brought by a third party,
specifying (a) the factual basis for such claim and (b) the estimated amount of
the claim. If the claim relates to an action, suit or proceeding filed by a
third party against Claimant, such notice shall be given by Claimant within ten
business days after written notice of such
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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.
9.3.2 Following receipt of notice from the Claimant of a claim, the
Indemnifying Party shall have 30 days to make such investigation of the claim as
the Indemnifying Party deems necessary or desirable. For the purposes of such
investigation, the Claimant agrees to make available to the Indemnifying Party
and/or its authorized representative(s) the information relied upon by the
Claimant to substantiate the claim. If the Claimant and the Indemnifying Party
agree at or prior to the expiration of said 30-day period (or any mutually
agreed upon extension thereof) to the validity and amount of such claim, the
Indemnifying Party shall immediately pay to the Claimant the full amount of the
claim subject to the terms and in accordance with the procedures set forth
herein. If the Claimant and the Indemnifying Party do not agree within said
period (or any mutually agreed upon extension thereof), the Claimant may seek
appropriate legal remedy.
9.3.3 With respect to any claim by a third party as to which the
Claimant is entitled to indemnification hereunder, the Indemnifying Party shall
have the right at its own expense, to participate in or assume control of the
defense of such claim, and the Claimant shall cooperate fully with the
Indemnifying Party. If the Indemnifying Party elects to assume control of the
defense of any third-party claim, the Claimant shall have the right to
participate in the defense of such claim at its own expense. If the Indemnifying
Party does not elect to assume control or otherwise participate in the defense
of any third party claim, it shall be bound by the results obtained by the
Claimant with respect to such claim, and the Indemnifying Party shall be
responsible and shall promptly reimburse Claimant for all associated costs, fees
and expenses.
9.3.4 If a claim, whether between the parties or by a third party,
requires immediate action, the parties will make every effort to reach a
decision with respect thereto as expeditiously as possible.
9.4 Exclusive Remedy. After the Closing Date, the sole and exclusive
remedy of any party for any misrepresentation or any breach of a warranty or
covenant set forth in or made pursuant to this Agreement shall be a claim for
indemnification under and pursuant to this Article 9.
10. MISCELLANEOUS
10.1 Benefit and Binding Effect. Seller may not assign this Agreement
without the prior written consent of the Buyer. Buyer may its rights and
obligations under this Agreement to any of its affiliates or assigns upon notice
to Seller. This Agreement shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and permitted assigns.
10.2 Bulk Transfer. Buyer acknowledges that Seller has not and will not
file any transfer notice or otherwise complied with applicable bulk transfer
laws, and the parties agree to waive compliance with same.
10.3 Governing Law. This Agreement shall be governed, construed and
enforced in accordance with the laws of the State of Washington, without regard
to the conflicts of law principles of such state. The parties agree that this
Section 10.3 serves as a material inducement for Seller to enter into this
Agreement.
10.4 Gender and Number. Words used herein, regardless of the gender and
number specifically used, shall be deemed and construed to include any other
gender, masculine, feminine or neuter, and any other number, singular or plural,
as the context requires.
10.5 Entire Agreement. This Agreement, and all documents and
certificates to be delivered by the parties pursuant hereto collectively
represent the entire understanding and agreement between Buyer and Seller with
respect to the subject matter hereof. This Agreement supersedes all prior
negotiations
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between Buyer and Seller with respect to the transactions contemplated hereby,
and all letters of intent and other writings relating to such negotiations, and
cannot be amended, supplemented or modified except by an agreement in writing
which makes specific reference to this Agreement or an agreement delivered
pursuant hereto, as the case may be, and which is signed by the party against
which enforcement of any such amendment, supplement or modification is sought.
10.6 Further Assurances. Each party covenants that at any time, and
from time to time, after the Closing Date, it will execute such additional
instruments and take such actions as may be reasonably requested by the other
parties to confirm or perfect or otherwise to carry out the intent and purposes
of this Agreement.
10.7 Waiver of Compliance; Consents. Except as otherwise provided in
this Agreement, any failure of any of the parties to comply with any obligation,
representation, warranty, covenant, agreement or condition herein may be waived
by the party entitled to the benefits thereof, but such waiver or failure to
insist upon strict compliance with such obligation, representation, warranty,
covenant, agreement or condition shall not operate as a waiver of, or estoppel
with respect to, any subsequent or other failure.
10.8 Severability. If any provision of this Agreement or the
application thereof to any person or circumstance shall be invalid or
unenforceable to any extent, the remainder of this Agreement and the application
of such provision to other persons or circumstances shall not be affected
thereby and shall be enforced to the greatest extent permitted by law; provided,
however, that the economic and legal substance of the transactions contemplated
by this Agreement is not affected in any manner that is materially adverse to
any party affected by such invalidity or unenforceability.
10.9 Counterparts. This Agreement may be signed in any number of
counterparts with the same effect as if the signature on each such counterpart
were upon the same instrument, and a facsimile transmission shall be deemed to
be an original signature.
10.10 No Third-Party Beneficiaries. This Agreement constitutes an
agreement solely among the parties hereto, and, except as otherwise provided
herein, is not intended to and will not confer any rights, remedies, obligations
or liabilities, legal or equitable on any person other than the parties hereto
and their respective successors or assigns, or otherwise constitute any person a
third party beneficiary under or by reason of this Agreement.
10.11 Tax Consequences. No party to this Agreement makes any
representation or warranty, express or implied, with respect to the tax
implications of any aspect of this Agreement on any other party to this
Agreement, and all parties expressly disclaim any such representation or
warranty with respect to any tax consequences arising under this Agreement. Each
party has relied solely on its own tax advisors with respect to the tax
implications of this Agreement.
10.12 Construction. This Agreement has been negotiated by Buyer and
Seller and their respective legal counsel, and legal or equitable principles
that might require the construction of this Agreement or any provision of this
Agreement against the party drafting this Agreement shall not apply in any
construction or interpretation of this Agreement.
10.13 Time of the Essence. Time is of the essence under this Agreement.
If the last day permitted for the giving of any notice or the performance of any
act required or permitted under this Agreement falls on a day that is not a
business day, the time for the giving of such notice or the performance of such
act will be extended to the next succeeding business day.
10.14 Cure. For all purposes under this Agreement, the existence or
occurrence of any event or circumstance that constitutes a breach of a
representation or warranty or the nonfulfillment of any pre-Closing covenant or
agreement of Buyer or Seller contained in this Agreement on the date such
representation or warranty is made or the fulfillment of such pre-Closing
covenant or agreement is due, shall not constitute a breach of such
representation or warranty or the nonfulfillment of such pre-Closing covenant or
agreement if such event or circumstance is cured on or prior to the Closing
Date.
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10.15 Covenant Not to Sue and Nonrecourse to Partners.
10.15.1 Buyer agrees that notwithstanding any other provision in
this Agreement, any agreement, instrument, certificate or document entered into
pursuant to or in connection with this Agreement or the transactions
contemplated herein or therein (each a "Transaction Document") and any rule of
law or equity to the contrary, to the fullest extent permitted by law, Seller's
obligations and liabilities under all Transaction Documents and in connection
with the transactions contemplated therein shall be nonrecourse to all general
and limited partners of Seller. As used herein, the term "nonrecourse" means
that the obligations and liabilities are limited in recourse solely to the
assets of Seller (for those purposes, any capital contribution obligations of
the general and limited partners of Seller or any negative capital account
balances of such partners shall not be deemed to be assets of Seller) and are
not guaranteed directly or indirectly by, or the primary obligations of, any
general or limited partner of Seller, and neither Seller nor any general or
limited partner or any incorporator, stockholder, officer, director, partner,
employee or agent of Seller or of any general or limited partner of any
successor partnership, either directly or indirectly, shall be personally liable
in any respect for any obligation or liability of Seller under any Transaction
Document or any transaction contemplated therein.
10.15.2 Buyer hereby covenants for itself, its successors and
assigns that it, its successors and assigns will not make, bring, claim,
commence, prosecute, maintain, cause or permit any action to be brought,
commenced, prosecuted, maintained, either at law or equity, in any court of the
United States or any state thereof against any general or limited partner of
Seller or any incorporator, stockholder, officer, director, partner, employee or
agent of Sellers or of any general or limited partner of Seller for (i) the
payment of any amount or the performance of any obligation under any Transaction
Document or (ii) the satisfaction of any liability arising in connection with
any such payment or obligation or otherwise, including without limitation,
liability arising in law for tort (including, without limitation, for active and
passive negligence, negligent misrepresentation and fraud), equity (including,
without limitation, for indemnification and contribution) and contract
(including, without limitation, monetary damages for the breach of
representation or warranty or performance of any of the covenants or obligations
contained in any Transaction Document or with the transactions contemplated
herein or therein).
10.16 Headings. The headings herein are included for ease of reference
only and shall not control or affect the meaning or construction of the
provisions of this Agreement.
[REMAINDER OF PAGE INTENTIONALLY BLANK; SIGNATURE PAGE FOLLOWS]
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EXECUTED as of the date first above written.
Buyer:
NORTHLAND COMMUNICATIONS CORPORATION
By:
--------------------------------------
Name Printed:
--------------------------------------
Title: Vice President
Seller:
NORTHLAND CABLE PROPERTIES SIX LIMITED
PARTNERSHIP
By: Northland Communications
Corporation,
Managing General Partner
By:
--------------------------------------
Name Printed:
--------------------------------------
Title: Vice President
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EXHIBIT G
PROPOSED TRANSACTION
PROMISSORY NOTE
$ , 200
Seattle, Washington
FOR VALUE RECEIVED, NORTHLAND COMMUNICATIONS CORPORATION, or any affiliated
entity to which it may assign its rights and obligations (the "Maker"), promises
to pay to NORTHLAND CABLE PROPERTIES SIX LIMITED PARTNERSHIP, a Washington
limited partnership ("NCP-Six"), upon the terms and conditions stated herein,
the principal sum of Nine Million Eight Hundred Seventy-Five Thousand Dollars
($9,875,000), which sum shall be payable in two equal payments of principal,
plus accrued interest, due annually commencing on the first anniversary of the
date of this Note. Payments shall be made in lawful money of the United States,
at such place as NCP-Six may designate in writing. Maker shall have the
privilege of prepaying all or any portion of this Note without premium or
penalty.
This Note is issued in connection with that certain Asset Purchase
Agreement between the Maker and NCP-Six dated as of , 200 (the
"Agreement"). The Maker may be entitled to the right of offset, as provided in
the Agreement and that certain Proxy Statement dated , 200 , and
may, without being in default under this Note, effect such offset against any
amounts payable under this Note.
The principal sum of this Note shall bear interest at a per annum rate of
six and one-half percent (6 1/2%). If any portion of this Note shall not be paid
when due, then the principal balance of the Note shall thereafter bear interest
at the rate of twelve percent (12%) per annum, from the date of such default. A
default shall exist as to any failure of the Maker to make any payment required
hereunder in a timely manner; provided, however, there shall be no default and
no payment shall be due hereunder if the Maker is effecting an offset to account
for any prorations or other adjustments provided for pursuant to the Agreement.
In the event a suit is commenced to enforce the payment of this Note, the
Maker hereby agrees to pay all costs of collection, including a reasonable sum
as the fees of attorneys and certified public accountants.
The indebtedness and all other obligations evidenced by this Note are
subordinated to the prior payment in full in cash of all obligations of the
Maker from time to time outstanding in respect of all other indebtedness of the
Maker, other than any indebtedness which by its terms is expressly subordinated
to this Note, including, without limitation, amounts that would become due
except for the operation of the automatic stay under Section 362(a) of the
Bankruptcy Code, 11 U.S.C. Section 362(a), and interest, fees, charges and other
amounts that, but for the filing of a petition in bankruptcy with respect to the
Maker, would accrue on such indebtedness whether or not a claim is allowed
against the Maker for the same in such proceeding (collectively, "Senior Debt").
The Maker agrees that upon the occurrence and during the continuance of any
default under any Senior Debt or upon any distribution of the assets or
readjustment of the obligations of the Maker whether by reason of voluntary or
involuntary liquidation, dissolution, winding up, composition, bankruptcy,
reorganization, arrangement, receivership, assignment for the benefit of
creditors or any marshalling of its assets or the readjustment of its
liabilities, whether partial or total, the holders of the Senior Debt shall be
entitled to receive cash payment in full of lawful money of the United States of
America of all of the Senior Debt in accordance with their respective terms
prior to payment of, or other distribution in respect of, all or any part of the
indebtedness or other obligations hereunder. NCP-Six agrees, by its acceptance
of this Note, that at any time that payment under this Note is prohibited by
operation of this paragraph, it shall not take any action to enforce or
otherwise collect any such payment and in the event that, notwithstanding the
foregoing, NCP-Six shall have received any payment under or in respect of this
Note at a time when such payment is prohibited, then such payment
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shall be received and held in trust for the benefit of the holders of the Senior
Debt and shall be paid over and delivered to such holders or their agent to the
extent necessary to pay the Senior Debt in full in cash after giving effect to
any other concurrent payment or distribution to such holders in respect of the
Senior Debt.
THIS NOTE IS AND SHALL FOR ALL PURPOSES BE DEEMED NONASSIGNABLE AND
NONNEGOTIABLE; provided, however, that NCP-Six may assign its rights and
delegate its duties and obligations under this Note, including without
limitation the right to receive payment hereunder, to a liquidating trust
established for the purpose of distributing amounts due hereunder for the
benefit of the beneficiaries of such liquidating trust, and provided further the
Maker may assign its rights and delegate its duties and obligations under this
Note to any affiliate of Maker.
This Note is to be construed in all respects and enforced according to the
laws of the State of Washington.
MAKER: [ ]
By:
--------------------------------------
Its:
--------------------------------------
By:
--------------------------------------
Its:
--------------------------------------
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EXHIBIT H
DANIELS' APPRAISAL
NORTHLAND CABLE PROPERTIES SIX LIMITED PARTNERSHIP
APPRAISAL ANALYSIS SUMMARY
INTRODUCTION
Northland Cable Properties Six Limited Partnership (the "Partnership") is a
Washington limited partnership consisting of two general partners (the "General
Partners") and approximately 1,865 limited partners. Northland Communications
Corporation ("Northland"), a Washington corporation, is the Managing General
Partner of the Partnership. The Partnership was formed on January 22, 1986 and
began operations in 1986 with the acquisition of the cable television systems
serving the communities surrounding Starkville, Maben and Mathiston,
Mississippi, six additional communities in central Mississippi and the community
of and areas surrounding Highlands, North Carolina. As the result of subsequent
acquisitions made between July 1988 and January 1998 as well as sales of certain
systems, the Partnership currently owns and operates seven cable television
system groups ("System Operating Groups"), comprised of twelve headends, serving
numerous communities in Mississippi, South Carolina and North Carolina (referred
to in the aggregate as the "Systems"). As of March 31, 1999, the Systems passed
an estimated 50,060 homes and served approximately 32,963 equivalent basic
subscribers ("EBUs").
Based on information provided by Northland for the three month period ended
March 31, 1999, annualized run-rate revenue and operating cash flow for the
Systems are estimated to be approximately $14.3 million and $6.7 million,
respectively. This equates to average monthly revenue per EBU of $36.07 and
average annual cash flow per EBU of $203.15.
A summary of the Partnership's System Operating Groups is presented in the
following table.
EST.
3/31/99 ESTIMATED ANNUALIZED
SYSTEM MILES OF PLANT/ EST. ESTIMATED 3/31/99 3/31/99 ANNUALIZED RUN-RATE
OPERATING NUMBER OF HOMES/ HOMES EBUS/ PAY UNITS/ RUN-RATE CASH FLOW/
GROUP HEADENDS MILE PASSED PENETRATION PENETRATION REVENUE MARGIN
--------- --------------- ------ --------- ----------- ----------- ----------- ---------------
Starkville, MS.............. 194.5/2 57 11,085 8,097/73.0% 2,930/36.2% $ 3,680,744 $1,895,951/51.5%
Philadelphia, MS............ 170/1 26 4,395 3,851/87.6% 1,450/37.7% 1,617,933 731,306/45.2%
Kosciusko, MS............... 125.8/2 43 5,440 4,350/80.0% 1,371/31.5% 1,854,490 952,651/51.4%
Forest, MS.................. 154/2 24 3,735 3,222/86.3% 1,442/44.8% 1,390,976 689,646/49.6%
Subtotal, MS.............. 644.3/7 38 24,655 19,520/79.2% 7,193/36.9% 8,544,143 4,269,554/50.0%
Highlands, NC............... 128/1 33 4,190 2,584/61.7% 482/18.7% 1,036,879 459,752/44.3%
Barnwell, SC................ 308.5/3 39 12,125 5,941/49.0% 4,301/72.4% 2,694,265 1,079,592/40.1%
Bennettsville, SC........... 145/1 63 9,090 4,918/54.1% 3,628/73.8% 1,993,654 887,575/44.5%
Subtotal, SC.............. 453.5/4 47 21,215 10,859/51.2% 7,929/73.0% 4,687,919 1,967,167/42.0%
Total All Systems........... 1,225.8/12 41 50,060 32,963/65.8% 15,604/47.3% $14,268,941 $6,696,473/46.9%
Daniels was retained by Northland to appraise the fair market value of the
assets of the Partnership as of July 1, 1999 (the "Valuation Date"). The
appraisal was performed in conjunction with the anticipated dissolution and
liquidation of the Partnership. This report summarizes Daniels' conclusions and
provides an outline of the scope of the engagement, the process used, an
overview of the Systems by System Operating Group, the valuation methodology,
the assumptions relied upon and an explanation of the values derived.
PROCESS
Daniels prepared an independent appraisal analysis to determine the fair
market value of the operating assets of the Partnership. The Systems were
appraised on a going-concern basis, in conformance with standard appraisal
techniques, utilizing a ten-year discounted net cash flow analysis and applying
relevant market and economic factors. The appraisal assumes that the Systems
have been and will continue to be
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operated as efficiently as comparable cable television systems and that the
franchises and leases of assets used in the operation of the Systems will be
renewed indefinitely without material changes, other than upgrade and/or rebuild
requirements (see "The Systems").
The appraisal process included discussions with the Partnership's
management, due diligence visits to substantially all of the Systems by Daniels'
personnel, research of demographic information concerning the various
communities served by the Partnership and analyses of historical and forecasted
financial and operating information, as well as Daniels' general knowledge about
the cable television industry. From such due diligence, summaries of the
relevant operating, technical, financial and demographic characteristics were
prepared for each of the seven System Operating Groups. These characteristics
were instrumental in determining value.
In order to assess the fair market value of the Partnership's operating
assets, Daniels prepared detailed operating and financial forecasts for each of
the seven System Operating Groups, incorporating the critical elements of
operating revenues and expenses as well as capital expenditure requirements.
These financial forecasts then formed the basis for determining a discounted
cash flow value for each System Operating Group, a standard valuation
methodology used within the cable television industry (the "DCF" valuation
methodology). The combined values of the Systems, by System Operating Group,
pursuant to the DCF, provide a value of the operating assets of the Partnership.
In addition, using the private market transaction multiples methodology, an
aggregate value for the Partnership's cable television assets was derived by
applying value per subscriber and operating cash flow multiples obtained in
private market sales of comparable cable television systems to the respective
statistics of the Systems. The results of the DCF and the private market
transaction multiples valuation methodologies were then analyzed to determine a
final appraised value for the Partnership's operating assets.
THE SYSTEMS
The Systems are comprised of seven System Operating Groups, four of which
are located in Mississippi, two of which are located in South Carolina and one
of which is located in North Carolina. The largest System Operating Group is
Starkville, Mississippi with 8,097 EBUs as of March 31, 1999. The smallest
System Operating Group is Highlands, North Carolina with 2,584 EBUs as of the
same period. As of March 31, 1999, the System Operating Groups had EBU
penetration rates ranging from 49.0% to 87.6%, and a weighted average EBU
penetration level of 65.8%. Subscriber growth rates for the Systems have been
essentially flat to modest for the past several years.
In the seven System Operating Groups, there are a total of 12 headends and
1,226 plant miles, of which approximately 89% is aerial and 11% is underground.
Based on information provided by Northland, approximately 10% of the plant miles
are at 300 MHz; 42% are at 330 MHz; 1% are at 400 MHz; 36% are at 450 MHz; and
11% are at 550 MHz. According to Northland, none of the Systems are currently
addressable, and pay-per-view service is offered on an event-only basis.
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TECHNICAL SUMMARY
MILES OF PLANT AT VARIOUS BANDWIDTHS AS OF MARCH 31, 1999
300 MHZ 330 MHZ 400 MHZ 450 MHZ 550 MHZ TOTAL
SYSTEM OPERATING MILES MILES MILES MILES MILES MILES
---------------- ------- ------- ------- ------- ------- -------
Starkville, MS................... 194.5 194.5
Philadelphia, MS................. 51 119 170
Kosciusko, MS.................... 125.8 125.8
Forest, MS....................... 17 137 154
Subtotal, MS................... 17 382.5 244.8 644.3
Highlands, NC.................... 128 128
Barnwell, SC..................... 111.2 197.3 308.5
Bennettsville, SC................ 6 139 145
Subtotal, SC................... 111.2 6 197.3 139 453.5
TOTAL ALL SYSTEMS................ 128.2 510.5 6 442.1 139 1,225.8
Percent of Total............ 10.5% 41.6% 0.5% 36.1% 11.3% 100.0%
The reality of competition from DBS, SMATV and MMDS and the lack of excess
channel capacity in certain of the Partnership's Systems suggest that a rebuild
or upgrade of all of the Systems with a current capacity of less than 450 MHz
would be prudent over the next several years. The Partnership plans to upgrade
substantially all of the Systems to a bandwidth of at least 450 MHz over the
next three years; however, there are no current franchise requirements to
rebuild or upgrade any of the Systems. None of the Systems are currently
addressable.
The quality of broadcast signals that can be received off-air varies among
the different System Operating Groups from good to poor, and the communities
that receive good off-air signals typically have a lower subscriber penetration
rate. Selected subscribers in the Starkville System Operating Group have the
option of receiving service from Wireless One, a MMDS operator. Management of
the Partnership does not believe that MMDS operators will have a further
material negative effect on the Systems in the future. Additionally, selected
homes in the community of Sapphire Valley in the Highlands system have been
overbuilt by a small operator. Although competition from DBS providers exists in
areas served by the Systems, such competition has not had a material effect on
the Partnership's operations to date.
On May 5, 1995, the Federal Communications Commission ("FCC") announced the
adoption of a simplified set of rate regulation rules that will apply to "small"
cable systems, defined as a system serving 115,000 or fewer subscribers, that
are owned by "small" companies, defined as a company serving 400,000 or fewer
subscribers. Under the FCC's definition, the Partnership is a "small" company
and each of the Partnership's Systems are "small" systems. Maximum permitted
rates under these revised rules are dependent on several factors including the
number of regulated channels offered, net asset basis of plant and equipment
used to deliver regulated services, the number of subscribers served and a
reasonable rate of return.
On February 8, 1996, the Telecommunications Act of 1996 (the "1996 Act")
became law. The 1996 Act eliminated all rate controls on cable programming
service tiers ("CPSTs") of "small" cable systems, defined by the 1996 Act as
systems serving fewer than 50,000 subscribers owned by operators serving fewer
than 1% of all subscribers in the United States (approximately 600,000
subscribers). Under the 1996 Act, all of the Partnership's Systems qualify as
"small" cable systems.
As of March 31, 1999, six of the Partnership's Systems have received
notification that local franchising authorities have elected to certify to
regulate basic rates. Based on Northland's analysis, the rates charged by the
Systems are within the maximum rates allowed under FCC rate regulations.
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STARKVILLE, MISSISSIPPI
The Starkville, Mississippi System Operating Group is the largest of the
seven System Operating Groups with subscribers located in Oktibbeha County,
Mississippi, which is approximately 125 miles northeast of Jackson, Mississippi.
The City of Starkville serves as the County Seat and is the home of Mississippi
State University, which has an enrollment of approximately 12,000 students and
features a leading, nationally recognized veterinary medicine program. The
University is the largest employer in Starkville. Also located in Starkville is
the Mississippi Research and Technology Park, a long-range economic development
project initiated through the joint efforts of the City of Starkville, Oktibbeha
County, Mississippi State University and local businesses.
As noted previously, the Starkville system faces limited competition from
Wireless One, a MMDS operator. Additionally, the City of Starkville has formed
an exploratory committee to assess the feasibility of building a cable system.
In consideration of the fact that the City also owns the local power company,
there is at least a potential threat that the City will move forward with a
hardwire overbuild of the Starkville system with a bundled telecommunications
strategy. Additionally, there is a small independent cable operator who has
overbuilt approximately 12 homes in a low density area of Oktibbeha County.
As of March 31, 1999, the Starkville System Operating Group passed 11,085
estimated homes and served 8,097 equivalent basic subscribers, for a penetration
rate of 73.0%. This penetration rate is the fourth highest of the seven System
Operating Groups. There are currently five franchises covering this group, with
franchise expiration dates ranging from November 7, 2005 to June 30, 2010. The
Starkville System Operating Group accounts for approximately 25% of the
Partnership's equivalent basic units.
The Starkville System Operating Group is comprised of two systems, each
with one headend, located in Starkville and Maben, Mississippi. The Starkville
System Operating Group was acquired in 1986 and has approximately 195 miles of
plant, 97% of which is aerial. Currently, 100% of the plant is capable of
passing 330 MHz. Within a period of two years, the Partnership will complete its
rebuild of the Starkville system to 550 MHz and the Maben system to 400 MHz. The
financial forecasts prepared by Daniels take into account such capital projects,
among others.
The Starkville system offers three levels of non-premium service: Economy
Basic service, consisting of 11 primarily broadcast and local origination
channels, for $14.00; Standard Basic service, consisting of the 11 Economy Basic
channels plus an additional 21 satellite channels, for $25.95; and Specialty
Tier service, consisting of the 32 Standard Basic channels plus an additional
eight satellite channels, for $34.45. The Maben system offers 29 channels of
Standard Basic service for $25.50. Both systems offer HBO and Showtime, while
the Starkville system also offers Cinemax and The Disney Channel. The last rate
increase was implemented on August 1, 1998.
BARNWELL, SOUTH CAROLINA
The Barnwell System Operating Group was acquired by the Partnership in
January 1998. Barnwell is the second largest System Operating Group, passing
12,125 estimated homes in the communities of Barnwell, Allendale and Bamberg,
South Carolina and serving 5,941 equivalent basic subscribers as of March 31,
1999. The areas served by the Barnwell System Operating Group are located in
Southern South Carolina, approximately 60 miles south of Columbia, South
Carolina. The economy is based primarily on manufacturing and agricultural
activities. The largest employer in the area is the Savannah River Site nuclear
plant. Other major employers that employ in excess of 500 people include Sara
Lee, Ducane Heating Corporation and Dixie Narco, a soft drink vending machine
manufacturer. The overall penetration rate in this System Operating Group is
49.0%. The Barnwell System Operating Group is covered by 12 franchises which
expire between January 8, 2000 and July 16, 2012. The Barnwell System Operating
Group accounts for approximately 18% of the Partnership's equivalent basic
subscribers.
The Barnwell System Operating Group is comprised of three systems, each
with one headend, located in Barnwell, Allendale and Bamberg, South Carolina.
The Barnwell System Operating Group includes 309 miles of plant, of which
approximately 84% is aerial. Approximately 64% of the plant is capable of
passing
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450 MHz, and approximately 36% can pass 300 MHz. Over the next two years, the
Partnership will complete its rebuild of the entire System Operating Group to
450 MHz. The financial forecasts prepared by Daniels take into account such
capital projects, among others.
The Barnwell system offers two levels of non-premium service: Economy Basic
service, consisting of 13 primarily broadcast and local origination channels,
for $10.26; and Standard Basic service, consisting of the 13 Economy Basic
channels plus an additional 15 satellite channels, for $29.65. Both the
Allendale and Bamberg systems offer Economy Basic service, comprised of 12
channels, for $10.40; and Standard Basic service, comprised of 12 Economy Basic
channels plus an additional 24 channels, for $30.58. The Barnwell system offers
HBO, The Disney Channel, Showtime and The Movie Channel. The Allendale and
Bamberg systems offer the four aforementioned premium channels plus Cinemax. The
last rate increase was implemented on March 1, 1998.
BENNETTSVILLE, SOUTH CAROLINA
The Bennettsville System Operating Group was acquired by the Partnership in
January 1998. The city of Bennettsville is located approximately 100 miles
northeast of Columbia, South Carolina and is the county seat of Marlboro County.
The economy is based primarily on manufacturing and agricultural activities,
with the three largest employers being Mohawk Carpet, United Technologies
Automotive and Williamette Industries. As of March 31, 1999, the Bennettsville
System Operating Group passed 9,090 estimated homes and served 4,918 equivalent
basic subscribers, for a penetration rate of 54.1%. The Bennettsville System
Operating Group represents a single headend located in Bennettsville, South
Carolina, and covers five franchised areas. The five franchises covering this
System Operating Group expire between June 10, 2006 and August 30, 2007. The
Bennettsville System Operating Group accounts for approximately 15% of the
Partnership's equivalent basic subscribers.
The Bennettsville System Operating Group includes 145 miles of plant, of
which approximately 81% is aerial. Approximately 96% of the plant is capable of
passing 550 MHz and approximately 4% can pass 400 MHz. By the end of 2000, the
Partnership is planning to upgrade the small portion of the system that is
currently not capable of passing 550 MHz. The financial forecasts prepared by
Daniels take into account this capital project, among others.
The Bennettsville system offers three levels of non-premium service:
Economy Basic service, consisting of 11 primarily broadcast and local
origination channels, for $7.57; Standard Basic service, consisting of the 11
Economy Basic channels plus an additional 18 satellite channels, for $19.10; and
Super Basic service, consisting of the 29 Standard Basic channels plus an
additional 19 satellite channels, for $26.67. The Bennettsville system offers
HBO, Cinemax, The Disney Channel, Showtime, The Movie Channel and Encore. The
last rate increase was effective May 1, 1998. Service rates at Bennettsville are
lower than the average rates charged by the Systems due to the aggressive
pricing strategy effected by the system's prior owner in response to entry into
the market by an overbuilder, who has subsequently ceased operating in the
market. Northland indicates that significant rate adjustments will be
implemented over the next few years to get the Bennettsville system more in line
with average rates charged by the Systems.
KOSCIUSKO, MISSISSIPPI
Kosciusko is the fourth largest of the seven System Operating Groups,
consisting of two systems, each with one headend, located in Kosciusko and
Carthage, Mississippi, approximately 70 miles northeast of Jackson, Mississippi.
The local economy is based primarily on manufacturing and agricultural
activities with three of the largest employers being Choctaw Maid Farms, Inc.,
Choctaw Manufacturing Enterprise and Interstate Industries, Inc. The Kosciusko
System passes 5,440 estimated homes and serves 4,350 equivalent basic
subscribers as of March 31, 1999, for a penetration rate of 80.0%. There are
three franchise agreements covering the Kosciusko System Operating Group,
expiring between March 13, 2003 and April 4, 2010. The Kosciusko System
Operating Group accounts for approximately 13% of the Partnership's equivalent
basic subscribers.
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The Kosciusko System Operating Group consists of 126 miles of plant, of
which approximately 94% is aerial. Both the Kosciusko and Carthage plants are
capable of passing 450 MHz. The Partnership currently has no plans for a rebuild
of the systems.
The Kosciusko and Carthage systems offer three levels of non-premium
service: Economy Basic service, consisting of 12 primarily broadcast and local
origination channels, for $15.00; Standard Basic service, consisting of the 12
Economy Basic channels plus an additional 19 satellite channels, (18 for
Carthage), for $25.95 in Kosciusko and $25.50 in Carthage; and Specialty Tier
service, consisting of the 31 Standard Basic channels (30 for Carthage) plus an
additional 10 satellite channels, for $34.45 in Kosciusko and $34.00 in
Carthage. Both Systems offer HBO, Cinemax, The Disney Channel and Showtime. The
last rate increase was implemented on August 1, 1998.
PHILADELPHIA, MISSISSIPPI
The Philadelphia System Operating Group serves communities in central
Mississippi through a single headend located in Philadelphia, Mississippi. The
city of Philadelphia is located approximately 80 miles northeast of Jackson,
Mississippi and is the County Seat. Philadelphia's economy is based primarily on
manufacturing with the largest employer being U.S. Electrical Motors.
Additionally, the gaming industry, highlighted by the Silver Star Casino and
Hotel (500+ rooms), owned by the Choctaw Indian Reservation, has added growth to
the local economy. As of March 31, 1999, the Philadelphia System Operating Group
passed 4,395 estimated homes and served 3,851 equivalent basic subscribers, for
a penetration rate of 87.6%. This penetration rate is the highest of the seven
System Operating Groups. The Philadelphia System Operating Group includes a
single headend located in Philadelphia, Mississippi, and has four franchise
agreements expiring between March 20, 2009 and June 3, 2017. The Philadelphia
System Operating Group accounts for approximately 12% of the Partnership's
equivalent basic subscribers, resulting largely from the Silver Star Casino
Hotel.
The Philadelphia System Operating Group includes 170 miles of plant, of
which approximately 96% is aerial. Approximately 70% of the plant is capable of
passing 450 MHz and approximately 30% can pass 330 MHz. Over the next two years,
the Partnership is planning to complete a rebuild of the entire system to 450
MHz. The financial forecasts prepared by Daniels take into account this capital
project, among others.
The Philadelphia system offers three levels of non-premium service: Economy
Basic service, consisting of 12 primarily broadcast and local origination
channels, for $15.00; Standard Basic service, consisting of the 12 Economy Basic
channels plus an additional 16 satellite channels, for $25.50; and Specialty
Tier service, consisting of the 28 Standard Basic channels plus an additional 10
satellite channels, for $34.75. The Philadelphia system offers HBO, Cinemax,
Showtime, Starz and Encore. The last rate increase was implemented on August 1,
1998 for all services and the Specialty Tier service rate was increased again on
May 1, 1999.
FOREST, MISSISSIPPI
The Forest, Mississippi System Operating Group serves communities in
central Mississippi. The local economy is primarily based on agricultural and
manufacturing activities. One of the largest industries in the area is poultry.
Nearly two million birds are dressed per week in Forest, which ranks as the
second-largest producer of broilers in the nation. As of March 31, 1999, the
Forest System Operating Group passed 3,735 estimated homes and served 3,222
equivalent basic subscribers for a penetration rate of 86.3%. This penetration
rate is the second highest of the seven System Operating Groups. There are
currently four franchises covering this System Operating Group, with franchise
expiration dates ranging from February 20, 2003 to October 17, 2010. The Forest
System Operating Group accounts for approximately 10% of the Partnership's
equivalent basic subscribers.
The Forest System Operating Group includes two systems, each with one
headend, located in Forest and Raleigh, Mississippi. The Forest System Operating
Group includes 154 miles of plant, 95% of which is aerial. Currently, 89% of the
plant is capable of passing 330 MHz and 11% is capable of passing
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300 MHz. Over the next two years, the Partnership is planning to rebuild the
Forest system to 550 MHz. The small Raleigh system currently has no plans for
further upgrade. The financial forecasts prepared by Daniels take into account
such capital projects, among others.
The Forest system offers three levels of non-premium service: Economy Basic
service, consisting of 13 primarily broadcast and local origination channels,
for $15.00; Standard Basic service, consisting of the 13 Economy Basic channels
plus an additional 17 satellite channels, for $25.95; and Specialty Tier
service, consisting of the 30 Standard Basic channels plus an additional eight
satellite channels, for $33.90. The Raleigh system offers 25 channels of
Standard Basic service for $23.95. The Forest system offers HBO, Cinemax,
Showtime, Encore and Starz, while the Raleigh system offers only HBO. The last
rate increase was implemented on August 1, 1998.
HIGHLANDS, NORTH CAROLINA
The Highlands System Operating Group is the smallest of the seven System
Operating Groups and serves the community of and areas surrounding Highlands,
North Carolina. The city of Highlands is located on a plateau of the Blue Ridge
Mountains where Georgia, North Carolina and South Carolina meet. The Highlands
region has long been a vacation destination for affluent families from many
Southern cities. The area is encircled by 200,000 acres of the End National
Forest. One of the main attractions of Highlands is the area's exclusive golf
clubs. As of March 31, 1999, the Highlands System Operating Group passed 4,190
estimated homes and served 2,584 equivalent basic subscribers, for a penetration
rate of 61.7%. The Highlands System Operating Group includes a single headend
located in Highlands, North Carolina, and has four franchise agreements expiring
between October 3, 1999 and June 2, 2013. The Highlands System Operating Group
accounts for approximately 8% of the Partnership's equivalent basic subscribers.
In keeping with the fluctuating occupancy of the area's homes throughout the
year, the system experiences seasonality in its subscriber base.
The Highlands System Operating Group includes 128 miles of plant, of which
approximately 78% is aerial. Currently, 100% of the plant is capable of passing
330 MHz. Over the next two years, the Partnership is planning to rebuild the
system to 450 MHz. The financial forecasts prepared by Daniels take into account
this capital project, among others.
The Highlands system offers two levels of non-premium service: Economy
Basic service, consisting of 17 primarily broadcast and local origination
channels, for $17.50; and Standard Basic service, consisting of the 17 Economy
Basic channels plus an additional 19 satellite channels, for $33.20. The
Highlands system offers HBO, Cinemax, The Disney Channel and Encore. The last
rate increase was effective February 1, 1999.
VALUATION METHODOLOGY
In order to appraise the fair market value of the assets of the
Partnership, Daniels applied two valuation methodologies to each of the seven
System Operating Groups: (i) discounted cash flow valuation; and (ii) comparable
private market transaction multiples analysis. The respective aggregate fair
market values of the Partnership's operating assets derived from each valuation
methodology were then compared, and a final value was derived.
DISCOUNTED CASH FLOW
The discounted cash flow valuation methodology ("DCF") measures the present
value of an entity's forecasted free cash flow from operations, defined as
pre-tax earnings before interest, taxes, depreciation and amortization
("EBITDA"), less capital expenditures ("Free Cash Flow"). The forecasted Free
Cash Flow was determined through a 10-year financial forecast prepared by
Daniels for each of the seven System Operating Groups, which provides for
detailed forecasts of revenue and operating expenses. In addition to Free Cash
Flow, and based upon the 10-year financial forecasts discussed above, a terminal
enterprise value was estimated for each of the seven System Operating Groups
assuming a sale at the end of year 10 (the "Terminal Enterprise Value"). This
Terminal Enterprise Value was based on a multiple of
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terminal EBITDA which Daniels determined to be reasonable in light of comparable
private market transaction multiples of EBITDA.
The revenue forecasts for each of the seven System Operating Groups were
based upon Daniels' forecasts of homes passed, subscriber penetration levels and
rates and non-subscriber based revenue sources. Expense forecasts were based
primarily on assumed rates of inflation over the forecast period and were
adjusted for particular growth characteristics of each of the seven System
Operating Groups. Capital expenditure forecasts were based upon costs associated
with the construction of new miles of plant, plant maintenance and
rebuild/upgrade requirements. Daniels did not include telephony or commercial
data services revenue, expenses or capital costs in its forecasts. Daniels did,
however, include residential data services revenue and expenses in its forecast
where warranted.
The forecasted Free Cash Flow and the Terminal Enterprise Value (together,
the "Forecasted Net Cash Flows") resulting from the 10-year financial forecasts
prepared by Daniels were discounted back to the present at a discount rate
representing the weighted average cost of capital for an array of entities
within the cable television industry that are capable of consummating an
acquisition similar in size to the acquisition of the Systems. The weighted
average cost of capital is a company's required rate of return necessary to
satisfy the expectations of both the debt and equity investors of a company.
Theoretically, an entity will be willing to pay a price for an investment as
high as the value that will allow it to equal or exceed its weighed average cost
of capital requirements.
Borrowing costs are different for every entity, depending primarily upon
the overall credit quality of the borrower and the quality of the collateral, if
any. In the cable television industry, many lending institutions often use the
prime rate as a benchmark for determining loan interest rates. Some borrowers
pay interest rates above the prime rate, while others are able to borrow at more
favorable rates below the prime rate. Daniels, therefore, has assumed that the
prime rate is a fair benchmark, within a margin of 25 to 50 basis points, of the
average cost of debt of an array of entities willing and financially able to
consummate an acquisition similar in size to an acquisition of the Systems. The
cost of equity was determined by sampling the current estimated private market
cost of equity for cable television investments and blending that with equity
return objectives of large publicly traded companies in this industry. Such
equity returns are those which would be required by experienced private equity
investors and publicly traded companies in cable television investments with
characteristics similar to those of the Systems. The weighted average cost of
capital Daniels derived for each of the discounted cash flow analyses was
13.50%. Listed below are the estimates of the costs of debt and equity in the
capitalization structure as of the Valuation Date used to determine the discount
rate.
ASSUMED CAPITAL STRUCTURE % OF TOTAL CAPITAL COST OF CAPITAL
------------------------- ------------------ ---------------
Debt............................................ 60.0% 7.5%
Equity.......................................... 40.0% 22.5%
Estimated Weighted Average Cost of Capital...... 100.0% 13.5%
The combined aggregate fair market value of the Systems derived from this
analysis is $73.3 million, which is equal to 10.9x estimated annualized run-rate
cash flow and $2,200 per equivalent basic subscriber.(1)
MULTIPLE OF ANNUALIZED
DISCOUNTED CASH FLOW RUN-RATE CASH
VALUATION FLOW(1) VALUE PER EBU(1)
- -------------------- ---------------------- ----------------
$73,300,000 10.9x $2,200
- ---------------
(1) Annualized run-rate cash flow for the three months ended 3/31/99 and EBUs as
of 3/31/99 have been adjusted for seasonality of the Highlands system. The
adjusted annualized run-rate cash flow for the Systems is estimated to be
$6.7 million and the adjusted EBU for the Systems is estimated to be 33,313.
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COMPARABLE PRIVATE MARKET TRANSACTION MULTIPLES
In addition to the DCF valuation methodology, Daniels also utilized the
comparable private market transaction multiples methodology, which is another
generally accepted valuation methodology used to correlate and validate the
findings of the DCF with the realities of the private market. Under this
methodology, Daniels has compared selected market multiples reported in sales of
cable television systems of similar size, markets and technical condition as the
Systems to selected operating statistics of the Systems. In the case of cable
television system transactions, the most commonly used market multiples are: (i)
a multiple of trailing three or six months annualized operating cash flow; and
(ii) the price per subscriber. The Systems' annualized operating cash flow for
the quarter ended March 31, 1999 will be used as a comparable statistic to the
annualized statistics reported in the comparable group of transactions.
COMPARABLE CABLE TELEVISION SYSTEM SALES
AGGREGATE VALUE/ CLOSE
SYSTEM BUYER SELLER SUBS. VALUE(SM) SUB. VALUE/CF DATE
- ----------------------- ------------ -------------- ------ --------- ------ -------- --------
Riverside Co., CA Century Act 5 19,000 $ 33.0 $1,737 9.2x Contract
Various, SD Mediacom Zylstra 14,300 21.5 1,500 9.4 Contract
Nitro, WV & Various TX Fanch Harmon 18,300 50.0 2,732 14.0 Jun-99
Various, MI Millennium Horizon 43,000 112.0 2,605 11.2 May-99
Buffalo, MN Bresnan Jones 14,550 27.0 1,856 9.8 Mar-99
CA-based MSO USA Media WestStar Comm. 45,000 84.0 1,867 9.0 Mar-99
Livingston County, MI Fanch Multi- 16,000 42.0 2,625 10.0 Feb-99
Cablevision
Various, LA, TX Star Cable Illini 12,000 18.0 1,500 10.9 Feb-99
Cablevision
Hotsprings, Deadwood, TCl Duhamel 16,400 28.3 1,726 9.0 Feb-99
Blackhawk, SD Cable Frc.
Hanover, PA Susquehanna Hanover Cable 16,700 33.4 2,000 11.5 Jan-99
Various, MI Bresnan Omega 25,900 40.0 1,545 9.0 Jan-99
Various, GA Jones Bresnan 24,000 50.0 2,083 10.0 Dec-98
Communications
Payson, AZ NPG Cable/AZ Mark Twain 12,350 21.6 1,750 9.2 Sep-98
Various, TX, OK, KS, MO Classic CableOne 28,000 44.0 1,600 9.0 Aug-98
Communications
Total/Average 21,821 $604.8 $1,940 10.0x
The comparable private market transactions analysis yields a cash flow
multiple range of 9.0x to 14.0x cash flow, with a weighted average of 10.0x cash
flow. Value per subscriber ranges from $1,500 to $2,732, with a weighted average
of $1,940 per subscriber.
MATERIAL RELATIONSHIPS
Daniels has no ownership position in Northland or the Partnership; however,
Daniels has at various times sold cable television systems to Northland while
representing other cable television operators and has sold cable television
systems on behalf of Northland. Daniels does not believe that these prior
relationships in any way affect its ability to fairly and impartially render the
opinion of value expressed herein.
VALUATION SUMMARY
Based on the analysis using the valuation methodologies described above,
the estimated fair market value of the Systems as of the Valuation Date is
$73,300,000, representing 10.9x estimated annualized run-rate operating cash
flow and value per equivalent basic subscriber of $2,200.
THE CASH FLOW MULTIPLE IS SLIGHTLY HIGHER THAN THE WEIGHTED AVERAGE
MULTIPLE BUT WELL WITHIN THE RANGE OF MULTIPLES DERIVED FROM THE COMPARABLE
PRIVATE MARKET TRANSACTIONS ANALYSIS, AND EQUAL TO THE MULTIPLE DERIVED FROM THE
DCF ANALYSIS. THE VALUE PER EQUIVALENT BASIC
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202
SUBSCRIBER IS ALSO ABOVE THE WEIGHTED AVERAGE VALUE BUT WELL WITHIN THE RANGE OF
VALUES DERIVED FROM THE COMPARABLE PRIVATE MARKET TRANSACTIONS ANALYSIS, AND
EQUAL TO THE VALUE PER SUBSCRIBER DERIVED FROM THE DCF ANALYSIS. IT IS WORTH
NOTING THAT DANIELS IS CURRENTLY ACTING AS AN ADVISOR ON SEVERAL COMPARABLE,
NON-PUBLIC TRANSACTIONS WITH IMPLIED VALUATION STATISTICS THAT SUPPORT OUR
ANALYSIS OF VALUE OF THE SYSTEMS.
OUR OPINION OF VALUE EXPRESSED IN THIS APPRAISAL IS BASED ON FINANCIAL AND
OPERATING INFORMATION PROVIDED TO DANIELS BY THE PARTNERSHIP, AS WELL AS
PUBLISHED DEMOGRAPHIC INFORMATION PERTAINING TO THE PARTNERSHIP'S SERVICE AREAS.
WHILE DANIELS BELIEVES SUCH SOURCES TO BE RELIABLE AND ACCURATE, IT HAS NOT
INDEPENDENTLY VERIFIED ANY SUCH INFORMATION. THE VALUATION IS BASED ON
INFORMATION AVAILABLE TO DANIELS AS OF THE LATEST PRACTICABLE DATE. DANIELS
UNDERTAKES NO RESPONSIBILITY FOR UPDATING THIS OPINION TO REFLECT CHANGES IN THE
VALUE OF THE ASSETS SUBSEQUENT TO THE DATE OF THIS APPRAISAL, SUCH AS MARKET,
ECONOMIC, TECHNOLOGICAL, OPERATIONAL, GOVERNMENTAL AND OTHER CHANGES.
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EXHIBIT I
COMMUNICATIONS EQUITY ASSOCIATES APPRAISAL
JULY 1, 1999
Northland Cable Properties Six Limited Partnership
1201 Third Avenue, Suite 3600
Seattle, WA 98101
Communications Equity Associates, Inc. ("CEA") is pleased to submit the
results of our valuation analysis of the assets of the cable television systems
(the "Cable Systems") owned by Northland Cable Properties Six Limited
Partnership ("NCP-Six" or the "Partnership") as of the date of this report. It
is our understanding that the values determined by this analysis will be used in
connection with the anticipated dissolution and liquidation of the Partnership.
We hereby express our opinion of the fair market value of the assets of the
Cable Systems, free and clear of all liens, liabilities and encumbrances. "Fair
Market Value" is defined as the price which could be negotiated in an arm's
length free market transaction between a willing seller and a willing buyer,
neither of whom is under undue pressure of compulsion to complete the
transaction. We hereby express no opinion as to the fairness of any transaction
involving the Cable Systems.
Based on the analysis detailed in this report and subject to the limiting
conditions listed in this report, it is the opinion of Communications Equity
Associates that, as of the date of this report the fair market value of the
assets of the Cable Systems is $74,600,000.
This valuation is intended solely for your use for the purpose stated
above, and is not intended for general publication or circulation. Since these
value conclusions are the result of certain specific assumptions, and since
these assumptions may not be relevant for other purposes, these values should
not be used for any other purpose.
In performing this analysis, CEA relied substantially on financial and
operational information provided by management of the Partnership and by Cable
System personnel. CEA did not independently verify this information and can
therefore accept no responsibility as to its accuracy.
The fee CEA has been paid for the valuation services performed is in no way
contingent upon the results of CEA's analysis. CEA is independent of both
Northland and NCP-Six, and neither CEA nor any of its employees involved in this
valuation have a financial interest in Northland nor any of its affiliated
companies, in NCP-Six, nor in the Cable Systems. To the best of CEA's knowledge
and belief, all statements contained in this report are true and correct, and no
important information has been knowingly withheld. This valuation has been
prepared to conform with the Uniform Standards of Professional Appraisal
Practice as promulgated by the American Society of Appraisers.
Respectfully submitted,
/s/ COMMUNICATIONS EQUITY ASSOCIATES, INC.
--------------------------------------------
COMMUNICATIONS EQUITY ASSOCIATES, INC.
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LIMITING CONDITIONS
1. CEA offers no opinions on either the potential effect of current or
future FCC regulations on the cash flow of the Cable Systems, or on the
Partnership's strategy in dealing with these regulations. The value conclusions
derived herein were based on the assumption that the current rates of the Cable
Systems are in compliance with current FCC regulations, and that no future
refund liability is associated with the Cable Systems.
2. This valuation is based on CEA's assessment of market conditions as of
the date of this report, and assumes that market, regulatory and other
conditions remain static. Changes in the economy as well as additional
rule-making by the FCC could have a material effect on the values herein
derived.
3. CEA cannot guarantee that a buyer could be found for the Cable Systems
at the value herein determined, or at any rational price.
4. As part of this analysis, CEA relied substantially on historical and
projected financial and operational information provided by management of the
Partnership. CEA did not independently verify this information and can therefore
accept no responsibility as to its accuracy.
5. CEA hereby expresses no opinion as to the fairness of any transactions
involving the Cable Systems or the shares of the Partnership.
6. CEA specifically prohibits the use of these value conclusions in all
matters related to the solvency of the Partnership. Since we have not undertaken
an analysis of the debt of the Partnership, we can make no representations as to
whether the fair salable value of the Partnership's assets exceeds the
Partnership's debt, whether the Partnership will be able to meet its debt
obligations as they come due, or whether the Partnership is reasonably
capitalized.
7. CEA did not conduct a detailed technical evaluation of the Cable
Systems, but instead relied on information provided by management of the
Partnership and Cable Systems' employees in assessing the technical condition of
the Cable Systems.
8. CEA has assumed that the Cable Systems, as currently operated, are in
material compliance with all franchise, regulatory, and FCC requirements. CEA
did not independently verify compliance with these requirements.
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TABLE OF CONTENTS
PAGE
----
SECTION
1. OVERVIEW OF ANALYSIS..................................... I-3
-- BACKGROUND AND DESCRIPTION OF ANALYSIS................ I-3
-- DEFINITION OF FAIR MARKET VALUE....................... I-3
-- DESCRIPTION OF VALUATION METHODOLOGY.................. I-4
2. CABLE SYSTEMS OVERVIEW................................... I-5
-- STARKVILLE, MS........................................ I-5
-- PHILADELPHIA, MS...................................... I-5
-- KOSCIUSKO, MS......................................... I-6
-- FOREST, MS............................................ I-6
-- HIGHLANDS, NC......................................... I-6
-- BARNWELL, SC.......................................... I-6
-- BENNETTSVILLE, SC..................................... I-7
-- FINANCIAL SUMMARY..................................... I-7
3. VALUATION................................................ I-8
-- DISCOUNTED CASH FLOW APPROACH......................... I-8
-- MARKET APPROACH....................................... I-8
-- VALUE CONCLUSION...................................... I-9
-- CABLE SYSTEM STATISTICS............................... I-9
1. OVERVIEW OF ANALYSIS
-- BACKGROUND AND DESCRIPTION OF ANALYSIS
-- DEFINITION OF FAIR MARKET VALUE
-- DESCRIPTION OF VALUATION METHODOLOGY
OVERVIEW OF ANALYSIS
BACKGROUND AND DESCRIPTION OF ANALYSIS
Communications Equity Associates ("CEA") has been retained by Northland
Cable Properties Six Limited Partnership ("NCP-Six" or the "Partnership") to
determine the fair market value of the assets of the cable television systems
(the "Cable Systems") owned by the Partnership as of the date of this report. It
is CEA's understanding that the values determined by this analysis will be used
in connection with the anticipated dissolution and liquidation of the
Partnership.
As part of this analysis, CEA requested and obtained from Partnership
management detailed historical and projected financial and operating information
pertaining to the Cable Systems. Additionally, CEA visited and toured
significant portions of the cable service area and had discussions regarding the
operations of the Cable Systems with Partnership management and employees. CEA
has not conducted a technical analysis of the cable plant, and has therefore
relied on assertions made by Cable Systems' management regarding the technical
performance of the cable plant.
DEFINITION OF FAIR MARKET VALUE
For the purpose of this appraisal, "Fair Market Value" is defined as the
price which could be negotiated in an arm's length free market transaction
between a willing seller and a willing buyer, neither of whom is under undue
pressure of compulsion to complete the transaction.
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DESCRIPTION OF VALUATION METHODOLOGY
CEA used the discounted cash flow approach and the market approach in
determining the fair market value of the assets of the Cable Systems. In the
discounted cash flow approach, the value of an asset is determined by
calculating the total present value of the future cash flows generated by the
asset. In the case of the assets of cable television systems, the value is
usually calculated as the present value of the free cash flow (operating cash
flow less capital expenditures) of the system, using a weighted average cost of
debt and equity capital as the discount rate, with a terminal value at the end
of the projection period calculated based on a multiple of the operating cash
flow of the cable system. In the market approach, the value of an asset is
determined based on a comparison with market transactions involving comparable
assets. In order to facilitate this comparison, the respective purchase prices
of the comparable assets are expressed as ratios based on a relevant operating
statistic, typically earnings or cash flow. In the case of cable television
systems, the purchase price of a system is usually expressed as a multiple of
the operating cash flow of the system. The appropriate multiple is then applied
to the operating cash flow of the subject system in order to determine its
value.
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2. CABLE SYSTEMS OVERVIEW
-- STARKVILLE, MS
-- PHILADELPHIA, MS
-- KOSCIUSKO, MS
-- FOREST, MS
-- HIGHLANDS, NC
-- BARNWELL, SC
-- BENNETTSVILLE, SC
-- FINANCIAL SUMMARY
CABLE SYSTEMS OVERVIEW
The Partnership owns Cable Systems that serve certain areas of Mississippi
and the Carolinas. In Mississippi, the Partnership owns cable systems that serve
the operating regions of Starkville, Philadelphia, Kosciusko and Forest, as well
as several nearby smaller towns. In the Carolinas, the Partnership's operating
areas serve Highlands, NC; Barnwell, SC and nearby areas, and Bennettsville, SC.
Relevant statistics for each of these system groups as of March 31, 1999 are
displayed in the system statistics table attached to this report.
STARKVILLE, MS
The Starkville, MS operating group consists of two cable systems that serve
the towns of Starkville and Maben, MS. At March 31, 1999, the Starkville group
passed an estimated 11,085 homes with approximately 195 miles of plant, for an
overall estimated home density of 57 homes per mile. At that time, the group
served 8,097 basic subscribers from two headends, for a basic penetration of
73.0%.
The Starkville area is home to Mississippi State University, and the area
benefits from the school's economic impact. Home growth in the Starkville area
has been steady as the growth of the university has led to the need for new
housing for students, teachers and support staff, as well as new roads and other
community growth. In Starkville, the cable system competes in certain areas with
Wireless One, an MMDS operator, and has also seen competition from DBS.
Both the Starkville and the Maben cable systems operate at 330 MHz. The
Starkville system offers 44 channels, while the Maben system offers 31 channels.
The systems are not addressable and do not offer pay-per-view services. The
Partnership plans to upgrade both systems to a minimum of 550 MHz and 400 MHz,
respectively during the next two years.
PHILADELPHIA, MS
The Philadelphia, MS cable system is served from one headend. At March 31,
1999, the Philadelphia system passed an estimated 4,395 homes with approximately
170 miles of plant, for an overall estimated home density of 26 homes per mile.
At that time the cable system served 3,851 basic subscribers, for a basic
penetration of 87.6%.
While the city of Philadelphia is growing moderately, the cable service
area includes the nearby Choctaw Indian reservation, which is experiencing
significant home growth. The area benefits economically from the Silver Star
Casino, which is located on the reservation.
The Philadelphia system currently operates at 330 MHz, but the Partnership
is in the process of upgrading the system to 450 MHz, with about 70% of the
upgrade complete at this time, and the rest to be done within the next few
years. The Philadelphia system currently offers 43 channels of programming, with
no pay-per-view.
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KOSCIUSKO, MS
The Kosciusko, MS operating group consists of two cable systems that serve
the towns of Kosciusko and Carthage, MS. At March 31, 1999, the Kosciusko group
passed an estimated 5,440 homes with approximately 126 miles of plant, for an
overall estimated home density of 43 homes per mile. At that time, the group
served 4,350 basic subscribers from two headends, for a basic penetration of
80.0%.
Both the Kosciusko and the Carthage cable systems operate at 450 MHz, and
the systems offer 45 and 44 channels of programming, respectively. The Kosciusko
system is designed at 550 MHz, while the Carthage system is designed at 450 MHz.
Neither system is addressable.
FOREST, MS
The Forest, MS operating group currently consists of two cable systems that
serve the towns of Forest and Raleigh, MS. At March 31, 1999, the Forest group
passed an estimated 3,735 homes with approximately 154 miles of plant, for an
overall estimated home density of 24 homes per mile. At that time, the group
served 3,222 basic subscribers from two headends, for a basic penetration of
86.3%.
Forest is located east of Jackson, MS along interstate 20. The area's
economy includes several large poultry processing plants. Forest and Raleigh are
the county seats of Scott County and Smith County, respectively. The Forest
system also serves the town of Morton, MS.
The Forest and the Raleigh systems operate at 330 MHz and 300 MHz,
respectively. The Forest system offers 43 channels of programming, while the
Raleigh system offers just 25 channels. Neither system is addressable. The
Partnership plans to rebuild the Forest system in the near future to a 550 MHz
design, with activation at 450 MHz. The smaller Raleigh system currently has no
plans for further upgrade.
HIGHLANDS, NC
The Highlands, NC cable system is served from a single headend. At March
31, 1999, the Highlands system passed an estimated 4,190 homes with
approximately 128 miles of plant, for an overall estimated home density of 33
homes per mile. At that time, the system served 2,584 basic subscribers for a
basic penetration of 61.7%.
Highlands is a resort area located in western North Carolina near the
Georgia state line. The system operates at 330 MHz and offers 40 channels of
programming. The Partnership plans to rebuild the Highlands system to 450 MHz,
with the rebuild slated for completion by late in the year 2000.
BARNWELL, SC
The Barnwell, SC operating group includes three cable systems that serve
the towns of Barnwell, Allendale and Bamberg, SC. At March 31, 1999, the
Barnwell operating group passed an estimated 12,125 homes with approximately 309
miles of plant, for an overall estimated home density of 39 homes per mile. At
that time, the group served 5,941 basic subscribers from three headends, for a
basic penetration of 49.0%.
The Barnwell group was purchased by the Partnership in 1998. The towns
served by the group are not growing and some show signs of economic decline. The
service area is located near the Savannah River in Barnwell, Allendale and
Bamberg Counties, with the systems three main towns being the county seats of
those counties.
The cable plant in Allendale and Bamberg has been rebuilt to 450 MHz, with
550 MHz spacing. The Barnwell plant is in the process of being rebuilt, with
about 25 percent of the plant at 450 MHz, and the remainder at 300 MHz. The
Barnwell rebuild is planned to continue through 2001. The Barnwell system
currently offers 32 channels of programming, while the Bamberg and Allendale
systems currently offer 41 channels each.
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BENNETTSVILLE, SC
The Bennettsville, SC cable system is served from one headend. At March 31,
1999, the Bennettsville system passed an estimated 9,090 homes, with
approximately 145 miles of plant, for an overall estimated home density of 63
homes per mile. At that time the cable system served 4,918 basic subscribers,
for a basic penetration of 54.1%.
Bennettsville is located in northeastern South Carolina near the North
Carolina state line. It is the county seat of Marlboro County and the only town
of its size in the county. The area has experienced economic difficulty lately,
with an unemployment rate in the high teens and a declining downtown area.
The Bennettsville system is in the process of being rebuilt to 550 MHz,
with about 96% of the rebuild completed at this time. The system offers 54
channels of programming.
FINANCIAL SUMMARY
For the three months ended March 31, 1999, the Cable Systems generated
combined annualized revenue of $14,363,656, or $36.31 per basic subscriber. The
Cable Systems for the same period had combined annualized operating cash flow of
$6,731,196, resulting in a 47% operating cash flow margin.
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3. VALUATION
-- DISCOUNTED CASH FLOW APPROACH
-- MARKET APPROACH
-- VALUE CONCLUSION
-- CABLE SYSTEM STATISTICS
VALUATION
DISCOUNTED CASH FLOW APPROACH
Financial projections, including all assumptions regarding operations and
future capital expenditures were prepared by CEA based on historical and
projected financial and operational information provided by the Partnership.
The discount rate used in this analysis was derived using a weighted
average cost of capital. Based on CEA's recent experience in the cable system
transaction market, it is CEA's opinion that equity investors in cable systems
would likely require a 25 percent return in order to justify the equity
investment. Additionally, based on CEA's recent experience in raising debt
financing for cable operators, a lender would likely charge an interest rate of
approximately 8 percent and would likely be willing to lend up to 60 percent of
asset value at that rate. Thus, the likely typical weighted average cost of
capital that a buyer would experience in purchasing the assets of the subject
Cable Systems can be calculated as follows:
60 percent debt at a rate of 8% = .60 X 8% = 4.8%
40 percent equity at a rate of
25% = .40 X 25% = 10.0%
Weighted Average Cost of Capital = 14.8%
The terminal value of the Cable Systems was calculated by multiplying the
free cash flow of the Cable Systems in the final year of the projection period
by an appropriate cash flow multiple.
The application of the discounted cash flow approach resulted in a total
present value indication for the Cable Systems of $74,600,000. This value is
equivalent to 11.1 times running rate operating cash flow for the Cable Systems,
or $2,263 per basic subscriber.
MARKET APPROACH
In the first six months of 1999, prices paid for cable television systems
increased dramatically over past prices, as the consolidation of the industry
accelerated rapidly. In recent years, prices paid for cable television systems
have generally ranged from 8 to 12 times operating cash flow. During 1999, this
cash flow multiple range increased and widened to a level of 11 to 19 times cash
flow.
Many of the transactions announced during this time period were very large
transactions involving target companies with over 1 million subscribers. The
increase in prices was attributable to, among other things, the advent of
Internet service, the desire of top players in the industry to increase their
size quickly, and the recent increase in cable public stock values, which gave
these large players an inexpensive currency with which to buy.
With the larger buyers focused on increased size and the smaller potential
buyers unable to pay higher prices, there have been fewer transactions involving
cable systems of comparable size and markets to the subject Cable Systems, and
as a result, the prices paid in such transactions have not increased as
dramatically as the prices paid for the very large cable operators.
I-8
211
The table below highlights several transactions involving systems of
similar size and markets to the subject Cable Systems. In these transactions,
the prices paid range from 9.2 to 12.7 times operating cash flow, with a
weighted average of 10.8 and a median of 11.3. Prices per subscriber range from
$1,500 to $2,755 with a weighted average of $2,313 and a median of $2,134.
PRICE CF VALUE/
DATE SYSTEM SELLER BUYER (MIL) SUBS MULTIPLE SUB
---- ------ ------ ----- ----- ---- -------- ------
May 99 NC, SC, MS, OK, GA Genesis Benchmark $128 51,000 12.1 $2,510
Feb 99 CA, NM, CO, ND, etc. Scott Cable Interlink 165 77,000 9.2 $2,134
Feb 99 Various LA, TX Illini Cablevision Star Cable 18 12,000 10.9 $1,500
Feb 99 MI, IN Michiana Cable Ohio Cablevision 11 6,000 11.3 $1,909
Jan 99 Various PA Raystay Lenfest 92 33,000 12.7 $2,755
Wt. Average 10.8 $2,313
Median 11.3 $2,134
Based on these transactions, as well as on CEA's current experience in the
cable system transaction market, it is CEA's opinion that a cash flow multiple
of 11.0 is appropriate in valuing the Cable Systems. Applying this multiple to
the Cable Systems' annualized operating cash flow of $6,731,196 yields a value
indication from the market approach of $74,043,156. This value, which is
equivalent to $2,246 per subscriber, correlates well with the results of the
discounted cash flow approach.
VALUE CONCLUSION
CEA used the discounted cash flow approach and the market approach to
determine the fair market value of the assets of the Cable Systems. Based on
this analysis and Subject to the limiting conditions listed in this report, it
is the opinion of Communications Equity Associates that, as of the date of this
report the fair market value of the assets of the Cable Systems is $74,600,000.
NCP SIX CABLE SYSTEM STATISTICS
AS OF MARCH 31, 1999
STARKVILLE, PHILADELPHIA, KOSCIUSKO, FOREST, HIGHLANDS, BARNWELL, BENNETTSVILLE,
MS MS MS MS NC SC SC
----------- ------------- ---------- ---------- ---------- ------------- --------------
HOMES PASSED.......... 11,085 4,395 5,440 3,735 4,190 12,125 9,090
BASIC SUBSCRIBERS..... 8,097 3,851 4,350 3,222 2,584 5,941 4,918
Basic Pen %.......... 73.0% 87.6% 80.0% 86.3% 61.7% 49.0% 54.1%
PAY UNITS............. 2,930 1,450 1,371 1,442 482 4,301 3,628
Pay Pen %............ 36.2% 37.7% 31.5% 44.8% 18.7% 72.4% 73.8%
MILES OF PLANT........ 194.5 170 125.8 154 128 308.5 145
Home/Mile Density.... 57 26 43 24 33 39 63
HEADENDS.............. 2 1 2 2 1 3 1
PLANT CAPACITY:
Headend 1............ 330 MHz 450 MHz - 70% 450 MHz 330 MHz 330 MHz 300 MHz - 75% 550 MHz - 96%
330 MHz - 30% 450 MHz - 35% 440 MHz - 4%
Headend 2............ 330 MHz 450 MHz 300 MHz 450 MHz
Headend 3............ 450 MHz
1ST Q ANNUALIZED......
REVENUE.............. $3,645,756 $1,633,004 $1,848,480 $1,414,784 $1,036,216 $2,706,144 $2,079.272
Rev/Sub/Mo......... $ 37.51 $ 35.54 $ 35.46 $ 36.59 $ 32.86 $ 38.67 $ 35.59
OCF (PRE CAP.)........ $1,753,776 $ 681,828 $ 885,716 $ 723,800 $ 423,652 $ 990,764 $ 853,812
Margin............... 48.1% 41.8% 47.9% 51.2% 40.9% 36.6% 41.1%
Annual OCF/Sub....... $ 217 $ 178 $ 204 $ 225 $ 161 $ 170 $ 175
OCF (AFTER
CAPITALIZATION)......
Margin...............
Annual OCF/Sub.......
TOTAL
-----------
HOMES PASSED.......... 50,060
BASIC SUBSCRIBERS..... 32,963
Basic Pen %.......... 65.8%
PAY UNITS............. 15,604
Pay Pen %............ 47.3%
MILES OF PLANT........ 1,226
Home/Mile Density.... 41
HEADENDS.............. 12
PLANT CAPACITY:
Headend 1............
Headend 2............
Headend 3............
1ST Q ANNUALIZED......
REVENUE.............. $14,363,656
Rev/Sub/Mo......... $ 36.31
OCF (PRE CAP.)........ $ 6,313,348
Margin............... 44.04%
Annual OCF/Sub....... $ 192
OCF (AFTER
CAPITALIZATION)...... 6,731,196
Margin............... 47%
Annual OCF/Sub....... $ 205
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EXHIBIT J
FAIRNESS OPINION OF HOULIHAN LOKEY REGARDING THE ADELPHIA TRANSACTION
FAIRNESS OPINION FORM
[HOULIHAN LOKEY LETTERHEAD]
THIS DRAFT IS FURNISHED SOLELY TO INDICATE THE EXPECTED FORM OF THE FINAL
OPINION AND THE PROCEDURES AND UNDERLYING ASSUMPTIONS EXPECTED TO BE USED. THE
TEXT OF THE FINAL OPINION WILL NECESSARILY DEPEND UPON OUR REVIEW PROCEDURES,
INCLUDING REVIEW BY COUNSEL, WHICH WILL NOT BE COMPLETED UNTIL SHORTLY BEFORE
THE FINAL LETTER IS DELIVERED. THE FINAL OPINION MAY VARY FROM THIS FORM
INCLUDING, BUT NOT LIMITED TO, QUALIFICATIONS TO THE OPINION.
[ , 2001]
John S. Whetzell
President
Northland Communications Corporation
Managing General Partner of Northland Cable Properties Six Limited Partnership
1201 3rd Avenue
Suite 3600
Seattle WA, 98101
John S. Simmers Vice President and Secretary
FN Equities Joint Venture
Administrative General Partner of Northland Cable Properties Six Limited
Partnership
2780 Skypark Drive
Suite 300
Torrance, CA 90505
RE: PROPOSED SALE OF ASSET BY NCP-SIX TO ADELPHIA COMMUNICATIONS CORPORATION
Dear Sirs:
We understand that Northland Cable Properties Six Limited Partnership
("NCP-Six") is a limited partnership consisting of its limited partners,
Northland Communications Corporation ("Northland"), as its managing general
partner (the "Managing GP"), and FN Equities Joint Venture as its administrative
general partner (the "Administrative GP," with the Managing GP and the
Administrative GP hereinafter referred to as the "General Partners"). NCP-Six
consists of five operating groups of cable assets as follows: the Starkville,
Mississippi operating group; the Philadelphia, Mississippi operating group; the
Highlands, North Carolina operating group; the Barnwell, South Carolina
operating group, and the Bennettsville, South Carolina operating group.
In the second quarter of 1999, NCP-Six retained the services of both
Daniels and Associates, L.P. and Communications Equity Associates to conduct
appraisals of the assets owned by NCP-Six. Each firm appraised the assets with a
valuation date as of July 1, 1999. Daniels & Associates appraised the fair
market value of the NCP-Six assets at $73.3 million. Communications Equity
Associates appraised the fair market value of the NCP-Six assets at $74.6. These
appraisals were obtained by the General Partners as part of an effort to
determine a fair price at the time for the sale of all of the assets of NCP-Six.
In addition to the appraisals, NCP-Six retained Daniels and Associates to
solicit bids from third parties for the purchase of NCP-Six's assets. NCP-Six
received four offers for the purchase of all or portions of the assets. Two of
the offers were to purchase all of the assets. One offer proposed to purchase
all of the assets for $70.4 million, and the other offer proposed to purchase
all of the assets for $76 million. The remaining two offers proposed to purchase
only a portion of the assets. Of these offers, the highest
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offer of $76 million required a material break up fee and certain other
conditions that were not, in the opinion of the General Partners, in the best
interest of NCP-Six, and each of the third party offers were rejected. Following
rejection of the third party offers, Northland made an offer to buy all of the
assets of NCP-Six, subject to Northland securing acceptable financing, for a
proposed valuation of $76 million, an amount equal to the highest third party
bid, without requiring the break up fee that was part of the highest third party
bid.
On December 6, 1999, a proxy solicitation (the "Initial Filing") was filed
by NCP-Six with the Securities and Exchange Commission to solicit approval by
the limited partners of NCP-Six of a proposed sale to Northland, or its
affiliate, of the entirety of the assets of NCP-Six for a purchase price of $76
million. Northland was unable thereafter to secure acceptable financing for the
transaction. As a result, Northland concluded that it could not proceed to make
a formal offer to buy the assets of NCP-Six for the $76 million purchase price,
and the Initial Filing was withdrawn before the transaction was voted upon by
the limited partners of NCP-Six.
In July, 2000, NCP-Six again retained Daniels and Associates to solicit
third party bids for the assets of NCP-Six, using a blind bid process, the
results of which were not made available to the General Partners until all bids,
including Northland's, had been received. Northland and three other bidders
submitted offers for the assets of NCP-Six in response to the July, 2000
solicitation, with Northland submitting the only offer to acquire the entirety
of the assets of NCP-Six. After evaluating the second offers, it was determined
that the offer of Adelphia Communications Corporation to purchase NCP-Six's
Bennetsville, South Carolina operating group for $8,388,000 (the "Adelphia
Transaction"), and Northland's offer to acquire the remaining assets of NCP-Six
for $62,250,000 (the "Northland Transaction"), were the highest and best offers
for the respective assets covered by those offers. The General Partners now wish
to solicit the approval of the limited partners of NCP-Six for the sale of the
assets of NCP-Six (excluding the Bennettsville, South Carolina operating group)
to Northland, or its affiliate, for $62,250,000, subject to certain adjustments.
You have requested our opinion (the "Opinion") as to whether the
consideration to be received by NCP-Six in exchange for NCP-Six's assets in the
Adelphia Transaction is fair to NCP-Six from a financial point of view. The
Opinion does not address NCP-Six's underlying business decision to effect the
Adelphia Transaction. We did not solicit third party indications of interest in
acquiring all or any part of NCP-Six. Furthermore, we have not negotiated the
Transactions or advised you with respect to alternatives to it.
In connection with this Opinion, we have made such reviews, analyses and
inquiries as we have deemed necessary and appropriate under the circumstances.
Among other things, we have:
1. held discussions with:
- John S. Whetzell: Founder, President, CEO and Chairman of the Board of
Directors, Northland Telecommunications Corporation;
- Gary Jones: Vice President and Chief Financial Officer, Northland
Telecommunications Corporation;
- Richard Dyste: Vice President of Technical Services, Northland
Telecommunications Corporation;
- Laura Williams: Vice President and Senior Counsel, Northland
Communications Corporation;
- Richard Clark: Vice President, Treasurer and Director, Northland
Telecommunications Corporation;
- H. Lee Johnson: Divisional Vice President, Northland
Telecommunications Corporation;
- Richard Belland: System Manager, Starkville, MS system;
- Ricky Mooneyham: Regional Manager, Philadelphia and Forest, MS system;
J-2
214
- Toby Ellington: South East Operations Analyst, Northland
Communications Corporation;
- Bill Staley: Regional Manager, Aiken, SC area systems;
- Bob Sturm: System Technician, Barnwell, SC system;
- Shirley McCormick: Business Manager, Bennettsville, SC system;
- Leroy Hendricks: System Technician, Bennettsville, SC system; and
- Randy Wells: Senior Vice President, Daniels and Associates, L.P.
2. visited the following cable system operations representing approximately
92% of NCP-Six's subscribers:
- Starkville, MS
- Philadelphia, MS
- Barnwell, SC
- Bennettsville, SC
3. reviewed the following documents:
- Northland Telecommunications Corporation 1999 Annual Report;
- Northland Cable Properties Six Limited Partnership Prospectus dated
July 10, 1986;
- Amended and Restated Certificate and Agreement of Limited Partnership
of Northland Cable Properties Six Limited Partnership, executed on
November 3, 1986;
- Northland Cable Properties Six Limited Partnership First Supplement to
Prospectus dated October 23, 1986;
- Northland Cable Properties Six Limited Partnership Second Supplement
to Prospectus dated December 1, 1986;
- Northland Cable Properties Six Limited Partnership Third Supplement to
Prospectus dated January 26, 1987;
- Audited Financial Statements for the years ended December 31, 1988 and
1987;
- Audited Financial Statements for the years ended December 31, 1996 and
1995;
- Audited Financial Statements for the years ended December 31, 1997 and
1996;
- Northland Cable Properties Six Limited Partnership 10-K for the fiscal
year ended December 31, 1997;
- Northland Cable Properties Six Limited Partnership 8-K dated January
2, 1998;
- Northland Cable Properties Six Limited Partnership 10-K/A for the
fiscal year ended December 31, 1998;
- Northland Cable Properties Six Limited Partnership 10-Q for the
quarterly period ended June 30, 1999;
- Northland Cable Properties Six Limited Partnership 10-K for the fiscal
year ended December 31, 1999;
- Northland Cable Properties Six Limited Partnership 10-Q for the
quarterly period ended June 30, 2000;
- Unaudited detailed financial statements for each operating group the
year-to-date period ended December 31, 2000;
J-3
215
- Draft audited financial statements for Northland Cable Properties Six
Limited Partnership for the two fiscal years ended December 31, 2000
and 1999;
- Northland Cable Properties Six Limited Partnership Appraisal Analysis
Summary as of July 1, 1999 prepared by Daniels & Associates, L.P.;
- Northland Cable Properties Six Limited Partnership Asset Valuation
Analysis as of July 1, 1999 prepared by Communications Equity
Associates;
- Northland Cable Properties Six Limited Partnership Confidential
Memorandum prepared by Daniels & Associates, L.P., dated July 1999;
- Northland Cable Properties Six Limited Partnership Bid Instructions
Letters, dated August 6, 1999 from Daniels & Associates, L.P.;
- Northland Cable Properties Six Limited Partnership Buyer List,
prepared by Daniels & Associates, dated August 20, 1999;
- Northland Cable Properties Six Limited Partnership Bid Summary, Dated
August 20, 1999;
- NCP-Six Draft Proxy Statement dated December 9, 1999;
- Northland Cable Properties Six Limited Partnership Confidential
Memorandum prepared by Daniels & Associates, L.P., dated June, 2000;
- Northland Cable Properties Six Limited Partnership Bid Instructions
Letters, dated July 27, 2000 from Daniels & Associates, L.P.;
- Bid Procedures Letter from Daniels & Associates, L.P., dated July 18,
2000 and Proposed Asset Purchase Agreement;
- Northland Cable Properties Six Limited Partnership Prospective Buyers
List, prepared by Daniels & Associates, dated July 28, 2000;
- Northland Cable Properties Six Limited Partnership Updated Bid Book,
dated August 16, 2000;
- Follow-up Bid Instruction Letters to Scott Johnson at Adelphia
Communications from Daniels & Associates, L.P., dated July 28, 2000
and August 3, 2000;
- Affidavits from Hubbard & Johnson, P.C., signed August 10, 2000 and
August 17, 2000;
- Purchase and Sale Agreement By and Between Northland Cable Properties
Six Limited Partnership and Adelphia Communications Corporation, dated
February , 2001;
- Asset Purchase Agreement between Northland Cable Properties Six
Limited Partnership and Northland Communications Corporation, or its
Affiliates or Assigns, revised 12/12/00;
- Northland Cable Properties Six Limited Partnership Preliminary Proxy
Statement filed with the Securities Exchange Commission on December
21, 2000;
- Northland Cable Properties Six Limited Partnership Subscriber History
from January 1998 to September 2000, dated October 25, 2000;
- Northland Cable Properties Six Limited Partnership Subscriber
Report -- End of Month Subs as of December 2000;
- Summary of Secondary Trading for units in NCP-Six from inception to
February 6, 2001 from Bloomberg L.P.;
- Franchise Renewal Docket;
- Listing of Property Leases;
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216
- Channel Line-up, printed October 25, 2000;
- NCP-Six Company Summary 3 Year Capital Plan dated January 22, 2001;
and
- Organization Chart for Northland Telecommunications Corporation.
In addition, we reviewed publicly available information on the
industry, NCP-Six and comparable companies and transactions.
4. performed appraisals of the assets proposed to be sold to Northland and
separately to Adelphia, which included, among other things, the following
analyses:
- Analysis of comparable transactions
- Analysis of all previous purchases and sales of cable systems by
NCP-Six
- Analysis of comparable public companies
- Discounted cash flow analysis
- Review of the returns to the original limited partners and limited
partners from secondary trading
- Review of the historical and projected financial performance of the
systems
- Review of the historical subscriber performance of the systems
- Review of the historical and projected capacity and other technical
aspects of the systems
- Review of the implied multiples from the Proposed Transactions
- Analysis of the change in valuations of cable systems over time
- Other studies, analyses and inquiries as we have deemed appropriate
We have relied upon and assumed, without independent verification, that the
financial forecasts and projections provided to us by NCP-Six have been
reasonably prepared and reflect the best currently available estimates of the
future financial results and condition of NCP-Six, and that there has been no
material change in the assets, financial condition, business or prospects of
NCP-Six since the date of the most recent financial statements made available to
us.
We note that NCP-Six and the Managing GP have agreed to indemnify us for
certain liabilities arising out of our engagement. The fees for our services
were fixed upon our engagement at the same rate regardless of whether the
Adelphia Transaction was ever consummated, and regardless of the conclusions
reached in this Opinion.
We have not independently verified the accuracy and completeness of the
information supplied to us with respect to NCP-Six and do not assume any
responsibility with respect to it. We have not made an independent appraisal of
individual fixed assets of the Partnership, but we have appraised the value of
NCP-Six as a going concern. Our opinion is necessarily based on business,
economic, market and other conditions as they exist and can be evaluated by us
at the date of this letter.
This Opinion is furnished solely for your benefit and may not be relied
upon by any other person without our express, prior written consent. This
Opinion is delivered to each recipient subject to the conditions, scope of
engagement, limitations and understandings set forth in this Opinion, and
subject to the understanding that the obligations of Houlihan Lokey in the
Adelphia Transaction are solely corporate obligations, and no officer, director,
employee, agent, shareholder or controlling person of Houlihan Lokey shall be
subjected to any personal liability whatsoever to any person, nor will any such
claim be asserted by or on behalf of you or your affiliates. This Opinion does
not constitute a recommendation to any limited partner of NCP-Six as to how such
limited partner should vote on the proposed transactions or any matter related
thereto.
J-5
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Based upon the foregoing, and in reliance thereon, it is our opinion that
the consideration to be received by NCP-Six in connection with the Adelphia
Transaction, is fair to NCP-Six from a financial point of view.
HOULIHAN LOKEY HOWARD & ZUKIN FINANCIAL ADVISORS, INC.
DRAFT
J-6
218
EXHIBIT K
FAIRNESS OPINION OF HOULIHAN LOKEY REGARDING THE PROPOSED TRANSACTION
FAIRNESS OPINION FORM
[HOULIHAN LOKEY LETTERHEAD]
THIS DRAFT IS FURNISHED SOLELY TO INDICATE THE EXPECTED FORM OF THE FINAL
OPINION AND THE PROCEDURES AND UNDERLYING ASSUMPTIONS EXPECTED TO BE USED. THE
TEXT OF THE FINAL OPINION WILL NECESSARILY DEPEND UPON OUR REVIEW PROCEDURES,
INCLUDING REVIEW BY COUNSEL, WHICH WILL NOT BE COMPLETED UNTIL SHORTLY BEFORE
THE FINAL LETTER IS DELIVERED. THE FINAL OPINION MAY VARY FROM THIS FORM
INCLUDING, BUT NOT LIMITED TO, QUALIFICATIONS TO THE OPINION.
[ , 2001]
John S. Whetzell
President
Northland Communications Corporation
Managing General Partner of Northland Cable Properties Six Limited Partnership
1201 3rd Avenue
Suite 3600
Seattle WA, 98101
John S. Simmers Vice President and Secretary
FN Equities Joint Venture
Administrative General Partner of Northland Cable Properties Six Limited
Partnership
2780 Skypark Drive
Suite 300
Torrance, CA 90505
RE: PROPOSED SALE OF ASSETS BY NCP-SIX TO NORTHLAND COMMUNICATIONS CORPORATION
Dear Sirs:
We understand that Northland Cable Properties Six Limited Partnership
("NCP-Six") is a limited partnership consisting of its limited partners,
Northland Communications Corporation ("Northland"), as its managing general
partner (the "Managing GP"), and FN Equities Joint Venture as its administrative
general partner (the "Administrative GP," with the Managing GP and the
Administrative GP hereinafter referred to as the "General Partners"). NCP-Six
consists of five operating groups of cable assets as follows: the Starkville,
Mississippi operating group; the Philadelphia, Mississippi operating group; the
Highlands, North Carolina operating group; the Barnwell, South Carolina
operating group, and the Bennettsville, South Carolina operating group.
In the second quarter of 1999, NCP-Six retained the services of both
Daniels and Associates, L.P. and Communications Equity Associates to conduct
appraisals of the assets owned by NCP-Six. Each firm appraised the assets with a
valuation date as of July 1, 1999. Daniels & Associates appraised the fair
market value of the NCP-Six assets at $73.3 million. Communications Equity
Associates appraised the fair market value of the NCP-Six assets at $74.6. These
appraisals were obtained by the General Partners as part of an effort to
determine a fair price at the time for the sale of all of the assets of NCP-Six.
In addition to the appraisals, NCP-Six retained Daniels and Associates to
solicit bids from third parties for the purchase of NCP-Six's assets. NCP-Six
received four offers for the purchase of all or portions of the assets. Two of
the offers were to purchase all of the assets. One offer proposed to purchase
all of the assets for $70.4 million, and the other offer proposed to purchase
all of the assets for $76 million. The remaining two offers proposed to purchase
only a portion of the assets. Of these offers, the highest
K-1
219
offer of $76 million required a material break up fee and certain other
conditions that were not, in the opinion of the General Partners, in the best
interest of NCP-Six, and each of the third party offers were rejected. Following
rejection of the third party offers, Northland made an offer to buy all of the
assets of NCP-Six, subject to Northland securing acceptable financing, for a
proposed valuation of $76 million, an amount equal to the highest third party
bid, without requiring the break up fee that was part of the highest third party
bid.
On December 6, 1999, a proxy solicitation (the "Initial Filing") was filed
by NCP-Six with the Securities and Exchange Commission to solicit approval by
the limited partners of NCP-Six of a proposed sale to Northland, or its
affiliate, of the entirety of the assets of NCP-Six for a purchase price of $76
million. Northland was unable thereafter to secure acceptable financing for the
transaction. As a result, Northland concluded that it could not proceed to make
a formal offer to buy the assets of NCP-Six for the $76 million purchase price,
and the Initial Filing was withdrawn before the transaction was voted upon by
the limited partners of NCP-Six.
In July, 2000, NCP-Six again retained Daniels and Associates to solicit
third party bids for the assets of NCP-Six, using a blind bid process, the
results of which were not made available to the General Partners until all bids,
including Northland's, had been received. Northland and three other bidders
submitted offers for the assets of NCP-Six in response to the July, 2000
solicitation, with Northland submitting the only offer to acquire the entirety
of the assets of NCP-Six. After evaluating the second offers, it was determined
that the offer of Adelphia Communications Corporation to purchase NCP-Six's
Bennetsville, South Carolina operating group for $8,388,000 (the "Adelphia
Transaction"), and Northland's offer to acquire the remaining assets of NCP-Six
for $62,250,000 (the "Northland Transaction"), were the highest and best offers
for the respective assets covered by those offers. The General Partners now wish
to solicit the approval of the limited partners of NCP-Six for the sale of the
assets of NCP-Six (excluding the Bennettsville, South Carolina operating group)
to Northland, or its affiliate, for $62,250,000, subject to certain adjustments.
You have requested our opinion (the "Opinion") as to whether the
consideration to be received by NCP-Six in exchange for NCP-Six's assets in the
Northland Transaction is fair to NCP-Six from a financial point of view. The
Opinion does not address NCP-Six's underlying business decision to effect the
Northland Transaction. We did not solicit third party indications of interest in
acquiring all or any part of NCP-Six. Furthermore, we have not negotiated the
Transactions or advised you with respect to alternatives to it.
In connection with this Opinion, we have made such reviews, analyses and
inquiries as we have deemed necessary and appropriate under the circumstances.
Among other things, we have:
1. held discussions with:
- John S. Whetzell: Founder, President, CEO and Chairman of the Board
of Directors, Northland Telecommunications Corporation;
- Gary Jones: Vice President and Chief Financial Officer, Northland
Telecommunications Corporation;
- Richard Dyste: Vice President of Technical Services, Northland
Telecommunications Corporation;
- Laura Williams: Vice President and Senior Counsel, Northland
Communications Corporation;
- Richard Clark: Vice President, Treasurer and Director, Northland
Communications Corporation;
- H. Lee Johnson: Divisional Vice President, Northland
Telecommunications Corporation;
- Richard Belland: System Manager, Starkville, MS system;
- Ricky Mooneyham: Regional Manager, Philadelphia and Forest, MS
system;
K-2
220
- Toby Ellington: South East Operations Analyst, Northland
Communications Corporation;
- Bill Staley: Regional Manager, Aiken, SC area systems;
- Bob Sturm: System Technician, Barnwell, SC system;
- Shirley McCormick: Business Manager, Bennettsville, SC system;
- Leroy Hendricks: System Technician, Bennettsville, SC system; and
- Randy Wells: Senior Vice President, Daniels and Associates, L.P.
2. visited the following cable system operations representing approximately
92% of NCP-Six's subscribers:
- Starkville, MS
- Philadelphia, MS
- Barnwell, SC
- Bennettsville, SC
3. reviewed the following documents:
- Northland Telecommunications Corporation 1999 Annual Report;
- Northland Cable Properties Six Limited Partnership Prospectus dated
July 10, 1986;
- Amended and Restated Certificate and Agreement of Limited
Partnership of Northland Cable Properties Six Limited Partnership,
executed on November 3, 1986;
- Northland Cable Properties Six Limited Partnership First Supplement
to Prospectus dated October 23, 1986;
- Northland Cable Properties Six Limited Partnership Second Supplement
to Prospectus dated December 1, 1986;
- Northland Cable Properties Six Limited Partnership Third Supplement
to Prospectus dated January 26, 1987;
- Audited Financial Statements for the years ended December 31, 1988
and 1987;
- Audited Financial Statements for the years ended December 31, 1996
and 1995;
- Audited Financial Statements for the years ended December 31, 1997
and 1996;
- Northland Cable Properties Six Limited Partnership 10-K for the
fiscal year ended December 31, 1997;
- Northland Cable Properties Six Limited Partnership 8-K dated January
2, 1998;
- Northland Cable Properties Six Limited Partnership 10-K/A for the
fiscal year ended December 31, 1998;
- Northland Cable Properties Six Limited Partnership 10-Q for the
quarterly period ended June 30, 1999;
- Northland Cable Properties Six Limited Partnership 10-K for the
fiscal year ended December 31, 1999;
- Northland Cable Properties Six Limited Partnership 10-Q for the
quarterly period ended June 30, 2000;
- Unaudited detailed financial statements for each operating group the
year-to-date period ended December 31, 2000;
K-3
221
- Draft audited financial statements for Northland Cable Properties
Six Limited Partnership for the two fiscal years ended December 31,
2000 and 1999;
- Northland Cable Properties Six Limited Partnership Appraisal
Analysis Summary as of July 1, 1999 prepared by Daniels &
Associates, L.P.;
- Northland Cable Properties Six Limited Partnership Asset Valuation
Analysis as of July 1, 1999 prepared by Communications Equity
Associates;
- Northland Cable Properties Six Limited Partnership Confidential
Memorandum prepared by Daniels & Associates, L.P., dated July 1999;
- Northland Cable Properties Six Limited Partnership Bid Instructions
Letters, dated August 6, 1999 from Daniels & Associates, L.P.;
- Northland Cable Properties Six Limited Partnership Buyer List,
prepared by Daniels & Associates, dated August 20, 1999;
- Northland Cable Properties Six Limited Partnership Bid Summary,
Dated August 20, 1999;
- NCP-Six Draft Proxy Statement dated December 9, 1999;
- Northland Cable Properties Six Limited Partnership Confidential
Memorandum prepared by Daniels & Associates, L.P., dated June, 2000;
- Northland Cable Properties Six Limited Partnership Bid Instructions
Letters, dated July 27, 2000 from Daniels & Associates, L.P.;
- Bid Procedures Letter from Daniels & Associates, L.P., dated July
18, 2000 and Proposed Asset Purchase Agreement;
- Northland Cable Properties Six Limited Partnership Prospective
Buyers List, prepared by Daniels & Associates, dated July 28, 2000;
- Northland Cable Properties Six Limited Partnership Updated Bid Book,
dated August 16, 2000;
- Follow-up Bid Instruction Letters to Scott Johnson at Adelphia
Communications from Daniels & Associates, L.P., dated July 28, 2000
and August 3, 2000;
- Affidavits from Hubbard & Johnson, P.C., signed August 10, 2000 and
August 17, 2000;
- Purchase and Sale Agreement By and Between Northland Cable
Properties Six Limited Partnership and Adelphia Communications
Corporation, dated February , 2001;
- Asset Purchase Agreement between Northland Cable Properties Six
Limited Partnership and Northland Communications Corporation, or its
Affiliates or Assigns, revised 12/12/00;
- Northland Cable Properties Six Limited Partnership Preliminary Proxy
Statement filed with the Securities Exchange Commission on December
21, 2000;
- Northland Cable Properties Six Limited Partnership Subscriber
History from January 1998 to September 2000, dated October 25, 2000;
- Northland Cable Properties Six Limited Partnership Subscriber
Report -- End of Month Subs as of December 2000;
- Summary of Secondary Trading for units in NCP-Six from inception to
February 6, 2001 from Bloomberg L.P.;
- Franchise Renewal Docket;
- Listing of Property Leases;
K-4
222
- Channel Line-up, printed October 25, 2000;
- NCP-Six Company Summary 3 Year Capital Plan dated January 22, 2001;
and
- Organization Chart for Northland Telecommunications Corporation.
In addition, we reviewed publicly available information on the
industry, NCP-Six and comparable companies and transactions.
4. performed appraisals of the assets proposed to be sold to Northland and
separately to Adelphia, which included, among other things, the following
analyses:
- Analysis of comparable transactions
- Analysis of all previous purchases and sales of cable systems by
NCP-Six
- Analysis of comparable public companies
- Discounted cash flow analysis
- Review of the returns to the original limited partners and limited
partners from secondary trading
- Review of the historical and projected financial performance of the
systems
- Review of the historical subscriber performance of the systems
- Review of the historical and projected capacity and other technical
aspects of the systems
- Review of the implied multiples from the Proposed Transactions
- Analysis of the change in valuations of cable systems over time
- Other studies, analyses and inquiries as we have deemed appropriate
We have relied upon and assumed, without independent verification, that the
financial forecasts and projections provided to us by NCP-Six have been
reasonably prepared and reflect the best currently available estimates of the
future financial results and condition of NCP-Six, and that there has been no
material change in the assets, financial condition, business or prospects of
NCP-Six since the date of the most recent financial statements made available to
us.
We note that NCP-Six and the Managing GP have agreed to indemnify us for
certain liabilities arising out of our engagement. The fees for our services
were fixed upon our engagement at the same rate regardless of whether the
Northland Transaction was ever consummated, and regardless of the conclusions
reached in this Opinion.
We have not independently verified the accuracy and completeness of the
information supplied to us with respect to NCP-Six and do not assume any
responsibility with respect to it. We have not made an independent appraisal of
any specific individual fixed assets of the Partnership, but we have appraised
the value of NCP-Six as a going concern. Our opinion is necessarily based on
business, economic, market and other conditions as they exist and can be
evaluated by us at the date of this letter.
This Opinion is furnished solely for your benefit and may not be relied
upon by any other person without our express, prior written consent. This
Opinion is delivered to each recipient subject to the conditions, scope of
engagement, limitations and understandings set forth in this Opinion, and
subject to the understanding that the obligations of Houlihan Lokey in the
Transaction are solely corporate obligations, and no officer, director,
employee, agent, shareholder or controlling person of Houlihan Lokey shall be
subjected to any personal liability whatsoever to any person, nor will any such
claim be asserted by or on behalf of you or your affiliates. This Opinion does
not constitute a recommendation to any limited partner of NCP-Six as to how such
limited partner should vote on the proposed transactions or any matter related
thereto.
K-5
223
Based upon the foregoing, and in reliance thereon, it is our opinion that
the consideration to be received by NCP-Six in connection with the Northland
Transaction, is fair to NCP-Six from a financial point of view.
HOULIHAN LOKEY HOWARD & ZUKIN FINANCIAL ADVISORS, INC.
DRAFT
K-6
224
EXHIBIT L
NCP-SIX LIQUIDATING TRUST AGREEMENT
THIS AGREEMENT is made and entered into by and among NORTHLAND
COMMUNICATIONS CORPORATION ("NCC"), as agent for the Limited Partners of
NORTHLAND CABLE PROPERTIES SIX LIMITED PARTNERSHIP ("NCP-Six"), a Washington
limited partnership ("Trustors"), and RICHARD I. CLARK ("the Trustee").
1. Transfer of Property. The Trustors are contemporaneously herewith
transferring to the Trustee the right to receive payment and other rights
associated with that certain Promissory Note, dated , 2001,
in the principal amount of $9,875,000, made by NCC in favor of NCP-Six. The
amount payable under said Promissory Note is subject to adjustment in accordance
with its terms and the terms of that certain Proxy Statement dated
, 2001 (the "Proxy Statement"). The Trustors are also
contemporaneously herewith transferring to the Trustee the right to receive up
to $1,000,000 from the "hold back escrow" established pursuant to section of
the Asset Purchase Agreement dated , 2001 by and between
NCP-Six and Adelphia Communications Corporation. In addition, the Trustors are
depositing contemporaneously herewith $750,000 cash in accordance with the terms
of the Proxy Statement. These sums, together with other property that may be
added to the trust created herein, shall be held, managed and distributed by the
Trustee as herein provided. This trust shall be known as the NCP-Six Liquidating
Trust. The purpose of the Trust shall be to hold and administer for the benefit
of the beneficiaries the amounts owing to the beneficiaries in accordance with
the terms of the Proxy Statement.
2. Identification of Beneficiaries. The beneficiaries of the Trust (each a
"Beneficiary") are the limited partners of NCP-Six, whose names and whose
proportionate shares of the Trust are set forth on Exhibit A.
3. Allocation of Property. The Trustee shall allocate the property
described in Article 1, and the income and expenses of the Trust, among the
Beneficiaries in the proportions set forth on Exhibit A.
4. Distribution of Principal and Income. The Trustee may distribute to each
Beneficiary such portion or all of such Beneficiary's share of the principal and
income of the Trust at such time and in such manner as the Trustee shall
determine, until the termination of the Trust. At least annually, the Trustee
shall distribute to the Beneficiaries any income from investments, net of any
expenses of the Trust.
5. Distribution of Principal and Termination of Trust. To the extent that
each trust has not been distributed sooner, the entire balance of the Trust
shall be distributed to the Beneficiaries no later than December 31, 2004.
6. Death of Beneficiary. In the event of the death of any Beneficiary prior
to that time, the Beneficiary is entitled to receive a full distribution of the
balance of the trust estate, and any part of such trust still being held shall
be distributed as the Beneficiary shall appoint by Last Will and Testament.
7. Purpose of Trust. The purpose of the Trust is solely to hold and invest
temporarily the proceeds attributable to Trustors from the liquidation of
NCP-Six, and to make payment of any claims and/or contingent liabilities arising
from the business formerly conducted by NCP-Six. The Trust is not intended to
continue or engage in the conduct of the business formerly conducted by NCP-Six.
8. Successor Trustee. In the event the Trustee should die, resign or
otherwise become incapable of serving hereunder, a Successor Trustee shall be
elected by a majority of the Beneficiaries, voting in accordance with their
respective proportionate interests in the Trust.
9. Spendthrift Provision. Neither the income nor the principal of the
trusts created hereunder, nor any portion thereof, shall be alienable by any
Beneficiary, either by assignment or by any other method, and the same shall not
be subject to be taken by the creditors of any such Beneficiary by any process
whatsoever.
L-1
225
10. Trustee's Powers. In addition to the rights, powers and authority
incident to the office or required in or convenient to the Trust otherwise
vested in or impliedly conferred on the Trustee, the Trustee shall have all of
the rights, powers and authority with respect to the Trust created hereunder
provided under Washington law.
10.1 Without limiting the generality of the foregoing, the Trustee is
expressly authorized to:
(a) Determine what is principal or income, which authority shall
specifically include the right to make any adjustments between principal
and income for premiums, discounts, depreciation or depletion.
(b) To hold and retain in the same form as received any and all
property transferred to the Trustee for administration hereunder (and
additions thereto), even though such property may not be of a nature or
character authorized under the laws of the State of Washington or of any
other state or jurisdiction for trust investments, or be unsecured,
unproductive, underproductive, overproductive or be of a wasting nature, or
be inconsistent with the usual concepts of diversification of trust assets.
(c) Rely with acquittance on advice of counsel on questions of law.
(d) Employ persons to advise or assist the Trustee in the performance
of his duties, and to pay reasonable compensation therefore.
10.2 Notwithstanding the foregoing, the Trustee is expressly
prohibited from:
(a) Investing trust assets except in demand and time deposits in
banks, or temporary investments such as short-term certificates of deposit
or Treasury bills.
(b) Receiving any transfer of any listed or unlisted stocks or
securities, any general or limited partnership interest, or any operating
assets of a going business.
(c) Receiving or retaining cash in excess of a reasonable amount to
meet claims and contingent liabilities.
11. Accounting. The Trustee shall file income tax returns for the Trust as
a grantor trust pursuant to Section 1.671-4(a) of the Income Tax Regulations.
L-2
226
12. Governing Law. The validity and construction of any provision of this
trust agreement shall be governed by the internal laws of the State of
Washington, and this trust shall be deemed to have its status in the State of
Washington.
DATED , 2001.
TRUSTORS:
NORTHLAND COMMUNICATIONS CORPORATION,
agent for the Limited Partners of
NORTHLAND CABLE PROPERTIES SIX LIMITED
PARTNERSHIP
By:
------------------------------------
Its:
------------------------------------
TRUSTEE:
--------------------------------------
Richard I. Clark
L-3