1
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
[X] Filed by the Registrant
[ ] 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
Exchange Act Rule 14(a)-6(e)(2)]
[ ] Definitive Proxy Statement
[ ] Definitive Additional Material
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or
Section 240.14a-12
NORTHLAND CABLE PROPERTIES FOUR LIMITED PARTNERSHIP
(Name of Registrant as Specified in Its Charter)
0-16064
(Commission File Number)
NORTHLAND CABLE PROPERTIES FOUR LIMITED PARTNERSHIP
(Name of Persons Filing Proxy Statement)
Payment of Filing Fee:
[ ] $125 per Exchange Act Rule 0-11(c)(1)(ii), 14a-6(i)(1) or
14a-6(i)(2), or Item 22(a)(2) of Schedule 14A.
[ ] $500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and
0-11:
(1) Title of each class of securities to which transaction
applies: LIMITED PARTNER INTERESTS (REGISTERED UNDER THE
EXCHANGE ACT), AND GENERAL PARTNER INTERESTS (NOT REGISTERED
UNDER THE EXCHANGE ACT)
(2) Aggregate number of securities to which transaction applies:
14,663 UNITS (REPRESENTING ALL OF THE LIMITED PARTNER
INTERESTS, THE "UNITS"), AND ALL OF THE GENERAL PARTNER
INTERESTS
(3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (including amount
on which filing fee is calculated and how determined): $722.07
PER UNIT, AND $2,818,318 FOR THE GENERAL PARTNER INTERESTS,
BASED UPON THE PROJECTED PARTNERSHIP NET CASH VALUE OF
$13,406,072 (AFTER RETURN OF LIMITED PARTNERS' INITIAL CAPITAL
CONTRIBUTION, 75% ATTRIBUTABLE TO THE UNITS, AND 25%
ATTRIBUTABLE TO THE GENERAL PARTNER INTERESTS)
(4) Proposed maximum aggregate value of transaction: $13,406,072
(5) Total fee paid: $2,681.21
[ ] 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:
(2) Form, schedule or registration statement number:
(3) Filing party:
(4) Date filed:
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NORTHLAND CABLE PROPERTIES FOUR LIMITED PARTNERSHIP
1201 THIRD AVENUE, SUITE 3600
SEATTLE, WASHINGTON 98101
NOVEMBER 1, 1996
TO: THE LIMITED PARTNERS OF NORTHLAND CABLE PROPERTIES FOUR LIMITED
PARTNERSHIP
The accompanying Notice of Special Meeting and Proxy Statement contain an
explanation relating to the proposed liquidation by Northland Cable Properties
Four Limited Partnership (the "Partnership") of the cable television systems
owned by the Partnership including the franchises and operating assets serving
eight operating groups, including Flint/Tyler, New Caney, Whitewright,
Hillsboro, Kaufman, Waterwood and Prairie View, Texas and Chowchilla, California
as well as surrounding contiguous areas in these operating groups (the
"Systems"), and the dissolution, winding up and liquidation of the Partnership.
The Proxy Statement describes a proposal whereby the Partnership would sell the
undivided portion of the Systems that is attributable to the Limited Partners'
collective interest in the Partnership (the "LPs' Interest") at a price which is
based on a valuation of the Systems of $33,500,000. Such valuation, which is
based on, but in excess of, the independently appraised fair market value of the
Systems ($30,318,000), represents the General Partners' arbitrary determination
of the fair market value of the Systems, and is not based on any formula or
recognized valuation method. If approved, the sale transaction and resulting
liquidation is anticipated to yield a cumulative total of approximately $2,184
per $1,000 investment to Limited Partners during the life of the Partnership (or
approximately $1,092 per $500 unit of limited partnership interest). These
estimates include prior cash distributions to date of $700 per $1,000 investment
(or $350 per $500 unit of limited partnership interest). Because the transaction
involves the acquisition of the Systems by an affiliate of the Managing General
Partner of the Partnership, the General Partners have a conflict of interest in
making this proposal.
If the proposal is approved, the Partnership will be authorized to enter into an
agreement (the "Agreement") with Northland Communications Corporation, the
Managing General Partner of the Partnership or its assigns ("Northland"), to (i)
sell to Northland both the LPs' Interest and the undivided portion of the
Systems that is attributable to the Administrative General Partner's interest in
the Partnership (the "AGP's Interest"), and (ii) distribute in-kind to Northland
the undivided portion of the Systems that is attributable to the Managing
General Partner's interest in the Partnership (the "MGP's Interest"). Net
proceeds from the sale of the LPs' Interest and the AGP's Interest will be
distributed solely to the Limited Partners and the Administrative General
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Partner. Closing of the sale ("Closing") will be subject to certain terms and
conditions, including the availability of sufficient debt financing to
Northland. The Managing General Partner believes that such terms and conditions
will be satisfied. If Closing does not occur within 180 days of the date of the
Special Meeting called pursuant to the Notice of Special Meeting included
elsewhere in this information package, the Agreement will be terminated without
penalty. Following Closing, which is expected to occur in early January 1997,
the Partnership will be dissolved.
At Closing, Northland will purchase the LPs' Interest and the AGP's Interest by
(i) making an initial payment to the Partnership equal to that amount which,
after retiring Partnership liabilities attributable to the LPs' Interest and the
AGP's Interest, will enable the Partnership to distribute to the Limited
Partners $1,000 for every $1,000 invested, and (ii) delivering to the
Partnership a promissory note (the "Note") in principal amount equal to the
remaining balance of the aggregate purchase price for the LPs' Interest and the
AGP's Interest.
The aggregate amount to be distributed to the Limited Partners, as a group, in
connection with the acquisition of the Systems by Northland will be equal to the
amount of cash that would be distributable to the Limited Partners collectively
assuming the liquidation of the Partnership following the sale of the Systems to
a third party, as of the date of Closing, for a gross cash purchase price equal
to $33,500,000 (the "Gross Valuation"). Such amount will be determined in
accordance with the Partnership Agreement. In determining the amount
distributable to the Limited Partners collectively, the Gross Valuation
generally will be (i) reduced by Partnership liabilities attributable to the
Limited Partners' collective interest in the Systems and by the net value of the
portion of the Systems attributable to the collective interests of the General
Partners and (ii) increased by the Limited Partners' collective interest in any
net Partnership assets other than the Systems.
Distributions to Limited Partners will be made in three installments. The
initial distribution of $1,000 per $1,000 investment will be made within 30 days
after the date of Closing. The General Partners believe that the initial
distribution will occur in late January 1997. The balance of distributions to be
made to the Limited Partners, anticipated to approximate a total of $484 per
$1,000 investment, will be made as and when payments are made by Northland to
the Partnership pursuant to the Note. The Note will have a two-year term, with
two equal payments of principal, plus accrued interest, due annually commencing
on the first anniversary of the Closing. The Note will bear interest at a per
annum rate of six percent (6%), and will be subordinated to Northland's senior
debt. Assuming that the Closing occurs in January 1997, distributions to the
Limited Partners are expected to approximate $249 per $1,000 investment in
January 1998, and $235 per $1,000 investment in January 1999. These payment
estimates include both principal and interest. The principal amount of the Note
will be subject to adjustment from time to time for the Limited Partners' and
the Administrative General Partner's share of any post-Closing adjustments,
claims, liquidation expenses and undisclosed liabilities for which the
Partnership is liable.
Approval of the proposed transaction is subject to the affirmative vote of the
holders of a majority of the outstanding units of limited partnership interest.
Each Limited Partner is entitled to one vote for each unit held. Because
Northland is not yet assured of financing for purchase of
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the LPs' Interest and the AGP's Interest, Northland will be under no obligation
to consummate the purchase. No bids from independent third parties have been
solicited by the General Partners to date. Although the Partnership obtained an
independent appraisal of the value of the Systems, the Partnership has not
sought or obtained a fairness opinion with respect to the terms of the proposed
transaction. If the requisite approval of Limited Partners is not obtained, or
if Limited Partners approve the proposed transaction but Closing does not occur
for any reason, the Partnership will continue to conduct its operations as
usual. If the requisite approval of Limited Partners is obtained and the Closing
does not occur within the requisite period, the Systems will not be sold without
again obtaining approval of the Limited Partners. The General Partners believe
that the proposed transaction at a Gross Valuation of $33,500,000, which is
based on, but in excess of, the appraised fair market value of the Systems, will
enable Limited Partners to liquidate their investment at a favorable price.
A Special Meeting of the Limited Partners to vote on the proposed transaction
will be held at the executive offices of Northland Communications Corporation,
the Managing General Partner, at 1201 Third Avenue, Suite 3600, Seattle,
Washington at 3:00 p.m., local time, on December 18, 1996. The Notice of Special
Meeting and Proxy Statement are included with this letter.
YOUR VOTE IS IMPORTANT.
The accompanying Proxy Statement, which relates to the Special Meeting, provides
you with a description of the proposed transaction. The General Partners urge
you to review carefully the accompanying Proxy Statement, including the section
entitled "Conflicts of Interest."
ALL LIMITED PARTNERS OF THE PARTNERSHIP, WHETHER OR NOT THEY INTEND TO ATTEND
THE SPECIAL MEETING, ARE URGED TO VOTE BY COMPLETING THE ENCLOSED PROXY AND BY
MAILING THE PROXY, PROPERLY EXECUTED, IN THE POSTAGE-PAID ENVELOPE AS SOON AS
POSSIBLE. A copy of the form of proxy is included as Exhibit A to the Proxy
Statement, and should be retained for your records.
The General Partners recommend that you vote IN FAVOR of the proposed
transaction.
If you have any questions or desire further information, you are encouraged to
contact our Investor Relations Department or Richard I. Clark, Vice
President/Treasurer of Northland, at (206) 621-1351.
Very truly yours,
NORTHLAND COMMUNICATIONS CORPORATION,
Managing General Partner of the Partnership
By __________________________________________
John S. Whetzell, President
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NOTICE OF SPECIAL MEETING OF LIMITED PARTNERS
OF NORTHLAND CABLE PROPERTIES FOUR LIMITED PARTNERSHIP
TO BE HELD DECEMBER 18, 1996
A Special Meeting of the Limited Partners of Northland Cable Properties Four
Limited Partnership (the "Partnership") will be held at 1201 Third Avenue, Suite
3600, Seattle, Washington, at 3:00 p.m., local time, on December 18, 1996.
The purpose of the Special Meeting is to consider and vote upon the proposed
liquidation by the Partnership of its cable television systems, including the
franchises and operating assets serving eight operating groups including
Flint/Tyler, New Caney, Whitewright, Hillsboro, Kaufman, Waterwood and Prairie
View, Texas and Chowchilla, California, as well as surrounding contiguous areas
in these operating groups (the "Systems"), and the dissolution, winding up and
liquidation of the Partnership.
If the proposal is approved, the Partnership will be authorized to enter into an
agreement (the "Agreement") with Northland Communications Corporation, the
Managing General Partner of the Partnership or its assigns ("Northland"), to (i)
sell to Northland the undivided portion of the Systems that is attributable to
the Limited Partners' and the Administrative General Partner's collective
interest in the Partnership (the "LPs' Interest" and the "AGP's Interest,"
respectively) at a price which is based on a valuation of the Systems of
$33,500,000, and (ii) distribute in-kind to Northland the undivided portion of
the Systems that is attributable to the Managing General Partner's interest in
the Partnership (the "MGP's Interest"). Such $33,500,000 valuation, which is
based on, but in excess of, the independently appraised fair market value of the
Systems, represents the General Partners' arbitrary determination of the fair
market value of the Systems, and is not based on any formula or recognized
valuation method. Net proceeds from the sale of the LPs' Interest and the AGP's
Interest will be distributed solely to the Limited Partners and the
Administrative General Partner. If approved, the sale transaction and resulting
liquidation is anticipated to yield a cumulative total of approximately $2,184
per $1,000 investment to Limited Partners during the life of the Partnership (or
approximately $1,092 per $500 unit of limited partnership interest). These
estimates include prior cash distributions to date of $700 per $1,000 investment
(or $350 per $500 unit of limited partnership interest).
Closing of the sale and the in-kind distribution ("Closing") will be subject to
certain terms and conditions, including the availability of sufficient debt
financing to Northland. The Managing General Partner believes that such terms
and conditions will be satisfied. If Closing does not occur within 180 days of
the date of the Special Meeting, the Agreement will be terminated without
penalty. Following Closing, which is expected to occur in early January 1997,
the Partnership will be dissolved. Also in January 1997, the Partnership expects
to make its initial distribution of sale proceeds to Limited Partners, in the
amount of $1,000 per $1,000 investment.
Approval of the proposed transaction is subject to the affirmative vote of the
holders of a majority of the outstanding units of limited partnership interest.
Each Limited Partner is entitled to one vote for each unit held. Because
Northland is not yet assured of financing for purchase of
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the LPs' Interest and the AGP's Interest, Northland will be under no obligation
to consummate the purchase. No bids from independent third parties have been
solicited by the General Partners to date. Although the Partnership obtained an
independent appraisal of the value of the Systems, the Partnership has not
sought or obtained a fairness opinion with respect to the terms of the proposed
transaction. If the requisite approval of Limited Partners is not obtained, or
if Limited Partners approve the proposed transaction but Closing does not occur
within the requisite period, the Partnership will continue to conduct its
operations as usual. If the requisite approval of Limited Partners is obtained
and the Closing does not occur, the Systems will not be sold without again
obtaining approval of the Limited Partners. The General Partners believe that
the proposed transaction at a Gross Valuation of $33,500,000, which is based on,
but in excess of, the appraised fair market value of the Systems, will enable
Limited Partners to liquidate their investment at a favorable price.
Accordingly, the specific purpose of the meeting is to consider and vote upon
the following, and to consider and transact such other business as may properly
come before the meeting:
The grant to the Managing General Partner of authority to
sell the cable systems owned by the Partnership (the
"Systems"), to dissolve and wind up the affairs of the
Partnership, to distribute the proceeds of the liquidation
and any remaining assets in accordance with the Partnership
Agreement and the Proxy Materials, and to take any action
deemed necessary or appropriate by it to accomplish the
foregoing; together with an amendment to the Amended and
Restated Certificate and Agreement of Limited Partnership of
Northland Cable Properties Four Limited Partnership, as such
amendment is set forth in Exhibit B to the Proxy Materials,
to authorize the Partnership to enter into an agreement with
Northland Communications Corporation or its assigns
("Northland") for the sale to Northland of the undivided
portion of the Systems which is attributable to the Limited
Partners' and Administrative General Partner's collective
interest in the Partnership, and the distribution to
Northland, in-kind, of the undivided portion of the Systems
which is attributable to the Managing General Partner's
interest in the Partnership, all on the terms and conditions
described in the Proxy Materials; and all such other and
future actions reasonably necessary to accomplish the
foregoing.
Approval of Limited Partners for these matters is solicited by the General
Partners and shall be given (or withheld) by Limited Partners in attendance in
person at the Special Meeting to be held on December 18, 1996, or by execution
and delivery of the enclosed proxy prior to the Special Meeting. Any Limited
Partner who later finds that he or she can be present at the meeting, or who for
any reason desires to do so, may revoke his or her proxy at any time before it
is voted. The proposed transaction is subject to the approval of a majority in
interest of the Limited Partners.
Only persons who are Limited Partners of record of the Partnership at the close
of business on October 15, 1996 will be entitled to notice of and to vote at the
Special Meeting or any adjournments thereof. The Special Meeting may be
adjourned by the Managing General Partner
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from time to time for any reason without notice except such notice as is
conveyed at the meeting or adjournment thereof.
Your attention is directed to the accompanying Proxy Statement which contains
further information with respect to the meeting and the proposed transaction. A
form of proxy is enclosed. YOU ARE URGED TO COMPLETE, SIGN AND RETURN PROMPTLY
THE ENCLOSED PROXY, WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING. A
POSTAGE-PAID RETURN ENVELOPE IS ENCLOSED FOR YOUR CONVENIENCE. PROXIES MUST BE
RECEIVED ON OR BEFORE DECEMBER 18, 1996.
The General Partners recommend that you vote IN FAVOR of the proposed
transaction.
NORTHLAND CABLE PROPERTIES FOUR
LIMITED PARTNERSHIP
By: Northland Communications Corporation,
Managing General Partner of the Partnership
By ___________________________________________
John S. Whetzell, President
Seattle, Washington
November 1, 1996
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NORTHLAND CABLE PROPERTIES FOUR LIMITED PARTNERSHIP
PROXY STATEMENT
This Proxy Statement describes a proposal whereby Northland Cable Properties
Four Limited Partnership (the "Partnership") would liquidate its cable
television systems and other operating assets (the "Systems") at a valuation
which is based on, but in excess of, the appraised fair market value of such
Systems. The proposal, which is made jointly by Northland Communications
Corporation, the Managing General Partner of the Partnership (the "Managing
General Partner"), and FN Equities Joint Venture, the Administrative General
Partner of the Partnership (the "Administrative General Partner"), includes the
grant of authority to the Partnership to enter into an agreement (the
"Agreement") with the Managing General Partner or its assigns ("Northland"), to
(i) sell to Northland the undivided portion of the Systems which is attributable
to the Limited Partners' and the Administrative General Partner's collective
interest in the Partnership (the "LPs' Interest" and the "AGP's Interest,"
respectively), and (ii) distribute in-kind to Northland the undivided portion of
the Systems which is attributable to the Managing General Partner's interest in
the Partnership (the "MGP's Interest). See "Proposed Transaction."
The proposed transaction is subject to the approval of a majority in interest of
the Limited Partners. As of October 15, 1996, the record date, there were 14,663
units of limited partnership interest outstanding, held by 1,028 Limited
Partners of record. The Managing General Partner holds 20 of such units
(representing 0.1% of the total), and intends to vote in favor of the proposal
described herein. No affiliate of the General Partners holds units of limited
partnership interest. The General Partners do not know the voting intentions of
other unit holders. Units of limited partnership interest held and voted by the
Managing General Partner will be included in determining whether the requisite
approval has been obtained. If the proposal described herein is approved and
closing of the transaction occurs, Northland will acquire the Systems from the
Partnership and the Partnership will be dissolved. If the proposal is approved
and Closing (defined below) does not occur within the requisite period, the
Systems will not be sold without again obtaining approval of the Limited
Partners.
This Proxy Statement and the accompanying proxy are furnished in connection with
the solicitation of proxies by the Managing General Partner for use at the
Special Meeting of Limited Partners to be held at 3:00 p.m. on December 18,
1996, at the offices of the Managing General Partner at 1201 Third Avenue, Suite
3600, Seattle, Washington 98101, and at any adjournments thereof (the "Special
Meeting"). Only Limited Partners of record as of October 15, 1996 will be
entitled to vote at the meeting. This Proxy Statement is first being mailed to
Limited Partners on November 1, 1996.
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE FAIRNESS OR MERITS OF
SUCH TRANSACTION NOR UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION CONTAINED
IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
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A proxy that is properly executed and returned will be voted for or against the
proposed transaction in accordance with the instructions on the proxy. In the
absence of instructions on the proxy to the contrary, all interests of an
executing Limited Partner will be voted in favor of the proposal described in
this Proxy Statement. Any Limited Partner executing the proxy shall have the
power to revoke it at any time prior to the voting thereof by delivering written
notice of revocation to the Managing General Partner, by executing and
delivering another proxy dated as of a later date, or by voting in person at the
Special Meeting.
The General Partners recommend that Limited Partners vote IN FAVOR of the
proposed transaction.
LIMITED PARTNERS ARE URGED TO CAREFULLY REVIEW THIS PROXY
STATEMENT AND TO RETURN THEIR PROXY PROMPTLY.
----------------------------------------
The date of this Proxy Statement is November 1, 1996.
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TABLE OF CONTENTS
Introduction......................................................................................................4
Special Factors...................................................................................................8
Summary Historical Financial Information.........................................................................11
Proposed Transaction.............................................................................................12
Certain Consequences Of The Transaction..........................................................................27
Certain Consequences Of Limited Partners' Determination Not To Sell..............................................30
Projected Cash Available From Liquidation........................................................................31
Projected Cash Available If Closing Occurs.......................................................................32
Management's Discussion And Analysis Of Financial Condition And Results Of Operations............................34
Federal Income Tax Consequences..................................................................................39
Conflicts Of Interest............................................................................................44
Certain Affiliates Of The Partnership............................................................................46
Plan Of Solicitation.............................................................................................52
Financial Statements.............................................................................................53
Exhibits:
Form of Proxy..........................................................................................A-1
Form of Amendment to Partnership Agreement.............................................................B-1
Daniels Appraisal......................................................................................C-1
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INTRODUCTION
GENERAL
This Proxy Statement is being furnished to the Limited Partners of the
Partnership 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 the Partnership are the same. The Proxy Statement is to be
used in connection with the solicitation of proxies for use at the Special
Meeting.
The purpose of the Special Meeting is to consider and vote upon the proposed
liquidation by the Partnership of its cable television systems, including the
franchises and operating assets serving eight operating groups including
Flint/Tyler, New Caney, Whitewright, Hillsboro, Kaufman, Waterwood and Prairie
View, Texas and Chowchilla, California, as well as surrounding contiguous areas
in these operating groups (the "Systems"), and the dissolution, winding up and
liquidation of the Partnership.
If the proposal is approved, the Partnership will be authorized to enter into an
agreement (the "Agreement") with Northland Communications Corporation, the
Managing General Partner of the Partnership or its assigns ("Northland"), to (i)
sell to Northland the undivided portion of the Systems that is attributable to
the Limited Partners' and the Administrative General Partner's collective
interest in the Partnership (the "LPs' Interest" and the "AGP's Interest,"
respectively) at a price which is based on a valuation of the Systems of
$33,500,000, and (ii) distribute in-kind to Northland the undivided portion of
the Systems that is attributable to the Managing General Partner's interest in
the Partnership (the "MGP's Interest"). Such $33,500,000 valuation, which is
based on, but in excess of, the independently appraised fair market value of the
Systems, represents the General Partners' arbitrary determination of the fair
market value of the Systems ($30,318,000) and is not based on any formula or
recognized valuation method. Net proceeds from the sale of the LPs' Interest and
the AGP's Interest will be distributed solely to the Limited Partners and the
Administrative General Partner. If approved, the sale transaction and resulting
liquidation is anticipated to yield a cumulative total of approximately $2,184
per $1,000 investment to Limited Partners during the life of the Partnership (or
approximately $1,092 per $500 unit of limited partnership interest). These
estimates include prior cash distributions to date of $700 per $1,000 investment
(or $350 per $500 unit of limited partnership interest).
Closing of the sale and the in-kind distribution ("Closing") will be subject to
certain terms and conditions, including the availability of sufficient debt
financing to Northland. The Managing General Partner believes that such terms
and conditions will be satisfied. If Closing does not occur within 180 days of
the date of the Special Meeting, the Agreement will be terminated without
penalty. Following Closing, which is expected to occur in early January 1997,
the Partnership will be dissolved. Also in January 1997, the Partnership expects
to make its initial distribution of sale proceeds to Limited Partners, in the
amount of $1,000 per $1,000 investment.
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In June 1996, the Systems were appraised by Daniels & Associates, an
internationally-recognized expert in the appraisal of cable television systems,
at an aggregate valuation of $30,318,000 (the "Appraised Value"). For purposes
of the proposed transaction, the General Partners have valued the Systems at
$33,500,000, which exceeds their appraised fair market value. At Closing,
Northland will purchase the LPs' Interest and the AGP's Interest by (i) making
an initial payment to the Partnership equal to that amount which, after retiring
Partnership liabilities, will enable the Partnership to distribute to the
Limited Partners an amount equal to $1,000 for every $1,000 invested, and (ii)
delivering to the Partnership a promissory note (the "Note") in principal amount
equal to the remaining balance of the aggregate purchase price for the LPs'
Interest and the AGP's Interest.
The aggregate amount to be distributed to the Limited Partners, as a group, in
connection with the acquisition of the Systems by Northland will be equal to the
amount of cash that would be distributable to the Limited Partners collectively
assuming the liquidation of the Partnership following the sale of the Systems to
a third party, as of the date of Closing, for a gross cash purchase price equal
to $33,500,000 (the "Gross Valuation"). Such amount will be determined in
accordance with the Partnership Agreement. In determining the amount
distributable to the Limited Partners collectively, the Gross Valuation
generally will be (i) reduced by Partnership liabilities attributable to the
Limited Partners' collective interest in the Systems and by the net value of the
portion of the Systems attributable to the collective interests of the General
Partners and (ii) increased by the Limited Partners' collective interest in any
net Partnership assets other than the Systems. If approved, the transaction is
anticipated to yield a total of approximately $2,184 per $1,000 investment to
Limited Partners during the life of the Partnership (or approximately $1,092 per
$500 unit of limited partnership interest). These estimates include prior cash
distributions to date of $700 per $1,000 investment (or $350 per $500 unit of
limited partnership interest).
Distributions to Limited Partners will be made in three installments. The
initial distribution of $1,000 per $1,000 investment will be made within 30 days
after the date of Closing. The General Partners believe that the initial
distribution will occur in late January 1997. The balance of distributions to be
made to the Limited Partners, anticipated to approximate a total of $484 per
$1,000 investment, will be made as and when payments are made by Northland to
the Partnership pursuant to the Note. The Note will have a two-year term, with
two equal payments of principal, plus accrued interest, due annually commencing
on the first anniversary of the Closing. The Note will bear interest at a per
annum rate of six percent (6%), and will be subordinated to Northland's senior
debt. Assuming that the Closing occurs in January 1997, distributions to the
Limited Partners are expected to approximate $249 per $1,000 investment in
January 1998, and $235 per $1,000 investment in January 1999. These payment
estimates include both principal and interest. The principal amount of the Note
will be subject to adjustment from time to time for the Limited Partners' and
the Administrative General Partner's share of any post-Closing adjustments,
claims, liquidation expenses and undisclosed liabilities for which the
Partnership is liable.
The proposed transaction is subject to the approval of a majority in interest of
Limited Partners. Units of limited partnership interest held and voted by the
Managing General Partner will be
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included in determining whether the requisite approval has been obtained.
Although Northland presently intends to consummate the proposed transaction, if
approved, it will be under no obligation to do so. If Limited Partners approve
the proposed transaction and Closing does not occur within the requisite period,
or if the requisite approval of Limited Partners is not obtained, the
Partnership will continue to conduct its operations as usual.
VOTING AT THE SPECIAL MEETING
The Managing General Partner and the Administrative General Partner (the
"General Partners") have determined that Limited Partners of record as of the
close of business on October 15, 1996 are entitled to notice of and to vote at
the Special Meeting. Each Limited Partner is entitled to one vote for each
limited partnership unit held. Under the terms of the Certificate and Agreement
of Limited Partnership of the Partnership, as amended (the "Partnership
Agreement"), the affirmative vote of Limited Partners holding a majority of the
outstanding units is required to approve the proposed transaction. There
currently is no established market in which the units are being traded.
A proxy that is properly completed and returned in time for voting with the
choice specified thereon will be voted in accordance with the specification. If
an executed proxy is returned without a specification having been made, such
proxy will be voted at the Special Meeting in favor of the proposed transaction
and the amendment to the Partnership Agreement authorizing the proposed
acquisition of the Systems by Northland. Limited Partners may revoke their
proxies at any time prior to voting 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.
Attendance at the Special Meeting, by itself, will not revoke a proxy.
CONFLICTS OF INTEREST
There are no contracts, arrangements, understandings or relationships between
the General Partners or their affiliates and any Limited Partner regarding the
voting of proxies at the Special Meeting.
The General Partners and their affiliates have faced and will continue to face
substantial conflicts of interest in connection with the proposed transaction.
The conflicts of interest arise out of the relationship of the General Partners
with the Partnership and the proposed agreement with Northland to liquidate the
Systems. For example, assuming that the requisite approval of Limited Partners
is obtained, Northland will be authorized to enter into an agreement with the
Partnership for the acquisition of the Systems. The terms of the acquisition
have been determined by the General Partners. Neither the Administrative General
Partner nor any affiliate of the Administrative General Partner will be
acquiring any interest in the Systems. The Managing General Partner has faced a
substantial conflict of interest in determining the terms of acquisition of the
Systems by Northland. In addition, the Managing General Partner faced a
significant conflict of interest in determining not to solicit bids from
independent third parties, but instead to propose that the Partnership grant to
Northland the right to acquire the Systems. However, if the
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proposed transaction is consummated, the transaction is expected to provide
Limited Partners with a total overall cash return of approximately 218%
(inclusive of the 70% percent returned to date) in approximately 13.5 years.
Conflicts of interest include the possibility that the fair market value and net
cash flow of the Systems may increase over time. Therefore, it is possible that
Limited Partners would receive a greater return on their investment if the
Partnership continues to own and operate the Systems, instead of consummating
the proposed transaction. Similarly, if the Systems are acquired by Northland as
proposed, Northland may experience a rate of return on its investment in excess
of that experienced by the Partnership. In addition, although Daniels &
Associates, the cable appraiser retained by the General Partners in connection
with the proposal herein ("Daniels"), is not affiliated with the General
Partners or the Partnership, the General Partners and their affiliates have
frequently entered into material contracts with Daniels for the purchase or sale
of cable television systems in transactions where Daniels or its affiliates
acted either as broker or as principal, and the General Partners expect that
they and their affiliates will enter into similar transactions with Daniels or
its affiliates in the future. See "Conflicts of Interest."
The General Partners recommend a vote IN FAVOR of the proposed transaction and
amendment to the Partnership Agreement. The Managing General Partner holds 20
units of limited partnership interest and intends to vote IN FAVOR of the
transaction. Units of limited partnership interest held and voted by the
Managing General Partner will be included in determining whether the requisite
approval has been obtained. See "Conflicts of Interest."
In addition to use of the mail, proxies may be solicited by telephone or
personally by the General Partners and their directors, officers, partners and
employees, none of whom will receive any extra compensation for their services.
The expenses of the solicitation will be borne by the Partnership. The
Partnership's accountants are not expected to attend the Special Meeting.
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SPECIAL FACTORS
A number of special factors apply to the proposed transaction. Such factors are
described more fully elsewhere in this Proxy Statement and should be read in
conjunction with the rest of this Proxy Statement. Limited partners are urged
to read all of this Proxy Statement carefully.
The purpose of the proposed transaction is primarily to provide Limited Partners
with an opportunity to liquidate their investment in the Partnership. The
General Partners considered seeking third party buyers for the Systems, but
believe that the present transaction structure represents a more favorable
option for Limited Partners, especially in light of present market conditions.
Although the solicitation of third party bids may provide the Partnership with
an opportunity to consider a disinterested estimate of the sale value of the
Systems, or even to obtain a higher price for the Systems, the General Partners
believe that this is unnecessary given the obtaining of an independent appraisal
of the Systems, given the General Partners' belief that there is little
likelihood of obtaining bids in the immediate future on more favorable terms
than those offered by Northland, and further given that any such solicitation
would involve broker's fees and an additional investment of Partnership time and
resources. See "Proposed Transaction -- Background of Proposed Transaction and
Market Factors." If the Limited Partners approve of the disposition of the
Systems and the Closing occurs, the General Partners will proceed with the
distribution of proceeds in accordance with the Partnership Agreement provisions
for dissolution, winding up and termination. The Systems will then be owned and
operated by Northland. See "Certain Consequences of the Transaction." There are
material tax consequences to the Limited Partners resulting from the proposed
transaction. See "Federal Income Tax Consequences."
Limited Partners should also be aware, however, that Northland hopes to benefit
from its acquisition of the Systems, for example, by achieving potential
economies of scale. Notwithstanding the factors described below under "Proposed
Transaction -- Market Factors," the fair market value and net cash flow of the
Systems may increase over time. Therefore, it is possible that Limited Partners
would receive a greater return on their investment if the Partnership continues
to own and operate the Systems, instead of consummating the proposed
transaction. Similarly, if the Systems are acquired by Northland, Northland may
experience a rate of return on its investment in excess of that experienced by
the Partnership.
The General Partners have faced a substantial conflict of interest in proposing,
negotiating and structuring the proposed transaction. See "Conflicts of
Interest." Although the General Partners believe that Limited Partners are
interested in a means of liquidating their investment, the proposed transaction
has not been solicited by Limited Partners. The only steps taken to provide the
Limited Partners with procedural safeguards are the commissioning of an
independent appraisal of the Systems, and the submission of the proposed
transaction to Limited Partners for their approval. The Partnership has not, for
example, solicited an independent fairness opinion, or arranged for the
appointment of an independent representative of the Limited Partners. The
General Partners nonetheless believe that the steps taken and to be taken
constitute sufficient safeguards for the Limited Partners' interests.
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The General Partners also believe that the proposed transaction is fair to the
Limited Partners. The General Partners have considered a number of material
factors in connection with such belief. Foremost among such factors are the
obtaining of an independent appraisal with respect to the Systems, and the
structuring of the proposed transaction so that the approval of Limited Partners
is required to be obtained. (Units of limited partnership interest held and
voted by the Managing General Partner will be included in determining whether
the requisite approval has been obtained.) In determining the fairness of the
proposed transaction, the General Partners carefully considered a number of
factors. In favor of the proposed transaction were the valuation of the Systems,
which is in excess of the appraised value, and the opportunity for the Limited
Partners to liquidate their investment. Against the proposed transaction were
the fact of an inside transaction, under which Northland would acquire the
Systems, and the General Partners' decision not to solicit bids from independent
third parties. See "Proposed Transaction -- Fairness of the Proposed
Transaction."
No other material factors were considered. For example, in the absence of an
established market in which units of limited partnership interests are being
traded, the General Partners were not able to consider current market prices for
the units, nor historical market prices. Having obtained an appraisal from
Daniels & Associates, L.P., Denver, Colorado, an internationally-recognized
cable brokerage, appraisal and investment banking firm, the General Partners did
not believe it worthwhile to consider the net book value, going concern value or
liquidation value of the Partnership. The General Partners could not consider
recent purchases of units by the Partnership or any affiliate of the Partnership
because none have occurred. The General Partners have made no recent effort to
solicit bids from independent third parties for a sale of the Systems, and no
firm offers have been made by an unaffiliated entity for a merger or
consolidation of the Partnership, the sale or transfer for all or a substantial
part of the assets of the Partnership, or a sale of partners' interests in the
Partnership allowing the purchaser thereof to exercise control over the
Partnership. See "Proposed Transaction -- Fairness of the Proposed Transaction."
In connection with the proposed transaction, the Partnership obtained an
independent appraisal of the Systems from Daniels. Daniels was retained based
upon its reputation and expertise. Daniels has a prior history of providing
investment banking, brokerage and appraisal services to Northland, and the
General Partners believe that such services will continue to be provided by
Daniels to Northland and its affiliates following consummation or expiration of
the proposed transaction. No other reports, opinions or appraisals were obtained
from outside or independent parties. See "Proposed Transaction -- Market Factors
and Appraisal Process." A COPY OF THE DANIELS APPRAISAL IS ATTACHED AS EXHIBIT C
TO THIS PROXY STATEMENT. In addition, a summary of the appraisal is contained
elsewhere in this Proxy Statement. See "Proposed Transaction -- Summary of
Appraisal."
Daniels appraised the fair market value of the Systems at $30,318,000. See
"Proposed Transaction -- Summary of Appraisal." The valuation of $33,500,000
applicable to the proposed transaction is based on, but in excess of, the
Daniels appraised fair market value. This higher valuation represents the
General Partners' arbitrary determination of the fair market value of the
Systems, and is not based on any formula or recognized valuation method.
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In valuing the Systems, Daniels relied primarily on a discounted operating 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 Systems at
the end of that ten-year period. The value of the Systems is also expressed in
terms of a multiple of operating cash flow and value-per-subscriber. The
valuation is supported by a review of other cable system sales that have
occurred over the recent past and by a comparison of the value-per-subscriber
and multiple of cash flows for such system sales with the value-per-subscriber
and multiple of cash flows for the Systems. See "Proposed Transaction -- Summary
of Appraisal."
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SUMMARY HISTORICAL FINANCIAL INFORMATION
INCOME STATEMENT DATA:
(unaudited)
YEAR ENDED DECEMBER 31, Six Months
----------------------- Ended
June 30,
1991 1992 1993 1994 1995 1996
---- ---- ---- ---- ---- ----
Revenue $ 4,709,010 $ 5,062,574 $5,406,112 $5,657,619 $ 6,617,205 $4,326,394
Expenses 4,235,553 4,591,589 4,775,166 5,090,689 5,354,807 $3,655,282
----------- ----------- ---------- ---------- ----------- ----------
Operating 473,457 470,985 630,946 566,930 1,262,398 671,112
Income
Other Income
(Expenses) (1,092,390) (841,860) (723,428) (636,208) (1,070,856) (889,133)
----------- ----------- ---------- ---------- ----------- ----------
Net Income (Loss) ($618,933) ($370,875) ($92,482) ($69,278) $191,542 ($218,021)
=========== =========== ========== ========== =========== ==========
Allocation of
Net Income (Loss):
General Partners ($6,189) ($3,709) ($925) ($693) $ 1,915 ($2,180)
Limited Partners (612,744) (367,166) (91,557) (68,585) 189,627 (215,841)
Net Income (Loss)
Per Limited (41) (25) (6) (5) 13 (15)
Partnership Unit
BALANCE SHEET DATA:
DECEMBER 31, (unaudited)
------------ June 30,
1991 1992 1993 1994 1995 1996
---- ---- ---- ---- ---- ----------
Total Assets $ 8,300,267 $ 7,178,850 $ 5,788,906 $ 4,745,345 $ 15,074,134 $ 14,718,361
Total Liabilities 12,495,196 12,108,578 11,138,379 10,502,904 20,937,173 20,873,477
Partners' Deficit:
General Partners (105,225) (111,948) (115,866) (119,537) (120,592) (123,513)
Limited Partners (4,089,704) (4,817,780) (5,233,607) (5,638,022) (5,742,447) (6,031,603)
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PROPOSED TRANSACTION
BACKGROUND OF PROPOSED TRANSACTION
Commencing in 1985, the Partnership acquired the Systems in a series of
transactions. The Systems currently serve eight operating groups including the
communities of Flint/Tyler, New Caney, Whitewright, Hillsboro, Kaufman,
Waterwood and Prairie View, Texas and Chowchilla, California, and contiguous
areas around these operating groups. The Flint/Tyler, New Caney, Whitewright and
Chowchilla systems were acquired in 1985. The Kaufman, Hillsboro, Waterwood and
Prairie View systems were acquired in 1995. 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 June 30, 1996, the outstanding principal balance
owing on the Partnership's bank financing was $19,333,406. In addition, the
Partnership owed the Managing General Partner an aggregate of approximately
$60,408 for accrued but unpaid management fees and certain unreimbursed
operating expenses.
Due to the General Partners' belief that a significant number of Limited
Partners may desire to liquidate their investment, the General Partners began in
early 1996 to formulate a proposal to sell the Systems. (There is no established
public trading market for the Partnership's units of limited partnership
interest.) After assessing the opportunities for sale to unaffiliated third
parties, and after considering the current small cable system marketplace, the
General Partners believe the transaction described in this Proxy Statement
represents the optimum method to achieve a liquidation of the Limited Partners'
investment in today's marketplace. Therefore, the General Partners are
submitting the proposal described in this Proxy Statement to provide the Limited
Partners an opportunity to liquidate their investment and to receive significant
cash distributions upon such liquidation. The General Partners have faced
substantial conflicts of interest in making these determinations. See "Conflicts
of Interest."
PURPOSE OF MEETING
The General Partners are calling the Special Meeting for the purpose of
providing the Limited Partners with an opportunity to approve, by the requisite
consent of a majority in interest, the proposed liquidation of the Systems and
the dissolution of the Partnership. Limited Partners approving the proposal
described in this Proxy Statement will be consenting to: (a) the disposition of
the Systems and specific amendments to the Partnership Agreement authorizing the
acquisition of the Systems by Northland; (b) the effect of such disposition and
grant on the amount of proceeds and assets distributed to the Partners; and (c)
the dissolution, winding up and termination of the Partnership.
The proposed amendment to the Partnership Agreement contains provisions that
authorize the Partnership to enter into an agreement with Northland for the sale
of the undivided portion of the Systems which is attributable to the Limited
Partners' and the Administrative General Partner's collective interest in the
Partnership. If the Closing occurs, the net proceeds from such sale will be
distributed to the Limited Partners and the Administrative General Partner, and
the undivided
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portion of the Systems attributable to the Managing General Partner's interest
will be distributed to Northland in-kind. Following the Closing, the Partnership
will be dissolved.
MARKET FACTORS
The Limited Partners acquired their units of limited partnership interest in
1985. There is no established market in which the units are being traded.
Pending a liquidation of the Partnership, the units will likely remain an
illiquid investment. Although the General Partners have not solicited or
received input from representatives of the Limited Partners concerning the
proposal described herein, the General Partners believe that Limited Partners
may welcome the opportunity to liquidate their investment. In these
circumstances, the Managing General Partner began to formulate a proposal for
the sale of the Systems in early 1996. The General Partners decided to implement
the proposed transaction at this time in light of the length of time over which
Limited Partners have held their investment, the belief that Limited Partners
would welcome the opportunity to liquidate their investment, the possibility
that Northland might have access to funds necessary to consummate the proposed
transaction, and the General Partners' belief that the prospects for the
Partnership's obtaining third party buyers may be difficult. In particular, the
Managing General Partner studied the market factors discussed below.
Due to a number of factors, the market for small rural cable systems nationwide
has generally declined over the past few years. In late 1992, Congress enacted
The Cable Television Consumer Protection and Competition Act of 1992 (the "1992
Act"), which significantly increased regulation of the cable television
industry. While the Telecommunications Act of 1996 (the "1996 Act"), and
rulemakings of the Federal Communications Commission ("FCC"), have essentially
rescinded the most stringent aspects of rate regulation with respect to "small
systems" owned by "small cable operators" (as those terms are defined in the
1996 Act and the regulations of the FCC), many of the rules promulgated in
response to the 1992 Act make it more expensive for cable companies to operate.
Competition to the cable television industry is becoming more intense. Several
direct broadcast satellite companies are operational, each with a full line-up
of direct-to-home satellite-delivered programming, including pay-per-view. In
addition, many of the Regional Bell Operating Companies have announced plans to
spend billions of dollars over the next several years to upgrade their twisted
copper wire to fiber optic transmission facilities, thereby significantly
increasing their ability to offer video service within their service areas. The
1996 Act essentially eliminated the remaining legal barriers to telephone
company entry in the video programming business.
Based on the market factors discussed above, the General Partners concluded that
selling the Systems to an independent third party at a price and on terms
acceptable to the Partnership would be difficult. The General Partners have made
no attempt to solicit interest from independent third parties for the Systems.
Prior to this solicitation, the Partnership has never sought to liquidate all of
its assets. The General Partners believe that the effective invitation of third
party offers would require the appointment of a broker. Given their conclusion
that the obtaining of acceptable offers would be difficult, the General Partners
believe that the cost and delay
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associated with the appointment of a broker, the seeking of potential buyers,
and the conduct of negotiations would likely not be in the best interests of the
Partnership.
The possibility that Northland might acquire the Systems first arose in early
1996, at the same time as the General Partners began to consider a means to
permit Limited Partners to liquidate their investment in the Partnership. The
possibility was considered by John S. Whetzell and Richard I. Clark, who are
senior officers of the Managing General Partner. As such, Messrs. Whetzell and
Clark were in a position to assess the opportunity presented to each of the
Partnership and Northland by the prospect of a sale or other disposition of the
Systems. They realized that a sale or other disposition would provide a means
for the Limited Partners to liquidate their investment, and they believed that
the Systems would be more attractive to Northland, as a purchaser familiar with
the operation of the Systems and one able to realize economies of scale, than
the Systems might be to an unaffiliated third party. By virtue of their dual
capacity, Messrs. Whetzell and Clark faced a conflict of interest in making such
an assessment.
Messrs. Whetzell and Clark, together with other officers of the Managing General
Partner, gave further consideration to the acquisition at meetings commencing in
March. Participants at the meetings carefully considered, among other factors,
the market factors discussed above, the availability of third party purchasers
willing and able to acquire the Systems on terms acceptable to the Partnership,
the advantages and disadvantages of soliciting independent third-party bids and
the benefits to the Partnership and Northland of Northland's acquisition of the
Systems. Such meetings occurred in series on an informal basis. A series of
meetings regarding the proposed transaction was also held by telephone among the
respective management groups of Northland and the Administrative General Partner
over the same period. Such meetings consisted primarily of contacts and
negotiations between Messrs. Whetzell and Clark and John S. Simmers, a general
partner of the Administrative General Partner, to discuss and formulate the
proposed transaction. 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. Officers of FN Equities, Inc., the corporate general
partner of the Administrative General Partner, also considered the proposed
transaction. See "Certain Affiliates of the Partnership." Except with respect to
a meeting of the General Partners held on May 1, 1996, no formal written logs
specifying the dates and times of meetings are available.
In agreeing with the Administrative General Partner to pursue the proposed
transaction, Northland's primary motivating factor was its desire to accommodate
the General Partners' joint interest in obtaining liquidity for the Limited
Partners. The sole other material factors motivating Northland's interest were
the potential economies of scale it could achieve and its familiarity with the
Systems.
Although the negative market factors described above were perceived as an
obstacle to the sale of the Systems to an independent third party on acceptable
terms, the ownership by Northland of other cable television systems in the
vicinity of the Systems makes the acquisition of the Systems a more valuable
proposition to Northland. Third parties would not experience such economies of
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scale. The proximity of the Partnership's Systems to other cable systems owned
or managed by Northland would enable all of such systems to share, for example,
certain customer service, technical and administrative personnel.
A third party purchaser would also be forced to bear transition costs that
Northland would not be required to bear. For example, Northland's engineers are
currently familiar with the technical aspects of the Systems, and Northland's
management is familiar with the Partnership'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 Systems while gaining the degree of
familiarity with the Systems that Northland has attained.
Due to the reasons for Northland's interest in acquiring the Systems, and the
fact that Northland's motivating factors are unique to Northland, the General
Partners remain convinced that selling the Systems to an independent third party
on acceptable terms would be difficult.
As a result, in May 1996, the Partnership retained Daniels & Associates, L.P.,
Denver, Colorado, an internationally-recognized cable brokerage, appraisal and
investment banking firm to appraise the fair market value of the Systems. Given
Daniels' experience, the General Partners determined not to retain outside
experts other than Daniels. The Partnership will pay the fees and expenses of
Daniels. See "Conflicts of Interest."
APPRAISAL PROCESS
The Partnership instructed Daniels to prepare its appraisal on the basis that
the Systems were to be sold to an independent third party on the open market.
Daniels was advised that Northland would be a potential buyer of the Systems.
Daniels delivered a written report in July 1996 that the fair market gross asset
value of the Systems as of June 30, 1996 was $30,318,000. Daniels valued the
Systems on a cash-for-assets basis, free and clear of all liens, liabilities and
encumbrances. The estimated value of the Systems represented Daniels' best
judgment as to the probable market value of the Systems at that time, if sold in
an orderly, arms'-length transaction between willing and knowledgeable buyers
and sellers.
LIMITED PARTNERS ARE ENCOURAGED TO REVIEW THE DANIELS APPRAISAL ATTACHED HERETO
AS EXHIBIT C.
SUMMARY OF APPRAISAL
The following summary is qualified in its entirety by, and should be read in
conjunction with, the Daniels Appraisal attached hereto as Exhibit C.
In valuing the Systems, Daniels relied primarily on a discounted operating cash
flow analysis (see pages 9-10 of the Daniels Appraisal) based on the projected
operating results of the Systems over a ten-year period and applied a factor for
the residual value of the Systems at the end of that ten-year period. The
valuation of the Systems is also expressed in terms of a multiple of
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operating cash flow and value-per-subscriber. The valuation is supported by a
review of other system sales that have occurred over the recent past and by a
comparison of (i) the multiple of cash flow represented by the purchase price of
such other systems with the multiple of the Partnership's cash flow represented
by the appraised value for the Systems, and (ii) the value-per-subscriber of
such other system sales with the value- per-subscriber valuation of the Systems
(see pages 10-11 of the Daniels Appraisal).
In the course of performing the valuation, Daniels met with employees of the
Managing General Partner's corporate office, made due diligence visits to
inspect substantially all of the Systems, reviewed and evaluated materials and
information provided by the Managing General Partner and Systems' management,
researched demographic information relating to the various communities served by
the Systems, analyzed forecasted financial and operating information, and drew
upon its own general knowledge about the industry. On the basis of this
information and these efforts, Daniels prepared summaries of relevant operating,
technical, financial and demographic characteristics of the Systems.
Thereafter, in order to assess the fair market value of the Partnership's
assets, Daniels prepared detailed operating and financial forecasts for each
system operating group, 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 system operating group.
According to Daniels, this is a standard methodology used within the industry.
The combined values for each system operating group constituted the value of the
cable operating assets for the Partnership on a discounted cash flow basis.
In addition to this methodology, Daniels used the market multiple methodology to
derive an aggregate value for the Partnership by analyzing the value per
subscriber and operating cash flow multiples obtained in private sales of
comparable cable television systems. These multiples were compared to similar
multiples for the Systems obtained using the value arrived at for the Systems by
the discounted cash flow methodology. Informed by the results of both of these
methodologies, Daniels then determined a final appraised value for the
Partnership's assets.
Assumptions
In performing its discounted cash flow analysis of the value of the
Partnership's assets, Daniels assumed the Systems have been and will continue to
be operated as efficiently as comparable cable systems, and that the franchises
and asset leases used by the Partnership in the operation of the Systems will be
renewed indefinitely as needed without material change except to reflect any
upgrade or rebuild of the Systems. In addition, Daniels assumed, in evaluating
future capital expenditures and cash flows, that the Systems will be upgraded or
rebuilt within five to six years to increase their capacity (see pages 3-4 of
the Daniels Appraisal).
Discounted Cash Flow Valuation
This methodology measures the present value of the Systems' forecasted net cash
flow, which is defined as pre-tax operating income less capital expenditures
including all rebuild or upgrade
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costs. Daniels determined forecasted net cash flows by creating ten-year
operating forecasts for each of the Systems, each of which took into account
detailed projections of critical revenue and expense components. Daniels then
calculated the projected residual value of the Systems at the end of such period
based on the projected growth of the Systems' net cash flow into perpetuity, and
discounted this value to the present.
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
group, plus an analysis of non-subscriber based revenue sources. Its expense
forecasts were based on assumed rates of inflation over the forecast period,
adjusted to reflect the particular growth characteristics of each system
operating group. The capital expenditure forecasts were based upon costs
associated with new construction of cable plant, plant maintenance, replacement
and upgrading of converters, and rebuild or upgrade requirements. Daniels
believes that the opportunity of the Systems 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.
Once Daniels had arrived at a forecast of cash flows, it determined the discount
rate for its valuation. Daniels attempted to approximate the weighted average
cost of capital for various entities within the cable television industry
capable of consummating a sale similar in size to the acquisition of the
Systems. 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. Daniels assumed, after
some analysis, that the prime rate is 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 as of the valuation date and blending
this cost with the equity return objectives for large publicly traded companies.
Daniels arrived at a weighted cost of capital of 14.55% (See pages 9-10 of the
Daniels Appraisal).
Applying the discount rate to its cash flow forecasts, Daniels arrived at a
valuation of $30,200,000 for the Partnership's assets. This figure is 8.1 times
the annualized operating cash flow for the five-month period ended May 31, 1996,
and represents $1,305 per basic subscriber.
Comparable Transactions Valuation
In addition to the discounted cash flow methodology, Daniels used a comparable
transactions methodology. Daniels describes this as a generally accepted
valuation methodology for correlating and validating the findings of the
discounted cash flow analysis with private market realities. Daniels examined
the sales of cable systems of similar size, situated in similar markets, and of
similar technical condition to the Systems, about which information was
available. Daniels determined the relationship of the purchase price paid for
these systems to the annualized cash flow for the three or six month period
prior to such sale, expressed as a multiple, and the price paid per subscriber.
Based on an analysis of both the range and average of these multiples and a
comparison to these figures for the Systems, Daniels assessed its discounted
cash flow valuation (See pages 10-11 of the Daniels Appraisal).
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Daniels' comparable transactions analysis yielded a cash flow multiple range of
7.0 to 8.5 times cash flow, with a weighted average of all of the transactions
examined of 7.9 times cash flow. The range of value per subscriber was $1,062 to
$1,351, with an overall weighted average of $1,201 (see page 11 of the Daniels
Appraisal).
Valuation
Based on its analysis using these two methodologies, Daniels arrived at an
estimated fair market value for the Partnership's assets as of June 30, 1996 of
$30,318,000, which is 8.1 times annualized operating cash flow for the
five-month period prior to May 31, 1996, and equals $1,310 per basic subscriber.
This cash flow multiple is 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 significantly above the weighted
average value per subscriber for the comparable transactions and slightly above
the value per subscriber derived from the discounted cash flow analysis, due to
rounding.
The table set forth below indicates the appraised value as a multiple of cash
flow and value-per-subscriber, as compared to the offer price.
Appraised Offer
--------- -----
Value of Systems $30,318,000 $33,500,000
Multiple of cash flow (1) 8.10 8.95
Value per subscriber (2) $1,310 $1,447
(1) Based on annualized cash flow for the five months prior to May 31,
1996
(2) Based on basic subscribers as of May 31, 1996
Consolidated subscriber and financial information, discounted cash flow
valuation results, and a summary of comparable transactions are set forth on the
tables appearing in the Daniels Appraisal. The Daniels Appraisal describes each
of the system operating groups individually, including the number of
subscribers, penetration rate, homes passed, plant mileage, capacity, and cable
service rates (See pages 3-8 of the Daniels Appraisal).
Brookridge Systems Acquisition
On October 31, 1995, the Partnership acquired substantially all of the assets of
seven cable television systems serving the communities and surrounding areas of
Brookshire, Huffman, Tarkenton, Prairie View, Ace, Livingston, and Cut & Shoot,
Texas (the "Brookridge Systems"). Because detailed financial statements
reflecting the prior owner's operations are not available, the Managing General
Partner is providing the following information concerning the Brookridge
Systems. As of May 31, 1996, the Brookridge Systems served a total of 3,621
subscribers, or 15.6% of the Partnership's total subscriber base. Because of
their close proximity to the
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Partnership's New Caney profit center, system administration and technical
operations for the Huffman, Cut & Shoot, Tarkenton, Livingston, and Ace systems
(as of May 31, 1996 - 2,566 subscribers) were consolidated into the New Caney
office facility, enabling the Partnership to close an office site used by the
previous operator. System operations for the Prairie View and Brookshire systems
(as of May 31, 1996 - 1,055 subscribers) are managed as a separate operating
group. The restructuring of operations created significant operating
efficiencies, including the elimination of duplicative office facilities and
associated general and administrative expenses, and a 65% reduction in the
number of employees.
In addition to improvements in the administrative and technical operating
efficiencies, the channel lineups for the Brookridge Systems were enhanced,
increasing the number of channels and programming options offered to the
systems' subscribers. On March 1, 1996 the rates charged to the Brookridge
Systems' subscribers were increased by amounts ranging from $.50 to $2.50,
bringing the current monthly rates for a standard basic package to a range of
$25.50 to $28.00.
SALE PRICE OF THE SYSTEMS
The Appraised Value of the Systems of $30,318,000 determined by Daniels appears
fair and reasonable to the General Partners. Nevertheless, the General Partners
have determined to increase the value of the Systems for purposes of the
proposed transaction with Northland. This increase has been arbitrarily
determined by the General Partners, and is not based on any formula or
recognized valuation method. The aggregate value of the Systems, for purposes of
the proposed transaction, thus will be $33,500,000, which represents an increase
of $3,182,000 over Appraised Value.
REGULATION OVERVIEW
The Partnership's business is subject to intensive regulation at the federal and
local levels, and to a lesser degree, at the state level. The FCC, the principal
federal regulatory agency with jurisdiction over cable television, is
responsible for implementing federal policies such as rate regulation, cable
system relations with other communications media, cross-ownership, signal
carriage, equal employment opportunity and technical performance. Portions of
the regulatory framework that impact the Partnership's operations are summarized
below.
The 1992 Cable Act
On October 5, 1992, Congress enacted the Cable Television Consumer Protection
and Competition Act of 1992 (the "1992 Cable Act"), which significantly
increased regulation of the cable television industry. The 1992 Cable Act became
generally effective on December 4, 1992,
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although certain provisions became effective at later dates. The 1992 Cable Act
represented a significant change in the regulatory framework under which cable
television systems operate and has had and likely will continue to have a
significant impact on the cable industry and the Partnership's business.
From the effective date of the Cable Communications Policy Act of 1984 until the
enactment of the 1992 Cable Act, rates for cable services were unregulated for
substantially all of the Partnership's systems. The 1992 Cable Act and the rules
of the FCC promulgated thereunder instituted rate regulation for certain cable
television services and equipment in communities not subject to "effective
competition" as defined in the legislation. Effective competition is defined in
the 1992 Cable Act to exist only where (i) fewer than 30 percent of the
households in the franchise area subscribe to the cable service of a cable
system; (ii) there are at least two unaffiliated multichannel video programming
distributors serving the franchise area meeting certain penetration criteria; or
(iii) a multichannel video programming distributor is available to 50 percent of
the homes in the franchise area and is operated by the franchising authority.
Because none of the Partnership's systems were subject to effective competition
under this definition, they became subject to rate regulation for basic service
by local franchising authority officials under the oversight of the FCC and
subject to rate regulation for their remaining programming services (other than
those offered for a per- channel or per-program charge) by the FCC.
The 1992 Cable Act required each cable system to establish a basic service tier
consisting, at a minimum, of all local broadcast signals and all non-satellite
delivered distant broadcast signals which the system wishes to carry, and all
public, educational and governmental access programming.
Cable systems may not require subscribers to purchase any service tier other
than the basic service tier as a condition of access to video programming
offered on a per-channel or per-program basis. Cable systems are allowed a
10-year phase-in period to the extent necessary to implement the required
technology to facilitate such access. The FCC may grant extensions of the
10-year time period, if deemed necessary.
The 1992 Cable Act also provided that the consent of most television stations
(except satellite-delivered television stations that were provided to the cable
television industry as of May 1, 1991, and noncommercial stations) would be
required before a cable system could retransmit their signals. Alternatively, a
television station could elect to exercise must-carry rights. Stations are bound
by such elections for a three-year period. Must-carry rights entitle a local
broadcast station to demand carriage on a cable system, and a system generally
is required to devote up to one-third of its channel capacity for the carriage
of local stations. Litigation challenging the constitutionality of the mandatory
broadcast signal carriage requirements of the 1992 Cable Act is currently
pending before the United States Supreme Court. The must- carry rules will
remain in effect during the pendency of the proceedings before the Supreme
Court. If
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must-carry requirements withstand judicial review, the requirements may cause
displacement of more attractive programming. If and to the extent broadcast
stations electing to forego must-carry status for the next election period
commencing January 1, 1997 require significant monetary payments for cable
system carriage of their signals, the cost of such signal carriage may adversely
affect the Partnership's operations.
In addition, the 1992 Cable Act (i) requires cable programmers under certain
circumstances to offer their programming to present and future competitors of
cable television such as multichannel multipoint distribution services ("MMDS"),
satellite master antenna systems ("SMATV") and direct broadcast satellite system
operators; (ii) prohibits new exclusive contracts with program suppliers without
FCC approval; (iii) bars municipalities from granting exclusive franchises and
from unreasonably refusing to grant additional competitive franchise; (iv)
permits municipal authorities to operate a cable system without a franchise; (v)
regulates the ownership by cable operators of other media such as MMDS and
SMATV; and (vi) prohibits a cable operator from charging a customer for any
service or equipment that the subscriber has not affirmatively requested.
In response to the 1992 Cable Act, the FCC has imposed or will impose new
regulations in the areas of customer service, technical standards, compatibility
with other consumer electronic equipment such as "cable ready" television sets
and video cassette recorders, equal employment opportunity, privacy, rates for
leased access channels, obscene or indecent programming, limits on national
cable system ownership concentration, standards for limiting the number of
channels that a cable television system operator could program with programming
services controlled by such operator and disposition of a customer's home
wiring.
The 1992 Cable Act and subsequent FCC rulings have generally increased the
administrative and operational expenses of cable television systems as a result
of additional regulatory oversight by the FCC and local franchise authorities.
There have been several lawsuits filed by cable operators and programmers in
federal court challenging various aspects of the 1992 Cable Act. The litigation
concerning the must-carry rules is described above. Appeals also have been filed
in connection with litigation resulting from the FCC's rate regulation
rulemaking decisions. The Partnership cannot determine at this time the outcome
of pending FCC rulemakings, the litigation described herein, or the impact of
any adverse judicial or administrative decisions on the Partnership's system or
business.
The 1996 Act
On February 8, 1996, the Telecommunications Act of 1996 (the "1996 Act") was
enacted which dramatically changed federal telecommunications laws and the
future competitiveness of the telecommunications industry. Many of the changes
called for by the 1996 Act will not take effect until the 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 certain provisions affecting the
Partnership's operations follows:
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Regulation of rates other than the basic service tier has been eliminated for
small cable systems served by small companies. Small cable systems are those
having 50,000 or fewer subscribers served by companies with fewer than one
percent of national cable subscribers (approximately 600,000). The Partnership
qualifies as a small company and all of the Partnership's cable systems qualify
as small cable systems. Basic service tier rates remain subject to regulation 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 by the local exchange carrier, its affiliates, or any
multichannel video programming distributor which uses the facilities of the
local exchange carrier. No penetration criteria exists that triggers the
presence of effective competition under these circumstances.
The 1996 Act allows telephone companies to offer video programming directly to
customers in their service areas immediately upon enactment. They may provide
video programming as a cable operator fully subject to the 1996 Act, or a
radio-based multichannel programming distributor not subject to any provisions
of the 1996 Act, or through non-franchised "open video systems" offering
non-discriminatory capacity to unaffiliated programmers, subject to selected
provisions of the 1996 Act.
The 1996 Act also addresses various other aspects of providing cable television
service including prices for equipment, discounting of rates to multiple
dwelling units, lifting of anti-trafficking restrictions, cable- telephone cross
ownership provisions, pole attachment rate formulas, rate uniformity, program
access, scrambling and censoring of public, educational and governmental access
channels and leased access channels.
Copyright
Cable television systems are subject to federal copyright licensing, covering
carriage of television broadcast signals. In exchange for paying a percentage of
their revenues to a federal copyright royalty pool, cable television operators
obtain a compulsory license to retransmit copyrighted materials from broadcast
signals. Existing Copyright Office regulations require that compulsory copyright
payments be calculated on the basis of revenue derived from any service tier on
which broadcast television signals are transmitted. Although the FCC has no
formal jurisdiction over this area, it has recommended to Congress to eliminate
the compulsory copyright scheme altogether. The Copyright Office has similarly
recommended such a repeal. Without the compulsory license, cable television
operators would need to negotiate rights from the copyright owners for each
program carried on each broadcast station in each cable system's channel lineup.
Such negotiated agreements could increase the cost to cable television operators
of carrying broadcast signals.
Local Regulation
Cable television systems are generally operated pursuant to franchises, permits
or licenses issued by a municipality or other local government entity. Each
franchise generally contains provisions governing fees to be paid to the
franchising authority, sale or transfer of the franchise, territory of the
franchise, design and technical performance of the system, use and occupancy of
public
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streets and number and types of cable television services provided. Franchises
are usually issued for fixed terms and must periodically be renewed. There can
be no assurance that the franchises for the Partnership's systems will be
renewed as they expire, although the Partnership believes that its cable systems
generally have been operated in a manner that satisfies the standards of the
1984 Cable Act, as amended by the 1992 Act, for franchise renewal.
Summary
The foregoing does not purport to be a summary of all present and proposed
federal, state and local regulations and legislation relating to the cable
television industry. 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 cable television systems
operate. Neither the outcome of these proceedings nor their impact upon the
cable television industry or the Partnership can be predicted at this time.
ACQUISITION OF SYSTEMS BY NORTHLAND
If the proposal is approved, the Partnership will be authorized to enter into an
agreement with Northland to (i) sell to Northland the undivided portion of the
Systems that is attributable to the Limited Partners' and the Administrative
General Partner's collective interest in the Partnership, and (ii) distribute
in-kind to Northland the undivided portion of the Systems that is attributable
to the Managing General Partner's interest in the Partnership. Net proceeds from
the sale of the LPs' Interest and the AGP's Interest will be distributed solely
to the Limited Partners and the Administrative General Partner. Closing will be
subject to certain terms and conditions, including the availability of
sufficient debt financing to Northland. The Managing General Partner believes
that such terms and conditions will be satisfied. If Closing does not occur
within 180 days of the date of the Special Meeting, the Agreement will be
terminated without penalty. Following Closing, which is expected to occur in
early January 1997, the Partnership will be dissolved, wound-up and terminated
pursuant to the terms of the Partnership Agreement.
At Closing, Northland will purchase the LPs' Interest and the AGP's Interest
from the Partnership by (i) making an initial payment to the Partnership equal
to that amount which, after retiring Partnership liabilities attributable to the
LPs' Interest and the AGP's Interest, will enable the Partnership to distribute
to the Limited Partners an amount equal to $1,000 for each $1,000 invested, and
(ii) delivering to the Partnership a promissory note in principal amount equal
to the remaining balance of the aggregate purchase price for the LPs' Interest
and the AGP's Interest.
The aggregate amount to be distributed to the Limited Partners, as a group, in
connection with the acquisition of the Systems by Northland will be equal to the
amount of cash that would be distributable to the Limited Partners collectively
assuming the liquidation of the Partnership following the sale of the Systems to
a third party, as of the date of Closing, for a gross cash purchase price equal
to $33,500,000. Such amount will be determined in accordance with the
Partnership Agreement. In determining the amount distributable to the Limited
Partners collectively, the Gross Valuation generally will be (i) reduced by
Partnership liabilities
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attributable to the Limited Partners' collective interest in the Systems and by
the net value of the portion of the Systems attributable to the collective
interests of the General Partners and (ii) increased by the Limited Partners'
collective interest in any net Partnership assets other than the Systems.
Distributions to Limited Partners will be made in three installments. The
initial distribution of $1,000 for each $1,000 invested will be made within 30
days after the date of Closing. The General Partners believe that the initial
distribution will occur in late January 1997. The balance of distributions to be
made to the Limited Partners, anticipated to approximate a total of $484 per
$1,000 investment, will be made as and when payments are made by Northland to
the Partnership pursuant to the Note. The Note will have a two-year term, with
two equal payments of principal, plus accrued interest, due annually commencing
on the first anniversary of the Closing. The Note will bear interest at a per
annum rate of six percent (6%), and will be subordinated to Northland's senior
debt. Assuming that Closing occurs in January 1997, distributions to the Limited
Partners are expected to approximate $249 per $1,000 investment in January 1998
and $235 per $1,000 investment in January 1999. These payment estimates include
both principal and interest. The principal amount of the Note will be subject to
adjustment from time to time for the Limited Partners' and Administrative
General Partner's share of any post-Closing adjustments, claims, liquidation
expenses and undisclosed liabilities for which the Partnership is liable.
DETERMINATION BY NORTHLAND NOT TO CLOSE
If the proposed transaction is approved, Northland will have no obligation to
consummate the transaction. The ability of Northland to consummate the
transaction will be subject to certain contingencies, including obtaining bank
financing. Although Northland has obtained an informal financing commitment on
terms that would enable it to finance the acquisition, no loan agreement has yet
been signed. Moreover, the obligation of the lender to provide necessary funding
will be subject to a variety of conditions. The Managing General Partner
believes, however, that any lender-imposed conditions to the acquisition will be
satisfied and that the necessary funds will be made available. If so, Closing is
expected to occur in early January 1997.
If the proposals described in this Proxy Statement are approved and the Closing
does not occur, the Partnership will continue to own and operate the Systems. In
such event, the Systems will not be sold without again obtaining the approval of
Limited Partners in accordance with the Partnership Agreement.
TERMS OF THE TRANSACTION
The General Partners have proposed that the Partnership dispose the Systems
based on the Gross Valuation of $33,500,000. The value of Partnership assets
other than the Systems 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 Limited Partners
thus will vary from the estimated amounts set forth in this Proxy Statement.
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A vote in favor of the transaction described in this Proxy Statement shall be
deemed to constitute consent to any such variation.
Because Northland is the acquiring entity, the undivided portion of the Systems
attributable to the Managing General Partner's interest in the Partnership will
be distributed to the Managing General Partner in-kind, rather than sold for
cash. This procedure reduces the amount of cash required by the acquiring
entity, in that the cash price payable for the Systems is reduced by the value
of the Managing General Partner's interest in the Systems. Subject to adjustment
as described below, the total amount of funds and other consideration to be used
in connection with the transaction will consist of the Gross Valuation of
$33,500,000. Northland anticipates that it will obtain the cash funds required
to purchase the LPs' Interest and the AGP's Interest from lenders, although
Northland cannot be assured that such funds will be made available.
As a consequence of the in-kind distribution to the Managing General Partner,
net proceeds from the sale of the Systems will be distributed solely to the
Limited Partners and to the Administrative General Partner, ratably in
accordance with the requirements of the Partnership Agreement, subject to
certain adjustments.
The amount of such proceeds will be increased by the Limited Partners' and the
Administrative General Partner's share of Partnership assets other than the
Systems, and will be reduced Partnership liabilities. In essence, the
Partnership Agreement currently requires that all distributions be made, and
that all liabilities be shared, as follows: first, until the Limited Partners
receive cumulative distributions equal to their capital contributions, 99% to
the Limited Partners and 1% to the Managing General Partner; and, thereafter,
75% to the Limited Partners; 5% to the Administrative General Partner; and 20%
to the Managing General Partner. Because the Limited Partners have received
cumulative distributions equal to $700 per $1,000 investment, the first
$2,221,667 of distributions will be allocated $2,199,450 to the Limited Partners
(in cash) and $22,217 to the Managing General Partner (in kind). Remaining cash
distributions to the Limited Partners, as a group, and the Administrative
General Partner will be equal to 75% and 5%, respectively, of (i) the Gross
Valuation less $2,221,667, plus (ii) the value of Partnership assets other than
the Systems, less (iii) Partnership liabilities. The amount of cash to be
distributed to the Managing General Partner will be equal to 20% of the value of
Partnership assets other than the Systems, less 20% of Partnership liabilities.
Following Closing, the Partnership will remain liable for any post-Closing
adjustments, claims, liquidation expenses and undisclosed liabilities. All such
liabilities, including liabilities to Northland arising out of the sale of the
Systems or otherwise, will be shared by the Partners ratably in accordance with
the Partnership Agreement (that is, 75% to the Limited Partners, 5% to the
Administrative General Partner, and 20% to the Managing General Partner). See
"Projected Cash Available from Liquidation".
FAIRNESS OF THE PROPOSED TRANSACTION
The General Partners believe the terms of the proposed transaction are
reasonable and fair to the Limited Partners. In setting the Gross Valuation for
the Systems, the General Partners have
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relied on the Daniels Appraisal attached hereto as Exhibit C and their own
conclusions as to the value of the Systems. Although the Appraised Value and the
Gross Valuation represent estimates of the amount that an independent third
party would pay for the Systems, the actual price that any such party may be
willing to pay could be in excess of the Appraised Value and the Gross
Valuation. Accordingly, there is a possibility that the Limited Partners will
receive less from the proposed transaction with Northland than they would
receive if bids were solicited from independent third parties and the Systems
were sold to such a third party. However, a sale of the Systems to a third party
could involve significant brokerage commissions and other transaction costs not
applicable to the proposed transaction with Northland which would result in
lower net proceeds to the Limited Partners.
In determining the fairness of the proposed transaction, the General Partners
carefully considered a number of factors. In favor of the proposed transaction
were the price to be paid by Northland, which is in excess of the appraised
value, and the opportunity for the Limited Partners to liquidate their
investment. Against the proposed transaction were the fact of an inside
transaction, under which Northland would acquire the Systems, and the General
Partners' decision not to solicit bids from independent third parties. No other
material factors were considered.
For example, in the absence of an established market in which units of limited
partnership interests are being traded, the General Partners did not consider
current market prices for the units, nor historical market prices. Having
obtained an appraisal from Daniels, the General Partners did not believe it
worthwhile to consider the net book value, going concern value or liquidation
value of the Partnership. The General Partners have made no effort to solicit
offers from unaffiliated entities in connection with the proposed transaction.
No firm offer has been made by an unaffiliated entity for a merger or
consolidation of the Partnership, the sale or transfer of all or a substantial
part of the assets of the Partnership, or a sale of partners' interests in the
Partnership allowing the purchaser thereof to exercise control over the
Partnership. Accordingly, these factors were not considered by the General
Partners.
The General Partners concluded that independent third-party buyers were unlikely
to be willing to acquire the Systems at the same price as that payable by
Northland and that, even if they were, the Partnership would incur brokerage and
other transactional costs which may be to the Partnership's detriment. In
reaching their decision as to fairness, the General Partners ascribed the most
weight to the fact that the valuation of the transaction exceeds the appraised
value of the Systems, and then ascribed weight to the structuring of the
transaction so that approval of a majority in interest of the Limited Partners
is required. (Units of limited partnership interest held and voted by the
Managing General Partner will be included in determining whether the requisite
approval has been obtained.)
Issues of fairness were primarily considered by John S. Whetzell, the President
of the Managing General Partner, and John S. Simmers. Mr. Simmers is a general
partner of the Administrative General Partner and the Executive Vice President
and Chief Operating Officer of FN Equities, Inc., the corporate general partner
of the Administrative General Partner. In each case, Messrs. Whetzell and
Simmers considered these issues in collaboration with members of their
respective
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boards of directors and senior officers. In analyzing the fairness issue,
discussions by such persons focused on the conflicts of interest faced by the
Managing General Partner. Partnership management determined at the outset that
concurrence by the Administrative General Partner, which would be less affected
by the conflicts than the Managing General Partner, would be required with
respect to decisions made regarding the proposed transaction. Management also
recognized that procedural and substantive safeguards would be required to
protect the Limited Partners in light of such conflicts. Management ultimately
determined that the appraisal and voting procedures described in this Proxy
Statement would provide the Limited Partners with adequate safeguards against
the conflicts of interest. The appraisal and voting procedures represent the
only steps taken to provide safeguards to the Limited Partners in connection
with the proposed transaction. The determination that the proposed transaction
is fair, as well as the decision to recommend that Limited Partners vote in
favor of the proposed transaction, was unanimous among management personnel of
both of the General Partners. Insofar as such personnel also are officers or
partners of the general partners of the Administrative General Partner, such
general partners may also be said to have considered the proposed transaction.
See "Certain Affiliates of the Partnership."
The General Partners have not retained and will not retain an unaffiliated
representative to act on behalf of the Limited Partners for the purpose of
negotiating the terms of the proposed transaction, or preparing a report or
opinion concerning the fairness of such transaction. The General Partners
believe that the retention of any such person would cause the Partnership to
incur unnecessary expense. The General Partners have relied upon Daniels'
reputation and independence in ensuring that the proposed transaction is fair to
Limited Partners. In addition, from a fairness standpoint, the proposed
liquidation is structured so that the approval of a majority in interest of the
Limited Partners is required.
CERTAIN CONSEQUENCES OF THE TRANSACTION
DISSOLUTION PROCEDURES
If the Limited Partners approve of the disposition of the Systems and the
Closing occurs, the General Partners shall proceed with the distribution of
proceeds in accordance with the Partnership Agreement provisions for
dissolution, winding-up and termination.
Each of the Limited Partners shall be furnished with a statement which shall set
forth the assets and liabilities of the Partnership as of the date of Closing.
Within 30 days following the Closing, the Partnership shall make the initial
distribution to the Limited Partners and the Administrative General Partner.
Additional distributions will be made as and when Northland makes payments on
the Note.
Following the final distribution, which is expected to occur in January 1999,
each of the Limited Partners shall be furnished with a final Schedule K-1. Upon
completion of the foregoing distribution plan, Limited Partners shall cease to
be partners of the Partnership, and the General Partners, as the sole remaining
partners of the Partnership, shall file a certificate of cancellation of the
Partnership.
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See "Projected Cash Available From Liquidation" for certain financial
information regarding the anticipated effect that the proposed transaction will
have on Limited Partners.
NO DISSENTERS' RIGHTS
Dissenter's appraisal rights are not available to partners under Washington law
with respect to a sale of substantially all of the Partnership's assets and
subsequent liquidation. Appraisal rights will not be voluntarily accorded to
dissenting partners in connection with the proposed transaction.
Dissenting partners are protected under state law by virtue of the fiduciary
duty of the General Partners to act with prudence in the business affairs of the
Partnership on behalf of both the General Partners and the Limited Partners.
Records of the Partnership are available for inspection by Limited Partners upon
reasonable notice and during reasonable business hours. Neither the General
Partners nor the Partnership will bear the costs of a Limited Partner who
desires to obtain counsel or appraisal services.
TAX CONSIDERATIONS
There are certain material tax consequences to the Limited Partners resulting
from the proposed transaction. See "Federal Income Tax Consequences." In order
to avoid the additional expense, the Partnership has not obtained a tax opinion
in connection with the proposed transaction. The table below sets forth certain
estimated federal income tax consequences per $1,000 investment. The table
relates only to persons who purchased units in the initial offering, and does
not reflect estimated federal income tax consequences for those persons who
received their interests through transfer from other Limited Partners.
The table below sets forth the amount of long-term capital gain and ordinary
income which is expected to result from the disposition of the Systems and the
liquidation of the Partnership. The dollar amounts reflect allocations as
required pursuant to the Partnership Agreement. As of October 15, 1996, there
were 14,663 units of limited partnership interest outstanding at $500 per unit.
ALL FIGURES SET FORTH IN THE TABLE ARE NECESSARILY IMPRECISE AND REPRESENT ONLY
THE GENERAL PARTNERS' ESTIMATE OF CERTAIN TAX EFFECTS, assuming that the 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 Limited Partners are strongly encouraged to review the following table, the
"Federal Income Tax Consequences" section of this Proxy Statement, and their
individual tax situations with their personal tax advisors.
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Tax Results from Disposition of the Systems and Resulting Liquidation
(Per $1,000 Investment)
Overall Ordinary Income Per $1,000 Investment (1) (2) ($5)
Overall Long-Term Capital Gain Per $1,000 Investment (2) (3) $ 1,489
(1) Assumes that depreciation recapture per $1,000 investment will be equal
to $632. Limited Partners may be able to offset some or all of the
income with suspended tax basis losses. If those losses are available,
a Limited Partner may be entitled to use $637 of suspended tax basis
losses per $1,000 investment.
(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 the Partnership. Assumes that the Limited Partners'
remaining basis in the Partnership may be used upon termination of the
Partnership to offset capital gain from the disposition of the Systems
of $445 per $1,000 investment.
STATE TAX CONSIDERATIONS
In addition to the federal income tax considerations outlined above, the
proposed transaction has state income tax consequences.
The state of California, wherein one of the Systems is located, imposes an
income tax on the net income earned by nonresidents from property or a business
in California. Therefore, the state of California requires the withholding of
funds for income or franchise taxes by a partnership when it makes a
distribution in excess of $1,500 income to a domestic nonresident partner.
Domestic nonresident partners include individuals who are nonresidents of
California and corporations, estates, trusts, LLCs and partnerships, that are
not qualified to do business in California or do not have a permanent place of
business in California.
Partnerships are required to withhold at a rate of seven percent (7%) of
distributions of income from California sources made to domestic nonresident
partners. Accordingly, Limited Partners are liable for payment of California
state income tax on a portion of the net income generated by Partnership
operations, including the income to be generated by the proposed transaction.
The Partnership will withhold from distributions in connection with the proposed
transaction such California income tax to be paid on behalf of the nonresident
Limited Partners. Limited Partners should consult their own tax advisors
concerning the application of California income tax laws and other state and
local laws to their specific situation.
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CERTAIN CONSEQUENCES OF LIMITED PARTNERS'
DETERMINATION NOT TO SELL
If a majority in interest of the Limited Partners do not approve the proposed
transaction, the Partnership will continue to own and operate the Systems. The
General Partners are unable to determine whether the future fair market value of
the Systems, and their operating income, will increase over time, or whether
future cash flow, refinancings or sales, if any, will yield a return to Limited
Partners that is greater than that possible through the proposed transaction.
See "Management' s Discussion and Analysis of Financial Condition and Results of
Operations."
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PROJECTED CASH AVAILABLE FROM LIQUIDATION
If Closing occurs, the Limited Partners are expected to receive the same amount
of cash they would receive if the Systems were sold at the Gross Valuation to an
unaffiliated third party in accordance with the procedures described in the
Partnership Agreement. However, a sale to a third party could involve
significant brokerage commissions and other increased transaction costs which
would result in lower net proceeds to the Limited Partners. In the event that
the Systems were to be sold to an independent third party at a price in excess
of the Gross Valuation, such sale might result in net proceeds to Limited
Partners sufficiently higher to offset transaction costs. In any event, if the
Closing occurs, the amount of cash distributed to Limited Partners shall not be
less than the amount they would receive if the Systems were sold to an
unaffiliated third party at the Gross Valuation.
The table below sets forth the amount of cash projected for distribution to
Limited Partners assuming that the Partnership disposes of the Systems based on
the Gross Valuation of $33,500,000, without payment of any cable brokerage
commission, and fully liquidates. The projected net cash available assumes that
the transaction occurs on June 30, 1996, and thus reflects payments of principal
and interest on Partnership indebtedness and certain accrued receipts and costs
as of June 30, 1996. The table also shows projected net cash available for
distribution based on a $1,000 capital contribution by a Limited Partner. THE
AMOUNT OF CASH ACTUALLY DISTRIBUTED TO THE LIMITED PARTNERS WILL 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 THE PARTNERSHIP PRIOR TO SUCH DATE, AND THE EXTENT OF ANY
CURRENTLY UNKNOWN LIABILITIES THAT ACCRUE PRIOR TO SUCH DATE. IN ANY EVENT, THE
AMOUNT OF THE VARIANCE COULD BE SIGNIFICANT. Although there is no maximum
quantifiable amount of the variance, the variance has been projected as being up
to five percent of the Gross Valuation.
The figures presented take into account, where applicable, the projected costs
associated with the sale of the Systems, including proxy solicitation expenses,
and estimated general and administrative and operating expenses. Partnership
assets other than the Systems (such as 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 transaction
occurred on June 30, 1996, the General Partners do not anticipate that any
events will occur between June 30, 1996 and the Closing date that will
materially affect the figures.
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PROJECTED CASH AVAILABLE IF CLOSING OCCURS
PARTNERSHIP PROJECTED CASH VALUE:
Gross Valuation for Systems $ 33,500,000
Plus (Less):
Cash on Hand, Receivables & Other Assets (1) 1,009,549
Appraisal Expenses (2) (30,000)
Transaction and Proxy Costs (3) (50,000)
Partnership Administrative Costs (4) (50,000)
Debt Repayment to Others (5) (20,873,477)
Miscellaneous Costs (6) (100,000)
Projected Net Cash Value (7) $ 13,406,072
LIMITED PARTNERS' PROJECTED CASH AVAILABLE (8) $ 10,587,754
------------
Per $1,000 Capital Contribution - INITIAL DISTRIBUTION FROM CLOSING $ 1,000
Per $1,000 Capital Contribution - DISTRIBUTION FROM FIRST NOTE PAYMENT,
INCLUDING INTEREST $ 249
Per $1,000 Capital Contribution - DISTRIBUTION FROM FINAL NOTE PAYMENT,
INCLUDING INTEREST $ 235
Total Cash Distributions Paid Prior to Closing $ 700
------------
TOTAL OVERALL POTENTIAL RETURN OVER THE LIFE OF
THE PARTNERSHIP PER $1,000 LIMITED PARTNER CAPITAL
CONTRIBUTION $ 2,184
California Non-Resident Tax Paid on Behalf of the Limited Partners, Treated as a
Cash Distribution (THIS APPLIES ONLY TO CALIFORNIA
NON-RESIDENT LIMITED PARTNERS) (9) ($ 11)
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(1) Consists of the Partnership's (i) cash on hand of $627,048, (ii)
accounts receivable of $258,089, and (iii) prepaid expenses of
$124,412, all of which were determined as of June 30, 1996.
(2) Under its agreement with Daniels, the Partnership is obligated to pay
Daniels a fee equal to $30,000 and to reimburse Daniels for its
out-of-pocket expenses.
(3) Estimated costs of this proxy solicitation and closing of the
transaction, including legal fees and expenses of approximately
$40,000, printing costs of approximately $4,000, mailing expenses of
approximately $3,000, and Security and Exchange Commission filing fees
of approximately $3,000. The Partnership will be responsible for all
such costs. No auditing or solicitation costs are expected to be
incurred in connection with the proposed transaction.
(4) General and administrative, auditing, accounting, reporting and other
costs have been estimated through the final distribution, which is
assumed to occur in January 1999.
(5) Consists of (i) notes payable of $19,333,406 to the Partnership's
lender, (ii) advances, deferred expenses and fee reimbursements of
$40,020 payable to the Managing General Partner net of amounts due from
affiliates, and (iii) accounts payable, accrued expenses and other
liabilities of $1,500,051, all of which were determined as of June 30,
1996.
(6) Estimated amount to be set aside to cover miscellaneous costs.
(7) "Projected Net Cash Value" includes the Partners' distributive share of
cash and the value of Northland's in-kind distribution of assets.
(8) 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 such
General Partners' shares are determined after the Limited Partners
receive 100% return on their aggregate capital contributions.
(9) See "Certain Consequences of the Transaction -- State Tax
Considerations."
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General
The purpose of the proposed transaction is to provide Limited Partners the
opportunity to receive significant cash distributions upon the disposition of
the Systems. The proposed transaction is not a result of insufficient working
capital or declining results of operations. It is the opinion of the General
Partners that the Partnership's operations provide sufficient capital resources
to maintain its current operations on an ongoing basis. Although quarterly cash
distributions are not currently being made to Limited Partners, it is
anticipated that quarterly distributions could possibly be reinstated in the
future if the proposed transaction is not consummated. The amounts and timing of
such future distributions are dependent in part on the Partnership's ability to
increase cash flow from operations through rate increases and subscriber growth.
Results of Operations
Six Months ended June 30, 1996 and 1995
Total revenues reached $4,326,394 for the six months ended June 30, 1996,
representing an increase of approximately 45% over the same period in 1995. Of
these revenues, $3,192,049 (74%) is derived from basic service charges, $481,168
(11%) from premium services, $94,657 (2%) from installation charges, $176,484
(4%) from tier services, and $382,036 (9%) from other sources. The overall
revenue increase is primarily attributable to acquisitions of cable television
systems in September and October, 1995. These acquisitions represented
approximately 6,900 additional basic subscribers and 2,675 additional premium
subscribers, a 42% and 43% increase, respectively. Also contributing to the
revenue gain were basic rate increases placed into effect on October 1, 1995 in
systems representing 86% of the total basic subscribers. These increases
averaged approximately 4.3%.
As of June 30, 1996, the Systems served approximately 22,900 basic subscribers,
8,030 premium subscribers and 4,250 tier subscribers.
Operating expenses totaled $544,746 for the six months ended June 30, 1996,
representing an increase of approximately 45% over the same period in 1995. The
overall increase in operating expenses was attributable to the cable television
system acquisitions which increased the number of employees, vehicles in service
and leased poles to which the cable plant is attached. The Partnership had 37
employees as of June 30, 1996 compared to 30 employees at June 30, 1995.
General and administrative expenses totaled $1,155,234 for the six months ended
June 30, 1996, representing an increase of approximately 55% over the same
period in 1995. The acquisition of cable television systems in late 1995
impacted several areas proportionately, including wages, copyright and franchise
fees, billing expenses, property taxes and insurance, management fees and
general office expenses such as utilities and telephone costs. Additionally, net
bad debt
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expense increased from $21,750 to $66,000 for the six months ended June 30, 1995
and 1996, respectively.
Programming expenses totaled $ 980,339 for the six months ended June 30, 1996,
representing an increase of approximately 58% over the same period in 1995.
Programming costs are generally paid for each service on a per subscriber basis.
A substantial portion of this increase was attributable to the cable system
acquisitions in late 1995 which raised the number of basic and premium
subscribers by 42% and 43%, respectively. Additionally, various new channels of
programming were added to several other owned cable systems and costs charged by
the various program suppliers increased in 1996. This resulted in an increase in
average monthly programming costs per basic subscriber from $5.99 to $6.50 for
the six months ended June 30, 1995 and 1996, respectively.
Depreciation and amortization expense increased approximately 37% as compared to
the same period in 1995 as a result of the acquisitions of additional cable
television systems. The increase was partially offset as certain assets of the
Partnership were fully depreciated or amortized during 1996.
Interest expense for the six months ended June 30, 1996, increased approximately
144% as compared to the same period in 1995. The average bank debt outstanding
increased from $9,636,769 during the six months ended June 30, 1995 to
$19,333,406 for the same period in 1996. This increase in average outstanding
debt was attributable to borrowings made in late 1995 to finance the acquisition
of cable television systems.
Results of Operations
1995 and 1994
Total revenue reached $6,617,205 for the year ended December 31, 1995,
representing an increase of approximately 17% over 1994. This increase is
primarily due to the acquisition of cable television systems, in September 1995
and October 1995, respectively. The Partnership experienced a 4% increase in
revenue (exclusive of the activity for the acquired systems) which is
attributable to a 2% increase in basic subscribers, rate increases placed into
effect during the second quarter 1995, and increases in advertising revenue.
These increases were offset by a 5% decrease in revenue for the Chowchilla,
California system resulting from the elimination of the Easton, California
headend in January 1995. Of the 1995 revenue, $4,717,279 (71%) is derived from
subscriptions to basic service, $764,484 (12%) from subscriptions to premium
services, $366,870 (6%) from subscriptions to tier services, $148,911 (2%) from
installation charges, $205,405 (3%) from service contracts and $414,256 (6%)
from other sources.
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The following table displays historical average rate information for various
services offered by the Partnership's systems (amounts per subscriber per
month):
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
Basic Rate $ 22.41 $ 21.41 $ 20.95 $ 20.15 $ 19.02
Tier Rate 6.00 5.62 5.50 5.05 5.05
HBO Rate 11.35 11.10 11.10 10.65 10.65
Cinemax Rate 7.65 7.65 7.65 7.65 7.65
Showtime Rate 10.00 9.80 9.80 9.43 9.43
Movie Channel Rate 9.60 9.60 9.65 9.65 9.65
Disney Rate 7.50 7.50 7.65 7.65 7.30
Additional Outlet
Rate -- -- -- 3.48 3.48
Service Contract
Rate 3.00 3.10 3.20 -- --
Operating expenses totaled $838,545 for 1995, representing a decrease of
approximately 1% as compared to 1994. This operating expense decrease was due to
a reduction in pole rental expense resulting from a retroactive charge in the
previous year and a decrease in system maintenance expense. The decrease was
offset by an increase in salary and benefit costs as a result of the cable
system acquisitions and cost of living increases. Salary and benefit costs are
the major component of operating expenses. Employee wages are reviewed annually
and, in most cases, increased based on cost of living adjustments and other
factors.
General and administrative expenses totaled $1,740,021 for 1995, representing an
increase of approximately 17% over 1994. Approximately two-thirds of the
increase is attributable to expenses associated with the cable system
acquisitions. The remaining increase is due to increases in revenue based
expenses, such as franchise and management fees. Significant administrative
expenses are based on Partnership revenues, therefore, as the Partnership's
revenues increase, the trend of increased administrative expenses is expected to
continue.
Programming expenses totaled $1,394,806 for 1995, representing an increase of
approximately 27% over 1994. This is due to the additional subscribers as a
result of the cable system acquisitions, increased payroll and other costs
related to local programming and advertising support, addition of new channels,
and increases in costs charged by the various program suppliers. Programming
expenses mainly consist of payments made to the suppliers of various cable
programming services. As these costs are based on the number of subscribers,
future subscriber increases will cause the trend of programming expense
increases to continue. In addition, rate increases from program suppliers, as
well as new fees due to the launch of additional channels, will contribute to
the trend of increased programming costs.
Depreciation and amortization expense decreased from $1,653,369 to $1,381,435 in
1995 (approximately 16%). This is due to fixed assets related to the formation
of the Partnership becoming fully depreciated, offset by depreciation and
amortization on plant, equipment and intangible assets acquired with the
purchase of the cable systems and depreciation on assets placed into service
during 1995.
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Interest expense increased from $601,948 to $1,005,691 in 1995 (approximately
67%). The Partnership's average debt balance increased from $10,197,000 in 1994
to $14,559,000 in 1995. In addition, the Partnership's effective interest rate
increased from 5.90% in 1994 to 6.91% in 1995.
Liquidity and Capital Resources
The Partnership's cable television systems are located in and around eight
operating groups, including Flint/Tyler, New Caney, Whitewright, Hillsboro,
Kaufman, Waterwood and Prairie View, Texas and Chowchilla, California. The
principal physical properties of the Systems consist of system components
(including antennas, coaxial cable, electronic amplification and distribution
equipment), motor vehicles, miscellaneous hardware, spare parts and real
property, including office buildings and land on which towers and antennas are
located. The General Partners believe that the Partnership's cable plant passes
all areas which are currently economically feasible to service. Future line
extensions depend upon the density of homes in the area as well as available
capital resources for the construction of new plant.
Currently, the Partnership's primary source of liquidity is cash provided from
operations and borrowing capacity under its revolving credit facility. Net cash
provided by operating activities was $993,690 for the six months ended June 30,
1996 and $1,834,074 and $1,809,339 for the years ended December 31, 1995 and
1994 respectively. Operating activities and credit capacity are expected to
provide sufficient liquidity to meet future investing and financing needs of the
Partnership, which consist primarily of capital expenditures and principal and
interest payments due under the current loan facility. The general and limited
partners have no future obligation to make additional capital contributions to
the Partnership.
Should the Partnership's future working capital needs exceed cash provided from
operating activities and its borrowing capacity, several alternative sources of
additional funding exist, including renegotiation of the Partnership's current
loan agreement to provide additional borrowing capacity, deferral of management
fees and certain operating costs payable to the Managing General Partner, and
the seeking of a loan from the Managing General Partner. It is not anticipated
that these alternative sources of working capital will be needed. In any event,
General Partners are not obligated to defer payments due to them or to make
loans to the Partnership.
The Partnership currently has a $23,000,000 revolving credit and term loan
facility with The First National Bank of Chicago, Chicago, Illinois. As of June
30, 1996, this loan facility had an outstanding balance of $19,333,406. Pursuant
to its loan agreement, the Partnership is subject to certain restrictive
covenants, consisting primarily of the maintenance of certain financial ratios,
including a maximum ratio of senior debt to annualized operating cash flow of
5.75 to 1 and a minimum ratio of annualized operating cash flow to pro forma
debt service of 1.15 to 1. Based on the Partnership's ratio of senior debt to
annualized operating cash flow at June 30, 1996 approximately $135,000 of the
remaining credit available under the revolving credit facility could be borrowed
for working capital purposes. Future availability will vary with the
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Partnership's leverage. Breach of these financial covenants constitutes an event
of default, upon the happening of which the lender is entitled to accelerate the
loan and enforce legal remedies, including foreclosure upon the Partnership's
assets. The Partnership was in compliance with all required financial ratios at
December 31, 1995 and June 30, 1996. Based on 1996 operating budgets, the
Partnership expects to meet these restrictive covenants on each of the two
remaining quarterly calculation dates in 1996.
The Partnership estimates that total capital expenditures for 1996 will be
approximately $1,600,000 of which $460,000 was incurred during the six months
ended June 30, 1996. These expenditures have included plant extensions to a new
development in Chowchilla, California and initial phases of plant upgrades in
the Whitewright and New Caney, Texas systems. Future 1996 expenditures include
the completion of these initial upgrade phases. The Partnership has no material
commitments for capital expenditures.
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FEDERAL INCOME TAX CONSEQUENCES
Limited Partners should refer to the "Federal Income Tax Aspects" section of the
Prospectus for a discussion of the tax consequences of the disposition of
Partnership assets. Limited Partners should note, however, that several
amendments to the Internal Revenue Code, including the Tax Reform Act of 1986
("the 1986 Act"), the Revenue Act of 1987, the Technical and Miscellaneous
Revenue Act of 1988, the Omnibus Budget Reconciliation Act of 1989, the Omnibus
Budget Reconciliation Act of 1990 and the Revenue Reconciliation Act of 1993
("the 1993 Act"), collectively referred to as the "Tax Acts," have made
substantial changes to the existing federal income tax structure as it was
described in the Prospectus. It is not possible to discuss all of the provisions
of the Tax Acts in this Proxy Statement. Moreover, in many areas the Tax Acts
specifically authorize the Treasury Department to promulgate regulations to
govern certain transactions and it is not known what positions such regulations
will take. The following constitutes a general summary of some of the provisions
of the Tax Acts. ALL LIMITED PARTNERS ARE STRONGLY ENCOURAGED TO REVIEW THE
"FEDERAL INCOME TAX ASPECTS" SECTION OF THE PROSPECTUS, THE TAX ACTS, AND THE
"FEDERAL INCOME TAX CONSEQUENCES" SECTION OF THIS PROXY STATEMENT WITH THEIR
PERSONAL TAX ADVISORS.
TAX CONSEQUENCES OF DISPOSITION OF THE SYSTEMS AND LIQUIDATION OF PARTNERSHIP
Upon the disposition of the Systems, taxable income will be recognized to the
extent that the amount of proceeds received from such 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 Partnership
Agreement. The allocation of gain to the Limited Partners will increase each
Limited Partner's basis in the Partnership and increase his or her "amount at
risk" with respect to the Partnership's activity. Accordingly, a Limited Partner
will be entitled to deduct, up to the amount of the gain, "suspended tax basis
losses" which were allocated to him or her in previous years but were
nondeductible in those years because of tax basis limitations on the
deductibility of those losses. In addition, suspended or current passive
activity losses from other passive activities of the taxpayer may be used to
offset gain from the disposition of the Systems. See "Tax Consequences of a
Decision Not to Sell" below for a discussion of passive activity loss
limitations and suspended losses.
The Systems should be treated as a "Section 1231 asset" and, therefore, a
Partner's share of gain or loss on the sale of the Systems will be combined with
any other Section 1231 gain or loss incurred by that Partner in that taxable
year and his or her net Section 1231 gain or loss will be taxed as capital gain
or ordinary loss, as the case may be. However, Section 1231 gain may be
converted into ordinary income to the extent the taxpayer has Section 1231
losses in the five most recent tax years. The tax treatment of Section 1231
gains will depend on the tax situation of each individual Limited Partner. See
"Federal Income Tax Aspects--Sale of Partnership Property" in the Prospectus. In
addition, all cost recovery deductions which have been taken with respect to the
Systems will be subject to recapture as ordinary income upon the sale to the
extent of gain on the sale, and each Limited Partner will be allocated a share
of recapture in proportion to the amount of depreciation which was allocated to
the Limited Partner. See "Federal Income Tax Aspects -- Depreciation and Cost
Recovery" in the Prospectus. A Limited Partner will also
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recognize gain or loss upon the liquidation of the Partnership following the
disposition of the Systems to the extent that the cash distributed in the
liquidation exceeds or is less than the Limited Partner's adjusted tax basis in
his or her interest. See "Other Tax Law Changes" below for a discussion of the
applicable tax rates for ordinary income and capital gains.
Neither the Partnership 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 the Partnership in connection with the issuance and marketing of the
units of limited partnership interest, including sales commission costs. Upon
liquidation of the Partnership, the Treasury Regulations provide that the
Partnership may not deduct the capitalized syndication expenses. However, there
is uncertainty in the law concerning whether the Limited Partners may claim a
capital loss for the remaining portion of their tax basis in the Partnership
which is attributable to the capitalized syndication costs. For purposes of the
calculations presented in the "Tax Results from Sale of the Systems" section of
this Proxy Statement, the General Partners have assumed that the Limited
Partners' remaining basis in the Partnership may be used upon the termination of
the Partnership to offset capital gain from the sale of the Systems. The IRS may
contend, however, that the Limited Partners are not entitled to claim such a
capital loss because they should have reduced their basis in their Partnership
interests for the syndication fees, as expenditures of the Partnership 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 Limited Partners
should recognize an additional amount of capital gain. EACH INDIVIDUAL LIMITED
PARTNER SHOULD CONSULT WITH HIS OR HER INDIVIDUAL TAX ADVISOR WITH RESPECT TO
HIS OR HER TREATMENT OF SYNDICATION COSTS UPON TERMINATION OF THE PARTNERSHIP.
UNRELATED BUSINESS TAXABLE INCOME
Unrelated business taxable income ("UBTI") will be generated by the sale of the
Systems to Limited Partners that are qualified retirement plans and tax exempt
trusts ("Plans") as defined by the Internal Revenue Code and subject to the
Employment Retirement Income Security Act of 1974 (i.e., IRAs, Keoghs, Pension
Plans, etc.). See "Federal Income Tax Aspects -- Unrelated Business Income Tax"
in the Prospectus.
Generally, partnership allocations of ordinary income and capital gains will
result in UBTI to Plans and generate an unrelated business income tax. The
Internal Revenue 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
staxed 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
the partnership assets, the following is an analysis which assumes that a $5,000
IRA investment is the sole UBTI investment of the IRA. It is also assumed that a
limited partner has properly reflected the use of net operating loss carryovers
generated in the early years of the partnership, has properly limited losses
recognized to the extent of the tax basis in the partnership interest and has
properly
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recognized UBTI with respect to cash distributions in excess of basis. See
"Federal Income Tax Aspects -- Basis" in the Prospectus.
INITIAL NCP-FOUR IRA INVESTMENT - $5,000
Cash distributions received over the life
of the partnership ($2,184 per $1,000 investment) $ 10,920
UBTI tax liability - 1997 (1,000)
UBTI tax liability - 1998 (17)
UBTI tax liability - 1999 (17)
--------
NET CASH AFTER TAXES TO IRA INVESTOR $ 9,886
========
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 initial year of sale (1997) and thereafter on the installment payments
(1998 and 1999). In addition, should the IRA be able to utilize a capital loss
in 1999, the remaining basis in the partnership in the year of termination would
result in a $302 tax benefit 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 discussed in the "Federal Income Tax Aspects" section of the
Prospectus. However, the Tax Acts have made significant changes in the
deductibility of passive losses generated by a limited partnership and the
amount of available depreciation, and have eliminated the investment tax credit.
In addition, Limited Partners should note that the current deductibility of any
losses which are allocated to the Limited Partners in future years will continue
to be limited because of the "at-risk" rules and basis limitations. See "Federal
Income Tax Aspects -- Basis" and "Federal Income Tax Aspects -- Amount at Risk"
in the Prospectus.
With respect to the deductibility of Partnership losses by a Limited Partner,
the Tax Acts do 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 capital gains. However, such
losses apparently can be used to offset passive activity taxable income from
another limited partnership. In addition, disallowed losses and credits may be
suspended and carried forward by a taxpayer indefinitely and used to offset
income from passive activities. The disallowed losses will also be allowed in
full when the taxpayer recognizes gain or loss upon a disposition of his or her
entire interest in the passive activity. Limited Partners should also note that
under the 1986 Act the Treasury Department prescribed regulations which 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 the Partnership. For example,
the Treasury Department has issued regulations holding that interest earned on
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Partnership cash balances represents portfolio income, and thus may not be
offset by passive losses.
LIMITED PARTNERS SHOULD ALSO NOTE THAT THE EFFECT OF PASSIVE ACTIVITY LOSS
LIMITATIONS MAY VARY FROM ONE TAXPAYER TO ANOTHER DEPENDING UPON HIS OR HER
INDIVIDUAL TAX SITUATION. THEREFORE, EACH LIMITED PARTNER SHOULD CONSULT HIS OR
HER OWN PROFESSIONAL TAX ADVISOR WITH RESPECT TO THE APPLICATION OF THE PASSIVE
ACTIVITY LOSS LIMITATIONS TO HIS OR HER PARTICULAR TAX SITUATION.
The passive activity loss limitation rules were effective for tax years
beginning on or after January 1, 1987. With respect to a passive activity in
which a taxpayer acquired an interest before the date of enactment of the law
and where the activity had commenced prior to the date of enactment, the 1986
Act provided a four-year phase-in period, with 35 percent of such losses being
disallowed in 1987, 60 percent in 1988, 80 percent in 1989, 90 percent in 1990
and 100 percent in 1991 and subsequent years.
With respect to the recovery of capital expenditures, the 1986 Act modified the
Accelerated Cost Recovery System ("ARCS") by reclassifying certain assets
according to their present class life and creating a new seven-year class.
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 under the 1993
Act using the straight-line method over 39 years. Partnership equipment which 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 recovered over a
five- or seven-year recovery period.
The 1986 Act eliminated the investment tax credit for all property placed in
service after December 31, 1985, subject to certain transitional rules.
OTHER TAX LAW CHANGES
The 1993 Act 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. In addition, long-term capital gains are taxed at a
maximum rate of 28 percent, but the deductibility of capital losses continue to
be restricted as under prior law.
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, and 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 for personal property). 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
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individuals. 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.
Under the 1986 Act, an individual taxpayer generally is not allowed a deduction
for investment interest expense in excess of investment income. Investment
interest 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.
Under the 1986 Act, 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 the partnership 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 debt exceeds
partnership expenditures during the year.
Under the 1993 Act, net long-term capital gains will no longer be considered
investment income for purposes of deducting investment interest expense. A
taxpayer may elect to include such gains in investment income if he or she
agrees to have long-term gains taxed at ordinary tax rates.
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.
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CONFLICTS OF INTEREST
FIDUCIARY RESPONSIBILITIES
The General Partners are accountable to the Partnership as fiduciaries and
consequently must exercise good faith in the resolution of any conflicts of
interest and in handling the Partnership's business. Their fiduciary duties
arise out of state law. The extent of a general partner's fiduciary
responsibilities is a changing area of the law, and Limited Partners who have
questions concerning these responsibilities should consult with their own
counsel. In discharging their obligations to the Partnership, the General
Partners must take into account the specific duties, obligations and limitations
imposed upon them by the Partnership Agreement.
Conflicts of Interest
The General Partners are subject to substantial conflicts of interest arising
out of their relationship with the Partnership and the proposed transaction.
For example, assuming that the requisite approval of Limited Partners is
obtained, Northland will be granted the authority to acquire the Systems from
the Partnership. The terms of the transaction have been determined by the
General Partners. Neither the Administrative General Partner nor any affiliate
of the Administrative General Partner will be granted any right to acquire
Systems. The Managing General Partner has faced a substantial conflict of
interest in determining such terms. In addition, the Managing General Partner
faced a significant conflict of interest in determining not to solicit bids from
independent third parties, but to propose that it acquire the Systems itself.
Notwithstanding the factors described above under "Proposed Transaction --
Market Factors," the fair market value and net cash flow of the Systems may
increase over time. Therefore, it is possible that Limited Partners would
receive a greater return on their investment if the Partnership continues to own
and operate the Systems, instead of consummating the proposed transaction.
Similarly, if the Systems are acquired by Northland, Northland may experience a
rate of return on its investment in excess of that experienced by the
Partnership.
Although the General Partners believe that the Gross Valuation for the Systems
is fair and reasonable, and that the disposition of the Systems in accordance
with the terms and conditions described in this Proxy Statement will assist the
Partnership in meeting its investment objectives, the General Partners have
faced substantial conflicts of interest in determining to present these
proposals to the Limited Partners. There can also be no assurance that the
Limited Partners would not receive a greater return on their investment if the
General Partners solicited bids for the Systems from third parties.
Although Daniels, the appraiser of the Systems, is not affiliated with the
General Partners or the Partnership, the General Partners and their affiliates
have frequently entered into material contracts with Daniels for the purchase or
sale of cable television systems in transactions where Daniels or its affiliates
acted either as broker or as principal, and the General Partners expect that
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52
they and their affiliates will enter into similar transactions with Daniels or
its affiliates in the future. Because the Limited Partners have not and will not
participate in either the appraisal process or the selection of Daniels as the
appraiser, there can be no assurance that a different appraisal procedure or a
different appraiser would not generate a higher valuation of the Systems.
The Managing General Partner holds 20 units of limited partnership interest
(representing 0.1% of the total) and intends to vote IN FAVOR of the proposed
transaction. Units of limited partnership interest held and voted by the
Managing General Partner will 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."
The General Partners have not retained and do not intend to retain an
unaffiliated representative to act on behalf of the Limited Partners for the
purpose of negotiating the terms, or preparing a report or opinion concerning
the fairness of, the proposed transaction.
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53
CERTAIN AFFILIATES OF THE PARTNERSHIP
The Partnership is a Washington limited partnership with no directors or
officers. The Managing General Partner of the Partnership is Northland
Communications Corporation, a Washington corporation ("NCC"); the Administrative
General Partner of the Partnership is FN Equities Joint Venture, a California
general partnership (the "Administrative General Partner").
NCC is a wholly-owned subsidiary of Northland Telecommunications Corporation, a
Washington corporation ("NTC"). The principal business of NCC historically has
been locating cable television systems, negotiating for their acquisition,
forming limited partnerships to own the systems, arranging for the sale of
limited partnership interests to investors, managing the partnerships, and
liquidating partnership assets upon dissolution. The principal business of NTC
is that of a holding company. The address of the principal executive offices of
each of NCC and NTC is 1201 Third Avenue, Suite 3600, Seattle, Washington 98101.
The sole partners of the Administrative General Partner are FN Equities, Inc.
("FNE"), a wholly-owned subsidiary of FNI International, Inc. ("FNIII"), FN
Network Partners, Ltd., a California limited partnership ("FNPL"), and John
Simmers, an affiliate of FNE and FNIIE. The principal business of each of the
Administrative General Partner and FNE is to provide administrative services as
administrative general partner of cable television limited partnerships. FNPL is
an investment partnership. The principal business of FNIII is that of a holding
company. The address of the principal executive offices of each of the
Administrative General Partner, FNE, FNPL and FNIII is 2780 Sky Park Drive,
Suite 300, Torrance, California 90505.
The following table sets forth the executive officers and directors of NTC:
NAME POSITION
- ---- --------
John S. Whetzell Board Chairman and President
Richard I. Clark Director, Vice President, Treasurer and Assistant
Secretary
John E. Iverson Director and Assistant Secretary
James A. Penney Vice President and Secretary
James E. Hanlon Divisional Vice President
Richard J. Dyste Vice President, Technical Services
Gary S. Jones Vice President
H. Lee Johnson Divisional Vice President
Arlen E. Prentice Director
Milton A. Barrett, Jr. Director
Arthur H. Mazzola Director
Travis H. Keeler Director
JOHN S. WHETZELL. Mr. 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
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54
Chairman of the Board of Northland Telecommunications Corporation, Northland
Cable Television, Inc., Northland Cable Services Corporation, Cable Ad-Concepts,
Inc. Cable Television Billing, Inc. and Northland Cable News, Inc. He has been
involved with the cable television industry for over 21 years and currently
serves as a director on the board of the Cable Telecommunications Association, a
national cable television association. 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
Federal Communications Commission (FCC) from May 1974 to February 1979. He
provided economic studies which 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.
JOHN E. IVERSON. Mr. Iverson is the Assistant Secretary of Northland
Communications Corporation and has served on the Board of Directors since
December 1984. He also serves on the Board of Directors of Northland
Telecommunications Corporation and each of its subsidiaries. He is currently a
partner in the law firm of Ryan, Swanson & Cleveland, Northland's general
counsel. He is a member of the Washington State Bar Association and American Bar
Association and has been practicing law for more than 33 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.
ARLEN I. PRENTICE. Since July 1985, Mr. Prentice has served on the Board of
Directors of Northland Telecommunications Corporation, and he served on the
Board of Directors of Northland Communications Corporation between March 1982
and July 1985. Since 1969, Mr. Prentice has been Chairman and Chief Executive
Officer of Kibble & Prentice, a diversified financial services firm. Kibble &
Prentice has four divisions, which include Estate Planning and Business
Insurance, Financial Planning and Investments, Employee Benefit Services, and
Property and Casualty Insurance. Mr. Prentice is a Chartered Life Underwriter,
Chartered Financial Consultant, past President of the Million Dollar Round Table
and a registered representative of Investment Management and Research. Mr.
Prentice has a Bachelor of Arts degree from the University of Washington.
MILTON A. BARRETT, JR. Since April 1986, Mr. Barrett has served on the Board of
Directors of Northland Telecommunications Corporation. In 1995 he retired from
the Weyerhaeuser Company after 34 years with that company. At the time of his
retirement he was a Vice President of Sales and Marketing as well as chairman of
Weyerhaeuser's business ethics committee. Mr. Barrett is a graduate of Princeton
University magna cum laude and of the Harvard University Graduate School of
Business Administration.
RICHARD I. CLARK. Mr. Clark has served as Vice President of Northland since
March 1982. He has served on the Board of Directors of both Northland
Communications Corporation and Northland Telecommunications Corporation since
July 1985. He also serves as Vice President
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and Director of Northland Cable Services Corporation, Cable Ad-Concepts, Inc.
Cable Television Billing, Inc. and Northland Cable News, Inc. Mr. Clark was
elected Treasurer in April 1987, prior to which he served as Secretary from
March 1982. He also serves as a registered principal, President and director of
Northland Investment Corporation. Mr. Clark was an original incorporator of
Northland and 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 17 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 though the application of these programs. In
1979, Mr. Clark graduated cum laude from Pacific Lutheran University with a
Bachelor of Arts degree in accounting.
ARTHUR H. MAZZOLA. Mr. Mazzola was elected to the Board of Directors of
Northland Telecommunications Corporation in April 1987. From 1985 to 1990, he
was Senior Vice President of Benjamin Franklin Leasing Company, Inc., an
equipment lease financing company. Currently, Mr. Mazzola is serving as a
Business Development Coordinator for the Bank of California. Prior to his
association with Benjamin Franklin Leasing Company, Mr. Mazzola served as
President of Federal Capital Corporation and Trans Pacific Lease Co., Inc. Both
of these companies also engaged exclusively in equipment lease financing. Mr.
Mazzola is a past Board Chairman and current Trustee of the Pacific Northwest
Ballet Association and current Board Member of the Dante Alighieri Society. Mr.
Mazzola attended Boston University School of Business in 1943 where he studied
economics.
TRAVIS H. KEELER. Mr. Keeler was elected to the Board of Directors of Northland
Telecommunications Corporation in April 1987. Since May 1985, he has served as
President of Overall Laundry Services, Inc., an industrial laundry and garment
rental firm. Mr. Keeler received a Bachelor of Arts degree from the University
of Washington in 1962.
JAMES E. HANLON. Since June 1985, Mr. Hanlon has been a Divisional Vice
President for Northland's Tyler, Texas regional office and is currently
responsible for the management of systems serving approximately 92,900 basic
subscribers in Texas, Alabama and Mississippi. He also serves as Vice President
for Northland Cable News, Inc. Prior to his association with Northland, he
served as Chief Executive of M.C.T. Communications, a cable television company,
from 1981 to June 1985. His responsibilities included supervision of the
franchise, construction and operation of a cable television system located near
Tyler, Texas. From 1979 to 1981, Mr. Hanlon was President of the CATV Division
of Buford Television, Inc., and from 1973 to 1979, he served as President and
General Manager of Suffolk Cablevision in Suffolk County, New York. Mr. Hanlon
has also served as Vice President and Corporate Controller of Viacom
International, Inc. and Division Controller of New York Yankees, Inc. Mr. Hanlon
has a Bachelor of Science degree in Business Administration from St. Johns
University.
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JAMES A. PENNEY. Mr. Penney is Vice President and General Counsel for Northland.
He has served as Vice President and General Counsel for Northland
Telecommunications Corporation, Northland Communications Corporation and
Northland Cable Television, Inc. since September 1985 and was elected Secretary
in April 1987. He also serves as Vice President and General Counsel for
Northland Cable Services Corporation, Cable Ad-Concepts, Inc. Cable Television
Billing, Inc. and Northland Cable News, Inc. Mr. Penney is responsible for
advising all Northland systems with regard to legal and regulatory matters, and
also is involved in the acquisition and financing of new cable systems. From
1983 until 1985 he was associated with the law firm of Ryan, Swanson &
Cleveland, Northland's general counsel. Mr. Penney holds a Bachelor of Arts
degree from the University of Florida and a Juris Doctor from The College of
William and Mary, where he was a member of The William and Mary Law Review.
GARY S. JONES. Mr. Jones is Vice President for Northland. Mr. Jones joined
Northland in March 1986 as Controller and has been Vice President of Northland
Telecommunications Corporation, Northland Communications Corporation and
Northland Cable Television, Inc. since October 1986. He also serves as Vice
President for Northland Cable Services Corporation, Cable Ad-Concepts, Inc.
Cable Television Billing, Inc. and Northland Cable News, Inc. Mr. Jones is
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 as a Certified Public
Accountant with 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. Mr. Dyste has served as Vice President-Technical Services of
Northland Telecommunications Corporation, Northland Communications Corporation
and Northland Cable Television, Inc. since April 1987. He also serves as Vice
President for Cable Ad-Concepts, Inc. and Northland Cable News, Inc. During
1995, he was responsible for the management of systems serving approximately
48,600 basic subscribers in California, Idaho, Oregon and Washington. Mr. Dyste
is a past president and a current member of the Mount Rainier Chapter of the
Society of Cable Television 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. Mr. Johnson has served as Divisional Vice President for
Northland's Statesboro, Georgia Regional Office since March 1994. He is
responsible for the management of systems serving over 50,400 basic subscribers
in Georgia, Mississippi, North Carolina and South Carolina. He also serves as
Vice President for Northland Cable News, Inc. Prior to his association with
Northland, Mr. Johnson 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 nearly 27 years
and is a current member of the Society of Cable Television Engineers. He is a
graduate of Swainsboro Technical Institute and
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has attended numerous training seminars, including courses sponsored by Jerrold
Electronics, Scientific Atlanta and The Society of Cable Television Engineers.
The following table sets forth the executive officers and directors of FNE:
NAME POSITION
- ---- --------
Miles Z. Gordon President and Director
John S. Simmers Vice President, Secretary and Director
Harry M. Kitter Treasurer
The business address for all of the above is the address of the principal
executive offices of FNE.
MILES Z. GORDON. Mr. Gordon is President of FNE 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. Mr. Simmers is Vice President and Secretary of FNE and
Executive Vice President and Chief Operating Officer of FNIC 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.
HARRY M. KITTER. Mr. Kitter is Treasurer of FNE and Controller for FNIC and has
held those positions since 1983. Prior to this association from 1981 to 1983 he
was employed as the Los Angeles Internal Audit Manager at the Pacific Stock
Exchange. From 1978 to 1981, he was Senior Accountant at Arthur Young & Co.,
C.P.A. He holds an MBA from the University of Pittsburgh and a bachelor's degree
in economics from Lafayette College, Easton, Pennsylvania.
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The following table sets forth the officers and directors of FNIII:
NAME POSITION
- ---- --------
Miles Z. Gordon Director and Executive Officer
John S. Simmers Director and Executive Officer
John D. Cartwright Director
Gerald W. Brown Director
Harold G. Nahigian Director
Edward R. Hunt, Sr. Director
John L. Kassab Director
For biographies of Messers. Gordon and Simmers, please see the entries above for
FNE.
GERALD W. BROWN is President of Coordinated Management Corporation, Koll Center
Bellevue, 500 108th Avenue, NE, #225, Bellevue, Washington. Mr. Brown has held
this position since February 1985. Previously he was Marketing Director of
University Securities Corporation from January 1979 to January 1983, and Sales
Manager for American Bankers Life from June 1975 to December 1978.
JOHN D. CARTWRIGHT is President of John D. Cartwright & Associates, a position
he has held since August 28, 1980. The address of John D. Cartwright &
Associates is 1025 W. 190th Street #120, Gardena, California 90248.
EDWARD R. HUNT is an Independent Contractor with FNIC. Previously he was a
Registered Principal with University Securities Corporation from June 1978 to
August 1983. His address is 3447 Atlantic Avenue, #110, Long Beach, CA 90807.
JOHN L. KASSAB is also an Independent Contractor with FNIC. Previously he was
Marketing Director of University Securities Corporation from July 1978 to July
1983. His address is P.O. Box 1690, Colfax, California 95713.
HAROLD G. NAHIGIAN is President of Nationwide Investments and Insurance, Inc.,
3807 Wilshire Blvd. #1040, Los Angeles, California 90010-3145, a position he has
held since August 1979. Previously he was Senior Vice President of University
Securities Corporation from June 1980 to May 1983.
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59
PLAN OF SOLICITATION
SPECIAL MEETING
The Special Meeting of Limited Partners of the Partnership will be held on
December 18, 1996 at 3:00 p.m., local time, at the office of Northland
Communications Corporation, 1201 Third Avenue, Suite 3600, Seattle, Washington
98101. The purpose of the meeting is to vote regarding the proposed liquidation
of the Systems and the acquisition of such Systems by Northland. All Limited
Partners are invited to attend the meeting and are urged to submit a proxy even
if they will be able to attend the meeting.
FORM OF PROXY
A form of the proxy hereby solicited is set forth as Exhibit A to this Proxy
Statement. Actual, execution-ready proxy forms accompany this Proxy Statement.
By submitting a marked and executed proxy, a Limited Partner appoints John S.
Whetzell and Richard I. Clark, or either of them, with full power of
substitution, his or her attorney-in-fact to vote his or her interest as a
Limited Partner at the Special Meeting with respect to approval or disapproval,
as the Limited Partner specifies, of the disposition and related actions
described in such proxy, as well as all actions necessary or appropriate to
effect such transaction if the requisite percentage interest of Limited Partners
vote to approve such transaction. Messrs. Whetzell and Clark serve as President
and Vice President/Treasurer, respectively, of the Managing General Partner.
VOTING AND REVOCATION OF PROXY
All proxies will be voted in the manner indicated thereon by the Limited
Partner. The proposal described in this Proxy Statement is an integrated
transaction. Therefore, Limited Partners may not vote for or against individual
elements of the proposed transaction, but must vote either for or against the
proposed transaction as a whole. Each Limited Partner is entitled to one vote
for each limited partnership unit held. There are 14,663 units of limited
partnership interest outstanding. Signed proxies returned by Limited Partners
who do not specify whether they wish to approve the proposed transaction will be
voted for approval of such transaction. If no proxy is received from a Limited
Partner and the Limited Partner does not vote in person at the Special Meeting
of Limited Partners, the Limited Partner will be deemed to have voted against
approval of the proposal set forth in the proxy.
Once given, a proxy may be revoked either by delivering to the Managing General
Partner, prior to the vote to be taken at the Special Meeting, a proxy dated
subsequent to the date of the proxy previously given or by 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.
Only persons who are Limited Partners of record of the Partnership at the close
of business on October 15, 1996 will be permitted to vote or grant proxies.
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60
All questions as to the validity, form, eligibility, time of receipt, and
acceptance of any proxies will be determined by the General Partners in their
sole discretion, which determination will be final and binding.
Solicitation may be in person, by telephone, mail, or other means. The General
Partners and their directors, officers, partners and employees may solicit the
vote of Limited Partners.
FINANCIAL STATEMENTS
Included in this Proxy Statement are the Partnership's audited financial
statements for the years ended December 31, 1995, 1994 and 1993, and unaudited
financial statements for the six months ended June 30, 1996 and 1995. Financial
statements for prior years and periods have previously been distributed to
Limited Partners on an ongoing basis. Also included in this Proxy Statement are
audited balance sheets and associated materials for each of the General
Partners. Any Limited Partner seeking additional information regarding financial
statements should contact the Managing General Partner.
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61
NORTHLAND CABLE PROPERTIES FOUR LIMITED PARTNERSHIP
BALANCE SHEETS - (Unaudited)
(Prepared by the Managing General Partner)
June 30, December 31,
1996 1995
------------------- -------------------
ASSETS
Cash $ 627,048 $ 384,304
Accounts receivable 258,089 378,621
Prepaid expenses 124,412 86,313
Property and equipment, net of accumulated
depreciation of $14,057,886 and $13,265,067,
respectively 11,424,737 11,507,245
Intangible assets, net of accumulated
amortization of $1,578,178 and $1,396,035,
respectively 2,284,075 2,717,651
------------------- -------------------
Total assets $14,718,361 $15,074,134
=================== ===================
LIABILITIES AND PARTNERS' EQUITY
Accounts payable and accrued expenses $ 1,123,955 $ 801,634
Due to managing general partner and affiliates 40,020 116,345
Converter deposits 40,399 44,184
Subscriber prepayments 97,939 185,835
Notes payable 19,571,164 19,789,175
------------------- -------------------
Total liabilities 20,873,477 20,937,173
------------------- -------------------
Partners' equity:
General Partners:
Contributed capital, net (51,616) (50,875)
Accumulated deficit (71,897) (69,717)
------------------- -------------------
(123,513) (120,592)
------------------- -------------------
Limited Partners:
Contributed capital, net 1,086,099 1,159,414
Accumulated deficit (7,117,702) (6,901,861)
------------------- -------------------
(6,031,603) (5,742,447)
------------------- -------------------
Total partners' equity (6,155,116) (5,863,039)
------------------- -------------------
Total liabilities and partners' equity $14,718,361 $15,074,134
=================== ===================
The accompanying notes to unaudited financial statements
is an integral part of these statements
62
NORTHLAND CABLE PROPERTIES FOUR LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS - (Unaudited)
(Prepared by the Managing General Partner)
For the six months ended June 30,
----------------------------------------------------
1996 1995
------------------- -------------------
Service revenues $ 4,326,394 $ 2,989,066
Expenses:
Operating 544,746 374,962
General and administrative (including
$601,843 and $363,774 to affiliates
in 1996 and 1995, respectively) 1,155,234 746,087
Programming 980,339 620,267
Depreciation and amortization 974,963 709,390
------------------- -------------------
3,655,282 2,450,706
------------------- -------------------
Income from operations 671,112 538,360
Other income (expense):
Interest expense (890,446) (365,087)
Interest income 1,313 2,394
Loss on disposal of assets - (4,240)
------------------- -------------------
(889,133) (366,933)
------------------- -------------------
Net income (loss) $ (218,021) 171,427
=================== ===================
Allocation of net income (loss):
General Partners $ (2,180) $ 1,714
=================== ===================
Limited Partners $ (215,841) $ 169,713
=================== ===================
Net income (loss) per limited partnership unit:
(14,663 units) $ (15) $ 12
=================== ===================
Net income (loss) per $1,000 investment $ (30) $ 23
=================== ===================
The accompanying notes to unaudited financial statements
is an integral part of these statements
63
NORTHLAND CABLE PROPERTIES FOUR LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS - (Unaudited)
(Prepared by the Managing General Partner)
For the six months ended June 30,
----------------------------------------------------
1996 1995
------------------- -------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (218,021) $ 171,427
Adjustments to reconcile net income (loss) to cash provided by operating
activities:
Depreciation and amortization 974,963 709,390
Loss on disposal of assets - 4,515
(Increase) decrease in operating assets:
Accounts receivable 120,532 (8,468)
Prepaid expenses (38,099) (32,308)
Increase (decrease) in operating liabilities
Accounts payable and accrued expenses 322,321 63,258
Due to managing general partner and affiliates (76,325) 29,645
Converter deposits (3,785) 512
Subscriber prepayments (87,896) (82,471)
------------------- -------------------
Net cash from operating activities 993,690 855,500
------------------- -------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment, net (459,975) (204,627)
Purchase of cable television systems (268,750) -
------------------- -------------------
Net cash used in investing activities (728,725) (204,627)
------------------- -------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from seller escrow 71,397 -
Principal payments on borrowings (523) (589,189)
Distributions to partners (74,056) (148,911)
Loan fees and other costs incurred (19,039) -
------------------- -------------------
Net cash used in financing activities (22,221) (738,100)
------------------- -------------------
INCREASE (DECREASE) IN CASH 242,744 (87,227)
CASH, beginning of period 384,304 350,892
------------------- -------------------
CASH, end of period $ 627,048 $ 263,665
=================== ===================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest $ 583,519 $ 367,317
=================== ===================
The accompanying notes to unaudited financial statements
is an integral part of these statements
64
NORTHLAND CABLE PROPERTIES FOUR LIMITED PARTNERSHIP
NOTES TO UNAUDITED FINANCIAL STATEMENTS
JUNE 30, 1996
(1) PRESENTATION BASIS
These unaudited financial statements are being filed in conformity with Rule
10-01 of Regulation S-X regarding interim financial statement disclosure and do
not contain all of the necessary footnote disclosures required for a fair
presentation of the Balance Sheets, Statements of Operations and Statements of
Cash Flows in conformity with generally accepted accounting principles. However,
in the opinion of management, this data includes all adjustments, consisting
only of normal recurring accruals, necessary to present fairly the Partnership's
financial position at June 30, 1996 and December 31, 1995, its Statements of
Operations and its Statements of Cash Flows for the six months ended June 30,
1996 and 1995. Results of operations for these periods are not necessarily
indicative of results to be expected for the full year.
Certain information and note disclosures normally included in annual financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to those rules and regulations, although
management believes that the disclosures made are adequate to make the
information presented not misleading. These financial statements should be read
in connection with the audited financial statements of Northland Cable
Properties Four Limited Partnership included elsewhere in this Proxy Statement.
(2) 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 $113,372 and 75,447 for the six months ended
June 30, 1996 and 1995, respectively. Minimum annual lease payments to the end
of the lease terms are as follows:
1996 $31,624
1997 21,005
1998 10,367
1999 3,920
2000 9,120
Thereafter 42,630
--------
$118,666
========
65
Effects of Regulation
On October 5, 1992, Congress enacted the Cable Television Consumer Protection
and Competition Act of 1992 (the 1992 Act). On April 1, 1993, the Federal
Communications Commission (FCC) adopted rules implementing rate regulation and
certain other provisions of the 1992 Act, which became effective September 1,
1993. On February 22, 1994, the FCC adopted further rate regulation rules
requiring additional reductions, which became effective May 15, 1994; and
revised the benchmarks and formulas used to calculate such rates. Also in
February, the FCC's initial rules governing cost-of-service showings were
adopted, with an effective date of May 15, 1994. Cable operators may pursue
cost-of-service showings to justify charging rates for regulated services in
excess of those established by the FCC in its benchmark regulatory scheme.
On May 5, 1995, the FCC announced the adoption of a simplified set of rate
regulation rules applicable to small cable systems, defined as a system serving
15,000 or fewer subscribers, owned by small companies, defined as a company
serving 15,000 or fewer subscribers, 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 cable systems are
small systems. Maximum permitted rates under these revised rules are dependent
on several factors including the number of regulated channels offered, the net
asset basis of plant and equipment used to deliver regulated services, the
number of subscribers served and a reasonable rate of return.
It is management's opinion that, in all material respects, the rates in effect
in the Partnership's cable systems are within the maximum allowable rates
permitted under the FCC's small cable system rules.
On February 8, 1996, the Telecommunications Act of 1996 (the 1996 Act) became
law. The 1996 Act will eliminate all rate controls on cable programming service
tiers 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). All of the
Partnership's cable systems qualify as small cable systems. Many of the changes
called for by the 1996 Act will not take effect until the FCC issues new
regulations, a process that could take from several months to a few years
depending on the complexity of the required changes and the statutory time
limits. Because of this the full impact of the 1996 Act on the Partnership's
operations cannot be determined at this time.
66
NORTHLAND CABLE PROPERTIES FOUR LIMITED
PARTNERSHIP
FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1995 AND 1994
TOGETHER WITH AUDITORS' REPORT
67
NORTHLAND CABLE PROPERTIES FOUR LIMITED PARTNERSHIP
BALANCE SHEETS -- DECEMBER 31, 1995 AND 1994
ASSETS
1995 1994
------ -----
CASH $ 384,304 $ 350,892
ACCOUNTS RECEIVABLE 378,621 135,960
PREPAID EXPENSES 86,313 56,210
INVESTMENT IN CABLE TELEVISION PROPERTIES:
Property and equipment, at cost 24,772,312 16,209,792
Less--accumulated depreciation (13,265,067) (12,415,608)
----------- -----------
11,507,245 3,794,184
Franchise agreements (net of
accumulated amortization of
$899,053 in 1995 and $770,734
in 1994) 1,801,801 329,130
Noncompetition agreements and
other intangibles (net of
accumulated amortization of
$496,982 in 1995 and $489,328
in 1994) 915,850 78,969
----------- -----------
Total investment in cable
television properties 14,224,896 4,202,283
----------- -----------
Total assets $15,074,134 $ 4,745,345
=========== ===========
LIABILITIES AND PARTNERS' DEFICIT
1995 1994
------ -----
LIABILITIES:
Accounts payable and accrued expenses $ 801,634 $ 489,794
Due to General Partner and affiliates 116,345 58,851
Deposits 44,184 31,995
Subscriber prepayments 185,835 138,196
Notes payable 19,789,175 9,784,068
----------- -----------
Total liabilities 20,937,173 10,502,904
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 7)
PARTNERS' DEFICIT:
General partners-
Contributed capital, net (50,875) (47,905)
Accumulated deficit (69,717) (71,632)
----------- -----------
(120,592) (119,537)
----------- -----------
Limited partners-
Contributed capital, net - 14,663
units in 1995 and 1994 1,159,414 1,453,466
Accumulated deficit (6,901,861) (7,091,488)
----------- -----------
(5,742,447) (5,638,022)
----------- -----------
Total liabilities and
partners' deficit $15,074,134 $ 4,745,345
=========== ===========
The accompanying notes are an integral part of these balance sheets.
68
NORTHLAND CABLE PROPERTIES FOUR LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1995 1994 1993
----------- ----------- -----------
REVENUE $ 6,617,205 $ 5,657,619 $ 5,406,112
----------- ----------- -----------
EXPENSES:
Operating (including $52,395,
$32,848 and $33,084 paid to
affiliates in 1995, 1994 and 1993,
respectively) 838,545 848,919 735,936
General and administrative
(including $681,345, $570,155 and
$548,091 paid to affiliates in
1995, 1994 and 1993, respectively) 1,740,021 1,486,927 1,409,693
Programming 1,394,806 1,101,474 1,011,566
Depreciation and amortization 1,381,435 1,653,369 1,617,971
----------- ----------- -----------
5,354,807 5,090,689 4,775,166
----------- ----------- -----------
Operating income 1,262,398 566,930 630,946
OTHER INCOME (EXPENSE):
Interest income 5,601 3,827 8,374
Interest expense (1,005,691) (601,948) (731,802)
Other expense (15,467) (25,000) --
Loss on disposal of assets (55,299) (13,087) --
----------- ----------- -----------
Net income (loss) $ 191,542 $ (69,278) $ (92,482)
=========== =========== ===========
ALLOCATION OF NET INCOME (LOSS):
General partners $ 1,915 $ (693) $ (925)
=========== =========== ===========
Limited partners $ 189,627 $ (68,585) $ (91,557)
=========== =========== ===========
NET INCOME (LOSS) PER LIMITED
PARTNERSHIP UNIT $ 13 $ (5) $ (6)
=========== =========== ===========
The accompanying notes are an integral
part of these financial statements.
69
NORTHLAND CABLE PROPERTIES FOUR LIMITED PARTNERSHIP
STATEMENTS OF CHANGES IN PARTNERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
General Limited
Partners Partners Total
---------- ------------ -----------
BALANCE, December 31, 1992 $(111,948) $(4,817,780) $(4,929,728)
Repurchase of limited partnership
units -- (28,000) (28,000)
Cash distributions ($20 per limited
partnership unit) (2,993) (296,270) (299,263)
Net loss (925) (91,557) (92,482)
--------- ----------- -----------
BALANCE, December 31, 1993 (115,866) (5,233,607) (5,349,473)
Repurchase of limited partnership
units -- (41,000) (41,000)
Cash distributions ($20 per limited
partnership unit) (2,978) (294,830) (297,808)
Net loss (693) (68,585) (69,278)
--------- ----------- -----------
BALANCE, December 31, 1994 (119,537) (5,638,022) (5,757,559)
Cash distributions ($20 per limited
partnership unit) (2,970) (294,052) (297,022)
Net income 1,915 189,627 191,542
--------- ----------- -----------
BALANCE, December 31, 1995 $(120,592) $(5,742,447) $(5,863,039)
========= =========== ===========
The accompanying notes are an integral
part of these financial statements.
70
NORTHLAND CABLE PROPERTIES FOUR LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1995 1994 1993
------------ ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 191,542 $ (69,278) $ (92,482)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities-
Depreciation and amortization 1,381,435 1,653,369 1,617,971
Loss on disposal of assets 55,299 13,087 --
(Increase) decrease in operating assets:
Accounts receivable (193,261) 10,199 (7,606)
Prepaid expenses (30,103) 12,571 831
Increase (decrease) in operating liabilities:
Accounts payable and accrued expenses 311,840 134,928 13,266
Due to General Partner and affiliates 57,494 37,529 (14,170)
Deposits 12,189 (1,035) 1,401
Subscriber prepayments 47,639 17,969 (15,764)
------------ ----------- -----------
Net cash provided by operating activities 1,834,074 1,809,339 1,503,447
------------ ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net (769,176) (509,415) (494,810)
Purchases of cable television systems (10,229,571) -- --
Hold-back note payable 455,769 -- --
------------ ----------- -----------
Net cash used in investing activities (10,542,978) (509,415) (494,810)
------------ ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings 19,333,406 -- --
Principal payments on notes payable (9,784,068) (824,866) (955,071)
Distributions to partners (297,022) (297,808) (299,263)
Loan fees and other costs incurred (510,000) -- --
Repurchase of limited partnership units -- (41,000) (28,000)
------------ ----------- -----------
Net cash provided by (used in) financing activities 8,742,316 (1,163,674) (1,282,334)
------------ ----------- -----------
INCREASE (DECREASE) IN CASH 33,412 136,250 (273,697)
CASH, beginning of year 350,892 214,642 488,339
------------ ----------- -----------
CASH, end of year $ 384,304 $ 350,892 $ 214,642
============ =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 978,220 $ 601,973 $ 760,223
============ =========== ===========
The accompanying notes are an integral part of these financial statements.
71
NORTHLAND CABLE PROPERTIES FOUR LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
1. ORGANIZATION AND PARTNERS' INTERESTS:
Formation and Business
Northland Cable Properties Four Limited Partnership (the Partnership), a
Washington limited partnership, was formed on January 2, 1985. The Partnership
was formed to acquire, develop and operate cable television systems. The
Partnership began operations on April 19, 1985, by acquiring cable television
systems in the city of Sherman, Texas. Additional systems were acquired in San
Joaquin, California, and Tyler, Texas. In September of 1995, the Partnership
acquired cable television systems serving the areas of Hillsboro, Kaufman, New
Waverly, Waterwood and Oak Grove, Texas. In October of 1995, the Partnership
acquired cable television systems serving the areas of Huffman, Prarie View, Cut
and Shoot, Brookshire, Tarkenton, Ace, Simonton and Fulshear, Texas. The
Partnership has 41 nonexclusive franchises to operate the cable systems for
periods which will expire at various dates through the year 2012.
Northland Communications Corporation is the Managing General Partner (the
General Partner) of the Partnership. The General Partner and its affiliates also
own and operate cable television systems. In addition, the General Partner
manages cable television systems for other limited partnerships for which it is
the General Partner.
FN Equities 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 to partnership capital.
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 are recorded as a
reduction of limited partners' capital.
72
-2-
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Depreciation
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 5-10 years
Allocation of Cost of Purchased Cable Television Systems
The Partnership allocates 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 would have been allocated to goodwill.
Intangible Assets
Costs assigned to franchise agreements and noncompetition agreements and other
intangibles are being amortized using the straight-line method over the
following estimated useful lives:
Franchise agreements 12-23 years
Noncompetition agreements and
other intangibles 5-15 years
Revenue Recognition
The Partnership recognizes revenue in the month service is provided to customers
and accounts for advance payments on services to be rendered as subscriber
prepayments.
Estimates Used in Financial Statement Presentation
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amount of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Reclassifications
Certain reclassifications have been made to conform prior years' data with the
current year presentation.
73
-3-
3. TRANSACTIONS WITH THE GENERAL PARTNER AND AFFILIATES:
Management Fees
The General Partner manages the Partnership and receives a fee for its services
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 $396,408, $339,457 and $324,367 during
1995, 1994 and 1993, 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, losses and distributions. In
any year after the limited partners have received cumulative cash distributions
equal to 100% of their contributions, the limited partners will receive cash
distributions equal to at least 50% of the net taxable income allocated to them
prior to any cash distribution to the general partners. 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 $7,500,000
($500 per limited partnership unit). As of December 31, 1995, $5,150,259 ($351
per limited partnership unit) has been distributed to the limited partners and
the Partnership has repurchased $154,500 of limited partnership units (267 units
at $500 per unit and 70 units at $300 per unit).
Reimbursements
The General Partner provides certain centralized services to the Partnership and
other affiliated entities. As set forth in the Partnership Agreement, the
Partnership reimburses the General Partner for the cost of those services
provided by the General Partner to the Partnership. These services include
engineering, marketing, management services, accounting, bookkeeping, legal,
copying, office rent and computer services.
The amounts billed to the Partnership for these services are based on the
General Partner's cost. The cost of certain services is charged directly to the
Partnership, based upon actual time spent by employees of the General Partner.
The cost of other services is allocated to the Partnership, and other affiliated
entities, based upon their relative size, revenue and other factors. Amounts
charged to the Partnership by the General Partner for these services were
$324,511, $270,988 and $266,449 for 1995, 1994 and 1993, respectively.
In 1995, 1994 and 1993, the Partnership paid billing service fees to an
affiliate, amounting to $42,444, $37,481 and $36,161, respectively.
74
-4-
The Partnership has entered into an operating management agreement with an
affiliate managed by the General Partner. Under the terms of these agreements,
the affiliate serves as the managing agent for one of the Partnership's cable
television systems and is reimbursed for certain operating, administrative and
programming expenses. The Partnership paid $29,856, $20,590 and $23,788 under
the terms of these agreements during 1995, 1994 and 1993, respectively.
During 1994 and 1993 the Partnership served as the managing agent for an
affiliate's cable television system and was reimbursed for certain operating and
programming expenses. The Partnership received $23,272 and $30,408 under the
terms of these agreements during 1994 and 1993, respectively.
In September 1994, the Partnership began paying 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 1995 and 1994 were $24,619 and $40,002, 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 staffs. CAC billed the Partnership $14,296 and $11,950 in 1995 and 1994,
respectively, for these services.
Due to General Partner and Affiliates
The liability to the General Partner and affiliates consists of the following:
December 31,
-----------------
1995 1994
------ ------
Management fees $ 40,574 $28,913
Reimbursable operating costs
and other 39,016 26,474
Due to affiliates 36,755 3,464
-------- -------
$116,345 $58,851
======== =======
75
-5-
4. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following:
December 31,
------------------------
1995 1994
------ -----
Land and buildings $ 346,392 $ 287,892
Distribution plant 23,009,700 14,714,120
Other equipment 1,382,604 1,168,295
Construction in progress 33,616 39,485
----------- -----------
24,772,312 16,209,792
Less--accumulated depreciation 13,265,067 12,415,608
----------- -----------
$11,507,245 $ 3,794,184
=========== ===========
Replacements, renewals and improvements are capitalized. Maintenance and repairs
are charged to expense as incurred.
5. NOTES PAYABLE:
Notes payable consists of the following:
December 31,
-----------------------
1995 1994
------ -----
Revolving credit and term loan agreement,
collateralized by a first lien position on all
present and future assets of the Partnership.
Interest rates vary based on certain financial
covenants; currently 8.92% (weighted average).
Graduated principal payments plus interest are due
quarterly until maturity on December 31, 2003. $19,333,406 $ -
Unsecured, subordinated hold-back note, bearing
interest at the prime rate, currently 8.5%,
payable June 1996. 237,658 -
Unsecured, subordinated, non-interest bearing hold-
back note, payable April 1996. 218,111 -
Term loan, repaid in 1995, collateralized by a first
lien position on all present and future assets of
the Partnership. - 9,784,068
----------- ----------
$19,789,175 $9,784,068
=========== ==========
76
-6-
Annual maturities of notes payable after December 31, 1995 are as follows:
1996 $ 1,132,438
1997 1,353,388
1998 1,546,672
1999 2,030,008
2000 2,610,010
Thereafter 11,116,659
-----------
$19,789,175
===========
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 a maximum Leverage Ratio of 5.75 to 1, a minimum Pro Forma
Debt Service Ratio of 1.15 to 1 and a minimum Interest Coverage Ratio of 1.75 to
1. As of December 31, 1995, the Partnership was not in compliance with the
requirements for limited partnership distributions made and the outstanding
balance on a hold-back note payable. The Partnership has received a waiver from
the creditor for these covenant violations. The General Partner submits
quarterly debt compliance reports to the Partnership's creditor under this
agreement.
The Partnership has entered into interest rate swap agreements to reduce the
impact of changes in interest rates. Interest rate swap transactions generally
involve the exchange of fixed and floating interest payment obligations without
the exchange of the underlying principal amounts. At December 31, 1995, the
Partnership had outstanding two interest rate swap agreements with its creditor,
having a notional principal amount of $14,000,000. These agreements effectively
change the Partnership's interest rate exposure to a fixed rate of 5.96%
(weighted average), plus an applicable margin based on certain financial
covenants (the margin at December 31, 1995 was 3.0%). Both interest rate swap
agreements expire in September of 1997. At December 31, 1995, the Partnership
would have been required to pay approximately $173,000 to settle these
agreements, based on the fair value estimated by the counterparty.
The counterparty to the Partnership's interest rate swap agreements is the
Partnership's creditor. The Partnership is exposed to credit risk to the extent
of nonperformance by this counterparty; however, management believes the risk of
incurring losses due to credit risk is remote. The notional amount of the
instruments discussed above reflects the extent of involvement in the
instruments, but does not represent the Partnership's exposure to market risk.
Considerable judgment is required to develop the estimates of fair value; thus,
the estimates provided above are not necessarily indicative of the amounts that
could be realized in a current market exchange.
6. INCOME TAXES:
Income taxes 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
77
-7-
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.
Taxable income to the limited partners was approximately $321,000, $846,000 and
$710,000 for the three years in the period ended December 31, 1995, and is
different from that reported in the statements of operations due to the
difference in depreciation expense allowed for tax purposes and that amount
recognized under generally accepted accounting principles. There were no other
significant differences between taxable income and the net income (loss)
reported in the statements of operations.
In general, under current federal income tax laws, a limited partner's allocated
share of tax losses from a partnership is allowed as a deduction on his
individual income tax return only to the extent of the partner's adjusted basis
in his 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 he does 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 other income from
passive activities. 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 his
entire interest in the passive activity.
7. COMMITMENTS AND CONTINGENCIES:
Lease Arrangements
The Partnership rents tower sites, office facilities and pole attachments under
leases accounted for as operating leases. Rental expense included in operations
was $169,945, $190,215 and $138,503 in 1995, 1994 and 1993, respectively.
Minimum lease payments to the end of the lease terms are as follows:
1996 $ 31,624
1997 21,005
1998 17,835
1999 16,920
2000 16,720
Thereafter 55,170
--------
$159,274
========
78
-8-
Effects of Regulation
On October 5, 1992, Congress enacted the Cable Television Consumer Protection
and Competition Act of 1992 (the 1992 Act). On April 1, 1993, the Federal
Communications Commission (FCC) adopted rules implementing rate regulation and
certain other provisions of the 1992 Act, which became effective September 1,
1993. On February 22, 1994, the FCC adopted further rate regulation rules
requiring additional reductions, which became effective May 15, 1994, and
revised the benchmarks and formulas used to calculate such rates. Also in
February, the FCC's initial rules governing cost-of-service showings were
adopted, with an effective date of May 15, 1994. Cable operators may pursue
cost-of-service showings to justify charging rates for regulated services in
excess of those established by the FCC in its benchmark regulatory scheme.
On May 5, 1995, the FCC announced the adoption of a simplified set of rate
regulation rules applicable to small cable systems, defined as a system serving
15,000 or fewer subscribers, 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 cable systems are
small systems. Maximum permitted rates under these revised rules are dependent
on several factors including the number of regulated channels offered, the net
asset basis of plant and equipment used to deliver regulated services, the
number of subscribers served and a reasonable rate of return.
It is management's opinion that, in all material respects, the rates in effect
in the Partnership's cable systems are within the maximum allowable rates
permitted under the FCC's small cable system rules.
On February 8, 1996, the Telecommunications Act of 1996 (the 1996 Act) became
law. The 1996 Act will eliminate all rate controls on cable programming service
tiers 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). All of the
Partnership's cable systems qualify as small cable systems. Many of the changes
called for by the 1996 Act will not take effect until the FCC issues new
regulations, a process that could take from several months to a few years
depending on the complexity of the required changes and the statutory time
limits. Because of this the full impact of the 1996 Act on the Partnership's
operations cannot be determined at this time.
8. CABLE TELEVISION SYSTEM ACQUISITION:
On September 15, 1995, the Partnership acquired substantially all of the
operating assets and franchise rights of cable systems serving approximately
3,500 subscribers in or around the communities of Kaufman, Oak Grove, Hillsboro,
New Waverly and Waterwood, all in the state of Texas. The purchase price for
these systems was $4,492,254, of which $4,226,896 was paid at the closing date.
The balance will be paid in June 1996, net of any purchase price and other
adjustments, under the terms of an unsecured, subordinated hold-back note
bearing interest at the prime rate. At December 31, 1995, the balance owing on
this note was $237,658. The purchase was financed by borrowings under the
Partnership's revolving credit and term loan facility.
79
-9-
On October 31, 1995, the Partnership acquired substantially all operating assets
and franchise rights of the cable television systems in or around Huffman,
Prairie View, Waller, Cut and Shoot, Brookshire, Tarkenton, Ace, Simonton and
Fulshear, all in the state of Texas (the Brookridge system). The Brookridge
system serves approximately 3,600 subscribers and the purchase price was
$5,585,900 of which $5,306,510 was paid at the closing date. The balance will be
paid in April 1996, net of any purchase price and other adjustments, under the
terms of an unsecured, subordinated, non-interest bearing hold-back note. At
December 31, 1995, the balance owing on this note was $218,111. The purchase was
financed by borrowings under the Partnership's revolving credit and term loan
facility.
Pro forma operating results (unaudited) of the Partnership for 1995, assuming
the acquisitions of the systems described above had been made at the beginning
of year, follow.
For the year ended
December 31,
1995
------------------
(unaudited)
Revenue $ 8,799,777
===========
Net loss $(1,101,961)
===========
Net loss per limited partnership unit $ (74)
===========
80
FN EQUITIES JOINT VENTURE
(A CALIFORNIA PARTNERSHIP)
FINANCIAL REPORT
JUNE 30, 1996
SINGER, LEWAK, GREENBAUM & GOLDSTEIN
CERTIFIED PUBLIC ACCOUNTANTS
81
CONTENTS
PAGE
INDEPENDENT AUDITOR'S REPORT 1
FINANCIAL STATEMENT
Balance Sheet 2
Notes to Financial Statement 3-5
SINGER, LEWAK, GREENBAUM & GOLDSTEIN
CERTIFIED PUBLIC ACCOUNTANTS
82
[SINGER, LEWAK, GREENBAUM & GOLDSTEIN LLP LETTERHEAD]
INDEPENDENT AUDITOR'S REPORT
To the Partners
FN Equities Joint Venture
Torrance, California
Partners:
We have audited the accompanying balance sheet of FN Equities Joint Venture (a
California Partnership) as of June 30, 1996. This financial statement is the
responsibility of the Joint Venture's management. Our responsibility is to
express an opinion on this financial statement based on our audit. We did not
audit the financial statements of the four Northland Cable Properties Limited
Partnerships, the investments in which, as discussed in Note 2 to the financial
statement, are accounted for by the equity method of accounting. The financial
statements of the four Northland Cable Properties Limited Partnerships were
audited by other auditors whose reports have been furnished to us, and our
opinion, insofar as it relates to the amounts included for the four Northland
Cable Properties Limited Partnerships, is based solely on he reports of the
other auditors.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the balance sheet is free of material
misstatement . An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall balance sheet presentation. We
believe that our audit of the balance sheet and the reports of the other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audit and the reports of other auditors, the
balance sheet referred to above presents fairly, in all material respects, the
financial position of FN Equities Joint Venture as of June 30, 1996 in
conformity with generally accepted accounting principles.
/s/ Singer, Lewak, Greenbaum & Goldstein LLP
Los Angeles, California
July 3, 1996
83
FN EQUITIES JOINT VENTURE
(A CALIFORNIA PARTNERSHIP)
BALANCE SHEET
As of June 30, 1996
ASSETS
CURRENT ASSETS $693
Cash ----
TOTAL ASSETS $693
====
PARTNERS' CAPITAL
PARTNERS' CAPITAL $693
----
TOTAL PARTNERS' CAPITAL $693
====
The accompanying notes are an integral part of these financial statements.
SINGER, LEWAK, GREENBAUM & GOLDSTEIN
CERTIFIED PUBLIC ACCOUNTANTS
84
FN EQUITIES JOINT VENTURE
(A CALIFORNIA PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
As of June 30, 1996
NOTE 1 - ORGANIZATION AND PARTNERS' INTERESTS
Formation and Banners
FN Equities Joint Venture (the Joint Venture), a California
Partnership, was formed on November 12, 1984. The Joint Venture was
formed to serve as the Administrative General Partner of certain
limited partnerships, as described in Note 3, involved in the
acquisition, construction, operation, sale, or other disposition of
cable television systems and to provide administrative services to
certain other limited partnerships.
Contributed Capital and Income Allocation
The three partners in the Joint Venture are John Simmers (Simmers); FN
Equities, Inc., a California corporation (FN); and FN Network Partners,
Ltd., a California limited partnership (NPL). The Joint Venture is
operated in accordance with the Amended and Restated Joint Venture
Agreement dated March 15, 1989 (the Joint Venture Agreement).
The initial capital contributions of each of the partners were as
follows: Simmers--no initial capital contribution, FN--$100,
NPL--$100,000. The Joint Venture Agreement provides that all additional
capital contributions shall be made by NPL, but no additional capital
contributions shall be required, nor shall any partner be entitled to a
return of any of his capital contribution without the agreement of all
the partners.
As defined in the Joint Venture Agreement, net income and net losses of
the Joint Venture shall be allocated among the partners in the
following proportions: 10% to Simmers and 90% to NPL.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Investments in Limited Partnerships
Investments in limited partnerships are carried on the equity method
whereby the Joint Venture records the investments at cost and, on an
ongoing basis, the investments are adjusted to reflect the Joint
Venture's share of the income or loss of the limited partnerships and
additional contributions to or withdrawals from the portfolio entities.
Income Taxes
Income taxes are the responsibility of the Joint Venture's individual
partners. Accordingly, no income taxes have been provided for in this
financial statement.
SINGER, LEWAK, GREENBAUM & GOLDSTEIN
Certified Public Accountants
85
FN EQUITIES JOINT VENTURE
(A CALIFORNIA PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
As of June 30, 1996
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements. Actual results could differ from
those estimates.
NOTE 3 - INVESTMENTS IN LIMITED PARTNERSHIPS
At June 30, 1996, the Joint Venture was the Administrative General
Partner of the following partnerships (the Northern Partnerships):
Northland Cable Properties Four Limited Partnership (NCP4)
Northland Cable Properties Five Limited Partnership (NCP5)
Northland Cable Properties Six Limited Partnership (NCP6)
Northland Cable Properties Seven Limited Partnership (NCP7)
Northland Communications Corporation is the Managing General Partner of
each of the Northland Partnerships. The Northland Partnerships were
formed to acquire, develop, and operate cable television systems. Each
Northland Partnership owns non-exclusive franchises to operate cable
systems as follows:
Number of Franchise area -
Franchises Various towns in: Expiration date
---------- ----------------- ---------------
NCP4 41 Texas & California Various through 2012
NCP5 25 Texas & North Carolina Various through 2014
NCP6 24 Mississippi & North Carolina Various through 2017
NCP7 10 Texas and Washington Various through 2017
Each Northland Partnership is operated under separate partnership
agreements which are similar to each other but not identical. In
general, items of income and loss are allocated 99% to the limited
partners and 1% to the general partners (not including the
Administrative General Partner) until the limited partners receive
aggregate cash distributions in an amount equal to their aggregate
capital contributions, at which time the general partners (including
the Administrative General Partner) are allocated 25% and the limited
partners are allocated 75% of partnership income, loss, and
distributions. This point had not been reached in NCP4, NCP5, NCP6 or
NCP7 at June 30, 1996, and accordingly, the Joint Venture had no
investment interest therein.
SINGER, LEWAK, GREENBAUM & GOLDSTEIN
CERTIFIED PUBLIC ACCOUNTANTS
86
FN EQUITIES JOINT VENTURE
(A CALIFORNIA PARTNERSHIP)
NOTES TO FINANCIAL STATEMENTS
As of June 30, 1996
NOTE 3 - INVESTMENTS IN LIMITED PARTNERSHIPS (Continued)
Summarized financial information of the Northland Partnerships as of
June 30, 1996 is as follows:
UNAUDITED (in 000s)
-------------------------------------------
NCP4 NCP5 NCP6 NCP7
------- ------- ------- -------
Cash $ 627 $ 1,139 $ 996 $ 799
Other assets 383 420 394 615
Intangible assets (net) 2,573 12,932 7,107 6,226
Investment in Cable TV
properties (net) 11,304 10,392 5,954 10,070
------- ------- ------- -------
Total Assets $14,887 $24,883 $14,451 $17,710
======= ======= ======= =======
Notes payable $19,660 $26,698 $13,417 $21,392
Other liabilities 1,520 1,574 1,507 1,450
------- ------- ------- -------
Total Liabilities 21,180 28,272 14,924 22,842
------- ------- ------- -------
Partners' (Deficit)
General (125) (246) (132) (153)
Limited (6,168) (3,143) (341) (4,979)
------- ------- ------- -------
Total Partners' (Deficit) (6,293) (3,389) (473) (5,132)
------- ------- ------- -------
Total Liabilities and
Partners' (Deficit) $14,887 $24,883 $14,451 $17,710
======= ======= ======= =======
An affiliate of the Managing General Partner of the Northland
Partnership is negotiating to acquire the operating assets of NCP4. The
proposed purchase price will be based on an independent appraisal and
the purchase will be subject to the approval of the limited partners. If
the limited partners approval is obtained, it is anticipated that this
purchase will be completed in 1996.
SINGER, LEWAK, GREENBAUM & GOLDSTEIN
CERTIFIED PUBLIC ACCOUNTANTS
87
[ARTHUR ANDERSEN LLP LETTERHEAD]
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of
Northland Cable Properties Four Limited Partnership:
We have audited the accompanying balance sheets of Northland Cable Properties
Four Limited Partnership (a Washington limited partnership) as of December 31,
1995 and 1994, 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, 1995. These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Northland Cable Properties Four
Limited Partnership as of December 31, 1995 and 1994, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
- ------------------------
Seattle, Washington,
March 4, 1996
88
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of
Northland Cable Properties Five Limited Partnership and Subsidiary:
We have audited the accompanying consolidated balance sheets of Northland Cable
Properties Five Limited Partnership and subsidiary (a Washington limited
partnership) as of December 31, 1995 and 1994, and the related consolidated
statements of operations, changes in partners' deficit and cash flows for each
of the three years in the period ended December 31, 1995. These financial
statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Northland Cable Properties Five
Limited Partnership and subsidiary as of December 31, 1995 and 1994, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1995 in conformity with generally accepted
accounting principles.
Seattle, Washington,
February 27, 1996
89
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,
1995 and 1994, and the related statements of operations, changes in partners'
capital (deficit) and cash flows for each of the three years in the period ended
December 31, 1995. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Northland Cable Properties Six
Limited Partnership as of December 31, 1995 and 1994, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1995 in conformity with generally accepted accounting principles.
Seattle, Washington,
February 9, 1996
90
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of
Northland Cable Properties Seven Limited Partnership:
We have audited the accompanying balance sheets of Northland Cable Properties
Seven Limited Partnership (a Washington limited partnership) as of December 31,
1995 and 1994, and the related statements of operations, changes in partners'
capital (deficit) and cash flows for each of the three years in the period ended
December 31, 1995. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Northland Cable Properties
Seven Limited Partnership as of December 31, 1995 and 1994, and the results of
its operations and its cash flows for the three years in the period ended
December 31, 1995 in conformity with generally accepted accounting principles.
Seattle, Washington,
January 24, 1996
91
ARTHUR ANDERSEN LLP
[LETTERHEAD]
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Shareholder of
Northland Communications Corporation:
We have audited the accompanying consolidated balance sheets of Northland
Communications Corporation (a Washington corporation and a wholly owned
subsidiary of Northland Telecommunications Corporation) and subsidiary as of
December 31, 1995 and 1994, and the related consolidated statements of
operations, changes in shareholder's equity and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Northland Communications
Corporation and subsidiary as of December 31, 1995 and 1994, and the results of
their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
/s/ Arthur Andersen LLP
- -----------------------------
Seattle, Washington,
March 21, 1996
92
NORTHLAND COMMUNICATIONS CORPORATION AND SUBSIDIARY
(A wholly owned subsidiary of
Northland Telecommunications Corporation)
CONSOLIDATED BALANCE SHEETS -- DECEMBER 31, 1995 AND 1994
ASSETS
1995 1994
----- ----
CASH $ 424,243 $ 60,533
ACCOUNTS RECEIVABLE 39,703 -
RECEIVABLES FROM MANAGED
LIMITED PARTNERSHIPS 412,012 484,684
UNSECURED NET ADVANCES TO PARENT
AND AFFILIATES 13,628,675 12,281,180
OTHER 130,825 105,465
INVESTMENT IN CABLE TELEVISION
PROPERTIES:
Property and equipment, at cost 2,859,228 -
Less-- accumulated depreciation (162,221) -
----------- -----------
2,697,007 -
Franchise agreements (net of
accumulated amortization of
$70,735 in 1995) 1,078,647 -
Other intangibles (net of accumulated
amortization of $27,242 in 1995) 202,066 -
----------- -----------
Total investment in cable
television properties 3,977,720 -
----------- -----------
OTHER PROPERTY AND EQUIPMENT 1,248,204 1,099,404
Less-- accumulated depreciation (765,080) (671,191)
----------- -----------
483,124 428,213
----------- -----------
Total assets $19,096,302 $13,360,075
=========== ===========
LIABILITIES AND SHAREHOLDER'S EQUITY
1995 1994
----- ----
LIABILITIES:
Accounts payable and accrued expenses $ 235,127 $ 38,566
Subscriber prepayments 46,240 -
Deposits 6,099 -
Due to managed limited partnership 581,037 -
Notes payable 2,963,692 27,951
Taxes payable 3,975,350 3,766,250
Accumulated deficit in managed limited partnerships 668,697 488,119
----------- -----------
Total liabilities 8,476,242 4,320,886
----------- -----------
COMMITMENTS AND CONTINGENCIES (Note 8)
SHAREHOLDER'S EQUITY:
Common stock, par value $.00625 per share;
4,000,000 shares authorized;
10,000 shares issued and outstanding 63 63
Additional paid-in capital 995,101 995,101
Retained earnings 9,624,896 8,044,025
----------- -----------
Total shareholder's equity 10,620,060 9,039,189
----------- -----------
Total liabilities and shareholder's
equity $19,096,302 $13,360,075
=========== ===========
The accompanying notes are an integral part of
these consolidated balance sheets.
93
NORTHLAND COMMUNICATIONS CORPORATION AND SUBSIDIARY
(A wholly owned subsidiary of
Northland Telecommunications Corporation)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
1995 1994
---- ----
MANAGEMENT OPERATIONS:
Management fee revenue $2,061,528 $2,182,266
General and administrative expenses, net of
reimbursed operating expenses 193,863 501,148
---------- ----------
Income from management operations 1,867,665 1,681,118
---------- ----------
CABLE TELEVISION OPERATIONS:
Service revenues 863,274 -
Expenses, including reimbursements to affiliates-
Operating 75,735 -
General and administrative 148,005 -
Programming 204,337 -
---------- ----------
Income from cable television operations 435,197 -
---------- ----------
Income from operations before depreciation
and amortization 2,302,862 1,681,118
---------- ----------
DEPRECIATION AND AMORTIZATION EXPENSE 354,088 98,596
---------- ----------
Income from operations 1,948,774 1,582,522
---------- ----------
OTHER INCOME (EXPENSE):
Interest income 16,252 7,699
Interest expense (156,624) (55,877)
(Loss) gain on sale of managed limited partnership
interests (23,588) 3,518,417
Equity in net income of managed limited
partnerships 6,657 260,788
Loss on disposal of assets - (18,134)
Other - (1,395)
---------- ----------
(157,303) 3,711,498
---------- ----------
Income before income taxes 1,791,471 5,294,020
PROVISION IN LIEU OF INCOME TAXES 210,600 1,807,827
---------- ----------
NET INCOME $1,580,871 $3,486,193
========== ==========
The accompanying notes are an integral part of these
consolidated financial statements.
94
NORTHLAND COMMUNICATIONS CORPORATION AND SUBSIDIARY
(A wholly owned subsidiary of
Northland Telecommunications Corporation)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
Common Stock
--------------------- Additional
Number Paid-in Retained
of Shares Amount Capital Earnings Total
--------- ------ ------- -------- -----
BALANCE, at December 31, 1993 10,000 $63 $995,101 $4,557,832 $ 5,552,996
Net income - - - 3,486,193 3,486,193
------ --- -------- ---------- -----------
BALANCE, at December 31, 1994 10,000 63 995,101 8,044,025 9,039,189
Net income - - - 1,580,871 1,580,871
------ --- -------- ---------- -----------
BALANCE, at December 31, 1995 10,000 $63 $995,101 $9,624,896 $10,620,060
====== === ======== ========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
95
NORTHLAND COMMUNICATIONS CORPORATION AND SUBSIDIARY
(A wholly owned subsidiary of
Northland Telecommunications Corporation)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1994
1995 1994
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,580,871 $ 3,486,193
Adjustments to reconcile net income to net cash
provided by (used in) operating activities-
Depreciation and amortization 354,088 98,596
Loss on disposal of assets - 18,134
Loss (gain) on sale of managed limited
partnership interests 23,588 (3,518,417)
Equity in net income of managed limited
partnerships (6,657) (260,788)
(Increase) decrease in operating assets:
Receivables from managed limited
partnerships 72,672 (413,828)
Accounts receivable (39,703) -
Other (15,634) (8,745)
Increase (decrease) in operating liabilities:
Accounts payable and accrued expenses 152,642 (1,829)
Subscriber prepayments 19,728 -
Deposits 6,099 -
----------- -----------
Net cash provided by (used in) operating
activities 2,147,694 (600,684)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of cable television system, less holdback
of $581,037 (3,434,566) -
Purchases of property and equipment (315,610) (82,212)
Cash distributions from managed limited partnerships 223,330 71,332
Proceeds from disposition of assets - 3,000
----------- -----------
Net cash used in investing activities (3,526,846) (7,880)
----------- -----------
1995 1994
---- ----
CASH FLOWS FROM FINANCING ACTIVITIES:
Unsecured net advances to parent and affiliates,
including income taxes $(1,138,395) $562,685
Proceeds from notes payable 3,050,000 -
Principal payments on notes payable (113,259) (26,019)
Loan fees (55,484) -
----------- --------
Net cash provided by financing activities 1,742,862 536,666
----------- --------
INCREASE (DECREASE) IN CASH 363,710 (71,898)
CASH, beginning of year 60,533 132,431
----------- --------
CASH, end of year $ 424,243 $ 60,533
=========== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 155,197 $ 59,357
=========== ========
Cash paid during the year for state income taxes $ 1,500 $ 7,827
=========== ========
The accompanying notes are an integral part of these
consolidated financial statements.
96
NORTHLAND COMMUNICATIONS CORPORATION AND SUBSIDIARY
(A wholly owned subsidiary of
Northland Telecommunications Corporation)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES:
Formation and Business
Northland Communications Corporation (NCC), a Washington corporation, is the
managing general partner of six limited partnerships which own and operate cable
television systems throughout the western United States, Texas, Mississippi,
North Carolina, Alabama and Georgia. Northland Cable Properties, Inc. (NCP,
Inc.), a Washington corporation, was formed in 1995 to own and operate cable
television systems. NCP, Inc. is a wholly owned subsidiary of NCC. NCP, Inc.
currently has eight non-exclusive franchises to operate cable television systems
which expire at various dates through 2010. NCC and NCP, Inc. are collectively
referred to as the Company.
The Company and its affiliates, Northland Cable Television, Inc. and subsidiary
(NCTV); Northland Cable Services Corporation and subsidiaries (NCSC); and
Northland Media, Inc. and subsidiary (NMI) are wholly owned subsidiaries of
Northland Telecommunications Corporation and subsidiaries (NTC). NCTV was formed
to own and operate cable television systems. Northland Cable News, Inc. (NCN)
was formed to develop and distribute programming to affiliated entities. NCN is
a wholly owned subsidiary of NCTV. NCSC is the parent company of Cable
Television Billing, Inc. (CTB), Northland Investment Corporation (NIC) and Cable
Ad-Concepts, Inc. (CAC). CTB provides billing services to cable systems owned
and managed by limited partnerships and wholly owned systems of the Company and
NCTV. NIC acts as the managing underwriter of affiliated limited partnership
offerings. CAC develops and produces video commercial advertisements to be
cablecast on Northland affiliated cable systems. NMI was formed as a holding
company to own certain non-cable related assets.
Summary of Significant Accounting Policies:
Principles of Consolidation
The consolidated financial statements of the Company include the accounts of NCC
and NCP, Inc. Significant intercompany accounts and transactions have been
eliminated.
Acquisition of Cable Television Systems
Cable television system acquisitions are accounted for as purchase transactions
and their cost is allocated as follows: first, to the estimated fair market
value of net tangible assets acquired; then, to the franchise and other
determinable intangible costs; and then, any excess is allocated to goodwill.
97
-2-
Depreciation -- 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
Furniture and fixtures 10 years
Vehicles 5 years
Intangible Assets -- Costs assigned to franchise agreements and other intangible
assets are amortized using the straight-line method over the following estimated
useful lives.
Franchise agreements 7-15 years
Other intangible assets 5 years
Revenue Recognition -- Cable television service revenue is recognized in the
month service is provided to customers. Advance payments on cable services to be
rendered are recorded as subscriber prepayments. Revenue for management services
provided to managed limited partnerships is recorded on the accrual method in
the month service is provided.
Estimates Used in Financial Statement Presentation
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amount of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amount of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
Reclassifications
Certain reclassifications have been made to conform the prior year's data to the
current year presentation.
2. INCOME TAXES:
The operations of the Company and its affiliates are included in a consolidated
federal income tax return filed by NTC. For financial reporting purposes, the
provision in lieu of income taxes is computed as if the Company filed a separate
federal income tax return.
Taxes payable include amounts currently payable, as well as deferred income
taxes payable. Deferred income taxes primarily relate to differences in
computing the equity in net income or losses of managed limited partnerships and
in computing depreciation as reported for financial reporting and income tax
purposes.
Deferred income taxes are determined on the asset and liability method in
accordance with Statement of Financial Accounting Standards (SFAS) No. 109,
"Accounting for Income Taxes." The asset and liability method requires the
recognition of deferred income taxes for the expected future tax consequences of
temporary differences between the financial statement and the tax bases of
assets and liabilities.
98
-3-
The primary components of taxes payable, as of December 31, 1995 and 1994, are
as follows:
1995 1994
---- ----
Deferred tax assets:
Net operating loss carryforward $ - $ 874,000
Valuation allowance - (486,250)
---------- ----------
- 387,750
---------- ----------
Deferred tax liabilities:
Property and equipment 112,080 90,000
Accumulated deficit in managed limited partnerships 3,475,233 4,064,000
---------- ----------
3,587,313 4,154,000
---------- ----------
Deferred tax liabilities, net 3,587,313 3,766,250
Current taxes payable 388,037 -
---------- ----------
Taxes payable $3,975,350 $3,766,250
========== ==========
During 1995, the Company fully realized its tax net operating loss carryforward
resulting from the sale in 1994 of certain partnerships for which it served as
general partner. This resulted in a tax benefit in 1995 of approximately
$400,000, for financial reporting purposes. The Company has elected not to
adjust the previously issued 1994 results for this amount.
3. TRANSACTIONS WITH MANAGED LIMITED PARTNERSHIPS AND OTHER RELATED PARTIES:
Management Fees
The Company receives a fee for managing the limited partnerships of 5% to 6% of
the partnerships' gross revenues, excluding revenues from the sale of cable
television systems or franchises. Under the terms of certain credit agreements,
the payment of management fees is only allowed upon a partnership's compliance
with certain covenants.
Reimbursed Operating Expenses
The Company provides certain centralized services to managed limited
partnerships and other affiliated entities. As set forth in the partnership and
intercompany agreements, the managed limited partnerships and affiliated
entities reimburse the Company for the cost of those services, which include
executive salaries, engineering, marketing, management services, accounting,
bookkeeping, legal, copying, office rent and computer services.
The amounts billed to managed limited partnerships and affiliated entities for
these services are based on the Company's cost. The cost of certain services is
charged directly to these entities, based upon the actual time spent by the
Company's employees. The cost of other services is allocated to these entities
based upon their relative size, revenue and other factors. Amounts charged to
managed limited partnerships and affiliated entities for these services were
$3,903,518 and $3,097,333 for 1995 and 1994, respectively.
99
-4-
Accumulated Deficit in Managed Limited Partnerships
The Company is a general partner in limited partnerships that own and operate
cable television systems. All items of income, loss, deduction and credit are
allocated 99% to the limited partners and 1% to the Company, as general partner,
until the limited partners have received aggregate cash distributions in an
amount equal to aggregate capital contributions (plus, in some cases, a
preferred return). Thereafter, general partners receive 25% (20% at two
partnerships) and the limited partners are allocated 75% (80% at two
partnerships) of partnership income, losses and distributions.
Prior to the general partners' receiving cash distributions from operations for
any year, the limited partners must receive cash distributions in an amount
equal to at least 50% of the limited partners' allocable share of taxable net
income for such year. In the case of certain partnerships, the limitation is the
lesser of (i) 50% of the limited partners' allocable share of net income for
such year or (ii) the federal income tax payable on the limited partners'
allocable share of net income on the then highest marginal federal income tax
rate applicable to such net income.
Any distribution 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 the partnership agreements.
Upon a majority vote of the limited partners, the assets of the partnerships may
be sold to the Company. The price to be paid will be based upon an independent
appraisal. The Company is not obligated to purchase the interests offered.
Other Services
Affiliates of the Company charge fees to certain affiliated entities and managed
limited partnerships for providing program production, advertising and billing
services.
Receivables from (Payables to) Managed Limited Partnerships
Receivables from (payables to) managed limited partnerships consist of the
following:
December 31,
------------------------
1995 1994
---- ----
Northland Cable Properties Two $ - $ 4,758
Northland Cable Properties Three - 7,200
Northland Cable Properties Four 79,601 55,387
Northland Cable Properties Five 91,259 74,666
Northland Cable Properties Six 92,041 74,384
Northland Cable Properties Seven 87,046 77,453
Northland Cable Properties Eight 34,402 49,216
Pend Oreille Cable TV (581,037) 134,525
Others 27,663 7,095
--------- --------
$(169,025) $484,684
========= ========
100
-5-
4. CABLE TELEVISION PROPERTY AND EQUIPMENT:
Cable television property and equipment at December 31, 1995 consists of the
following:
Buildings $ 30,000
Distribution plant 2,739,228
Other equipment 90,000
----------
2,859,228
Less-- accumulated depreciation (162,221)
----------
$2,697,007
==========
Replacements, renewals and improvements are capitalized. Maintenance and repairs
are charged to expense as incurred.
5. OTHER PROPERTY AND EQUIPMENT
Other property and equipment consists of the following:
December 31,
----------------------------
1995 1994
----- ----
Furniture and fixtures $1,111,171 $ 962,371
Vehicles 137,033 137,033
---------- ----------
1,248,204 1,099,404
Less-- accumulated depreciation (765,080) (671,191)
---------- ----------
$ 483,124 $ 428,213
========== ==========
6. NOTES PAYABLE:
Notes payable consist of the following:
December 31,
-------------------
1995 1994
---- ----
Term loan, collateralized by a first lien
position on all present and future assets
of NCP, Inc. Interest rates vary based on
certain financial covenants; currently 8.71%.
Graduated principal payments plus interest are
due quarterly, with the remaining outstanding
balance due on December 31, 1999. $2,950,000 $ -
Other 13,692 27,951
---------- -------
$2,963,692 $27,951
========== =======
101
-6-
Annual maturities of notes payable ending after December 31, 1995, are as
follows:
1996 $ 213,692
1997 280,000
1998 320,000
1999 2,150,000
----------
$2,963,692
==========
Under the current term loan agreement, NCP, Inc. has agreed to restrictive
covenants which require the maintenance of certain ratios, including a Cash Flow
to Debt Service Ratio of 1.20 to 1 and a Funded Debt to Cash Flow Ratio of 4.75
to 1, among other restrictions. NCC submits quarterly debt compliance reports to
NCP, Inc.'s creditor under this agreement.
NCP, Inc. has entered into an interest rate swap agreement to reduce the impact
of changes in interest rates. Interest rate swap transactions generally involve
the exchange of fixed and floating interest payment obligations without the
exchange of the underlying principal amounts. At December 31, 1995, NCP, Inc.
had outstanding one interest rate swap agreement with its creditor, having a
notional principal amount of $2,950,000. This agreement effectively changes NCP,
Inc.'s interest rate exposure to a fixed rate of 5.71%, plus an applicable
margin based on certain financial covenants (the margin at December 31, 1995 was
3.00%). The interest rate swap agreement matures on June 30, 1997. At December
31, 1995, NCP, Inc. would have been required to pay approximately $21,500 to
settle this agreement, based on fair value estimates received from financial
institutions.
The counterparty to NCP, Inc.'s interest rate swap agreement is NCP, Inc.'s
creditor. NCP, Inc. is exposed to credit risk to the extent of nonperformance by
this counterparty; however, management believes the risk of incurring losses due
to credit risk is remote. The notional amount of the instruments discussed above
reflected the extent of involvement in the instruments, but did not represent
NCP, Inc.'s exposure to market risk. Considerable judgment is required to
develop the estimates of fair value; thus, the estimates provided above are not
necessarily indicative of the amounts that could be realized in a current market
exchange.
During 1994, an affiliate of the Company repaid all amounts outstanding under
the Company's then outstanding term loan, reducing amounts advanced to the
affiliate by the Company. For purposes of the consolidated statements of cash
flows, this has been treated as a noncash transaction.
7. EMPLOYEE BENEFIT ARRANGEMENTS:
NTC has a nonqualified stock option plan (the Plan) for certain key executives
of the Company. Under the terms of the Plan, options granted vest in incremental
amounts over specified time periods and are exercisable in the year vested, or
in any year thereafter, until termination of the Plan on March 31, 1997. The
exercise price of each option is $2.50. The Plan is administered by the
president of NTC. Since establishment of the Plan, 70,000 options have been
granted. At December 31, 1995 and 1994, no options were exercisable. During 1995
and 1994, options for 19,000 and 17,000 shares, respectively, were exercised. No
compensation expense was recognized when these options were exercised.
102
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The Company has a 401(k) retirement plan for the benefit of its employees.
Employees who have completed one year of service and who are at least 21 years
of age are eligible to participate in the plan.
In 1994, NTC established a discretionary regional managers stock bonus plan (the
Bonus Plan). The Bonus Plan is administered by the president of NTC. The
earliest bonus award date was January 1, 1996.
In 1995, NTC established a discretionary senior executive stock bonus plan,
which is based on total revenues generated by NTC and affiliates. The earliest
bonus award date is April 1996.
The Financial Accounting Standards Board has recently issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." This statement affects, among other things, the valuation and
disclosure of stock-based transactions with employees. As the Company plans to
use the pro forma disclosure alternative, the Company does not anticipate any
material impact on its financial position, results of operations or cash flows.
8. COMMITMENTS AND CONTINGENCIES:
Lease Arrangements
The Company rents office space, certain tower sites and pole attachments under
agreements accounted for as operating leases. Rental expense (including
month-to-month leases) was approximately $462,000 and $389,000 in 1995 and 1994,
respectively, before reimbursements from managed limited partnerships and
affiliates. Future minimum lease payments for noncancelable leases are as
follows:
1996 $455,897
1997 450,411
1998 1,541
1999 1,541
2000 1,041
Thereafter 3,122
--------
$913,553
========
Effects of Regulation
On October 5, 1992, Congress enacted the Cable Television Consumer Protection
and Competition Act of 1992 (the 1992 Act). On April 1, 1993, the Federal
Communications Commission (FCC) adopted rules implementing rate regulation and
certain other provisions of the 1992 Act, which became effective September 1,
1993. On February 22, 1994, the FCC adopted further rate regulation rules
requiring additional reductions, which became effective May 15, 1994, and
revised the benchmarks and formulas used to calculate such rates. Also in
February, the FCC's initial rules governing cost-of-service showings were
adopted, with an effective date of May 15, 1994. Cable operators may pursue
cost-of-service showings to justify charging rates for regulated services in
excess of those established by the FCC in its benchmark regulatory scheme.
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-8-
On May 5, 1995, the FCC announced the adoption of a simplified set of rate
regulation rules applicable to small cable systems, defined as a system serving
15,000 or fewer subscribers, owned by small companies, defined as a company
serving 400,000 or fewer subscribers. Under the FCC's definition, the Company is
a small company and each of the Company's cable systems are small systems.
Maximum permitted rates under these revised rules are dependent on several
factors including the number of regulated channels offered, the net asset basis
of plant and equipment used to deliver regulated services, the number of
subscribers served and a reasonable rate of return. It is management's opinion
that, in all material respects, the rates in effect in the Company's cable
systems are within the maximum allowable rates permitted under the FCC's small
cable system rules.
On February 8, 1996, the Telecommunications Act of 1996 (the 1996 Act) became
law. The 1996 Act will eliminate all rate controls on cable programming service
tiers 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). All of the
Company's cable systems qualify as small cable systems. Many of the changes
called for by the 1996 Act will not take effect until the FCC issues new
regulations, a process that could take from several months to a few years
depending on the complexity of the required changes and the statutory time
limits. Because of this, the full impact of the 1996 Act on the Company's
operations cannot be determined at this time.
Contingencies and Guarantees
As general partner, the Company is liable for partnership losses in excess of
amounts invested by the limited partners. The Company is also contingently
liable for the debt obligations of the limited partnerships, which were
approximately $87,071,000 as of December 31, 1995.
9. UNSECURED NET ADVANCES TO PARENT AND AFFILIATES:
Unsecured net advances to parent and affiliates consist of the following:
December 31,
-------------------------------
1995 1994
---- ----
Northland Cable Services Corp. $ 6,197 $ 1,831
Northland Telecommunications Corporation 5,369,366 4,195,636
Northland Cable Television, Inc. 7,752,657 7,586,773
Cable Television Billing, Inc. 500,455 496,940
----------- -----------
$13,628,675 $12,281,180
=========== ===========
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Following is a condensed consolidated balance sheet of Northland Cable
Television, Inc. and subsidiary at December 31, 1995:
Investment in cable television properties, net $72,464,372
Other assets 3,290,218
-----------
Total assets $75,754,590
===========
Bank notes payable $82,724,745
Unsecured advances payable to the Company 7,752,657
Other liabilities 7,057,150
Shareholder's deficit (21,779,962)
-----------
Total liabilities and shareholder's deficit $75,754,590
===========
The Company has advanced amounts to Northland Cable Television, Inc. to meet
working capital and debt service requirements. Management is of the opinion that
these advances are realizable through NCTV's future cash flow or from the
underlying value of NCTV's cable television systems, which served approximately
80,000 basic subscribers as of December 31, 1995. Under the terms of an
intercompany borrowing arrangement, the Company's parent and its affiliates have
mutually agreed to repay all outstanding advances by December 31, 1997.
10. SALES OF MANAGED LIMITED PARTNERSHIPS:
During 1994, NCTV purchased the assets of three partnerships which were managed
by the Company and in which it was a general partner. The Company reported a
gain of approximately $3,500,000, before income taxes, from the sales. The
Company received its proportionate share of the partnerships' assets upon the
sales. These assets were transferred to NTC, which then transferred the assets
to NCTV. For purposes of the consolidated statements of cash flows, these
amounts have been treated as noncash transactions. During 1995, the Company
received approximately $208,000 from the limited partnerships, representing its
proportionate share of holdback notes payable by NCTV.
11. ACQUISITION OF CABLE TELEVISION SYSTEMS:
On May 31, 1995, NCP, Inc., acquired the assets of the Pend Oreille Cable TV
Limited Partnership, a limited partnership managed by the Company. The aggregate
purchase price of these assets was $4,450,000, which was reduced by $435,000,
representing the Company's proportionate share of the sales proceeds
distributable by the partnership. The acquisition was financed through
borrowings under NCP, Inc.'s term loan, working capital provided by the Company
and approximately $581,000 payable under the holdback provisions of the purchase
agreement on August 31, 1996, net of any post-closing adjustments.
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Pro forma consolidated operating results (unaudited) of the Company for 1995 and
1994, assuming the acquisition of the assets described above had been made at
the beginning of the respective periods, follow:
1995 1994
---------- ----------
(unaudited) (unaudited)
Revenue $3,473,000 $3,552,000
========== ==========
Net income $1,132,000 $1,144,000
========== ==========
Pro forma results for 1994 have been adjusted to eliminate the gain on sale of
limited partnerships, on an after-tax basis.
106
EXHIBIT A
PROXY
For delivery at the Special Meeting of Limited Partners to be held on December
18, 1996, and at adjournments thereof.
SOLICITED ON BEHALF OF THE GENERAL PARTNERS.
The undersigned hereby: acknowledges receipt of the Notice of Special Meeting of
Limited Partners of Northland Cable Properties Four Limited Partnership (the
"Partnership") and accompanying Proxy Statement, each dated November 1, 1996
("Proxy Materials"); appoints John S. Whetzell and Richard I. Clark, or either
of them, as proxies, each with full power to appoint his substitute; represents
that the undersigned holds of record as of October 15, 1996, the number of units
of limited partnership interest set forth below; 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 December 18, 1996 or any adjournments
thereof; and directs the proxies to:
APPROVE / / DISAPPROVE / / ABSTAIN FROM VOTING ON / /
The following:
The grant to the Managing General Partner of authority to sell the
cable systems owned by the Partnership (the "Systems"), to dissolve and
wind up the affairs of the Partnership, to distribute the proceeds of
the liquidation and any remaining assets in accordance with the
Partnership Agreement and the Proxy Materials, and to take any action
deemed necessary or appropriate by it to accomplish the foregoing;
together with an amendment to the Amended and Restated Certificate and
Agreement of Limited Partnership of Northland Cable Properties Four
Limited Partnership, as such amendment is set forth in Exhibit B to the
Proxy Materials, to authorize the Partnership to enter into an
agreement with Northland Communications Corporation or its assigns
("Northland") for the sale to Northland of the undivided portion of the
Systems which is attributable to the Limited Partners' and
Administrative General Partner's collective interest in the
Partnership, and the distribution to Northland, in-kind, of the
undivided portion of the Systems which is attributable to the Managing
General Partner's interest in the Partnership, all on the terms and
conditions described in the Proxy Materials; and all such other and
future actions reasonably necessary to accomplish the foregoing.
This proxy will be voted as directed by the undersigned. The above-referenced
proposal is an integrated transaction. Therefore, Limited Partners may not vote
for or against individual elements of the proposed transaction, but must vote
either for or against the proposed transaction as a whole. IF THIS PROXY IS
EXECUTED AND RETURNED AND NO DIRECTION IS INDICATED, THIS PROXY WILL BE VOTED TO
APPROVE THE ABOVE-REFERENCED PROPOSAL.
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: __________________________, 1996 SIGN EXACTLY AS NAME APPEARS BELOW
X_____________________________________
Number of Limited Partnership (Signature)
Units Held:
X_____________________________________
(Signature, if held jointly)
PLEASE PROMPTLY COMPLETE, SIGN, DATE AND RETURN THIS PROXY FORM
IN THE ENCLOSED ENVELOPE.
107
EXHIBIT B
AMENDMENT
TO
AMENDED AND RESTATED CERTIFICATE AND AGREEMENT OF LIMITED PARTNERSHIP
OF
NORTHLAND CABLE PROPERTIES FOUR LIMITED PARTNERSHIP
The Amended and Restated Certificate and Agreement of Limited Partnership
of Northland Cable Properties Four Limited Partnership (the "Partnership"),
dated April 19, 1985, as amended (the "Partnership Agreement"), is further
amended by adding a new Article 22, which reads in its entirety as follows:
22. Sale and Distribution to Northland.
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 all of the cable television systems owned by the Partnership,
which serve the communities of Flint/Tyler, New Caney, Whitewright,
Hillsboro, Kaufman, Waterwood and Prairie View, Texas and Chowchilla,
California, as well as surrounding contiguous areas (the "Systems"),
that is attributable to the Limited Partners' and the Administrative
General Partner's collective interest in the Partnership, and (ii)
distribute in-kind to Northland the undivided portion of the Systems
that is attributable to the Managing General Partner's interest in the
Partnership. The terms and conditions of the Northland Agreement are
generally described in the Proxy Statement of the Partnership dated
November 1, 1996 (the "Proxy Statement"). This Article relates only to
the acquisition of the Systems by Northland and shall not, in any
respect, restrict or otherwise affect the authority of the General
Partners to sell or otherwise dispose of the Systems to unaffiliated
third parties in accordance with Article 11.
(1) Appraisal Process. The Partnership commissioned
Daniels & Associates, L.P., an independent, nationally-known cable
appraiser, to appraise the value of the Systems. The final appraisal,
which is dated as of June 30, 1996, was made in conformity with standard
appraisal techniques and applied relevant market and economic factors.
The General Partners made available to the appraiser all of the books
and records of the Partnership, and such other information as the
appraiser reasonably requested in order to ascertain the value of the
Systems. The Partnership will pay the fees and expenses of the
appraiser. The value of the Systems, as determined by the appraiser, is
$30,318,000. Such appraised value has been increased by the General
Partners to $33,500,000, which constitutes the "Northland Price," as
that term is used below in this Article 22.
(2) Exercise of Purchase Option. At any time within
180 days of the date of the Special Meeting of Limited Partners to which
the Proxy Statement relates, or of any adjournment thereof, Northland,
in its sole and absolute discretion, shall have the right to consummate
the Northland Agreement. The date of such consummation shall be the
"Closing Date." On the Closing Date, (a) the Partnership
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108
shall (i) sell to Northland the undivided portion of the Systems that
is attributable to the Limited Partners' and the Administrative General
Partner's collective interest in the Partnership, and (ii) distribute
to Northland in-kind the undivided portion of the Systems that is
attributable to the Managing General Partner's interest in the
Partnership; and (b) Northland shall pay the Partnership, through a
combination of cash and a promissory note (the "Note"), an amount (the
"Purchase Price") which is equal to the amount of cash that would be
distributed collectively to the Limited Partners and the Administrative
General Partner if, on the Closing Date, (i) the Systems were sold at
the Northland Price for cash to an independent third party, and gain
from the transaction were allocated in accordance with paragraph 16(c)
of the Partnership Agreement, (ii) all known Partnership liabilities
were paid, and (iii) the remaining sale proceeds were distributed to
the Partners in accordance with paragraph 16(d) of the Partnership
Agreement.
The cash payment made by Northland to the Partnership on the
Closing Date shall be in an amount which, after retiring known
Partnership liabilities, will enable the Partnership to distribute to
the Limited Partners $1,000 for every $1,000 invested. The Note
delivered by Northland to the Partnership on the Closing Date shall be
in principal amount equal to the remaining balance of the Purchase
Price, and shall bear interest at a rate of six percent (6%) per annum.
The Note will be payable in two annual installments commencing on the
first anniversary of the Closing Date, with one-half of the principal,
plus all accrued but unpaid interest, due on each payment date. The Note
will be subordinated to Northland's existing and future senior debt.
On the Closing Date, the Partnership will deliver to Northland
such deeds, bills of sale, endorsements, assignments and other good and
sufficient instruments of sale, transfer and conveyance, in form and
substance satisfactory to Northland, as shall be necessary or
appropriate to vest in Northland legal title to and ownership of the
Systems, free and clear of any liens, encumbrances and adverse interests
of other parties, except for those liens, encumbrances and adverse
interests expressly assumed by Northland.
b. Allocation of Gain and Cash Distributions. Gain from the
sale by the Partnership to Northland of the undivided portion of the
Systems that is attributable to the Limited Partners' and the
Administrative General Partner's collective interest in the Partnership
shall be allocated solely to the Limited Partners and to the
Administrative General Partner in accordance with paragraph 16(c) of the
Partnership Agreement, except that all allocations pursuant to paragraph
16(c)(3) shall be made 93.75% to the Limited Partners and 6.25% to the
Administrative General Partner. Distributions on and following the
Closing Date shall be made in accordance with paragraph 16(d) of the
Partnership Agreement, except that any liquidating distributions to the
Managing General Partner shall be in kind and shall include the in-kind
distribution to Northland of the undivided portion of the Systems that
is attributable to the Managing General Partner's interest in the
Partnership, and any liquidating distributions to the Limited Partners
and the Administrative General Partner shall be monetary and shall
include the net proceeds from the sale to Northland and payments made on
account of the Note. All other allocations of income, gain or loss and
distributions of cash shall be made to all the Partners in accordance
with the Partnership Agreement.
The General Partners are authorized to take all other and further
action deemed by them necessary or appropriate to effect the foregoing,
including but not limited to the
B-2
109
creation of a liquidating trust for purposes of collecting Note
payments and carrying on other appropriate business following
dissolution of the Partnership. Notwithstanding paragraph 16(e) of the
Partnership Agreement, the General Partners shall furnish to Limited
Partners an audited statement, at Partnership expense, which shall set
forth the assets and liabilities of the Partnership as of the date of
final liquidation, but shall not be obligated to furnish reports
pursuant to paragraphs 18(b), (c) or (d) of the Partnership Agreement
for the year in which such liquidation occurs.
Except as expressly amended by this Amendment, the Partnership Agreement
shall remain in full force and effect.
DATED: December___, 1996.
NORTHLAND COMMUNICATIONS CORPORATION
(for itself as Managing General Partner of the
Partnership, and as attorney-in-fact for the
Administrative General Partner and a majority
in interest of the Limited Partners of the
Partnership)
By___________________________________________
John S. Whetzell, President
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110
EXHIBIT C
CONFIDENTIAL
APPRAISAL OF THE ASSETS OF
NORTHLAND CABLE PROPERTIES FOUR
LIMITED PARTNERSHIP
as of June 30, 1996
PREPARED BY
DANIELS & ASSOCIATES
111
CONFIDENTIAL
NORTHLAND CABLE PROPERTIES FOUR LIMITED PARTNERSHIP
Appraisal Analysis Summary
Introduction
Northland Cable Properties Four Limited Partnership (the "Partnership") is a
Washington limited partnership consisting of two general partners and 1,028
limited partners. Northland Communications Corporation ("Northland"), a
Washington corporation, is the managing general partner of the Partnership. The
Partnership was formed on January 2, 1985 and began operations in April 1985
with the acquisition of several cable television systems in Texas and
California.
Daniels & Associates, L.P. ("Daniels") was retained by Northland to appraise
the fair market value of the assets of the Partnership as of June 30, 1996 (the
"Valuation Date"). The Partnership owns and operates cable television systems
serving numerous communities in Texas and California (referred to in the
aggregate as the "Systems") that, as of May 31, 1996, passed approximately
43,500 homes and served 23,152 basic subscribers in the following eight system
operating groups.
As of May 31, 1996
Annualized
System Miles of Plant Approximate Basic Cash Flow for
Operating /Number of Homes/ Homes Subscriber Pay Units/ the Five M/E
Groups Headends Mile Passed Penetration Penetration 5/31/96
--------- -------------- ------- ----------- ------------- ------------ -------------
Flint/Tyler, TX 424/8 28 12,040 7,973/66.2% 2,361/29.6% N/A
New Caney, TX 547/6 25 13,550 6,806/50.2% 2,614/38.4% N/A
Whitewright, TX 100/2 43 4,275 1,756/41.1% 468/26.7% N/A
Hillsboro, TX 57/1 55 3,120 1,600/51.3% 413/25.8% N/A
Kaufman, TX 65/1 32 2,060 1,396/67.8% 671/48.1% N/A
Prairie View, TX 99/2 25 2,485 1,055/42.5% 406/38.5% N/A
Waterwood, TX 35/1 34 1,180 425/36.0% 160/37.6% N/A
Sub-Total Texas 1,327/21 29 38,710 21,011/54.3% 7,093/33.8% N/A
Chowchilla, CA 61/5 79 4,790 2,141/44.7% 910/42.5% N/A
Total All Systems 1,388/26 31 43,500 23,152/53.2% 8,003/34.6% $3,742,909
The appraisal was performed in conjunction with the anticipated dissolution
and liquidation of the Partnership. This report summarizes Daniels' conclusions
and provides
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112
an outline of the scope of the engagement, the process used, an overview of
the Systems by group, the valuation methodology, the assumptions relied upon
and an explanation of the values derived.
Process
Daniels prepared an independent appraisal analysis to determine the fair
market value of the 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 operated as efficiently as
comparable cable systems, and that the franchises and leases of assets used
in the operation of the Systems will be renewed indefinitely without material
changes, other than upgrade and/or rebuild requirements (see "The Systems"
section).
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 and analyses of historical and forecasted
financial and operating information, as well as Daniels' general knowledge
about the industry. From such due diligence, summaries of the relevant
operating, technical, financial and demographic characteristics of the
Systems by operating group were prepared. These characteristics of the
Systems were instrumental in determining value.
In order to assess the fair market value of the Partnership's assets,
detailed operating and financial forecasts by system operating group were
prepared, incorporating the critical elements of operating revenues and
expenses as well as capital expenditure requirements. These financial
forecasts then formed the basis for determining a discounted cash flow value
for each system operating group, a standard valuation methodology used within
the industry. The combined values of the Systems, by system operating
group, provides a value of the cable operating assets of the Partnership on
a discounted cash flow basis. In addition, using the market multiple
methodology, an aggregate value for the Partnership's assets was derived
by analyzing value per subscriber and operating cash flow multiples
obtained in private market sales of comparable cable television systems, and
then by applying those comparable market multiples to the Systems. The
products of these two valuation methodologies were then analyzed to determine
a final appraised value for the Partnership's assets.
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113
The Systems
The Systems are clustered and managed as eight operating groups - including
seven in Texas and one in California. The largest operating group is
Flint/Tyler, Texas with approximately 8,000 basic subscribers and the smallest
is Waterwood, Texas with 425 basic subscribers. As of the Valuation Date, the
Systems had subscriber penetration rates ranging from 36.0% to 67.8%, and a
total basic penetration level of 53.2%, compared to the national average of
approximately 63.0%.
In the eight system operating groups, there are a total of 26 headends and 1,388
plant miles, of which approximately 93% is aerial and 7% is underground.
Approximately 8% of the plant miles are 270 MHz or less; 84% are 300 MHz to 370
MHz; and 8% of the plant is 400 MHz. Approximately 10% of the homes passed are
passed by plant with a bandwidth of 270 MHz or less, 73% are passed by 300 MHz
to 370 MHz plant, and 17% of the homes are passed by cable with a bandwidth of
400 MHz.
Technical Summary
Miles of Plant and Approximate Homes Passed at Various Bandwidths
System Operating Miles @ 220/270 Miles @ 300 - 370 Miles @ 400 MHz/ Total Miles/
Group MHz/Homes Passed MHz/Homes Passed Homes Passed Homes Passed
------------------ ---------------- ----------------- ------------ ---------------
Flint/Tyler, TX 9/165 415/11,875 424/12,040
New Caney, TX 547/13,550 547/13,550
Whitewright, TX 100/4,275 100/4,275
Hillsboro, TX 57/3,120 57/3,120
Kaufman, TX 65/2,060 65/2,060
Prairie View, TX 99/2,485 99/2,485
Waterwood, TX 35/1,180 35/1,180
Sub-Total Texas 109/4,440 1,161/31,150 57/3,120 1,327/38,710
Chowchilla, CA 6/495 55/4,295 61/4,790
Total All-Systems 109/4,440 1,167/31,645 12/7,415 1,388/43,500
The lack of excess channel capacity and the reality of competition from DBS and
MMDS 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 all of the Systems to a bandwidth of 400 MHz to 450
MHz over the next three to four years, however, there are no current franchise
requirements to rebuild or upgrade any of the Systems. None of the Systems are
currently addressable. Daniels believes to
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114
remain competitive, these Systems will probably need to be further upgraded
or rebuilt in five to six years, and Daniels built this assumption into its
financial forecasts.
The quality of broadcast signals that can be received off-air varies among the
various system groups from very good to poor, and the communities that
receive good off-air signals typically have a lower subscriber
penetration rate. There are no hardwire overbuilds in any of the Systems;
however, there is an MMDS operator with service available to subscribers
served by the Whitewright, Texas operating group and by the Chowchilla,
California operating group. The MMDS operator has had a significant negative
effect on the Whitewright, Texas subscriber base, but the Chowchilla,
California subscriber base has remained fairly constant.
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 15,000 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 is
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 will eliminate 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). All of the Partnership's Systems qualify as small cable
systems. Many of the changes called for by the 1996 Act will not take
effect until the FCC issues new regulations, a process that could take from
several months to a few years, depending on the complexity of the required
changes and the statutory time limits.
As of the Valuation Date, the Partnership has received notification that
local franchising authorities with jurisdiction over approximately 8% of the
Partnership's subscribers 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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The annualized revenue and cash flow for the five-month period ended May 31,
1996 for the Systems was $8.6 million and $3.7 million, respectively. This
equates to an average monthly revenue per basic subscriber of $31.14 and average
annual cash flow per basic subscriber of $161.72.
Flint/Tyler, Texas
The Flint/Tyler, Texas group is the largest of the eight system operating groups
with subscribers located in suburban areas to the southeast, south, and
southwest of Tyler, Texas. As of May 31, 1996, this group passed approximately
12,040 homes and served 7,973 basic subscribers, for a penetration rate of
66.2%. This penetration rate is the second highest of all of the system
operating groups. The Flint/Tyler group added approximately 635 homes passed
and 626 basic subscribers over the last 29 months, for compound annual growth
rates of 2.3% and 3.4%, respectively. There are eight franchises covering this
group, with franchise expiration dates ranging from November 1997 to February
2008.
The Flint/Tyler operating group includes eight headends and 424 miles of plant,
91% of which is aerial. With the exception of approximately nine miles of
plant from one of the headends, all of the plant is capable of passing 300 MHz
or 330 MHz. The channel capacity varies by headend from 22 to 42, with only two
to six excess channels available. The Partnership is currently planning to
consolidate two of the eight headends into one headend and upgrading the plant
from this one headend to 450 MHz. This project is anticipated to be completed
by September 1996. Over the next three to four years, the Partnership is
planning to upgrade all of the remaining Flint/Tyler plant to at least 400 MHz
in order to increase channel capacity.
An Economy Basic service of primarily broadcast and local origination channels,
and a Specialty Tier of four satellite channels, are offered to the subscribers
served from three of the headends. A Standard Basic level of service of 13 to
27 channels is offered to all subscribers. The Economy Basic rate varies from
$11.95 to $12.95, the Specialty Tier is $5.35, and the Standard Basic rate
varies from $22.95 to $25.15. The last rate increase was effective October 1,
1995, and the next planned rate increase is August 1, 1996.
New Caney,Texas
New Caney is the second largest system operating group - passing approximately
13,550 homes in several communities approximately forty miles north of Houston
and serving 6,806 basic subscribers as of May 31, 1996. The overall penetration
rate in this group is
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116
only 50.2%, well below both the average for the Flint/Tyler group and the
current industry average. The New Caney system operating group includes six
headends and seven franchised areas, all of which, with the exception of the New
Caney headend, were acquired by the Partnership in September and October of
1995. The New Caney headend accounts for approximately 60% of the subscriber
base, and over the last 29 months has added approximately 58.0 homes passed and
351 basic subscribers, for compound annual growth rates of 3.3% and 3.8%,
respectively. The seven franchises covering this group expire between May 2002
and March 2011.
This system operating group includes six headends with 547 miles of plant, of
which approximately 94% is aerial and 6% is underground. Approximately 72% of
the plant miles are capable of passing 300 MHz, and 28% can pass 330 MHz. The
channel capacity is 36 channels from the 300 MHz plant and 41 from the 330 MHz
plant. The New Caney headend, which accounts for approximately 60% of the
subscribers in this group, has no excess channel capacity. The other five
headends have four to sixteen channels of excess channel capacity. The
Partnership is planning to combine the two largest headends into one headend and
to upgrade the plant from this headend to 330 MHz by October 1997. The
Partnership plans to upgrade the remaining plant to 450 MHz over the next two to
three years.
The subscribers served from four of the headends are offered only one level of
service - a Standard Basic package consisting of 15 to 29 channels for a rate of
$19.20 to $26.50. The remaining headends offer an Economy Basic service of 12
channels for $10.60, a Standard Basic with 15 or 20 channels for an additional
$12.70 to $17.40, and one of the headends offers a Specialty Tier of 6 channels
for $7.50. All of the headends also offer two to four pay services. The last
rate increase was effective October 1995 for approximately 60% of the
subscribers and March 1996 for the remaining 40%. The subscribers whose rates
were increased October 1, 1995 will have their next rate increase August 1,
1996. For the rest of the subscribers, no further rate increases are planned
for 1996.
Whitewright, Texas
The Whitewright system operating group, located north of Dallas and just south
of the Oklahoma border, was acquired by the Partnership in April 1985, as its
first acquisition. As of May 31, 1996, this system group passed approximately
4,275 homes and served 1,756 basic subscribers, for a penetration rate of 41.1%.
Homes-passed growth has been minimal over the last 29 months, and the subscriber
base has declined by approximately 500 subscribers since December 31, 1995, due
primarily to the presence
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117
of a local MMDS wireless cable operator known as Heartland Wireless. This
system group is operated under seven franchise agreements, with expiration dates
ranging from October 2001 to January 2012.
Included in this system group are two headends, the larger of which serves
approximately 97% of the subscriber base and has no excess channel capacity.
There are a total of 100 miles of 270 MHz plant in this system group, 92% of
which is aerial. Because of the absence of excess channel capacity and the
competitive operating environment, the Partnership is planning to upgrade the
plant to 330 MHz by the end of September 1996.
The larger headend offers an Economy Basic package of 14 channels for $12.00, a
Standard Basic package of an additional 16 channels for $12.70, and 3 pay
services. The last rate increase was effective April 1, 1996 for all
subscribers except the approximately 60 subscribers served from the Trenton
headend, whose rates will increase August 1, 1996.
Hillsboro, Kaufman, Waterwood and Prairie View, Texas
The four smallest of the Texas system operating groups were all acquired in
September and October of 1995, and account for approximately 19% of the
subscribers served by the Partnership. As of May 31, 1996, these four system
groups passed 8,845 homes and served 4,476 basic subscribers, for a penetration
rate of 50.6%. There are nine franchises covering these system groups, with
expiration dates ranging from September 1998 to April 2012.
There are five headends serving these four system groups, with the two largest
headends serving approximately 1,600 and 1,400 subscribers each. The Hillsboro
headend (1,600 subs) is currently being upgraded to 400 MHz, Kaufman (1,396
subs) is 370 MHz and will be upgraded to 450 MHz by December 1996, and the plant
from the remaining three headends is 300 MHz, and will probably be upgraded to
450 MHz over the next two to three years. There are a total of 248 miles of
aerial and only 8 miles of underground plant in these four system groups. The
Partnership is planning to eliminate one of the Prairie View headends and
replace those subscribers from line extension opportunities off the Brookshire
headend, an adjacent headend in the group.
Only the Hillsboro system offers an Economy Basic service of 17 channels for
$11.50. The other three system groups all offer a Standard Basic package only,
which includes 20 to 34 channels for $19.20 to $28.00. The Prairie View system
increased its rates effective
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118
March 1, 1996, however, rate increases in the other systems will not be
implemented until August 1, 1996.
Chowchilla, California
The Chowchilla system group serves several communities in California to the
northwest and the southwest of Fresno. As of May 31, 1996, this system group
passed 4,790 homes and served 2,141 basic subscribers, for a penetration rate of
44.7%. While the homes-passed growth has been minimal over the last 29 months,
the subscriber level and the subscriber penetration rate have declined (net of
the effect of an acquisition of approximately 200 subscribers), due primarily to
the availability of good quality off-air signals and the presence of an MMDS
wireless cable operator (People's Choice) in Fresno.
There are currently five headends and 61 miles of plant (79% aerial) serving the
Chowchilla system group, with the largest headend accounting for approximately
1,400 subscribers (65%). Approximately 55 miles of the plant is capable of
passing 400 MHz, while the remaining 6 miles is only 330 MHz. The Partnership
plans to combine two of the headends, and upgrade the plant from the combined
headend from 330 MHz to 400 MHz by the end of October 1996. One of the
headends, serving 106 subscribers, was shut down June 1, 1996 because of the
unprofitability of operating such a small system in a competitive environment.
The Partnership management believes that they will, however, increase
subscribers served from the other headends to more than offset this loss by
adding channels utilizing the available headend equipment and marketing the new
programming services. The Partnership management has no further near term plans
to upgrade the plant.
This system group offers a Standard Basic service of 23 to 32 channels for
$17.38 to $22.95. No Economy Basic level of service is available. The last
rate increase in this system group was effective October 1, 1995 and the next
planned rate increase is August 1, 1996.
Methodology
In order to appraise the fair market value of the assets of the Partnership,
Daniels used two valuation methodologies: (i) a discounted cash flow ("DCF")
valuation analysis; and (ii) an analysis of market multiples realized from
comparable private market cable transactions. The respective aggregate fair
market values of the Partnership's assets
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119
from each valuation methodology used were then compared, and a final value was
derived.
Discounted Cash Flow
This methodology measures the present value of the Systems' forecasted net
cash flows, defined as pre-tax operating income less capital expenditures
including all rebuild/upgrade costs. The Systems' forecasted net cash flow
is determined through the creation of a long-range operating forecast which
provides for detailed forecasts of critical revenue and expense components.
A residual value was forecasted based on growth of the Systems' net cash
flow into perpetuity, and discounted back to the present at the same
discount rate as the forecasted net cash flow. Daniels prepared a detailed
10-year revenue, cash flow and capital expenditure forecast for each of the
Systems to apply this discounted cash flow method.
The revenue forecasts were based upon Daniels' forecast of homes passed,
subscriber penetration levels and rates and non-subscriber based revenue
sources. The expense forecasts were based primarily on assumed rates of
inflation over the forecast period, and were adjusted for particular growth
characteristics of each of the Systems. The capital expenditure forecasts
were based upon costs associated with the construction of new miles of plant,
plant maintenance and rebuild/upgrade requirements, and replacement and
upgrading of converters. Daniels believes the opportunities for the Systems
to provide ancillary telecommunications and data services are limited in
these markets and the technology and costs are also uncertain, therefore,
Daniels did not include telephony or data services revenue, expenses or
capital costs in its forecasts.
To determine the appropriate discount rate for this valuation, Daniels
attempted to approximate the weighted average cost of capital for an array
of entities within the cable television industry that are capable of
consummating an acquisition similar in size to the acquisition of these
Systems. The weighted average cost of capital is an entity's required
return on an investment necessary to satisfy the expectations of all of the
entity's investors, both debt and equity. An entity, therefore, will be
willing to pay a price for an investment as high as the value that will
allow it to meet its weighted average cost of capital or hurdle rate
requirement.
Borrowing costs are different for every entity, depending primarily upon
the overall credit quality of the borrower and/or the quality of the
collateral. In the cable 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
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120
borrow at more favorable rates below the prime rate. Daniels, therefore,
assumes that the prime rate is a fair estimate of the average cost of debt of
an array of entities willing and financially able to consummate an acquisition
similar in size to the Systems. The cost of equity was determined by sampling
the estimated private market cost of equity for cable television investments
as of the Valuation Date and blending that with equity return objectives
of large publicly traded companies. Such equity returns are those which
would be required by experienced private equity investors and publicly traded
companies in cable television investments with similar characteristics as
those of the Partnership's Systems. The weighted average cost of capital
Daniels derived for the discounted cash flow analyses was 14.55%. 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% 8.25%
Equity 40.0% 24.0%
Total Weighted Average Cost of Capital 100% 14.55%
The combined DCF value of the Systems arrived at from this analysis was
$30.2 million, which is equal to 8.1 times the annualized operating cash
flow for the five-month period ended May 31, 1996, and $1,305 per basic
Subscriber.
Discounted Cash Flow Multiple of 5 M/E 5/31/96
Valuation Annualized Cash Flow Value I Basic Subscriber
-------------------- ------------------------- ------------------------
$30,223,720 8.1X $1,305
Comparable Transactions
In addition to the DCF valuation methodology, Daniels also used the
comparable transactions methodology, which is another generally accepted
valuation methodology used to correlate and validate the findings of the DCF
method with the realities of the private market. Under this method, the
market multiples reported in sales of cable systems of similar size, markets
and technical condition are compared to the subject Systems. In the case of
cable television system values, the most commonly used market multiples are
(i) a multiple of trailing three or six months annualized operating cash flow
and (ii) the price per Subscriber. Because detailed financial, operating and
technical information is not generally available regarding private cable
system transactions, it is difficult to relate specific transaction values
and multiples directly to the subject Systems. However, through an analysis
of both the range and average of the market multiples
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121
derived from a group of comparable system transactions, about which
information is available, this methodology provides a general measure of the
market multiples realized from comparable transactions, which are then applied
to the subject Systems in order to assess fair market value.
Comparable Sale Transactions
No. of Price/ CF
System Buyer Seller Subscribers Price Subscriber Multiple Date
- ------- ----- ------ ----------- ----- ---------- -------- -----
Various IL, KS, NE, MO Galaxy Telecom Douglas Communication 43,100 $46,000,000 $1,067 8.2 8/95
Various OK, TX Classic Cable Mission Cable 42,550 $57,471,000 $1,351 7.5 10/95
Various VA, GA, TN FrontierVision C4 Media 40,600 $47,500,000 $1,170 8.5 1/96
Various CO, MN, MO, NM Fanch Comm. Mark Twain Cablevision 27,300 $35,300,000 $1,293 8.0 5195
Various SC, GA, FL Galaxy Telecom Friendship Cable 18,000 $21,028,000 $1,168 7.0 9/95
Various KS, IA, IL, MO, NE Anderson Pacific Douglas Communication 16,000 $17,000,000 $1,062 8.1 12/95
AZ, MS Fanch Comm. GH Cable 12,400 $15,789,000 $1,273 8.0 8/95
------- ------------ ------ --- -----
Total/Average of System Comparables 199,950 $240,088,000 $1,201 7.9
Source: Paul Kagan Associates, Inc. Cable TV Investor through May 31,1996 and
Daniels & Associates' Data Base as of May 31, 1996
The comparable transactions analysis yields a cash flow multiple range of 7.0
to 8.5 times cash flow and a weighted average for all of the transactions of
7.9 times cash flow. The range for the value per subscriber is between $1,062
and $1,351 with an overall weighted average of $1,201 per subscriber.
Material Relationships
Daniels has no ownership position in Northland or the Partnership; however,
Daniels has at various times sold cable systems to Northland while
representing other cable operators, and has sold cable systems on behalf of
Northland. Currently, Daniels is engaged by another cable operator who is
negotiating a letter-of-intent to sell three small cable systems to
Northland. Daniels does not believe that these prior and present
relationships in any way affect its ability to fairly and impartially render
the opinion of value expressed herein.
Valuation
Based on the analyses using the above-described methodologies, the
estimated fair market value of the cable television operating assets of the
Partnership, as of June 30, 1996, is 8.1 times the annualized operating cash
flow for the five-month period ended May 31, 1996. This translates to a gross
value of $30,318,000, and a value per basic subscriber of $1,310.
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122
The cash flow multiple is above the weighted average multiple from the
comparable transactions analysis and equal to the multiple derived from the
DCF methodology. The value per basic subscriber is significantly above the
weighted average value per subscriber derived from the comparable transactions
analysis and modestly above the value per subscriber derived from the Daniels
DCF valuation analysis, due to rounding.
Our opinion of value expressed in this appraisal is based on financial and
operating information provided to Daniels by the Partnership, as well as
published demographic information for the service areas. While Daniels
believes such sources to be reliable and accurate, it has not independently
verified any such information. The valuation is based on information
available to Daniels as of the Valuation Date. Daniels undertakes no
responsibility for updating this opinion to reflect changes in the value
of the assets subsequent to the Valuation Date of June 30, 1996, such as
market, economic, technological, operational, governmental and other changes.
12
123
NORTHLAND CABLE PROPERTIES FOUR LIMITED PARTNERSHIP
Subscriber Summary
System Headend Approximate Homes Passed
- ------ ------- ----------------------------------------
12/31/93 12/31/94 12/31/95 12/31/96
-------- -------- -------- --------
Chowchilla, ca Chowchilla 2,480 2,485 2,490 2,490
Riverdale 735 735 735 740
Easton * N/A N/A N/A N/A
Caruthers ** 360 360 360 360
Planada 700 700 705 705
Le Grand *** N/A N/A N/A 495
------ ------ ------ ------
Total - CA 4,275 4,280 4,290 4,790
Whitewright, TX Whitewright 3,905 3,915 3,925 3,930
Trenton 260 345 345 345
------ ------ ------ ------
Sub-Total 4,165 4,260 4,270 4,275
Flint/Tyler, TX Flint 3,180 3,430 3,450 3,460
Chapel Hill 2,190 2,220 2,250 2,265
Jackson's Landing 865 905 905 910
Red Ackers 1,175 1,185 1,195 1,200
Berryville 990 990 995 995
Chandler 780 850 865 875
Big Eddy 2,085 2,125 2,165 2,170
Dixie 140 165 165 165
------ ------ ------ ------
Sub-Total 11,405 11,870 11,990 12,040
New Caney, Tx New Caney 7,050 7,440 7,600 7,630
Huffman **** N/A N/A 3,380 3,395
Tarkenton **** N/A N/A 500 500
Ace **** N/A N/A 400 400
Cut & Shoot **** N/A N/A 1,290 1,295
New Waverly **** N/A N/A 330 330
------ ------ ------ ------
Sub-Total 7,050 7,440 13,500 13,550
Hillsboro, TX Hillsboro **** N/A N/A 3,105 3,120
Kaufman, TX Kaufman/Oak Grove **** N/A N/A 2,050 2,060
Waterwood, TX Waterwood **** N/A N/A 1,175 1,180
Prairie View, TX Prairie View/Waller **** N/A N/A 1,175 1,785
Brookshire **** N/A N/A 700 700
Simonton ****/***** N/A N/A N/A N/A
------ ------ ------ ------
Sub-Total N/A N/A 2,475 2,485
Total - Texas 22,620 23,570 38,565 38,710
Total - TX/CA 26,895 27,850 42,855 43,500
* This headend was shut down December 1994.
** The Caruthers headend was shut down June 1, 1996.
*** Acquired December 1995
**** Acquired September/October 1995
***** The Simonton headend will be shut down by the end of the third
quarter 1996.
124
NORTHLAND CABLE PROPERTIES FOUR LIMITED PARTNERSHIP
Subscriber Summary
System Headend Basic Subscribers/Penetration
- ------ ------- -----------------------------------------------------------------
12/31/93 12/31/94 12/31/95 12/31/96
------------- -------------- --------------- ---------------
Chowchilla, ca Chowchilla 1,411/56.9% 1,408/56.7% 1,397/56.1% 1,387/55.1%
Riverdale 214/29.1% 210/28.6% 244/33.2% 224/30.3%
Easton * 139 55 N/A N/A
Caruthers ** 115/32.2% 104/28.9% 113/31.4% 106/29.4%
Planada 250/35.7% 236/33.7% 246/34.9% 214/30.4%
Le Grand *** N/A N/A N/A 210/42.4%
----------- ----------- ----------- -----------
Total - CA 2,129/51.3% 2,013/47.0% 2,000/46.6% 2,141/44.7%
Whitewright, TX Whitewright 2,084/53.4% 2,111/53.9% 2,196/55.9% 1,700/43.3%
Trenton 56/21.5% 71/20.6% 70/20.3% 56/16.2%
----------- ----------- ----------- -----------
Sub-Total 2,140/51.4% 2,182/51.2% 2,266/53.1% 1,756/41.1%
Flint/Tyler, TX Flint 2,164/68.1% 2,352/68.6% 2,449/71.0% 2,480/71.7%
Chapel Hill 1,333/60.9% 1,365/61.5% 1,411/62.7% 1,424/62.9%
Jackson's Landing 646/74.7% 681/75.2% 670/74.0% 676/74.3%
Red Ackers 644/54.8% 673/56.8% 661/55.3% 648/54.0%
Berryville 609/61.5% 608/61.4% 584/58.7% 574/57.7%
Chandler 516/66.2% 558/65.6% 569/65.8% 607/69.4%
Big Eddy 1,330/63.8% 1,382/65.0% 1,437/66.4% 1,438/66.3%
Dixie 105/75.0% 119/72.1% 121/73.3% 126/76.4%
----------- ----------- ----------- -----------
Sub-Total 7,347/64.4% 7,738/65.2% 7,902/65.9% 7,973/66.2%
New Caney, Tx New Caney 3,705/52.6% 3,939/52.9% 4,046/53.2% 4,056/53.2%
Huffman **** N/A N/A 1,617/47.8% 1,573/46.3%
Tarkenton **** N/A N/A 256/51.2% 225/45.0%
Ace **** N/A N/A 223/55.8% 221/55.3%
Cut &Shoot **** N/A N/A 513/39.8% 547/42.2%
New Waverly **** N/A N/A 192/58.2% 184/55.8%
----------- ----------- ----------- -----------
Sub-Total 3,705/52.6% 3,939/52.9% 6,847/50.7% 6,806/50.2%
Hillsboro, TX Hillsboro **** N/A N/A 1,554/50.0% 1,600/51.3%
Kaufman, TX Kaufman/Oak Grove **** N/A N/A 1,452/70.8% 1,396/67.8%
Waterwood, TX Waterwood **** N/A N/A 440/37.4% 425/36.0%
Prairie View, TX Prairie View/Waller **** N/A N/A 346/19.5% 631/35.4%
Brookshire **** N/A N/A 200/28.6% 298/42.6%
Simonton ****/***** N/A N/A 131 126
----------- ----------- ----------- -----------
Sub-Total N/A N/A 677/27.4% 1,055/42.5%
----------- ----------- ----------- -----------
Total - Texas 13,192/58.3% 13,859/58.8% 21,138/54.8% 21,011/54.3%
----------- ----------- ----------- -----------
Total - TX/CA 15,321/57.0% 15,872/57.0% 23/138/53.7% 23/152/53.2%
=========== =========== =========== ===========
* This headend was shut down December 1994.
** The Caruthers headend was shut down June 1, 1996.
*** Acquired December 1995
**** Acquired September/October 1995
***** The Simonton headend will be shut down by the end of the third
quarter 1996.
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NORTHLAND CABLE PROPERTIES FOUR LIMITED PARTNERSHIP
Subscriber Summary
System Headend Pay Units/Penetration
- ------ ------- -----------------------------------------------------------------
12/31/93 12/31/94 12/31/95 5/31/96
------------- -------------- --------------- ---------------
Chowchilla, ca Chowchilla 603/42.7% 594/42.2% 567/40.6% 548/39.5%
Riverdale 160/74.8% 157/74.8% 166/68.0% 145/64.7%
Easton * 104/74.8% 32/58.2% N/A N/A
Caruthers ** 73/63.5% 63/60.6% 60/53.1% 49/46.2%
Planada 127/50.8% 105/44.5% 99/40.2% 84/39.3%
Le Grand *** N/A N/A N/A 84/40.0%
----------- ----------- ----------- -----------
Total - CA 1,067/48.7% 951/47.2% 892/44.6% 910/42.5%
Whitewright, TX Whitewright 648/31.1% 674/31.9% 613/27.9% 456/26.8%
Trenton 4/7.1% 17/23.9% 21/30.0% 12/21.4%
----------- ----------- ----------- -----------
Sub-Total 652/30.5% 691/31.7% 634/28.0% 468/26.7%
Flint/Tyler, TX Flint 747/34.5% 812/34.5% 750/30.6% 764/30.8%
Chapel Hill 411/30.8% 429/31.4% 422/29.9% 453/31.8%
Jackson's Landing 151/23.4% 189/27.8% 178/26.6% 195/28.8%
Red Ackers 135/21.0% 179/26.6% 160/24.2% 167/25.8%
Berryville 132/21.7% 171/28.1% 161/27.6% 168/29.3%
Chandler 125/24.2% 151/27.1% 167/29.3% 176/29.0%
Big Eddy 419/31.5% 424/30.7% 415/28.9% 413/28.7%
Dixie 14/13.3% 23/19.3% 26/21.5% 25/19.8%
----------- ----------- ----------- -----------
Sub-Total 2,134/29.0% 2,378/30.7% 2,279/28.8% 2,361/29.6%
New Caney, Tx New Caney 2,024/54.6% 2,048/52.0% 1,830/45.2% 1,817/44.8%
Huffman **** N/A N/A 525/32.5% 513/32.6%
Tarkenton **** N/A N/A 71/27.7% 51/22.7%
Ace **** N/A N/A 30/13.5% 32/14.5%
Cut &Shoot **** N/A N/A 137/26.7% 133/24.3%
New Waverly **** N/A N/A 68/35.4% 68/37.0%
----------- ----------- ----------- -----------
Sub-Total 2,024/54.6% 2,048/52.0% 2,661/38.9% 2,614/38.4%
Hillsboro, TX Hillsboro **** N/A N/A 647/41.6% 413/25.8%
Kaufman, TX Kaufman/Oak Grove **** N/A N/A 747/51.4% 671/48.1%
Waterwood, TX Waterwood **** N/A N/A 152/34.5% 160/37.6%
Prairie View, TX Prairie View/Waller **** N/A N/A 188/54.3% 169/26.8%
Brookshire **** N/A N/A 117/58.5% 175/58.7%
Simonton ****/***** N/A N/A 63/48.1% 62/49.2%
----------- ----------- ----------- -----------
Sub-Total N/A N/A 368/54.4% 406/38.5%
----------- ----------- ----------- -----------
Total - Texas 4,810/36.5% 5,117/36.9% 7,488/35.4% 7,093/33.8%
----------- ----------- ----------- -----------
Total - TX/CA 5,877/38.4% 6,068/38.2% 8,380/36.2% 8,003/34.6%
=========== =========== =========== ===========
* This headend was shut down December 1994.
** The Caruthers headend was shut down June 1, 1996.
*** Acquired December 1995
**** Acquired September/October 1995
***** The Simonton headend will be shut down by the end of the third
quarter 1996.
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NORTHLAND CABLE PROPERTIES FOUR LIMITED PARTNERSHIP
Financial Summary
Year Ended Year Ended Year Ended Annualized Five
12/31/93 12/31/94(1) 12/31/95(3) Months Ended 5/31/96
---------- ----------- ----------- --------------------
Revenue $5,406,112 $5,657,619 $6,617,205 $8,647,735
Expense(2) 2,832,828 3,097,862 3,576,339 4,904,826
Cash Flow $2,573,284 $2,559,757 $3,040,866 $3,742,909
Cash Flow Margin 47.6% 45.2% 46.0% 43.3%
Average Monthly Revenue/Sub N/A $30.23 $30.50 $31.14
Average Annual Cash Flow/Sub N/A $164.12 $168.19 $161.72
Notes:
(1) Decline in revenue and cash flow is primarily due to
federally mandated rate rollbacks effective 9/1/93.
(2) Expenses are shown before partnership management fees, which
are 6.0% of gross revenue.
(3) Includes the revenue and cash flow from acquiring
approximately 6,900 subscribers in September and October
1995.