Exhibit (b)(3)
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JONES INTERCABLE, INC. CABLE TV JOINT FUND 11
CABLE TELEVISION SYSTEM
MANITOWOC, WISCONSIN
APPRAISAL OF CERTAIN ASSETS AS OF AUGUST 31, 1996
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JONES INTERCABLE, INC. CABLE TV JOINT FUND 11
CABLE TELEVISION SYSTEM
MANITOWOC, WISCONSIN
APPRAISAL OF CERTAIN ASSETS AS OF AUGUST 31, 1996
TABLE OF CONTENTS
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Section Page
Number Item Number
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I. Introduction 1
II. Executive Summary 10
III. Discounted Cash Flow Model
and Assumptions: 12
Manitowoc Market Overview 14
Homes Passed 15
Basic and Expanded Basic Penetration 16
Pay Penetration 16
Rates 17
Revenue Projections 17
Operating Profit Margins 18
Depreciation and Amortization 18
Federal, State, and Local Tax Rates 19
Capital Expenditures 19
Net After-Tax Cash Flow 19
Discount Rate 20
Residual Cash Flow Multiple 20
Present Value of Residual 21
Model Results 21
IV. Comparable Sales Analysis 26
TABLE OF CONTENTS
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(continued)
Section Page
Number Item Number
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V. Consolidation 28
Exhibits
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A. Qualifications of James R. Bond, Jr. and Timothy S. Pecaro
JONES INTERCABLE, INC. CABLE TV JOINT FUND 11
CABLE TELEVISION SYSTEM
MANITOWOC, WISCONSIN
APPRAISAL OF CERTAIN ASSETS AS OF AUGUST 31, 1996
I. INTRODUCTION
---------------
Bond & Pecaro, Inc. has been retained to establish the fair market value of
the non-current assets of the Jones Intercable, Inc. Cable TV Joint Fund 11
cable television system in Manitowoc, Wisconsin (the "Manitowoc System") as of
August 31, 1996. Among these assets were towers, electronic equipment, office
equipment, vehicles, a cable television distribution plant, a cable television
franchise, and a cable television subscriber base.
The Manitowoc System serves the City of Manitowoc, Wisconsin. The system
also manages cable systems owned by Marcus Cable in the Village of Whitelaw and
the Towns of Manitowoc, Newton, Cato, and Manitowoc Rapids. The revenues and
expenses attributable to the Marcus Cable systems were excluded from this
analysis.
The Manitowoc System's cable distribution plant operates at 400 mHz with a
capacity of 52 channels. The channel capacity of the system is currently fully
utilized; there were no unused channels available as of August 31, 1996. The
system is fully addressable and provides impulse pay-per-view services to
subscribers. As of August 31, 1996, the system had 15.47 miles of underground
cable distribution plant and
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155 miles of aerial cable plant. Approximately 15,400 homes were passed by the
system's cable distribution plant.
As of August 31, 1996, the system had approximately 10,825 basic
subscribers, representing a basic subscriber penetration of 70.3%. The system
had approximately 6,842 pay subscriptions, yielding a pay to basic ratio of
approximately 63.2%.
On August 31, 1996, the technical operations of the Manitowoc System were
conducted from two sites. These consist of an office, headend, and studio
facility located at 1614 Washington Street in Manitowoc and an off-air reception
site on Silver Creek Road in Newton, Wisconsin.
INDUSTRY OVERVIEW
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The cable television industry developed in the late 1940s in order to
provide television service to communities in rural Pennsylvania which were too
isolated to receive over-the-air broadcasts. Since that time, the industry has
grown and diversified to provide a broad range of educational, entertainment,
cultural, and sports programming to large urban areas and rural communities
alike.
According to the Broadcasting & Cable Yearbook 1996, the cable industry in
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the United States consists of approximately 11,800 operating systems serving
over 34,000 communities throughout the United States. Approximately 100
additional cable television franchises have been approved but have yet to be
constructed. Approximately 65.3% of all households in the United States are
currently served by cable television.
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Each system has been granted a franchise by its local municipal government.
Franchises are awarded competitively, and the winning bidder must generally
provide guarantees that expensive investments in local employment, local
programming, and system technical design will be made.
The construction of a cable television system is extremely capital
intensive. The cost of installing aerial cable often comprises the single
largest investment made by a cable television system operator. Underground cable
television installation is even more expensive, when considered on a per-mile
basis. Additionally, investments must be made in headend facilities, satellite
receiving equipment, office facilities, and subscriber equipment such as
converter units, which ultimately deliver cable television service to
households.
Numerous changes have occurred in the development of cable television
technology. Original systems used vacuum tube electronics and provided only a
few off-air channels to subscribers. By contrast, modern systems are capable of
providing over 100 channels of service, including satellite signals and locally-
originated programs. These systems use solid state amplifiers and addressable
converter equipment to control subscriber service levels.
Cable television systems provide entertainment, news, music, and other
forms of programming to the public. The cable operator must pay a fee, usually
calculated on a per-subscriber basis, to program suppliers. These fees may
either be on a fixed basis, or calculated as a percentage of system revenues.
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In order to cover the costs of operation, systems sell "basic" and "tier"
services which include local television signals, local origination programs, and
selected satellite services for a fixed monthly fee to all subscribers.
Customers also have the option to subscribe to additional "premium" or "pay"
services, such as Home Box Office and Showtime, which offer movies, sports,
entertainment, and cultural programming.
In some cases, cable systems generate additional revenues by selling
advertising time to local and national businesses, government agencies, and
political organizations which seek to deliver information to the general public.
Given the substantial fixed costs resulting from the capital requirements
of the business, as well as high programming costs, cable operators seek to
maximize system penetration. Two types of system penetration are of paramount
importance in the industry.
The first is basic penetration, which is a measure of the number of homes
sub scribing to cable television as a proportion of the homes which are passed
by cable; if 400 homes subscribed to cable service in a community of 1,000
homes, basic penetration would be 40%.
The second important measure is pay penetration, which gauges the
popularity of pay services among those households which subscribe to basic cable
service. If each of the 400 cable households in the example subscribed to two
pay services, pay penetration would be 200%.
The linkage between basic penetration, pay penetration, and customer
development is fundamental to the cable industry. Operators constantly seek to
provide programming
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and services that will develop the widest appeal among local households. The
more effectively the cable operator is able to meet the preferences of the
public, the larger the system's subscriber base will be. This relationship
between subscribers and revenues is axiomatic in the cable industry and is the
primary determinant of success or failure among system operators.
The cable industry has become increasingly competitive in recent years.
Overall financial performance of the industry has fallen short of expectations
that were developed in the early 1980s, when a large number of cable television
facilities were constructed. Traditional broadcast stations continue to be the
mainstay of television viewing in the United States. In recent years, the FCC
has issued many additional licenses for new independent television stations
throughout the country. Moreover, cable operators have come under increasing
competitive pressure from videocassette rental outlets, direct broadcast
satellite services, and other competing technologies.
In order to build the largest possible subscriber base, systems invest
heavily in tangible assets, such as distribution equipment and satellite
equipment, and intangible assets such as marketing systems and programming
agreements. Similarly, investments in equipment and intangible assets, such as
managerial talent, may be oriented toward controlling costs and increasing
profitability.
It is in this marketplace, one defined by heavy capital investment, the
relationship between subscriber base size and revenues, and increasing
competition, that the Manitowoc System operates.
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APPRAISAL METHODOLOGY
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To inspect the physical plant and gather relevant financial and market data
necessary for the appraisal, Timothy S. Pecaro of the firm visited the offices
and technical facilities of the system in Manitowoc, Wisconsin on June 2, 1995.
In addition, the appraiser received updated financial and system information as
of August 31, 1996 to assist in the preparation of this appraisal.
A number of specific tasks were necessary for the completion of this
project. These included:
1. Consultation with system management regarding market factors and
system-specific issues which have an impact on the value of the
property's tangible and intangible assets.
2. The completion of a discounted cash flow analysis to quantify the cash
flows attributable to the Manitowoc System.
3. The development of a comparable sales analysis to establish the prices
recently paid for similar cable television properties.
4. The consolidation of these analyses into an opinion of value.
Specific data provided by the system and Jones Intercable, Inc. Cable TV
Joint Fund 11 included historical audited financial statements for 1992 through
1996 year to date, operating statistic summaries, system technical data, market
demographic data, management's ten year financial projections, and related
materials. Other sources consulted in the preparation of this report include
industry factbooks, government publications, and
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similar reference materials. Additionally, the appraiser relied upon information
furnished by system management relative to the age, condition, and adequacy of
the system's physical plant.
In the valuation of such properties, the income approach is generally
judged to be the most appropriate methodology. The value of these assets is
defined by the benefit that they bring to the owner of the property. The fair
market value of the system's non-current assets can be expressed by discounting
these future benefits. "Fair market value" is defined as the cash price that
would be paid by a willing buyer to a willing seller in an arm's-length
transaction, in which neither party acts under any compulsion to buy or sell.
It is generally accepted that a telecommunications business' value lies in
the fact that it is a "going concern." That is, its value reflects the revenues
and, ultimately, the after-tax cash flow that the business may reasonably be
expected to generate over a period of years. The potential resale value of the
business at the end of that period is also an important factor in the valuation
of such properties.
The discounted cash flow model incorporates variables such as capital
expenditures, homes passed by the system, basic penetration, pay penetration,
system revenue projections, anticipated system operating expenses and profits,
and various discount rates. The variables used in the analysis reflect
historical system and market growth trends, as well as anticipated system
performance and market conditions.
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The capital expenditures provision reflects the amount of investment
required to expand and maintain a competitive cable television business in the
Manitowoc, Wisconsin operating area.
The discounted cash flow projection period of ten years was judged to be an
appropriate time horizon for the analysis. Cable operators and investors
typically expect to recover their investments within a ten year period. It is
over this period that projections regarding market demographics, system basic
and pay penetration, and operating profit margins can be made with the highest
degree of accuracy.
During this ten year period, household growth in the Manitowoc area,
anticipated market penetration percentages, and system operating performance
expectations were used to project the system's operating profits. Income taxes
were deducted from the projected operating profits to determine after-tax net
income. Depreciation and amortization expenses were added back to the after-tax
income stream and projected capital expenditures were subtracted to calculate
the system's net after-tax cash flow.
The stream of annual cash flows was adjusted to present value using a base
after-tax discount rate of 12.0%. The discount rate represents an after-tax
adjusted rate calculated for the cable television industry as of August 31,
1996.
Additionally, it was necessary to project the system's residual value at
the end of the ten year projection period. In order to determine this value, an
operating cash flow multiple of 10.75 was applied to the system's 2006 projected
operating cash flow. The
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indicated terminal value was then discounted to present value using a discount
rate of 12.0%. These calculations are described in detail in the body of this
report.
The market, or comparable sales, approach provides a useful means by which
assumptions made in the development of the discounted cash flow analysis can be
tested against marketplace transactions. Recent cable television system sales
transactions were analyzed to obtain pertinent comparable sales data.
The results of these approaches are considered and given appropriate weight
in the consolidation portion of the analysis.
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JONES INTERCABLE, INC. CABLE TV JOINT FUND 11
CABLE TELEVISION SYSTEM
MANITOWOC, WISCONSIN
APPRAISAL OF CERTAIN ASSETS AS OF AUGUST 31, 1996
II. EXECUTIVE SUMMARY
----------------------
The appraiser has quantified the value of the Manitowoc System using both
the income and market approaches as of August 31, 1996. The indicated fair
market value of the non-current assets of the system was approximately $16.7
million.
The appraiser developed a discounted cash flow analysis to determine the
value of the system, based upon its economic potential. The results of this
analysis indicate that the value of the Manitowoc System as of August 31, 1996
was $16,713,500. In order to verify the results of the discounted cash flow
analysis, the appraiser also utilized a comparable sales approach, relying upon
an analysis of subscriber multiples. The results of this analysis support the
conclusion resulting from application of the income approach.
The assets were valued based upon information provided by Jones Intercable,
Inc. Cable TV Joint Fund 11 and its affiliates. The appraiser can assume no
responsibility for hidden defects, liabilities, or errors in information
provided by the Manitowoc System, Jones Intercable, Inc. Cable TV Joint Fund 11,
or other sources utilized in the preparation of this report. The appraiser has
relied upon information furnished by system management and engineering personnel
regarding the operating characteristics of certain assets.
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Neither this firm nor any of its employees have any present or anticipated
economic interest in the Manitowoc System or Jones Intercable, Inc. Cable TV
Joint Fund 11. The compensation received by the firm was in no way contingent
upon the values or the conclusions developed herein.
This appraisal was prepared for Jones Intercable, Inc. in connection with
its planned acquisition of the Manitowoc System from Jones Intercable, Inc.
Cable TV Joint Fund 11.
All information and conclusions contained in this report are based upon the
best knowledge and belief of the undersigned, whose qualifications are attached
hereto.
BOND & PECARO, INC. BOND & PECARO, INC.
1201 Connecticut Ave, NW
Suite 450
Washington, D.C. 20036
(202) 775-8870
November 9, 1996 BY /s/ James R. Bond, Jr.
-----------------------------
James R. Bond, Jr.
BY /s/ Timothy S. Pecaro
-----------------------------
Timothy S. Pecaro
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JONES INTERCABLE, INC. CABLE TV JOINT FUND 11
CABLE TELEVISION SYSTEM
MANITOWOC, WISCONSIN
APPRAISAL OF CERTAIN ASSETS AS OF AUGUST 31, 1996
III. DISCOUNTED CASH FLOW MODEL AND ASSUMPTIONS
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The assumptions used in the discounted cash flow model reflect potential
system performance and trends in the Manitowoc, Wisconsin service area, as well
as the experience of the cable television industry in general.
As of August 31, 1996, Jones Intercable, Inc. Cable TV Joint Fund 11 owned
various assets associated with the operation of the system in Manitowoc,
Wisconsin. These assets include the system's tangible assets, subscriber base,
franchise operating rights, and miscellaneous other intangibles assets which are
essential to the lawful and efficient operation of the system.
Tangible assets in place at the Manitowoc System as of August 31, 1996
include a cable television distribution plant, cable television subscriber
drops, subscriber converters, towers, electronic equipment, office equipment,
vehicles, and miscellaneous other tangible assets.
As discussed in the introduction to this report, a critical element in the
success of a cable television operation is its ability to build a viable
subscriber base. The owner of a cable system that does not have a developed
subscriber base would be forced to incur
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substantial sales and marketing expenses in order to build subscriber revenues
sufficient to cover the system's fixed costs and contribute to profits. In
order to generate these subscribers, it would be necessary for the system to
conduct major promotions, undertake direct marketing campaigns, and place
advertisements in local media. There would also be substantial costs associated
with customer cable connection and administrative costs. The inherent value of
the Manitowoc System subscriber base is an important component of the system's
overall value.
In order to operate a cable television system within an area, a cable
system operator must be awarded a local area franchise. Obtaining this
franchise is a competitive process through which applicants submit bids which
include, among other things, proposed channel capacity, service area, technical
operating standards, and basic subscriber fees. The local government then
typically selects the successful applicant and negotiates a franchise agreement.
The Manitowoc System operates under the provisions of a single cable
television franchise. On November 3, 1980, the system was granted a cable
television franchise to serve the City of Manitowoc, Wisconsin. This franchise
expired on November 3, 1995. The City of Manitowoc has temporarily extended the
Jones Intercable, Inc. Cable TV Joint Fund 11 franchise to provide cable service
within the city limits for an increased franchise fee of 5%. A renewal of The
City of Manitowoc franchise is expected by December 1996.
Going concern value consists of the organization and procedures that were
in place at the Manitowoc System as of August 31, 1996. A number of factors
contribute to going
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concern value, including the formation of a business plan; the construction of
the system headend facility; the development of a functional general,
administrative, and technical organization; establishment of a sales and
marketing organization; and the coordination of all of these functions into a
well defined and efficient operating organization.
In order to determine the value of the Manitowoc System as of August 31,
1996, a discounted cash flow analysis was developed. This analysis reflects
assumptions regarding system revenues, operating expenses, and capital
expenditures.
MANITOWOC MARKET OVERVIEW
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The Manitowoc System serves subscribers in the City of Manitowoc.
According to the Wisconsin Public Service Corporation, the City of Manitowoc's
population reached 34,000 in 1996. Major employers in the community include the
Mirro Company, the Manitowoc Company, A. E. Goetze Corporation, and the Pullman
Company (Imperial Eastman Division). Manitowoc County, in which the City of
Manitowoc is located, had an unemployment rate below 3.0% in August 1996.
According to Broadcasting & Cable Yearbook 1996, the Manitowoc System area
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is located within the Green Bay - Appleton, Wisconsin television market, which
ranks 71st in the United States and contains approximately 375,000 households.
The Green Bay -Appleton DMA (Designated Market Area) consists of 15 Wisconsin
- - -
counties, including Brown, Winnebago, Outagamie, Fond Du Lac, and Manitowoc, and
one Michigan county, Menominee.
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There are currently six commercial television stations operating in the
Green Bay-Appleton market: WBAY-TV, Channel 2 (ABC); WFRV-TV, Channel 5 (CBS);
WLUK-TV, Channel 11 (Fox); WSCO, Channel 14; WGBA, Channel 26 (NBC); and WACY-
TV, Channel 32 (WBN).
In addition to competition from these local broadcast television stations,
the Manitowoc System vies with local radio stations, newspapers, MMDS, DBS, and
videocassette rental outlets for audience share and advertising revenues.
HOMES PASSED
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The initial parameter upon which the discounted cash flow projection is
based is homes passed, or "passings." Two factors affect the number of homes
passed, new plant construction and household growth. Plant expansion improves
system coverage by allowing the system to offer service to previously unserved
areas. Household growth is the result of new construction and occupancies in
areas that are already served by the system.
It has been assumed that the number of households in the Manitowoc System
franchise area will increase at a rate equivalent to the average growth
projected for the areas served by the system as a whole, or approximately 0.8%
per year.
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BASIC AND EXPANDED BASIC PENETRATION
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Basic and expanded basic subscriber penetration at the system are currently
69.4% and 97.1% (expressed as a ratio of basic subscribers), respectively.
System basic penetration has shown limited but consistent growth during the past
two years. It is likely that basic and expanded basic penetration will continue
to demonstrate a modest growth trend over the projected 10 year period.
For purposes of this analysis, the appraiser has assumed that basic
subscriber penetration will gradually increase from its current level to
approximately 85.0% by 2006, as shown in Table 1. Basic subscribers at the
Manitowoc System are projected to increase at an annual rate of 4.2% in 1996,
3.2% in 1997, 2.7% in 1998, and from 1.7% to 2.5% through the year 2006.
Expanded basic subscribers have been projected to remain at a 97.1% penetration
ratio of basic subscribers through 2006. These rates are derived from the
historical and anticipated performance of the system and the cable television
industry in general.
PAY PENETRATION
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As of August 31, 1996, pay penetration at the Manitowoc System attained a
level of 63.2%. For the purposes of this analysis, the appraiser has assumed
that pay penetration will increase from this level to approximately 72.0% by
2006, as indicated in Table 1. This estimate is reasonable in light of the
historical performance of the Manitowoc System and the anticipated performance
of the cable television industry in general.
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RATES
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System service rates are projected in Table 2. These are based upon
prevailing Manitowoc System rates with provisions for anticipated increases,
where appropriate.
As of August 31, 1996, monthly service rates were $11.08 for limited basic
service, $9.58 for expanded basic service, $7.95 to $9.95 for each pay service,
and $1.45 for each converter. There is also an average one-time charge of $9.00
for remote control unit purchases. Installation fees ranged from $13.25 to
$35.00, depending upon the type of installation service performed.
Due to regulatory and competitive limitations, service rates for basic and
expanded basic services are expected to grow with inflation, while premium
channel services are expected to remain relatively flat. These assumptions are
consistent with management expectations for service rate growth.
REVENUE PROJECTIONS
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Most of the revenue projections appearing in Table 2 are calculated by
multiplying the number of subscribers to a particular level of service by the
projected rate.
Commercial service revenue is projected to increase at an annual rate of
5.0%, based upon management expectations for the Manitowoc System. Similarly,
pay-per-view service revenue is projected to increase at a 12.0% annual rate
through 2006, reflecting management's system performance projections.
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Commercial advertising is projected to increase at an 11.3% annual rate
through 1999 and at an 11.4% rate thereafter, consistent with management
expectations. Annual installation revenue was projected to grow at a compound
annual rate of 3.5% during the projection period. Equipment rental revenues, as
well as other revenues, are also projected to increase by 3.5% annually through
2006.
As indicated in Table 3, total system revenues are projected to increase
from $3.9 million in 1996 to approximately $7.2 million in 2006.
OPERATING PROFIT MARGINS
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Operating profit margins are based upon historical operating performance of
the Manitowoc System. Operating profits are defined as profit before interest,
depreciation, tax, and corporate allocation charges. For the purposes of this
analysis, the system's August 1996 operating profit margin of 42.5% has been
used. The Manitowoc System's operating profit margin was adjusted to exclude
revenues and expenses associated with the Marcus Cable systems managed by the
Jones Intercable, Inc. Cable TV Joint Fund 11.
DEPRECIATION AND AMORTIZATION
- -----------------------------
Depreciation and amortization estimates have been based upon an estimated
tangible asset value of $2,820,000, the continuing annual capital expenditures
required to upgrade and maintain the system's plant and equipment, and the
system's estimated intangible asset value.
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Depreciation for tangible property in each year has been determined using
the MACRS schedule for 5, 7, 15, and 39 Year Property. Amortization of
intangible assets has been estimated using the straight-line method over 15
years.
FEDERAL, STATE, AND LOCAL TAX RATES
- -----------------------------------
An estimated tax rate of 40.1% was applied to the projected taxable income
of the system. This estimated rate reflects the effective combined federal,
state, and local tax rates in effect on August 31, 1996.
CAPITAL EXPENDITURES
- --------------------
Capital expenditures were projected at approximately 8% of the estimated
value of the tangible assets of the Manitowoc System as of August 31, 1996.
These expenditures are necessary in order to replace assets that become
irreparable, technically obsolete, or for other reasons are no longer useful to
the system. As the system physical plant ages and as changes in technology
occur, additional equipment and facilities will be necessary to improve and
expand its productive capacity.
NET AFTER-TAX CASH FLOW
- -----------------------
Net after-tax cash flow was determined in two steps. After taxes were
subtracted from the system's taxable income, non-cash depreciation and
amortization expense was added back to net income to yield after-tax cash flow.
From the after-tax cash flow, a
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provision for subsequent capital expenditures was deducted to calculate net
after-tax cash flow.
DISCOUNT RATE
- -------------
A discount rate of 12% was used to calculate the present value of the net
after-tax cash flows. In order to account for the risk associated with
investments in the cable television industry and the Manitowoc System in
particular, a premium was added to a base discount rate to develop the 12% rate
employed in this analysis. The base rate reflects application of the WACC
(Weighted Average Cost of Capital) model.
- - - -
RESIDUAL CASH FLOW MULTIPLE
- ---------------------------
The residual cash flow multiple refers to the multiplier used to estimate
the system's value at the end of the projection period. A multiplier of 10.75
was applied to the system's 2006 operating cash flow. Generally, multiples used
in the valuation of cable television systems of this type range from 9 to 12
times operating cash flow, depending upon market conditions and a system's
profit potential. Exceptional circumstances will warrant multiples outside of
this range.
The selected multiple of 10.75 was used to estimate the value of the system
at the end of the investment period. This multiple reflects the state of the
market for cable television systems as of August 31, 1996, tempered by the
economic conditions of the system's franchise service area, the necessity for a
system rebuild, and the uncertainty
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introduced by re-regulation of the cable television industry and competition
from telephone companies and direct broadcast satellite (DBS) operators.
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PRESENT VALUE OF RESIDUAL
- -------------------------
In the analysis, capital gains taxes were deducted from the discounted
terminal value at a rate of 40.1%. This result was then discounted for present
value. A rate of 12% was used in this calculation.
MODEL RESULTS
- -------------
The results of the discounted cash flow analysis are summarized in Table 4.
Based upon the assumptions outlined above, the indicated fair market value of
the system's non-current assets is $16,713,500. This value incorporates the
cumulative present value of the net after-tax cash flows of $9,750,400 and the
discounted residual value of $6,963,100, as shown in Table 4.
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TABLE 1
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MANITOWOC SYSTEM SUBSCRIBER PROJECTIONS
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Subscribers
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Homes Passed 15,468 15,592 15,716 15,842 15,969 16,096 16,225 16,355 16,486 16,618 16,751
Basic Subscribers:
Beginning of Year 10,647 11,094 11,449 11,758 12,017 12,221 12,527 12,840 13,161 13,490 13,827
Net Additions 447 355 309 259 204 306 313 321 329 337 346
End of Year 11,094 11,449 11,758 12,017 12,221 12,527 12,840 13,161 13,490 13,827 14,173
Average Basic Subscribers 10,871 11,272 11,604 11,888 12,119 12,374 12,684 13,001 13,326 13,659 14,000
Tier 1 Subscribers (EOY) 10,772 11,117 11,417 11,669 11,867 12,164 12,468 12,779 13,099 13,426 13,762
Premium Subscribers (EOY) 7,111 7,442 7,749 8,027 8,274 8,594 8,924 9,265 9,618 9,983 10,360
Basic Service Penetration 71.7% 73.4% 74.8% 75.9% 76.5% 77.8% 79.1% 80.5% 81.8% 83.2% 84.6%
Tier 1 Penetration (% Subs.) 97.1% 97.1% 97.1% 97.1% 97.1% 97.1% 97.1% 97.1% 97.1% 97.1% 97.1%
Premium Penetration (% Subs.) 64.1% 65.0% 65.9% 66.8% 67.7% 68.6% 69.5% 70.4% 71.3% 72.2% 73.1%
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TABLE 2
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MANITOWOC SYSTEM REVENUE PROJECTIONS
(Dollar Amounts Shown in Thousands)
1996 1997 1998 1999 2000 2001 2002 2003 2004
---- ---- ---- ---- ---- ---- ---- ---- ----
Service Revenue
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Basic Service Revenue $1,496.2 $1,605.5 $1,711.3 $1,814.5 $1,915.3 $2,023.9 $2,147.6 $2,277.7 $2,416.2
Tier 1 Service Revenue 1,256.5 1,348.8 1,437.2 1,523.7 1,608.5 1,700.0 1,803.1 1,913.2 2,029.4
Basic Commercial & Pay Revenue 38.0 39.9 41.9 44.0 46.2 48.5 50.9 53.4 56.1
Premium Service Revenue 626.1 658.4 687.2 713.7 737.5 763.1 792.5 822.9 854.3
Pay Per View Revenue 39.7 44.5 49.8 55.8 62.5 70.0 78.4 87.8 98.3
-------- -------- -------- -------- -------- -------- -------- -------- --------
Subtotal Service Revenue $3,456.5 $3,697.1 $3,927.4 $4,151.7 $4,370.0 $4,605.5 $4,872.5 $5,155.0 $5,454.3
Other Revenue
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Advertising Revenue $ 297.0 $ 330.6 $ 368.0 $ 409.6 $ 455.9 $ 507.9 $ 565.8 $ 630.3 $ 702.2
Installation 34.2 35.4 36.6 37.9 39.2 40.6 42.0 43.5 45.0
Equipment Rentals 42.9 44.4 46.0 47.6 49.3 51.0 52.8 54.6 56.5
FCC Pass Thru Revenue 4.9 5.1 5.2 5.4 5.5 5.6 5.7 5.9 6.0
Other Revenue 61.4 63.5 65.7 68.0 70.4 72.9 75.5 78.1 80.8
-------- -------- -------- -------- -------- -------- -------- -------- --------
Subtotal Other Revenue $ 440.4 $ 479.0 $ 521.5 $ 568.5 $ 620.3 $ 678.0 $ 741.8 $ 812.4 $ 890.5
Total Revenue $3,896.9 $4,176.1 $4,448.9 $4,720.2 $4,990.3 $5,283.5 $5,614.3 $5,967.4 $6,344.8
2005 2006
---- ----
Service Revenue
- ---------------
Basic Service Revenue $2,563.4 $2,719.9
Tier 1 Service Revenue 2,153.3 2,283.8
Basic Commercial & Pay Revenue 58.9 61.8
Premium Service Revenue 886.7 920.3
Pay Per View Revenue 110.1 123.3
-------- --------
Subtotal Service Revenue $5,772.4 $6,109.1
Other Revenue
- -------------
Advertising Revenue $ 782.3 $ 871.5
Installation 46.6 48.2
Equipment Rentals 58.5 60.5
FCC Pass Thru Revenue 6.2 6.3
Other Revenue 83.6 86.5
-------- --------
Subtotal Other Revenue $ 977.2 $1,073.0
Total Revenue $6,749.6 $7,182.1
-24-
TABLE 3
-------
MANITOWOC SYSTEM FINANCIAL PROJECTIONS
(Dollar Amounts Shown in Thousands)
1996 1997 1998 1999 2000 2001 2002 2003 2004
---- ---- ---- ---- ---- ---- ---- ---- ----
Projected System Revenues $3,896.9 $4,176.1 $4,448.9 $4,720.2 $4,990.3 $5,283.5 $5,614.3 $5,967.4 $6,344.8
Operating Profit Margin 42.5% 42.5% 42.5% 42.5% 42.5% 42.5% 42.5% 42.5% 42.5%
Operating Cash Flow $1,656.2 $1,774.8 $1,890.8 $2,006.1 $2,120.9 $2,245.5 $2,386.1 $2,536.1 $2,696.5
Less: Depreciation 1,362.5 1,701.5 1,501.6 1,373.6 1,338.1 1,299.3 1,260.9 1,201.4 1,132.1
-------- -------- -------- -------- -------- -------- -------- -------- --------
Taxable Income $ 293.7 $ 73.3 $ 389.2 $ 632.5 $ 782.8 $ 946.2 $1,125.2 $1,334.7 $1,564.4
Taxes 117.8 29.4 156.1 253.6 313.9 379.4 451.2 535.2 627.3
-------- -------- -------- -------- -------- -------- -------- -------- --------
Net Income $ 175.9 $ 43.9 $ 233.1 $ 378.9 $ 468.9 $ 566.8 $ 674.0 $ 799.5 $ 937.1
Add Back: Depreciation 1,362.5 1,701.5 1,501.6 1,373.6 1,338.1 1,299.3 1,260.9 1,201.4 1,132.1
-------- -------- -------- -------- -------- -------- -------- -------- --------
After-Tax Cash Flow $ 518.4 $1,745.4 $1,734.7 $1,752.5 $1,807.0 $1,866.1 $1,934.9 $2,000.9 $2,069.2
Capital Expenditures 76.0 225.6 225.6 225.6 225.6 225.6 225.6 225.6 225.6
-------- -------- -------- -------- -------- -------- -------- -------- --------
Net After-Tax Cash Flow $ 442.4 $1,519.8 $1,509.1 $1,526.9 $1,581.4 $1,640.5 $1,709.3 $1,775.3 $1,843.6
Present Value Net After-Tax
Cash Flow $ 434.0 $1,382.3 $1,225.5 $1,107.1 $1,023.7 $ 948.2 $ 882.1 $ 818.0 $ 758.5
Cumulative Present Value
Net After-Tax Cash Flow $ 434.0 $1,816.3 $3,041.8 $4,148.9 $5,172.6 $6,120.8 $7,002.9 $7,820.9 $8,579.4
Cumulative Present Value
Net After-Tax Cash Flow $9,750.4
========
2005 2006
---- ----
Projected System Revenues $6,749.6 $7,182.1
Operating Profit Margin 42.5% 42.5%
Operating Cash Flow $2,868.6 $3,052.4
Less: Depreciation 1,132.1 1,132.1
-------- --------
Taxable Income $1,736.5 $1,920.3
Taxes 696.3 770.0
-------- --------
Net Income $1,040.2 $1,150.3
Add Back: Depreciation 1,132.1 1,132.1
-------- --------
After-Tax Cash Flow $2,172.3 $1,513.2
Capital Expenditures 225.6 149.6
-------- --------
Net After-Tax Cash Flow $1,946.7 $1,363.6
Present Value Net After-Tax
Cash Flow $ 715.1 $ 455.9
Cumulative Present Value
Net After-Tax Cash Flow $9,294.5 $9,750.4
Note: 1996 and 2006 after-tax cash flows and capital expenditures adjusted for
partial years.
-25-
TABLE 4
-------
CALCULATION OF VALUE ATTRIBUTABLE TO MANITOWOC SYSTEM NON-CURRENT ASSETS
(Dollar Amounts Shown in Thousands)
2006 Operating Cash Flow 1/ $ 3,052.4
10.75x Cash Flow Multiple 2/ $32,813.3
Less: Remaining Basis 4,915.8
---------
Capital Gain $27,897.5
Capital Gains Tax @ 40.1% 2/ $11,186.9
___________________________
Terminal Value $32,813.3
Less: Capital Gains Tax 11,186.9
---------
After-Tax Terminal Value $21,626.4
After-Tax Terminal Value Discounted to
Present Value @ 12% 2/ $ 6,963.1
Plus: Cumulative Present Value After-Tax Cash Flow 1/ 9,750.4
---------
Indicated Fair Market Value: (Income Approach)
Non-Current Assets of the Manitowoc System $16,713.5
=========
1/ See Table 3.
2/ See text.
-26-
JONES INTERCABLE, INC. CABLE TV JOINT FUND 11
CABLE TELEVISION SYSTEM
MANITOWOC, WISCONSIN
APPRAISAL OF CERTAIN ASSETS AS OF AUGUST 31, 1996
IV. COMPARABLE SALES ANALYSIS
------------------------------
In recent years, there have been many sales of cable television systems in
the United States. Table 5 identifies ten cable television system sales which
occurred within the past year. These sales have been selected based upon their
comparability to the Manitowoc System.
Subscriber counts for the comparable cable television systems shown in
Table 5 are within 25% of the August 31, 1996 Manitowoc cable television system
subscriber level of 10,825. The prices paid for these comparable systems range
from $9.6 million to $20.0 million.
As shown in Table 5, the price per subscriber has been computed for each
comparable sale. This measure is calculated by dividing the reported purchase
price of the cable television system by the total number of basic subscribers.
The average price per subscriber paid for the ten comparable cable television
system sales listed in Table 5 is approximately $1,419.
-27-
TABLE 5
-------
MANITOWOC CABLE TELEVISION SYSTEM COMPARABLE SALES
Basic Price
Price Subs Per Sub
Date Location Seller Buyer (mil.) (000) (000)
- ---- -------- ------ ----- ------ ----- -----
Nov. 95 Emmaus, PA Lenfest Service Electric $15.2 9.1 $1,672
Mar. 96 Northern, MS TCI of Kansas Galaxy Telecom 15.4 10.0 1,537
Apr. 96 KS based system Cablevision of Texas Galaxy Telecom 9.6 9.0 1,066
Apr. 96 GA based system Falcon Holdings Teleview Inc. 15.0 9.5 1,579
Apr. 96 WA, OR and CA systems Apollo Comm. Cable Plus, Inc. 12.1 11.6 1,052
Jun. 96 Columbus, GA TCI Charter Communications 15.8 13.0 1,212
Jun. 96 Jasper, TN PCI Sun Cable Helicon 11.4 8.2 1,382
Jul. 96 San Francisco, CA area Balkin Cable TCI of Georgia 19.6 12.3 1,594
Jul. 96 GA and OH based systems Clear-Vu Cable Helicon 18.2 12.3 1,530
Aug. 96 Moses Lake, WA Marcus Cable Northland Comm. 20.0 12.5 1,568
----- ---- ------
Average $15.2 10.8 $1,419
===== ==== ======
Source: Announced cable television sales data from Paul Kagan Associates Cable
-----
TV Investor.
- -----------
Note: Price per subscriber calculations may show slight rounding discrepancy.
-28-
JONES INTERCABLE, INC. CABLE TV JOINT FUND 11
CABLE TELEVISION SYSTEM
MANITOWOC, WISCONSIN
APPRAISAL OF CERTAIN ASSETS AS OF AUGUST 31, 1996
V. CONSOLIDATION
-----------------
The results of the discounted cash flow analysis are summarized in Table 4.
Based upon the assumptions outlined above, the indicated value of the cable
system serving the Manitowoc franchise area is found to be approximately $16.7
million. This value incorporates the cumulative present value of the net after-
tax cash flows of $9,750,400 and the discounted residual value of $6,963,100.
To place this economic value in the context of current market conditions,
the appraiser sought to compare this value with prevailing subscriber multiples
for cable television systems in August 1996. The $16.7 million value reflects a
subscriber multiple of approximately $1,540 per subscriber. The indicated value
for the system appears to be quite consistent with prevailing subscriber
multiples, as shown in Table 5.
Giving appropriate weight to the discounted cash flow analysis and the
reported comparable sales transactions, the indicated value of the non-current
assets of the Manitowoc cable television system as of August 31, 1996 is found
to be $16.7 million.
-29-
EXHIBIT A
QUALIFICATIONS OF JAMES R. BOND, JR. AND TIMOTHY S. PECARO
PROFESSIONAL EXPERIENCE AND QUALIFICATIONS
------------------------------------------
JAMES R. BOND, JR.
------------------
James R. Bond, Jr. is a principal in the consulting firm of Bond & Pecaro, Inc.
In this capacity, he is routinely retained to examine and study economic issues
which affect media businesses.
Before the formation of Bond & Pecaro, Inc., Mr. Bond was a Vice President with
Frazier, Gross & Kadlec, Inc. Mr. Bond joined that firm in 1978, was appointed
Manager of Asset Appraisal Services in 1979, and in 1982 was named Vice
President. In this capacity he engaged in the development and preparation of
asset appraisal reports and economic analyses for owners of broadcast and cable
television properties.
Mr. Bond has been retained to appraise, for a fee, the assets of over 1,500
radio, television, radio common carrier, and cable television properties. He is
a member of the Society of Broadcast Engineers (SBE), the Cable Television Tax
Professionals Institute (CTTPI), and The Society of Cable Television Engineers
(SCTE). He is a member and director of the Broadcast and Cable Television
Financial Management Association (BCFM), and serves on that organization's
Taxation Advisory Committee. He also serves on the National Association of
Broadcasters (NAB) Tax Advisory Panel and Depreciation Task Force. Mr. Bond is
a Certified Senior Radio Broadcast Engineer (SBE), a Certified Senior Television
Broadcast Engineer (SBE), and holds an FCC First Class Radiotelephone Operator
License.
He has testified as an expert witness in connection with numerous
telecommunications valuation matters before federal, state, and local courts.
Mr. Bond received a Bachelor of Arts degree in Radio, Television and Motion
Pictures from the University of North Carolina at Chapel Hill in 1976. Mr. Bond
also holds a Masters Degree in Business Administration from the University of
Virginia in Charlottesville, Virginia.
PROFESSIONAL EXPERIENCE AND QUALIFICATIONS
------------------------------------------
TIMOTHY S. PECARO
-----------------
Timothy S. Pecaro is a principal in the firm of Bond & Pecaro, Inc., a
Washington based consulting firm specializing in valuations, asset appraisals,
and related financial services for the communications industry. Before the
formation of Bond & Pecaro, Inc., Mr. Pecaro was a Vice President with Frazier,
Gross & Kadlec, Inc. Mr. Pecaro joined that firm in 1980 and was named Manager
of the firm's Asset Appraisal Services Division in 1982. He became Director of
Asset Appraisal Services in 1983 and Vice President of the firm in 1984.
Mr. Pecaro has actively participated in the development, research, and
preparation of asset appraisal reports for owners of radio, television,
newspaper, radio common carrier, and CATV properties. He has also developed
several research studies and has participated in special research at the FCC.
Mr. Pecaro has appraised the assets of more than 1,500 communications
facilities. He has also been retained to provide special market studies and
individual research projects for the management of broadcast properties and
related industries. He is a member of the Broadcast Cable Financial Management
Association, the NAB Tax Advisory Panel, and the NAB Depreciation Task Force.
Mr. Pecaro has testified as an expert witness in connection with
telecommunications valuation matters before federal and state courts. He has
also spoken on communications financial issues at the annual conferences of the
National Association of Broadcasters, the Broadcast Financial Management
Association, and Telocator.
Prior to his association with Frazier, Gross & Kadlec, Mr. Pecaro was employed
at WMAQ and WKQX(FM) in Chicago, Illinois, two of the NBC owned and operated
radio stations. Mr. Pecaro served as Program Research Director and Assistant
Music Director at WKQX.
Mr. Pecaro received a Bachelor of Arts degree in Radio/Television Communication
Arts from Monmouth College in 1976. He graduated Cum Laude with highest honors
in his major field of study.