Exhibit (b)(2)
[LOGO OF KAGAN MEDIA APPRAISALS INC. APPEARS HERE]
November 8, 1996
Mr. Kevin Coyle
Group Vice President/Finance
JONES INTERCABLE
9697 East Mineral Avenue
Englewood, CO 80112
Tel: (303) 792-3111
Fax: (303) 790-0533
Dear Mr. Coyle:
In accordance with your request, we have appraised the cable TV system in
Manitowoc, Wisconsin for the purpose of determining its fair market value.
We were not assigned to complete a tangible asset valuation of the property.
Rather, we were assigned to do a financial analysis of the property and its
future market potential. The limiting conditions of this appraisal are more
fully outlined in a statement included within this report.
We are qualified to complete this assignment by virtue of our 27 years of
experience in appraising communications properties. During that period, we have
appraised over $26 billion worth of media properties on contract assignment. In
addition, many more billions of dollars worth of such properties have been
valued by Paul Kagan Associates, Inc. in such newsletters as CABLE TV INVESTOR,
CABLE TV FINANCE, CABLE TV TECHNOLOGY and BROADCAST BANKER/BROKER.
We have based our analysis in part on financial data supplied to us by Jones
Intercable and in part on our personal knowledge of the communications industry
acquired over two decades. Our credentials are more fully outlined in the
enclosed appraisal report.
Included in this report is a description of the property and its market, a brief
explanation of key operating expectations related to the financial potential of
the business and the results of a comparable sale study for the property. Also
included is a 10-year discounted cash flow projection for the property, followed
by a list of the assumptions underlying the projections.
Based on the results of our analysis, more fully outlined within this report, we
conclude that in a willing buyer-willing seller, all cash transaction, the fair
market value of the Manitowoc, Wisconsin cable TV systems is approximately $16.1
-----
million.
- -------
Mr. Kevin P. Coyle
JONES INTERCABLE
November 8, 1996
Page Two
It has been a pleasure to be of service to you in this matter. If you have any
further questions, please feel free to call.
Sincerely,
KAGAN MEDIA APPRAISALS, INC.
/s/ Robin V. Flynn
- ----------------------------
Robin V. Flynn
Vice President
RVF/jht
enclosures
APPRAISAL REPORT
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MANITOWOC, WISCONSIN
CABLE SYSTEM
PREPARED BY:
KAGAN MEDIA APPRAISALS, INC.
126 CLOCK TOWER PLACE
CARMEL, CA 93923
(408) 624-1536
NOVEMBER 8, 1996
TABLE OF CONTENTS
- -------------------------------------------------------------
CERTIFICATE OF APPRAISAL................................... 1
STATEMENT OF LIMITING CONDITIONS........................... 3
RESTRICTIONS UPON DISCLOSURE AND USE....................... 5
QUALIFICATIONS OF THE APPRAISER............................ 6
PURPOSE OF THE APPRAISAL................................... 8
ASSET APPRAISAL METHODOLOGY................................ 9
COST APPROACH........................................ 9
MARKET DATA (COMPARABILITY) APPROACH................. 9
INCOME APPROACH..................................... 10
VALUATION THEORY USING DISCOUNTED CASH FLOW ANALYSIS...... 11
VALUATION OF MANITOWOC, WISCONSIN CABLE SYSTEM............ 14
DESCRIPTION OF SUBJECT MARKET....................... 15
DESCRIPTION OF SUBJECT BUSINESS..................... 20
10-YEAR CASH FLOW PROJECTIONS....................... 30
ASSUMPTIONS FOR THE 10-YEAR CASH FLOW PROJECTIONS... 32
COMPARABLE ANALYSIS................................. 36
CORRELATION AND FINAL ESTIMATE OF VALUE............. 39
CERTIFICATE OF APPRAISAL
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The undersigned does hereby certify that, except as otherwise noted in this
appraisal report:
l. We have inspected the financial statements and other operating and
financial data of the subject business as furnished by Jones Intercable.
2. We hereby certify that we have no present or contemplated financial
interest in the cable system that is the subject of this appraisal report, and
that our employment and compensation are in no way contingent upon the value
reported.
3. We have no personal interest or bias with respect to the subject matter
of this appraisal report, nor are we connected in any way with the parties
involved.
4. Pursuant to an investment policy adopted in 1974, Paul Kagan personally
and Paul Kagan Associates, Inc., as a corporation, invest profits in publicly
held media companies. Clients of Kagan Capital Management are also invested in
publicly held media companies. As a result, portfolios owned and/or managed by
Paul Kagan at present may maintain a long-term investment in stock of various
KMA clients. Additionally, KMA clients may be subscribers to a number of Kagan
information services and its executives from time to time may have enrolled at
Kagan seminars or serve as panelists themselves.
5. To the best of our belief and knowledge, any statements of fact
contained in this appraisal report, upon which the analyses, opinions and
conclusions expressed herein are based, are true and correct. Information used
to complete this report was obtained from sources considered reliable and is
believed to be true and correct. We make no warranty as to the
accuracy or reasonableness of such information furnished to us by others.
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PREPARED FOR: JONES INTERCABLE 1 KAGAN MEDIA APPRAISALS, INC.
CERTIFICATE OF APPRAISAL (CONTINUED)
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6. This appraisal report sets forth all of the limiting conditions imposed
by the terms of our assignment or by the undersigned, affecting the analyses,
opinions and conclusions contained in this report.
7. The analyses, conclusions and opinions that are set forth in this
appraisal report represent the work of the Kagan Media Appraisals, Inc. team,
including the undersigned.
8. The business that is the subject of this appraisal report, the
Manitowoc, Wisconsin cable TV system is currently valued at approximately $16.1
-----
million.
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Signed: /s/ Robin V. Flynn
__________________________________________
Kagan Media Appraisals Inc./Robin V. Flynn
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PREPARED FOR: JONES INTERCABLE 2 KAGAN MEDIA APPRAISALS, INC.
STATEMENT OF LIMITING CONDITIONS
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Financial and operating data concerning the subject system furnished us by
Jones Intercable are assumed to be correct and current. We assume no
responsibility for knowledge of matters legal in nature concerning Jones
Intercable. We do not render any opinions as to the title of ownership of the
subject property, which is assumed to be correct and good and free of liens or
other financial or legal encumbrances.
We have taken into consideration existing long-term liabilities that have
been called to our attention by the parties involved, but do not guarantee that
other liabilities, of a financial or legal nature, do not exist. We have
appraised the subject property as if it was free and clear of debt and under
responsible ownership and competent management. Completion of any scheduled
capital improvements is assumed.
Our assignment was to appraise the value of the subject property from the
standpoint of a financial analysis of its ability to generate revenue, cash flow
and profit. Utilizing accepted principles of appraisal methodology, Kagan Media
Appraisals, Inc. has developed its own method of valuing media properties, which
may differ in certain aspects from other methods. We conduct our research under
the assumption that a fair market value can be established within the
constraints of a financial analysis, supplemented by analysis of the markets in
which the subject business operates and analysis of comparable businesses sold
in the industry. We have therefore made no survey of the property, plant and
equipment of the subject business. Further, no technical engineering analysis
of the businesses has been made or rendered by Kagan Media Appraisals, Inc.
This appraisal assumes that the subject business' technical equipment is in good
working
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PREPARED FOR: JONES INTERCABLE 3 KAGAN MEDIA APPRAISALS, INC.
STATEMENT OF LIMITING CONDITIONS (Continued)
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order and appropriate for the conduct of businesses of its type, and that it is
operated by competent management.
We have queried management regarding any specific circumstances concerning
market conditions, and have taken its response into account in our evaluation.
Possession of this report, or a copy thereof, does not carry with it the
right of publication, nor may it be used for any purpose by any but the assignor
without the previous written consent of the appraiser or the assignor and in any
event only with proper qualifications. This appraisal is not to be construed as
an offer to sell the subject property or as a solicitation of an offer to buy
said property. Neither is this appraisal intended for use as a business plan in
connection with the securing of financing or the financial restructuring of the
subject business. It is offered solely as an independent study of the fair
market value of the subject property, combining the technical competence and the
experienced judgement of the staff of Kagan Media Appraisals, Inc. The final
estimate of value cited in this report is a result of our independent
conclusions based on the assumptions, analyses and discussions contained in the
following pages.
Unless previous written arrangements have been made, neither Kagan Media
Appraisals, Inc., nor any officer of Kagan Media Appraisals, Inc. is required to
give testimony or attendance in court, pre-trial proceedings or arbitration by
reason of having made, or participated in, this report.
The reader is advised that this Statement of Limiting Conditions and the
accompanying introductory pages are an integral part of the final report, which
contains the details of our analyses and all necessary documentation to support
valuation conclusions.
Signed: /s/ Robin Flynn
____________________________________________
Kagan Media Appraisals, Inc. /Robin V. Flynn
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PREPARED FOR: JONES INTERCABLE 4 KAGAN MEDIA APPRAISALS, INC.
RESTRICTIONS UPON DISCLOSURE AND USE
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Neither all nor any part of the contents of this report, especially any
conclusions as to value, or the identity of Kagan Media Appraisals, Inc. and its
affiliates, shall be disseminated to the public through advertising media,
public relations media, news media, sales media or any other public means of
communications without the prior written consent and approval of the
undersigned.
Signed: /s/ Robin Flynn
_____________________________________
Kagan Media Appraisals/Robin V. Flynn
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PREPARED FOR: JONES INTERCABLE 5 KAGAN MEDIA APPRAISALS, INC.
QUALIFICATIONS OF THE APPRAISER
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PAUL F. KAGAN is a financial analyst, consultant, investment manager and
publisher of appraisal commentaries and analytical newsletters serving the
communications and entertainment industries.
He has been engaged in this business since February 1969, when he formed
Paul Kagan Associates, Inc., in Rockville Centre, New York. Offices were moved
to Carmel, CA, in 1978. The Kagan group of companies includes Paul Kagan
Associates, Inc. (publishing), Kagan Seminars Inc. (seminars), Kagan Capital
Management, Inc. (investment management) and Kagan Media Appraisals, Inc.
(appraisals and strategic consulting).
Prior to forming PKA, Paul Kagan was a security analyst specializing in
broadcasting and cable TV for E.F. Hutton & Co. in New York. In the past he has
also contributed numerous articles on investments and finance to such popular
publications as Barron's, the Dow Jones financial weekly.
--------
Earlier, he was employed in executive positions with CBS, Inc., and WOR-FM
in New York.
Mr. Kagan is a fellow of the Financial Analysts Federation, a member of the
New York Society of Security Analysts and an associate member of the Broadcast
Financial Management Association.
PKA publishes over 40 newsletters on various communications and media
disciplines, including CABLE TV INVESTOR, BROADCAST INVESTOR, CABLE TV
BANKER/BROKER and BROADCAST BANKER/BROKER. Since 1969, it has published CABLE
TV INVESTOR, the only continuing publication analyzing the value of public and
private cable TV companies.
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PREPARED FOR: JONES INTERCABLE 6 KAGAN MEDIA APPRAISALS, INC.
QUALIFICATIONS OF APPRAISER (Continued)
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For 27 years, Mr. Kagan and his staff have appraised over $26 billion
worth of media properties on contract assignment. In addition, the Kagan
Newsletters have analyzed public and private companies, on at least a quarterly
basis, totaling hundreds of billions of dollars.
Mr. Kagan is a graduate of Hunter College of the City University of New
York, where he majored in communications. He also studied accounting at the New
York University Graduate School of Business Administration.
Mr. Kagan and his analyst team have, for the past 23 years, conducted
seminars for corporate executives and public officials on communications and
media topics.
ROBIN V. FLYNN is Vice President of Kagan Media Appraisals, Inc. Prior to
joining the firm in 1988, she was employed with the Overseas Private Investment
Corporation (OPIC) in Washington, DC, where she analyzed the revenue-generating
ability of proposed overseas investment projects. Earlier, she worked with
Scudder, Stevens & Clark, an investment counsel firm in Boston, MA, in
developing an international investment fund for Canadian institutional
investors.
Ms. Flynn holds a Bachelor of Arts degree from Duke University, a
Certificate in Contemporary French Studies from the Sorbonne in Paris, and an
MBA in Finance from the Monterey Institute of International Studies.
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PREPARED FOR: JONES INTERCABLE 7 KAGAN MEDIA APPRAISALS, INC.
PURPOSE OF THE APPRAISAL
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The purpose of this appraisal is to estimate the current fair market value
of the Manitowoc, Wisconsin cable TV system.
Market value for purposes of this report is the definition recommended by
the United States Internal Revenue Service:
"The fair market value is the price at which the property would change
hands between a willing buyer and a willing seller, neither being under any
compulsion to buy or sell and both having reasonable knowledge of relevant
facts."
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PREPARED FOR: JONES INTERCABLE 8 KAGAN MEDIA APPRAISALS, INC.
THE APPRAISAL PROCESS
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The valuation of a business is generally done by use of one or more of the
following three approaches:
l. Cost approach
2. Market Data (comparability) approach
3. Income approach
Under certain circumstances, it is not always possible to apply all of the
aforementioned approaches to value, due to special purpose or use
characteristics of a given business.
COST APPROACH
Under this method, value is derived by estimating the replacement cost of
the equipment, building and other improvements owned by the subject business,
based on current prices for labor and materials and latest construction
techniques. To this total might be added a cost factor for obtaining the
government licenses required to engage in the subject business. Kagan Media
Appraisals, Inc. does not employ this approach in its fair market valuations
unless specifically requested to do so.
MARKET DATA (COMPARABILITY) APPROACH
A value estimate by this method is derived by direct comparison of the
subject business with other companies of similar size or type that are
currently, or have been recently, offered for sale. Kagan Media Appraisals,
Inc. typically uses this methodology in its appraisals.
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PREPARED FOR: JONES INTERCABLE 9 KAGAN MEDIA APPRAISALS, INC.
THE APPRAISAL PROCESS (Continued)
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INCOME APPROACH
This technique relates the evaluation of a property to its ability to
generate income over a specified investment period. The value to the owner of
this "earning expectancy" must be compared with the value of other investments
the owner might otherwise make. Because the value is expressed as a capitalized
rate of income, the income stream of the subject business is of vital importance
to the appraiser.(1)
The value estimate under this approach is developed by first determining
the current income level of the subject business, then projecting growth rates
for the span of years in which the investment is expected to be returned,
discounting future income by an imputed rate based on cost-of-money factors.
Finally, the total valuation is yielded by the sum of present values to be
generated in each of the years counted.
This method of calculation is normally applied to "operating income," or,
in the lexicon of many entrepreneurs in the marketplace, "cash flow." The
latter term consists of operating revenue minus operating expense, and does not
include deductions for depreciation, interest, or income taxes.
Kagan Media Appraisals, Inc. typically uses this methodology in its
appraisals, in the form of discounted cash flow projections.
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(1) "In order to value the property, it is necessary to forecast its
earnings expectancy. The past earnings expectancy of the subject property
and/or of comparable properties, adjusted for such trends and circumstances as
can be foreseen as of the valuation date, is projected into the future...The
valuation of the investment property is based on the principle that, as of the
valuation date, the value is equivalent to the series of future net returns.
The present worth calculation is based on the principle that an investor, buying
the subject property, expects 1) either to preserve the amount of his original
investment or to recover the consumer portion therefore out of earnings and/or
any terminal sale of assets and 2) to receive the equivalent of any annual
remunerative yield rate being high enough to compensate him for the investment
risk involved."
-- Opinion of the College of Fellows, American Society of
Appraisers, published in the June 1975 edition of VALUATION journal, p. 87.
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PREPARED FOR: JONES INTERCABLE 10 KAGAN MEDIA APPRAISALS, INC.
VALUATION THEORY USING DISCOUNTED CASH FLOW ANALYSIS
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The time value of money means that a dollar one year from today is "worth"
less than a dollar today. This is due, in part, to inflation, because the
buying power of tomorrow's dollar will likely be less than it is today.
Future dollars are worth less than present dollars, however, for another,
perhaps more important reason: the existence of the interest rate, or cost-of-
money factor, in the leveraging of a business enterprise.
Put more simply: one dollar invested in a risk-free instrument, such as a
savings bank or a government security, will earn a given amount of interest over
a certain period of time. Thus, the same dollar invested in a business
enterprise "loses" value over time unless the business "returns" dollars at a
rate at least equal to that which would have been enjoyed in the alternate
investment.
Because the business likely will entail risk of considerable nature, the
ultimate "rate of return" must be substantially better than that paid by the
risk-free instrument.
Suppose, for example, a person deposits $1,000 in a bank that pays 7%
interest compounded quarterly, and both principal and interest are left in the
account over 10 years. At the end of 10 years, the original $1,000 will have
doubled, to $2,001. That's an effective annual rate of return of 7.2%.
If, instead, the investor had placed his $1,000 in a more speculative
account--say, by acquiring equity ownership of a cable TV system or radio
station--the average annual rate of return would have to be considerably higher
than 7.2% to warrant taking the risk. How long should the investment return
period be, so that the average rate of return is desirable?
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PREPARED FOR: JONES INTERCABLE 11 KAGAN MEDIA APPRAISALS, INC.
VALUATION THEORY USING DISCOUNTED CASH FLOW ANALYSIS
(Continued)
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It is the appraiser's experience that media investors typically seek
return-on-investment within approximately 10 years. Such rates of return enable
them to obtain returns on equity of as much as 50% annually, through the use of
leverage.
The form of the return is at the heart of every buy-sell negotiation. For
it is not the percentage of net profit to equity that concerns the media
investor. Rather, it is the percentage of operating profit to equity. This
operating profit is also called "cable cash flow" because it differs from true
accounting cash flow. Cable cash flow is depreciation and amortization,
interest and income taxes added back to net income.
Entrepreneurs use this variation of cash flow to distinguish among
properties because it tends to make one potential investment easier to compare
to another.
In the media, many properties are purchased on "terms," i.e., over a number
of years with installment payments and varying interest rates, or other payment
schedules with certain contingencies. And because individuals and corporations
also have varying tax rates, the amount of taxes paid takes the media investor
further away from reasonable comparisons. In addition, capitalizations of
companies vary, yielding widely disparate financial operating characteristics.
In order to determine how a business is really performing in its day-to-day
operation, cable investors go directly to operating income (cable cash flow) to
make their comparisons. It is this line that is expected to grow, and it is
this line on the income statement that they look to for their return on
investment.
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PREPARED FOR: JONES INTERCABLE 12 KAGAN MEDIA APPRAISALS, INC.
VALUATION THEORY USING DISCOUNTED CASH FLOW ANALYSIS
(Continued)
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In order to determine the cash flow potential of a (cable) system,
the appraiser must perform the following functions:
l. Compute a projected growth of absolute cash flow over a given
investment payback period.
2. Compute a projected rate of inflation, to reduce future cash flows
to present value.
3. Discount future cash flow utilizing present-value factors widely
published in financial handbooks.
The result of these steps is the accumulation over a set period of
years of "discounted cash flow," the amount of real income that will be counted
as the "return" against the investment.
To say it another way, the value of the business is equal to the
-----------------------------------------
cumulative discounted cash flow (future income stream) to be generated by the
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business over the desired investment payback period.
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PREPARED FOR: JONES INTERCABLE 13 KAGAN MEDIA APPRAISALS, INC.
VALUATION OF MANITOWOC, WISCONSIN
CABLE TV SYSTEM
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PREPARED FOR: JONES INTERCABLE 14 KAGAN MEDIA APPRAISALS, INC.
DESCRIPTION OF SUBJECT MARKET
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The City of Manitowoc is located in east central Wisconsin, 38 miles
southeast of Green Bay and 79 miles north of Milwaukee. It is located on Lake
Michigan, and has a small harbor which is used primarily for yachting and car
ferrying services across the lake between Wisconsin and Michigan. The City is a
regional manufacturing, transportation and retail center in that part of
Wisconsin. The City has been oriented historically toward maritime activities
stretching all the way back to the launching of wooden sailing ships on Lake
Michigan in 1847. 28 submarines were built here during World War II. Even
today, there is a small facility which produces Berger luxury yachts and a 250-
slip marina, which is popular with sport fishermen.
Manitowoc's population was on an upward trend during the 1970's and
then flattened. The Bay-Lake Regional Planning Commission 1992 Annual Report
stated that the eight-county region including Manitowoc grew at a rate equal to
the state's growth between 1950 and 1991 (43%), whereas Manitowoc County grew at
about half this rate (20%). One significant trend noted in the report was the
smaller size of the average household unit. Thus, even though population in
Manitowoc declined by 3.3% between 1980 and 1990, the number of households
increased by 3.6%. The population grew by an estimated 2.1% from 1990 through
1995, increasing from 32,520 to an estimated 33,208. The population is
estimated to have increased from 33,208 to 33,253 between 1995 and 1996. By
2000, the population is estimated by one source (Claritas, Inc.) to increase to
33,793. This would mean an increase of 1.8% over the next five years. Another
source estimates that the population will climb to 37,000 from an estimated 1995
population of 34,000 ("Manitowoc Public Utilities Water Demand Projections to
the Year 2015," July 1993). This higher projection was based on the ease of
expansion in the city, improved transportation and communications facilities and
the desirability of living in non-congested areas such as Manitowoc.
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PREPARED FOR: JONES INTERCABLE 15 KAGAN MEDIA APPRAISALS, INC.
DESCRIPTION OF SUBJECT MARKET (CONTINUED)
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This higher projection would mean a total increase of 8.8% from 1995-2000, or a
compound growth rate of 1.71% annually.
Manufacturing is a major contributor to the economy. The major
employers are:
NAME OF EMPLOYER; NUMBER OF EMPLOYEES
------------------------------------------
Mirro 1,700
Holy Family MMC 1,000
Manitowoc County 996
Manitowoc Company 989
MTWC School 900
Dayco/Imperial Eastman 617
Goetze 574
City of Manitowoc/MPU 450
Lakeside Foods 340
ECK Industries 330
(C) 1996 Kagan Media Appraisals, Inc.
In Manitowoc County, the unemployment rate is 4.9% out of a total
labor force of 42,200. Among the 32,500 employed nonagricultural wage and
salary workers, 11,900 are in manufacturing and 20,600 are in non-manufacturing
activities. The City reports that unemployment declined by 200 from September,
1995 to August, 1996. This is a decline of 25% in this economic indicator.
While there are no apparent major expansions, management reports
numerous minor expansions by local businesses and in the community's industrial
park. The area is not dependent on any military installations.
According to the 1990 Census, the per capita income of Manitowoc was
$12,350. The city's average household income was $30,187, and its median family
income (family of four) was $31,709. This is significantly lower in all three
categories than the 1994 figures for the State of
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PREPARED FOR: JONES INTERCABLE 16 KAGAN MEDIA APPRAISALS, INC.
DESCRIPTION OF SUBJECT MARKET (Continued)
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Wisconsin. Those were as follows: per capita income of $15,645, average
household income of $41,762, and median family income of $35,849.
One source projects that households will grow by 2.9% between 1995 and
2000 in Manitowoc, that per capita income will increase by 26.5%, average
household income by 23.5%, and median family income by 16.4%. Household income
and wealth is estimated to have changed as follows from 1995 to 1996:
CATEGORY 1995 1996
--------------------------------------
($) ($)
Average HH income 39,615 38,583
Median HH income 30,129 30,242
Avg. Family HH 49,061 48,010
Med. Family HH 39,624 40,094
Avg. HH wealth 123,734 125,466
Med. HH wealth 65,811 66,264
Source: Claritas, Inc. 1996 Household Trend Report
HOUSING GROWTH
Housing growth for the cable system's service area was projected using
a combination of actual housing growth from 1992 through August, 1996, the
housing growth estimates in the "Manitowoc Public Utilities Water Demand
Projections," and the household growth forecast from Claritas, Inc.
The system reported the homes in its franchise area as follows:
1991 1992 1993 1994 1995 AUG. 1996
---------------------------------------------------------------
15,241 15,553 15,567 16,190 16,269 16,481
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PREPARED FOR: JONES INTERCABLE 17 KAGAN MEDIA APPRAISALS, INC.
DESCRIPTION OF SUBJECT MARKET (Continued)
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Therefore, during the more than 4.67-year period from 1991 to August,
1996, the system's franchise area experienced compounded average annual growth
in homes of 1.69%.
The Claritas, Inc. Household Trend Report for the City of Manitowoc
reports 13,144 households, based on the 1990 census. The report estimates 1996
households at 13,825. This represents an estimated compounded average annual
growth of 0.85%. For the year 2001, this Report forecasts 14,237 homes, for a
compound annual growth rate of 0.59% over the next five years.
The "Manitowoc Public Utilities" study estimated 1995 dwelling units
within the City at 14,225. This would imply a growth rate since 1990 of 1.59%
annually. That study projects 14,600 homes by the year 2000. This is a growth
rate of 0.52% per year. This is in line with the forecast by Claritas.
The estimated increase in households from 1995 to 1996 was from 13,560
to 13,825. (Source: Claritas, Inc.) This is an increase of 1.9%. In both its
1995 and 1996 estimates, Claritas continues to forecast growth in housing of
only 0.58% per year through 2001. Another source projects that households will
grow at an annual rate of 1.06% from 1995-2000 (Equifax National Decision
Systems, February 1996). Local management reports that homes passed grew from
16,300 in April, 1995 to 16,481 by August, 1996. This is a growth rate of
approximately 0.56%.
Both these estimates are well below the growth rate reported by system
management over the past four years and eight months. The major reason for this
could be that the system's service area includes five smaller towns in the
suburbs of Manitowoc, which are included in the figures reported by management.
Since these towns are not under the ownership of the company, and are to be
excluded from the appraisal, we find it prudent to rely on the lower projections
by both
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PREPARED FOR: JONES INTERCABLE 18 KAGAN MEDIA APPRAISALS, INC.
DESCRIPTION OF SUBJECT MARKET (Continued)
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Claritas and the "Manitowoc Public Utilities" study, particularly since
the estimates by each are so close. In addition, one of the projections for the
next five years is virtually identical to the rate reported by local management
over the past 16 months. Therefore, we assume that housing in the area will grow
at an annual rate of 0.58%.
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PREPARED FOR: JONES INTERCABLE 19 KAGAN MEDIA APPRAISALS, INC.
DESCRIPTION OF SUBJECT BUSINESS
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The Manitowoc cable system consists of approximately 208 miles of
plant, only about 20 miles of which is underground. The channel capacity is 400
MHZ throughout the plant. The system was originally constructed in 1980-81 and
purchased by Jones in the late 1980s. The five smaller franchises were added to
the system in the late 1980s.
CASH FLOW ALLOCATION
The five smaller franchises were sold to another company, Crown Media,
in late 1991. Crown then sold these systems to Marcus Cable in early 1995.
Management reports that Marcus obtained renewals of these franchises in late
1995.
The Manitowoc system was supposed to be part of the sale to Crown, but
the City refused to approve the transfer of the franchise, which led to the
company's litigation with the City. Therefore, at the present time, although
the five smaller franchises are operationally part of the Manitowoc system, they
are not owned by the company. Their results are included in all the financial
statements and budgets for the Manitowoc system. Since 1991, the company has
had an arrangement with the owner of these systems whereby the company is
reimbursed for all capital expenditures in those five towns, and the company
makes a monthly allocation of system operating income to these systems. These
five franchises account for about 698 subscribers. The operating income
allocation has been in the range of 3.62-4.13% of system operating income.
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PREPARED FOR: JONES INTERCABLE 20 KAGAN MEDIA APPRAISALS, INC.
DESCRIPTION OF SUBJECT BUSINESS (Continued)
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FRANCHISE STATUS
Management obtained a one-year extension of the franchise at the end
of 1995, under a 1994 settlement of litigation begun in 1991. Management
reports that the City has tentatively agreed to a 5-year renewal to be approved
in mid-November. Management reports that it believes the franchises for the
five smaller systems were renewed by Marcus Cable.
PROGRAMMING ADDITIONS
All of the system's 52 channels are presently being used. As part of
the arrangement for franchise renewal, the City would turn back to the operator
three of the seven access channels presently allocated for the City's use. At
the same time, management plans to drop carriage of two of the Milwaukee
television stations to free up two more channels. These stations are duplicates
of network affiliates from Green Bay which are carried on the system.
Management intends then to add three popular satellite services. One
of these is Product Information Network, which remits a percentage of its
revenues from home shopping orders back to the system. Management plans to
preview other popular satellite services and let subscribers "vote" their
preference by calling an 800 number. However, management presently has no plans
to rebuild the system to add channel capacity.
TECHNICAL CONFIGURATION
The system consists of a single headend. It is located at the office,
which is owned by the company. The off-air signals are received on a 400-foot
tower located in the town of Newton about five miles from the office. Those
signals are then transmitted to the headend via supertrunk.
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PREPARED FOR: JONES INTERCABLE 21 KAGAN MEDIA APPRAISALS, INC.
DESCRIPTION OF SUBJECT BUSINESS (Continued)
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There are three active and two standby satellite receive-only antennas, all of
which are located at the office. The office building is concrete block and there
is ample space for expansion of the headend. The system has no fiber optic
cable deployed. Therefore, there is little likelihood of the system beginning
to lease fiber capacity to other users or to provide local area network
services in the future unless management to rebuild the system with fiber
optics. However, there is an extensive institutional network on a separate
cable which connects all the schools. The network is activated two-way with the
bandwidth being mid-split. The institutional cable is about 10 miles.
The system is fully addressable. However, of the five per-channel pay
services, only two use addressability (Cinemax and The Movie Channel). The
other three (HBO, Showtime and Disney) utilize positive and negative traps for
security. Management removed those channels from the addressability due to
complaints from owners of cable-ready television sets who did not think they
needed a converter. In addition, the Oak TC-56 converters are of an older
vintage. They are fairly large and not particularly attractive, which added to
complaints. Nevertheless, the addressability function is used for pay-per-view
services, though the base of addressable homes has shrunk with the shift to
trapping for the three major premium services.
COMPETITION
Management reports that the system passes all of the 16,481 homes in
the franchise area. As previously discussed, growth in homes passed is
expected to average about 0.58% per year during the projection period, reaching
17,500 in 2006. The system is not presently threatened by competition, although
management has seen some impact from direct broadcast satellite services (about
125 customer losses). DBS has been available in the area since August-September
of
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PREPARED FOR: JONES INTERCABLE 22 KAGAN MEDIA APPRAISALS, INC.
DESCRIPTION OF SUBJECT BUSINESS (Continued)
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1994. There are MMDS services in Appleton and Green Bay, each offering about
15-20 channels. But, because of the distance from Manitowoc, their signals are
not a factor. The local telephone company, Ameritech, has made no moves to
apply for video dial tone service in the area, and management reports no
evidence of Ameritech's placing fiber in their local loop. The system's service
area has no other cable operator, and no other franchises have been granted in
the area, despite talk by the City during the franchise-related litigation about
overbuilding the system.
PENETRATION
With the uncertainties created by rate reregulation, along with the
negative press about the difficult franchise litigation with the City, largely
behind it, management is now focusing on remarketing its services. The system
has done well in raising basic penetration following the litigation. Television
broadcast signals from Milwaukee are marginal, due to the distance. But the
system is in the Green Bay-Appleton ADI, and the off-air signals are receivable
from Green Bay with a good rooftop antenna. Therefore, a focused marketing
effort is important. Because of this, management has used door-to-door sales
since 1994 with generally excellent results. It has had little or no success
with direct mail. It has also made occasional use of both radio and newspaper
advertising. The most successful promotion was a free installation and two
months for the price of one. This was launched with a simultaneous audit of
system subscribers, which was also successful. Management has also utilized an
"instant install" campaign with $10 worth of canned goods to be donated to a
local charity.
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PREPARED FOR: JONES INTERCABLE 23 KAGAN MEDIA APPRAISALS, INC.
DESCRIPTION OF SUBJECT BUSINESS (Continued)
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The system has managed to maintain, and even improve upon, the
penetration gain it made in 1994. For 1995, basic penetration was 70.3%, up
from 68.9% in 1994. As of August, 1996, it had slipped negligibly to 69.9%.
There is no discounting of monthly rates. The only discounting is
free installation or free converters (after the first one) for senior citizens.
The penetration of pay services in this system, with its basic penetration in
the 70 percent range, is about average for such systems.
As subscriber confusion from FCC-mandated rate adjustments, and the
adverse press from the franchise litigation dissipates, it is reasonable to
expect that the system will be able to gradually increase its penetration
throughout the forecast period. The success of the 1994 marketing campaign in
increasing basic penetration from 63.2% to 68.9%, and management's ability in
1995-1996 to hold these gains, is evidence of this.
RATES
The City of Manitowoc certified to regulate the system's rates for the
25-channel basic service pursuant to the rules of the FCC. As a result, the
system restructured its rates but was not required to take the first rate
reduction required by the FCC's benchmarks in September, 1993. However, the
system was required to take the second round of FCC rate reductions in
September, 1994, and reduced the monthly rate by $2.09.
The City also filed a complaint at the FCC regarding the rates for the
system's cable programming services tier ("Satellite Tier Service"), so this
monthly rate is also regulated. Therefore, any increase in rates for either
tier of basic service, can only be made in accordance with FCC rules.
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PREPARED FOR: JONES INTERCABLE 24 KAGAN MEDIA APPRAISALS, INC.
DESCRIPTION OF SUBJECT BUSINESS (Continued)
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The monthly rate for the limited basic service of 25 channels is
$11.08 in the City of Manitowoc. For the 21-channel "Satellite Tier," the rate
is an additional $9.58, making the total for Full Basic Plus $20.66. The system
implemented a rate increase of $0.80 to cover inflation effective March 1,
1995. Management plans to implement a rate increase of $1.95 per month on March
1, 1997. The plan is to have the five new channels previously discussed added
before then. In addition, they will begin "passing through" the franchise fee
of 5%, rather than including it in the monthly rate. Given the current
regulatory climate, the average basic monthly rate is assumed to grow after 1997
at the rate of 5% per year to $33.95 by 2006.
Installation rates are $35.00 for the first outlet in homes with no
existing cable, and $13.10 for each additional outlet at the time of initial
installation. The rate of churn declined from 24.5% in 1992 to 14.9% in 1993,
but rebounded to 15.9% in 1994. It jumped from 15.9% in 1994 to 24.2% in 1995
but has declined somewhat to an annual rate of 21.2% in 1996. Given the stable
nature of the market, we are projecting that churn will remain fairly constant
for the projection period. Through the necessary efforts of management and no
expectations for drastic changes in the stable nature of this market, annual
churn is expected to stabilize at the 1996 level of 21.2%.
The reported installation revenue and total installs, however, show
that the effective installation rate dropped from $15.18 in 1994 to $10.77 in
1995. It rebounded somewhat to $11.66 through August, 1996. This indicates
that the installation rate is being discounted or dropped for promotional
purposes.
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PREPARED FOR: JONES INTERCABLE 25 KAGAN MEDIA APPRAISALS, INC.
DESCRIPTION OF SUBJECT BUSINESS (Continued)
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PAY SERVICES
The system offers five premium channels: HBO, Showtime, Cinemax, The
Movie Channel and Disney. The premium services are provided on an a la carte
basis at $9.95 per month for all but Disney, which is $7.95. There is
discounting for packages of premium services. The discounts range between
$2.00-6.00 for two services, $9.00 and higher for three services, $11.80 and
higher for four, and $12.75 for five.
Total pay units increased from 4,328 in 1992 to 7,726 in 1995. It had
declined somewhat to 7,337 by August, 1996. Even with the fairly sizable gain
in basic subscribers from 1992-1995, the system's pay-to-basic ratio also
increased from 46.3% to 68.4%. The continued success of the aggressive discount
packages and marketing efforts should enable the system to continue gradually
increasing its pay penetration levels. We forecast it to reach 75.0% by 2006.
PAY-PER-VIEW SERVICES
The system launched its pay-per-view service in 1990. Because the
system is addressable, it provides movies as well as wrestling and boxing
events. With the shift to traps for three of the premium services, addressable
homes declined from 5,184 in 1992 to 4,717 in 1995. It declined further to
4,539 in August, 1996. We believe, however, that with continued promotion of
pay-per-view events, along with more attractive offerings, there could be a
return to the system's earlier 1993 level of addressable homes. Therefore, we
forecast the percentage to climb back to 50% over the next four years and remain
at that level throughout the remainder of the projection period.
From 3,128 pay-per-view buys in 1992, the total number of buys
increased to 3,892 pay-per-view buys in 1993, but declined to 3,529 in 1994 and
remained flat at 3,507 in 1995. Through
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PREPARED FOR: JONES INTERCABLE 26 KAGAN MEDIA APPRAISALS, INC.
DESCRIPTION OF SUBJECT BUSINESS (Continued)
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August, 1996, it rebounded to 3,071, which is an annualized rate of 4,606. This
increase occurred despite the decline in the number of addressable homes.
Therefore, we expect continued steady gains in the number of buys by the end of
the forecast period. The pricing will continue to be in the range of $3.95 for
movies and $14.95-$35.00 for events. The continuation of popular events should
enable the system to gradually increase its monthly buy rate from the 1994 level
of 6.0% into the 28% range by 2006. Given these projected increases in the buy
rate, we believe that moderate increases in the average price per buy of 4.0%
annually are reasonable, so that the average reaches $14.92 in 2006.
ADVERTISING
Local advertising is a significant and increasing source of revenue.
It is expected to continue growing during the period of the projections as cable
continues to prove it is a cost-effective medium for advertisers. While the
monthly revenue per subscriber has declined slightly from $1.88 to $1.69 from
1992 to 1994, it climbed in 1995 to $2.12, well above its 1992 level. This may
be due in part to the elimination of the uncertainty and negative press
surrounding the franchise litigation with the City. The system does ad
insertion on 10 satellite channels, in addition to 37 live events per year,
including high school and college sports, for the past six years, on its local
origination channel. The live sporting events alone account for about $35,000
in annual advertising revenue. The system's mobile production van is connected
to the institutional network for these purposes. Since 1991, the system has had
a sales manager and two full-time account representatives.
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PREPARED FOR: JONES INTERCABLE 27 KAGAN MEDIA APPRAISALS, INC.
DESCRIPTION OF SUBJECT BUSINESS (Continued)
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The continuation of the sales, promotion and local programming efforts
could well sustain further growth in advertising sales. There are no other
video outlets for advertisers who wish to concentrate on the Manitowoc market.
Therefore, we have projected modest increases in the monthly advertising revenue
per subscriber of 10% annually from its August 1996 level of $1.44. It reaches
$3.74 in 2006.
HOME SHOPPING
The system has carried a single home shopping channel, Home Shopping
Network, since 1988. Revenue from HSN remained fairly constant at $0.10-.11 per
subscriber per month in 1992-4. In 1995, it reached $0.15. We believe that,
despite the seasonal dip reflected in the numbers through August, 1996, this
revenue stream will increase gradually from its 1996 monthly rate of $0.10.
While the amount is uncertain, there should be additional revenue derived from
the Product Information Network which management will be adding to the system
once the City relinquishes three of its access channels. Therefore, we believe
it is justified to forecast modest increases of 5.0% per year, so that the
revenue reaches $0.16 per subscriber per month in 2006.
OTHER REVENUE
The system derives additional revenue from commercial accounts with
bars, restaurants, motels and other multiple-unit buildings. Late fees, remote
control sales and converter rentals were also major contributors to this
revenue stream. "Other" revenue has decreased slightly as a percentage of basic
revenue, with the significant increase in basic subscribers from 1992 to
August, 1996. It declined from 5.8% in 1992 to 5.0% in 1994 and 4.9% in 1995.
We expect this
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PREPARED FOR: JONES INTERCABLE 28 KAGAN MEDIA APPRAISALS, INC.
DESCRIPTION OF SUBJECT BUSINESS (Continued)
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revenue to increase at a modest rate of 5.0% annually, with the increases in
subscribers and basic revenue. This amount as a percentage of basic revenue will
decline very gradually over the remainder of the projection period. It reaches
about $233,000 in 2006.
Total cable revenue declined to $27.83 per subscriber per month in
1994. With the increase of $0.80 in the monthly rate for the full basic
service, combined with the other revenue increases previously discussed, total
cable revenue per subscriber increased slightly to $28.47 in 1995. It has
remained very close to that level through August, 1996. The combination of
expected growth in homes passed, steady gains in basic penetration, modest rate
increases, and some continued growth in pay-per-view, advertising sales and home
shopping, is projected to raise total cable revenue to nearly $7.8 million in
2006, or $50.42 per subscriber per month. This is an average gain of 5.9%
annually over the ten-year forecast period.
The system derives no revenues from leasing of fiber capacity because
of the lack of fiber deployment. Management has no plans to install fiber,
since there are no plans to rebuild the system. Therefore, we are projecting
no revenues from fiber leasing or any networking services.
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PREPARED FOR: JONES INTERCABLE 29 KAGAN MEDIA APPRAISALS, INC.
10-YEAR CASH FLOW PROJECTIONS
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Manitowoc, Wisconsin 1992 1993 1994 1995 08/96 1997 1998 1999
3 HOMES IN FRANCHISE AREA (000) 15.6 15.6 16.2 16.3 16.5 16.6 16.7 16.8
4 HOMES PASSED (000) 15.5 15.5 16.2 16.3 16.5 16.6 16.7 16.8
5 % HP IN FRANCHISE AREA 100% 100% 100% 100% 100% 100% 100% 100%
6 PCT PENETRATION 60.9% 63.2% 68.9% 70.3% 69.9% 71.0% 72.0% 73.0%
7 TOTAL BASIC SUBS (000) 9.4 9.8 11.1 11.4 11.5 11.8 12.0 12.2
8 AVERAGE BASIC SUBS (000) 9.4 9.6 10.5 11.3 11.5 11.7 11.9 12.1
9 AVG MONTHLY RATE $ 22.57 22.44 20.13 19.97 20.26 21.89 22.98 24.13
10 REVENUE/SUBSCRIBER $ 270.78 269.29 241.61 239.65 243.15 262.65 275.78 289.57
11 BASIC SERVICE REVENUE (000) $2,533.3 $2,594.3 $2,532.5 $2,705.6 $1,860.8 $3,061.6 $3,278.1 $3,510.4
12
13 NEW BASIC (000) 0.2 0.4 1.3 0.3 0.1 0.2 0.2 0.2
14 BASIC CHURN (000) 1.8 1.9 1.8 3.0 1.8 2.5 2.5 2.5
15 RATE OF CHURN 24.5% 14.9% 15.9% 24.2% 14.2% 21.2% 21.2% 21.2%
16 TOTAL INSTALLS (000) 2.0 2.3 3.1 3.3 1.9 2.7 2.7 2.8
17 EFFECTIVE INSTALL RATE $ 15.25 18.39 15.18 10.77 11.66 12.24 12.85 13.49
18 INSTALL REVENUE (000) $ 30.9 $ 41.5 $ 47.0 $ 35.5 $ 22.2 $ 33.0 $ 35.0 $ 38.0
19
20 TOTAL BASIC REVENUE (000) $ 2,564 $ 2,636 $ 2,580 $ 2,741 $ 1,883 $ 3,093 $ 3,313 $ 3,548
21
22 PAY % AVG SUBS 46.3% 55.4% 68.8% 68.4% 63.9% 66.0% 67.0% 68.0%
23 AVERAGE SUBSCRIBERS (000) 4.3 5.3 7.2 7.7 7.3 7.7 8.0 8.2
24 MONTHLY RATE $ 9.07 7.60 6.23 6.90 7.73 8.04 8.36 8.70
25 REVENUE/SUBSCRIBER $ 107 91 75 83 93 96 100 104
26 PAY SERVICE REVENUE (000) $ 471.3 $ 486.4 $ 539.0 $ 639.3 $ 453.8 $ 742.3 $ 799.3 $ 860.5
27
28 AVG ADDRESSABLE SUBS (000) 5.2 4.9 4.9 4.7 4.5 4.8 5.3 5.9
29 % ADDRESSABLE SUBS 54.9% 50.0% 44.2% 41.2% 39.4% 41.0% 44.0% 48.0%
30 PPV CUME MO. BUY RATE 5.0% 6.6% 6.0% 6.2% 8.5% 10.5% 12.5% 14.5%
31 TOTAL PPV BUYS (000) 3.1 3.9 3.5 3.5 3.1 6.1 7.9 10.2
32 AVERAGE PRICE/BUY $ 9.69 8.37 8.61 10.87 10.8 10.48 10.90 11.34
33 TOTAL PPV REVENUE (000) $ 30.3 $ 32.6 $ 30.4 $ 38.1 $ 31.0 $ 63.0 $ 86.0 $ 116.0
34 PPV REV/SUB/MO $ 0.27 0.28 0.24 0.28 0.34 0.45 0.60 0.79
35
36 AD REVENUE/SUB/MO $ 1.88 1.66 1.69 2.12 1.44 1.58 1.74 1.92
37 AD REVENUE/SUB $ 22.60 19.91 20.30 25.39 17.29 19.01 20.92 23.01
38 TOTAL AD REVENUE (000) $ 211.4 $ 191.8 $ 212.8 $ 286.6 $ 132.3 $ 222.0 $ 249.0 $ 279.0
39
40 HOME SHOPPING REV/SUB/MO $ 0.11 0.11 0.10 0.15 0.10 0.10 0.11 0.11
41 HOME SHOPPING REV/SUB $ 1.30 1.33 1.15 1.74 1.19 1.25 1.31 1.38
42 TOTAL HOME SHOPPING REV (000) $ 12.1 $ 12.8 $ 12.0 $ 19.7 $ 9.1 $ 15.0 $ 16.0 $ 17.0
43
44 OTHER REVENUE (000) $ 145.8 $ 141.4 $ 126.7 $ 132.4 $ 95.4 $ 150.0 $ 158.0 $ 166.0
45 % BASIC REVENUE 5.8% 5.4% 5.0% 4.9% 5.1% 4.9% 4.8% 4.7%
46
47 TOTAL CABLE REVENUE (000) $3,435.1 $3,500.8 $3,500.6 $3,857.2 $2,604.6 $4,286.0 $4,621.0 $4,986.0
48 TOTAL REV/SUB/MONTH $ 30.60 30.28 27.83 28.47 28.36 30.65 32.39 34.27
49
Manitowoc, Wisconsin 2000 2001 2002 2003 2004 2005 2006 GTH. RATE
3 HOMES IN FRANCHISE AREA 16.9 17.0 17.1 17.2 17.3 17.4 17.5 0.6%
4 HOMES PASSED 16.9 17.0 17.1 17.2 17.3 17.4 17.5 0.6%
5 % HP IN FRANCHISE AREA 100% 100% 100% 100% 100% 100% 100% 0.0%
6 PCT PENETRATION 73.5% 74.0% 74.0% 74.0% 74.0% 74.0% 74.0% 0.6%
7 TOTAL BASIC SUBS 12.4 12.6 12.6 12.7 12.8 12.8 12.9 1.2%
8 AVERAGE BASIC SUBS 12.3 12.5 12.6 12.7 12.7 12.8 12.9 1.2%
9 AVG MONTHLY RATE 25.34 26.60 27.63 29.33 30.80 32.34 33.95 5.3%
10 REVENUE/SUBSCRIBER 304.05 319.25 335.21 351.97 369.57 388.05 407.45 5.3%
11 BASIC SERVICE REVENUE $3,745.6 $3,982.7 $4,220.3 $4,457.1 $4,707.1 $4,971.1 $5,249.9 6.6%
12
13 NEW BASIC 0.2 0.2 0.1 0.1 0.1 0.1 0.1 -3.4%
14 BASIC CHURN 2.6 2.6 2.7 2.7 2.7 2.7 2.7 1.2%
15 RATE OF CHURN 21.2% 21.2% 21.2% 21.2% 21.2% 21.2% 21.2% 0.0%
16 TOTAL INSTALLS 2.8 2.8 2.7 2.8 2.8 2.8 2.8 1.1%
17 EFFECTIVE INSTALL RATE 14.17 14.88 15.62 16.40 17.22 18.08 18.99 5.0%
18 INSTALL REVENUE 39.0 42.0 43.0 45.0 48.0 50.0 53.0 6.1%
19
20 TOTAL BASIC REVENUE $ 3,785 $ 4,024 $ 4,263 $ 4,502 $ 4,755 $ 5,021 $ 5,303 6.6%
21
22 PAY % AVG SUBS 69.0% 70.0% 71.0% 72.0% 73.0% 74.0% 75.0% 1.5%
23 AVERAGE SUBSCRIBERS 8.5 8.7 8.9 9.1 9.3 9.5 9.7 2.7%
24 MONTHLY RATE 9.04 9.41 9.78 10.17 10.58 11.00 11.44 4.0%
25 REVENUE/SUBSCRIBER 109 113 117 122 127 132 137 4.0%
26 PAY SERVICE REVENUE $ 922.8 $ 986.0 $1,050.0 $1,113.4 $1,180.8 $1,252.1 $1,327.4 6.8%
27
28 AVG ADDRESSABLE SUBS 6.2 6.3 6.3 6.3 6.4 6.4 6.5 3.9%
29 % ADDRESSABLE SUBS 50.0% 50.0% 50.0% 50.0% 50.0% 50.0% 50.0% 2.7%
30 PPV CUME MO. BUY RATE 16.5% 18.5% 20.5% 22.5% 24.5% 26.5% 28.5% 13.5%
31 TOTAL PPV BUYS 12.2 13.9 15.5 17.1 18.7 20.4 22.1 18.0%
32 AVERAGE PRICE/BUY 11.79 12.26 12.75 13.26 13.79 14.35 14.92 4.0%
33 TOTAL PPV REVENUE $ 144.0 $ 170.0 $ 198.0 $ 227.0 $ 259.0 $ 293.0 $ 329.0 22.7%
34 PPV REV/SUB/MO 0.98 1.14 1.31 1.49 1.69 1.9 2.13 21.2%
35
36 AD REVENUE/SUB/MO 2.11 2.32 2.55 2.81 3.09 3.40 3.74 10.0%
37 AD REVENUE/SUB 25.31 27.84 30.62 33.69 37.05 40.76 44.84 10.0%
38 TOTAL AD REVENUE $ 312.0 $ 347.0 $ 386.0 $ 427.0 $ 472.0 $ 522.0 $ 578.0 11.3%
39
40 HOME SHOPPING REV/SUB/MO 0.12 0.13 0.13 0.14 0.15 0.15 0.16 5.0%
41 HOME SHOPPING REV/SUB 1.45 1.52 1.60 1.67 1.76 1.85 1.94 5.0%
42 TOTAL HOME SHOPPING REV $ 18.0 $ 19.0 $ 20.0 $ 21.0 $ 22.0 $ 24.0 $ 25.0 6.3%
43
44 OTHER REVENUE $ 174.0 $ 183.0 $ 192.0 $ 201.0 $ 212.0 $ 222.0 $ 233.0 5.0%
45 % BASIC REVENUE 4.6% 4.6% 4.5% 4.5% 4.5% 4.5% 4.4% -1.5%
46
47 TOTAL CABLE REVENUE $5,355.0 $5,730.0 $6,108.0 $6,492.0 $6,900.0 $7,334.0 $7,796.0 7.2%
48 TOTAL REV/SUB/MONTH 36.23 38.27 40.43 42.72 45.15 47.71 50.42 5.9%
49
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PREPARED FOR: JONES INTERCABLE 30 KAGAN MEDIA APPRAISALS, INC.
10-YEAR CASH FLOW PROJECTIONS (CONTINUED)
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Manitowoc, Wisconsin 1992 1993 1994 1995 08/96 1997 1998 1999
50 CASH FLOW (000) $1,574.0 $1,576.9 $1,469.6 $1,539.8 $1,108.2 $1,888.0 $2,105.0 $2,346.0
51 OPERATING MARGIN 45.8% 45.0% 42.0% 39.9% 42.5% 44.0% 45.5% 47.0%
52 CASH FLOW PERCENT INCREASE 0.2% -6.8% 4.8% 8.0% 13.3% 11.5% 11.4%
53 CASH FLOW PER AVERAGE SUB $ 168.24 $ 163.68 $ 140.20 $ 136.39 $ 144.81 $ 162.00 $ 177.06 $ 193.48
54 JONES/CROWN ALLOCATION % 3.71% 3.62% 3.83% 3.75% 4.13% 3.90% 3.90% 3.90%
55 JONES/CROWN CSH FLOW ALLOC. $ 58.36 $ 57.12 $ 56.26 $ 57.74 $ 45.74 $ 73.62 $ 82.08 $ 91.48
56 NET CASH FLOW FOR APPRAISAL $1,515.6 $1,519.8 $1,413.4 $1,482.1 $1,062.5 $1,814.1 $2,022.6 $2,254.1
57 DISCOUNT % 10%
58 DISCOUNT FACTOR 1.10 1.21 1.33
59 PRESENT VALUE FACTOR 0.91 0.83 0.75
60 DISCOUNTED CASH FLOW (000) $ 1,649 $ 1,672 $ 1,694
61 CUMULATIVE DISC CASH FLOW (000) $ 1,649 $ 3,321 $ 5,014
62 10 YEAR CUM. CASH FLOW (000) $ 16,386
63 EXTRAORDINARY CAP.EX. (000) $ 0 $ 0 $ 0
64 DISCOUNT % 0% 10% 10%
65 DISCOUNT FACTOR 1.10 1.21 1.33
66 PRESENT VALUE FACTOR 0.91 0.83 0.75
67 DISCOUNTED EXT. CAP. EX. (000) $ 0 $ 0 $ 0
68 CUMULATIVE DISC EXT CAP EX. (000) $ 0
69 10 YEAR CUM. NET CASH FLOW (000) $ 16,386 9.0 X 97 CF
70 $1,514 PER 10,825 SUBS ON 08/31/96
Manitowoc, Wisconsin 2000 2001 2002 2003 2004 2005 2006 GTH. RATE
50 CASH FLOW $2,573.0 $2,810.3 $3,057.0 $3,314.0 $3,591.0 $3,854.0 4,135.0 9.8%
51 OPERATING MARGIN 48.0% 49.0% 50.0% 51.0% 52.0% 52.55 53.0%
52 CASH FLOW PERCENT INCREASE 9.7% 9.2% 8.8% 8.4% 8.4% 7.3% 7.3%
53 CASH FLOW PER AVERAGE SUB $ 208.87 $ 225.27 $ 242.80 $ 261.70 $ 281.97 $ 300.84 $ 320.95 8.4%
54 JONES/CROWN ALLOCATION 3.90% 3.90% 3.90% 3.90% 3.90% 3.90% 3.90%
55 JONES/CROWN CSH FLOW ALLOC. $ 100.35 $ 109.60 $ 119.22 $ 129.24 $ 140.06 $ 150.30 $ 161.28
56 NET CASH FLOW FOR APPRAISAL $2,472.8 $2,700.7 $2,937.7 $3,184.7 $3,451.3 $3,703.6 $3,974.1 9.8%
57 DISCOUNT %
58 DISCOUNT FACTOR 1.46 1.61 1.77 1.95 2.14 2.36 2.59
59 PRESENT VALUE FACTOR 0.68 0.62 0.56 0.51 0.47 0.42 0.39
60 DISCOUNTED CASH FLOW $ 1,689 $ 1,677 $ 1,658 $ 1,634 $ 1,610 $ 1,571 $ 1,532
61 CUMULATIVE DISC CASH FLOW $ 6,703 $ 8,380 $ 10,038 $ 11,673 $ 13,283 $ 14,853 $16,386
62 10 YEAR CUM. CASH FLOW
63 EXTRAORDINARY CAP.EX.
64 DISCOUNT %
65 DISCOUNT FACTOR
66 PRESENT VALUE FACTOR
67 DISCOUNTED EXT. CAP. EX.
68 CUMULATIVE DISC EXT CAP EX.
69 10 YEAR CUM. NET CASH FLOW
70
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PREPARED FOR: JONES INTERCABLE 31 1996 KAGAN MEDIA APPRAISALS, INC.
ASSUMPTIONS FOR THE 10-YEAR CASH FLOW PROJECTIONS
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1. HOMES IN FRANCHISE AREA. Household growth in the service area is assumed to
average 0.58% per year in 1997-2006, based on historical trends, census data,
information from local agencies and chambers of commerce, and Claritas, Inc.
2. HOMES PASSED. According to system management, the system will pass all new
home growth in the franchise areas. Therefore, homes passed as a percentage of
homes in the franchise areas is projected to remain at 100%.
3. BASIC PENETRATION. Basic penetration is presently at 70% because of the
service offerings and marketing programs of management. With a continuation of
these efforts, we expect that it can gradually increase to 74.0% in 2001 and
remain at that level through the remainder of the forecast period. This
increase is supportable because of management's plan for five new service
offerings by 1997, although we are assuming no system rebuild to add channel
capacity.
4. BASIC MONTHLY RATES. Basic monthly rates were restructured in September,
1993 to take account of the FCC's new rate regulations. The system took the
required rate rollback in September, 1994. Since the rate increase on March 1,
1995, the rate for the 25-channel Limited Basic has been $11.08, with the
"Satellite Tier Service" of an additional 21 channels costing an added $9.58,
for a total of $20.66 for 46 channels. The average monthly rate in 1994 was
$20.13. With the rate increase of $0.80 in 1995, the average rate for through
August, 1996 was $20.26. In 1997, it is assumed to increase by $1.95 in March,
for the remaining 10 months of the year. For the remainder of the forecast
period, this rate is assumed to increase at the modest rate of 5.0% annually,
since no rebuild is projected. Basic service revenue increased from $2,532,600
in 1994 to $2,705,500 in 1995. This is an increase of 6.8%. Our projection
shows annual increases of nearly the same level, at 6.6% for the 10-year
forecast period.
5. RATE OF CHURN. The rate of churn declined from 24.5% in 1992 to 21.2%
through August, 1996 (on an annualized basis). This is probably the result of
the management's marketing efforts. With a continuation of those efforts, we
are projecting that churn will stabilize at the 1996 level of 21.2%.
6. PAY PENETRATION. The system's pay-to-basic ratio increased dramatically
from 46.3% to 68.8% from 1992 through 1994. It held at 68.4% in 1995 but
declined slightly to 63.9% in August, 1996. The attractive discount package for
multiple premium services, combined with a continuation of the system's
successful marketing campaigns, should result in steady increases in pay
penetration from the August 1996 rate. Therefore, we project that the pay-to-
basic ratio will rise gradually to 75.0% by 2006.
7. PAY SERVICE RATES. The average monthly rate for premium services declined
steadily from $9.07 in 1992 to $6.90 in 1995. This was undoubtedly the result
of the aggressive discounting program for multiple pay services discussed
previously. However, through August, 1996, it rebounded to $7.73. We
anticipate that, with more than four years behind it, the discount package
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PREPARED FOR: JONES INTERCABLE 32 KAGAN MEDIA APPRAISALS, INC.
ASSUMPTIONS FOR THE 10-YEAR CASH FLOW PROJECTIONS
(Continued)
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program will stabilize as a percentage of the premium subscriber base.
Therefore, pay rates are projected to remain at the August year-to-date number
for all of 1996, and then begin increasing in 1997 at a moderate annual rate of
4.0%.
8. PAY-PER-VIEW REVENUES. The Manitowoc system introduced pay-per-view
services in 1990. The shifting of three major pay services to negative and
positive traps for security has reduced the base of addressable homes. But most
of the negative impact has already been felt, and the incentive being given to
add the two remaining pay services, which remain addressable, is probably
staunching the erosion of addressable homes. Therefore, we anticipate that the
percentage of addressable homes will remain at its August 1996 level of 39.3%
for the rest of the year. Because of continued marketing efforts and the
offering of more attractive programming previously discussed, we believe that
the percentage could return gradually over the next four years to its 1993 level
of 50.0%. We also believe that, with effective marketing, that level could at
least be sustained during the balance of the projection period. The cumulative
monthly buy rate as a percentage of addressable subscribers was 6.0% in 1994 and
6.2% in 1995. By August, 1996, it had climbed to 8.5%. Given the stabilization
in both the franchise situation (eliminating negative publicity) and the number
of addressable homes, combined with management's increased emphasis on
marketing, we expect the number of pay-per-view buys to remain at its August
1996 year-to-date rate for all of 1996, an increase of 2.3 percentage points
from 1995. We project that the system's buy rate should increase gradually by
2.0 percentage points annually throughout the remainder of the forecast period,
reaching the range of 28% by 2006. Given that we have not projected a rebuild
for video-on-demand services, this level of pay-per-view penetration is
justified. We also assume that the average price per buy will increase only
modestly at 4.0% per year, rising from $10.08 in 1996 to $14.92 in 2006.
9. ADVERTISING. The system's advertising revenue averaged $1.69 per subscriber
per month in 1994, a decline from 1992 ($1.88) and a slight increase from 1993
($1.66). This was probably due to all the negative publicity surrounding the
franchise litigation with the City which could easily have caused an adverse
reaction among advertisers. The settling of that lawsuit, dissipating the ill-
will, combined with the continuation of the three-person sales team, resulted in
an encouraging increase ad sales in 1995, reaching $2.12 per subscriber per
month. However, by August, 1996, it had declined to $1.44. As management
demonstrated in 1995, the absence of the negative factors previously mentioned,
along with the growing recognition among local advertisers of the cost
effectiveness of cable, could well mean modest growth in advertising sales,
particularly from the lower level of August 1996. From that level, we have
projected only modest increases in the advertising revenue per subscriber of 10%
annually, reaching $3.74 in 2006.
10. HOME SHOPPING. Home shopping revenue was in the range of $0.10-0.11 during
1992-1994. In 1995, it jumped to $0.15 but returned again to $0.10 for year-to-
date August 1996. As the noteworthy gains in basic subscribers continue to
expose more people to the convenience of home shopping via cable, we expect that
1995 will not be an aberration. In light of the 1995 results, we project that
the revenue per subscriber can gradually increase, especially from the lower
August 1996 level . As noted previously, the system will also be adding the
Product Information Network,
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PREPARED FOR: JONES INTERCABLE 33 KAGAN MEDIA APPRAISALS, INC.
ASSUMPTIONS FOR THE 10-YEAR CASH FLOW PROJECTIONS
(Continued)
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which should result in more commission revenues for the system. Therefore, we
project that revenue will remain at $0.10 for all of 1996, and increase modestly
at a rate of 5.0% annually through 2006.
11. OTHER REVENUE. Other revenue consists primarily of commercial accounts,
converter rentals and sales, as well as late fees. In August, 1996, it stood at
5.1% of basic revenue, an slight decrease from its level of 5.8 % in 1992. We
project that this percentage will decline only slightly as the basic penetration
level continues to increase during the projection period. From its August 1996
level of about $143,000 (annualized), other revenue increases at 5.0% annually,
reaching about $233,000 per year in 2006.
12. FIBER LEASING AND ADVANCED SERVICES. The system has no fiber capacity and
has no plans to install it. Therefore, we have projected no revenues from this
source. Nor have we projected revenues from the provision of network services,
since there is no provision for deploying fiber at all, nor any plans to use
the two-way capacity of the 10-mile institutional network beyond its present
limited role of connecting the schools for educational programming.
13. OPERATING MARGIN. Continued modest growth in basic penetration, increases
in ancillary revenues (e.g. pay-per-view, advertising and home shopping) and
operating efficiencies associated with the projected growth in subscribers are
expected to increase operating margins somewhat over the next several years.
Historically, the system has operated at moderate margins in the range of 45%.
This is because it has slightly above average penetration in a well-clustered
territory served by a single headend and office. The margin decreased somewhat
from its high in 1992 of 45.8% to 39.9% in 1995 because of the effects of the
FCC's rate freeze, rate unbundling and the rate rollback. With those factors
behind it, and the "catch up" increase of $1.95 on March 1, 1997, we expect the
margin to improve to 44%, closer to its pre-regulation 1993 rate of 45.0%.
This is only somewhat above its rate of 42.5% through August, 1996. With the
continued modest basic rate increases, and increasing revenue in high-margin
categories, it is reasonable to assume that the operating margins would return
to their typically higher level of 45.5% in 1997, increasing 1.5 percentage
points in 1998 and 1.0 percentage points each year thereafter through 2006 to
53.0%.
14. JONES/CROWN ALLOCATION. The five smaller franchises, and the portion of
the system serving them, are not included in this appraisal, since they are not
owned by the company. However, all the revenue and cash flow projections are
for the entire system, so that they correlate to the financial statements for
the system which have been provided. To allow for the exclusion of these five
areas from the appraised value, we have adopted the method for allocating system
operating income used by the company since 1992. The "Jones/Crown Allocation"
has ranged from a low of 3.62% in 1993 to a high of 4.13% in the first eight
months of 1996. In 1995, it was somewhat lower, at 3.75%. Since it has been
higher in the more recent period of 1996 through August, we have calculated the
weighted average percentage allocation for the 20-month period. It is 3.90%.
This percentage is deducted each year from system cash flow to arrive at the
"Net Cash Flow for
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PREPARED FOR: JONES INTERCABLE 34 KAGAN MEDIA APPRAISALS, INC.
ASSUMPTIONS FOR THE 10-YEAR CASH FLOW PROJECTIONS
(Continued)
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Appraisal" shown in the 10-year projections. It is this "Net Cash Flow for
Appraisal" that is then discounted in arriving at the valuation.
15. DISCOUNT FACTOR. Future cash flows are discounted by a risk-adjusted 10%
factor, slightly above the Moody's Aaa corporate bond yield, which stood at
8.04% as of August 30, 1996. This rate is widely accepted in financial circles
as a reliable indicator of future inflation and the cost of funds.
16. EXTRAORDINARY CAPITAL EXPENDITURES. System management has no plans to
rebuild the system to increase channel capacity to 550 MHZ or 750 MHZ.
Therefore, we have not included any capital expenditures for a system rebuild.
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PREPARED FOR: JONES INTERCABLE 35 KAGAN MEDIA APPRAISALS, INC.
COMPARABLE ANALYSIS
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Comparison of a cable TV system to similar properties recently sold is
an accepted appraisal methodology used to correlate the findings of the
Statistical Income method with the realities of the private marketplace.
Analysis of historical cable system sales indicates that systems can be compared
to one another on the basis of such variables as local demographics, system
size, basic and pay penetration levels and revenue per subscriber.
Like cable properties can often be compared to one another on a value-
per-subscriber (VPS) or cash flow multiple basis. VPS is a short-form valuation
yardstick that reflects a multiple of the cash flow a subscriber is expected to
generate in the first or second year of ownership. Cable systems have
historically sold most often in the range of 9-11 times projected first-year
cash flow with the higher end of the range generally assigned to systems which
are expected to achieve significant near-term increases in cash flow. Thus a
cable subscriber forecasted to generate $170 of cash flow in the coming year and
selling at 11x that cash flow would be valued at $1,870, or at $2,210 at 13x
cash flow.
For Manitowoc , we studied comparable sales in 1996, focusing on sales
with between 5,000 and 20,000 subscribers, with basic penetration of 50-85%.
We emphasized stand-alone, similarly sized systems located in one primary area.
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PREPARED FOR: JONES INTERCABLE 36 KAGAN MEDIA APPRAISALS, INC.
COMPARABLE ANALYSIS (Continued)
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MANITOWOC COMPARABLE SYSTEMS
BASIC BASIC COMP. ANN.
LOCATION SUBS PEN. % CFX VALUE DATE
------------------------------------------------------------------
(MIL.)
Colombus, MS 15,700 65% 9.5 $17.2 2/96
San Fran. Bay Area 12,300 51% 8.8 $16.0 7/96
Kern Valley, CA 8,200 70% 7.6 $13.8 6/96
Moses Lake, WA 12,500 83% 9.5 $17.2 8/96
-------------------------------
Averages 12,200 67% 8.9x $16.1
Manitowoc, WI 10,825 70% 9.0x $16.4
(C) 1996 Kagan Media Appraisals, Inc.
The above comparables as a group closely mirror the Manitowoc, WI system,
at 68% basic penetration and a similar subscriber base.
The first comparable we considered was the sale of Columbus Cable's
Columbus, MS system to Post-newsweek in February 1996. Like Manitowoc, the
system serves one distinct community. The system sold at a multiple of 9.5x
forward cash flow, a slightly higher multiple than Manitowoc due partially to a
larger sub base and lower basic penetration. Applying that multiple to
Manitowoc values the system at $17.2 mil.
We next analyzed TCI's buy of a system serving the San Francisco bay area
from Balkin Cable. TCI filled some holes in its bay area holdings by buying the
Balkin subs in an all-cash deal July 30. The multiple, at 8.8x, reflects
expenses necessary to upgrade the systems, as well as a limitation on
penetration upside. The system's 8.8x 1997 cash flow multiple yields a
comparable value of $16.0 mil. when applied to Manitowoc.
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PREPARED FOR:JONES INTERCABLE 37 KAGAN MEDIA APPAISALS, INC.
COMPARABLE ANALYSIS (Continued)
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We then considered the system in Kern Valley, CA sold by PCI Sun Cable to
Helicon in June 1996. This system is smaller, and in a more spread out area,
which suggests a lower multiple and less potential for cash flow growth.
Applying this 7.6x multiple to Manitowoc yields a comparable value of $13.8 mil.
The last comparable we studied was the sale of Marcus Cable's Moses Lake,
WA system to Northland Comm. in August 1996. This is a stand-alone system with
a relatively high penetration of 83%, with a 9.5x sale multiple reflecting
growth opportunities. Applying this multiple to Manitowoc yields a comparable
value of $17.2 mil.
The average of the comparable sales listed above is $16.1 mil.
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PREPARED FOR: JONES INTERCABLE 38 KAGAN MEDIA APPRAISALS, INC.
CORRELATION AND FINAL ESTIMATE OF VALUE
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The discounted cash flow analysis yields a value for the Manitowoc cable
system of $16.4 mil., while the comparable analysis of comparable sales yields a
value of $16.1 mil. The proximity of these values, within 2% of each other,
arrived at through two independent appraisal methodologies, underscores the
validity of the assumptions used to cast the 10-year cash flow projections and
establishes a range within which the value of the Manitowoc cable system can be
expected to fall. In arriving at a single estimate of value, we note that while
the system has some upside in basic penetration, this is limited by satellite
competition and the fact that the system has no spare channel capacity to
increase offerings, making it that much more vulnerable to competition. In
addition, the system has only moderate upside in household growth. It does,
however, have proven upside in the operating margin and ancillary revenues,
which nevertheless will be constrained by the need to market effectively to meet
competition.
These factors lead us to value the system at the lower end of the range.
Therefore, we conclude that the value of the Manitowoc cable television system
is approximately $16.1 million.
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PREPARED FOR: JONES INTERCABLE 39 KAGAN MEDIA APPRAISALS, INC.