EXHIBIT 99(b)(2)
FAIR MARKET VALUE APPRAISAL FOR THE
ALBUQUERQUE, NEW MEXICO
CABLE TELEVISION SYSTEM
APRIL 30, 1997
PREPARED FOR
JONES INTERCABLE, INC.
TIMOTHY J. BURKE
PREPARED BY
WESTERN CABLESYSTEMS, INC
R. MICHAEL KRUGER, PRESIDENT
CABLE TELEVISION MANAGEMENT,
CONSULTING, AND APPRAISALS
513 WILCOX, #230
CASTLE ROCK, CO 80104
303-688-4462
BACKGROUND AND LIMITING CONDITIONS
----------------------------------
Western was asked by Jones to prepare an analysis of the fair market value as a
going concern of the assets of the Albuquerque, New Mexico cable television
system as of April 30, 1997. This appraisal report is being issued pursuant to
the June 20, 1997 engagement letter between Jones and Western. This report
presents key data, our analysis and assumptions, and our conclusions.
The assets being appraised include, as an assemblage, all of the tangible and
intangible assets and personal property necessary to operate the cable
television system as a going concern, consistent with past practice and industry
norms. The assets include the antennas and signal receiving equipment, strand,
conduit, cables, amplifiers, passive devices, drops, converters, tools, test
equipment, subscriber records, franchises, pole attachment agreements,
easements, supplier and programming contracts, and goodwill. Financial assets
such as cash, accounts receivable, and liabilities, are not considered.
The appraisal is based on financial data provided by Jones, including Income
Statements for the 12 months ended December 31, 1994, 1995, and 1996, and the
four months ended April 30, 1997, and the operational data presented herein,
such as passings and subscriber counts.
The appraiser visited the system on June 24, 1997. The system manager and
acting engineer were interviewed to obtain data including subscriber history,
technical data, demographics, and local economic information. The appraiser
toured representative portions of the general market area.
The work herein is based on data provided by Jones, and we assume no
responsibility for the accuracy of such data. Western has used customary
techniques and industry knowledge available to Western in preparing this report.
Western does not warrant or represent that the appraised value is that which
would actually be obtained in an open market transaction, or that the value
would be upheld in litigation or administrative proceeding. Accordingly,
Western (including its officers, employees, and owners) does not indemnify or
hold harmless any user of this report in any manner against any costs, losses,
or damages arising out of the use of the appraised value or other conclusions
contained herein.
Albuquerque, NM, 4/97, Page 2
GENERAL DESCRIPTION
- -------------------
The company serves substantially all of the Albuquerque, New Mexico metropolitan
area. The community is located in north-central New Mexico. Other than Santa
Fe, the closest large metro areas are Denver, Phoenix, and El Paso, all several
hours distant. As of April 30, 1997, key data are:
Homes Passed 233,070
Residential Basic Subs 112,530 (48%)
Commercial/Bulk EBU's (14,361 units) 3,940
Total EBU's 116,470
Pay Units 60,912 (54%)
Plant Miles 2,561
Homes Per Mile 91
Number of headends 3
Channels in use 56
Plant Channel Capacity 60
The Albuquerque headend serves 94% of the customers; outlying headends in Bosque
Farms and Bernalillo serve the balance.
The demographics are predominantly middle-class family. The ethnic composition
is about 38% Hispanic, of which about half speak Spanish as a primary or
exclusive language. There are about 10% Oriental and black, and 52% white.
The older "inner" areas consist mostly of commercial and small industrial areas,
and smaller homes and apartments in an urban setting. Outlying areas have a
number of new subdivisions with more expensive homes and uppper-middle income
families, with accompanying malls, commercial areas, and some service-business
offices. We did not see any major "poverty" areas, and the number of very high-
priced homes, while increasing, is still relatively low. New homes in most
areas are priced around $180,000. Older homes, particularly in the central
areas, sell at around $110,000.
Albuquerque has a stable and diverse economy. Historically, it has had a mix of
small industry and service business. In the past 30 years, a "high-tech"
community has steadily grown, as a result of nearby advanced government research
facilities such as Sandia Labs and Los Alamos. While the stability of this
segment has fluctuated due to government spending changes, other high-tech is
starting to augment government-oriented facilities. Intel located a chip plant
here several years ago, and continues to expand. Other computer-based companies
are also relocating and expanding here. There have been several small startups
and expansions recently, but no significant reductions. The University of New
Mexico is here, and the area serves as a regional center for finance, medicine,
etc. Overall, the economy is steady and healthy, but not "explosive".
Albuquerque, NM, 4/97, Page 3
PASSINGS GROWTH
---------------
The company reported a passing count of 200,483 at 1/1/93, and 233,070 at
4/30/97. Growth over the four year period was fairly steady, at an average of
8,146, at a rate of 3.8%. However, management indicates that a substantial part
of this growth came from database correction, audits, changes in definition,
etc. Local management estimates that actual growth in homes has been about
3,500 homes per year in the past 12-18 months. The system budget calls for
about 4,100 new homes in 1997. We would support this lower estimate, based on
our general observations of the extent of housing development that we saw in our
visit. We also believe that the housing boom in the Rockies of the past few
years may be slowing. We used growth of 4,100 homes for the first year, and
2.5% annual growth in the 10-year projections.
New development is coming principally from small builders, and most is on the
west side. A few high-end projects are underway in the east. There are no
immediate barriers to growth, but in the long term water will be a key issue.
Over 90% of the water is from nonrenewable groundwater, and levels are falling.
This is becoming an issue, and could eventually slow growth.
There are a few unserved areas along the foothills, but they do not have
sufficient density to warrant cable. The company presently serves them in a
limited fashion using MMDS (see below). In aggregate, ther areas are small and
not likely to be served soon.
The Rio Rancho system is surrounded by Jones. It has about 8,000 customers, and
may be acquired in the future, but there are no discussions underway.
Otherwise, there are no potential expansions of the system.
SUBSCRIBER PENETRATION
----------------------
Basic penetration has been just under 50% for several years. Management
indicates that there is a relative lack of interest in television. The high
Hispanic level is a key factor, as this is a tough market across the industry.
The availability of good offair signals is also a major factor.
Penetration in similar Southwest markets is also similar. Nearby Santa Fe is at
51%. Tucson is around 45%. Carlsbad and Roswell, which have very limited
offair, are in the 60%-70% range. El Paso is similar to Albuquerque, but does
reach 63%.
While the current system performance is reasonable, we believe the proposed
changes in service this fall, coupled with a new emphasis on targeted marketing
to Hispanics, will slowly increase penetration.
Albuquerque, NM, 4/97, Page 4
SUBSCRIBER RATES AND SERVICES
-----------------------------
The company offers very traditional programming and packages, at industry-norm
rate levels:
Channels Rate
Basic 19 10.49
Tier 30 16.13
Total 46 $26.62
Pay channels 4 6.88-10.50
Pay-per-view 3 varies
Converters 1.05- 3.57
Remote control free
Installation 18.21-36.75
Approximately 97% of the customers take the tier, which includes the Disney
Channel.
Basic includes 10 offair, 3 local/access channels, WTBS, WGN, Spanish-language,
and several "filler" channels. The tier is all the better-quality satellite
services. Pay includes Cinemax, HBO, Movie Channel, and Showtime. Pay-per-view
offerings consist of Viewers Choice and various events.
There is no monthly fee for additional outlets. There are a number of small
transaction fees, including late charges. Applicable FCC and franchise fees
are added as a separate charge on bills. There are package discounts and
promotional rates available from time to time.
The system took a rate increase of $1.47 in February, 1997. No further
increases are planned. The company expects to revise and slightly expand its
lineup this fall, and an increase next year seems likely.
RATE REGULATION
---------------
The City of Albuquerque certified to regulate rates. The company filed a 1994
cost-of-service showing which was not seriously contested. The company believes
it has adequate room to continue taking regular annual increases. There are no
issues or problems at present with rates, and none are expected.
Albuquerque, NM, 4/97, Page 5
NON-SUBSCRIBER REVENUE
----------------------
The company has an extensive advertising sales department. Due to the company's
dominance in the market, sales are strong. This area should continue to show
steady growth.
The company has recently introduced some Sprint long-distance service options,
but they are insignificant at present, and not likely to expand quickly. There
is no other significant revenue source (fiber rental, tower rental, local phone)
at present. It is reasonable to expect that data communication and fiber
leasing could be a small source of revenue in the future.
STAFF AND OPERATIONS
--------------------
The system leases its main office and warehouse in a centrally located
industrial park. An older building houses the studio operations, and has room
for expansion as needed.
The system has a normal complement of test equipment, including fiber testing
and splicing. The inventory is at normal 30-60 day levels. Vehicles are in
good condition. The office staff is well-equipped, and uses centralized
Cabledata billing services.
The system offers customary business-day service Monday through Saturday. The
Jones national CSR center offers after-hours backup and technicians are
dispatched on outages if necessary.
Management reports about 32% annual customer turnover, and 25% annual service
call volume. Both are normal.
System staffing can be summarized as:
Item Office Field/Cons Mkt/Ad
---- ------ ---------- ------
Number of employees 68 138 46
Subs/employee 1,647 811 -
Average Wages 31,000 29,000 -
In addition, the company uses extensive field contract labor; the dollar amounts
are equivalent to about 29 field personnel.
The office staffing and wage rates appear normal. The field staffing,
particularly if one adds in the contract labor, appears to be more extensive
than we would expect for the circumstances. Levels are not extraordinarily
high, but we believe the system could absorb more growth without field staff
expansion. Field wages are reasonable.
Albuquerque, NM, 4/97, Page 6
MARKETING
---------
The system uses in-house commissioned direct salespeople on a regular basis.
Direct mail, special promotions, and newspaper are used regularly, and most
nonsubscribers are contacted every 1-2 months. Spanish-language staff and
promotions are used regularly. Increasingly, the company is doing targeted
marketing toward the Hispanic population.
FRANCHISES
----------
The major Albuquerque franchise (85% of the customers) expires in 1999. Eight
others expire in 1999 through 2011. Renewal discussions have started with
Albuquerque. Management expects that there will be a number of demands for
access support, etc., but overall expects that renewal will be accomplished
without major problems.
COMPETITION
-----------
Residents can get good reception on 10 offair signals with standard antennas.
The only major concern is that only one offair station has Hispanic
broadcasting.
There is no cable overbuild, and none is likely. Management stated that US West
has not indicated any intent to provide video services here.
There are three licensed MMDS systems. Jones owns one, and uses it to serve
rural areas. It has about 100 customers. UNM has an 8-channel system used for
educational purposes. A third operator offers 16 channels for $25. He markets
principally in the outskirts, and is not an issue with only about 100 customers.
DBS competition is a factor. DirecTV started national service here, and this
continues to be a target market. An outside data service (Skytrends) estimates
that about 5% of overall passings are now DBS customers. Since customers have
easy access to offair signals, DBS can be a threat here.
Albuquerque, NM, 4/97, Page 7
TECHNICAL PROFILE
-----------------
Coaxial Strand Mileage: 2,561, 38% aerial, 62% underground
Fiber Strand Miles: 78
Headend Electronics: High-quality S-A
Plant Electronics: Magnavox
Amplifier Cascade: 25 maximum
Power: Headend and 95% of system has standby
Trunk Cable: Old is 750 P3, new is 875/1000 P3
Distribution Cable: 500 P3; new areas 500/540/715
Pay Security: Addressable and traps
Percent of Addressable Subs: 21%
Converter Types: Predominantly GI 550 MHZ and Panasonic.
The older areas were built in 1978-82. The system has expanded steadily over
the years to serve new areas. There has been no major rebuild, but several of
the oldest areas were upgraded to 450 Mhz operation. An approximate breakout of
the age and capacity of the plant is:
Miles Percent
----- --------
330-400 old plant 111 4%
450 mhz 1982-1992 approx. 1949 77%
450 mhz newer areas 187 7%
750 mhz new plant 291 12%
There are a few problems with the oldest electronics and cable, but the company
is able to maintain service to high levels with careful maintenance.
Management is developing a plan for upgrading to 550 mhz throughout. The
industry norm for large markets is generally 550 mhz. The timing is uncertain,
but it is likely that an upgrade will follow franchise renewal in 2-3 years.
Management's present estimate is $30,000,000 which is in the range of
$15,000/mile. Considering the extent of undergound cable, this is reasonable.
DETERMINATION OF OPERATING INCOME
---------------------------------
Appraising the value of cable television systems involves calculation of
historic and projected operating income (commonly called "cashflow"). Operating
income is defined as direct operating revenues less expenses, before capital
expenditures, depreciation, and management fees. The operating income
considered in appraisals is typically that which will be derived by the buyer,
using his cost structure and nominal predictable changes in operations.
FIRST-YEAR PROJECTION:
- ----------------------
We prepared a detailed Projected-Year statement of operating income, attached.
Projections are based on the company's historic income statements for 1994,
1995, and 1996. We also calculated and used a "running rate" operating income by
multiplying by 3 the results for the first four months of 1997. We used this
historic data to prepare an estimate of projected operating income for the first
year after April 30, 1997, shown in the last column.
Albuquerque, NM, 4/97, Page 8
The Projected-Year subscriber revenues are based on the current subscriber
count, plus allowances for growth, and on 1997 rates, plus a small allowance for
increases late in 1997 or early in 1998. Other revenue items were based on
consideration of past results and trends.
Certain Projected-Year expense items such as programming costs which are based
on subscribers or revenue have been adjusted to match the subscriber and revenue
projections for the projected year, using prior-year unit costs or ratios plus
an allowance for increases where appropriate. Overhead items, such as
maintenance and property tax have been based principally on longer-term trends.
In preparing our detailed analysis, we reviewed key operating ratios, such as
programming cost per subscriber, staffing ratios, copyright and bad debt expense
levels, etc. and compared them to industry norms and our experience. All were
in normal ranges except as mentioned below. A brief discussion of key
individual items follows.
Passings: Increase by 4,100 (1.8%) in the next 12 months, based on management
expectation and our review of housing construction.
Basic Penetration: Increase slightly, reflecting target marketing, lineup
improvements, and less DBS pressure.
Pay Penetration: No change, reflecting recent trends.
Average Basic+Tier Revenue/Subscriber: Use current rates plus 2%.
Average Pay Revenue/Unit: Has been dropping; use present levels.
Pay-Per-View Revenues Per Subscriber: Appears to be growing, but levels are
relatively high. Use only a small gain rate.
Advertising: Fluctuating; use the 1996 level.
Salary: Ratios and wage levels are reasonable, as discussed above, but the
system can absorb growth without increases in the field. Increase office
payroll by inflation and some growth.
Bad Debt: This area is high at 2.5%, and has grown sharply; reduce it somewhat
to 2%.
Basic Programming: Use the 1997 level plus increases of 10% to cover price
hikes and new channels.
Premium/PPV Programming: We used the 1997 level of 52%.
Marketing/Sales: Industry norms vary from 1% of revenue in classic systems with
little need for sales, to 4% in urban markets. This system is at about 4%, but
should be able to decline a bit as a percentage, given target marketing and its
competitive situation; use 3.9%.
Albuquerque, NM, 4/97, Page 9
TEN-YEAR CASHFLOW PROJECTIONS
- -----------------------------
Another appraisal technique involves projection of free cashflow for 10 years;
free cashflow is equal to operating income less capital expenditures, but still
before depreciation and interest, and taxes. Our ten-year projection for this
system is shown on the two-page spreadsheet enclosed. We started with the data
contained in the first-year projection spreadsheet, and extended it with the
variables and assumptions shown.
Revenue items used are the same as for the first-year analysis. However, they
include forecasts for system growth in areas such as passings, penetration, and
revenue/subscriber. The small amount of commercial revenue was converted to
EBU's.
We have considered the potential for new services not now offered, and have not
included either the revenues or the capital and operating costs in our operating
income analysis. These items are quite uncertain. Albuquerque does not have
any expectations on these items that are more certain or more promising than the
industry generally. We thus believe the market multiples (discussed later)
adequately reflect the industry's opinions on future revenue streams.
Passings growth was assumed to be 2.5% over the long run.
Penetration increases: We limited penetration gains until immediately after the
rebuild, at which time growth should increase based on the added services coming
from the rebuild.
Addressable Subs & PPV Revenue/Sub: Management estimates that PPV homes will
grow at 8% per year; we used a higher growth rate based on the strong PPV
performance.
Basic Rate Increases: Rates are at reasonable levels, and in this situation the
system should be able to keep pace with inflation for a few years. After the
rebuild, it should be possible to exceed inflation.
The ten-year model uses summary expense variables which were calculated from the
one-year information as follows:
Personnel: Salaries, Tax/benefit, Professional services, contract labor,
and capitalized labor
Per-Subscriber: Office rent, Office Operation, Basic Programming, LO
Programming
Revenue-related: Franchise fee, copyright, bad debt, marketing, and
advertising sales
Premium Programming: Pay and pay-per-view
Per-Mile: Insurance, Property Tax, Pole Rent, Power, System Maintenance
Personnel costs are forecasted based on current personnel costs, plus annual
percentage increases to reflect growth and inflation. We calculated the amounts
for the other expense categories on a per-sub or per-mile, or percentage of
revenue basis, as noted.
Albuquerque, NM, 4/97, Page 10
The per-sub and per-mile costs were increased over the 10-year period for
inflation. The percentage costs were held to the same percentage of revenue
over 10 years, on the assumption that gradual increases in unit costs can be
passed on to customers.
Capital costs were forecast for several items. New plant costs were calculated
using new plant mileage derived from passings growth and an average per-mile
cost for new plant. Drops were calculated on the assumption that a certain
percentage of existing drops are replaced each year, and new drops are added
equal to growth plus a churn allowance. Costs for new addressable (or other
advanced) subscriber devices were allowed based on the increase in addressable
subscribers. Capitalized labor is based on 1996/97 levels, plus inflation. We
did not include the full charge for capitalized labor as a line item, because
some of the costs are likely to be included in other capital cost lines. The
capital costs for vehicles and miscellaneous is estimated from system size and
current vehicle count. We used the rebuild cost estimates discussed earlier in
the text.
DETERMINATION OF APPRAISED VALUE
--------------------------------
GENERAL METHODOLOGY
- -------------------
Appraisal of income-producing property typically relies on one or more of three
main approaches.
Replacement cost, which is the cost to assemble and put the property into
operation, is not typically used in the cable television industry for valuing a
property as a going concern. In addition to tangible assets, cable television
business sales include a very substantial intangible value for franchise,
goodwill, and customer lists. Although these intangibles can be valued
separately, it is quite difficult. Thus, replacement cost is not used to
estimate fair market value of a cable system.
Market value as determined by comparable transactions is a very common approach.
Transaction value is typically reported on the basis of either per-subscriber
cost or operating income multiple. We consider both ratios, but place much more
reliance on the income multiple; per-subscriber values can vary widely depending
on operating results, but multiples of operating income are more predictable
because they tie directly to profitability.
The Income Approach is widely used in business valuation. Our method involves
determination of the discounted present value of free cashflow generated over
ten years, plus an allowance for the terminal value after ten years.
INCOME APPROACH
- ---------------
Ten-year free cashflow was projected, as discussed previously. The annual free
cashflow was discounted using an average cost of capital calculated as shown on
the spreadsheet.
We then added a terminal value based on the resale value of the system in year
10. The terminal value was calculated at 6.0 x year 10 cashflow. The industry
will increasingly feel the effects
Albuquerque, NM, 4/97, Page 11
of increased competition. Sale multiples on existing income sources (which in
part reflect perceived growth opportunities into other areas) will gradually
decline as the opportunities for growth into new lines are realized or
abandoned. Non-cable businesses currently trade in the 3-7 x cashflow range.
Selection of 6 x should reflect the industry's maturity.
The terminal value was then discounted to a present value using the same
discount rate. The discounted cashflow and discounted terminal values were
added, to arrive at the estimate of potential system value shown on the
worksheet, which is $205,791,000.
MARKET VALUE
- ------------
The prices of cable system transactions are frequently evaluated to determine
the ratio of operating income (income before depreciation, interest, and
management fees) to purchase price; sales results are frequently reported in the
trade press. Per-subscriber values are also widely reported. We consider
principally the multiple of first year projected operating income. To facilitate
our analysis, we compared this system to the overall market with respect to
some key factors:
Future passing and subscriber growth: Albuquerque in the long run should have
average growth rates.
Demographics: Demographics are perhaps a bit below average, due to the ethnic
mix and relatively less higher-income residents.
Competitive situation: Competition from DBS could be a problem, since offair
reception is good. The system lineup is somewhat weak. This system may face a
bit more than normal pressure.
System Capacity/Quality: The need for rebuild/upgrade is a negative. The
system will feel pressure for a rebuild during franchise renewal. We believe
that buyers paying "market prices" expect at least 450 mhz plant, and many
companies indicate that they explicitly consider costs required to take the
system to 550 mhz or more.
General Operations: With regard to matters such as staff, franchise problems,
etc., the system is normal.
New Revenues: The system has average potential for these items.
System marketability: The system is of an attractive size, but is relatively
isolated. It would have average marketability compared to systems of similar
size.
Overall, Albuquerque would be at or slightly below market norms compared to
comparably-sized systems.
Albuquerque, NM, 4/97, Page 12
COMPARABLE TRANSACTION DATA
We then select an appropriate multiplier from information available about other
reasonably similar transactions, and the general state of the cable market. We
reviewed announcements in the trade press, information from brokers, recent
issues of the Cable TV Investor Newsletter, published by Paul Kagan Associates,
----------------------------
and other private sources. Some of the key transactions we considered are:
Minneapolis: US West sold this 290,000-sub system to Charter for $2,069/sub,
and a 10 x multiple. The system has 51% penetration. However, it is perhaps a
better market with more growth potential.
Buffalo/Erie: These 166,000 customers were sold from TCI to a joint venture
controlled by Adelphia. The price was reported ast 10 x, or $2,108/sub.
Penetration is 60%.
Bangor, Maine: This is a somewhat smaller system at 53,000 customers at 62%
penetration. Cablevision sold to Frontier at 9 x operating income, and
$1,471/sub.
Myrtle Beach and Hampton, Virginia (each around 45,000 customers) were traded by
Time Warner and Cox; the transactions were valued at 9.5 x, and about
$1,600/sub.
Hickory, NC was purchased from Prime by Charter for 9.7 x cashflow, and $1,946
per customer. This system is contiguous to numerous other Charter operations,
and has been recently upgraded.
US West reported a deal to purchase 40,000 customers in Michigan from Booth at
the equivalent of about $1,875 per customer.
The market has been slow this spring, and generally in the buyer's favor, but
has been improving slightly. Concern over competition from DBS has continued,
although concerns about phone competition are diminishing a bit. Capital
required for system upgrades is a factor. We believe that the multiple for
large systems is generally in the range of 9-10 x first-year operating income.
Some large systems with unusually good prospects or other favorable factors
trade at higher prices. Smaller systems trade in the 7-9 range, with increased
variability to reflect buyer interests and system characteristics.
Albuquerque can be valued at a multiple of 10.0 x operating income. Our
calculation using the market value multiples follows:
Projected operating income 22,236,000
Multiple 10.0
Estimated value $222,360,000
Resultant value per EBU $1,909
Albuquerque, NM, 4/97, Page 13
APPRAISED VALUE
- ---------------
The range of values as calculated by the two different approaches is
$205,791,000 to $222,360,000. The values are reasonably consistent, and we
place reliance on each. The DCF approach may better reflect the growth
prospects for Albuquerque, which are perhaps a bit below some of the "comparable
transactions" and the DCF does explicitly consider rebuild costs, which are a
factor. We believe a midpoint is appropriate. We find the appraised value to
be $214,100,000.
The multiples calculated by dividing the appraised value by current subscriber
count and projected income are:
Appraised Value 214,100,000
Subscriber EBU's at 4/30/97 116,470
Projected operating income 22,236,000
Multiple 9.63
Per-subscriber $1,838
Overall, the foregoing ratios conform to the general market conditions and
analysis presented above.
The appraised fair market value of the Independence system as of April 30, 1997
is $214,100,000. The appraised value represents the price which a willing buyer
would pay to a willing seller, neither being under any prior obligation to
complete the transaction, for the assemblage of system assets as a going
concern, without any discount imputed for brokers' fees or sale costs. We
believe the appraisal reflects the relevant and material general market factors,
assumptions, and limitations, all of which are presented in this report. The
appraisal was prepared using standard appraisal techniques, and conforms to
Standards 7-10 of the Uniform Standards of Professional Appraisal Practice.
Albuquerque, NM, 4/97, Page 14
QUALIFICATIONS OF THE APPRAISER
-------------------------------
The appraisal was prepared by R. Michael Kruger, owner and President of Western
Cablesystems, Inc. Since 1979, he has appraised hundreds of systems for a
variety of clients including major MSO's, independent operators, and clients
outside the CATV industry. Kruger has extensive background as a CATV executive.
From 1974 to 1979, he held various operating positions at ATC, one of the
industry's largest operators. In 1979, he joined a small MSO, and until mid-
1986 was president of the 30,000 - subscriber company. There, in addition to
his operating duties, Kruger prepared CATV system appraisals.
Kruger formed Western Cablesystems, Inc. in 1986, and is its sole owner and
principal. Western has been directly involved in all aspects of system
operations and finance, including several acquisitions and sales, partnership
formation, debt placement, franchising, and system construction and startup.
From 1986 through 1996, Western purchased, built, and operated cable systems
that served approximately 21,000 customers.
In addition to continuing appraisal work, Kruger has performed consulting
engagements for a wide range of topics and clients, including the economic
feasibility of international cable and restructuring of individual systems to
achieve financial improvements.
Kruger received a BS/MS in engineering from the Massachusetts Institute of
Technology in 1967/68. In 1974, he received a Masters in Business
Administration (MBA) from the Stanford University Graduate School of Business.
Albuquerque, NM, 4/97, Page 15
ALBUQUERQUE OPERATING INCOME CALCULATION
1994 ACTUAL 1995 ACTUAL 1996 ACTUAL 4/30/97 DATA PROJ. YEAR
(Dollars Annualized)
SUBSCRIBER BASE:
Ending Passings 215,651 223,809 231,709 233,070 237,170
Ending Basic Subs 106,835 109,911 112,460 112,530 116,925
Ending Pay Units 58,838 57,189 60,373 60,912 63,291
Ending Basic Pen. 49.5% 49.1% 48.5% 48.3% 49.3%
Ending Pay Pen. 55.1% 52.0% 53.7% 54.1% 54.1%
Average Basic Subs 102,779 108,373 111,186 112,495 114,727
Average Pay Units 59,953 58,014 58,781 60,643 62,101
Ending Addr. Homes est. 18,900 20,600 22,400 23,096 24,944
REVENUE/SUB
Avg. Basic $/Sub $ 21.52 $ 23.13 $ 24.25 $ 25.14 $ 25.64
Avg. Pay $/Unit $ 9.18 $ 8.91 $ 8.86 $ 8.78 $ 8.78
Avg. PPV $/Addr Home $ 49.57 $ 69.19 $ 69.62 $ 87.92 $ 90.00
Avg. Adv. $/Basic $ 30.54 $ 33.01 $ 36.69 $ 32.98 $ 37.00
REVENUES
Basic, Tier, AO, Con 26,540,210 30,081,554 32,350,525 33,938,952 35,304,702
Commercial Basic 890,516 957,015 956,428 1,188,774 1,188,774
Premium Service 6,607,511 6,201,686 6,247,157 6,387,900 6,541,581
Com'l Premium 191,889 211,147 234,533 259,032 259,032
Pay Per View 936,947 1,425,273 1,559,572 2,030,502 2,244,931
Guide Revenue 420,875 388,846 305,524 309,579 309,579
Installation 794,223 774,352 685,577 650,559 625,000
Late/Other/Shop/Equip/Leas 705,829 877,797 1,207,478 1,207,407 1,200,000
Advertising Sales 3,139,269 3,577,614 4,078,980 3,710,124 4,244,914
Fran. Fee Passthru 1,570,763 1,761,254 1,862,151 1,961,307 2,024,822
Total Revenue 41,798,032 46,256,538 49,487,925 51,644,136 53,943,335
EXPENSES
Salary-Admin. 1,512,696 1,696,534 1,908,288 2,143,743 2,272,368
Salary-LO 0 0 0 0 0
Salary-Field 3,586,311 3,641,193 4,167,040 4,061,064 4,000,000
Tax/Benefit 1,374,146 1,411,048 1,652,673 1,783,857 1,756,263
T & E 95,121 128,344 147,801 84,618 100,000
Vehicle 379,678 377,357 378,501 314,841 380,000
Labor/OH Capitalize -2,325,050 -3,397,791 -4,010,911 -4,327,809 -3,500,000
Basic Programming 4,569,820 6,180,004 7,468,696 8,350,149 9,361,756
Computer Billing 1,151,002 1,277,058 1,359,867 1,485,990 1,500,000
Franchise/FCC/Dev Fees 1,883,200 2,061,803 2,281,536 2,279,049 2,427,450
Copyright 195,101 197,457 203,187 212,589 225,000
Bad Debt/Coll. 643,913 847,144 920,835 1,269,924 1,078,867
Premium Service 3,185,503 2,523,969 3,032,782 3,312,357 3,392,046
Pay-Per-View 505,724 687,056 885,820 1,081,764 1,196,003
Premium-Com'l 157,161 149,140 189,945 208,980 194,274
Merchandise 56,678 38,951 42,569 51,273 45,000
Real Estate Rent 307,876 300,028 269,404 267,600 270,000
Power 200,504 192,610 217,504 225,960 233,869
Insurance 418,179 578,175 585,009 611,751 550,000
Pole Rent 175,686 180,804 161,963 166,620 170,000
Property Tax 178,988 172,567 272,360 337,980 350,000
System Operation 578,568 421,620 419,078 398,091 400,000
Field Contract Labor 686,200 809,500 907,685 610,944 600,000
Professional Service 123,203 88,519 101,005 132,864 100,000
Office Costs 556,167 562,231 648,319 715,083 675,000
Marketing 2,596,091 2,781,166 2,571,288 2,139,486 2,103,790
Advert. Sales Cost 1,396,163 1,537,684 1,775,988 1,967,181 1,825,313
Total Expenses 24,188,629 25,444,171 28,558,232 29,885,949 31,706,998
0
Op. Income 17,609,403 20,812,367 20,929,693 21,758,187 22,236,337
Margin 42.1% 45.0% 42.3% 42.1% 41.2%
Page 1
DISCOUNTED CASHFLOW MODEL FOR APPRAISAL OF ALBUQUERQUE
Change Rate Current Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7
- ------------------------------------------------------------------------------------------------------------------------------------
Beginning Passings 233,070 237,170 243,099 249,177 255,406 261,791 268,336
Growth 2.50% 4,100 5,929 6,077 6,229 6,385 6,545 6,708
Ending Passings 233,070 237,170 243,099 249,177 255,406 261,791 268,336 275,044
Passings Growth 2.50% 2.50% 2.50% 2.50% 2.50% 2.50%
Ending Basic EBU's 116,470 120,788 125,023 129,395 133,907 139,872 146,052 152,454
Ending Pay Units 60,912 63,291 65,510 67,801 70,165 73,291 76,529 79,884
Ending Basic EBU Pen. 49.97% 50.93% 51.43% 51.93% 52.43% 53.43% 54.43% 55.43%
Basic Penetration Change 0.50% 0.50% 0.50% 1.00% 1.00% 1.00%
Pay/Basic Penetration 0.00% 52.30% 52.40% 52.40% 52.40% 52.40% 52.40% 52.40% 52.40%
Average Basic EBU's 118,629 122,906 127,209 131,651 136,889 142,962 149,253
Average Pay Units 62,102 64,401 66,655 68,983 71,728 74,910 78,206
Addr Terminal Sub % 19.80% 20.70% 25.70% 30.70% 35.70% 40.70% 45.70% 50.00%
Ending Plant Miles 2,561 2,612 2,686 2,762 2,840 2,920 3,002 3,086
New Miles 80 51 74 76 78 80 82 84
New Drops 1.1 4,750 4,659 4,809 4,963 6,562 6,798 7,042
Rebuild Miles 0 400 600 600 460 0 0
Replace Drops % 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00%
Basic Revenue/EBU $307.63 $316.86 $326.36 $336.15 $346.24 $363.55 $381.73
Basic Rev/EBU Increase 3.00% 3.00% 3.00% 3.00% 5.00% 5.00%
Guide Rev/EBU 2.00% $ 2.61 $ 2.66 $ 2.72 $ 2.77 $ 2.82 $ 2.88 $ 2.94
Pay Revenue/Unit 2.00% $109.51 $111.70 $113.93 $116.21 $118.54 $120.91 $123.32
PPV Rev/Addr. Sub 7.00% $ 91.42 $ 97.82 $104.67 $111.99 $119.83 $128.22 $137.20
Late/Shop/Oth $/EBU 5.00% $ 10.12 $ 10.62 $ 11.15 $ 11.71 $ 12.30 $ 12.91 $ 13.56
Advertising Rev/EBU 7.00% $ 35.14 $ 37.60 $ 40.24 $ 43.05 $ 46.07 $ 49.29 $ 52.74
Personnel Cost Incr. % 3.00% 5.85% 6.17% 6.16% 6.15% 6.63% 6.61% 6.59%
Per-Sub Expense 3.50% $ 98.95 $102.41 $106.00 $109.71 $113.55 $117.52 $121.63
% of Rev. Expense % 14.20% 14.20% 14.20% 14.20% 14.20% 14.20% 14.20%
Pay/PPV Expense % 52.87% 52.87% 52.87% 52.87% 52.87% 52.87% 52.87%
Per-Mile Expense 4.00% $ 652 $ 678 $ 705 $ 734 $ 763 $ 794 $ 825
Capex per drop 2.00% $ 40 $ 41 $ 42 $ 42 $ 43 $ 44 $ 45
Capex per new mile 3.00% $25,000 $25,750 $26,523 $27,318 $28,138 $28,982 $29,851
Capex per rebuild mile $ 0 $15,000 $15,000 $15,000 $13,043
Capex per new adr. sub 1.00% $ 150 $ 152 $ 153 $ 155 $ 156 $ 158 $ 159
REVENUE
Basic/Tier/Com'l 36,493,476 38,943,345 41,516,086 44,254,650 47,396,133 51,973,724 56,973,833
Guide 309,579 327,154 345,381 364,589 386,679 411,910 438,637
Pay 6,800,613 7,193,429 7,594,201 8,016,550 8,502,262 9,057,040 9,644,700
Pay-per-view 2,244,931 3,089,800 4,087,571 5,263,616 6,676,378 8,377,186 10,238,540
Installation 3.00% 625,000 643,750 663,063 682,954 703,443 724,546 746,283
Late/Other/Shop 1,200,000 1,305,423 1,418,687 1,541,634 1,683,128 1,845,687 2,023,251
Advertising 4,244,914 4,621,687 5,118,353 5,667,863 6,305,940 7,046,692 7,871,751
Franch. Fee billed 3.90% 2,024,822 2,176,100 2,355,520 2,551,663 2,779,424 3,081,970 3,412,436
Total Revenue 53,943,335 58,300,689 63,098,862 68,343,519 74,433,388 82,518,755 91,349,431
EXPENSES
Personnel 5,608,631 5,954,783 6,321,730 6,710,701 7,155,795 7,628,797 8,131,408
Per-Sub costs 11,951,756 12,803,800 13,715,290 14,690,305 15,881,829 17,163,983 18,543,384
Per-mile costs 1,703,869 1,822,300 1,948,787 2,083,870 2,228,128 2,382,175 2,546,669
Percent of Rev. costs 7,660,420 8,279,202 8,960,584 9,705,371 10,570,185 11,718,377 12,972,409
Pay & PPV Costs 4,782,323 5,436,679 6,176,080 7,021,142 8,024,853 9,217,367 10,512,146
Total Expenses 31,706,999 34,296,764 37,122,471 40,211,389 43,860,790 48,110,699 52,706,016
OPERATING INCOME 22,236,336 24,003,924 25,976,391 28,132,131 30,572,599 34,408,056 38,643,415
Operating Ratio 41.22% 41.17% 41.17% 41.16% 41.07% 41.70% 42.30%
Change Rate Current Year 8 Year 9 Year 10
- ----------------------------------------------------------------------------------------
Beginning Passings 275,044 281,921 288,969
Growth 2.50% 6,876 7,048 7,224
Ending Passings 233,070 281,921 288,969 296,193
Passings Growth 2.50% 2.50% 2.50%
Ending Basic EBU's 116,470 159,085 165,951 173,062
Ending Pay Units 60,912 83,358 86,956 90,682
Ending Basic EBU Pen. 49.97% 56.43% 57.43% 58.43%
Basic Penetration Change 1.00% 1.00% 1.00%
Pay/Basic Penetration 0.00% 52.3% 52.40% 52.40% 52.40%
Average Basic EBU's 155,769 162,518 169,507
Average Pay Units 81,621 85,157 88,819
Addr Terminal Sub % 19.80% 60.00% 70.00% 80.00%
Ending Plant Miles 2,561 3,172 3,260 3,350
New Miles 80 86 88 90
New Drops 1.1 7,294 7,553 7,822
Rebuild Miles 0 0 0
Replace Drops % 10.00% 10.00% 10.00%
Basic Revenue/EBU $393.18 $404.97 $417.12
Basic Rev/EBU Increase 3.00% 3.00% 3.00%
Guide Rev/EBU 2.00% $ 3.00 $ 3.06 $ 3.12
Pay Revenue/Unit 2.00% $125.79 $128.31 $130.87
PPV Rev/Addr. Sub 7.00% $146.80 $157.08 $168.07
Late/Shop/Oth $/EBU 5.00% $ 14.23 $ 14.95 $ 15.69
Advertising Rev/EBU 7.00% $ 56.43 $ 60.38 $ 64.61
Personnel Cost Incr. % 3.00% 6.57% 6.55% 6.53%
Per-Sub Expense 3.50% $125.89 $130.30 $134.86
% of Rev. Expense % 14.20% 14.20% 14.20%
Pay/PPV Expense % 52.87% 52.87% 52.87%
Per-Mile Expense 4.00% $ 858 $ 893 $ 928
Capex per drop 2.00% $ 46 $ 47 $ 48
Capex per new mile 3.00% $30,747 $31,669 $32,619
Capex per rebuild mile
Capex per new adr. sub 1.00% $ 161 $ 162 $ 164
REVENUE
Basic/Tier/Com'l 61,245,056 65,815,442 70,705,072
Guide 466,943 496,917 528,651
Pay 10,267,088 10,926,146 11,623,923
Pay-per-view 13,720,231 17,869,464 22,791,495
Installation 3.00% 768,671 791,731 815,483
Late/Other/Shop 2,217,162 2,428,881 2,659,997
Advertising 8,790,498 9,813,339 10,951,816
Franch. Fee billed 3.90% 3,783,340 4,198,155 4,662,364
Total Revenue 101,258,989 112,340,076 124,738,801
EXPENSES
Personnel 8,665,426 9,232,760 9,835,431
Per-Sub costs 20,027,122 21,622,787 23,338,509
Per-mile costs 2,722,311 2,909,847 3,110,075
Percent of Rev. costs 14,379,652 15,953,262 17,713,988
Pay & PPV Costs 12,681,947 15,224,061 18,195,218
Total Expenses 58,476,457 64,942,717 72,193,222
OPERATING INCOME 42,782,532 47,397,359 52,545,579
Operating Ratio 42.25% 42.19% 42.12%
CAPITAL EXPENDITURES
Drops 673,144 700,170 738,604 779,086 889,731 945,244 1,003,966
Addr. Converters 291,308 1,079,869 1,161,873 1,248,799 1,424,064 1,547,813 1,509,661
New plant 1,281,250 1,908,477 2,014,875 2,127,204 2,245,796 2,370,999 2,503,182
Rebuild 0 6,000,000 9,000,000 9,000,000 6,000,000 0 0
Labor capitalized 35.00% 3,500,000 3,500,000 2,212,605 2,348,745 2,504,528 2,670,079 2,845,993
Vehicles 5.00% 250,000 262,500 275,625 289,406 303,877 319,070 335,024
Other 3.00% 50,000 50,000 51,500 53,045 54,636 56,275 57,964
Total Capex 6,045,702 13,501,016 15,455,083 15,846,285 13,422,632 7,909,481 8,255,789
CAPITAL EXPENDITURES
Drops 1,066,076 1,131,758 1,201,211
Addr. Converters 3,091,568 3,364,743 3,655,705
New plant 2,642,735 2,790,067 2,945,613
Rebuild 0 0 0
Labor capitalized 35.00% 3,032,899 3,231,466 3,442,401
Vehicles 5.00% 351,775 369,364 387,832
Other 3.00% 59,703 61,494 63,339
Total Capex 10,244,755 10,948,892 11,696,101
DISCOUNTED FREE CASHFLOW
Operating Income 22,236,336 24,003,924 25,976,391 28,132,131 30,572,599 34,408,056 38,643,415
Less Capital Expenditures 6,045,702 13,501,016 15,455,083 15,846,285 13,422,632 7,909,481 8,255,789
Free cashflow 16,190,634 10,502,908 10,521,309 12,285,845 17,149,967 26,498,575 30,387,625
DISCOUNTED FREE CASHFLOW
Operating Income 42,782,532 47,397,359 52,545,579
Less Capital Expenditures 10,244,755 10,948,892 11,696,101
Free cashflow 32,537,777 36,448,467 40,849,478
Discount Rate 12.70% Discount Rate Calculation
Net Present Value of Free Cashflow 110,413,035 Proportion Rate
Equity 30.00% 20.00%
Senior Debt 60.00% 9.00%
Sub. Debt 10.00% 13.00%
Blended 12.70%
TERMINAL VALUE
Year 10 operating income 52,545,579
Multiple 6
Terminal Value 315,273,475
Discounted at 12.70% 95,378,014
POTENTIAL VALUE
NPV of Free Cashflow 110,413,035
NPV of Terminal Value 95,378,014
Total Potential Value 205,791,049
RATIOS
Starting EBU's 116,470
First-year Op. Income 22,236,336
Value per EBU $1,767
Op. Income Multiple 9.25