EXHIBIT 99(b)(3)
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CABLE TV FUND 12 CABLE TELEVISION SYSTEM
ALBUQUERQUE, NEW MEXICO
APPRAISAL OF NON-CURRENT ASSETS AS OF APRIL 30, 1997
PREPARED FOR:
THE JONES GROUP, LTD.
JUNE 20, 1997
[LOGO OF BOND & PICARO APPEARS HERE]
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CABLE TV FUND 12 CABLE TELEVISION SYSTEM
ALBUQUERQUE, NEW MEXICO
APPRAISAL OF NON-CURRENT ASSETS AS OF APRIL 30, 1997
TABLE OF CONTENTS
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Page
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Introduction 1
System Background 1
Industry Overview 2
Executive Summary 7
Valuation Method 7
Conclusion 10
Cable TV Fund 12 Cable Television System, Albuquerque, New Mexico
System Background 13
Demographic Profile 16
Media Overview 20
Market Analysis 21
Discounted Cash Flow Analysis 26
Comparable Sales Analysis 32
Conclusion 34
Exhibits
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A. Qualifications of James R. Bond, Jr., Julie A. Kroskin, and Tracy A.
Hogan
CABLE TV FUND 12 CABLE TELEVISION SYSTEM
ALBUQUERQUE, NEW MEXICO
APPRAISAL OF NON-CURRENT ASSETS AS OF APRIL 30, 1997
INTRODUCTION
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Bond & Pecaro, Inc. has been retained to determine the fair market value
of the non-current assets of the Cable TV Fund 12 cable television system in
Albuquerque, New Mexico, ("the Albuquerque System") as of April 30, 1997. Among
these assets were towers, electronic equipment, office equipment, vehicles, a
cable television distribution plant, cable television franchises, and a cable
television subscriber base.
SYSTEM BACKGROUND
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The Albuquerque System serves the City of Albuquerque; the Villages of
Corrales, Bosque Farms, Los Ranchos de Albuquerque, North Valley, Paradise
Hills, Peralta, South Valley, and Taylor Ranch; the Town of Bernalillo;
unincorporated portions of the Counties of Bernalillo, Sandoval, and Valencia;
and the Kirkland Air Force Base. Most of the system's cable distribution plant
operates at 450 mHz with a capacity of up to 63 channels. There were two vacant
channels available for use as of April 30, 1997.
The system is approximately 25% addressable and provides impulse pay-per-
view services to subscribers. The system has approximately 1,604 miles of
underground cable
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distribution plant and 1,035 miles of aerial cable plant. Approximately 233,798
homes are passed by the system's cable distribution plant.
As of April 30, 1997, the system had 112,603 basic subscribers, representing
a basic subscriber penetration of 48.2%. The system had 60,912 pay
subscriptions as of April 30, 1997, yielding a pay to basic ratio of 54.1%.
The Albuquerque System operates under the provisions of 10 cable television
franchises. The terms of each of the franchises are as follows:
Expiration
Franchise Date
--------- ----------
City of Albuquerque 09/01/99
Village of Corrales 04/21/06
Village of Bosque Farms 09/13/99
Village of Los Ranchos de Albuquerque 05/14/11
Town of Bernalillo 08/17/01
Bernalillo County 08/05/11
Sandoval County 03/03/02
Valencia County 01/21/00
Kirkland Air Force Base 08/28/99
INDUSTRY OVERVIEW
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The cable television industry developed in the late 1940s in order to
provide television service to communities in rural Pennsylvania that were too
isolated to receive over-the-air broadcasts. Since that time, the industry has
grown and diversified to provide a broad range of educational, entertainment,
cultural, and sports programming to large urban areas and rural communities
alike.
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According to Broadcasting & Cable Yearbook 1997, the cable industry in the
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United States consists of approximately 11,800 operating systems serving over
34,000 communities throughout the United States. Approximately 100 additional
cable television franchises have been approved but have yet to be constructed.
Each system has been granted a franchise by its local municipal government.
Franchises are awarded competitively, and the winning bidder must generally
provide guarantees that expensive investments in local employment, local
programming, and system technical design will be made.
The construction of a cable television system is extremely capital
intensive. The cost of installing aerial cable often comprises the single
largest investment made by a cable television system operator. Underground
cable television installation is even more expensive, when considered on a per-
mile basis. Additionally, investments must be made in headend facilities,
satellite receiving equipment, office facilities, and subscriber equipment such
as converter units, that ultimately deliver cable television service to
households.
Numerous changes have occurred in the development of cable television
technology. Original systems used vacuum tube electronics and provided only a
few off-air channels to subscribers. By contrast, modern systems are capable of
providing over 100 channels of service, including satellite signals and locally
originated programs. These systems use solid state amplifiers and addressable
converter equipment to control subscriber service levels.
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Cable television systems provide entertainment, news, music, and other forms
of programming to the public. The cable operator must pay a fee, usually
calculated on a per-subscriber basis, to program suppliers. These fees may
either be determined on a fixed basis or calculated as a percentage of system
revenues.
In order to cover the costs of operation, systems sell "basic" services such
as local television signals, local origination programs, and some satellite
services for a fixed monthly fee to all subscribers. Customers also have the
option to subscribe to additional "premium" or "pay" services, such as Home Box
Office and Showtime, which offer movies, sports, entertainment, and cultural
programming.
In some cases, cable systems generate additional revenues by selling
advertising time to local and national businesses, government agencies, and
political organizations which seek to deliver information to the general public.
Given the substantial fixed costs resulting from the capital requirements of
the business, as well as high programming costs, cable operators seek to
maximize system penetration. Two types of system penetration are of paramount
importance in the industry.
The first is basic penetration, which is a measure of the number of homes
subscribing to cable television as a proportion of the homes which are passed by
cable; if 400 homes subscribed to cable service in a community of 1,000 homes,
basic penetration would be 40%.
The second important measure is pay penetration, which gauges the popularity
of pay services among those households which subscribe to basic cable service.
If each of the 400
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cable households in the example subscribed to two pay services, pay penetration
would be 200%. Approximately 67% of all households in the United States are
currently served by cable television.
The linkage between basic penetration, pay penetration, and customer
development is fundamental to the cable industry. Operators constantly seek to
provide programming and services that will develop the widest appeal among local
households. The more effectively the cable operator is able to meet the
preferences of the public, the larger the system's subscriber base will be.
This relationship between subscribers and revenues is axiomatic in the cable
industry and is the primary determinant of success or failure among system
operators.
The cable industry has become increasingly competitive in recent years.
Overall financial performance of the industry has fallen short of expectations
that were developed in the early 1980s, when a large number of cable television
facilities were constructed. Traditional broadcast stations continue to be the
mainstay of television viewing in the United States. In recent years, the FCC
has issued many additional licenses for new independent television stations
throughout the country. Moreover, cable operators have come under increasing
competitive pressure from videocassette rental outlets, satellite program
services, and other competing technologies.
In order to build the largest possible subscriber base, systems invest
heavily in tangible assets, such as distribution equipment and satellite
equipment, and intangible assets such as marketing systems and programming
agreements. Similarly, investments in
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equipment and intangible assets, such as managerial talent, may be oriented
toward controlling costs and increasing profitability.
It is in this marketplace, one defined by heavy capital investment, the
relationship between subscriber base size and revenues, and increasing
competition, that the Albuquerque System operates.
To inspect the physical plant and gather relevant financial and market data
necessary for the appraisal, James R. Bond, Jr. of the firm visited the offices
and technical facilities of the system in Albuquerque on May 15 and 16, 1997.
In performing this analysis, various sources were employed. These include
1997 Broadcasting & Cable Yearbook; 1997 Television and Cable Factbook; Market
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Statistics Demographics USA 1996, County Edition; the National Association of
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Broadcasters and Bond & Pecaro, Inc. The Television Industry: 1997 Television
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Market-by-Market Review; Paul Kagan Associates Cable TV Investor; other industry
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publications; internal financial statements and reports provided by the
Albuquerque System; and financial information and projections supplied by The
Jones Group, Ltd. Additionally, the appraiser relied upon information furnished
by system management relative to the age, condition, and adequacy of the
system's physical plant. These materials are assumed to be accurate with
respect to factual matters.
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CABLE TV FUND 12 CABLE TELEVISION SYSTEM
ALBUQUERQUE, NEW MEXICO
APPRAISAL OF NON-CURRENT ASSETS AS OF APRIL 30, 1997
EXECUTIVE SUMMARY
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An analysis to determine the fair market value of the non-current assets
of the Albuquerque System has been made. Fair market value is defined as the
price in cash or cash equivalents that would be paid by a willing buyer to a
willing seller in an arm's length transaction in which neither party acts under
any compulsion to buy or sell. The effective date of this analysis is April 30,
1997.
VALUATION METHOD
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In order to determine the fair market value of the non-current assets of
the Albuquerque System, a discounted cash flow projection was developed. This
income approach measures the expected economic benefits these assets bring to
their holder. The fair market value of the assets of the system may therefore be
expressed by discounting these future benefits.
It is generally accepted that the value of a telecommunications business
lies in the fact that it is a "going concern." That is, its value reflects the
revenues and, ultimately, the after-tax cash flow that the business may
reasonably be expected to generate over a period of years. The potential resale
value of the business at the end of that period is also
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an important factor in the valuation of such properties. A number of factors
contribute to going concern value, including the formation of a business plan;
the construction of the system headend facility; the development of a functional
general, administrative, and technical organization; establishment of a sales
and marketing organization; and the coordination of all of these functions into
a well defined and efficient operating organization.
The market, or comparable sales, approach provides a useful means by which
assumptions made in the development of the discounted cash flow analysis can be
tested against marketplace transactions.
The discounted cash flow model incorporates variables such as capital
expenditures, homes passed by the system, basic penetration, pay penetration,
system revenue projections, anticipated system operating expenses and profits,
and various discount rates. The variables used in the analysis reflect
historical system and market growth trends as well as anticipated system
performance and market conditions.
The capital expenditures provision reflects the amount of investment
required to expand and maintain a competitive cable television business in the
Albuquerque, New Mexico area.
The discounted cash flow projection period of ten years was judged to be an
appropriate time horizon for the analysis. Cable operators and investors
typically expect to recover their investments within a ten year period. It is
over this period that projections
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regarding market demographics, system basic and pay penetration, and operating
profit margins can be made with the highest degree of accuracy.
Over this ten year period, household growth in the Albuquerque area,
anticipated market penetration percentages, and system operating performance
expectations were used to project the system's operating profits.
Income taxes were deducted from the projected operating profits to
determine after-tax net income. Depreciation and amortization expenses were
added back to the after-tax income stream and projected capital expenditures
were subtracted to calculate the system's net after-tax cash flow.
The stream of annual cash flow was adjusted to present value using a
discount rate appropriate for the cable television industry. The discount rate
used is based upon an after-tax rate calculated for the cable television
industry.
Additionally, it was necessary to project the system's residual value at
the end of the ten year projection period. In order to determine this value, an
operating cash flow multiple was applied to the system's 2007 operating cash
flow projection. The terminal value represents the hypothetical value of the
system at the end of the projection period. Taxes were deducted from the
indicated terminal value. The net terminal value was then discounted to present
value.
The results of these approaches are considered and given appropriate weight
in the consolidation portion of the analysis. In order to verify the results of
the discounted cash flow analysis, the appraiser also utilized a comparable
sales approach, relying upon an
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analysis of subscriber multiples. The results of this analysis support the
conclusion resulting from application of the income approach.
CONCLUSION
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Based upon the application of the income and market approaches, the
indicated fair market value of the non-current assets of the Albuquerque System
as of April 30, 1997 is determined to be $221,349,800.
Recipients of this report agree that all of the information contained
herein is of a confidential nature. This report may not, in whole or in part,
be reproduced or distributed to others. Each recipient agrees to treat it in a
confidential manner, and will not, directly or indirectly, disclose or permit
its agents or affiliates to disclose any such information without the consent of
Bond & Pecaro, Inc.
This analysis is based upon a number of projections. Projections are
inherently subject to varying degrees of uncertainty. Their accuracy depends,
among other things, upon the reliability of the underlying assumptions and the
occurrence of events beyond the control of Bond & Pecaro, Inc.
Certain information and assumptions are based upon historical industry
data. Some of the assumptions set forth inevitably will prove not to have been
correct. Consequently, the results of operations will vary from those set forth
in the projections and such variations may be material.
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Bond & Pecaro, Inc. makes no representations or warranties as to the
accuracy or completeness of the information or projections and assumptions
contained herein, or otherwise furnished in connection with this analysis.
Neither Bond & Pecaro, Inc. nor its personnel assume any liability for damages,
direct or indirect, arising out of or related to this report, the information or
assumptions or projections contained herein, any omissions from this report, or
any information otherwise provided regarding this report.
Neither this firm nor any of its employees has any present or anticipated
economic interest in the Cable TV Fund 12 cable television system or The Jones
Group, Ltd. The compensation received by the firm was in no way contingent upon
the values or the conclusions developed herein.
This appraisal was prepared for The Jones Group, Ltd. in connection with
internal management requirements. The report is not to be otherwise cited or
disseminated without the prior written consent of Bond & Pecaro, Inc.
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All information and conclusions contained in this report are based upon the
best knowledge and belief of the undersigned, whose qualifications are attached
hereto.
BOND & PECARO, INC.
1201 Connecticut Ave., N.W. BY /s/ James R. Bond, Jr.
Suite 450 -----------------------
Washington, D.C. 20036 James R. Bond, Jr.
(202) 775-8870
June 20, 1997
BY /s/ Julie A. Kroskin
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Julie A. Kroskin
BY /s/ Tracy A. Hogan
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Tracy A. Hogan
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CABLE TV FUND 12 CABLE TELEVISION SYSTEM
ALBUQUERQUE, NEW MEXICO
APPRAISAL OF NON-CURRENT ASSETS AS OF APRIL 30, 1997
CABLE TV FUND 12 CABLE TELEVISION SYSTEM
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SYSTEM BACKGROUND
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The Albuquerque System serves the City of Albuquerque; the Villages of
Corrales, Bosque Farms, Los Ranchos de Albuquerque, North Valley, Paradise
Hills, Peralta, South Valley, and Taylor Ranch; the Town of Bernalillo;
unincorporated portions of the Counties of Bernalillo, Sandoval, and Valencia;
and the Kirkland Air Force Base, in New Mexico.
The technical operations of the Albuquerque System are conducted at five
sites. These consist of an office facility located at 4611 Montbell Place in
Albuquerque, an advertising office at 1700 Louisiana Street in Albuquerque, and
headend facilities located in Albuquerque, Bernalillo, and Bosque Farms, New
Mexico.
CABLE TV FUND 12 HISTORICAL PERFORMANCE
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The Albuquerque System financial statements were provided for the years
ending 1994, 1995, 1996, and projections for 1997. As shown in Table 1, the
system's net revenues increased from approximately $41.8 million in 1994 to
$49.5 million in 1996, reflecting a compound annual growth rate of approximately
8.8%. System revenues are projected to be $55.6 million in 1997.
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Operating cash flow at the Albuquerque System increased at an average
annual rate of approximately 9% during the 1994 to 1996 period. The system's
operating profit margin remained relatively constant between 1994 and 1996,
varying between 42.1% and 45.0%.
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TABLE 1
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HISTORICAL CABLE TV FUND 12 FINANCIAL PERFORMANCE
(Dollar Amounts Shown in Thousands)
Projected
1997 1996 1995 1994
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System Net Revenue $55,571.2 $49,488.0 $46,256.5 $41,798.1
Total Operating Expenses $32,199.1 $28,558.2 $25,444.2 $24,188.6
Operating Cash Flow $23,372.1 $20,929.8 $20,812.3 $17,609.5
Operating Cash Flow Margin 42.1% 42.3% 45.0% 42.1%
Source: The Jones Group, Ltd. financial statements for years ending 1994,
1995, 1996, and projections for the year 1997.
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DEMOGRAPHIC PROFILE
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According to Broadcasting & Cable Yearbook 1997, the Albuquerque System is
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located within the Albuquerque-Santa Fe DMA,/1/ which ranks 48th in the
country by Nielsen.
Population, income, retail sales, employment composition, and other
economic characteristics of the Albuquerque-Santa-Fe market were considered in
this analysis.
POPULATION GROWTH
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The current and projected populations of the Albuquerque-Santa-Fe market
are shown in Table 2. In 1995, the Albuquerque-Santa-Fe market population was
approximately 665,600. The population of the market area is projected to
increase at an annual rate of 1.6% through the year 2000, based upon forecasts
contained in Market Statistics Demographics USA 1996, County Edition. This
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mirrors the projected annual rate of population growth for the State of New
Mexico, and is above the 0.8% annual increase projected for the United States.
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/1/ Nielsen Media Research defines a DMA as a "group of counties in which
stations in the metro area receive the largest audience share. DMAs are
non-overlapping areas used for planning, buying, and evaluating television
audiences. Each county in the United States is assigned to only one DMA."
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INCOME GROWTH
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Summary income data for the Albuquerque-Santa-Fe market are also contained
in Table 2. Current income levels and projected growth rates for the market are
compared with averages for the State of New Mexico and for the United States.
Total Effective Buying Income ("EBI")/1/ in the Albuquerque-Santa-Fe
market during the 1995-2000 period is projected to increase from approximately
$9.6 billion to $12.8 billion. Per capita EBI is projected to increase from
$14,383 to $17,792 over the same period. EBI per household is approximately
12.3% higher than the average for the State of New Mexico but almost 5.8% lower
than the national average.
The projected income growth rate for the Albuquerque-Santa-Fe market is
well above that of the state and nation. The per capita and per household
income growth rates for the Albuquerque-Santa-Fe market are also higher than
state and national levels.
RETAIL SALES GROWTH
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Retail sales data provide additional information regarding economic
activity in the Albuquerque-Santa-Fe market. As reflected in Table 2, total,
per capita, and per household retail sales for the market are projected to grow
at compound annual rates of 6.0%, 4.3%, and 4.0%, respectively, during the 1995-
2000 period.
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/1/ EBI is defined by Market Statistics Demographics USA 1996, County
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Edition as "personal income less personal tax and non-tax payments."
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Projected retail sales in the area are compared to those for the State of
New Mexico and the United States. Using these measures, the total retail sales
growth in the Albuquerque-Santa-Fe market exceeds state and national averages.
For example, total retail sales growth during the 1995-2000 period is expected
to average 6.0% in the Albuquerque-Santa-Fe market, compared to 5.6% in the
State of New Mexico, and 4.0% in the United States as a whole. Retail sales per
capita of $10,015 in the market are well above the national average of $8,891
and also the New Mexico average of $8,606.
EMPLOYMENT COMPOSITION
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Major employers in the Albuquerque DMA include the Albuquerque Public
Schools (10,596 employees), the University of New Mexico (6,228 employees), and
Sandia National Labs (7,488 employees).
The estimated unemployment rate in the Albuquerque-Santa-Fe market as
of April 1997 was 4.0%, representing a significant decline from a 5.0% level at
the end of 1996./1/ The current rate is considerably lower than the 6.3%
unemployment rate for the State of New Mexico and the 4.9% national average.
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/1/ Unemployment data from the Bureau of Labor Statistics.
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TABLE 2
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DEMOGRAPHIC AND ECONOMIC PROJECTIONS FOR THE ALBUQUERQUE-SANTA FE DMA,
THE STATE OF NEW MEXICO, AND THE UNITED STATES
Annual
1995 2000 Change
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POPULATION
(THOUSANDS) Albuquerque 665.6 721.9 1.6%
New Mexico 1,700.4 1,840.2 1.6%
U.S. 264,900.9 276,107.0 0.8%
HOUSEHOLDS
(THOUSANDS) Albuquerque 250.2 274.7 1.9%
New Mexico 609.2 668.3 1.9%
U.S. 97,647.4 102,813.1 1.0%
AVERAGE HOUSEHOLD SIZE
Albuquerque 2.7 2.6 -0.8%
New Mexico 2.8 2.8 0.0%
U.S. 2.7 2.7 0.0%
TOTAL EFFECTIVE BUYING INCOME
(MILLIONS) Albuquerque $ 9,573.5 $ 12,843.9 6.1%
New Mexico 20,753.5 27,222.4 5.6%
U.S. 3,964,285.1 4,832,437.7 4.0%
EBI PER CAPITA
Albuquerque $ 14,383 $ 17,792 4.3%
New Mexico 12,205 14,793 3.9%
U.S. 14,965 17,502 3.2%
EBI PER HOUSEHOLD
Albuquerque $ 38,263 $ 46,756 4.1%
New Mexico 34,067 40,734 3.6%
U.S. 40,598 47,002 3.0%
TOTAL RETAIL SALES
(MILLIONS) Albuquerque $ 6,666.2 $ 8,921.1 6.0%
New Mexico 14,633.7 19,171.5 5.6%
U.S. 2,355,241.6 2,871,024.8 4.0%
RETAIL SALES PER CAPITA
Albuquerque $ 10,015 $ 12,358 4.3%
New Mexico 8,606 10,418 3.9%
U.S. 8,891 10,398 3.2%
RETAIL SALES PER HOUSEHOLD
Albuquerque $ 26,644 $ 32,476 4.0%
New Mexico 24,021 28,687 3.6%
U.S. 24,120 27,925 3.0%
Source: Market Statistics Demographics USA 1996, County Edition.
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MEDIA OVERVIEW
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The Albuquerque System faces competition from area television stations,
local radio stations, newspapers, direct broadcast satellite systems (DBS), and
videocassette rental outlets for audience share and advertising revenues.
There are 10 commercial television stations operating in the Albuquerque-
Santa-Fe market:
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Call Letters Channel Affiliation
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KKTO 2 Fox
KOB-TV 4 NBC
KOAT-TV 7 ABC
KCHF 11 Independent
KRQE 13 CBS
KNAT 23 Independent
KRPV 27 Independent
KHFT 29 Independent
KLUZ-TV 41 Independent
KASC 50 Independent
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Of the radio stations licensed to the Albuquerque-Santa-Fe market, 24
achieved a measurable audience share in the last Arbitron rating period, as
reported in Duncan's American Radio, Fall 1996. These include six AM radio
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stations and 18 FM radio stations.
The Albuquerque-Santa-Fe market is also served by the following cable
television operators: TCI Cablevision of New Mexico, Inc. (17,218 subscribers)
and Santa Fe Cablevision Co., (16,973 subscribers). The major daily newspaper
serving the area is the
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Albuquerque Journal, with a total circulation of 113,235 daily and 164,021 on
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Sundays. Three DBS systems are active in the Albuquerque-Santa-Fe market:
DirecTV, EchoStar, and PrimeStar. Additionally, there are 69 videocassette
rental outlets in the Albuquerque area.
MARKET ANALYSIS
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HOMES PASSED
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The initial parameter upon which the discounted cash flow projection is
based is homes passed, or "passings." Two factors affect the number of homes
passed, new plant construction and household growth. Plant expansion improves
system coverage by allowing the system to offer service to previously unserved
areas. Household growth is the result of new construction and occupancies in
areas that are already served by the system.
It has been assumed that the number of households in the Albuquerque System
franchise area will increase at a rate equivalent to the average growth
projected for the areas served by the system as a whole, or approximately 1.9%
per year.
BASIC AND EXPANDED BASIC PENETRATION
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Basic and expanded basic subscriber penetration at the system are currently
48.2% and 96.8% (expressed as a ratio of basic subscribers), respectively.
System basic penetration has shown modest but consistent growth during the past
three years. It is likely
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that basic and expanded basic penetration will continue to demonstrate a modest
growth trend over the projected 10 year period.
For the purpose of this analysis, the appraiser has assumed that basic
subscriber penetration will gradually increase from its current level to
approximately 71.6% by 2007, as shown in Table 3. Basic subscribers at the
system are projected to increase at an annual rate of 6.0% through the year
2007. Expanded basic subscriber penetration has been projected to remain at a
96.8% ratio of basic subscribers through 2007. These rates are derived from the
historical and anticipated performance of the system, as reflected in management
projections, and expectations for the cable television industry in general.
PAY PENETRATION
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As of April 30, 1997, pay penetration at the Albuquerque System attained a
level of 54.1%. Pay penetration is projected to increase from 55% at the end of
1997 to approximately 64.0% by 2007, as indicated in Table 3. This estimate is
reasonable in light of the historical performance of the system, as reflected in
management projections, and expectations for the anticipated performance of the
cable television industry in general.
RATES
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System service rates are projected in Table 4. These are based upon
prevailing rates in the Albuquerque System with provisions for anticipated
increases, where appropriate.
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As of April 30, 1997, monthly service rates ranged from $8.77 to $10.49 for
basic service, $11.97 to $16.13 for expanded basic service, $5.95 to $11.50 for
each pay service, and $3.40 to $3.57 for each addressable converter (with remote
control unit rentals). Installation fees ranged from $17.34 to $36.75, depending
upon the type of installation service performed.
Due to regulatory and competitive restrictions, service rates for basic and
expanded basic services are expected to grow with inflation, while premium
channel service rates are expected to remain relatively flat. These assumptions
are consistent with industry expectations for service rate growth.
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TABLE 3
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CABLE TV FUND 12 CABLE TELEVISION SYSTEM SUBSCRIBER PROJECTIONS
1997 1998 1999 2000 2001 2002 2003 2004 2005
---- ---- ---- ---- ---- ---- ---- ---- ----
Subscribers
Homes Passed/1/ 238,240 242,767 247,379 252,080 256,869 261,750 266,723 271,791 276,955
Basic Subscribers:
Beginning of Year 112,603 117,157 124,186 131,637 139,535 147,907 156,781 166,188 176,159
Net Additions 4,554 7,029 7,451 7,898 8,372 8,874 9,407 9,971 10,570
End of Year 117,157 124,186 131,637 139,535 147,907 156,781 166,188 176,159 186,729
Average Basic 114,880 120,672 127,912 135,586 143,721 152,344 161,485 171,174 181,444
Subscribers/2/
Tier 1 Subscribers 113,408 120,212 127,425 135,070 143,174 151,764 160,870 170,522 180,754
(EOY)/2/
Premium Subscribers (EOY) 64,436 69,420 74,770 80,512 86,674 93,285 100,378 107,985 116,145
Basic Service Penetration 49.2% 51.2% 53.2% 55.4% 57.6% 59.9% 62.3% 64.8% 67.4%
Tier 1 Penetration (% Subs.) 96.8% 96.8% 96.8% 96.8% 96.8% 96.8% 96.8% 96.8% 96.8%
Premium Penetration (% Subs.) 55.0% 55.9% 56.8% 57.7% 58.6% 59.5% 60.4% 61.3% 62.2%
2006 2007
---- ----
Subscribers
Homes Passed/1/ 282,217 287,579
Basic Subscribers:
Beginning of Year 186,729 197,933
Net Additions 11,204 8,004
End of Year 197,933 205,937
Average Basic
Subscribers/2/ 192,331 201,935
Tier 1 Subscribers
(EOY)/2/ 191,599 199,347
Premium Subscribers (EOY) 124,896 131,800
Basic Service Penetration 70.1% 71.6%
Tier 1 Penetration (% Subs.) 96.8% 96.8%
Premium Penetration (% Subs.) 63.1% 64.0%
Note: 1997 projections adjusted for a partial year.
- ------------------------------------
/1/ Number of households in the Albuquerque area are projected to increase
at 1.9% per year. See text.
/2/ Basic and expanded subscribers are projected to increase at an annual
rate of 6.0%. See text.
-24-
TABLE 4
-------
CABLE TV FUND 12 CABLE TELEVISION SYSTEM REVENUE PROJECTIONS
(Dollar Amounts Shown in Thousands)
1997 1998 1999 2000 2001 2002 2003 2004
---- ---- ---- ---- ---- ---- ---- ----
Service Revenue:
Basic Service Revenue $14,130.2 $15,219.1 $16,531.3 $17,962.4 $19,523.1 $21,206.3 $23,040.6 $25,039.3
Tier 1 Service Revenue 20,763.3 22,357.4 24,293.2 26,396.5 28,681.4 31,163.1 33,858.3 36,784.5
Basic Commercial & Pay
Revenue/1/ 1,220.7 1,251.2 1,282.5 1,314.6 1,347.5 1,381.2 1,415.7 1,451.1
Premium Service Revenue 6,716.1 7,172.0 7,725.7 8,320.0 8,957.8 9,642.2 10,376.5 11,164.1
Pay Per View Revenue/2/ 1,754.6 1,973.9 2,220.6 2,498.2 2,810.5 3,161.8 3,557.0 4,001.6
--------- --------- --------- --------- --------- --------- --------- ---------
Subtotal Service Revenue $44,584.9 $47,973.6 $52,053.3 $56,491.7 $61,320.3 $66,554.6 $72,248.1 $78,440.6
Other Revenue:
Advertising Revenue $ 4,588.9 $ 5,162.5 $ 5,807.8 $ 6,533.8 $ 7,350.5 $ 8,269.3 $ 9,303.0 $10,465.9
Installation 702.7 720.3 738.3 756.8 775.7 795.1 815.0 835.4
Equipment Rentals 1,483.6 1,632.0 1,795.2 1,974.7 2,172.2 2,389.4 2,628.3 2,891.1
Franchise Fees/3/ 1,910.5 2,025.2 2,146.7 2,275.5 2,412.0 2,556.7 2,710.1 2,872.8
FCC Pass Thru Revenue/3/ 63.4 67.2 71.2 75.5 80.0 84.8 89.9 95.3
Other Revenue 1,672.6 1,839.9 2,023.9 2,226.3 2,448.9 2,693.8 2,963.2 3,259.5
--------- --------- --------- --------- --------- --------- --------- ---------
Subtotal Other Revenue $10,421.7 $11,447.1 $12,583.1 $13,842.6 $15,239.3 $16,789.2 $18,509.6 $20,420.0
Total Revenue $55,006.6 $59,420.7 $64,636.4 $70,334.3 $76,559.6 $83,343.8 $90,757.7 $98,860.6
2005 2006 2007
---- ---- ----
Service Revenue:
Basic Service Revenue $27,194.8 $29,542.0 $31,792.6
Tier 1 Service Revenue 39,961.2 43,408.9 46,725.9
Basic Commercial & Pay
Revenue/1/ 1,487.4 1,524.6 1,562.7
Premium Service Revenue 12,008.9 12,915.0 13,753.8
Pay Per View Revenue/2/ 4,501.8 5,064.5 5,697.6
--------- --------- ---------
Subtotal Service Revenue $85,154.1 $92,455.0 $99,532.6
Other Revenue:
Advertising Revenue $11,774.1 $13,245.9 $14,901.6
Installation 856.3 877.7 899.6
Equipment Rentals 3,180.2 3,498.2 3,848.0
Franchise Fees 3,045.1 3,227.8 3,421.5
FCC Pass Thru Revenue 101.0 107.1 113.5
Other Revenue 3,585.5 3,944.1 4,338.5
---------- --------- ----------
Subtotal Other Revenue $ 22,542.2 $24,900.8 $27,522.7
Total Revenue $107,696.3 $117,355.8 $127,055.3
- ------------------------------------
/1/ Basic commercial and pay revenue projected to increase at a 2.5% annual
rate.
/2/ Pay Per View revenue projected to increase at a 12.5% annual rate.
/3/ Franchise Fees and FCC Pass Through Revenue projected to increase based
upon a subscriber growth rate of 6%. See text.
-25-
THE CABLE TV FUND 12 CABLE TELEVISION SYSTEM DISCOUNTED CASH FLOW ANALYSIS
- -------------------------------------------------------------------------
SYSTEM REVENUE PROJECTIONS
- --------------------------
Most of the revenue projections appearing in Table 4 are calculated by
multiplying the number of subscribers to a particular level of service by the
projected rate.
Commercial service revenue is projected to increase at an annual rate of
2.5%, based upon management expectations for the system. Similarly, pay-per-
view service revenue is projected to increase at a 12.5% annual rate through
2007, based upon management's projections.
Commercial advertising revenue is projected to increase at a 12.5% annual
rate through 2007. Annual installation revenue was projected to grow at a
compound annual rate of 2.5% during the projection period. Equipment rental
revenues, as well as other revenues, are also projected to increase by 10%
annually through 2007.
As indicated in Table 4, total system revenues are projected to increase
from $55.0 million in 1997 to $127.1 million in 2007.
OPERATING PROFIT MARGINS
- ------------------------
Operating profit margins are based upon historical operating performance of
the Albuquerque System. Operating profits are defined as profit before interest,
depreciation, tax, and corporate allocation charges. During the past three
years, system operating profit
-26-
margins have been within the 42.1% to 45.0% range. For the purposes of this
analysis, the system's 1996 operating profit margin of 42.3% has been used.
DEPRECIATION
- ------------
Depreciation expense for each year has been determined using the MACRS
schedule for Five, Seven, 15, and 39 Year Property, based upon the reported cost
of fixed assets present at the system.
FEDERAL, STATE, AND LOCAL TAX RATES
- -----------------------------------
An estimated tax rate of 38.1% was applied to the projected taxable income
of the system. This estimated rate reflects the effective combined federal,
state, and local tax rates in effect on April 30, 1997.
SUBSEQUENT CAPITAL EXPENDITURES
- -------------------------------
Subsequent annual capital expenditures were estimated to approximate $13.4
million annually, based upon management projections. These expenditures are
necessary in order to replace assets that become irreparable, technically
obsolete, or for other reasons are no longer useful to the system. In addition,
as the system matures, additional equipment and facilities will be necessary to
improve and expand its productive capacity.
-27-
NET AFTER-TAX CASH FLOW
- -----------------------
Net after-tax cash flow was determined in two steps. After taxes were
subtracted from the system's taxable income, non-cash depreciation expenses were
added back to net income to yield after-tax cash flow. From the after-tax cash
flow, the provision for subsequent capital expenditures was deducted to
calculate net after-tax cash flows.
DISCOUNT RATE
- -------------
A discount rate of 12% was used to calculate the present value of the net
after-tax cash flows. In order to account for the risk associated with
investments in the cable television industry and the system in particular, a
premium was added to a base discount rate to develop the 12% rate employed in
this analysis. The base rate reflects application of the Weighted Average Cost
of Capital ("WACC") model.
RESIDUAL CASH FLOW MULTIPLE
- ---------------------------
The residual cash flow multiple refers to the factor used to estimate the
system's value at the end of the projection period. A multiplier of 10 was
applied to the Year 10 operating cash flow. Generally, multiples used in the
valuation of cable television systems of this type range from 8.0 to 12.0 times
operating cash flow, depending upon market conditions and profit potential.
Exceptional circumstances will warrant multiples outside of this range.
-28-
The selected multiple of 10 was used to estimate the value of the system at
the end of the investment period. This multiple reflects the state of the
market for cable television systems as of April 30, 1997, tempered by the
economic conditions of the system's franchise service area, the necessity for a
system rebuild, the uncertainty introduced by re-regulation of the cable
television industry, and the prospects for increased competition from wireless
cable companies and DBS operators.
PRESENT VALUE OF RESIDUAL
- -------------------------
In the analysis, capital gains taxes were deducted from the discounted
terminal value at a rate of 38.1%. This result was then discounted for present
value using a rate of 12%.
The results of the discounted cash flow analysis are summarized in Tables 5
and 6. Based upon the assumptions outlined above, the indicated fair market
value of the system's non-current assets is $221,349,800. This value
incorporates the cumulative present value of the net after-tax cash flow of
$102,873,500 and the discounted residual value of $118,476,300.
-29-
TABLE 5
-------
CABLE TV FUND 12 CABLE TELEVISION SYSTEM DISCOUNTED CASH FLOW ANALYSIS
(Dollar Amounts Shown in Thousands)
1997 1998 1999 2000 2001 2002 2003
---- ---- ---- ---- ---- ---- ----
Projected System
Revenues/1/ $55,006.60 $59,420.70 $64,636.40 $70,334.30 $76,559.60 $83,343.80 $90,757.70
Operating Profit
Margin/2/ 42.3% 42.3% 42.3% 42.3% 42.3% 42.3% 42.3%
Operating Cash Flow/3/ $ 23,267.8 $ 25,135.0 $ 27,341.2 $ 29,751.4 $ 32,384.7 $ 35,254.4 $ 38,390.5
Less: Depreciation 21,157.9 30,540.4 28,365.1 26,924.4 26,331.5 27,065.6 27,813.4
---------- ---------- ---------- ---------- ---------- ---------- ----------
Taxable Income $ 2,109.9 ($5,405.4) ($1,023.9) $ 2,827.0 $ 6,053.2 $ 8,188.8 $ 10,577.1
Taxes 803.9 (2,059.5) (390.1) 1,077.1 2,306.3 3,119.9 4,029.9
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net Income $ 1,306.0 ($3,345.9) ($633.8) $ 1,749.9 $ 3,746.9 $ 5,068.9 $ 6,547.2
Add Back: Depreciation 21,157.9 30,540.4 28,365.1 26,924.4 26,331.5 27,065.6 27,813.4
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net After-Tax Cash Flow $ 15,140.7 $ 27,194.5 $ 27,731.3 $ 28,674.3 $ 30,078.4 $ 32,134.5 $ 34,360.6
Capital Expenditures/4/ 9,031.6 13,400.0 13,400.0 13,400.0 13,400.0 13,400.0 13,400.0
---------- ---------- ---------- ---------- ---------- ---------- ----------
Net After-Tax Cash Flow $ 6,109.1 $ 13,794.5 $ 14,331.3 $ 15,274.3 $ 16,678.4 $ 18,734.5 $ 20,960.6
Present Value Net
After-Tax Cash Flow $ 5,880.2 $ 12,076.0 $ 11,201.7 $ 10,659.7 $ 10,392.5 $ 10,422.9 $ 10,411.9
Cumulative Present Value
Net After-Tax Cash Flow $ 5,880.2 $ 17,956.2 $ 29,157.9 $ 39,817.6 $ 50,210.1 $ 60,633.0 $ 71,044.9
Cumulative Present Value
Net After-Tax Cash Flow $102,873.5
==========
2004 2005 2006 2007
---- ---- ---- ----
Projected System
Revenues/1/ $98,860.60 $107,696.30 $117,355.80 $127,055.30
Operating Profit
Margin/2/ 42.3% 42.3% 42.3% 42.3%
Operating Cash Flow/3/ $ 41,818.0 $ 45,555.5 $ 49,641.5 $ 53,744.4
Less: Depreciation 26,170.1 23,934.3 23,934.2 22,643.6
---------- ----------- ----------- -----------
Taxable Income $ 15,647.9 $ 21,621.2 $ 25,707.3 $ 31,100.8
Taxes 5,961.8 8,237.7 9,794.5 11,849.4
---------- ----------- ----------- -----------
Net Income $ 9,686.1 $ 13,383.5 $ 15,912.8 $ 19,251.4
Add Back: Depreciation 26,170.1 23,934.3 23,934.2 22,643.6
---------- ----------- ----------- -----------
Net After-Tax Cash Flow $ 35,856.2 $ 37,317.8 $ 39,847.0 $ 13,657.8
Capital Expenditures/4/ 13,400.0 13,400.0 13,400.0 4,368.4
---------- ----------- ----------- -----------
Net After-Tax Cash Flow $ 22,456.2 $ 23,917.8 $ 26,447.0 $ 9,289.4
Present Value Net
After-Tax Cash Flow $ 9,959.7 $ 9,471.4 $ 9,350.8 $ 3,046.7
Cumulative Present Value
Net After-Tax Cash Flow $ 81,004.6 $ 90,476.0 $ 99,826.8 $ 102,873.5
- ------------------------------------------
/1/ See Table 4.
/2/ Based upon actual year end 1996 system operating cash flow margin. See
text.
/3/ 1997 and 2007 net after-tax cash flows adjusted for partial years.
/4/ 1997 and 2007 capital expenditures adjusted for partial years.
-30-
TABLE 6
-------
VALUATION OF CABLE TV FUND 12 CABLE TELEVISION SYSTEM
(INCOME APPROACH)
(Dollar Amounts Shown in Thousands)
Year 10 Operating Cash Flow/1/ $ 53,744.4
10 X Cash Flow Multiple/2/ 537,444.0
Capital Gains Tax 169,474.7
----------
Future Residual Value $367,969.3
Discounted to Present Value @ 12% $118,476.3
Plus: Cumulative Present Value
Net After-Tax Cash Flow/1/ 102,873.5
----------
Valuation of Albuquerque System (Income Approach) $221,349.8
==========
- ---------------------------------------
/1/ See Table 5.
/2/ See text.
-31-
COMPARABLE SALES ANALYSIS
- -------------------------
The value of $221.3 million yielded by the discounted cash flow analysis of
the Albuquerque System corresponds to a 10.6 times multiple of the system's 1996
cash flow. This multiple is slightly above the range of prices paid by
purchasers of similar cable properties but is consistent with the expectation of
increased revenues in the Albuquerque area and continued above average market
growth.
In recent years, there have been many sales of cable television systems in
the United States. Table 7 identifies six cable television system sales which
occurred within the past year. These sales have been selected based upon their
comparability to the Albuquerque System. The prices paid for these comparable
systems range from $5.5 million to $171.2 million.
As shown in Table 7, the price per subscriber has been computed for each of
these sales. This measure is calculated by dividing the reported purchase price
of the cable television system by the total number of basic subscribers. The
average price per subscriber paid for the six comparable cable television system
sales transactions listed in Table 7 is approximately $1,971.
-32-
TABLE 7
-------
CABLE TELEVISION SYSTEM COMPARABLE SALES
Price
Price Per Sub
Date Location Seller Buyer (mil.) (000)
- ---- -------- ------ ----- ----- -------
Oct. 96 Roseville, CA Jones 87-A Roseville Cable $ 31.0 $1,938
Sept. 96 Rosenburg, TX Jones Spacelink TCI 5.5 1,896
Jan. 97 Palo Alto, CA Palo Alto Co-Op. Sun Country Cable 54.1 2,042
Jan. 97 Jonesburo, AR TCI TCA 41.0 2,000
Feb. 97 Independence, MO Jones Intercable Jones Intercable 171.2 2,004
Feb. 97 Hickory, NC Prime Cable Charter Communications, Inc. 68.1 1,946
------ ------
Average $ 61.8 $1,971
====== ======
Source: Announced cable television sales data from Paul Kagan Associates
Cable TV Investor.
-----------------
Note: Price per subscriber calculations may show slight rounding discrepancy.
-33-
CABLE TV FUND 12 CABLE TELEVISION SYSTEM
ALBUQUERQUE, NEW MEXICO
APPRAISAL OF NON-CURRENT ASSETS AS OF APRIL 30, 1997
CONCLUSION
-----------
Based upon the application of the income approach, employing a discounted
cash flow analysis, the fair market value of the non-current assets of the Cable
TV Fund 12 cable television system was determined to be $221,349,800.
Assumptions employed in this analysis include subscriber growth, system
revenue projections, and operating profit margins. These assumptions and the
results of the discounted cash flow analysis were confirmed through an
independent analysis of comparable sales transactions.
-34-
EXHIBIT A
QUALIFICATIONS OF JAMES R. BOND, JR., JULIE A. KROSKIN, AND TRACY A. HOGAN
PROFESSIONAL EXPERIENCE AND QUALIFICATIONS
------------------------------------------
JAMES R. BOND, JR.
------------------
James R. Bond, Jr. is a principal in the consulting firm of Bond & Pecaro, Inc.,
a Washington based consulting firm specializing in valuations, asset appraisals,
and related financial services for the communications industry. In this
capacity, he is routinely retained to examine and study economic issues which
affect media businesses.
Before the formation of Bond & Pecaro, Inc., Mr. Bond was a Vice President with
Frazier, Gross & Kadlec, Inc. Mr. Bond joined that firm in 1978, was appointed
Manager of Asset Appraisal Services in 1979, and in 1982 was named Vice
President. In this capacity he engaged in the development and preparation of
asset appraisal reports for owners of broadcast and cable television properties.
Mr. Bond has been retained to appraise, for a fee, the assets of over 1,500
radio, television, radio common carrier, and cable television properties. He is
a member of the Society of Broadcast Engineers (SBE), the Cable Television Tax
Professionals Institute (CTTPI), and the Society of Cable Television Engineers
(SCTE). He is a member and director of the Broadcast and Cable Television
Financial Management Association (BCFM), and serves on the National Association
of Broadcasters (NAB) Tax Advisory Panel and Depreciation Task Force. Mr. Bond
is a Certified Senior Radio Broadcast Engineer (SBE), a Certified Senior
Television Broadcast Engineer (SBE), and holds an FCC First Class Radiotelephone
Operator License.
He has testified as an expert witness in connection with numerous
telecommunications valuation matters before federal, state, and local courts.
Mr. Bond received a Bachelor of Arts degree in Radio, Television, and Motion
Pictures for the University of North Carolina at Chapel Hill in 1976. Mr. Bond
also holds a Masters Degree in Business Administration for the University of
Virginia in Charlottesville, Virginia.
PROFESSIONAL EXPERIENCE AND QUALIFICATIONS
------------------------------------------
JULIE A. KROSKIN
----------------
Julie A. Kroskin is an associate in the firm of Bond & Pecaro, Inc., a
Washington based consulting firm specializing in valuations, asset appraisals,
and related financial services for the communications industry.
Ms. Kroskin received a Bachelor of Arts degree in Radio, Television and Film
from the University of Maryland at College Park.
Prior to her association with Bond & Pecaro, Inc., Ms. Kroskin worked as a
customer and technical support representative at American Cablecom in
Beltsville, Maryland.
PROFESSIONAL EXPERIENCE AND QUALIFICATIONS
------------------------------------------
TRACY A. HOGAN
--------------
Tracy A. Hogan is an associate with the consulting firm of Bond & Pecaro, Inc.,
a Washington based consulting firm specializing in valuations, asset appraisals,
and related financial services for the communications industry.
Ms. Hogan received a Bachelor of Arts degree Cum Laude in German, with
distinction in her major field of study, from the University of Wisconsin at Eau
Claire. Additionally, she minored in Telecommunications and Radio/Television
Production.
Prior to her association with Bond & Pecaro, Inc., Ms. Hogan was station manager
for the campus cable television station at the University of Wisconsin at Eau
Claire. She has also worked in television and radio production.