EXHIBIT 99(b)(2)
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CONFIDENTIAL (to the 3 Fund 12 Rule 13e-3
============ Transaction Statements)
JONES INTERCABLE, INC.
Valuation of Palmdale/Lancaster System
February 23, 1998
WALLER CAPITAL
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CORPORATION
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Table of Contents
INTRODUCTION.......................................................I
STATE OF THE CABLE MARKET.........................................II
SYSTEM OVERVIEW..................................................III
VALUATION.........................................................IV
Scope and Approach
Methodology
DCF Analysis Summary
COMPARABLE TRANSACTION ANALYSIS....................................V
APPENDIX..........................................................VI
DCF Valuation
Comparable Transaction Valuation
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INTRODUCTION
At the request of Jones Intercable, Inc. ("Jones" or the "Company"), Waller
Capital Corporation ("Waller Capital") has conducted an appraisal of the fair
market value of the cable television system serving the Palmdale/Lancaster area
of California which is owned by a joint venture of Cable TV Funds 12-B, 12-C and
12-D (the "System"). This valuation,, as directed, assumes independence from the
Littlerock system owned by Cable TV Fund 14-B. As of December 31) 1997,, the
System passed 87,773 homes and served 65,447 equivalent basic subscribers for a
penetration rate of 72%.
Neither Waller Capital nor any of their representatives have any active or
contemplated direct interest in Jones, the Cable TV Fund or any of its
affiliates, except for incidental shareholdings of Jones.
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STATEMENT OF APPRAISAL ASSUMPTIONS AND LIMITING CONDITIONS
This appraisal has been prepared pursuant to the following general assumptions
and general limiting conditions:
1. We assume no responsibility for the legal description or matters including
legal or title considerations. Title to the subject assets, properties, and
business interests are assumed to be good and marketable unless otherwise
stated.
2. The subject assets, properties, and business interests are appraised free and
clear of any or all liabilities, liens and encumbrances unless otherwise
stated.
3. We assume responsible ownership and competent management with respect to the
subject assets, properties, or business interests.
4. The information furnished by others is believed to be reliable. However, we
issue no warranty or other form of assurance regarding its accuracy.
5. We assume that there is full compliance with all applicable Federal, state,
and local regulations and laws unless noncompliance is stated, defined, and
considered in the appraisal report.
6. We assume that all required licenses, certificates of occupancy, consents, or
legislative or administrative authority from any local, state or national
government, private entity or organization have been or can be obtained or
renewed for any use on which the valuation opinion contained in this report
is based.
7. Possession of this valuation opinion presentation, or a copy thereof, does
not carry with it the right of publication. It may not be used for any
purpose by any person other than the party to whom it is addressed without
our written consent and, in any event, only with proper written
qualifications and only in its entirety.
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8. We, by reason of this valuation, are not required to give testimony, or to
be in attendance in court with reference to the assets, properties, and
business interests in question unless arrangements have been previously
made.
9. No part of the contents of this presentation shall be disseminated to the
public through advertising, public relations, news, sales, or other media
without Waller Capital's prior written consent and approval.
10. We assume no responsibility for any financial reporting judgements which are
approximately those of management. Management accepts the responsibility for
any related financial reporting with respect to the assets, properties, and
business interests encompassed by this appraisal.
11. We have no responsibility to update this presentation for any changes
occurring subsequent to issuance.
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STATE OF THE CABLE MARKET
During 1994, the market for cable systems were dictated by regulatory matters.
RBOC interest early in the year created a near frenzy in the market. Moreover,
the FCC's announced alterations to current rate regulation schemes on February
22nd caused a serious market disruption. The market's bellwether transaction,
Bell Atlantic/TCI, collapsed, bringing the market for cable systems down.
Southwestern Bell's deal with Cox also unraveled. Other RBOCs were soon to
follow Bell Atlantic's lead and the demand for cable systems was greatly
reduced.
The transaction marketplace stalled until mid-summer 1994, as cable operators
once again worked to understand the impact of potential 17% basic rate rollbacks
and unclear cost-of-service guidelines. However, as in the prior year, cable
operators were willing to focus on acquisition opportunities once they
assimilated these changes. Perhaps the forces driving consolidation were now
even stronger as competition from telephone companies was more likely. The
necessity to amass capital and critical market mass to compete in voice and data
telecommunications was more evident.
Transaction activity picked up strongly in the second half of 1994 despite
generally weak capital markets. Commercial banks were supportive of the largest
MSOs, with commercial bank capital in short supply for many smaller and mid-
sized operators. The high yield debt market was weak, as rising short-term rates
limited demand
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among high yield buyers. Public equity markets were depressed due to the exodus
of RBOCs. However, many sellers were willing to accept securities from buyers,
the sale of Times Mirror, Summit Communications and Newhouse Broadcasting being
noteworthy.
Competitive forces increased their pressures upon the cable industry in late
1994 with two new digital DBS/DSS providers joining the four-year veteran
PrimeStar Partners ("PrimeStar") owned by GE American Communications. October
saw the launch of GM-Hughes Electronics' DirecTV ("DirecTV") and Hubbard
Broadcasting's United States Satellite Broadcasting ("USSB"), both using the
much-publicized 18-inch (Ku-band) digital satellite dish technology. The reduced
size of these antennae, coupled with broad channel offerings and digital-quality
audio, in large measure offset the initial high startup equipment price
associated with the new systems, and demand for the dishes was very brisk. While
most attractive to rural customers outside cable service areas, the DBS/DSS
systems are also very competitive inside cable service areas in the market for
premium and tier-level customers. The entry of DirecTV and USSB, along with
PrimeStar, has subjected cable MSOs in many areas to effective competition,
placing pressure on service rates. This pressure is likely to increase in the
future as DBS/DSS providers introduce interactivity to their product offerings.
By year-end 1994, the market for systems had stabilized. In addition, the fall
elections brought optimism on the regulatory front. Republican Senate Commerce
Committee chairman Larry Pressler introduced legislation that
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aimed to achieve sweeping cable/telecommunications deregulation and reform. The
market was enthusiastic that an approved bill would provide for the repeal of
the current federally controlled cable rate structure, and fully open the local
cable and telephony markets to both MSOs and telcos. In addition, the
legislation contemplated allowing the RBOCs to enter long-distance and telecom
equipment making markets, as well as relax the restrictive broadcast station
ownership rules currently in place.
1995 was a year of restructuring, mergers, acquisitions, strategic joint-
ventures, leveraging and the beginning of a what will prove to be a long battle
for the multimedia consumer dollar. Telcos, MSOs and long-distance carriers
("LDC"s) formed alliances in an attempt either to protect themselves from
unserved areas or to complement their current product offerings: 1) Bell
Atlantic/NYNEX (wireless, video programming) ii) U.S. West/Pactel's Airtouch
Communications (wireless); iii) AT&T/McCaw Cellular (wireless); iv)
Disney/BellSouth/Ameritech/SBC Communications (programming); v) MCI/News Corp.
(DBS, Internet); vi) Sprint/TCI/Comcast/Cox (cable, wireline and wireless
telephony). Perhaps the last alliance is the most telling of what will be MSO's
preferred method of competing in an open playing field where consumers can
choose one provider for cable, telephony and long-distance. Senator Pressler's
pending telecommunications reform legislation reform has caused cellular
providers, MSOs and LDCs to rethink their growth and product strategies in an
open, competitive environment and without exclusive franchise areas or protected
products.
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Over $20 billion in mergers were announced or closed in the cable industry
during 1995, including Time Warner/Cablevision Industries,, Intermedia/Viacom,
TCI/Viacom, Time Warner/Houston Industries (Paragon/KBLCOM), Comcast/E.W.
Scripps, Marcus/Sammons and Gannett/Multimedia. Through June 30, 1996, cable
systems serving 6.7 million subscribers were sold in deals valued at $13.7
billion, ahead of last years record of $10 billion over the same period. The
major deal of 1996 was US West Media's acquisition of Continental's cable
systems for $9.2 billion. MSOs faced the key operating decision of whether to
consolidate into strategic clusters or to sell to the highest bidder. Access to
capital was a key factor in this decision. The enormous expected costs to
upgrade cable plant using fiber so that voice and data transmission would be
possible prompted MSOs to look for scale economies by growing quickly via
acquisitions.
While the demand for capital remained strong throughout the year, the supply of
capital was also available through private and public debt markets to qualified
MSOs. In addition, an abundance of private equity was available to cable
companies as demonstrated by the following: 1) Austin Ventures/B.T. Capital
extended $20 million to Classic Cable; ii) Calpers extended $250 million to
Comcast; iii) Goldman Sachs extended $180 million to Marcus Cable; iv) Hicks
Muse extended $115 million to Marcus; v) J.P. Morgan extended $125 million to
FrontierVision; vi) Kelso/Charterhouse extended $300 million to Charter
Communications; and vii) Spectrum Partners/Fleet Ventures/T.A. Associates
extended $50 million to Galaxy.
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Two significant events have occurred in the regulatory arena which have
essentially removed the burdens imposed by the 1992 Cable Act on small cable
operators. As a result, small cable operators will have substantial flexibility
to increase rates based more on business and market considerations than on
regulatory limits. In June, 1995, the Federal Communications Commission issued
an order (the "Small Systems Order") adopting new rules that reduce the
regulatory burdens of the 1992 Cable Act on small cable systems that own MSOs
serving fewer than 400,000 subscribers. Under the Small Systems Order, the
regulatory benefits accruing to small cable systems remain effective even if
such systems are later acquired by an MSO that serves in excess of 400,000
subscribers. More recently, Congress enacted the 1996 Telecom Act that provides
regulatory relief for companies serving fewer than 600,000 subscribers. These
two events have allowed qualified MSOs to begin raising cable rates. This bodes
well for future growth in the cable industry's revenue and cash flow figures.
DBS competition has grown into a credible threat to cable's subscriber base.
Primestar, DirecTV, USSB and Echostar have acquired subscribers at an increasing
rate. Due to several multi-million dollar marketing campaigns, DBS has become a
significant threat to the high-end cable customer. However, the lack of local
broadcast stations, the high cost of initial setup and certain logistical
problems have hampered wide-scale defections to DBS services.
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RBOCs have also entered the video market by acquiring wireless cable operators,
or MDS/MMDS operators. The markets believe that RBOCs view wireless cable as a
short-term, stopgap measure to deliver video to the home, while they are
developing a long-term, cost-effective, quality delivery method.
During 1997, the cable industry continued to exhibit attractive opportunities
for growth and appreciation to well positioned MSOs. Whereas the public equity
markets battered MSOs during 1996, 1997 was a boom year. From the reevaluation
within the public market to the funds from private equity firms to the lessened
costs of high yield financing, MSO's saw increased investment in their companies
and within the industry. Cable modems and other data services became more of a
reality with an increased focus, improved technologies and increased capital
expenditures. Additionally, with refined compression methods, MSOs have been
able to increase their channel offerings without extensive capital expenditures.
In an effort to achieve economies of scale, clustering and consolidation of
systems continued to be the major goals of MSOs.
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SYSTEM OVERVIEW
Overview
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The System has one headend and serves Lancaster, Palmdale, Edwards Air Force
Base and portions of Los Angeles County and is located in the Antelope Valley of
California. As of December 31, 1997, the Systems passed 87,773 homes with
1,012.7 miles of plant (86.7 homes per mile), and served 65,447 equivalent basic
subscribers, representing a 72% basic penetration. Equivalent pay units totaled
42,731 representing a 65.0% pay penetration. The largest employers of the area
are Edwards Air Force Base, Plant 42, Boeing and Lockheed. Recently, the
Antelope Valley has become the West Coast distribution center for Frito Lay,
Coca-Cola, UPS, Rite Aid, Lance Campers and Michael's Furniture.
Customer Service.
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The System is operated from one full-service office in Palmdale, California. The
System employs 23 full-time and 9 part-time Customer Service representatives.
There is a large percentage of walk-in traffic due to the prevalent delay in
mail delivery within the area.
Technical Profile
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The System has one headend and eight receive sites. In addition to the 1,012.7
miles of coaxial plant, the system also has 83.95 miles of fiber plant.
Currently, the longest trunk amplifier cascade is 10 amps and the longest line
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extender cascade is 2. Recently, the System completed a 159-mile
upgrade/retrofit that increased channel capacity from 450 MHz to 550 MHz. Also
included in thus project was a 15 mile fiber extension which reduced amplifier
cascades and provides redundancy.
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SCOPE AND APPROACH
The primary purpose of this valuation is to arrive at the fair market value of
the System. Fair market value is defined as the amount at which a property would
change hands between a willing buyer and a willing seller when neither is acting
under compulsion and when both have reasonable knowledge of all the relevant
facts. The valuation was determined on a cash-for-assets basis.
In arriving at our opinion as to the fair market value of Jones's cable
television System, we utilized audited and unaudited financial statements,
visited the System, met with the management of Jones to discuss its business,
current operations and prospects, analyzed published financial and operating
information considered by us to be comparable or related to the Company's cable
television System, and made other financial studies, analyses and investigations
as we deemed appropriate.
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POSITIVE AND NEGATIVE OBSERVATIONS
As outlined below, numerous elements, both quantitative and qualitative, were
factored into our valuation. We highlight below some of these elements that were
considered.
Positive Observations
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. Attractive Demographics: Average household income, as calculated by National
Decision Systems, is $64,743, significantly higher than the U.S. average
($55,449). Due to the technical profile of the largest employers (aerospace
and defense), the residents of the area are also highly educated.
. High Growth: As calculated by National Decision Systems, the area has
experienced substantial growth in households from 1980 - 1990 (100.88%). The
area's households are expected to grow over 3% per year from 1997 to 2000.
. Technical Condition: We believe that the market would judge the 550 Mhz
capacity to be sufficient for this market for the near future.
Negative Observations
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. Future Competition: While there is no current wireless competition, there
exists the potential that a buyer of the PacBell wireless operation, which
could be available for acquisition could have a serious impact in the area
due to its flat geography.
. Economic Diversity: The local economy, while increasingly diversified, still
is heavily dependent on the aerospace and defense industries.
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METHODOLOGY
The general methodology of the appraisal was to evaluate the Discounted Cash
Flow ("DCF") stream generated by the System over a ten-year period (fiscal 1998
to 2007), applying all relevant market and economic factors. The ten-year
projections were prepared by using Company projections as well as Waller
Capital's industry estimates. Developing projections required a general
understanding of the Company's current business and future plans. This
understanding was obtained through on-site due diligence, a review of ii) the
1998 System operations budget prepared by the Company, ii) other operating and
subscriber data and projections; and iii) demographic data as it relates to the
System's service area.
A sale was assumed to occur in the tenth year (2007) of the DCF model. The cash
flow sales multiples selected reflect the long-term prospects for cash flow
growth and the cash flow quality of the System. The multiple selected also
accounted for the presumed technical condition of the System at the time of
sale. The multiple selected was applied against the full tenth-year System cash
flow.
This analysis utilized a discount rate of 14% derived from Waller Capital's
Weighted Average Cost of Capital ("WACC") model. The Discount rate was
commensurate with a probable buyer's capital structure, operating risk and other
factors associated with the operations of Jones. The discount rate used was
consistent with the WACCs
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for an average cable buyers, private or public, and adjusted for certain factors
such as size, liquidity, leverage and risk associated with a typically cable
System buyer.
Waller Capital's analysis was further supported by comparable System sales.
Waller Capital examined specific transactions to determine if an appropriate
multiple of cash flow could be derived from current market information. Waller
Capital examined multiples from announced and completed cable television
transactions for 1996 and 1997, relying upon data from transactions executed by
Waller Capital, from Paul Kagan Associates, Inc., and general industry
information. However, comparable sales data is difficult to generalize from
because of the variability of factors such as System size, growth prospects,
penetration, location, demographics, technical System condition and franchise
terms,, which are often not publicly available. Given these limitations, Waller
Capital is of the opinion that comparable sales data offers only an
approximation of factors that help devise a fair market value and is used as a
reasonableness test of the DCF approach to value.
CONCLUSION
BASED ON THE INVESTIGATION AND ANALYSIS OUTLINED IN THIS REPORT,
THE FAIR MARKET VALUE OF THE SYSTEM, AS OF
JANUARY 1, 1998, WAS $142,604,000.
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DISCOUNTED CASH FLOW METHODOLOGY
A discounted cash flow ("DCF") approach was utilized to value the System as DCF
measures the current value of an investment as the present value of its future
economic benefits such as earnings and proceeds from disposition.
A DCF model was developed for the System. While we considered and implemented
some of the projections of revenues and expenses developed by the Company for
1998, industry projections and demographic forecasts were also used in our DCF
model.
To arrive at System cash flow, operating expenses were deducted from projected
revenues. Corporate and regional management allocations were not deducted from
revenue because a potential buyer would not incur these costs when managing the
System. Cash flows recorded on the balance sheet (capital expenditures) were
subtracted from System cash flow to determine debt free net cash flow. In
addition, we incorporated our estimates of long-term growth, discount rate,
inflation and other factors. Our DCF analysis yielded the value of the System.
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INCOME STATEMENT SUMMARY
Homes Passed and Subscriber Revenues
HOMES PASSED:
Homes passed growth was projected based on a combination of management's
projections, trailing homes passed growth, economic variables, discussions with
management, future prospects and unserved areas reachable by existing plant.
This analysis resulted in homes passed growth of approximately 1.5% per annum.
over the 10-year projection period.
BROADCAST/BASIC SUBSCRIBERS:
Broadcast and Basic services were combined,, in order to easily evaluate these
rates. The Broadcast/Basic tier reflect the subscribers that utilize the most
highly penetrated service in the System's rate package. Subscriber growth
estimates was based on a combination of factors including management's
forecasts, the System's demographics, current penetration, historical trends,
availability of off-air signals, local competition, current rates, service
offerings, and the technical quality of the System plant.
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PAY SUBSCRIBERS:
Pay subscriber growth was based on a combination of factors including
management's projections, the System's demographics,, current penetration,
historical trends, availability of off-air signals, other entertainment
alternatives, rates, service offerings, and the technical quality of the System
plant.
PPV MOVIES AND EVENTS:
PPV Movies and Events ("PPV") were combined and projected based on management
forecasts, discussions with management, economic variables, historical trends,
the availability of other entertainment alternatives and the technical quality
of the System's plant.
Revenues
BROADCAST/BASIC REVENUE:
For the purposes of this analysis, Broadcast, Basic and NPT rates were combined
and analyzed against the number of basic subscribers. Rate growth was projected
after considering current rates and a combination of factors including the
community's demographics, current penetration, historical trends, availability
of off-air signals, service offerings, and the technical quality of the System
plant.
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PAY REVENUE:
Pay Revenue was determined by considering current weighted rates and a
combination of factors including the System's demographics, current penetration,
historical trends, inflation rate, service offerings, and the technical quality
of the System plant.
PPV Revenue:
PPV Revenue was determined by considering current rates and a combination of
factors including the System's demographics, current penetration, historical
trends, availability of off-air signals, service offerings, and the technical
quality of the System plant.
ADVERTISING REVENUE:
Advertising Revenues were projected based on management's projections, economic
variables, discussions with management and historical trends. Advertising
revenues were projected using varying growth rates which increased over the I 0-
year projection period.
OTHER REVENUES:
Other Revenues were projected based on management's projections, economic
variables, discussions with management, the technical quality of the System
plant, and historical trends, as well as, new services potentially
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offered with the completion of a rebuild. Other Revenues include but are not
limited to the following: connection charges, converter rental revenue, late
fees and home shopping revenues. Other revenues were projected over the 10-year
projection period using varying growth rates and are expected to increase as new
services, such as cable modems and telephony services become available.
Operating Expenses
The following expenses reduced revenues in order to determine System cash flow:
PERSONNEL RELATED EXPENSES:
Personnel Expenses were determined by growing the 1997 Expense by a factor that
reflects inflation and customary increases in wages.
SUBSCRIBER RELATED EXPENSES:
Subscriber Related Expenses, which includes basic and tier programming costs and
customer billing, were determined by growing the 1997 Expense by a factor based
on discussions with management, increases in subscribers, the System's channel
line-up and the technical quality of the System plant.
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REVENUE RELATED EXPENSES:
Revenue Related Expenses, which includes franchise fees, bad debt expense and
premium programming costs, were determined by growing the 1997 Expense by a
factor based on discussions with management, increases in subscribers, the
System's channel line-up and the technical quality of the System plant.
PAY-PER-VIEW EXPENSE:
Pay-Per-View Expense was determined by growing the 1997 expense by the inflation
rate over the 10-year projection period.
SYSTEM PLANT EXPENSES:
System Plant Expenses were determined by growing the 1997 Expense by a factor
based on historical trends as well as projected increases in subscribers and
plant extensions.
SYSTEM OFFICE RELATED EXPENSE:
System Office Related Expense was determined by growing the 1997 expense by the
inflation rate over the I 0-year projection period.
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MARKETING RELATED EXPENSES:
Marketing Expense were based on discussions with management and were driven by
such factors as marketing efforts to retain pay subscribers, the growth in local
business advertising and technical System upgrades that would provide new
products in need of promotion.
ADVERTISING:
Advertising Expense was determined by growing the 1997 expense by the inflation
rate over the I 0-year projection period.
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CAPITAL EXPENDITURE SUMMARY
System cash flow was then reduced by capital expenditures to determine debt free
net cash flow.
Recently the System was upgraded/retrofitted to increase channel capacity from
450 MHz to 550 MHz. Included through this upgrade was a 15-mile fiber extension
that further reduced amplifier cascades and provides redundancy. Currently, the
longest trunk amplifier cascade is 10 Amps.
In the future, to increase service rates and add new services needed to compete
with DBS, such as Internet access or digital services, Jones will need to
rebuild its System to 750 MHz. The capital expenditures needed to rebuild the
System are spread over 1999 and 2001 at $15,000 per mile. We have assumed a $35
per subscriber cost for maintenance costs per year.
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TERMINAL VALUE / DISCOUNT RATE
Terminal Value
The valuation model utilized an exit multiple (which was applied to the 10th
year's cash flow) thereby assuming a sale of the System at the end of the DCF
projection period. The exit multiple utilized was 9.0x. The exit multiple was
determined after analyzing current and projected demographics, System growth
prospects, the technical condition of the System at the time of sale and
projected financial performance. We also considered the logical buyers for
System, which is determined principally by the consolidation that has already
occurred in the System's general market, and the characteristics of the System
within the Company's market.
Discount Rate
The resultant debt-free net cash flow streams and terminal value were discounted
back to the present value at a 14% discount rate. This discount rate was based
on the risk-adjusted industry Weighted Average Cost of Capital ("WACC"). WACC is
estimates of the overall rate of return required for an investment by both
equity and debt owners. Determination of the weighted average cost of capital
required a separate analysis of the cost of equity and the cost of debt.
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The equity component was determined by using the Capital Asset Pricing Model
("CAPM"). The CAPM incorporates estimates of the risk-free rate for the use of
funds, an equity risk premium, an industry premium (Beta), as well as the risks
inherent with a specific investment in the System. The debt component of the
cost of capital was determined by using the after-tax cost of debt appropriate
for the Company.
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COMPARABLE TRANSACTION ANALYSIS
The System has approximately 65,447 subscribers serviced from a single headend.
For a comparable System sales analysis, we utilized System of similar size and
characteristics of the System. Comparables were selected for a variety of
criteria including size, multiple locations, single headends and similar
demographics. The following is a summary of the comparable transactions
completed in 1996 and 1997. See the Appendix for the complete listing of
comparable transactions.
Aggregate Basic Value/ Cash SCF
Value Subs Sub Flow Multiple
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($ million) (000) (millions)
1996 Totals/Weighted Average $468 250 $1,869 $49 9.56x
1997 Totals/Weighted Average $519 295 $1,760 $55 9.42x
Source: Waller Capital Corp.; Paul Kagan Associates
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The comparable System sales analysis yielded a value per subscriber of $1,810
and a cash flow multiple of 9.5x. This, combined with the better quality of the
System, supports and validates Waller Capital's analysis which resulted in an
aggregate value for Jones System of $2,179 per subscriber and an 10.5x 1997 cash
flow multiple.
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JONES INTERCABLE 23-Feb-98 7:18 PM
PALMDALE
MSO STATISTICS
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Projected
-------- FYE 12/31,
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Year 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Period 1 2 3 4 5 6 7 8 9 10
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OPERATIONS STATISTICS
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% Growth
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Homes Passed (1) 87,773 88,380 89,706 91,948 93,328 94,727 96,148 97,591 99,054 100,540 102,048
% Growth N/A See Years 0.7% 1.5% 2.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5%
Plant Miles 1,013 1,020 1,035 1,061 1,077 1,093 1,109 1,126 1,143 1,160 1,177
Homes Per Mile 86.7 86.7 86.7 86.7 86.7 86.7 86.7 86.7 86.7 86.7 86.7
EQUIVALENT BASIC UNITS 65,447 See Years 66,285 68,176 70,340 71,862 72,940 74,034 75,145 76,272 77,416 78,577
% Growth N/A 1.3% 2.9% 3.2% 2.2% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5%
% Penetration 74.6% 75.0% 76.0% 76.5% 77.0% 77.0% 77.0% 77.0% 77.0% 77.0% 77.0%
Pay Units 42,731 44,391 44,835 45,283 45,736 46,193 46,655 47,122 47,593 48,069 48,550
% Growth N/A See Years 3.9% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0%
% Basic 65.3% 67.0% 65.8% 64.4% 63.6% 63.3% 63.0% 62.7% 62.4% 62.1% 61.8%
PPV 38,833 39,013 39,403 39,797 40,195 40,597 41,003 41,413 41,827 42,245 42,668
% Growth N/A See Years 0.5% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0%
----------
- ------------------------
RATE SUMMARY
- ------------------------
Basic (1) $24.32 $26.92 $28.00 $29.12 $30.28 $31.49 $32.75 $34.06 $35.42 $36.84 $38.32
% Growth 10.7% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0%
Pay $7.04 7.62 7.77 7.93 8.09 8.25 8.41 8.58 8.75 8.93 9.11
% Growth 8.2% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0%
PPV $1.91 2.08 2.16 2.25 2.34 2.43 2.53 2.63 2.74 2.85 2.96
% Growth 8.9% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0%
________________________________________________________________________________
WALLER CAPITAL CORPORATION
________________________________________________________________________________
JONES INTERCABLE 23-Feb-98 7:18 PM
PALMDALE
Discounted Cash Flow Anaysis (000 unless otherwise specified)
----------------------------------------------------------------------------------------
Projected
-------- FYE 12/31,
-------- ----------------------------------------------------------------------------------------
Year 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Period 1 2 3 4 5 6 7 8 9 10
-------- ----------------------------------------------------------------------------------------
- ------------------------
INCOME STATEMENT SUMMARY
- ------------------------ ----------
% GROWTH
----------
REVENUES
Basic $19,104 MSO Stats $21,413 $22,905 $24,577 $26,113 $27,565 $29,098 $30,715 $32,423 $34,226 $36,129
% Growth N/A 12.1% 7.0% 7.3% 6.2% 5.6% 5.6% 5.6% 5.6% 5.6% 5.6%
Pay 3,610 MSO Stats 4,059 4,182 4,308 4,438 4,572 4,710 4,852 4,999 5,150 5,305
PPV 890 MSO Stats 974 1,023 1,074 1,129 1,185 1,245 1,308 1,374 1,443 1,516
Advertising 2,687 Inflation 2,800 2,884 2,971 3,060 3,151 3,246 3,343 3,444 3,547 3,653
Other 3,599 varies 3,800 3,914 4,227 4,565 4,931 5,325 5,751 6,211 6,397 6,589
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
TOTAL REVENUE $29,890 $33,046 $34,907 $37,157 $39,305 $41,404 $43,624 $45,970 $48,451 $50,763 $53,193
% Growth N/A 10.6% 5.6% 6.4% 5.8% 5.3% 5.4% 5.4% 5.4% 4.8% 4.8%
-----------------------------
Inflation Factor 3.00%
-----------------------------
OPERATING EXPENSES
Personnel Expenses $ 2,575 5%+Inflation 2,800 3,024 3,266 3,527 3,809 4,114 4,443 4,799 5,183 5,597
Subscriber Related
Expenses 5,218 See Growth 5,600 5,936 6,292 6,670 7,070 7,494 7,944 8,420 8,926 9,461
% Growth N/A 7.3% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0%
Revenue Related
Expenses 4,470 varies 4,700 5,076 5,482 5,866 6,276 6,716 7,186 7,689 8,227 8,803
Pay-Per-View 523 Inflation 575 592 610 628 647 667 687 707 728 750
System Plant Related
Expenses 1,302 varies 1,450 1,494 1,538 1,584 1,632 1,691 1,731 1,783 1,837 1,892
System Office Related
Expenses 410 Inflation 450 464 477 492 506 522 537 553 570 587
Marketing Related
Expenses 928 varies 1,050 1,082 1,114 1,147 1,182 1,217 1,254 1,291 1,330 1,370
Advertising Related
Expenses 891 varies 1,000 1,030 1,061 1,093 1,126 1,159 1,194 1,230 1,267 1,305
System G/A Expenses 2 varies 3 3 3 3 3 3 3 3 3 3
- - - - - - - - - - -
Total Operating
Expenses $16,318 $17,628 $18,699 $19,843 $21,010 $22,251 $23,573 $24,979 $26,476 $28,071 $29,769
% Growth N/A 8.0% 6.1% 6.1% 5.9% 5.9% 5.9% 6.0% 6.0% 6.0% 6.0%
----------
U.L. SYSTEM CASH
FLOW (EBITDA) $13,572 $15,418 $16,209 $17,314 $18,295 $19,153 $20,051 $20,991 $21,974 $22,693 $23,424
% Margin 45.4% 46.7% 46.4% 46.6% 46.5% 46.3% 46.0% 45.7% 45.4% 44.7% 44.0%
% Growth N/A 13.6% 5.1% 6.8% 5.7% 4.7% 4.7% 4.7% 4.7% 3.3% 3.2%
Revenue/Subscriber
/Month $ 38.06 $ 41.54 $ 42.67 $ 44.02 $ 45.58 $ 47.30 $ 49.10 $ 50.98 $ 52.94 $ 54.64 $ 56.41
SCF/Subscriber
/Year $207.38 $232.60 $237.73 $246.14 $254.58 $262.58 $270.84 $279.34 $288.11 $293.13 $298.10
- --------------------------------------------------------------------------------
WALLER CAPITAL CORPORATION
- --------------------------------------------------------------------------------
Jones Intercable 23-Feb-98 07:18 PM
Palmdale
Discounted Cash Flow Analysis (000 unless otherwise specified)
-------------------------------------------------------------------------------
Projected
FYE 12/31,
------ -------------------------------------------------------------------------------
Year 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Period 1 2 3 4 5 6 7 8 9 10
------ -------------------------------------------------------------------------------
- --------------------------
Summary Valuation Analysis Terminal
- -------------------------- Value
---------
System Cash Flow (EBITDA) $13,572 $15,418 $16,208 $17,314 $18,295 $19,153 $20,051 $20,991 $21,974 $22,693 $23,424 $210,816
% Growth
Upgrade/Rebuild Cap X 15K/Mile 8,321 8,445
Maintenance/New Build
Cap X $35/Sub 2,320 2,386 2,462 2,515 2,553 2,591 2,630 2,670 2,710 2,750
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
Total Capital Expenditures 0 2,320 2,386 2,462 2,515 2,553 10,912 11,075 2,670 2,750 2,832
% of Revenue 0.0% 7.0% 6.8% 6.6% 6.4% 6.2% 25.0% 24.1% 5.5% 5.4% 5.3%
Capex/Basic Sub $ 0.0 $ 35.0 $ 35.0 $ 35.0 $ 35.0 $ 35.0 $ 147.4 $ 147.4 $ 35.0 $ 35.5 $ 36.0
Unlevered Free Cash Flow $13,572 $13,098 $13,822 $14,852 $15,779 $16,600 $ 9,139 $ 9,916 $19,305 $19,943 $20,592
Present Value
Interest Factor 0.9366 0.8216 0.7207 0.6322 0.5545 0.4864 0.4267 0.3743 0.3283 0.2880 0.2880
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ -------
Discounted
Cash Flows $12,268 $11,355 $10,703 $ 9,975 $ 9,205 $ 4,446 $ 4,231 $ 7,226 $ 6,548 $ 5,931 $ 60,717
------------------------
FMV $142,604
------------------------
- ---------------------------------
Assumptions
- ---------------------------------
Value per Sub Multiple of 1997 Value per Sub Multiple of 1998
Discount rate 14.00% 1997 Cash Flow 1998 Cash Flow
Inflation rate 3.0% ------------- ---------------- ------------- ----------------
Exit Multiple
(times EBITDA) 9.0% $2,179 10.5 $2,151 9.2
- ---------------------------------
JONES INTERCABLE, INC.
- --------------------------------------------------------------------------------
Weighted Average Cost of Capital
Debt/ Debt/ Pfd/ Unlevered
Equity Market Total Market (Asset)
Company Name Beta (1) Equity Mkt Cap Equity Beta
- ------------ -------- ------ ------- ------ ---------
Adelphia Communication Corporation 1.16 582.3% 85.3% 0.0% 0.26
Comcast Corporation 1.25 59.7% 37.4% 0.0% 0.92
Cox 0.26 29.0% 22.5% 0.0% 0.22
Century Communications Corp. 0.98 312.1% 75.7% 0.0% 0.34
Cablevision Systems Corporation 1.68 221.0% 68.8% 0.0% 0.72
TCA Cable TV, Inc. 0.81 27.5% 21.6% 0.0% 0.70
Tele-Communications, Inc. 1.16 116.5% 53.8% 0.0% 0.68
Time Warner 1.05 39.5% 28.3% 0.0% 0.85
U S WEST Media 0.77 60.2% 37.6% 0.0% 0.56
-------- ------ ------- ------ ----------
------------------------------------------------------------------------------------
MEAN 1.01 160.9% 47.9% 0.0% 0.58
MEDIAN 1.05 60.1% 37.6% 0.0% 0.68
------------------------------------------------------------------------------------
Relevering of Mean Asset Beta (Mean/Median)
Debt/ Pfd/ Relevered Cost of Cost of Cost of Cost of Cost of
Equity Equity Beta Debt(P/T) Debt(A/T) Preferred Equity Capital(2)
- -------- -------- --------- --------- --------- --------- ------- ----------
110.0% 0.0% 0.97 7.75% 4.7% 0.0% 24.5% 14.1%
120.0% 0.0% 1.01 7.95% 4.8% 0.0% 25.2% 14.0%
130.0% 0.0% 1.04 8.15% 4.9% 0.0% 25.8% 14.0%
140.0% 0.0% 1.08 8.35% 5.0% 0.0% 26.5% 14.0%
150.0% 0.0% 1.11 8.55% 5.1% 0.0% 27.2% 14.0%
- -----------------------------------------------------------------------------------------------------------------------------
160.0% 0.0% 1.15 8.75% 5.3% 0.0% 27.9% 13.9%
- -----------------------------------------------------------------------------------------------------------------------------
170.0% 0.0% 1.18 8.95% 5.4% 0.0% 28.5% 14.0%
180.0% 0.0% 1.22 9.15% 5.5% 0.0% 29.2% 14.0%
190.0% 0.0% 1.25 9.35% 5.6% 0.0% 29.9% 14.0%
200.0% 0.0% 1.29 9.55% 5.7% 0.0% 30.6% 14.0%
210.0% 0.0% 1.32 9.75% 5.9% 0.0% 31.2% 14.0%
FORMULAS ASSUMPTIONS
- -------- -----------
Levered Beta D = Debt
Unlevered Beta = ----------- ----- ----------- E = Equity Risk Free Rate 5.78% (3)
1 + (D/E)(1-t)+(Pfd/E) t = Marginal Tax Rate Market Risk Premium 19.28%
Pfd = Preferred Marginal Tax Rate (t) 40.00%
Cost of Equity = Risk Free Rate + Levered Beta * (Market Risk Premium)
NOTES: (1) Source BARRA U.S. Equity Model
(2) Based in after-tax cost of debt.
(3) 10 Year Treasury as of January 2, 1998.
- -----------------------------------------------------------------------------------------------------------------------------
Waller Capital Corporation
- --------------------------------------------------------------------------------
WALLER CAPITAL
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
JONES INTERCABLE, INC.
- --------------------------------------------------------------------------------
INDUSTRY TRANSACTIONS: ANNOUNCED/PROPOSED CABLE SYSTEM SALES AND TRADES
ANNOUNCE AGGREGATE BASIC VALUE CASH SCF
DATE SELLER BUYER LOCATION VALUE SUBS SUB FLOW MULTIPLE
- -------- ------------------- ---------------------- -------------- --------- ----- ------- ---------- --------
($000,000) (000) ($000,000)
- ----------------------------------------------------------------------------------------------------------------------------------
1996 KC CABLE ASS. (CVI) CHARTER LONG BEACH, CA 150 70 2,143 17.4 8.6
- ----------------------------------------------------------------------------------------------------------------------------------
1996 Meredith Cable Continental MN based MSO 124 74 1,667 12.3 10.1
1996 Jones Intercable Century Comm. LA, Ventura, CA 104 59 1,763 10.5 9.9
- ----------------------------------------------------------------------------------------------------------------------------------
1996 COLUMBINE/WORLD TCI FORT COLLINS, CO 54 30 1,800 5.3 10.2
- ----------------------------------------------------------------------------------------------------------------------------------
1996 Jones Partners II Century Comm. Anaheim, CA 36 17 2,118 3.4 10.5
1997 Cablevision Insight Comm. Rockford, IL 97 65 1,492 10.2 9.5
1997 Insight Comm. Cox Comm. Phoenix, AZ 77 36 2,131 8.5 9.1
- ----------------------------------------------------------------------------------------------------------------------------------
1997 PRIME CABLE CHARTER COMM. HICKORY, NC 69 35 1,957 6.9 10.0
- ----------------------------------------------------------------------------------------------------------------------------------
1997 Palo Alto Co-Op Sun Country Cbl. Palo Alto, CA 54 27 2,042 4.7 11.5
1997 American Cable LP 5 Mediacom Dagsboro, DE 43 29 1,471 4.8 8.9
1997 Booth Comm Helicon Corp Boone, NC 35 19 1,852 3.7 9.5
1997 Harron Cable Marcus Cable Dallas, TX 35 22 1,601 3.8 9.1
1997 Pegasus Avalon Ptrs. CT, NH 30 15 1,954 3.3 9.0
1997 Auburn Cable Harron Comm Auburn, NY 28 14 1,958 2.8 10.2
1997 Cencom Partners Charter Communications Pelzer, SC 27 21 1,283 3.7 7.5
1997 IntrMeda G Force LLC Kauai, HI 24 12 2,065 2.8 8.6
- ----------------------------------------------------------------------------------------------------------------------------------
1996 TOTALS AND AVERAGES 5 DEALS $468 250 $1,869 $49 9.56 x
1997 TOTALS AND AVERAGES 11 DEALS $519 295 $1,760 $55 9.42 x
- ----------------------------------------------------------------------------------------------------------------------------------
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