Exhibit 99(b)(1)
APPRAISAL REPORT:
FAIR MARKET VALUATION
OF
CABLE TV FUND 14-B
LITTLEROCK, CALIFORNIA
As of December 31, 1997
Prepared for:
Jones Intercable, Inc.
Englewood, Colorado
Prepared by:
Strategis Financial Consulting, Inc.
1130 Connecticut Avenue, N.W.
Suite 325
Washington, D.C. 20036
(202) 530-7500
February 20, 1998
(C) Copyright 1998 Strategis Financial Consulting, Inc.
APPRAISAL REPORT:
FAIR MARKET VALUATION
OF
CABLE TV FUND 14-B
LITTLEROCK, CALIFORNIA
TABLE OF CONTENTS
-----------------
I. EXECUTIVE SUMMARY....................................................... 1
A. Introduction, Purpose, and Methodology............................... 1
B. Conclusions.......................................................... 2
II. PURPOSE OF APPRAISAL.................................................... 3
III. INDUSTRY OVERVIEW....................................................... 4
A. Historical Background................................................ 4
B. Industry Characteristics............................................. 6
1. General Background............................................... 6
2. Regulation....................................................... 8
3. Financial/Economic............................................... 9
4. Competition..................................................... 10
IV. SYSTEM DESCRIPTION..................................................... 13
A. History and Market.................................................. 13
B. Services............................................................ 15
C. Rates............................................................... 17
D. Subscribers......................................................... 19
E. System Mileage...................................................... 20
F. Physical Plant...................................................... 21
G. Franchises.......................................................... 22
H. Management.......................................................... 22
I. Financial History................................................... 22
V. TOTAL SYSTEM VALUE..................................................... 24
A. Valuation Procedure and Methods..................................... 24
B. Discounted Cash Flow Methodology.................................... 26
1. Net Cash Flow/Return on Equity.................................. 27
2. Net Cash Flow/Return On Investment.............................. 28
3. Cash Flow Projections........................................... 28
4. Residual Value.................................................. 30
5. Discount Rates.................................................. 31
C. Direct Income Methodology........................................... 32
D. Value Conclusions................................................... 33
VI. CONTINGENCIES AND LIMITING CONDITIONS.................................. 34
VII. STATEMENT OF VALUE..................................................... 36
VIII. QUALIFICATIONS......................................................... 37
A. Qualifications of Strategis Financial Consulting, Inc. ................ 37
B. Qualifications of Andrew R. Gefen...................................... 38
C. Qualifications of Elisabeth Boehler.................................... 39
EXHIBITS:
A. Valuation Methods and Summary of Values
B-1. Profit and Loss/Sources and Uses-Return on Equity - Low Value
B-2. Profit and Loss/Sources and Uses-Return on Equity - High Value
C-1. Debt Amortization-Return on Equity - Low Value
C-2. Debt Amortization-Return on Equity - High Value
D. Return on Investment
E. Cable Television Subscribers
F. Cable Television Service Rates
G. Cash Flow Projections
H. Capital Expenditures
I. Depreciation Schedule
J. Assumptions and Inputs
APPRAISAL REPORT:
FAIR MARKET VALUATION
OF
CABLE TV FUND 14-B
LITTLEROCK, CALIFORNIA
I. EXECUTIVE SUMMARY
A. Introduction, Purpose, and Methodology
Strategis Financial Consulting, Inc. was retained by Jones Intercable, Inc.
("Jones") to conduct a fair market valuation as of December 31, 1997, of the
Cable TV Fund 14-B cable television system serving Littlerock, California (the
"System") and adjacent portions of Los Angeles County. This appraisal will be
used by Jones as an independent estimate of the fair market value of the System
as of December 31, 1997, with the resulting value to be used in conjunction with
the purchase of the System by Jones.
Fair market value is the cash price a willing buyer would give a willing
seller in an arm's length transaction in order to complete the sale. It is
assumed that both buyer and seller have been informed of all relevant facts and
neither is under any compulsion to conclude the transaction. Strategis
Financial Consulting also assumes that the tangible assets will remain in their
present location and will continue to be employed in their highest and best use,
i.e., the delivery of cable television signals to subscribers.
Strategis Financial Consulting used five generally accepted cable
television valuation methods using the income approach to valuation in
establishing the range of total fair market values of the System as a going
concern. The first method used a multiple of the past year's operating income
derived from comparable asset values of privately-held and publicly-traded cable
companies. The second method used a lower multiple of the annualized current
month's operating income. The third method applied a slightly lower multiple of
next year's projected operating income. The fourth method
1
was a discounted net cash flow analysis in which a purchase price (estimated
fair market value) was calculated to achieve a target after-tax return on
equity, given particular operating and financing assumptions specific to the
System's assets. The fifth method was a discounted cash flow analysis that
measured the net present value of the pre-tax operating cash flows (less capital
expenditures, plus the residual value of the System) that represent the return
on total investment.
B. Conclusions
Strategis Financial Consulting's conclusions as to the range of values are
based upon information and data supplied by System management, an onsite
inspection by a representative of Strategis Financial Consulting of a
representative portion of the System and service area, and general cable
industry information. In Strategis Financial Consulting's opinion, the data
which support the valuations are reliable and sound. Our estimate of the
overall fair market value of the System as a business enterprise, free and clear
of any encumbrances, is $11,118,000.
2
II. PURPOSE OF APPRAISAL
Strategis Financial Consulting, Inc. was retained by Jones Intercable, Inc.
("Jones") to conduct a fair market valuation as of December 31, 1997 of the
Cable TV Fund 14-B cable television system (the "System"), serving Littlerock,
California. This appraisal will be used by Jones as an independent estimate of
the fair market value of the System as of December 31, 1997 in conjunction with
the purchase of the System by Jones.
Fair market value is the cash price a willing buyer would give a willing
seller in an arm's length transaction in order to complete the sale. It is
assumed that both buyer and seller have been informed of all relevant facts and
neither is under any compulsion to conclude the transaction and that the
tangible assets will remain in their present location and will continue to be
employed in their highest and best use, i.e., the delivery of cable television
signals to subscribers.
3
III. INDUSTRY OVERVIEW
A. Historical Background
Cable television was born in the late 1940s. The first systems were built
during the period 1948 to 1964. Most of these early systems were located in
rural areas where off-air television reception was limited and picture quality
was poor. The cable system basically provided a reception service, offering up
to 12 channels with no unique programming. Systems generally enjoyed high
levels of penetration, ranging from approximately 70% to 90% of homes passed.
During the period 1965 to 1972, cable systems were built in medium-sized
markets, importing distant television signals via terrestrial microwave.
Rulings by the Federal Communications Commission (FCC) in 1965 and 1966
initiated a regulatory period that lasted two decades. FCC constraints were
placed on importing distant signals which inhibited the construction of systems
in the largest 100 markets. The U.S. Supreme Court affirmed the FCC's
regulatory authority over the cable television industry. The typical cable
television system generally remained a 12- to 24- channel reception service with
some additional program selections via imported signals. Programming unique to
cable television did not exist. Basic penetrations of between 50% and 60% of
homes passed were typical for newly-cabled markets.
In 1972, the FCC eased its restrictions on signal importation, thus making
it feasible for cable television operators to enter the nation's top 100 markets
with differentiated product. Satellite delivered premium television services
(HBO, Showtime) and Super Stations (WTBS) were introduced in 1975. Cable
exclusive networks, such as ESPN, CNN, USA, and others, soon followed. During
the mid- to late-1970's, new 24- to 36-channel cable television systems emerged
as a result of these communications satellite services. Significant increases
in programming options allowed cable systems to attract ample numbers of
subscribers to attain operational profitability even where off-air broadcast
reception and leisure-time options were above average. The smallest 50 of the
top 100 markets were built first, followed by the larger metropolitan areas.
Premium, or
4
pay, services were the primary force behind basic penetration gains reaching 30%
to 45% of homes passed in these new markets.
During the period 1979 to 1983, the remaining major markets were
franchised. Cable channel options increased dramatically, both in pay services
(Disney, Cinemax, Bravo, Movie Channel) and basic services (MTV, Lifetime,
Nickelodeon, regional sports, CNN, and others). Systems with 54 and more
channels were built, offering an abundance of program alternatives. Cable
system operators instituted price increases for pay services and established
elaborate tiering structures to compensate for local constraints on basic
service pricing. In newer cable markets, basic penetrations of homes passed
began to edge above the 40% level.
In 1984, the U.S. Congress approved and President Reagan signed the Cable
Communications Policy Act, the first comprehensive cable legislation to be
enacted. The most significant feature of the legislation was the ultimate
removal of price controls on basic cable service in all but the very smallest
cable systems. Discretionary price increases of up to 5% were allowed in 1985
and 1986, and all price controls were removed in January 1987. During the
period 1984 to 1992, the mix of cable offerings and pricing changed as growth in
pay subscriptions slowed down and local constraints on basic price increases
were removed. Basic penetrations continued to rise in major markets, and
nationwide penetration reached 60% of homes passed by cable. New revenue
sources emerged in the form of pay-per-view, advertising, and home shopping.
The industry emphasized programming quality and marketing in order to increase
overall penetration levels above the 60% level.
The Cable Television Consumer Protection and Competition Act of 1992 was
passed on October 5, 1992, which imposed significant new regulations,
particularly on subscriber rates and programming packaging. Generally,
programming packages were specifically segregated between the "basic tier" and
the "satellite programming tier(s)" since the level of regulation was different
for each of them. After the new regulations were implemented, the overall cable
industry experienced a slight reduction in revenues in 1993, but learned to cope
with the new regulations in 1994 and continued its overall
5
growth due to added services, increased subscriber penetrations and repackaging
of programming services.
The Telecommunications Act of 1996, passed on February 8, 1996, revised the
Communications Act of 1934 and the Cable Act of 1992 in fundamental ways. It
highlighted competition in local loop telephone, video distribution, and long
distance telephone, and de-regulated cable rates beginning in 1999. The goal
was to create a competitive telecommunications marketplace. The FCC is in the
process of promulgating regulations to implement the law so its effect is still
uncertain.
B. Industry Characteristics
1. General Background
Cable television is a capital intensive business. The right to operate a
cable system is authorized by the local government. Substantial up-front
capital is required in plant and equipment with second entrants facing even
greater capital construction costs due primarily to space limitations on utility
poles. A considerable percentage of total operating costs are fixed. Similar
to utilities, once cable television has exceeded its break-even requirements,
operating margins grow very rapidly and remain fairly predictable from year to
year.
Unlike most businesses, market analysis in cable is better pursued on the
basis of system type than generic geographic or demographic criteria. The
classification of a cable system in any individual market tends to reflect the
competitive characteristics and demand dynamics resident in that market. In
general, there are two primary categories of cable systems--classic and modern.
Classic cable systems are those built in locations where reception of over-the-
air television signals has historically been poor or limited. They were the
earliest systems built, usually serving communities with lower densities (40 to
90 homes per mile), higher subscriber penetrations (60% to 90% of homes passed),
lower average revenues per subscriber ($14 to 20 per month), and higher cash
flow margins (45% to 65%) relative to modern systems. They usually were built
with fewer channels but may have been upgraded at a later time. Expectations
for additional
6
growth in these markets tends to be lower than the industry average. The
downside risk of investing in these systems is relatively low.
Modern cable systems have been constructed since the introduction of pay
and other cable-specific programming in the mid-1970's. They tend to serve
urban and suburban communities which have higher densities (70 to 120 and more
homes per mile), better quality off-air programming, and more extensive
competition for consumers' leisure time. These systems were built with broader
channel capacity (36 to 54 or more channels), individual subscriber
addressability, local programming capability, and the capacity for advertising
sales. They tend to have lower penetration (30% to 55%) than classic systems.
More rapid growth has been experienced in these systems than in classic systems
because of higher household growth rates, more potential for penetration gains,
and greater opportunities for ancillary revenues. They are also more risky
because of greater off-air competition and higher overall operating costs.
It is estimated that 32,255 communities are served throughout the United
States by approximately 13,000 operating cable systems. The industry is
structured into over 500 MSOs which manage these systems on a wholly-owned,
partially-owned, or management contract basis. Economic forces within the
industry are causing significant shifts in the ownership of these companies,
resulting in increasing consolidation of the industry into the hands of fewer,
larger operators.
Management characteristics in the industry vary considerably between the
MSO headquarters and system operating levels and between different categories of
systems. At the corporate level, nearly all of the mid-to-large sized MSOs have
a strong representation of professionally trained and field-seasoned management
among their ranks. Strong emphasis is placed on strategic, financial planning
and operating control functions at this level, and the staffing reflects those
requirements.
System-level management requirements vary significantly with the category
of system under consideration. Classic cable operations primarily require
custodial management to oversee customer service and maintenance functions.
Strategic, marketing, and financial management tends to be handled at the
corporate level. Billing
7
functions are processed through service bureaus specializing in cable systems.
Very little management complexity is left at the system level, and the positions
tend to be filled accordingly. Large-scale, urban cable operations are much
more dynamic and demanding. They require far more sophisticated and versatile
management capabilities. The physical plant, budgets, and operating staffs in
these systems are considerably larger. More of the strategic, marketing, and
financial planning functions are handled locally. The political liaison
requirements with the cities are far more complex. Not surprisingly, the
caliber of management found in these systems is substantially higher than that
found in classic systems, and tends to be professionally trained, financially
aware, and politically astute.
2. Regulation
Historically, the extent to which the cable television industry has been
regulated at the local, state and federal levels, has varied. Following the
deregulation of service prices in the 1984 Cable Communications Policy Act, the
next several years saw regulatory constraints on cable reduced at both the local
and federal levels. Subsequent public perception of the industry as abusing its
newly-won pricing freedom and additional consolidation in the industry led to
enactment of the Cable Television Consumer Protection and Competition Act of
1992 on October 5, 1992, ushering in a new period of extensive regulation. Many
aspects of such regulation are currently the subject of judicial, administrative
or legislative proceedings or proposals. This law required the FCC to regulate
the operation of cable television systems in a number of areas, including rates
that may be charged by systems.
On September 1, 1993, rate changes mandated by the FCC under the 1992 Act
went into effect for most systems. The FCC implemented a benchmark rate
structure that was intended to reduce the federally regulated portion of the
average cable subscriber's monthly bill by 10%. Most of the resulting
reductions in subscriber bills were attributable to the decline in equipment and
additional outlet charges. However, with the mandated reconfiguration of basic
service and the expanded basic tier, some
8
subscribers' bills increased. For cable operators, the effects of the rate
change were estimated to reduce revenue by 3% to 5% on an industrywide basis.
In February 1994, the FCC announced further rate reductions of 7% in order
to fully implement the 1992 Cable Act. As an alternative, cable systems were
permitted to file Cost of Service showings if implementation of the mandated
rate reductions was not feasible. By yearend 1995, widescale telecommunications
reform appeared imminent; although, the extent to which or even whether this
reform would entail relief from rate regulation was unclear. The likelihood
that providers of cable and telephony services would be allowed engage in both
businesses was a near certainty, however, the timetable for these changes was
uncertain.
The Telecommunications Act of 1996, passed on February 8, 1996, revised the
Communications Act of 1934 and the Cable Act of 1992 in fundamental ways. It
highlighted competition in local loop telephone, video distribution, and long
distance telephone, and de-regulated cable rates beginning in 1999. The goal
was to create a competitive telecommunications marketplace. The FCC is in the
process of promulgating regulations to implement the law so its effect is still
uncertain.
3. Financial/Economic
Cable's rapid financial growth and expectations for future growth have
drawn the attention of the capital markets and helped fuel consolidation within
the industry. With most cable markets already franchised and constructed,
growth-oriented MSOs turned to acquisitions as their primary method of
expansion. A flurry of acquisitions occurred during the period of 1986 through
1989, with the peak being reached in 1988. Most of these acquisitions were made
by companies already in the cable business who were seeking national
consolidation or regional clustering of cable television systems to produce
greater economies of scale and operating efficiencies. The number of
transactions decreased in 1990 due to federal government restrictions on banks
pertaining to highly leveraged transactions (HLT), uncertainty about the
regulatory environment, and other factors.
9
HLT restrictions caused less money to be available for the expansion,
upgrading, and trading of cable systems in 1990 and 1991. These restrictions
were subsequently removed in June 1992, and while the number of acquisitions
increased, they did not reach the same levels seen in the latter half of the
1980's. Passage of the Cable Television Consumer Protection and Competition Act
of 1992 and the resultant rate regulation decreased the overall attractiveness
of the cable industry to potential investors.
During the early- to mid-1990s, several of the largest MSOs formed or were
exploring alliances with both long distance and local telephone companies, as
both the cable and telephone industries were planning to enter one another's
primary lines of business. Simultaneously, a number of mid-sized MSOs were
developing exit strategies based on the belief that success in the evolving
cable industry would require a critical mass of subscribers and access to
substantial amounts of capital.
While the development of voice, video and data delivery technologies holds
the promise of substantial new services and revenues for the industry, the near-
term outlook based on established programming services continues to be positive.
Operators expect to continue to increase operating income by continuing to
attract more subscribers, exploit current and additional opportunities for
ancillary revenues, and improve operating efficiencies.
4. Competition
During the next several years, the cable industry may face additional
competition which could emerge in the form of system overbuilds, the
introduction of new technologies, and entry into the video distribution business
by telephone companies.
The long-term viability of overbuilds in most cable markets is questionable
at best. An overbuilder splits up the subscriber base, incurring higher costs
per subscriber and lower margins overall. Many attempted overbuilders have been
bought out by the incumbent or have simply gone out of business. The likelihood
of a successful overbuild in all but a few markets is very small.
10
Cable television has begun to face increasing competition from new
distribution technologies including direct-broadcast satellite (DBS), satellite
master antenna television (SMATV), and multichannel multipoint distribution
service (MMDS). The ultimate success or failure of any of these television
delivery systems will depend largely on a combination of the three
interconnected factors of technology, regulation, and economics. Strategis
Financial Consulting anticipates that the threat to cable television by these
technologies in the next few years will not be material, although various
technologies are proving adept at providing services in certain niche markets.
MMDS and SMATV typically have little or no effect on mature cable systems,
except in large urban areas where a high percentage of homes passed are in
multiple dwelling units (MDUs). DBS presents a greater competitive threat. The
DBS industry, which is still very young, has thus far focused on building its
customer base in areas not wired for cable television. As of 1994, leaders in
the DBS industry predicted that between 10% and 20% of television households
nationwide would use their service within ten years. However, DBS is hampered
by the fact that it does not carry off-air broadcast signals.
Telephone companies have long shown an interest in expanding into video
distribution. For the most part, this competition has not materialized as a
result of existing regulatory restraints and technical limitations. By the end
of 1993, there was widespread recognition that technological developments would
force dramatic changes in such regulation, as the telecommunications industry
entered a consolidation period characterized by mergers, joint ventures, and
acquisitions.
Fiber optics are increasingly being utilized as telephone and cable
companies begin experimenting with `full service' networks with the capability
of delivering voice, video and data services to the home. Several of the
largest MSOs, in conjunction with telephone companies, have built these
experimental systems to determine their feasibility from both technological and
marketing perspectives.
As of the mid- to late-1990s, the telephone industry is in the experimental
stage with regard to using fiber optic cable to deliver services to the home.
Cable companies, for their part, are focusing on the delivery of digital program
and data services via hybrid
11
fiber and coaxial cable networks. For technological, financial, and regulatory
reasons, the full convergence of telecommunications services and service
providers is most likely years away.
12
IV. SYSTEM DESCRIPTION
A. History and Market
At the time of the appraisal, the System served 5,672 subscribers in
Littlerock, California and adjacent portions of Los Angeles County. The
provision of cable service was governed by a franchise agreement held with the
County of Los Angeles. As of December 31, 1997, the remaining life of the
franchise agreement was 2.8 years.
The service area was located within the Antelope Valley, in the northern
part of Los Angeles County approximately 50 miles northeast of downtown Los
Angeles. Residents were primarily employed in the agriculture industry, while
some area residents commuted to Los Angeles and its surrounding employment
centers for employment. Major employers in the area included Boeing, Lockheed
Aircraft Company, Edwards Air Force Base, and the Federal Aviation
Administration Air Traffic Control Center. Most manufacturing in the area was
related to the aerospace industry.
The unemployment rate in Los Angeles County was 5.8% in December 1997.
This rate compared unfavorably during this period with both the statewide and
national unemployment rates of 5.5% and 4.7%, respectively, according to the
U.S. Bureau of Labor Statistics.
At the time of the appraisal, Direct Broadcast Satellite (DBS) service was
available in the Littlerock service area, with EchoStar and Direct TV being the
most predominant service providers in the market. According to System
management, as of December 1997, the number of cable subscribers switching to
DBS had significantly slowed from a year earlier. System management estimated
that, as of December 31, 1997, the DBS operators had a combined penetration of
approximately 2.36% of homes in the service area. At the time of appraisal, the
System did not have a multichannel multipoint distribution service (MMDS, or
wireless cable) competitor. However, Pacific Telesis, the Regional Bell
Operating Company in the region, operated an MMDS system in nearby communities
and could in the future provide MMDS competition in the
13
Littlerock service area, although System management was not aware of any current
plans for them to do so.
Table I presents demographic data published in Marketing Statistics'
Demographics USA 1997 for Los Angeles County. Data for population, households,
and Effective Buying Income (EBI) were estimated for 1996 and projected for
2001. Also presented, for comparison purposes, are data for the state of
California and the nation as a whole.
Los Angeles County, which encompassed the System's service area, had a
population of approximately 9,410,300 in 1996 and its population was forecast to
grow at an annual rate of 0.30% through 2001. This rate was lower than statewide
and nationwide population growth forecasted for the period of 0.88% and 0.84%,
respectively.
Average household EBI in Los Angeles County was $43,494 in 1995. While
this figure was higher than the national average household EBI of $42,191, it
was lower than the statewide figure for California of $44,430. Growth in
household EBI was forecast at 2.57% annually in Los Angeles County, and at 2.56%
and 2.97% throughout California and the U.S. as a whole, respectively. This
information is also presented in Table I.
TABLE I
Annual
1996 2001 Growth Rate
Estimate Projection 1996-2001
-------- ---------- ---------
Los Angeles County, CA
- ----------------------
Total Population 9,410,300 9,550,700 0.30%
Total Households 3,069,900 3,077,800 0.05%
Median Age 32.3 N/A
Effective Buying Income (EBI)
Total EBI (000's) $133,522,302 $151,954,394 2.62%
Average Household EBI $43,494 $49,371 2.57%
14
TABLE I (continued)
Annual
1996 2001 Growth Rate
Estimate Projection 1996-2001
-------- ---------- ---------
State of California
- -------------------
Total Population 32,686,800 34,149,600 0.88%
Total Households 11,085,300 11,477,900 0.70%
Median Age 33.3 N/A
Effective Buying Income (EBI)
Total EBI (000's) $492,516,991 $578,578,779 3.27%
Average Household EBI $44,430 $50,408 2.56%
United States of America
- ------------------------
Total Population 267,540,600 279,027,700 0.84%
Total Households 98,635,500 103,870,800 1.04%
Median Age 34.9 N/A
Effective Buying Income (EBI)
Total EBI (000's) $4,161,512,384 $5,072,856,995 4.04%
Average Household EBI $42,191 $48,838 2.97%
B. Services
Tables II (A) presents programming services offered to System subscribers
as of the appraisal date. Limited basic service was comprised of 27 channels,
16 of which were local off-air broadcast signals, two of which carried local
access programming, and 10 of which offered satellite delivered services. One
local access service and one satellite service share a single channel. Expanded
basic service encompassed 30 satellite delivered services carried on channels
36-65. Premium services available included Cinemax, HBO, The Movie Channel, The
Disney Channel and Showtime. Also offered were two general audience movie/event
pay-per-view (PPV) services and The Playboy Channel and Adult Vision for
adults.
15
TABLE II
Littlerock System
- --------------------------------------------------------------------------------------------
Cable
(Off-Air) Name or
Channels Call Letters Source Description
- --------------------------------------------------------------------------------------------
2 (2) KCBS Los Angeles, CA CBS
- --------------------------------------------------------------------------------------------
3 Jones Intercable News/ Local/ Local News/
Odyssey Satellite Religious
- --------------------------------------------------------------------------------------------
4 (4) KNBC Los Angeles, CA NBC
- --------------------------------------------------------------------------------------------
5 (5) KTLA Los Angeles, CA WBN/Independent
- --------------------------------------------------------------------------------------------
6 Great American Country Satellite Country Music Videos
- --------------------------------------------------------------------------------------------
7 (7) KABC Los Angeles, CA ABC
- --------------------------------------------------------------------------------------------
8 (28) KCET Los Angeles, CA PBS
- --------------------------------------------------------------------------------------------
9 (9) KCAL Los Angeles, CA Independent
- --------------------------------------------------------------------------------------------
10 Prevue Guide Satellite Pay Movie Previews
- --------------------------------------------------------------------------------------------
11 (11) KTTV Los Angeles, CA Fox
- --------------------------------------------------------------------------------------------
12 Knowledge TV Satellite Educational
- --------------------------------------------------------------------------------------------
13 (13) KCOP Los Angeles, CA UPN/Independent
- --------------------------------------------------------------------------------------------
14 (64) KHIZ Barstow, CA Independent
- --------------------------------------------------------------------------------------------
15 Antelope Valley Buyers Network Satellite Home Shopping
- --------------------------------------------------------------------------------------------
16 WTBS Satellite Independent - Atlanta, GA
- --------------------------------------------------------------------------------------------
17 (58) KLCS Los Angeles, CA PBS
- --------------------------------------------------------------------------------------------
18 (18) KSCI San Bernadino, CA Independent
- --------------------------------------------------------------------------------------------
19 Trinity Broadcasting Network Satellite Religious
- --------------------------------------------------------------------------------------------
20 C-SPAN Satellite U.S. Senate Coverage
- --------------------------------------------------------------------------------------------
21 Government Access Local Local
- --------------------------------------------------------------------------------------------
22 (22) KWHY Los Angeles, CA Independent
- --------------------------------------------------------------------------------------------
23 Jones Home Theatre 1 Satellite Pay-Per-View Movies
- --------------------------------------------------------------------------------------------
24 The Playboy Channel/ Satellite/ Pay-Per-View Adult Movies/
Adult Vision Satellite Pay-Per-View Adult Movies
- --------------------------------------------------------------------------------------------
25 Jones Home Theatre 2 Satellite Pay-Per-View Movies
- --------------------------------------------------------------------------------------------
26 HBO Satellite Pay Movies, Specials
- --------------------------------------------------------------------------------------------
27 Cinemax Satellite Pay Movies
- --------------------------------------------------------------------------------------------
28 The Disney Channel Satellite Pay Movies, Family Shows
- --------------------------------------------------------------------------------------------
29 Showtime Satellite Pay Movies, Specials
- --------------------------------------------------------------------------------------------
30 The Movie Channel Satellite Pay Movies
- --------------------------------------------------------------------------------------------
31 KHSC Ontario, CA Home Shopping
- --------------------------------------------------------------------------------------------
32 (62) KRCA Riverside, CA Independent
- --------------------------------------------------------------------------------------------
33 (52) KVEA Los Angeles, CA Telemundo
- --------------------------------------------------------------------------------------------
34 (34) KMEX Los Angeles, CA Univision
- --------------------------------------------------------------------------------------------
35 (38) K38CW Palmdale Low Power Independent
- --------------------------------------------------------------------------------------------
36 E! Entertainment Television Satellite Entertainment Information
- --------------------------------------------------------------------------------------------
37 American Movie Classics Satellite Classic Movies
- --------------------------------------------------------------------------------------------
38 CNBC Satellite Consumer News and Business
- --------------------------------------------------------------------------------------------
39 CNN Satellite 24-Hour News
- --------------------------------------------------------------------------------------------
40 Fox Sports West 2 Satellite Regional Sports Coverage
- --------------------------------------------------------------------------------------------
41 Fox Sports West Satellite Regional Sports Coverage
- --------------------------------------------------------------------------------------------
42 ESPN Satellite 24-Hour Sports
- --------------------------------------------------------------------------------------------
16
TABLE II (continued)
- --------------------------------------------------------------------------------------------
Cable
(Off-Air) Name or
Channels Call Letters Source Description
- --------------------------------------------------------------------------------------------
43 USA Network Satellite Entertainment, Movies
- --------------------------------------------------------------------------------------------
44 TNT Satellite Movies, Sports, Variety
- --------------------------------------------------------------------------------------------
45 TNN Satellite Country Music Videos
- --------------------------------------------------------------------------------------------
46 Lifetime Satellite Women's Programming, Variety
- --------------------------------------------------------------------------------------------
47 The Family Channel Satellite Family Programming
- --------------------------------------------------------------------------------------------
48 Nickelodeon Satellite Children's Programming
- --------------------------------------------------------------------------------------------
49 Cartoon Network Satellite Cartoons
- --------------------------------------------------------------------------------------------
50 A&E Satellite Biographies, Mysteries, Specials
- --------------------------------------------------------------------------------------------
51 Discovery Channel Satellite Nature, Science, Technology
- --------------------------------------------------------------------------------------------
52 BET Satellite Black Entertainment
- --------------------------------------------------------------------------------------------
53 MTV Satellite Music Videos, Variety
- --------------------------------------------------------------------------------------------
54 VH-1 Satellite Music Videos
- --------------------------------------------------------------------------------------------
55 Comedy Central Satellite Comedy Programming
- --------------------------------------------------------------------------------------------
56 The Food Network Satellite Culinary Programming
- --------------------------------------------------------------------------------------------
57 MSNBC Satellite News, Computer Information
- --------------------------------------------------------------------------------------------
58 ESPN 2 Satellite 24-Hour Sports
- --------------------------------------------------------------------------------------------
59 The History Channel Satellite Movies, Documentaries
- --------------------------------------------------------------------------------------------
60 Eye On People Satellite Entertainment, Interviews
- --------------------------------------------------------------------------------------------
61 Sci-Fi Channel Satellite Science Fiction
- --------------------------------------------------------------------------------------------
62 Animal Planet Satellite Nature, Pets, Wild Creatures
- --------------------------------------------------------------------------------------------
63 The Learning Channel Satellite Educational
- --------------------------------------------------------------------------------------------
64 Galavision Satellite Spanish Language Programming
- --------------------------------------------------------------------------------------------
65 The Weather Channel Satellite 24-Hour Weather
- --------------------------------------------------------------------------------------------
99 Product Information Network Satellite Infomercials
- --------------------------------------------------------------------------------------------
C. Rates
The average monthly programming rates, equipment rental rates, and
installation charges to subscribers for the preceding services as of the date of
the appraisal, are outlined in Table III. Comparison data for basic service,
pay services, and monthly revenue per subscriber were taken from The Strategis
Group's publication Cable Trends: 1997, which presents year end 1996 operating
and financial data.
As shown in Table III, subscribers paid $13.81 per month for limited basic
service and $12.71 for expanded basic service. Subscribers to the System paid a
combined basic and expanded basic rate that was slightly higher, at $26.52, than
the
17
average combined basic and expanded basic rate for the nation, which was
$25.84 as of 1996.
A la carte pay service rates in Littlerock ranged from $6.00 for Cinemax,
Showtime and The Movie Channel to $10.00 for HBO. Packages of multiple premium
services were available at reduced rates. On a nationwide basis, the average
revenue per pay unit was $7.77 in 1996, which was higher than the System's
average revenue per pay unit of $6.58 in 1997.
PPV general audience movies were $3.95 throughout the System. Playboy
movies were $6.95 while other Adult Vision movies were $5.95. Events were
priced individually.
Addressable converter rentals were $2.15 per month, while non-addressable
converter monthly rental rates were $0.66. Installation charges throughout the
System were $25.39 for subscribers in pre-wired homes, and $35.54 in unwired
homes.
Average revenue per subscriber per month on a nationwide basis was $35.46
as of the end of 1996, according to The Strategis Group research. This figure
includes revenues from basic, pay, and PPV services, as well as local
advertising, equipment rental, and miscellaneous income. During the twelve
months prior to December 31, 1997, the System generated monthly average revenue
of $36.75 per subscriber, which was higher than the nationwide average for 1996.
18
TABLE III
United
Littlerock States/1/
--------------------------------
Basic Service $13.81 N/A
Expanded Basic 12.71 N/A
Combined Basic and Expanded Basic $26.52 $25.84
--------------------------------
Pay Services (a la carte) N/A
HBO $10.00
Disney 8.00
Cinemax 6.00
The Movie Channel 6.00
Showtime 6.00
Playboy
Monthly Revenue Per Pay Unit $ 6.58 $ 7.77
--------------------------------
Pay Per View Movies
General Audience $ 3.95
Playboy 6.95
Adult 5.95 N/A
--------------------------------
Addressable Converters $ 2.15 N/A
Non-Addressable Converters 0.66 N/A
--------------------------------
Installation Charges: N/A
Pre-wired Home $25.39
Unwired Home 35.54
--------------------------------
Monthly Revenue Per Subscriber $36.75 $35.46
--------------------------------
/1/Source: The Strategis Group's Cable Trends: 1997
D. Subscribers
Table IV presents the number of homes passed, basic subscribers, expanded
basic subscribers, pay units, converter rentals, and addressable homes for the
System as of December 31, 1997. These figures are compared with similar figures
for the United States as a whole, taken from The Strategis Group's Cable Trends:
1997.
19
At the time of the appraisal, the System's basic penetration rate, at 69.3%
of homes passed, was higher than the corresponding rate for the nation of 65.8%.
Pay penetration for the System stood at 70.8%, which was lower than the national
average of 76.4%. Addressable home penetration for the System, at 66.8%, was
well above the national average of 48.1%.
TABLE IV
-----------------------------------------
System United States/1/
-----------------------------------------
Homes Passed 8,184 95,500,000
-----------------------------------------
Basic Subscribers 5,672 62,800,000
% of Homes Passed 69.3% 65.8%
-----------------------------------------
Expanded Basic Subscribers 4,891 N/A
% of Basic Subscribers 86.2% N/A
-----------------------------------------
Total Pay Units 4,017 48,000,000
% of Basic Subscribers 70.8% 76.4%
-----------------------------------------
Converters 5,455 N/A
% of Basic Subscribers 96.2% N/A
-----------------------------------------
Addressable Homes 3,790 30,200,000
% of Basic Subscribers 66.8% 48.1%
-----------------------------------------
/1/Source: The Strategis Group's Cable Trends: 1997
E. System Mileage
According to System management, mileage figures for the System are based on
estimates from System maps. Since a complete walk-out of the current System
would be prohibitively expensive, Strategis Financial Consulting used the
following approach to corroborate the plant mileage:
1. Interviewed knowledgeable System personnel to ascertain the source and
reliability of the mileage estimates.
20
2. Noted the configuration of the System on area maps and the existence
and condition of plant in a representative portion of the area served
by the System.
3. Related average density of the System to general observations of
densities while inspecting the System and service area.
Table V presents management's best estimate of the number of route miles of
plant as represented by total strand and trench in the System as of the
appraisal date. Coaxial mileage was approximately 41.1% aerial and 58.9%
underground. Approximately 11.2% of total plant miles were fiber optic cable.
Based upon the above procedures and cost limitations, these estimates appear to
be reasonable.
TABLE V
Aerial Underground Total
------ ----------- -----
Coaxial Miles 84.0 120.4 204.4
Fiber Optic Miles 24.0 1.9 25.9
F. Physical Plant
As of the valuation date, the System's administrative offices were located
at 8644 Pearblossom Highway, Littlerock, California. The System maintained two
hub sites fed by microwave and a fiber optic link from the Jones Intercable
System in Palmdale, California.
The System was constructed in 1986. As of the appraisal date, the
condition of the plant was very good. During a rebuild completed in 1991, a
14.39 mile fiber optic link was installed to tie Littlerock and Pearblossom to
the Palmdale headend. This reduced the System's longest cascade in these
communities from 26 amplifiers to 10 amplifiers. The System did not maintain
its own headend. As of December 31, 1997, the System passed approximately 8,184
homes, for an overall density of 36 homes per mile. As of the appraisal date,
the distribution plant capacity was 500 MHz with programming available on 70
channels.
21
Addressable homes totaled 3,790 in the System, and there were a total of
5,455 converters in the field. Converters provided to subscribers included
Panasonic standard set-top models, and Pioneer addressable models.
G. Franchises
As of December 31, 1997, the System operated under a single franchise
agreement with Los Angeles County. Table VI identifies the agreement and its
expiration date. As of the appraisal date, the weighted average remaining life
of the franchise agreement was 2.8 years.
TABLE VI
Franchise Expiration
--------- ----------
Los Angeles County October 1, 2000
Weighted Average Remaining Life 2.8 Years
H. Management
At the time of the appraisal, the System operated with ten employees. Many
of the System's managerial and administrative functions were performed by
personnel employed by Jones' Palmdale System. The costs for these functions
were allocated to the Littlerock System. The largest group of employees in
Littlerock were the five members of the technical department. Customer service
was handled by four employees.
Strategis Financial Consulting's representative met and spoke extensively
with the System's General Manager and acting Engineering Manager. Both were
experienced industry professionals and appeared to be well-versed on the
System's characteristics, including strengths and weaknesses.
I. Financial History
Unaudited financial statements for the year ending December 31, 1996,
showed that the System earned revenues of $2,349,662. Operating expenses
totaled $1,314,852,
22
which resulted in operating income of $1,034,810 and an operating profit margin
of 44.0%. Unaudited statements for the year ending 1997 indicated that
operating profits of $1,139,012 were generated on revenues of $2,523,597 for an
operating margin of 45.1%.
23
V. TOTAL SYSTEM VALUE
Strategis Financial Consulting has estimated the fair market value for the
System as a business enterprise to be $11,118,000, as of December 31, 1997.
Fair market value is the cash price a willing buyer would give a willing seller
in an arm's length transaction in order to complete the sale. It is assumed
that both buyer and seller have been informed of all relevant facts and neither
is under any compulsion to conclude the transaction and that the tangible assets
will remain in their present location and will continue to be employed in their
highest and best use, i.e., the delivery of cable television signals to
subscribers.
A. Valuation Procedure and Methods
Strategis Financial Consulting used the following basic methodology to
determine the overall fair market value of the System:
1. Performed an onsite review to observe a representative portion of the
market and homes passed, reviewed the number of subscribers, and
determined the quality and attractiveness of the services provided.
2. Made inquiries of management to ascertain and/or verify items relevant
to the appraisal.
3. Estimated the availability of additional homes passed and the
probability of future growth.
4. Reviewed selected financial records and other documents to verify
certain financial data.
5. Estimated the expected changes in operations that a buyer most likely
would institute.
6. Applied generally accepted methods of estimating the fair market value
of the entity as a whole.
A business valuation typically is performed using one or more of three
approaches: the cost approach, the market approach, and the income approach.
Since
24
the System will be relying to a large degree on intangible assets to generate
income, the cost approach is not appropriate in this case. The market, or
comparable sales, approach has not been used because of the difficulty in
choosing sales that reflect the same profitability, size, and growth as the
System. Therefore, this valuation has been based on the income approach to
valuation. The income approach is the best approach to valuing the System
because it reflects the future earnings potential of the System.
There are various established methods of determining a business entity's
total fair market value using the income approach. The most commonly accepted
methods are as follows:
1. Capitalization of projected net cash flow.
2. Capitalization of single-year operating profit.
3. Dividend capitalization.
4. Market price-to-book equity.
5. Price-earnings multiple.
Of the methods listed above, Strategis Financial Consulting normally relies
primarily upon the capitalization of projected net cash flow, or "discounted
cash flow" approach, to estimate total value. Strategis Financial Consulting
generally favors discounted cash flow methodology because it considers the
broadest range of factors that will affect both the present and future income,
and therefore value, of a cable television system. Accordingly, Strategis
Financial Consulting usually gives greater consideration to the discounted cash
flow methods in its final judgment concerning the fair market value of a cable
television system.
Strategis Financial Consulting has prepared two discounted cash flow
valuations for the System, one which analyzes the projected return on equity and
one which analyzes the projected return on investment. Strategis Financial
Consulting also has considered the second general methodology listed above,
i.e., capitalization of operating profit, in conducting its valuation of the
System. The methodologies are described in
25
Parts V-B and V-C of this report. The values for the overall fair market value
of the System are presented in Exhibit A.
The remaining methods listed above, although widely used in other
industries, generally are inappropriate for valuing cable television systems.
Dividend capitalization, based upon actual dividends or capacity, usually is
irrelevant since few publicly-traded cable companies pay dividends and earnings
(which should be reflective of a dividend capacity) are not reflective of the
capacity to generate operating income. A comparison of market price-to-book
equity also is not valid usually since book equity varies widely from one
company to another as to how much intangible and tangible value is reflected on
the books. Finally, an analysis of price-earnings multiples generally is not
appropriate because they also vary widely within the industry and are not
representative of the financial position of most cable systems.
B. Discounted Cash Flow Methodology
Strategis Financial Consulting has generated two discounted cash flow
models to arrive at a total System value. The return-on-equity model is based
upon a hypothetical purchase price that would achieve a target after-tax return
on equity based on the present value of the projected net cash flows. The
return-on-investment model measures the net present value of the projected pre-
tax operating cash flows, less capital expenditures, plus the residual value of
the System, that represent the return on total investment.
Both the return-on-equity and return-on-investment methods are dependent
upon projections of the System's future net cash flow and residual value and on
selection of an appropriate discount rate. Strategis Financial Consulting's
calculations are based on detailed projections of a variety of factors which
will affect future cash flow including housing growth, plant mileage, basic and
pay subscriber growth, subscriber rates, operating expenditures, and capital
expenditures. The projections and assumptions used in Strategis Financial
Consulting's discounted cash flow models are set forth in Exhibits E, F, G, and
H. Exhibit E provides details of Strategis Financial Consulting's projections
for plant mileage, housing, and subscriber growth. Exhibit F shows the rates
subscribers
26
were charged at the time of the appraisal for various services and Strategis
Financial Consulting's projections for future growth. Exhibit G lists revenues
and operating expenses for all years throughout the projection period, and
Exhibit H details capital expenditures anticipated for the System. In addition,
Exhibit J includes miscellaneous assumptions such as the average remaining life
of the franchises under which the System operates, tax rates, the net fair
market value of beginning tangible assets, the breakdown between debt and equity
and the interest rate anticipated on the debt, and the multiples and discount
rates used in the various appraisal methods. Strategis Financial Consulting's
determination and use of these factors is discussed further below.
1. Net Cash Flow/Return on Equity
This method involves the use of multiple year projected operations for the
System and a predetermined target after-tax return on equity for a hypothetical
outside buyer. The seven-year projection period is based on the average
remaining franchise life of the System. A complete discussion of the selection
of the projection period is provided in Part V-B-3 of this report.
Based on the use of typical debt-to-equity ratios and debt services,
Strategis Financial Consulting has made certain assumptions concerning the
capital structure that a "typical, prudent outside buyer" might experience as
well as the probable interest rates that would be applicable in connection with
any debt financing that might be incurred, as shown in Exhibit J. To calculate
future cash flows, Strategis Financial Consulting has projected future
subscribers, revenues, operating expenses, and capital expenditures. Strategis
Financial Consulting has then tested various hypothetical purchase prices, i.e.,
potential fair market values, to determine a value that yields the desired
return on equity, as shown in Exhibits C-1 and C-2.
Using the return-on-equity model, Strategis Financial Consulting has
generated low and high cash flow projections for the System shown in Exhibits B-
1 and B-2. The difference between the two projections reflects the range of
potential returns on equity
27
that a buyer could reasonably expect to realize depending upon the initial
purchase price paid for the System.
2. Net Cash Flow/Return On Investment
This discounted cash flow method, similar to the preceding method, is used
to measure the net present value of the pre-tax operating cash flow, less
capital expenditures, plus the residual value of the System, that represent the
return on the total investment rather than that which could result from an
assumed purchase with a predetermined debt-to-equity ratio. To calculate future
cash flows, Strategis Financial Consulting has used the same projections for
future subscribers, revenues, operating expenses, and capital expenditures as in
the return-on-equity method. The projected cash flows for the System, plus the
last-year residual value of the System, less capital expenditures, are then
discounted to their present value using an acceptable discount factor based on
the weighted average cost of money, as shown in Exhibit J. Strategis Financial
Consulting has used the return on investment model, like the return on equity
model, to generate low and high values for the System. These values, shown in
Exhibit D, represent the present value of the future pre-tax operating cash
flows and reflect more conservative and more optimistic assumptions,
respectively, as to the likely return on investment that the System will
generate over time.
3. Cash Flow Projections
There are many factors that affect the projections of a specific cable
system's cash flow. With respect to the System, Strategis Financial Consulting
has analyzed the franchise area, the costs incurred to meet franchise
obligations, the length of the franchise period, the degree of competition, and
the historic results of the System's operations. Strategis Financial Consulting
also has examined factors that affect the industry, such as possibility of
regulation, competitive threats, rapid technical changes, and the development of
additional programming services. These factors have been incorporated into
Strategis Financial Consulting's projections of the System's future cash flows.
28
The most critical factors in the expected cash flow of a specific cable
system are the opportunities for growth in the territory in which it operates,
i.e., its franchise area and the duration of the franchise. In making its cash
flow projections, Strategis Financial Consulting has carefully reviewed the
demographics of counties represented in the service area. Demographic
information was gathered from direct observation during Strategis Financial
Consulting's onsite visit, discussion with System management, Marketing
Statistics' Demographics USA 1997, U.S. Census Bureau data, and information
obtained from the local Chamber of Commerce.
Strategis Financial Consulting also has reviewed information pertaining to
the System's franchise in order to calculate its remaining life and made
inquiries of System management personnel to ascertain any relevant terms that
may affect the value of the System. Strategis Financial Consulting has
calculated a weighted average remaining life of 2.8 years for the franchise.
The projection period used for the cash flows normally is the weighted
average remaining life of the franchises, except when the weighted life of the
franchises falls below seven or exceeds ten years. When the franchise life falls
below seven years, Strategis Financial Consulting uses a seven-year projection
period, amortizing the franchises over fifteen years as mandated by the Internal
Revenue Service (IRS). When the franchise life exceeds ten years, a ten-year
projection period is used, with the franchises amortized over fifteen years.
Strategis Financial Consulting believes that the cash flows realized from a
projection period less than seven years generally are not reflective of the
value of a system than an investor would consider when utilizing discounted cash
flow methodology. Strategis Financial Consulting also believes that the
operating income resulting from income and expense projections beyond ten years
is increasingly uncertain and might produce less accurate values for the System.
Strategis Financial Consulting's cash flow projections are also based in
part on historical operating data such as subscriber rates, the ratio of
subscribers to homes passed, and the age and condition of the System's
distribution plant. Strategis Financial Consulting also has relied on
information provided by System management personnel,
29
discussions with System personnel, and Strategis Financial Consulting's
familiarity with typical industry expenses and operating trends to project the
future financial performance of the System. As shown in Exhibits E through H,
Strategis Financial Consulting has projected increases in the number of basic
and pay subscribers, projected changes in service rates, and estimated
expenditures for future installation of cable plant and other future capital
requirements.
4. Residual Value
Under both the return-on-equity and the return-on-investment approaches,
Strategis Financial Consulting has calculated a residual value for the System
following the seven-year projection period. The residual represents the
anticipated value of the System at the end of the projection period. This value
is added to the System's cash flow stream in the final year of the projection
period and then discounted back to present value.
The residual is calculated as a multiple of the projected annual net cash
flow in the final year of the discounted cash flow analysis. The multiple used
reflects the degree of likelihood that the System will have significant future
income, and therefore value, at the end of the projection period. If the
franchise is likely to be renewed on the same terms as the current franchise,
and if there is a realistic expectation of continued growth in income, a higher
multiple will be applied. On the other hand, if the franchise is not likely to
be renewed, or is renewed on terms and conditions significantly different from
the current franchise, or if competitive or technological factors jeopardize the
operator's future income, a lower multiple is appropriate.
Based on its experience and familiarity with the cable industry, and its
analysis of the System, Strategis Financial Consulting has calculated the
System's residual value using seventh-year cash flow times a multiple of 9.0, as
shown in Exhibit J. This multiple reflects Strategis Financial Consulting's view
that the System is likely to have significant value in seven years, but that
certain unknowns and uncertainties must be factored into the multiple
nonetheless. Currently, the Cable Act of 1984 puts operators
30
in a favorable position in that cable franchises are generally likely to be
renewed. However, the 1984 Act provides no guarantee of renewal, and it is
expected that the negotiation process required to obtain a renewal will result
in new franchises that will be on terms significantly different and probably
less favorable than current franchises. In addition, concerns about how re-
regulation of the cable industry will affect the Act's renewal provisions could
have the effect of reducing or eliminating the operator's expectation of
renewal.
5. Discount Rates
A critical component of both the return-on-equity and the return-on-
investment approaches is the selection of the rate at which future cash flows
are discounted to their present value. The discount rate represents the
investor's expected return on capital, i.e., the rate of return that reasonably
reflects the risk being undertaken by the investor.
Considering the relative risk associated with the cable industry in
comparison to other industries, and the risk associated with the System in
particular, Strategis Financial Consulting has adopted a range of discount rates
for its discounted cash flow methods. In the after-tax return-on-equity model,
Strategis Financial Consulting has applied a discount rate of 14.0% for its low
valuation, and a rate of 12.0% for its high valuation. In the pre-tax return-on-
investment model, the low valuation discount rate is 16.6%, while the high
valuation rate is 15.1%. The discount rates used in the two discounted cash flow
methods are indicated on Exhibit A and summarized in Exhibit J.
Strategis Financial Consulting has calculated the discount rate for the
return-on-equity model by first establishing a risk-free rate of return (the
current rate of return available on Treasury bills or Treasury bonds as of the
valuation date) and then adding the historical premium for risk that the market
has actually provided the holders of representative cable television stocks.
This assumes that using such historical data will provide a reasonable guide to
future return expectations after recognition for risk.
The discount rate incorporates systematic risk, which is the sensitivity of
the return on the subject investment to changes in the return for the market as
a whole.
31
Strategis Financial Consulting also has considered in our selection of the
discount rates unsystematic risk, which is any risk premium directly associated
with the industry, particular company, or the subject system. Thus, internal
risk factors, such as the possibility of competition, municipal and customer
relations, rate structure, franchise stability, etc., have been examined in our
selection of the discount rates.
The discount rate used in the return-on-investment model is determined by
the "band of investment" method. The rate is based on an average of the rate
applicable to equity and the cost of debt weighted in the proportions that are
utilized for the particular system.
C. Direct Income Methodology
An alternative valuation method to the discounted cash flow method is the
direct income method, in which the estimate of the cable system's value is based
on current net operating income times a multiple selected by the appraiser.
Strategis Financial Consulting has applied several alternative versions of this
method to the System. In the first model, Strategis Financial Consulting used
the System's actual annual net operating income for the 12-month period
preceding the valuation date, whenever the appropriate data was available. When
data was insufficient to ascertain the actual net operating income for the past
full year, Strategis Financial Consulting estimated the past year's annual net
operating income based on available financial information for the past several
months. In the second, the System's current cash flow as of the appraisal date
was annualized to create a "running rate" net operating income projection. In
the third model, Strategis Financial Consulting used the System's projected net
operating income for the twelve months following the appraisal date. The results
of these models are set forth in Exhibit A.
The multiples applied to each of these income figures are derived from a
variety of cable industry data. First, Strategis Financial Consulting has looked
at the income and stock value of several publicly traded cable companies as of
the appraisal date. From this analysis, Strategis Financial Consulting has
derived a range of multiples that it
32
believes are applicable to privately held cable systems, which includes
adjustments for control and marketability. Taking into account multiples derived
from the sale of other cable television systems, Strategis Financial Consulting
has arrived at a composite figure for each model. In the historical income
model, Strategis Financial Consulting has applied a low multiple of 9.5 and a
high multiple of 10.5. The running rate and projected income models use slightly
lower multiples to account for the additional risk and uncertainty of using
projections rather than historical data. The multiples used in each of the three
direct income approaches are indicated in Exhibit A and summarized again in
Exhibit J.
D. Value Conclusions
The valuations yielded by each of the methods described above are shown in
Exhibit A. In arriving at a final System valuation, Strategis Financial
Consulting considered both discounted cash flow methods, i.e., the return-on-
equity and return-on-investment methods, and the direct income methods. Based
upon the foregoing analysis and a consideration of the various methods,
Strategis Financial Consulting concludes that the fair market value of the
System as a business enterprise as of December 31, 1997, was $11,118,000.
33
VI. CONTINGENCIES AND LIMITING CONDITIONS
Our conclusions as to the value of the System are based upon the following,
which to the best of our knowledge and belief are reliable and sound:
1. Information and data obtained during an onsite inspection by a
representative(s) of Strategis Financial Consulting of a
representative portion of the System and communities served.
2. Personal and telephone interviews with the System's employees.
3. Selected documents including:
a. Various operating data and maps.
b. Miscellaneous internal data and documents.
The following limiting conditions apply to the subject appraisal:
1. Strategis Financial Consulting is under no obligation to update the
appraisal to account for events or additional data subsequent to the
appraisal date. The appraisal is based on laws and regulations in
place as of December 31, 1997, and does not reflect subsequent
changes, if any, in the relevant laws and regulations.
2. Neither this report nor any portions thereof may be used for any
purpose other than as stated herein nor may it be reproduced or
excerpted without the prior written consent of Strategis Financial
Consulting.
3. No copies of this report will be furnished to entities other than the
client without the client's specific permission or direction unless
ordered by a court of competent jurisdiction.
4. The comments and judgments of Strategis Financial Consulting as to the
physical and terminal state of the cable system were made by
representatives who are expert in valuing cable television assets but
not by qualified cable television engineers. Consequently, readers
should not rely on any statement made herein for any purpose other
than those set forth in this appraisal.
34
5. Strategis Financial Consulting did not consider, or factor into the
appraisal, any impact on value that might be caused by the presence of
toxic waste or hazardous material including electromagnetic radiation
or other forms of radio frequency radiation.
35
VII. STATEMENT OF VALUE
Strategis Financial Consulting certifies that a personal inspection of a
representative portion of the communities and System was made by a qualified
representative of this firm and that, to the best of our knowledge, the
statements contained in this appraisal are correct and that the opinions stated
are based on consideration of the relevant factors. In addition, neither
Strategis Financial Consulting nor any of its representatives have any current
interest or contemplated future interest in the entities appraised. In addition,
the fee paid for this report by Jones Intercable, Inc. is in no way dependent on
the values determined herein.
Based on the various analyses, computations, and considerations discussed
in this report, it is our professional judgment, subject to the assumptions and
limitations stated in this report, that the range of values as stated in this
report are true and correct. Therefore, it is the professional opinion of
Strategis Financial Consulting that the fair market value of the Cable TV Fund
14-B cable television system serving Littlerock, California as a business
enterprise, as of December 31, 1997, free and clear of any encumbrances, is
$11,118,000.
STRATEGIS FINANCIAL CONSULTING, INC.
____________________________________
By: Andrew R. Gefen
President
February 20, 1998
36
VIII. QUALIFICATIONS
A. Qualifications of Strategis Financial Consulting, Inc.
Strategis Financial Consulting, Inc. and its corporate parent, The
Strategis Group (formerly Malarkey-Taylor Associates-EMCI), have served the
communications industry for nearly 30 years specializing in the field of cable,
cellular, paging, mobile radio, and broadcasting technologies. Our companies
have completed thousands of projects for clients in the communications industry
and in the financial and investment communities. Our organizations are composed
of a multi-disciplinary team of professionals who combine academic training in
accounting, finance, engineering, marketing, management, economics, and law with
many years of experience solving problems for hundreds of clients in both the
public and private sectors.
A large portion of our financial, engineering, and managerial
professionals' time is devoted to the appraisal of cable television systems,
cellular telephone systems, paging systems, and broadcast stations. Since 1964,
we have appraised hundreds of communications properties for purposes of
financing, ownership transfers, property tax assessments, and estate planning
and probating. Our appraisal experience has included independent fair market
valuations and purchase price allocations, including valuation of both tangible
assets and intangible assets such as franchises, licenses, subscriber lists,
leases, and contracts. Strategis Financial has supplied expert testimony on
cable, cellular, paging, and broadcast property values in court and other legal
hearings.
37
B. Qualifications of Andrew R. Gefen
Andrew R. Gefen is the President of Strategis Financial Consulting, Inc. He
has provided valuation, financial, accounting and consulting services to
numerous cellular telephone, cable television, broadcasting, and paging
companies. Mr. Gefen is involved in the fair market valuation and asset
appraisal of publicly and privately held cellular telephone systems, cable
television systems, broadcast stations, paging systems, programming networks,
and Multichannel Multipoint Distribution Service (MMDS) systems. He has valued
over 100 cellular telephone systems and over 200 cable television systems with
an aggregate value of over $3 billion.
Mr. Gefen has provided expert testimony on the valuation of cellular
telephone systems, MMDS systems, cable television systems, and paging systems.
He has also assisted in the development of a statewide cellular telephone
network, and provided consulting services to professional sports leagues, cable
television programming networks, and U.S. Government agencies. His work has
included valuation and due diligence projects in several countries in Europe and
Latin America.
He has acquired an in-depth knowledge of the values of cellular systems,
cable television systems, broadcast stations, and paging systems, including
their market characteristics, growth prospects, construction costs, operating
cost structures, and other industry issues. Mr. Gefen has substantial
experience in the tax issues arising from the purchase and sale of cable and
broadcast properties. In addition, he has supported the taxpayer's values of
tangible and intangible assets during Internal Revenue Service reviews.
Mr. Gefen was previously with the communications consulting firm of
Frazier, Gross & Kadlec, Washington, D.C., as the Manager of the Appraisal Group
where he directed and participated in the asset appraisals of over 200
communications properties, primarily in the radio and television industry.
EXPERIENCE
President, Strategis Financial Consulting, Inc., Washington, D.C., 1988-present.
Business Analyst and Project Manager, American Management Systems, Arlington,
VA.
Planning Consultant, Panelvision Corporation, Pittsburgh, Pennsylvania.
Programmer and Chief Announcer, WBRU (FM), Providence, Rhode Island.
EDUCATION
M.S., Industrial Administration (M.B.A.), Carnegie-Mellon University,
Pittsburgh, Pennsylvania.
B.A., Economics, Brown University, Providence, Rhode Island.
38
C. Qualifications of Elisabeth Boehler
Elisabeth Boehler joined Strategis Financial Consulting, Inc. as a
Consultant. She conducts financial analyses, financial modeling and research for
the telecommunications industry. Ms. Boehler was previously a consultant in the
telecommunications industry, providing marketing research and analysis to
Internet and satellite communications providers as well as Regional Bell
Operating Company and long distance carrier clients.
Ms. Boehler has significant experience in financial analysis. While an
analyst with the CBS Television Network in New York City, she prepared
consolidated network income statements, cash forecasts and budgets, and
performed variance and profitability analyses. While at GE Medical Systems
Europe she conducted a financial and process audit of their multi-national lease
portfolio.
EXPERIENCE
Analyst/Consultant, Weber and Associates, Sterling, VA, 1997.
Analyst, General Electric Medical Systems - Europe, Buc, France, 1994-1995.
Senior Financial Analyst, CBS Inc., New York, NY, 1991-1994.
Assistant Controller, Melhado, Flynn & Associates, New York, NY, 1990-1991.
EDUCATION
M.B.A., INSEAD, Fontainebleau, France.
B.S.M., Management, Tulane University, New Orleans, Louisiana
39
EXHIBITS
EXHIBIT A
- --------------------------------- ---------
CABLE TV FUND 14-B
LITTLEROCK, CALIFORNIA
AS OF DECEMBER 31, 1997
- ---------------------------------
VALUATION METHODS
- -----------------
LOW HIGH
--- ----
I. MULTIPLE OF PAST YEAR'S OPERATING INCOME
OPERATING INCOME, PER BOOKS (12/31/97) $ 1,157,012 $ 1,157,012
VALUATION MULTIPLE 9.5 10.5
----------- -----------
ESTIMATED FAIR MARKET VALUE $10,991,614 $12,148,626
----------- -----------
II. MULTIPLE OF "RUNNING RATE" OPERATING INCOME
ESTIMATED OPERATING INCOME
TOTAL CURRENT YEAR'S REVENUE $ 2,578,058 $ 2,578,058
OPERATING MARGIN, PER BOOKS (12/31/97) 45.8% 45.8%
----------- -----------
"RUNNING RATE" OPERATING INCOME 1,181,981 1,181,981
VALUATION MULTIPLE 9.0 10.0
----------- -----------
ESTIMATED FAIR MARKET VALUE $10,637,832 $11,819,813
----------- -----------
III. MULTIPLE OF NEXT YEAR'S OPERATING INCOME
OPERATING INCOME $ 1,292,000 $ 1,292,000
VALUATION MULTIPLE 8.5 9.5
----------- -----------
ESTIMATED FAIR MARKET VALUE $10,981,999 $12,273,999
----------- -----------
IV. DISCOUNTED CASH FLOW RETURN ON EQUITY
TARGET RETURN ON EQUITY 14.0% 12.0%
ESTIMATED FAIR MARKET VALUE $10,452,720 $11,338,789
----------- -----------
V. DISCOUNTED CASH FLOW RETURN ON INVESTMENT
TARGET RETURN ON INVESTMENT 16.6% 15.1%
ESTIMATED FAIR MARKET VALUE $10,456,733 $11,282,266
----------- -----------
SUMMARY OF VALUES
- -----------------
I. MULTIPLE OF PAST YEAR'S OPERATING INCOME $10,991,614 $12,148,626
II. MULTIPLE OF "RUNNING RATE" OPERATING INCOME 10,637,832 11,819,813
III. MULTIPLE OF NEXT YEAR'S OPERATING INCOME 10,981,999 12,273,999
IV. DISCOUNTED CASH FLOW RETURN ON EQUITY 10,452,720 11,338,789
V. DISCOUNTED CASH FLOW RETURN ON INVESTMENT 10,456,733 11,282,266
----------- -----------
RANGE OF ESTIMATED FAIR MARKET VALUES $10,614,000 $11,622,000
ESTIMATED FAIR MARKET VALUE $11,118,000
===========
- -----------------------------------
CABLE TV FUND 14-B EXHIBIT B
LITTLEROCK, CALIFORNIA LOW ANALYSIS
AS OF DECEMBER 31, 1997 ------------
- -----------------------------------
RETURN ON EQUITY METHOD
PROFIT AND LOSS - LOW VALUE
- ---------------------------
YEAR ENDING DECEMBER 31, 1998 1999 2000 2001 2002 2003 2004 TOTAL
---- ---- ---- ---- ---- ---- ---- -----
REVENUES $2,730,899 $2,924,541 $3,109,980 $3,308,104 $3,507,301 $3,708,837 $3,919,943 $23,209,605
OPERATING EXPENSES 1,438,899 1,507,945 1,589,360 1,665,944 1,744,766 1,825,475 1,911,846 11,684,237
---------- ---------- ---------- ---------- ---------- ---------- ---------- -----------
OPERATING INCOME $1,292,000 $1,416,596 $1,520,619 $1,642,160 $1,762,534 $1,883,362 $2,008,097 $11,525,368
OPERATING MARGIN 0.47 0.48 0.49 0.50 0.50 0.51 0.51
PARENT SERVICES/MGT FEE (5%) 136,545 146,227 155,499 165,405 175,365 185,442 195,997 1,160,480
FRANCHISE AMORTIZATION (15) 280,333 280,333 280,333 280,333 280,333 280,333 280,333 1,962,333
SUBSCRIBER LIST (8) 209,500 209,500 209,500 209,500 209,500 209,500 209,500 1,466,500
NON-COMPETE COVENANTS (0) 0 0 0 0 0 0 0 0
DEPRECIATION 767,577 1,444,460 1,204,928 952,275 777,305 791,976 829,604 6,768,126
INTEREST 524,747 542,188 542,188 491,822 455,604 415,764 371,940 3,344,255
---------- ---------- ---------- ---------- ---------- ---------- ---------- -----------
PRE-TAX INCOME ($626,703) ($1,206,113) ($871,829) ($457,175) ($135,573) $346 $120,722 ($3,176,325)
INCOME TAX (EXPENSE)/BENEFIT 213,079 410,078 296,422 155,440 46,095 (118) (41,045) 1,079,951
---------- ---------- ---------- ---------- ---------- ---------- ---------- -----------
NET INCOME ($413,624) ($796,034) ($575,407) ($301,736) ($89,478) $229 $79,676 ($2,096,375)
SOURCES AND USES OF CASH
- ------------------------
SOURCES OF CASH -
PRE TAX INCOME ($626,703) ($1,206,113) ($871,829) ($457,175) ($135,573) $346 $120,722 ($3,176,325)
FRANCHISE AMORTIZATION (15) 280,333 280,333 280,333 280,333 280,333 280,333 280,333 1,962,333
SUBSCRIBER LIST (8) 209,500 209,500 209,500 209,500 209,500 209,500 209,500 1,466,500
NON-COMPETE COVENANTS (0) 0 0 0 0 0 0 0 0
DEPRECIATION 767,577 1,444,460 1,204,928 952,275 777,305 791,976 829,604 6,768,126
EQUITY 5,247,474 5,247,474
DEBT 5,247,474 174,410 0 0 0 0 0 5,421,885
RESIDUAL VALUE IN YEAR 7 18,072,871 18,072,871
---------- -----------
TOTAL SOURCES OF CASH $11,125,656 $902,590 $822,932 $984,933 $1,131,565 $1,282,156 $19,513,030 $35,762,864
USES OF CASH-
PURCHASE PRICE - CURRENT $10,452,720 $10,452,720
CAPITAL EXPENDITURES 572,825 902,702 310,658 331,846 344,896 356,384 368,259 3,187,570
DEBT RETIREMENT 0 0 503,665 362,180 398,398 438,238 3,719,403 5,421,885
TAXES PAID ON NET INCOME 0 0 0 0 0 0 0 0
TAXES PAID ON SALE (RESIDUAL) 3,894,093 3,894,093
---------- -----------
TOTAL USES OF CASH $11,025,545 $902,702 $814,323 $694,027 $743,294 $794,622 $7,981,755 $22,956,268
ANNUAL CASH INCREASE/(DECREASE) $100,112 ($112) $8,609 $290,906 $388,271 $487,534 $11,531,276 $12,806,596
CUMULATIVE CASH 100,112 100,000 108,609 399,516 787,787 1,275,321 12,806,596
- ------------------------
CABLE TV FUND 14-8 EXHIBIT 8
LITTLEROCK, CALIFORNIA HIGH ANALYSIS
AS OF DECEMBER 31, 1997 -------------
- ------------------------
RETURN ON EQUITY METHOD
PROFIT AND LOSS-HIGH VALUE
- --------------------------
YEAR ENDING DECEMBER 31, 1998 1999 2000 2001 2002 2003 2004 TOTAL
---- ---- ---- ---- ---- ---- ---- -----
REVENUES $2,730,899 $2,024,501 $3,109,990 $3,308,104 $3,507,301 $3,708,837 $3,910,943 $23,209,605
OPERATING EXPENSES 1,438,899 1,507,045 1,500,360 1,665,044 1,744,765 1,825,475 1,911,846 11,684,237
----------- ---------- ---------- ---------- ---------- ---------- ----------- -----------
OPERATING INCOME $1,292,000 $1,416,596 $1,520,619 $1,642,160 $1,762,534 $1,883,362 $2,008,097 $11,525,366
OPERATING MARGIN 0.47 0.48 0.49 0.50 0.50 0.51 0.51
PARENT SERVICES/MGT FEE (6%) 136,546 148,227 155,499 165,405 175,365 185,442 195,997 1,160,480
FRANCHISE AMORTIZATION (15) 280,333 280,333 280,333 280,333 280,333 280,333 280,333 1,962,333
SUBSCRIBER LIST (8) 209,500 209,500 209,500 209,500 209,500 209,500 209,500 1,466,500
NON-COMPETE COVENANTS (0) 0 0 0 0 0 0 0 0
DEPRECIATION 767,577 1,444,460 1,204,928 952,276 777,305 791,976 820,604 6,768,128
INTEREST 571,384 594,004 594,004 547,959 496,096 452,715 404,996 3,661,157
----------- ---------- ---------- ---------- ---------- ---------- ----------- -----------
PRE-TAX INCOME ($673,340) ($1,257,928) ($923,645) ($513,311) ($176,065) ($36,605) $87,666 ($3,493,227)
INCOME TAX (EXPENSE) BENEFIT 228,936 427,695 314,009 174,526 59,667 12,446 (29,806) 1,187,697
----------- ---------- ---------- ---------- ---------- ---------- ----------- -----------
NET INCOME ($444,404) ($830,232) ($609,605) ($338,786) ($116,203) ($24,159) $57,859 ($2,305,530)
SOURCES AND USES OF CASH
- ------------------------
SOURCES OF CASH -
PRE TAX INCOME ($673,340) ($1,257,928) ($923,645) ($513,311) ($176,065) ($36,605) $87,688 ($3,493,227)
FRANCHISE AMORTIZATION (15) 280,333 280,333 280,333 280,333 280,333 280,333 280,333 1,982,333
SUBSCRIBER LIST (8) 209,500 209,500 209,500 209,500 209,500 209,500 209,500 1,466,500
NON-COMPETE COVENANTS (0) 0 0 0 0 0 0 0 0
DEPRECIATION 767,577 1,444,460 1,204,928 952,276 777,305 791,976 820,604 6,768,128
EQUITY 5,713,643 5,713,643
DEBT 5,713,643 228,195 0 0 0 0 0 5,940,036
RESIDUAL VALUE IN YEAR 7 18,072,871 18,072,871
----------- ---------- ---------- ---------- ---------- ---------- ----------- -----------
TOTAL SOURCES OF CASH $12,011,756 $902,560 $771,117 $928,797 $1,091,074 $1,245,205 $19,479,974 $36,430,483
USES OF CASH -
PURCHASE PRICE - CURRENT $11,338,789 $11,338,789
CAPITAL EXPENDITURES 572,825 902,702 310,658 331,846 344,896 356,384 368,259 3,187,570
DEBT RETIREMENT 0 0 460,459 518,623 433,806 477,187 4,049,954 5,940,038
TAXES PAID ON NET INCOME 0 0 0 0 0 0 0 0
TAXES PAID ON SALE
(RESIDUAL) 3,405,083 3,405,083
----------- ---------- ---------- ---------- ---------- ---------- ----------- -----------
TOTAL USES OF CASH $11,911,614 $902,702 $771,117 $850,469 $776,702 $833,571 $7,903,306 $23,051,480
ANNUAL CASH INCREASE
(DECREASE) $100,142 ($142) $0 $76,328 $312,372 $411,634 $11,676,699 $12,479,003
CUMULATIVE CASH 100,142 100,000 100,000 178,328 480,700 802,335 12,479,003
[LOGO OF STRATEGIS
GROUP APPEARS HERE]
- -----------------------------------
CABLE TV FUND 14-B EXHIBIT C
LITTLEROCK, CALIFORNIA LOW ANALYSIS
AS OF DECEMBER 31, 1997 ------------
- -----------------------------------
RETURN ON EQUITY METHOD
DEBT AMORTIZATION - LOW VALUE
- -----------------------------
TOTAL YEAR 1 CASH REQUIREMENTS $10,494,949
YEAR 1 DEBT REQUIREMENTS 5,247,474
YEAR 1 EQUITY REQUIREMENTS 5,247,474
FINANCING AVAILABLE $7,520,578 $8,397,999 $9,207,873 $9,884,026 $10,674,042 $11,456,474 $12,241,853
UNUSED LEVERAGE 2,273,104 2,976,115 4,289,653 5,327,987 6,516,401 7,737,071 9,004,512
SENIOR DEBT: 1998 1999 2000 2001 2002 2003 2004 TOTAL
---- ---- ---- ---- ---- ---- ---- -----
BEGINNING DEBT $0 $5,247,474 $5,247,474 $4,918,220 $4,556,039 $4,157,641 $3,719,403
DEBT ADDED 5,247,474 0 0 0 0 0 0 5,247,474
TOTAL ANNUAL PAYMENTS 524,747 524,747 854,002 854,002 854,002 854,002 854,002 5,319,506
INTEREST 524,747 524,747 524,747 491,822 455,604 415,764 371,940 3,309,373
PRINCIPAL REPAYMENT 0 0 329,255 362,180 398,398 438,238 482,062 2,010,134
ENDING BALANCE 5,247,474 5,247,474 4,918,220 4,556,039 4,157,641 3,719,403 3,237,341
LINE OF CREDIT:
BEGINNING DEBT $0 $0 $174,410 $0 $0 $0 $0 $0
BORROWINGS 0 174,410 0 0 0 0 0 174,410
PRINCIPAL PAYMENTS 0 0 174,410 0 0 0 0 174,410
INTEREST 0 17,441 17,441 0 0 0 0 34,882
SENIOR DEBT COVERAGE 4.1 3.7 3.2 2.8 2.4 2.0 1.6
LOC DEBT COVERAGE 0.0 0.1 0.0 0.0 0.0 0.0 0.0
TOTAL DEBT COVERAGE 4.1 3.8 3.2 2.8 2.4 2.0 1.6
- -----------------------------------
CABLE TV FUND 14-B EXHIBIT C
LITTLEROCK, CALIFORNIA HIGH ANALYSIS
AS OF DECEMBER 31, 1997 -------------
- -----------------------------------
RETURN ON EQUITY METHOD
DEBT AMORTIZATION - HIGH VALUE
- ------------------------------
TOTAL YEAR 1 CASH REQUIREMENTS $11,427,685
YEAR 1 DEBT REQUIREMENTS 5,713,843
YEAR 1 EQUITY REQUIREMENTS 5,713,843
FINANCING AVAILABLE $8,677,590 $9,689,999 $10,624,468 $11,404,646 $12,316,202 $13,219,008 $14,125,215
UNUSED LEVERAGE 2,963,747 3,749,961 5,144,890 6,443,689 7,789,052 9,169,044 10,600,156
SENIOR: 1998 1999 2000 2001 2002 2003 2004 TOTAL
---- ---- ---- ---- ---- ---- ---- -----
BEGINNING DEBT $0 $5,713,843 $5,713,843 $5,355,325 $4,960,956 $4,527,150 $4,049,964
DEBT ADDED 5,713,843 0 0 0 0 0 0 $5,713,843
TOTAL ANNUAL PAYMENTS 571,384 571,384 929,902 929,902 929,902 929,902 929,902 5,792,276
INTEREST 571,384 571,384 571,384 535,533 496,096 452,715 404,996 3,603,492
PRINCIPAL REPAYMENT 0 0 358,517 394,369 433,806 477,187 524,905 2,188,784
ENDING BALANCE 5,713,843 5,713,843 5,355,325 4,960,956 4,527,150 4,049,964 3,525,059
LINE OF CREDIT:
BEGINNING DEBT $0 $0 $226,195 $124,254 $0 $0 $0 $0
BORROWINGS 0 226,195 0 0 0 0 0 226,195
PRINCIPAL PAYMENTS 0 0 101,942 124,254 0 0 0 226,195
INTEREST 0 22,620 22,620 12,425 0 0 0 57,664
SENIOR DEBT COVERAGE 4.4 4.0 3.5 3.0 2.6 2.2 1.8
LOC DEBT COVERAGE 0.0 0.2 0.1 0.0 0.0 0.0 0.0
TOTAL DEBT COVERAGE 4.4 4.2 3.6 3.0 2.6 2.2 1.8
- -----------------------------------
CABLE TV FUND 14-B EXHIBIT D
LITTLEROCK, CALIFORNIA ---------
AS OF DECEMBER 31, 1997
- -----------------------------------
RETURN ON INVESTMENT METHOD
PROFIT AND LOSS
- ---------------
YEAR ENDING DECEMBER 31, 1998 1999 2000 2001 2002 2003 2004 TOTAL
---- ---- ---- ---- ---- ---- ---- -----
REVENUES $2,730,899 $2,924,541 $3,109,980 $3,308,104 $3,507,301 $3,708,837 $3,919,943 $23,209,605
OPERATING EXPENSES 1,438,899 1,507,945 1,589,360 1,665,944 1,744,766 1,825,475 1,911,846 11,684,237
----------- ---------- ---------- ---------- ---------- ---------- ----------- -----------
OPERATING INCOME 1,292,000 1,416,596 1,520,619 1,642,160 1,762,534 1,883,362 2,008,097 11,525,368
PLUS: RESIDUAL VALUE 18,072,871 18,072,871
LESS: CAPITAL EXPENDITURES 572,825 902,702 310,658 331,846 344,896 356,384 368,259 3,187,570
----------- ---------- ---------- ---------- ---------- ---------- ----------- -----------
TOTAL CASH FLOW $719,175 $513,894 $1,209,962 $1,310,314 $1,417,638 $1,526,978 $19,712,709 $26,410,670
NET PRESENT VALUE @ 16.6% $10,456,733
-----------
NET PRESENT VALUE @ 15.1% $11,282,266
-----------
- -----------------------------------
CABLE TV FUND 14-B EXHIBIT E
LITTLEROCK, CALIFORNIA ---------
AS OF DECEMBER 31, 1997
- -----------------------------------
CABLE TELEVISION SUBSCRIBERS
- ----------------------------
YEAR ENDING DECEMBER 31, 1998 1999 2000 2001 2002 2003 2004
---- ---- ---- ---- ---- ---- ----
BEGINNING MILES 230.3
MILES ADDED 2.5 2.6 2.6 2.6 2.9 2.9 3.0
CUMULATIVE MILES 232.8 235.4 238.0 240.6 243.5 246.4 249.4
DENSITY OF ADDITIONAL PLANT 36 36 36 36 36 36 36
HOMES PASSED - BEGINNING 8,184
NEW HOMES & EXTENSIONS 90 91 92 93 103 104 105
HOMES PASSED - ENDING 8,274 8,365 8,457 8,550 8,653 8,757 8,862
GROWTH IN HOMES 1.1% 1.1% 1.1% 1.1% 1.2% 1.2% 1.2%
BASIC - BEGINNING SUBSCRIBERS 5,672 5,817 5,923 6,030 6,139 6,213 6,288
AVERAGE SUBSCRIBERS 5,745 5,870 5,977 6,085 6,176 6,250 6,325
ENDING SUBSCRIBERS 5,817 5,923 6,030 6,139 6,213 6,288 6,363
PENETRATION 70.3% 70.8% 71.3% 71.8% 71.8% 71.8% 71.8%
EXPANDED BASIC - BEGINNING 4,891 5,045 5,167 5,290 5,417 5,513 5,579
AVERAGE SUBSCRIBERS 4,968 5,106 5,229 5,354 5,465 5,546 5,613
ENDING SUBSCRIBERS 5,045 5,167 5,290 5,417 5,513 5,579 5,646
PENETRATION 86.7% 87.2% 87.7% 88.2% 88.7% 88.7% 88.7%
PAY TV - BEGINNING UNITS 4,017 3,945 3,958 3,999 4,041 4,059 4,107
AVERAGE UNITS 3,981 3,952 3,979 4,020 4,050 4,083 4,132
ENDING UNITS 3,945 3,958 3,999 4,041 4,059 4,107 4,157
PENETRATION 67.8% 66.8% 66.3% 65.8% 65.3% 65.3% 65.3%
PAY PER VIEW - BEGINNING UNITS/MO 603 746 893 1,091 1,300 1,513 1,781
AVERAGE UNITS 674 819 992 1,195 1,406 1,647 1,922
ENDING UNITS 746 893 1,091 1,300 1,513 1,781 2,062
AVERAGE BUY RATE/MO 18.9% 21.9% 25.9% 29.9% 33.9% 38.9% 43.9%
CONVERTER RENTALS - BEGINNING 5,455 5,711 5,874 6,041 6,212 6,348 6,487
AVERAGE SUBSCRIBERS 5,583 5,792 5,957 6,126 6,280 6,418 6,558
ENDING SUBSCRIBERS 5,711 5,874 6,041 6,212 6,348 6,487 6,629
PENETRATION 98.2% 99.2% 100.2% 101.2% 102.2% 103.2% 104.2%
ADDRESSABLE HOMES 3,790 3,945 4,076 4,210 4,348 4,462 4,579
AVERAGE HOMES 3,868 4,011 4,143 4,279 4,405 4,520 4,638
ENDING HOMES 3,945 4,076 4,210 4,348 4,462 4,579 4,697
PENETRATION 67.8% 68.8% 69.8% 70.8% 71.8% 72.8% 73.8%
BASIC CHURN RATE 37% 37% 37% 37% 37% 37% 37%
- -----------------------------------
CABLE TV FUND 14-B EXHIBIT F
LITTLEROCK, CALIFORNIA ---------
AS OF DECEMBER 31, 1997
- -----------------------------------
SERVICE RATES
- -------------
CURRENT RATES
- -------------
BASIC $13.81
EXPANDED BASIC 12.54
PAY 6.58
PAY PER VIEW 12.22
CONVERTER RENTALS 1.99
INSTALLATIONS-NEW 35.54
INSTALLATIONS-CHURN 25.39
YEAR ENDING DECEMBER 31, 1998 1999 2000 2001 2002 2003 2004
---- ---- ---- ---- ---- ---- ----
PERCENTAGE RATE INCREASES
- -------------------------
BASIC 4% 4% 3% 3% 3% 3% 3%
EXPANDED BASIC 4% 7% 4% 3% 3% 3% 3%
PAY 15% 1% 1% 1% 1% 1% 1%
PAY PER VIEW 0% -8% -6% -4% 0% 0% 0%
CONVERTER RENTALS 0% 3% 3% 3% 3% 3% 3%
INSTALLATIONS-NEW 0% 3% 3% 3% 3% 3% 3%
INSTALLATIONS-CHURN 0% 3% 3% 3% 3% 3% 3%
AVERAGE RATES
- -------------
BASIC $14.37 $14.87 $15.32 $15.78 $16.25 $16.74 $17.24
EXPANDED BASIC 13.10 14.03 14.60 15.04 15.49 15.95 16.43
PAY 7.57 7.64 7.72 7.80 7.87 7.95 8.03
PAY PER VIEW 12.22 11.24 10.57 10.15 10.15 10.15 10.15
CONVERTERS RENTALS 1.99 2.05 2.11 2.17 2.24 2.30 2.37
INSTALLATIONS-NEW 35.54 36.61 37.70 38.84 40.00 41.20 42.44
INSTALLATIONS-CHURN 25.39 26.15 26.94 27.74 28.58 29.43 30.32
- -----------------------------------
CABLE TV FUND 14-B EXHIBIT G
LITTLEROCK, CALIFORNIA ---------
AS OF DECEMBER 31, 1997
- -----------------------------------
YEAR ENDING DECEMBER 31, 1996 1999 2000 2001 2002 2003 2004 TOTAL
---- ---- ---- ---- ---- ---- ---- -----
REVENUES:
BASIC $ 990,248 $1,047,676 $1,098,708 $1,152,168 $1,204,554 $1,255,579 $1,308,766 $8,057,699
EXPANDED BASIC 780,932 859,883 916,032 966,094 1,015,752 1,061,753 1,106,729 6,707,175
PAY TV 361,503 362,404 368,537 376,118 382,670 389,653 398,272 2,639,157
PAY PER VIEW 98,882 110,542 125,780 145,550 171,256 200,546 233,994 1,086,550
CONVERTER RENTALS 133,111 142,250 150,691 159,608 168,520 177,386 186,701 1,118,267
INSTALLATIONS 52,949 54,329 56,965 59,727 61,108 63,697 66,395 415,171
COMMERCIAL 0 0 0 0 0 0 0 0
ADVERTISING 105,288 126,346 146,561 168,545 192,141 217,120 243,174 1,199,175
MISCELLANEOUS 207,985 221,112 246,706 280,293 311,298 343,104 375,912 1,986,411
---------- ---------- ---------- ---------- ---------- ---------- ---------- -----------
TOTAL REVENUES $2,730,899 $2,924,541 $3,109,980 $3,308,104 $3,507,301 $3,708,837 $3,919,943 $23,209,605
OPERATING EXPENSES:
OPERATIONS $ 422,016 $ 444,484 $ 466,781 $ 490,304 $ 514,320 $ 538,717 $ 564,215 $ 3,440,838
GENERAL & ADMINISTRATIVE 327,179 342,002 356,643 371,968 387,293 402,603 418,518 2,606,207
SALES & MARKETING 28,559 29,782 31,087 32,451 33,697 35,021 36,397 226,994
PROGRAMMING 661,145 691,677 734,846 771,221 809,455 849,135 892,717 5,410,198
---------- ---------- ---------- ---------- ---------- ---------- ---------- -----------
TOTAL OPERATING EXPENSES $1,438,899 $1,507,945 $1,589,360 $1,665,944 $1,744,766 $1,825,475 $1,911,846 $11,684,237
---------- ---------- ---------- ---------- ---------- ---------- ---------- -----------
OPERATING INCOME $1,292,000 $1,416,596 $1,520,619 $1,642,160 $1,762,534 $1,883,362 $2,008,097 $11,525,368
OPERATING MARGIN 47.3% 48.4% 48.9% 49.6% 50.3% 50.8% 51.2%
TOTAL REVENUE/BASIC SUB/MONTH $39.62 $41.52 $43.36 $45.30 $47.32 $49.45 $51.64
CASH FLOW/BASIC SUB/MONTH $18.74 $20.11 $21.20 $22.49 $23.78 $25.11 $26.46
OPERATIONS % OF REVENUE 15% 15% 15% 15% 15% 15% 14%
G & A PERCENTAGE OF REVENUE 12% 12% 11% 11% 11% 11% 11%
SALES & MARKETING % OF REVENUE 1% 1% 1% 1% 1% 1% 1%
PROGRAMMING % OF REVENUE 24% 24% 24% 23% 23% 23% 23%
- -----------------------------------
CABLE TV FUND 14-B EXHIBIT H
LITTLEROCK, CALIFORNIA ---------
AS OF DECEMBER 31, 1997
- -----------------------------------
CAPITAL EXPENDITURES
- --------------------
YEAR ENDING DECEMBER 31, 1998 1999 2000 2001 2002 2003 2004 TOTAL
---- ---- ---- ---- ---- ---- ---- -----
ASSUMPTIONS AND INPUTS:
- -----------------------
BV OF EXISTING PLANT $4,798,606
ADDITIONAL MILES OF PLANT 2.5 2.6 2.6 2.6 2.9 2.9 3.0
AERIAL PLANT PER MILE $32,966 $33,625 $34,298 $34,984 $35,683 $36,397 $37,125
UNDERGROUND PLANT PER MILE $33,578 $34,250 $34,935 $35,633 $36,346 $37,073 $37,814
PERCENTAGE OF PLANT AERIAL 0% 0% 0% 0% 0% 0% 0%
PERCENTAGE OF PLANT UNDERGROUND 100% 100% 100% 100% 100% 100% 100%
AVERAGE COST PER CONVERTER $152 $155 $158 $161 $165 $168 $171
PERCENTAGE CONVERTER USE 98% 99% 100% 101% 102% 103% 104%
PERCENTAGE REPLACEMENT 5% 5% 5% 6% 6% 6% 6%
INSTALLATION COST PER SUBSCRIBER $40 $41 $42 $42 $43 $44 $45
MISC. CAPITAL PER SUBSCRIBER $5 $5 $5 $5 $5 $6 $6
INFLATION FACTOR FOR CAPITALS 0% 2% 2% 2% 2% 2% 2% 113%
ANNUAL COSTS:
- -------------
PLANT ADDITIONS - AERIAL $0 $0 $0 $0 $0 $0 $0 $0
- UNDERGROUND 85,059 87,715 90,453 93,277 104,934 108,317 111,809 681,566
PLANT REBUILD/UPGRADE 310,000 632,400 30,000 30,600 31,212 31,836 32,473 1,098,521
AVERAGE COST OF NEW CONVERTERS 21,657 16,270 17,020 17,802 12,385 12,909 13,455 111,499
CONVERTER REPLACEMENT 38,088 44,722 46,915 59,049 61,925 64,547 67,274 382,520
INSTALLATION COSTS 89,297 91,658 95,179 98,831 101,012 104,269 107,631 687,878
MISC. CAPITAL EXPENDITURES 28,723 29,937 31,091 32,287 33,427 34,505 35,617 225,587
-------- -------- -------- -------- -------- -------- -------- ----------
TOTAL CAPITAL EXPENDITURES $572,825 $902,702 $310,658 $331,846 $344,896 $356,384 $368,259 $3,187,570
AS A % OF OPERATING INCOME 44.3% 63.7% 20.4% 20.2% 19.6% 18.9% 18.3%
- -----------------------------------
CABLE TV FUND 14-B EXHIBIT I
LITTLEROCK, CALIFORNIA ---------
AS OF DECEMBER 31, 1997
- -----------------------------------
DEPRECIATION
- ------------
YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5 YEAR 6 YEAR 7
------ ------ ------ ------ ------ ------ ------
ESTIMATED DEPRECIATION RATES 14.3% 24.5% 17.5% 12.5% 8.9% 8.9% 8.9%
DEPRECIATION - BEG. & ADTNS. 1998 1999 2000 2001 2002 2003 2004 TOTAL
---- ---- ---- ---- ---- ---- ---- -----
YEAR 1 $767,577 $1,315,463 $ 939,463 $670,892 $ 479,669 $479,132 $479,669 $5,131,865
YEAR 2 128,996 221,072 157,883 112,747 80,611 80,521 781,830
YEAR 3 44,393 76,080 54,334 38,801 27,742 241,350
YEAR 4 47,421 81,269 58,040 41,448 228,177
YEAR 5 49,286 84,465 60,322 194,073
YEAR 6 50,927 87,278 138,206
YEAR 7 52,624 52,624
-------- ---------- ---------- --------- -------- -------- -------- ----------
TOTAL DEPRECIATION $767,577 $1,444,460 $1,204,928 $952,275 $777,305 $791,976 $829,604 $6,768,126
- ---------------------------------
CABLE TV FUND 14-B EXHIBIT J
LITTLEROCK, CALIFORNIA ---------
AS OF DECEMBER 31, 1997
- ---------------------------------
ASSUMPTIONS AND INPUTS
- ----------------------
REMAINING LIFE OF FRANCHISES (YEARS) 3
AVERAGE SUBSCRIBER LIFE (YEARS) 8
INCOME TAX RATE 34%
CAPITAL GAIN RATE 34%
NET FMV OF EXISTING ASSETS $4,798,606
SUBSCRIBERS IN FRANCHISES 100%
[CAPTION]
LOW HIGH
ANALYSIS ANALYSIS
-------- --------
DEBT PERCENTAGE 50% 50%
EQUITY PERCENTAGE 50% 50%
RESIDUAL MULTIPLE (ROE & ROI) 9.0 9.0
MULT OF PAST YEAR'S OPERATING INCOME 9.5 10.5
MULT OF CURRENT YEAR'S OPERATING INCOME 9.0 10.0
MULT OF NEXT YEAR'S OPERATING INCOME 8.5 9.5
TARGET RETURN ON EQUITY 14.0% 12.0%
TARGET RETURN ON INVESTMENT 16.6% 15.1%