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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE
SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only
(as permitted by Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or
[ ] Rule 14a-12
NORTHLAND CABLE PROPERTIES SIX
LIMITED PARTNERSHIP
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if Other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[ ] No Fee Required
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(4)
and 0-11
CALCULATION OF FILING FEE
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PER UNIT PRICE OR
OTHER UNDERLYING
VALUE OF PROPOSED
TRANSACTION MAXIMUM
TITLE OF EACH CLASS OF AGGREGATE NUMBER OF COMPUTED PURSUANT AGGREGATE
SECURITIES TO WHICH SECURITIES TO WHICH TO EXCHANGE VALUE OF
TRANSACTION APPLIES: TRANSACTION APPLIES: ACT RULE 0-11: TRANSACTION: TOTAL FEE PAID
- ---------------------- -------------------- ------------------ ------------ --------------
L.P. UNITS 29,784 $62,250,000 $62,250,000 $12,450
======================================================================================================
[X] Fee paid previously with preliminary materials.
- --------------------------------------------------------------------------------
[ ] Check box if any part of the fee is offset as provided by
Exchange Act Rule 0-11(a)(2) and identify the filing for which
the offsetting fee was paid previously. Identify the previous
filing by registration statement number, or the Form or Schedule
and the date of its filing.
(1) Amount Previously Paid: $12,450
(2) Form, Schedule, or Registration Statement no.: Commission File
No. 000-16063
(3) Filing Party: Registrant / Partnership
(4) Date Filed: December 21, 2000
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NORTHLAND CABLE PROPERTIES SIX LIMITED PARTNERSHIP
PROXY STATEMENT
To our Limited Partners:
This proxy statement solicits your vote for two separate proposals. The
first proposal, if approved, will extend the term of Northland Cable Properties
Six Limited Partnership ("NCP-Six") for six years until December 31, 2007. The
second proposal, if approved, will provide authority for NCP-Six to sell all of
its existing assets to two affiliates of its managing general partner, Northland
Communications Corporation, leading to the winding up of NCP-Six. NCP-Six's
current debt of approximately $28,215,000 matures on June 30, 2001. The lenders
have indicated they will not consider extending this credit facility, unless
NCP-Six's term is extended. If the debt is not paid upon its maturity, the
lenders could commence foreclosure actions against NCP-Six's assets. As a
consequence, the general partners strongly recommend that you vote in favor of
the proposed extension regardless of whether you approve or disapprove of the
proposed sale of NCP-Six's assets at this time. A vote in favor of extending
NCP-Six's term is separate from the approval or disapproval of the proposed
transaction.
Pursuant to the second proposal for which limited partner approval is
solicited in this proxy statement, if the requisite majority of limited partners
approve of the proposed transaction, NCP-Six will sell and distribute all of its
cable television systems and other assets to two companies affiliated with
Northland Communications Corporation in a transaction valued at $70,200,000.
Based on the valuation of the proposed transaction, projected cash distributions
to be made to the limited partners of NCP-Six over the life of NCP-Six (per $500
partnership unit) are as follows:
PRIOR CASH 120 DAYS AFTER CLOSING NON-RESIDENT ONE YEAR AFTER CLOSING TWO YEARS THREE YEARS
DISTRIBUTIONS THE PROPOSED TRANSACTION TAX(1) THE PROPOSED TRANSACTION AFTER CLOSING AFTER CLOSING TOTAL
- ------------- ------------------------ ------------ ------------------------ ------------- ------------- ------
$128 $691 $58 $189 $147 $137 $1,350
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(1)NCP-Six on behalf of its limited partners will pay a required non-resident
state income tax resulting from the proposed transaction out of purchase
price proceeds to the states of Mississippi, North Carolina and South
Carolina in the aggregate amount of $58 per partnership unit.
THE AMOUNTS SET FORTH IN THE PRECEDING TABLE ARE PROVIDED ON A PRO FORMA BASIS
AS OF DECEMBER 31, 2000, AND ARE BEING PROVIDED FOR ILLUSTRATIVE PURPOSES ONLY.
IT IS CURRENTLY ANTICIPATED THAT THE PROPOSED TRANSACTION WILL CLOSE IN JUNE
2001. ACTUAL AMOUNTS WILL VARY FROM THESE PROJECTIONS. (For details, see
"Projected Cash Available from Liquidation" on page .)
NCP-Six received offers to purchase NCP-Six's assets from various parties,
but the managing general partner is seeking approval for the sale of NCP-Six's
assets to two companies that are affiliates of the managing general partner. The
proposed transaction thus gives rise to certain conflicts of interest as
discussed in greater detail in this proxy statement. As a result, the general
partners of NCP-Six and their affiliates will abstain from voting on whether to
approve the proposed transaction. This leaves only limited partners of NCP-Six
that are not affiliated with the general partners to determine whether the
proposed transaction should be consummated.
This proxy statement and the accompanying proxy card are being furnished in
connection with the solicitation of proxies for use at a special meeting of
limited partners to be held at 3:00 p.m. on June 28, 2001. The special meeting,
and any postponements or adjournments, will be held at the offices of NCP-Six
located at 1201 Third Avenue, Suite 3600, Seattle, Washington 98101. Only
limited partners of record as of December 31, 2000 will be entitled to notice of
and to vote at the special meeting.
THE PROPOSALS FOUND IN THIS PROXY STATEMENT HAVE NOT BEEN APPROVED OR
DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION. THE COMMISSION HAS NOT
PASSED UPON THE FAIRNESS OR MERITS OF THE PROPOSED TRANSACTION, NOR UPON THE
ACCURACY OR ADEQUACY OF THE INFORMATION CONTAINED IN THIS PROXY STATEMENT. ANY
REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
YOU ARE URGED TO CAREFULLY REVIEW THIS PROXY STATEMENT AND TO RETURN YOUR
PROXY CARD PROMPTLY IN ORDER FOR IT TO BE RECEIVED BY THE MANAGING GENERAL
PARTNER ON OR BEFORE JUNE 27, 2001.
The date of this proxy statement is May 21, 2001. We are first mailing this
proxy statement
to limited partners on or about May 21, 2001.
Sincerely,
Northland Communications
Corporation,
managing general partner of NCP-Six
By:
----------------------------------
John S. Whetzell,
President
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NORTHLAND CABLE PROPERTIES SIX LIMITED PARTNERSHIP
1201 THIRD AVENUE, SUITE 3600
SEATTLE, WASHINGTON 98101
NOTICE OF SPECIAL MEETING OF LIMITED PARTNERS
ON JUNE 28, 2001
A special meeting of the limited partners of Northland Cable Properties Six
Limited Partnership will be held at the Washington Mutual Tower, 1201 Third
Avenue, Suite 3600, Seattle, Washington, on June 28, 2001 at 3:00 p.m. local
time. The meeting is called for the following purposes:
1. To vote on an amendment to the NCP-Six partnership agreement extending
the term of NCP-Six for an additional six years from December 31, 2001
to December 31, 2007 as further described in the accompanying proxy
statement. The complete text of the proposed amendment to extend the
term of the NCP-Six partnership agreement is attached as Exhibit C to
the accompanying proxy statement.
2. To vote on authorizing NCP-Six and its general partners to consummate
the proposed transaction described in the accompanying proxy statement
and to take all steps necessary to complete such transaction. The
complete text of the proposed amendment to authorize the proposed
transaction is attached as Exhibit D to the accompanying proxy
statement.
3. To transact any other business that properly comes before the special
meeting, including any adjournments or postponements of the meeting.
Only unaffiliated limited partners of record as of December 31, 2000 are
entitled to vote at the special meeting and any adjournments or postponements.
Each proposal will be adopted if holders of a majority of the outstanding
limited partnership units (not including units held by the general partners or
their affiliates) vote to "APPROVE" the proposal. Limited partners are not
entitled to dissenters' or appraisal rights under Washington law with respect to
the proposed transaction.
THE GENERAL PARTNERS RECOMMEND THAT YOU VOTE TO "APPROVE" EXTENDING
NCP-SIX'S TERM. THE GENERAL PARTNERS ALSO RECOMMEND THAT YOU VOTE TO "APPROVE"
THE PROPOSED TRANSACTION. THE GENERAL PARTNERS HAVE SIGNIFICANT CONFLICTS OF
INTEREST IN RECOMMENDING APPROVAL OF THE PROPOSED TRANSACTION BECAUSE NORTHLAND
COMMUNICATIONS CORPORATION IS THE MANAGING GENERAL PARTNER OF NCP-SIX, AND TWO
COMPANIES AFFILIATED WITH NORTHLAND COMMUNICATIONS CORPORATION WILL ACQUIRE THE
ENTIRETY OF THE ASSETS OF NCP-SIX IF THE PROPOSED TRANSACTION IS CONSUMMATED.
THE GENERAL PARTNERS' CONFLICTS OF INTEREST ARE DESCRIBED IN GREATER DETAIL IN
THE ACCOMPANYING PROXY STATEMENT. THE GENERAL PARTNERS URGE YOU TO READ THE FULL
TEXT OF THE PROXY STATEMENT AND ITS EXHIBITS CAREFULLY BEFORE MAKING YOUR
DECISION ON THESE PROPOSALS.
Sincerely,
Northland Communications Corporation,
managing general partner of NCP-Six
By:
------------------------------------
John S. Whetzell,
President
Seattle, Washington
May 21, 2001
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TABLE OF CONTENTS
PAGE
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SUMMARY..................................................... 1
Extending the Term of NCP-Six and Proposed Amendment No.
1...................................................... 1
Risk Factors Pertaining to Extending the Term of
NCP-Six................................................ 2
The Proposed Transaction and Proposed Amendment No. 2..... 2
Federal Income Tax Consequences of the Proposed
Transaction............................................ 5
Risk Factors Pertaining to the Proposed Transaction....... 5
Conflicts of Interest of the Managing General Partner..... 6
Conflict of Interest of the Administrative General
Partner................................................ 7
The General Partners' Recommend Extending the Term of
NCP-Six and Approving the
Proposed Transaction................................... 7
Fairness of the Proposed Transaction...................... 8
Likely Consequences of Your Vote.......................... 8
Voting at the Special Meeting............................. 9
You Do Not Have Dissenters' Rights........................ 10
SUMMARY HISTORICAL FINANCIAL INFORMATION.................... 11
THE SPECIAL MEETING......................................... 12
Purpose of Special Meeting................................ 12
Record Date; Limited Partners Entitled to Vote at the
Special Meeting........................................ 12
Quorum; Vote Required for Approval........................ 12
Use of Proxies at the Special Meeting..................... 12
Revocation of Proxies..................................... 13
Solicitation of Proxies................................... 13
EXTENDING THE TERM OF NCP-SIX............................... 14
Background and Reasons for Extending the Term of
NCP-Six................................................ 14
RISK FACTORS PERTAINING TO THE ONGOING OPERATION OF
NCP-SIX................................................... 15
THE PROPOSED TRANSACTION.................................... 17
SPECIAL FACTORS OF THE PROPOSED TRANSACTION................. 17
Reasons for the Proposed Transaction...................... 17
Alternatives to the Proposed Transaction.................. 19
Fairness of the Proposed Transaction...................... 20
The General Partners' Belief as to Fairness............ 20
Material Factors Underlying Belief as to Fairness...... 20
Appraisal Process and Fairness Opinions; Summary of
Reports................................................ 22
Daniels & Associates Appraisal......................... 24
Communications Equity Associates Appraisal............. 26
Houlihan Lokey Fairness Opinion........................ 28
Compensation and Material Relationships................ 34
BACKGROUND OF THE PROPOSED TRANSACTION...................... 35
History of NCP-Six........................................ 35
Chronology of Events Leading up to the Proposed
Transaction............................................ 37
1999 Third-Party Bid Solicitation Process.............. 39
Northland Communications Corporation's 1999 Effort to
Purchase All of NCP-Six's Assets...................... 42
Failure of Northland Communications Corporation's 1999
Offer Due to Lack of Acceptable Financing............. 44
2000 Third-Party Bid Solicitation Process.............. 45
Preparations for Sales to Bidder AA and Northland
Communications Corporation............................ 48
SPECIFIC TERMS OF THE PROPOSED TRANSACTION.................. 51
General Structure......................................... 51
Terms of Promissory Notes................................. 51
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PAGE
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Senior Debt of Northland Cable Networks LLC............... 52
Conditions to Completion of the Proposed Transaction...... 52
Distributions to General and Limited Partners............. 53
DISSOLUTION AND LIQUIDATION CONSEQUENCES OF THE PROPOSED
TRANSACTION............................................... 55
Dissolution Procedures.................................... 55
Description of NCP-Six Liquidating Trust.................. 55
PROJECTED CASH AVAILABLE FROM LIQUIDATION................... 56
Projected Cash Available Following Closing of the Proposed
Transaction............................................ 57
Excess of Limited Partners' Capital Contributions over
Prior Cash Distributions............................... 58
FEDERAL AND STATE INCOME TAX CONSEQUENCES OF THE PROPOSED
TRANSACTION............................................... 59
Tax Considerations........................................ 60
Tax Consequences of Disposition of the Assets and
Liquidation of NCP-Six................................. 60
Unrelated Business Taxable Income......................... 62
Tax Consequences of a Decision Not to Sell................ 62
Other Tax Law Changes..................................... 63
State Income Tax Considerations........................... 64
North Carolina......................................... 65
Mississippi............................................ 65
South Carolina......................................... 65
RISK FACTORS RELATED TO THE PROPOSED TRANSACTION............ 66
INFORMATION ABOUT NCP-SIX................................... 71
General................................................... 71
Managing General Partner.................................. 71
NCP-Six's Business........................................ 72
NCP-Six Operating Systems................................. 72
Starkville, Mississippi................................ 72
Philadelphia, Mississippi.............................. 73
Highlands, North Carolina.............................. 73
Barnwell, South Carolina............................... 74
Bennettsville, South Carolina.......................... 74
Employees.............................................. 74
Customers.............................................. 74
Seasonality............................................ 74
NCP-Six's Competition..................................... 74
Applicable Regulations and Legislation.................... 76
Summary................................................ 76
Cable Rate Regulation.................................. 76
Cable Entry Into Telecommunications.................... 77
Internet Service....................................... 78
Telephone Company Entry Into Cable Television.......... 79
Electric Utility Entry Into Telecommunications and
Cable Television...................................... 79
Ownership Restrictions................................. 79
Must Carry and Retransmission Consent.................. 80
Access Channels........................................ 80
Access to Programming.................................. 80
Inside Wiring; Subscriber Access....................... 81
Other Applicable Regulations of the Federal
Communications Commission............................. 81
Copyright.............................................. 82
State and Local Regulation............................. 82
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PAGE
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Legal Proceedings......................................... 83
NCP-Six's Management's Discussion and Analysis of
Financial Condition and Results of Operations.......... 83
General................................................ 83
Results of Operations for Year 2000.................... 84
Results of Operations Year ended 1999.................. 84
Selected Quarterly Financial Data...................... 85
Liquidity and Capital Resources........................ 85
Capital Expenditures and Improvements.................. 86
Recent Acquisitions and Dispositions................... 87
MANAGEMENT AND BENEFICIAL OWNERSHIP OF NCP-SIX.............. 88
Management of NCP-Six..................................... 88
Officers and Directors of Northland Communications
Corporation........................................... 88
Officers and Directors of FN Equities Joint Venture.... 90
Beneficial Ownership...................................... 91
Changes in Control........................................ 91
FINANCIAL STATEMENTS........................................ 92
EXHIBIT A -- FORM OF PROXY CARD.......................................... A-1
EXHIBIT B -- AMENDED AND RESTATED CERTIFICATE AND AGREEMENT OF LIMITED
PARTNERSHIP OF NORTHLAND CABLE PROPERTIES SIX LIMITED
PARTNERSHIP................................................. B-1
EXHIBIT C -- FORM OF PROPOSED AMENDMENT NO. 1............................ C-1
EXHIBIT D -- FORM OF PROPOSED AMENDMENT NO. 2............................ D-1
EXHIBIT E -- NORTHLAND CABLE NETWORKS LLC ASSET PURCHASE AGREEMENT....... E-1
EXHIBIT F -- NORTHLAND CABLE PROPERTIES, INC. ASSET PURCHASE AGREEMENT... F-1
EXHIBIT G -- NORTHLAND CABLE NETWORKS LLC PROMISSORY NOTE................ G-1
EXHIBIT H -- NORTHLAND COMMUNICATIONS CORPORATION PROMISSORY NOTE........ H-1
EXHIBIT I -- APPRAISAL OF DANIELS & ASSOCIATES........................... I-1
EXHIBIT J -- APPRAISAL OF COMMUNICATIONS EQUITY ASSOCIATES............... J-1
EXHIBIT K -- FAIRNESS OPINION OF HOULIHAN LOKEY.......................... K-1
EXHIBIT L -- NCP-SIX LIQUIDATING TRUST AGREEMENT......................... L-1
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SUMMARY
This summary highlights selected information and may not contain all of the
information important to you. You should carefully read this entire proxy
statement and the attached exhibits for a more complete understanding of the two
proposals set forth herein.
Northland Cable Properties Six Limited Partnership ("NCP-Six") is a
Washington limited partnership consisting of its limited partners, a managing
general partner and an administrative general partner. The managing general
partner is Northland Communications Corporation, a Washington corporation, and a
wholly owned subsidiary of Northland Telecommunications Corporation. The
administrative general partner is FN Equities Joint Venture, a California
general partnership. This proxy statement solicits limited partner approval to
sell NCP-Six's assets to two affiliates of Northland Communications Corporation.
The proposed purchasers of NCP-Six's assets are Northland Cable Properties, Inc.
and Northland Cable Networks LLC. The following organizational chart shows the
interrelationship between NCP-Six and these various companies.
[NORTHLAND CABLE PROPERTIES SIX FLOW CHART]
EXTENDING THE TERM OF NCP-SIX AND PROPOSED AMENDMENT NO. 1 TO THE NCP-SIX
PARTNERSHIP AGREEMENT (SEE PAGE )
This proxy statement solicits approval from the limited partners of NCP-Six
for an amendment to the NCP-Six partnership agreement that will extend the term
of NCP-Six from its current expiration date of December 31, 2001 until December
31, 2007. Without such amendment to the NCP-Six partnership agreement, NCP-Six
will terminate on December 31, 2001, and upon such termination, the general
partners
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will be required to initiate the winding up of NCP-Six's affairs pursuant to the
NCP-Six partnership agreement and Washington law. Even before December 31, 2001,
however, NCP-Six will face the maturity of its current credit facility. That
credit facility is scheduled to mature on June 30, 2001. Based on discussions
with NCP-Six's lenders, the managing general partner does not believe the
maturity date can be further extended without first extending the term of
NCP-Six for a reasonable period of time. As of December 31, 2000, the balance of
principal and interest owed on the NCP-Six credit facility was $28,215,281.
Regardless of whether you vote to approve the proposed transaction, the general
partners of NCP-Six strongly recommend that you vote to approve proposed
Amendment No. 1 to the NCP-Six partnership agreement to extend NCP-Six's term.
Please refer to the section titled "Background and Reasons for Extending the
Term of NCP-Six" for more details. A copy of the NCP-Six partnership agreement
and proposed Amendment No. 1 are attached to this proxy statement for your
review as Exhibits B and C, respectively.
RISK FACTORS PERTAINING TO EXTENDING THE TERM OF NCP-SIX (SEE PAGE )
While the general partners feel strongly that the benefits of extending the
term of NCP-Six as requested in this proxy statement far outweigh the risks,
there are certain risks associated with NCP-Six's ongoing operations of which
you should be aware. These risks include:
NCP-Six operates in a highly competitive industry and in some instances
against competitors that are better financed and subject to fewer regulatory
restrictions than NCP-Six. Such competition could force NCP-Six to spend
significant amounts to upgrade or alter its cable operating systems to remain
competitive. NCP-Six could also be forced to cut rates to remain competitive or
could face obstacles that could significantly impair its growth, its financial
return from operations or the value of its operating systems.
NCP-Six operates under non-exclusive franchises that must be renewed on a
regular basis. There is no guarantee that required franchises will be renewed,
or that overlapping franchises will not be granted to other cable operators in
one or more of the areas where NCP-Six maintains its operating systems.
NCP-Six may become subject to additional regulatory constraints that could
materially impair future operations. The cable television industry is regulated
by federal, state and local agencies. The resulting regulations are in a
constant state of change and it is impossible to predict to what extent future
regulations will impair the profitability of NCP-Six's operations or the value
of its operating systems.
THE PROPOSED TRANSACTION AND PROPOSED AMENDMENT NO. 2 TO THE NCP-SIX PARTNERSHIP
AGREEMENT (SEE PAGE )
This proxy statement also solicits approval from the limited partners of
NCP-Six for an amendment to the NCP-Six partnership agreement that will
authorize the sale by NCP-Six of its cable television systems and other assets
to Northland Cable Properties, Inc. and Northland Cable Networks, LLC. A summary
of the terms of the proposed transaction is as follows:
PROPOSED SALE
Affiliates of the managing general partner have offered to purchase
NCP-Six's operating systems based upon assigning those systems an aggregate
value of $70,200,000. If approved, the proposed transaction will be consummated
at closing in the following manner:
(a) NCP-Six will make an in-kind distribution to the managing general
partner of an undivided interest in NCP-Six's operating systems, which
distribution will be deemed to have a value of $5,913,978, and will satisfy
in full the managing general partner's right to participate in future
distributions from NCP-Six.
(b) Northland Cable Networks LLC will pay to NCP-Six $44,250,000 for
NCP-Six's remaining interest in the cable television franchises and cable
television systems in Philadelphia, Mississippi and Starkville,
Mississippi. This purchase price will be paid at closing through a cash
payment of $38,175,000 and delivery of a promissory note in the principal
amount of $6,075,000.
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(c) Northland Cable Properties, Inc. will pay to NCP-Six $20,036,022
for NCP-Six's remaining interest in the cable television franchises and
cable television systems located in Highlands, North Carolina; Barnwell,
South Carolina; and Bennettsville, South Carolina. This purchase price will
be paid at closing through a cash payment of $14,286,022 and delivery of a
promissory note in the principal amount of $5,750,000 issued by Northland
Communications Corporation.
The offers assume that NCP-Six will convey the operating systems to the
purchasers free and clear of all liens and liabilities. If either of the
purchasers assume any of NCP-Six's liabilities, the amount of the assumed
liabilities will reduce the cash payable to NCP-Six at closing.
The proposed sale does not include all of NCP-Six's assets; NCP-Six will
retain its cash balances, accounts receivable and prepaid expenses as computed
at closing, and certain other immaterial assets.
SPECIFIC TERMS OF TWO PROMISSORY NOTES TO BE ISSUED TO NCP-SIX
At closing, NCP-Six will receive two unsecured subordinated promissory
notes as partial consideration for the sale of its assets. The first promissory
note will be in the principal amount of $6,075,000 from Northland Cable Networks
LLC. The second promissory note will be in the principal amount of $5,750,000
from Northland Communications Corporation. While these promissory notes will be
from different issuers, they will have substantially identical terms. Each
promissory note will:
- be payable through three equal payments of principal, together with
accrued but unpaid interest, due on the first, second, and third
anniversaries of closing;
- bear interest at a fixed rate of 8% per annum;
- be prepayable, at any time, without penalty or premium;
- constitute a full recourse but unsecured obligation of the issuer; and
- be subordinated to current and future senior debt of the issuer;
provided, however, that lenders of the senior debt will permit payments to
be made upon the issuer's promissory note to NCP-Six so long as there is
not an event of default under the senior debt.
At closing, Northland Cable Networks LLC expects to have outstanding senior
debt in the approximate amount of $25,000,000, and Northland Communications
Corporation expects to have outstanding senior debt (as a borrower or guarantor)
in the approximate amount of $53,900,000.
CONDITIONS TO CLOSING
Neither Northland Cable Networks LLC nor Northland Cable Properties, Inc.
will be obligated to close the proposed transaction unless certain closing
conditions are satisfied, including the following:
- the proposed transaction must be approved by holders of a majority of the
outstanding limited partnership units of NCP-Six;
- there must be no action, suit or other proceeding pending or threatened
to permit or restrict the proposed transaction;
- the necessary consents from all franchising authorities and from the FCC
to the transfer of necessary permits and licenses must be secured;
- the necessary financing for the proposed transaction must be obtained;
and
- both acquisitions must close concurrently.
These closing conditions are for the benefit of the purchasers. In
addition, if at any time prior to closing the managing general partner
determines that cumulative distributions to the limited partners are likely to
be reduced by more than $702,000 from the current projected distributions (an
amount representing 1% of the valuation assigned to the proposed transaction),
NCP-Six will not be obligated to sell its assets without again obtaining
approval of its limited partners.
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NORTHLAND COMMUNICATIONS CORPORATION'S IN-KIND DISTRIBUTION
Northland Communications Corporation, as the managing general partner of
NCP-Six, will not receive a cash distribution from the proceeds of the proposed
transaction but will instead receive only an in-kind distribution of its
percentage interest of the assets of NCP-Six. This adjustment will not impact
the distributions to be made to limited partners, who will still receive the
same distributions as if a purchase price equal to $70,200,000 for the proposed
transaction was paid by a third-party purchaser.
The NCP-Six partnership agreement does not permit NCP-Six to make
concurrent cash and in-kind distributions to its partners. As a consequence, the
limited partners are being asked to approve an amendment to the NCP-Six
partnership agreement permitting the in-kind distribution to the managing
general partner contemplated by the proposed transaction. The form of that
proposed amendment to the NCP-Six partnership agreement is attached to this
proxy statement as Exhibit D. Limited partners voting in favor of the proposed
transaction will be voting in favor of that proposed amendment.
INDEMNIFICATION BY NCP-SIX
Northland Cable Networks LLC will have the right to seek indemnification
for any breach of representations and warranties by NCP-Six from a $1,000,000
escrow fund to be retained by NCP-Six for one year after closing.
LIQUIDATION OF NCP-SIX FOLLOWING CONSUMMATION OF THE PROPOSED TRANSACTION
If the proposed transaction closes, the managing general partner will
commence dissolution of NCP-Six during the third quarter of 2001. NCP-Six will
use the net sale proceeds to pay off all known partnership obligations and to
set up a reserve of $750,000 for post-closing unknown and contingent
liabilities. NCP-Six will then distribute the balance of the cash proceeds to
the administrative general partner and limited partners in accordance with their
respective interests in NCP-Six. See "Specific Terms of the Proposed
Transaction -- Distributions to General Partners and Limited Partners" for the
rights of those parties to participate in such distributions.
NCP-Six will then transfer to a liquidating trust (established solely for
purposes of liquidating NCP-Six) the $750,000 cash reserve, the two promissory
notes in an aggregate principal amount of $11,825,000, and NCP-Six's interest in
the $1,000,000 hold-back escrow established at closing to cover indemnity claims
that might be made by Northland Cable Networks LLC. The liquidating trust will
collect the amounts due on these notes, apply funds as necessary to cover
partnership liabilities (including indemnity claims) and make distribution of
the balance of the funds to the administrative general partner and limited
partners in accordance with their respective ownership interests in NCP-Six.
NCP-Six will be obligated to continue filing periodic reports with the
Securities and Exchange Commission until it is dissolved and the liquidating
trust is established. See "Specific Terms of the Proposed
Transaction -- Distributions to Limited Partners" and "Dissolution and
Liquidation Consequences of the Proposed Transaction".
ESTIMATED DISTRIBUTIONS TO LIMITED PARTNERS AS A RESULT OF THE PROPOSED
TRANSACTION AND SUBSEQUENT LIQUIDATION OF NCP.
- If the proposed transaction is completed, distributions to the limited
partners of NCP-Six over the life of NCP-Six are estimated as of December
31, 2000 to be:
ONE YEAR
AFTER
INITIAL DISTRIBUTION CLOSING TWO YEARS THREE YEARS
120 DAYS AFTER THE AFTER CLOSING AFTER CLOSING
ANTICIPATED PRIOR CASH CLOSING THE NON-RESIDENT PROPOSED THE PROPOSED THE PROPOSED
DISTRIBUTIONS DISTRIBUTION PROPOSED TRANSACTION TAX TRANSACTION TRANSACTION TRANSACTION
------------- ------------ -------------------- ------------ ----------- ------------- -------------
- - Per $500 partnership
unit...................... $128 $ 691 $ 58 $189 $147 $137
- - Per $1,000 investment..... $255 $1,381 $115 $379 $294 $274
ANTICIPATED
DISTRIBUTIONS TOTAL
------------- ------
- - Per $500 partnership
unit...................... $1,350
- - Per $1,000 investment..... $2,698
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THE AMOUNTS SET FORTH IN THE PRECEDING TABLE ARE ESTIMATES
AND ARE BEING PROVIDED FOR ILLUSTRATIVE PURPOSES ONLY. IT
IS CURRENTLY ANTICIPATED THAT THE PROPOSED TRANSACTION
WILL CLOSE IN JUNE 2001. ACTUAL AMOUNTS WILL VARY FROM
THESE PROJECTIONS. FOR DETAILS, SEE "PROJECTED CASH
AVAILABLE FROM LIQUIDATION" ON PAGE ).
FEDERAL TAX CONSEQUENCES OF THE PROPOSED TRANSACTION (SEE PAGE )
The distribution of cash by NCP-Six to its limited partners in liquidation
of their partnership interests will generally result in a taxable transaction.
NCP-Six's limited partners will realize gain or loss on the distribution of cash
on limited partnership units to the extent of the difference between the amount
of cash distributed and the adjusted tax basis of the limited partner's interest
in NCP-Six immediately before the distribution. Upon closing of the proposed
transaction, and dissolution of NCP-Six, any limited partner that has accrued
but unused net losses that were suspended under the passive activity loss rules
of the Internal Revenue Code may use such losses to offset any income and gain
from the proposed transaction. In addition, the transaction may also be a
taxable transaction under applicable state, local and foreign tax laws. EACH
LIMITED PARTNER IS STRONGLY URGED TO CONSULT WITH THEIR OWN TAX ADVISOR
CONCERNING THE IMPACT OF THE ABOVE-DISCUSSED RULES ON THEIR INVESTMENT IN
NCP-SIX AND HOW THOSE RULES WILL LIKELY BE APPLIED TO THEIR DISTRIBUTIONS
RESULTING FROM THE PROPOSED TRANSACTION.
RISK FACTORS PERTAINING TO THE PROPOSED TRANSACTION (SEE PAGE )
There are several risks associated with the proposed transaction of which
you should be aware. These risks include:
Although the general partners believe that the price to be received by
NCP-Six for its assets in the proposed transaction represents fair value,
NCP-Six's assets may increase in value prior to closing the proposed
transaction. The amount of the purchase price was determined in August 2000 and
will not be adjusted for any increases or decreases in the value of the assets
prior to closing.
The managing general partner's potential interest in acquiring NCP-Six's
assets may have influenced the manner in which the managing general partner
solicited offers from other purchasers and negotiated with third parties that
expressed an interest in acquiring NCP-Six's assets. The managing general
partner believes it acted in good faith and consistent with its fiduciary duties
in structuring the proposed transaction. Notwithstanding, the managing general
partner has significant conflicts of interest in the proposed transaction.
A limited partner committee or independent third party did not participate
in negotiating the terms of the proposed transaction. While the managing general
partner feels that it took several procedural steps to protect against its
conflict of interest, an independent third party was not empowered to negotiate
the terms of the proposed transaction on behalf of the limited partners.
The two promissory notes to be issued as partial consideration for
NCP-Six's assets will be unsecured, subordinated obligations of their
issuers. The issuers of the notes, Northland Cable Networks LLC and Northland
Communications Corporation, will each have significant senior secured debt at
the time their promissory notes are delivered to NCP-Six at closing. Each issuer
also anticipates incurring significant additional senior debt after closing the
proposed transaction to fund operations and other acquisitions. If either issuer
defaults on its obligations to its senior lender, that issuer will be unable to
make its payments under the promissory note delivered to NCP-Six.
The 8% interest rate of the two promissory notes to be issued by the
purchasers at closing is likely lower than the rate that would be charged for a
subordinated loan to a borrower that has similar characteristics to the
purchasers. A third party would likely receive a higher rate of interest for
assuming the credit risk associated with promissory notes to be received by
NCP-Six at closing.
Northland Cable Networks LLC and Northland Communications Corporation will
be entitled to off set against the promissory notes delivered at closing,
indemnification obligations of NCP-Six under the applicable asset purchase
agreement. If one or both of the issuers of the promissory notes makes a
successful
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indemnification claim, that issuer will be entitled to decrease the amount to be
paid under its promissory note to NCP-Six. The decrease will, in turn, cause a
corresponding decrease in the amount of money available for cash distributions
to the administrative general partner and the limited partners after closing.
The managing general partner will not share in the risk that all or part of
the promissory notes may remain unpaid. The managing general partner will
receive the value of its interest in the proposed transaction through an in-kind
distribution of assets based on the forecasted full payment of the two
promissory notes to be delivered to NCP-Six at closing. If any portion of the
amounts to be paid under those promissory notes remain unpaid, the unpaid
portion will decrease the cash distributions to be made to the administrative
general partner and the limited partners after closing. The managing general
partner's distribution will not be similarly decreased because the managing
general partner will have already received its entire distribution through the
in-kind distribution of assets at closing.
The managing general partner will similarly not share in the risk that
NCP-Six's actual expenses and liabilities could exceed the pro forma expenses
and liabilities used in calculating the value of the managing general partner's
in-kind distribution. The value of the managing general partner's in-kind
distribution was calculated using the pro forma expenses and liabilities for
NCP-Six set forth under the "Projected Cash Available for Liquidation" section
below. If unanticipated expenses or liabilities exceed the pro forma figures,
the managing general partner will not share in the excess. The administrative
general partner and the limited partners will instead absorb the entire
unanticipated liability or expense since it will be deducted from the cash
proceeds otherwise available for distribution to them after closing.
The proposed transaction has not been solicited by any unaffiliated limited
partners. While the general partners believe that unaffiliated limited partners
are interested in liquidating their investment in NCP-Six at this time, the
general partners have not taken any survey of the unaffiliated limited partners
of NCP-Six on that subject.
The limited partners do not have dissenter's rights or appraisal rights in
the proposed transaction. Even if a limited partner disapproves of the proposed
transaction, no limited partners will be granted rights under Washington law or
the NCP-Six partnership agreement to require an appraisal of the fair market
value of the assets being sold and corresponding payment to the dissenting
limited partner.
The majority vote of holders of a majority of the limited partner units
will bind every limited partner, even if a limited partner disapproves of the
proposed transaction. Pursuant to the NCP-Six partnership agreement and
Washington law, even if a limited partner strongly disapproves of the proposed
transaction, that limited partner will be bound by the decision of the holders
of the majority of NCP-Six's limited partner units.
The amount and timing of cash distributions to the administrative general
partner and the limited partners may be affected by unanticipated events. If an
indemnification claim is brought against NCP-Six, or an unanticipated liability
is discovered after closing, NCP-Six may be required to pay a portion of the
proceeds from the proposed transaction to satisfy the claim or liability before
making cash distributions to its administrative general partner and limited
partners.
Even if the holders of a majority of the limited partner units in NCP-Six
vote to approve the proposed transaction it may not close. As mentioned in this
proxy statement, there are several conditions to closing the proposed
transaction which, if not satisfied or waived prior to closing, could result in
termination of the proposed transaction. Specifically, the proposed transaction
is subject to the purchasers obtaining financing. Northland Communications
Corporation attempted to obtain financing to purchase all of NCP-Six's cable
operating systems for $76 million in 1999 and was unsuccessful.
CONFLICTS OF INTEREST OF THE MANAGING GENERAL PARTNER (SEE PAGE )
Northland Communications Corporation is both the managing general partner
of NCP-Six and an affiliate of the purchasers of the assets in the proposed
transaction. As managing general partner of NCP-Six, Northland Communications
Corporation has negotiated and structured the terms of the proposed transaction
on behalf of NCP-Six. Northland Communications Corporation has an interest in
seeing that its affiliates pay the lowest possible purchase price for their
acquisition of assets from NCP-Six. At the same time, Northland
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Communications Corporation is primarily responsible for negotiating, on behalf
of NCP-Six, the highest possible price for NCP-Six's assets. Northland
Communications Corporation took a number of steps to protect against the
conflicts of interest inherent in its negotiation of the proposed transaction.
Notwithstanding, Northland Communications Corporation is faced with substantial
conflicts of interest with respect to the proposed transaction.
Furthermore, upon consummation of the proposed transaction, Northland
Communications Corporation is entitled to receive payment of management and
other fees from NCP-Six for its services as managing general partner and for
cost reimbursements prior to closing the proposed transaction. The estimated
amounts of these fees and reimbursements as of December 31, 2000 is $21,349.
CONFLICT OF INTEREST OF THE ADMINISTRATIVE GENERAL PARTNER
FN Equities Joint Venture, the administrative general partner of NCP-Six,
will have no economic or ownership interest in the assets following the closing
of the proposed transaction, other than its right to receive payment along with
the limited partners of proceeds from the liquidation of NCP-Six. Still, the
administrative general partner will receive economic benefits as a result of the
disposition of NCP-Six's assets and subsequent liquidation of NCP-Six. Under the
terms of the NCP-Six partnership agreement, the administrative general partner
is entitled to its percentage share of any distribution made by NCP-Six. The
estimated total cash proceeds (excluding interest on the notes to be delivered
by the purchasers at closing) payable to the administrative general partner as a
result of the proposed transaction is approximately $1,455,000. See "Projected
Cash Available From Liquidation" on page for a detailed discussion of the
relative distributions expected to be made to the administrative general partner
and the limited partners of NCP-Six.
THE GENERAL PARTNERS' RECOMMEND EXTENDING THE TERM OF NCP-SIX AND APPROVING THE
PROPOSED TRANSACTION (SEE PAGE )
Because there is no guarantee that the proposed transaction will close even
if it is approved, the general partners strongly recommend that you vote to
"Approve" extending the term of NCP-Six regardless of how you vote on the
proposed transaction. The general partners have determined that the term of
NCP-Six should be extended from its current expiration date of December 31, 2001
for an additional six years through December 31, 2007. This extension is
requested to allow for continued operation of NCP-Six and sufficient time for
future disposition of its assets in the event the proposed transaction does not
close. If the proposed transaction is closed prior to June 30, 2001, the
entirety of the assets of NCP-Six will be sold, and winding up of NCP-Six's
affairs will be the next step to pursue in bringing the activities of NCP-Six to
a close. If, however, the proposed transaction is not closed prior to June 30,
2001, NCP-Six's current credit facility matures on June 30, 2001, and the
managing general partner does not believe that NCP-Six's lenders will approve an
extension of the credit facility unless NCP-Six's term is extended first. As of
December 31, 2000, the outstanding balance of the NCP-Six credit facility
totaled $28,215,281. In order to amortize this debt through the anticipated
normal course of operations of NCP-Six, the general partners believe the
shortest acceptable extension of the term of NCP-Six is six years.
Furthermore, even if NCP-Six could extend the term of NCP-Six's credit
facility, the NCP-Six partnership agreement provides that upon expiration of the
term of NCP-Six on December 31, 2001, the general partners of NCP-Six are to
liquidate the assets of NCP-Six and wind up its affairs. Either expiration of
NCP-Six's term on December 31, 2001 or the earlier maturity of NCP-Six's credit
facility on June 30, 2001 will impose unnecessary time constraints on the
disposition of the assets of NCP-Six. The general partners believe these time
constraints may translate to a lower sale price for NCP-Six's assets, and a
corresponding lower distribution to the limited partners of NCP-Six upon final
dissolution of NCP-Six. The general partners therefore strongly recommend that
you vote to "Approve" extending the term of NCP-Six through December 31, 2007.
After careful evaluation of the proposed transaction and consideration of
their conflicts of interest, the general partners have also determined that the
proposed transaction is in the best interests of NCP-Six's limited partners. The
general partners believe the proposed transaction is the most attractive
alternative
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currently available for providing NCP-Six's limited partners with the
opportunity to liquidate their investment in NCP-Six and obtain a positive
return. The general partners therefore also recommend that you vote to "Approve"
the proposed transaction.
FAIRNESS OF THE PROPOSED TRANSACTION (SEE PAGE )
The general partners believe the terms of the proposed transaction are fair
as a whole to NCP-Six and its limited partners. The general partners based their
determination as to the fairness of the proposed transaction on the following
material factors, each of which is described in greater detail in this proxy
statement:
- the form and amount of consideration offered to the limited partners as a
result of the proposed transaction;
- the two independent appraisals prepared by Daniels & Associates and by
Communications Equity Associates, which were used in the general partners'
evaluation of the offers received for NCP-Six's assets. (See "Appraisal
Process and Fairness Opinion; Summary of Reports -- Daniels & Associates
Appraisal" and "-- Communications Equity Associates Appraisal" at pages
and , respectively);
- the third-party bid solicitation process undertaken by NCP-Six to obtain
bids from third parties for the purchase of NCP-Six's assets, which bids
were used in part in the determination of the fair market value of the
assets and in the general partners' evaluation of the proposed transaction
price. (See "Fairness of the Proposed Transaction," and "Background and
Reasons for the Proposed Transaction -- 1999 Third-Party Bid Solicitation
Process" and "-- 2000 Third-Party Bid Solicitation Process" at pages and
, respectively); and
- the fairness opinion rendered by Houlihan Lokey Howard & Zukin Financial
Advisors, Inc. ("Houlihan Lokey"), following its evaluation and analysis
of the consideration to be received in the proposed transaction (See
"Appraisal Process and Fairness Opinion; Summary of Reports -- Houlihan
Lokey Fairness Opinion" at page ).
LIKELY CONSEQUENCES OF YOUR VOTE
The following table summarizes the most likely consequences of a majority
vote for or against each of the two proposals found in this proxy statement.
- ----------------------------------------------------------------------------------------------
1. LIKELY CONSEQUENCES OF A VOTE TO - NCP-Six will probably be unable to extend
"DISAPPROVE" EXTENDING THE TERM OF the term of its existing credit facility,
NCP-SIX. which currently matures on June 30, 2001.
- NCP-Six will have insufficient funds to pay
its existing credit facility upon maturity,
and its lenders may proceed to foreclose on
their security interests in NCP-Six's assets
unless the proposed transaction is closed by
June 30, 2001.
- Even if NCP-Six is able to extend the term
of its existing credit facility beyond June
30, 2001, NCP-Six is to be wound up upon the
December 31, 2001 expiration of its term
pursuant to the NCP-Six partnership
agreement. If the proposed transaction is
not closed by the December 31, 2001
expiration of NCP-Six's term, NCP-Six could
still be required to sell its assets under
time constraints that could have a negative
impact on the purchase price obtained.
- ----------------------------------------------------------------------------------------------
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- ----------------------------------------------------------------------------------------------
2. LIKELY CONSEQUENCES OF A VOTE TO - The likelihood of closing the proposed
"APPROVE" EXTENDING THE TERM OF NCP-SIX. transaction will not be affected.
- NCP-Six will be in a better position to seek
extension of its existing credit facility to
protect against foreclosure if the proposed
transaction is not closed by the credit
facility's June 30, 2001 maturity date.
- If the proposed transaction is not closed
but NCP-Six's credit facility maturity date is
extended, the general partners will be in a
better position to explore other
alternatives to sell the assets of NCP-Six
for a fair price without being forced to
dispose of those assets on an expedited
basis.
- If the proposed transaction is not closed
but NCP-Six's credit facility maturity date is
extended, NCP-Six may be in a position to
repay amounts currently outstanding under
its existing credit facility through cash
generated by operations during the six year
extension of NCP-Six's term if suitable
alternative future sales fail to occur.
- ----------------------------------------------------------------------------------------------
3. LIKELY CONSEQUENCES OF A VOTE TO - All the operating assets of NCP-Six will be
"APPROVE" THE PROPOSED TRANSACTION. sold to Northland Cable Properties, Inc. and
Northland Cable Networks LLC, subject to
certain conditions.
- After closing the proposed transaction, net
proceeds from liquidation will be
distributed to the limited partners and the
administrative general partner as outlined
in this proxy statement.
- ----------------------------------------------------------------------------------------------
4. LIKELY CONSEQUENCES OF A VOTE TO - The proposed transaction will be terminated
"DISAPPROVE" THE PROPOSED TRANSACTION. and the general partners will explore other
alternatives for the sale of NCP-Six's
assets.
- ----------------------------------------------------------------------------------------------
VOTING AT THE SPECIAL MEETING
You are entitled to one vote at the special meeting for each unit of
limited partnership interest in NCP-Six that you held of record on the close of
business on December 31, 2000. The affirmative vote of limited partners holding
a majority of the outstanding limited partnership units of NCP-Six is required
to "APPROVE" both (i) the extension of the term of NCP-Six from its current
expiration date of December 31, 2001 until December 31, 2007 and (ii) the
proposed transaction. If you "ABSTAIN" from voting, it will have the same effect
as a vote to "DISAPPROVE" the proposal, or proposals, for which you abstain.
A proxy card is included with this proxy statement, and the general
partners are asking you to complete, date and sign the proxy card and return it
in the enclosed envelope as soon as possible. A proxy card that is properly
completed, dated, signed and returned in time for voting with a vote specified
on the proxy will be voted as requested.
As of December 31, 2000, the record date for the special meeting, there
were 29,784 units ($500/unit) of limited partnership interest outstanding, held
by 1,795 limited partners of record. Two affiliates of the general partners hold
30 units, none of which will be counted in determining whether the requisite
approval has been obtained. All abstentions shall be counted as a "no" vote. Any
signed and returned proxy cards that fail to vote
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on one or both of the proposed measures will be treated as a vote to approve the
proposed measure for which no vote was cast.
You may revoke your proxy at any time prior to the special meeting by
delivering to Northland Communications Corporation either an instrument revoking
the proxy or a duly executed proxy bearing a later date, or by attending the
special meeting and voting in person. Your attendance at the special meeting, by
itself, will not revoke your proxy.
YOU DO NOT HAVE DISSENTERS' RIGHTS
Limited partners are not entitled to dissenters' or appraisal rights in
connection with the proposed transaction under either the NCP-Six partnership
agreement or Washington law.
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SUMMARY HISTORICAL FINANCIAL INFORMATION
NCP-Six is providing the following financial information to help you in
your analysis of the proposed transaction. You should read the following
financial information in conjunction with the Consolidated Financial Statements
of NCP-Six and related notes, and "Information About NCP-Six -- NCP-Six's
Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in this proxy statement.
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------
1995 1996 1997 1998 1999 2000
---------- ---------- ---------- ----------- ----------- -----------
HISTORICAL STATEMENT OF OPERATIONS DATA:
Revenues.................................... $8,611,947 $9,262,702 $9,644,320 $14,746,766 $15,005,218 $15,221,887
Expenses.................................... $7,488,670 $7,883,536 $7,582,824 $13,125,628 $13,692,895 $13,633,998
Operating income............................ $1,123,277 $1,394,255 $2,061,496 $ 1,621,138 $ 1,312,323 $ 1,587,889
Other income (expense)...................... $ (917,104) $ (997,715) $ (845,597) $(2,990,739) $(1,213,467) $(2,914,282)
Net income (loss)........................... $ 206,173 $ 381,451 $1,215,899 $(1,369,601) $ 98,856 $(1,326,393)
Allocation of net income (loss):
general partners.......................... $ 2,062 $ 3,815 $ 12,159 $ (13,696) $ 989 $ (13,264)
limited partners.......................... $ 204,111 $ 377,636 $1,203,740 $(1,355,905) $ 97,867 $(1,313,129)
Net income (loss) per limited partnership
unit...................................... $ 7 $ 13 $ 40 $ (46) $ 3 $ (44)
Cash distributions per limited partnership
unit(1)................................... $ 10 $ 3 $ 0 $ 0 $ 0 $ 0
AS OF DECEMBER 31,
---------------------------------------------------------------------------------
1995 1996 1997 1998 1999 2000
----------- ----------- ----------- ----------- ----------- -----------
HISTORICAL BALANCE SHEET DATA:
Total assets............................ $14,778,671 $13,253,610 $13,609,386 $32,971,969 $30,603,533 $28,528,812
Total liabilities....................... $15,196,729 $13,365,510 $12,513,387 $33,249,571 $30,786,279 $30,037,951
Partners' capital (deficit):
general partners...................... $ (131,356) $ (128,294) $ (116,135) $ (129,831) $ (128,842) $ (142,106)
limited partners...................... $ (286,702) $ 16,394 $ 1,212,134 $ (147,771) $ (53,904) $(1,367,033)
- -------------------------
(1) Total cash distributions per limited partnership unit as of December 31,
2000 were $127.50 per partnership unit (or $255 per $1,000 investment).
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THE SPECIAL MEETING
This proxy statement is being furnished in connection with the solicitation
of proxies by the general partners of NCP-Six. The proxies are for use at the
special meeting of limited partners to be held on June 28, 2001 at 3:00 p.m.,
local time, at the offices of NCP-Six at 1201 Third Avenue, Suite 3600, Seattle,
Washington 98101, and at any adjournment or postponement of the meeting.
Limited partners are invited to attend the special meeting and are urged to
submit a proxy even if they will be able to attend the special meeting. The
approximate date of mailing this proxy statement and the accompanying proxy card
is May 21, 2001.
PURPOSE OF SPECIAL MEETING
The purpose of the meeting is to vote on proposals to:
- extend the term of NCP-Six from its current expiration date of December
31, 2001, until December 31, 2007, in order to allow for the extension of
NCP-Six's current credit facility; and
- approve the proposed transaction, as described in this proxy statement.
RECORD DATE; LIMITED PARTNERS ENTITLED TO VOTE AT THE SPECIAL MEETING
Only persons who are limited partners of record of NCP-Six at the close of
business on December 31, 2000 will be entitled to vote at the special meeting or
at any adjournment or postponement of the special meeting. As of the close of
business on December 31, 2000, there were 29,784 units of limited partnership
interest outstanding, held by 1,795 limited partners of record. Limited partners
will be entitled to one vote on each matter presented for approval at the
special meeting for each unit of limited partnership held as of the close of
business on December 31, 2000.
QUORUM; VOTE REQUIRED FOR APPROVAL
Pursuant to the NCP-Six partnership agreement, the presence in person or by
proxy of holders of limited partnership units representing a majority of the
votes entitled to be cast at the special meeting constitutes a quorum for the
transaction of business at the special meeting. Abstentions are included in the
calculation of the number of votes represented at a meeting for purposes of
determining whether a quorum has been achieved. The approval of either of the
proposals requires the affirmative vote of the holders of a majority of the
outstanding units of limited partnership interest. The general partners and
their affiliates hold 30 units, none of which will be voted or counted in
determining whether the requisite approval has been obtained. A failure to
submit a proxy card (or to vote in person at the special meeting) will have the
same effect as a vote to "Disapprove" both proposals.
USE OF PROXIES AT THE SPECIAL MEETING
The managing general partner will ensure that all properly executed proxies
received before the special meeting will be voted at the special meeting as
instructed on the proxy. Limited partners who abstain from voting will be
considered to have voted against the proposal(s) for which they have abstained.
Any signed and returned proxy cards that fail to vote on one or both of the
proposals will be treated as a vote to approve the proposal for which a vote was
not cast. All questions as to the validity, form, eligibility, time of receipt,
and acceptance of any proxies will be determined by the managing general partner
in its sole discretion, which determination will be final and binding.
The general partners know of no matters that will be presented for a vote
at the special meeting other than the matters identified in this proxy statement
and on the proxy card. If any other matters are properly presented, the persons
designated as proxies on the enclosed proxy card intend to vote on the matters
in accordance with their judgment.
A form of the proxy being solicited is included as Exhibit A to this proxy
statement. An actual execution-ready proxy card accompanies this proxy
statement. By submitting a completed and executed proxy, a limited
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partner will be appointing each of John S. Whetzell and Richard I. Clark as
their attorney-in-fact to vote their interest at the special meeting with
respect to approval or disapproval, as specified on the proxy card. Messrs.
Whetzell and Clark serve as President and Vice President, respectively, of the
managing general partner. The general partners request that limited partners
complete, date and sign the accompanying proxy card and return it promptly in
the enclosed postage-paid envelope, even if they are planning to attend the
special meeting.
REVOCATION OF PROXIES
Once you submit a signed proxy, you may change your vote only by (1)
delivering to the managing general partner before the special meeting either a
signed notice of revocation or a signed proxy dated subsequent to the date of
the proxy previously given, or (2) personally appearing at the special meeting
and, prior to the commencement of the special meeting, delivering to the
managing general partner notice in writing that the proxy already given is being
revoked. Attendance at the special meeting, by itself, will not revoke a proxy.
SOLICITATION OF PROXIES
This proxy statement is being furnished to the limited partners of NCP-Six
by the managing general partner, whose principal executive offices are located
at 1201 Third Avenue, Suite 3600, Seattle, Washington 98101 and whose telephone
number is (206) 621-1351. The principal executive offices and telephone number
of NCP-Six are the same.
In addition to use of the mail, proxies may be solicited by telephone or
personally by the general partners and any of their directors, officers,
partners and employees. The general partners will not pay any additional
compensation to any of these people for their services in this regard. The
expenses of the solicitation will be borne by NCP-Six.
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EXTENDING THE TERM OF NCP-SIX
You should consider the following factors carefully in evaluating whether
to extend the term of NCP-Six. You are also urged to read all of this proxy
statement and all exhibits carefully when evaluating whether to approve
extending NCP-Six's term and authorizing the proposed transaction before
completing the accompanying proxy card.
BACKGROUND AND REASONS FOR EXTENDING THE TERM OF NCP-SIX
NCP-Six was formed as a limited partnership in 1986 by the filing of its
certificate and agreement of limited partnership with the State of Washington.
At the time of formation of NCP-Six, it was contemplated that the partnership
term would expire 15 years after its formation, as set forth in Article 7 of the
NCP-Six partnership agreement. That expiration date is December 31, 2001.
In order to finance its operations beyond amounts received by NCP-Six from
its investors, NCP-Six has entered into credit facility agreements from time to
time. Such financing arrangements are customary in the industry, and are also
customarily secured by the assets of the borrower. In the case of NCP-Six, its
current credit facility is secured by a first lien on the entirety of the assets
of NCP-Six.
NCP-Six's current credit facility, was originally entered into with a
maturity date of December 31, 2000. The maturity date was later extended to June
30, 2001. While lenders are willing to loan funds to limited partnerships,
provided the lender is satisfied that the limited partnership is an acceptable
credit risk, lenders become less willing to extend credit as the expiration date
of the partnership grows near. In the case of NCP-Six, its lenders have
expressed an unwillingness to further extend NCP-Six's debt maturity beyond June
30, 2001 if the term of NCP-Six is not first extended for a period of time
sufficient to amortize NCP-Six's existing debt through currently forecasted
operations.
As of December 31, 2000, the outstanding balance of the NCP-Six credit
facility was $28,215,281. In order to amortize that debt through the anticipated
normal course of operations of NCP-Six, the managing general partner believes
that the shortest acceptable extension for the term of NCP-Six is six years. As
a result, the general partners are soliciting your approval of proposed
Amendment No. 1 to the NCP-Six partnership agreement that will result in
extending the term of NCP-Six through December 31, 2007.
If the term of NCP-Six is not extended, and the proposed transaction is not
closed by June 30, 2001, the general partners believe NCP-Six will be unable to
pay its debts when they become due upon the maturity of the NCP-Six credit
facility on June 30, 2001. The consequences will be that NCP-Six's lenders will
have the right to foreclose upon the assets of NCP-Six in order to raise
proceeds to pay off NCP-Six's credit facility. The general partners believe that
a sale of those assets under the time constraints imposed by pressures from
NCP-Six's lenders may result in a materially negative impact on the price
received for those assets, which could correspond to a materially lower return
to the limited partners of NCP-Six upon liquidation of NCP-Six.
Furthermore, even if NCP-Six could extend its credit facility until
NCP-Six's current December 31, 2001 expiration date, NCP-Six would be faced with
the same situation at the end of 2001. Pursuant to the terms of the NCP-Six
partnership agreement, if the term of NCP-Six is not extended, the general
partners will be required to commence liquidation of NCP-Six upon NCP-Six's
December 31, 2001 expiration. NCP-Six's liquidation will require the prompt sale
of NCP-Six's assets. The general partners believe that selling those assets
under significant time constraints could correspond to a materially lower return
to the limited partners of NCP-Six upon liquidation of NCP-Six.
In order to avoid these potential adverse consequences, the general
partners strongly recommend that the limited partners vote to extend the term of
NCP-Six for an additional six years until December 31, 2007. Even if the limited
partners vote to approve the proposed transaction, the general partners cannot
provide assurance that the proposed transaction will close. The general partners
therefore recommend that limited partners vote to approve the extension of
NCP-Six's term regardless of how they vote on the proposed transaction. Then, if
NCP-Six's term is extended, and the proposed transaction is either not approved,
or is not closed after being approved, the general partners will be able to
explore other opportunities for the limited partners to liquidate
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their investment in NCP-Six for what the general partners feel is a fair price,
without being required to sell those assets under significant time constraints
that the general partners believe may negatively impact the proceeds received by
NCP-Six and its limited partners.
RISK FACTORS PERTAINING TO THE ONGOING OPERATION OF NCP-SIX
The general partners do not intend to operate NCP-Six through December 31,
2007 if the term of NCP-Six is extended as requested herein. Instead, the
general partners are recommending that the term of NCP-Six be extended to place
NCP-Six in a position to extend its credit facility for a reasonable period of
time. During the extended term of NCP-Six the general partners will explore
alternatives for the future liquidation of NCP-Six if the proposed transaction
does not close. Notwithstanding, if the proposed transaction does not close and
the term of NCP-Six is extended, there are certain risks associated with the
ongoing operation of NCP-Six and its cable systems that you should be aware of.
NCP-SIX OPERATES IN A VERY COMPETITIVE BUSINESS ENVIRONMENT, WHICH CAN
AFFECT ITS BUSINESS AND OPERATIONS.
The industry in which NCP-Six operates is highly competitive, and NCP-Six
faces competition from many sources. In some instances NCP-Six competes against
companies with fewer regulatory burdens, easier access to financing, greater
personnel resources, greater brand name recognition and long-standing
relationships with regulatory authorities. Mergers, joint ventures and alliances
among cable television operators, regional telephone companies, long distance
telephone service providers, electric utilities, local exchange carriers (which
are local phone companies that provide local area telephone services and access
to long distance services to customers), providers of cellular and other
wireless communications services and others might result in providers capable of
offering cable television and other telecommunications services in direct
competition with NCP-Six.
NCP-Six also faces competition from companies distributing television
broadcast signals without a subscription fee and from other communications and
entertainment media, including conventional off-air television and radio
broadcasting services, direct-to-home satellite broadcasting services,
newspapers, movie theaters, the Internet, live sports events and home video
products. Federal legislation was recently passed that provides direct-to-home
satellite broadcasting services the authority to transmit local television
broadcast signals to their subscribers. The general partners believe this may
enhance the attractiveness of satellite broadcasting services and could make
program offerings even more competitive. NCP-Six also experiences competition
from overbuilders which are parties who have been given permits to build
duplicate cable systems in a geographic area where an operational cable system
already exists. In order to maintain competitiveness, NCP-Six anticipates
incurring significant capital expenditures to upgrade its systems. The general
partners cannot assure the limited partners that NCP-Six will upgrade its
systems in a timely manner or at all or that upgrading NCP-Six's cable systems
will allow NCP-Six to compete effectively. Additionally, as NCP-Six expands and
introduces new and enhanced services, including additional telecommunications
services, NCP-Six will be subject to competition from other telecommunications
providers. The general partners cannot predict the extent to which this
competition may affect NCP-Six's business and operations in the future.
NCP-SIX MAY NOT BE ABLE TO FUND THE CAPITAL EXPENDITURES NECESSARY TO KEEP
PACE WITH TECHNOLOGICAL DEVELOPMENTS OR ITS CUSTOMERS' DEMAND FOR NEW
PRODUCTS OR SERVICES. THIS COULD LIMIT ITS ABILITY TO COMPETE EFFECTIVELY.
The cable business is characterized by rapid technological change and the
introduction of new products and services. The general partners cannot assure
the limited partners that NCP-Six will be able to fund the capital expenditures
necessary to keep pace with technological developments, or that NCP-Six will
successfully anticipate the demand of its customers for products or services
requiring new technology. This type of rapid technological change could
adversely affect NCP-Six's plans to upgrade or expand its systems and respond to
competitive pressures. NCP-Six's inability to upgrade, maintain and expand its
systems and provide enhanced services in a timely manner, or to anticipate the
demands of the marketplace, could
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adversely affect its ability to compete. Consequently, NCP-Six's growth, results
of operations and financial condition could suffer materially.
NCP-SIX OPERATES ITS CABLE SYSTEMS UNDER FRANCHISES THAT ARE NON-EXCLUSIVE.
LOCAL FRANCHISING AUTHORITIES CAN GRANT ADDITIONAL FRANCHISES AND CREATE
COMPETITION IN MARKET AREAS WHERE NONE EXISTED PREVIOUSLY.
NCP-Six's cable systems are operated under franchises granted by local
franchising authorities. These franchises are non-exclusive. Consequently, these
local franchising authorities can grant additional franchises to competitors in
the same geographic area. As a result, competing operators may build systems in
areas in which NCP-Six holds franchises. The existence of more than one cable
system operating in the same territory is referred to as an "overbuild."
Overbuilds can adversely affect NCP-Six's operations. The general partners are
currently facing overbuild situations in two of NCP-Six's systems. Additional
overbuild situations may occur in other systems.
NCP-SIX'S CABLE SYSTEMS ARE OPERATED UNDER FRANCHISES THAT ARE SUBJECT TO
NON-RENEWAL OR TERMINATION. THE FAILURE TO RENEW A FRANCHISE COULD
ADVERSELY AFFECT NCP-SIX'S BUSINESS IN A KEY MARKET.
NCP-Six's cable systems operate pursuant to non-exclusive franchises,
permits or licenses granted by a municipality or other state or local government
controlling the public rights-of-way. Many franchises establish comprehensive
facilities and service requirements, as well as specific customer service
standards and establish monetary penalties for non-compliance. In many cases,
franchises are terminable if the franchisee fails to comply with material
provisions set forth in the franchise agreement governing system operations.
Franchises are generally granted for fixed terms and must be periodically
renewed. Local franchising authorities may resist granting a renewal if either
past performance or the prospective operating proposal is considered inadequate.
Franchise authorities often demand concessions or other commitments as a
condition to renewal, which may result in costs to NCP-Six that are
unreasonable. The general partners cannot assure the limited partners that
NCP-Six will be able to renew these or other franchises in the future. As a
result, a sustained and material failure to renew a franchise could adversely
affect NCP-Six's business in the affected geographic area.
LOCAL FRANCHISE AUTHORITIES HAVE THE ABILITY TO IMPOSE ADDITIONAL
REGULATORY CONSTRAINTS ON NCP-SIX'S BUSINESS. THIS CAN FURTHER INCREASE
EXPENSES.
In addition to franchises, cable authorities have also adopted in some
jurisdictions cable regulatory ordinances that further regulate the operation of
cable systems. This additional regulation could increase the expenses of
operating NCP-Six's business. The general partners cannot assure the limited
partners that the local franchising authorities will not impose new and more
restrictive requirements.
NCP-SIX'S BUSINESS IS SUBJECT TO EXTENSIVE GOVERNMENTAL LEGISLATION AND
REGULATION. THE APPLICABLE LAWS AND REGULATIONS, AND CHANGES TO THEM, COULD
ADVERSELY AFFECT NCP-SIX'S BUSINESS BY INCREASING ITS EXPENSES.
Regulation of the cable industry has increased the administrative and
operational expenses and limited the revenues of cable systems. Cable operators
are subject to, among other things:
- limited rate regulation;
- requirements that, under specified circumstances, a cable system must
carry all local broadcast stations or obtain consent to carry a local or
distant broadcast station;
- rules for franchise renewals and transfers; and
- other requirements covering a variety of operational areas such as equal
employment opportunity, technical standards and customer service
requirements.
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Many regulatory aspects of NCP-Six's business are currently the subject of
judicial proceedings and administrative or legislative proposals. The general
partners expect further regulatory efforts, but cannot predict whether any of
the states or localities in which NCP-Six now operates will expand regulation of
its cable systems in the future or how they will do so.
NCP-SIX MAY BE REQUIRED TO PROVIDE INTERNET SERVICE PROVIDERS ACCESS TO ITS
NETWORKS. THIS COULD SIGNIFICANTLY INCREASE NCP-SIX'S COMPETITION AND
ADVERSELY AFFECT THE UPGRADE OF ITS SYSTEMS OR ITS ABILITY TO PROVIDE NEW
PRODUCTS AND SERVICES.
There are several proposals before the United States Congress and the
Federal Communications Commission to require all cable operators to make a
portion of their cable systems' bandwidth available to Internet service
providers, such as America Online. Recently, a number of companies, including
telephone companies and Internet service providers, have also requested local
authorities and the Federal Communications Commission to require cable operators
to provide access to cable's broadband infrastructure, which allows cable to
deliver a multitude of channels and/or services, so that these companies may
deliver Internet services directly to customers over cable facilities. Some
local franchising authorities are considering or have already approved these
"open access" requirements. Allocating a portion of NCP-Six's bandwidth capacity
to other Internet service providers may impair its ability to use its bandwidth
in ways that would generate maximum revenues. In addition, if NCP-Six were
required to provide access, it may adversely impact NCP-Six's profitability in
many ways, including significantly increasing competition, increasing the
expenses NCP-Six incurs to maintain its systems, and increasing the expense of
upgrading or expanding its systems.
DESPITE RECENT DEREGULATION OF EXPANDED BASIC CABLE PROGRAMMING PACKAGES,
THE GENERAL PARTNERS ARE CONCERNED THAT CABLE RATE INCREASES COULD GIVE
RISE TO FURTHER REGULATION. THIS COULD IMPAIR NCP-SIX'S ABILITY TO RAISE
RATES TO COVER ITS INCREASING COSTS OR CAUSE NCP-SIX TO DELAY OR CANCEL
SERVICE OR PROGRAMMING ENHANCEMENTS.
On March 31, 1999, the pricing guidelines of expanded basic cable
programming packages were deregulated, permitting cable operators to set their
own rates. This deregulation was not applicable to basic services. However, the
Federal Communications Commission and the United States Congress continue to be
concerned that cable rate increases are exceeding inflation. It is possible that
either the Federal Communications Commission or the United States Congress will
again restrict the ability of cable television operators to implement rate
increases. Should this occur, it would impede NCP-Six's ability to raise its
rates. If NCP-Six is unable to raise its rates in response to increasing costs,
its financial condition and results of operations could be materially adversely
affected.
THE PROPOSED TRANSACTION
A number of special factors apply to the proposed transaction. You should
consider the following factors carefully in evaluating the proposed transaction.
You are also urged to read all of this proxy statement and all exhibits
carefully when evaluating whether to approve authorizing the proposed
transaction and extending NCP-Six's term before completing the accompanying
proxy card.
SPECIAL FACTORS OF THE PROPOSED TRANSACTION
REASONS FOR THE PROPOSED TRANSACTION
The general partners believe the reason for NCP-Six to enter into the
proposed transaction is that it provides an opportunity for the efficient
winding up of NCP-Six near the expiration of its term for an amount they believe
represents fair value for NCP-Six's assets. In reaching their conclusion to
present the proposed
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transaction to NCP-Six's unaffiliated limited partners for approval the general
partners considered the following factors:
- the past and projected financial and operational performance of NCP-Six;
- the relative lack of liquidity for limited partnership units in NCP-Six;
- the recent unsolicited offers to purchase units at prices which, in the
managing general partner's opinion, do not fairly represent the underlying
value of the units;
- the impending expiration of NCP-Six's term on December 31, 2001,
according to the NCP-Six partnership agreement;
- the potential alternatives to the proposed transaction, including the
alternative of remaining as an independent active operator of the systems
and of selling portions or all of the systems to unaffiliated
third-parties;
- the terms of the proposed asset purchase agreements presented by
Northland Cable Properties, Inc. and Northland Cable Networks LLC.
The general partners also considered the following risks and potentially
negative factors in deliberations concerning the proposed transaction:
- the possibility that the value of the systems and assets might increase
from the proposed transaction valuation prior to or following closing of
the proposed transaction;
- the conflicts of interest facing the managing general partner in
structuring and implementing the proposed transaction;
- the terms of the promissory notes to be delivered by the purchasers as
part of the purchase price in the proposed transaction, including their
eight percent interest rate, and that the notes will be unsecured and
junior to all other past or future debt of Northland Communications
Corporation and Northland Cable Properties, Inc. in the case of Northland
Communications Corporation note, and Northland Cable Networks LLC in the
case of its note;
- the tax impact of the proposed transaction on limited partners; and
- the costs of the proposed transaction and the effect of transaction
expenses and other known and contingent liabilities on the net amount to
be distributed to limited partners.
Following their analysis of the factors considered, the general partners
concluded that the anticipated benefits of the proposed transaction to the
limited partners of NCP-Six outweighed the possible disadvantages.
Northland Communications Corporation's, Northland Cable Properties, Inc.
and Northland Cable Networks LLC's reasons for entering into the proposed
transaction, are to acquire additional cable assets for a suitable price in
geographic locations that are complimentary to Northland Communications
Corporation's existing operations. By participating in the proposed transaction,
Northland Communications Corporation and its affiliates will acquire additional
cable assets at a price, and corresponding level of borrowing, that they deem
acceptable. Another reason for Northland Communications Corporation and its
affiliates to enter into the proposed transaction is that since Northland
Communications Corporation will receive an in-kind distribution of a portion of
the assets being purchased equal in value to the amount Northland Communications
Corporation would otherwise receive upon liquidation of NCP-Six, Northland
Communications Corporation's affiliates will be able to consummate the proposed
transaction with less cash at closing than if they were purchasing the assets
from another seller. The in-kind distribution to be received by Northland
Communications Corporation as managing general partner upon consummation of the
proposed transaction is estimated to equal approximately $5,913,978.
The reason for the general partners to enter into the proposed transaction
is that it provides an opportunity to wind up NCP-Six near the end of NCP-Six's
term for a positive return. Also, under the NCP-Six partnership agreement, the
managing general partner and certain of its affiliates are entitled to
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receive payment of management and other fees from NCP-Six for its services and
for cost reimbursements prior to closing the proposed transaction. The estimated
amounts of these fees and reimbursements as of December 31, 2000 totaled
$21,349. The NCP-Six partnership agreement similarly provides that the
administrative general partner is entitled to receive its pro rata portion of
the distributions to be made to the partners of NCP-Six upon liquidation. The
estimated total cash proceeds (excluding interest on the notes to be delivered
at closing by the purchasers) payable to the administrative general partner as a
result of the proposed transaction is approximately $1,450,478. See "Projected
Cash Available from Liquidation." These amounts are not, however, unique to the
proposed transaction and would still be received by the managing general partner
and the administrative general partner if the assets were being sold to a
third-party purchaser for a price equal to the valuation of the proposed
transaction.
Mr. Clark's reason for the proposed transaction is that as a limited
partner in NCP-Six, Mr. Clark desires to liquidate his investment in NCP-Six,
and the proposed transaction provides him an opportunity to do so at what he
believes is a fair return for his investment. As of March 31, 2001, Mr. Clark
held 20 limited partnership units in NCP-Six. Another reason for Mr. Whetzell
and Mr. Clark to enter into the proposed transaction is that as equity owners in
Northland Telecommunications Corporation, they believe that the assets to be
purchased by Northland Cable Properties, Inc. and Northland Cable Networks LLC
in the proposed transaction are of the type customarily purchased and operated
by the companies affiliated with Northland Communications Corporation and those
assets are being purchased for a price that they believe is acceptable and
within the range for which acceptable borrowing terms can be secured.
ALTERNATIVES TO THE PROPOSED TRANSACTION
In addition to the proposed transaction, the general partners considered
the following alternatives, when reaching the conclusion that a sale of all of
NCP-Six's assets would provide the limited partners with the highest return for
their investment in NCP-Six. The managing general partner also solicited input
from Daniels & Associates as to potential alternatives to consider. The
following list describes those alternatives that were considered:
- The continuation of the operation of NCP-Six as currently structured.
This alternative is being made available to the limited partners of
NCP-Six through this proxy statement. If the unaffiliated limited partners
desire to continue the operation of NCP-Six beyond its current term, they
can vote to "approve" the proposed extension to the NCP-Six partnership
agreement, thereby extending the life of NCP-Six for an additional six
years until December 31, 2007, and simultaneously vote to "disapprove" the
proposed transaction.
- The sale of only a portion of the assets in several installments. As
discussed in this proxy statement, because NCP-Six is subject to certain
loan covenants that require NCP-Six to apply the proceeds from the sale of
any assets outside the ordinary course of business towards NCP-Six's
existing debt. As a result, the managing general partner has concluded
that partial asset sales, without an accompanying opportunity to sell
NCP-Six's remaining assets, will only be suitable in situations where a
very favorable price can be obtained. This conclusion is supported by the
managing general partner's belief that if only certain assets are sold
without making arrangements for the sale of the remaining assets of
NCP-Six, NCP-Six could be left with certain less attractive assets that
are harder to sell, while still being required to pay its operating
expenses from a resulting smaller pool of operating cash flow.
- The refinancing or other form of new borrowings by NCP-Six aimed at
generating proceeds to make distributions to the limited partners of
NCP-Six. The managing general partner concluded that lenders will not
currently support such transactions, and that the only viable option for
NCP-Six to generate adequate unrestricted funds for distribution to its
limited partners is through the sale of enough assets that after paying
off existing debt, adequate funds remain to make meaningful distributions
to the partners of NCP-Six.
- The sale of NCP-Six's assets to another party or parties. Based on the
efforts of the managing general party to solicit bids from third parties
on two separate occasions through Daniels & Associates, and negotiate
purchase agreements with Bidders A and AA, the general partners have
concluded that the
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proposed transaction is the only suitable offer to present to the unaffiliated
limited partners of NCP-Six for consideration. This conclusion is based on the
purchase price and transaction terms presented in the proposed transaction
relative to the offer of other bidders, and the reality that prior
negotiations with Bidder A and AA were unsuccessful.
After considering each of these alternatives, the general partners have
concluded that a sale of all of the assets of NCP-Six is the most viable option
available for maximizing distributions to the limited partners of NCP-Six at
this time.
FAIRNESS OF THE PROPOSED TRANSACTION
THE GENERAL PARTNERS' BELIEFS AS TO FAIRNESS
The managing general partner, the administrative general partner and
Messrs. Whetzell and Clark considered the issue of fairness of the proposed
transaction to the unaffiliated limited partners of NCP-Six. In analyzing the
fairness issue, the discussions of the general partners and Messrs. Whetzell and
Clark focused on appropriate valuation of the assets and conflicts of interest
faced by the managing general partner. The managing general partner and Messrs.
Whetzell and Clark determined at the outset that concurrence by the
administrative general partner would be required with respect to decisions made
regarding the proposed transaction, because the administrative general partner
is not subject to conflicts of interest in the proposed transaction to the same
extent as the managing general partner.
The managing general partner, the administrative general partner and
Messrs. Whetzell and Clark believe that the terms of the proposed transaction
are reasonable and fair to the unaffiliated limited partners of NCP-Six. This
determination of fairness, as well as the decision to recommend that
unaffiliated limited partners vote to "Approve" the proposed transaction, was
unanimous among the general partners.
MATERIAL FACTORS UNDERLYING BELIEF AS TO FAIRNESS
The following discussion highlights the material factors underlying the
general partners' belief that the proposed transaction is fair to the
unaffiliated limited partners. Each of these factors was considered by the
administrative general partner, the managing general partner and Messrs.
Whetzell and Clark. In view of the wide variety of factors considered in
connection with their evaluation of the fairness of the proposed transaction,
the managing general partner, the administrative general partner and Messrs.
Whetzell and Clark did not attempt to quantify, rank or otherwise assign
relative weights to these factors, with two exceptions. They emphasized the
procedures used in the 2000 bid process and the resulting offers received by
NCP-Six for its assets because they felt that the bid process reflected the
price that interested buyers were willing to pay. They also emphasized the
Houlihan Lokey fairness opinion, over the earlier appraisals of Daniels &
Associates and Communication Equity Associates. They emphasized the Houlihan
Lokey opinion over the earlier appraisals because the opinion was more current
than the appraisals that were completed over a year prior to Northland
Communications Corporation's 2000 bid. While they adopted the methodology of
each of Daniels & Associates, Communication Equity Associates and Houlihan Lokey
as sound in the performance of their respective assessments, they did not adopt
that analysis as their own, but instead considered it as relevant factors in
reaching their own respective independent conclusions as to the fairness of the
proposed transaction.
- Third-Party Bid Solicitation. The general partners considered the bids
solicited from third parties by Daniels & Associates. Daniels & Associates
first contacted 35 potential purchasers to solicit bids for some or all of
the assets of NCP-Six in July and August of 1999. Ultimately, two bids for
some of the assets and two bids for all of the assets were submitted. One
bid for all of the assets offered an amount of $76 million, and the other
offered an amount of $70.4 million. The two bids for portions of the
assets offered an amount, on a per subscriber basis, that did not differ
materially from the higher bid for all the assets. The general partners
rejected all of the third party bids for reasons explained in "Background
and Reasons for the Proposed Transaction -- Chronology of Events Leading
up to the Proposed Transaction". The general partners then had Daniels &
Associates solicit bids a second time from interested third parties
between June and August, 2000. Daniels & Associates received four bids in
response, with Northland submitting the highest bid for all of NCP-Six's
cable systems, except
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Bennettsville, South Carolina, for which Bidder AA offered a higher
purchase price. Bidder AA subsequently lowered its offer to a price below
what Northland had offered to pay.
- Consideration Offered. The general partners believe that the transaction
valuation of $70,200,000 for NCP-Six's assets constitutes fair value. In
reaching this conclusion, the general partners considered the appraisals
of the fair market value of the assets prepared by Daniels & Associates
and Communications Equity Associates, the bids solicited from independent
third parties through Daniels & Associates and the fairness opinion of
Houlihan Lokey.
- Fairness Opinion. The general partners considered and reviewed the
fairness opinion of Houlihan Lokey with respect to the proposed
transaction. That fairness opinion concludes that the consideration to be
received by NCP-Six in the proposed transaction is fair from a financial
point of view.
- Independent Appraisals. The general partners considered the valuations
and corresponding timing of the appraisals performed by Daniels &
Associates and Communications Equity Associates. See "-- Appraisal Process
and Fairness Opinion; Summary of Reports" below. Daniels & Associates
concluded that the fair market value of the entirety of the NCP-Six assets
was $73.3 million, and Communications Equity Associates concluded that the
fair market value of those assets was $74.6 million. Each appraisal valued
those assets as of July 1, 1999.
You should note that the purchase price for all of NCP-Six's assets in the
proposed transaction totals $70,200,000. This amount is less than the
appraised value for those assets of $73.3 million by Daniels & Associates,
and $74.6 million by Communications Equity Associates. While the general
partners believe that the third-party bid process established a fair
actual value for the assets and that it provides evidence of what a
third-party is willing to pay, the general partners believe the difference
between the appraised value and the purchase prices obtained in the 2000
bid process may reflect market fluctuations in values for cable systems
between the date of the appraisals and the actual date of obtaining the
third-party bids. This belief is supported by the financial analysis
performed by Houlihan Lokey in preparation of its fairness opinion.
See"-- Appraisal Process and Fairness Opinion; Summary of
Reports -- Houlihan Lokey Fairness Opinion" below.
- You should also note that in November 1999 the managing general partner
was made aware of a second overbuild situation facing one of NCP-Six's
systems in Highlands, North Carolina. This potential second overbuild in
the Highlands system may have a negative impact on the present or future
value and revenues for that system. This second overbuild situation was
not present at the time of either of the appraisals or at the time of the
1999 third-party bid solicitation process and was not considered in either
process. The general partners cannot predict whether or to what extent
this second overbuild situation would have affected the results of either
appraisal or the 1999 third-party bids that NCP-Six received.
- Current market prices of limited partnership units in NCP-Six. The
general partners considered the prices offered for limited partnership
units in recent unsolicited offers. As already discussed in this proxy
statement under "The Proposed Transaction -- Background and Reasons for
the Proposed Transaction -- Secondary Sales of Limited Partnership Units,"
the managing general partner and Messrs. Whetzell and Clark are familiar
with certain recent unsolicited offers made for the purchase of limited
partnership units in NCP-Six. While they do not believe that such offers
amount to a reliable secondary market, the managing general partner, and
Messrs. Whetzell and Clark do believe that the prices offered provide a
relevant factor to consider when determining whether the proposed
transaction is fair to the limited partners of NCP-Six. Following their
evaluation, each of the managing general partner, the administrative
general partner and Messrs. Whetzell and Clark concluded that the
forecasted distributions to be received by the limited partners of NCP-Six
as a result of the proposed transaction will significantly exceed the
amount per unit offered for partnership units in those offers.
- Net Book Value, Liquidation Value and Going Concern Value. The general
partners did not consider net book value to be relevant in their fairness
determination. Several of the assets of NCP-Six have been significantly
depreciated over time for tax and accounting purposes. As a result the net
book value
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of those NCP-Six assets is significantly less than their fair market
value. Liquidation value, on the other hand, was considered by each of the
managing general partner, the administrative general partner and Messrs.
Whetzell and Clark since the proposed transaction is in essence a
liquidation of NCP-Six. As already discussed in this section of the proxy
statement, each of those parties has concluded that the amount to be
received by NCP-Six upon the sale of the entirety of NCP-Six's assets is
fair to the limited partners of NCP-Six. The general partners also
considered the going concern value of NCP-Six when making their
determination as to fairness. Current management and goodwill associated
with the Northland name would not be transferred with NCP-Six's operating
systems upon their sale to a third party purchaser, which could have a
negative impact on the going concern value of NCP-Six's operating systems.
The general partners did not, however, discount the going concern value of
those operating systems to take such factors into account. Instead, the
general partners evaluated the going concern value of NCP-Six as a going
concern based on current operations and performance. This methodology is
consistent with the approach taken by Daniels & Associates and
Communications Equity Associates in 1999 when they conducted their
appraisals of NCP-Six's assets, and by Houlihan Lokey in 2001 when it
conducted its valuation and fairness analysis of NCP-Six's assets.
- Prior Purchase of Barnwell, South Carolina system in 1998. The general
partners considered NCP-Six's acquisition of its Barnwell, South Carolina
cable systems in January 1998 for a price of $11,372,483, reflecting a
price per subscriber of $1,856. The purchase price to be paid by Northland
Communications Corporation in the proposed transaction for the Barnwell
system totals $11,400,000, or approximately $1,949 per subscriber
determined as of December 31, 2000. Northland Communications Corporation's
2000 bid initially translated to a purchase price of $1.896 per subscriber
for the Barnwell System, but it did not include a downward purchase price
adjustment for a loss of subscriber before closing. While the general
partners did not place any emphasis on these comparisons in concluding the
proposed transaction is fair, the general partners do believe that the
price paid for Barnwell is in line with the price for which it is to be
sold in the proposed transaction. Furthermore, Northland Communications
Corporation's offer to purchase Barnwell was only part of its overall bid
to purchase all of the systems to be included in the proposed transaction.
No party, except Northland Communications Corporation, bid in either the
1999 or 2000 bid procedures to separately purchase the Barnwell system. As
a result, the general partners do not feel that the comparison of the
price paid for Barnwell to the price for which it is proposed to be sold
deserves as much importance in reaching their decision as to fairness as
the other factors considered.
- Consent Procedures and Procedural Safeguards. The general partners
acknowledged that the proposed transaction can take place only if limited
partners holding a majority of NCP-Six's limited partnership units (not
including the 30 units held by the general partners) approve the proposed
transaction. If holders of a majority of those units vote to disapprove
the proposed transaction, the proposed transaction will be terminated. In
addition, even if the proposed transaction is approved, it must close
within 120 days after the special meeting. If the proposed transaction
does not close within this time period, or if at any time prior to closing
the general partners determine that cumulative distributions to limited
partners from the proposed transaction may be reduced by more than
$702,000 from the estimated distribution projections (an amount that
represents one percent of the total proposed transaction price), NCP-Six
will not sell its assets to Northland Communications Corporation or any
affiliate without again obtaining approval of the limited partners.
- The proposed transaction's effect on NCP-Six's future operations. The
general partners did not consider the effects the proposed transaction
will have on the future operations of NCP-Six when reaching their
determination that the proposed transaction is fair to the limited
partners of NCP-Six. The future effects of the proposed transaction on
operations was not considered important because if closed the proposed
transaction will completely divest NCP-Six of its future operations.
APPRAISAL PROCESS AND FAIRNESS OPINION; SUMMARY OF REPORTS
In May 1999, NCP-Six retained Communications Equity Associates, a
nationally recognized cable brokerage, appraisal and investment banking firm to
appraise the fair market value of the entirety of
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NCP-Six's assets. In June 1999, NCP-Six retained Daniels & Associates, a
nationally recognized cable brokerage, appraisal and investment banking firm to
conduct a second appraisal of the fair market value of those assets. Given
Daniels & Associates' and Communications Equity Associates' experience, the
general partners did not at that time retain any other outside experts to
conduct appraisals of the NCP-Six assets. Subsequently, however, the general
partners retained Houlihan Lokey to render an opinion as to the fairness of the
consideration to be received by NCP-Six in the proposed transaction as discussed
in greater detail later in this proxy statement under "-- Houlihan Lokey
Fairness Opinion." Based on the managing general partner's prior working
relationship with both Communications Equity Associates and Daniels &
Associates, at the time the general partners retained those firms to conduct
their appraisals, the general partners felt that those firms were qualified to
appraise the assets of NCP-Six due to their expertise and knowledge of the cable
television industry.
The managing general partner instructed both Daniels & Associates and
Communications Equity Associates to prepare appraisals on the basis that the
assets were to be sold to an independent third party on the open market. Daniels
& Associates and Communications Equity Associates were advised at the time of
their engagement that one of the companies affiliated with Northland
Communications Corporation might be a potential buyer of the assets. Daniels &
Associates delivered a written report in July 1999 that the fair market gross
asset value of the entirety of NCP-Six's assets as of July 1, 1999 was $73.3
million. Communications Equity Associates delivered a written report in July
1999 that the fair market gross asset value of those assets as of July 1, 1999
was $74.6 million.
Daniels & Associates and Communications Equity Associates each relied on a
discounted cash flow analysis based on the projected operating results of the
systems over a ten-year period, and applied a factor for the residual value of
the assets at the end of that ten-year period. Daniels & Associates and
Communications Equity Associates each undertook a comparable private market
transaction multiples analysis, to correlate and validate the findings of the
discounted cash flow analysis. This methodology involved a review of other cable
system sales that had recently occurred, and a comparison of the values per
subscriber and multiples of cash flow for those system sales with the same
statistics for NCP-Six.
Upon completion of the second third-party bid process, the general partners
wanted to obtain an independent third-party evaluation as to whether the
consideration to be received by NCP-Six as a result of the anticipated sales to
Bidder AA and Northland Communications Corporation was fair from a financial
point of view. The general partners' desire to obtain independent review of the
fairness of the proposed transaction was further motivated by their recognition
that the prior appraisals of both Daniels & Associates, and Communications
Equity Associates each valued the assets of NCP-Six as of July 1, 1999. Rather
than update those appraisals, the general partners concluded that it would be
more beneficial to NCP-Six if they obtained a fairness opinion that not only
evaluated the assets to be sold, but that further evaluated whether the
consideration to be received by NCP-Six was fair from a financial point of view.
Following their investigation of investment banking firms and financial advisory
services that are recognized to have expertise in valuing assets and
transactions in the cable television industry, the general partners concluded
that Houlihan Lokey was suitable to evaluate the fairness of the proposed
transaction.
The managing general partner provided Daniels & Associates, Communications
Equity Associates and Houlihan Lokey with pro forma three year capital
expenditure plans for NCP-Six. No other financial projections or forecasts were
provided by the general partners. Instead, each report was developed based on
independent information obtained by Daniels & Associates, Communications Equity
Associates and Houlihan Lokey, respectively. The general partners intentionally
refrained from providing additional materials to these professionals because the
general partners wanted the analysis to remain independent from the general
partners' internal forecasts and the general partner wanted the professionals to
develop their own forecasts based on each professional's knowledge of the cable
market-place. Neither of the appraisals placed a value on any individual assets
or cable systems of NCP-Six. Instead, they valued the assets of NCP-Six as a
whole. The general partners did not ask either Daniels & Associates or
Communications Equity Associates to appraise separately the operating systems of
NCP-Six. Such appraisals, if they had been obtained, could have been used by the
managing general partner to assess not only the overall fairness of the bids
submitted for the operating systems, but the fairness of bids for one or more of
the separate systems. The general partners have,
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however, requested Houlihan Lokey to opine as to the fairness of the separate
offers from Northland Cable Networks LLC and Northland Cable Properties, Inc.
The following summaries are qualified by, and should be read in conjunction
with, the Daniels & Associates appraisal, the Communications Equity Associates
appraisal and the Houlihan Lokey fairness opinion. You are encouraged to review
the appraisals prepared by Daniels & Associates and Communications Equity
Associates which are attached to this proxy statement as Exhibits I and J,
respectively. You are also encouraged to review Houlihan Lokey's fairness
opinion which is attached to this proxy statement as Exhibit K.
DANIELS & ASSOCIATES APPRAISAL
General. The general partner engaged Daniels & Associates to appraise the
entirety of NCP-Six's assets comprising the cable television systems serving
seven communities in Mississippi, South Carolina and North Carolina. Daniels &
Associates delivered its appraisal based on the review, analysis, scope and
limitations described in its written summary. Daniels & Associates appraised
NCP-Six's assets as of July 1, 1999. Events occurring after July 1, 1999, and
before the effective date of the proposed transaction could affect the
properties or assumptions used in preparing the appraisals. Daniels & Associates
will not deliver any additional written summary of the analysis and will not
prepare an update to its appraisal closer to the time of closing the proposed
transaction. The material assumptions, qualifications, limitations and methods
used in the Daniels & Associates appraisal are described below.
Summary of Methodology. Daniels & Associates evaluated each system on a
going-concern basis, in conformance with standard appraisal techniques,
utilizing a ten-year discounted net cash flow analysis and applying relevant
market and economic factors.
In valuing the assets, Daniels & Associates relied on a discounted
operating cash flow analysis based on the projected operating results of
NCP-Six's assets over a ten-year period and applied a factor for the residual
value of the assets at the end of that ten-year period. The discounted cash flow
analysis was validated by a review of private market transactions in cable
systems that had occurred in the recent past. The market transaction approach
applies the value per subscriber and operating cash flow multiples from the
other private market sales of cable systems. It then correlates those statistics
to the actual statistics of NCP-Six's assets. According to Daniels & Associates,
both the discounted cash flow analysis and the comparable private market
transaction multiple analysis are standard valuation methodologies used in the
cable television industry.
In the course of performing the valuation, Daniels & Associates engaged in
discussions with employees of the managing general partner's corporate office
and local system offices, made due diligence visits to substantially all of the
operating systems comprising the assets, reviewed and evaluated materials and
information provided by the managing general partner and local cable system
management, researched demographic information relating to the various
communities served by NCP-Six, analyzed forecasted financial and operating
information, and drew upon its own general knowledge about the cable television
industry. On the basis of this information and these efforts, Daniels &
Associates prepared summaries of relevant operating, technical, financial and
demographic characteristics of NCP-Six's operating systems.
Thereafter, in order to assess the fair market value of NCP-Six's assets,
Daniels & Associates prepared detailed operating and financial forecasts for
each of NCP-Six's operating cable systems, taking into account operating
revenues and expenses as well as capital expenditure requirements. These
financial forecasts formed the basis for determining a discounted cash flow for
each operating cable system. The combined values for each operating cable system
constituted the value of the cable operating assets for NCP-Six on a discounted
cash flow basis. In addition to this methodology, Daniels & Associates used the
comparable private market transaction multiple methodology to derive an
aggregate value for NCP-Six by analyzing the value per subscriber and operating
cash flow multiples obtained in similar private sales of cable television
systems. Informed by the results of these methodologies, Daniels determined a
final appraised value for NCP-Six's assets.
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Assumptions. In performing its discounted cash flow analysis of the value
of the assets, Daniels & Associates assumed the assets have been and will
continue to be operated as efficiently as comparable cable systems. Daniels &
Associates assumed that the franchises and asset leases used by NCP-Six in the
operation of the assets will be renewed indefinitely as needed without material
change except to reflect any upgrade or rebuild of the assets. Daniels &
Associates assumed, when evaluating future capital expenditures and cash flows,
that the various systems comprising the assets will be upgraded within three to
five years.
Discounted Cash Flow Valuation. The discounted cash flow valuation method
measures the present value of the assets' forecasted free cash flow from
operations, which is defined as earnings before interest, taxes, depreciation
and amortization ("EBITDA"), less capital expenditures including all rebuild or
upgrade costs. Daniels & Associates determined forecasted free cash flows by
creating ten-year operating forecasts for each of the operating cable systems.
Each forecast took into account detailed projections of revenue and expense
components. Daniels & Associates then calculated the projected residual value of
the assets assuming a sale of each system at the end of the ten-year period.
This terminal enterprise value was based on a multiple of EBITDA which Daniels &
Associates determined to be reasonable in light of comparable private market
transaction multiples of EBITDA.
Daniels & Associates' revenue forecasts were based on its forecasts of the
number of homes passed and the subscriber penetration levels and rates for each
operating cable system, plus an analysis of non-subscriber based revenue
sources. Its expense forecast was based on assumed rates of inflation over the
forecast period, adjusted to reflect the particular growth characteristics of
each operating system. The capital expenditure forecasts were based on costs
associated with new construction of cable plant, plant maintenance, and rebuild
or upgrade requirements. Daniels believes that the opportunities of the systems
comprising the assets to provide ancillary telecommunications and data services
are limited and costs uncertain, and thus Daniels & Associates did not include
telephony or data service revenue, expenses or capital costs in its projections.
Daniels & Associates did include residential data services revenue and expenses
where appropriate. All information provided to the managing general partner
relating to Daniels & Associates' operating revenue and expense forecasts and
the assumptions underlying these forecasts is contained in the Daniels &
Associates' appraisal. The general partners did not request that additional
information or analysis be included in the Daniels & Associates' appraisal
because they looked to Daniels & Associates to develop the appraisal methodology
it deemed appropriate in its professional judgment. The general partners did not
want to otherwise influence the appraisal performed by Daniels & Associates by
requiring any changes to its prepared methodology.
Once Daniels & Associates arrived at a forecast of cash flows and terminal
enterprise values, it discounted these values back to the present at a discount
rate representing the weighted average cost of capital for various entities
within the cable television industry that are capable of consummating a sale
similar in size to the acquisition of the assets. Daniels & Associates described
the weighted average cost of capital as the rate of return required by an entity
on its investment in order to satisfy the expectations of the entity's debt and
equity investors. After some analysis, Daniels & Associates assumed that the
prime rate on July 1, 1999 (7.5%) was a fair estimate of the cost of debt. It
determined the cost of equity by sampling the estimated private market cost of
equity for cable television investments and blended this cost with the equity
return objectives for large publicly traded companies. Daniels & Associates
determined the cost of equity to be 22.5%. Daniels & Associates arrived at a
weighted cost of capital of 13.50%.
Applying the discount rate to its cash flow forecasts, Daniels & Associates
arrived at a valuation of $73.3 million for NCP-Six's assets, representing a
value equal to 10.9 times annualized free cash flow and $2,200 per equivalent
basic subscriber.
Comparable Transactions Valuation. In addition to the discounted cash flow
methodology, Daniels & Associates used the comparable private market transaction
multiple methodology. Daniels & Associates describes this as another generally
accepted valuation method for correlating and validating the findings of the
discounted cash flow analysis with private market realities. Under this
methodology, Daniels & Associates compared selected market multiples reported in
the sales of cable television systems of similar size, situated in similar
markets, and of similar technical condition to NCP-Six's assets. In these
transactions, the purchase
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prices paid ranged from 9.0 to 14.0 times operating cash flow, with a weighted
average of 10.0. Prices per subscriber ranged from $1,500 to $2,732, with a
weighted average of $1,940. All information provided to the general partners
relating to the basis for Daniels & Associates' selection of comparable
transactions is also contained in the Daniels & Associates appraisal.
Valuation. Based on its analysis using these two methodologies, Daniels &
Associates arrived at an estimated fair market value for NCP-Six's cable
television assets as of July 1, 1999 of $73.3 million, representing 10.9 times
the estimated operating cash flow for those assets. The $73.3 million estimate
also translates to a value per equivalent basic subscriber of $2,200. This cash
flow multiple is slightly higher than the weighted average multiple for
comparable transactions and equal to the multiple derived from the discounted
cash flow analysis. The value per subscriber is higher than the weighted average
value per subscriber derived from the comparable transaction analysis and equal
to the value per subscriber derived from the discounted cash flow analysis.
COMMUNICATIONS EQUITY ASSOCIATES APPRAISAL
General. The general partners also engaged Communications Equity Associates
("CEA") to appraise the entirety of NCP-Six's assets comprising the cable
television systems serving seven communities in Mississippi, South Carolina and
North Carolina. CEA delivered its appraisal based on the review, analysis, scope
and limitations described in its written summary. CEA appraised NCP-Six's assets
as of July 1, 1999. Events occurring after July 1, 1999, and before the
effective date of the proposed transaction could affect the properties or
assumptions used in preparing the appraisal. CEA will not deliver any additional
written summary of the analysis and will not prepare an update to its appraisal
closer to the time of closing the proposed transaction. The material
assumptions, qualifications, limitations and methods used in the CEA appraisal
are described below.
Summary of Methodology. CEA evaluated each system on a going-concern basis
in conformance with standard appraisal techniques, utilizing a ten-year
discounted net cash flow analysis and applying relevant market and economic
factors. In valuing the assets, CEA relied on a discounted cash flow analysis
and market approach. The discounted cash flow approach is based on the projected
operating results of the assets over a ten-year period and applies a factor for
the residual value of the assets at the end of that ten-year period. The market
transaction approach reviews and compares recent private market transactions
involving comparable assets. The market approach provides a comparison of (1)
the multiple of cash flow represented by the purchase price of such other
systems with the multiple of NCP-Six's cash flow represented by the appraised
value for the assets, and (2) the value-per-subscriber of such other system
sales with the corresponding value-per-subscriber for NCP-Six's operating cable
systems. According to CEA, both the discounted cash flow analysis and the
comparable private market transaction multiple analysis are generally accepted
valuation methodologies for cable television systems.
In the course of performing its valuation, CEA engaged in discussions with
employees of the managing general partner's corporate office and local system
offices, and made due diligence visits to substantially all of the operating
systems comprising the assets. CEA reviewed and evaluated materials and
information provided by the managing general partner and local cable system
management, researched demographic information relating to the various
communities served by NCP-Six, and analyzed forecasted financial and operating
information and drew upon its own general knowledge about the cable television
industry. On the basis of this information and these efforts, CEA prepared
summaries of relevant operating, technical, financial and demographic
characteristics of NCP-Six's operating cable systems.
In order to assess the fair market value of NCP-Six's assets, CEA prepared
detailed operating and financial forecasts for each of NCP-Six's operating cable
systems, taking into account operating revenues and expenses as well as capital
expenditure requirements. These financial forecasts formed the basis for
determining a discounted cash flow for each operating cable system. The combined
value for each operating cable system constituted the value of the operating
cable assets for NCP-Six on a discounted cash flow basis. In addition to this
methodology, CEA used the comparable private market transaction multiple
methodology to derive an aggregate value for NCP-Six by analyzing the value per
subscriber and operating cash flow
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multiples obtained in private sales of comparable systems. Informed by the
results of both of these methodologies, CEA determined a final appraised value
for NCP-Six's assets.
Assumptions. In performing its discounted cash flow analysis of the value
of NCP-Six's assets, CEA assumed the assets have been and will continue to be
operated as efficiently as comparable cable systems. CEA assumed that the
franchises and asset leases used by NCP-Six in the operation of the assets will
be renewed indefinitely as needed without material change, other than upgrade
and/or rebuild requirements. CEA further assumed that the systems were in
material compliance with all franchise, regulatory and Federal Communications
Commission requirements.
Discounted Cash Flow Approach. The discounted cash flow approach measures
the present value of the assets' forecasted free cash flow from operations less
capital expenditures including all rebuild or upgrade costs. CEA determined
forecasted cash flows by creating ten-year operating forecasts for each of
NCP-Six's operating cable systems, each of which took into account detailed
projections of revenue and expenses. CEA then calculated the projected residual
value of NCP-Six's assets at the end of the ten-year period. This terminal value
was calculated by multiplying the projected free cash flow by a multiple which
CEA determined to be reasonable in light of its experience in the cable
industry. All information provided to the managing general partner relating to
CEA's forecasts and assumptions underlying these forecasts is contained in the
CEA appraisal. The general partners did not request that additional information
or analysis be included in the CEA appraisal because they looked to CEA to
develop the appraisal methodology it deemed appropriate in its professional
judgment. The general partners did not want to otherwise influence the appraisal
performed by CEA by requiring any changes to its prepared methodology.
Once CEA had arrived at a forecast of cash flow and terminal enterprise
value, it discounted these values back to the present at a discount rate
representing the weighted average cost of capital for cable television system
operators. CEA described the weighted average cost of capital as the rate of
return likely required by equity and debt investors in order to satisfy the
expectations of the investors. CEA assumed, based on its experience in raising
debt financing for cable operators, that a lender would likely charge an
interest rate of 8% for debt financing. It determined the cost of equity based
on its experience in the cable industry as being a 25% return on investors'
equity. Applying these rates, CEA arrived at a weighted cost of capital of
14.8%.
Applying the discount rate to its cash flow forecasts, CEA arrived at a
total present valuation of $74.6 million for NCP-Six's assets, representing a
value equal to 11.1 times NCP-Six's estimated operating cash flow and a price of
$2,263 per basic subscriber.
Comparable Market Approach. In addition to its discounted cash flow
methodology, CEA used the comparable market transaction approach. CEA describes
this as another generally accepted valuation method for valuing businesses and
for correlating and validating the findings of the discounted cash flow analysis
with private market realities. CEA noted in its appraisal that there was
significant consolidation activity in the cable industry during the first six
months of 1999. CEA observed that although there had been dramatic increases in
the prices paid for large cable systems, due in part to the size and location of
the systems and the introduction of cable Internet services, there had been
fewer transactions involving cable systems of comparable size and markets as
NCP-Six's assets and that the prices paid for these smaller systems had not seen
dramatic increases.
Under the market transaction method, CEA evaluated and compared
transactions occurring during the first six months of 1999 involving cable
systems of similar size and markets as NCP-Six's assets. In these transactions,
the purchase prices paid ranged from 9.2 to 12.7 times operating cash flow, with
a weighted average of 10.8 and a median of 11.3. Prices per subscriber ranged
from $1,500 to $2,755, with a weighted average of $2,313 and a median of $2,134.
Based on CEA's experience, it determined that a cash flow multiple of 11.0 was
appropriate to value the systems. CEA applied this multiple to NCP-Six's
annualized cash flow of $6,731,196 resulting in a valuation of $74,043,156,
representing a per subscriber price of $2,246.
Valuation. Based on CEA's analysis using these two methodologies, CEA
arrived at an estimated fair market value for NCP-Six's assets as of July 1,
1999 of $74.6 million, which represents a value equal to 11.1 times the
estimated operating cash flow and a price of $2,263 per basic subscriber. This
cash flow
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multiple of 11.1 is slightly higher than the weighted average multiple for
comparable market transactions and is equal to the multiple derived by CEA's
discounted cash flow analysis. The value per subscriber of $2,263 is slightly
higher than the weighted average value per subscriber for comparable market
transactions and is equal to the value per subscriber derived by CEA's
discounted cash flow analysis.
HOULIHAN LOKEY FAIRNESS OPINION
On May 13, 1998, the general partners in their capacities as general
partners of Northland Cable Properties Five Limited Partnership ("NCP-Five")
distributed a proxy statement to the limited partners of NCP-Five calling a
special meeting to consider a sale of NCP-Five's assets to Northland
Communications Corporation and the subsequent liquidation of NCP-Five. In that
transaction the assets were valued by a single appraiser and third-party bids
were not solicited. On June 3, 1998, a class action lawsuit was filed by a class
of limited partners of NCP-Five challenging the proposed sale of NCP-Five's
assets. On June 18, 1998, the managing general partner wrote to the limited
partners of NCP-Five alerting them to the lawsuit and outlining the allegations.
The special meeting of NCP-Five was held on June 25, 1998. The votes of limited
partners were counted and the results indicated that the holders of 77% of the
outstanding units had voted and, of those units voted, 95% were voted in favor
of the transaction. On August 28, 2000, a trial of the NCP-Five lawsuit
commenced in King County Superior Court, in Seattle, Washington. This litigation
was subsequently settled. On September 1, 1998, the managing general partner
closed the purchase and sale of the assets of NCP-Five.
To address issues raised in the NCP-Five litigation, the general partners
decided to solicit bids for NCP-Six's assets through a blind bid process. The
general partners also decided to engage an independent third party to evaluate
the fairness of the consideration to be received by NCP-Six as a result of the
proposed transaction, and to render a formal opinion as to those findings.
On October 24, 2000, the managing general partner on behalf of NCP-Six
engaged Houlihan Lokey to render opinions as to the fairness of the
consideration to be paid to NCP-Six, from a financial point of view, in both the
sale of the Bennettsville system to Bidder AA and the sale of NCP-Six's
remaining assets to Northland Communications Corporation or its affiliates for
the purchase price of the bids submitted by each party in August 2000. Houlihan
Lokey did not assist the general partners with any of the negotiations with
Bidder AA or any company affiliated with Northland Communications Corporation.
On February 16, 2001, Houlihan Lokey delivered to the general partners a
presentation as to Houlihan Lokey's findings and drafts of separate opinions as
to the fairness of each of the sale of the Bennettsville system to Bidder AA and
the sale of NCP-Six's remaining assets to Northland Communications Corporation.
Based on the assumptions, qualifications and limitations stated in those draft
opinions, Houlihan Lokey concluded that the consideration to be received by
NCP-Six in both transactions was fair from a financial point of view as of
February 16, 2001.
Following the general partners' termination of negotiations with Bidder AA,
the managing general partner requested Houlihan Lokey to revise its fairness
evaluation. Because the proposed transaction includes selling all of NCP-Six's
assets to Northland Communications Corporation affiliated companies, Houlihan
Lokey was requested to consolidate its two prior draft fairness opinions into
one opinion. That fairness opinion was to address whether the combined
consideration to be received by NCP-Six from both Northland Cable Properties,
Inc. and Northland Cable Networks LLC was fair from a financial point of view.
The full text of Houlihan Lokey's opinion in connection with the proposed
transaction, which sets forth, among other things, assumptions made, matters
considered and limitations on the review undertaken, is attached to this proxy
statement as Exhibit K. Houlihan Lokey's opinion was prepared for the benefit
and the use of the general partners and Messrs. Whetzell and Clark in connection
with their respective evaluations of the proposed transaction and does not
constitute a recommendation to the limited partners of NCP-Six as to how they
should vote on matters presented in this proxy statement.
Because Houlihan Lokey cannot control how the sale proceeds from the
proposed transaction will be distributed to the limited partners of NCP-Six, the
Houlihan Lokey opinion is also limited to whether the
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consideration to be received by NCP-Six is fair from a financial point of view,
and does not make a separate determination as to the fairness of the
consideration to be received by the limited partners of NCP-Six upon liquidation
of NCP-Six. Notwithstanding, the net proceeds from any sale of the assets of
NCP-Six will be first applied to the payment of known NCP-Six liabilities and a
$750,000 reserve for potential unknown or contingent liabilities. The balance of
net proceeds will be distributed pro rata amongst the partners of NCP-Six
following consummation of the proposed transaction and the payment of NCP-Six's
liabilities. Therefore, the primary concern of the general partners and Messrs.
Whetzell and Clark when evaluating whether to approve of the proposed
transaction was the fairness of the price to be received by NCP-Six for its
assets.
Houlihan Lokey's opinion does not address the underlying business decisions
of the general partners to proceed with the proposed transaction. Instead,
Houlihan Lokey's opinion is limited to Houlihan Lokey's independent evaluation
of whether the consideration to be received in the proposed transaction is fair
as of the date of the opinion.
In connection with the preparation of Houlihan Lokey's opinion, Houlihan
Lokey, among other things:
1. held discussions with:
- John Whetzell: Founder, President, CEO and Chairman of the Board of
Directors, Northland Telecommunications Corporation;
- Gary Jones: Vice President and Chief Financial Officer, Northland
Telecommunications Corporation;
- Richard Dyste: Vice President of Technical Services, Northland
Telecommunications Corporation;
- Laura Williams: Vice President and Senior Counsel, Northland
Communications Corporation;
- Richard Clark: Vice President, Treasurer and Director, Northland
Telecommunications Corporation;
- H. Lee Johnson: Divisional Vice President, Northland Telecommunications
Corporation;
- Richard Belland: System Manager, Starkville, MS system;
- Ricky Mooneyham: Regional Manager, Philadelphia and Forest, MS system;
- Toby Ellington: South East Operations Analyst, Northland Communications
Corporation;
- Bill Staley: Regional Manager, Aiken, SC area systems;
- Bob Sturm: System Technician, Barnwell, SC system;
- Shirley McCormick: Business Manager, Bennettsville, SC system;
- Leroy Hendricks: System Technician, Bennettsville, SC system; and
- Randy Wells: Senior Vice President, Daniels & Associates, L.P.;
2. visited the following cable system operations representing approximately
92% of NCP-Six's subscribers:
- Starkville, MS;
- Philadelphia, MS;
- Barnwell, SC; and
- Bennettsville, SC;
3. reviewed the following documents:
- Northland Telecommunications Corporation 1999 Annual Report;
- Northland Cable Properties Six Limited Partnership Prospectus dated
July 10, 1986;
- Amended and Restated Certificate and Agreement of Limited Partnership
of Northland Cable Properties Six Limited Partnership, executed on
November 3, 1986;
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- Northland Cable Properties Six Limited Partnership First Supplement to
Prospectus dated October 23, 1986;
- Northland Cable Properties Six Limited Partnership Second Supplement to
Prospectus dated December 1, 1986;
- Northland Cable Properties Six Limited Partnership Third Supplement to
Prospectus dated January 26, 1987;
- Audited Financial Statements for the years ended December 31, 1988 and
1987;
- Audited Financial Statements for the years ended December 31, 1996 and
1995;
- Audited Financial Statements for the years ended December 31, 1997 and
1996;
- Northland Cable Properties Six Limited Partnership 10-K for the fiscal
year ended December 31, 1997;
- Northland Cable Properties Six Limited Partnership 8-K dated January 2,
1998;
- Northland Cable Properties Six Limited Partnership 10-K/A for the
fiscal year ended December 31, 1998;
- Northland Cable Properties Six Limited Partnership 10-Q for the
quarterly period ended June 30, 1999;
- Northland Cable Properties Six Limited Partnership 10-K for the fiscal
year ended December 31, 1999;
- Northland Cable Properties Six Limited Partnership 10-Q for the
quarterly period ended June 30, 2000;
- Unaudited detailed financial statements for each operating group for
the year-to-date period ended December 31, 2000;
- Draft audited financial statements for Northland Cable Properties Six
Limited Partnership for the two fiscal years ended December 31, 2000 and
1999;
- Northland Cable Properties Six Limited Partnership Appraisal Analysis
Summary as of July 1, 1999 prepared by Daniels & Associates, L.P.;
- Northland Cable Properties Six Limited Partnership Asset Valuation
Analysis as of July 1, 1999 prepared by Communications Equity
Associates;
- Northland Cable Properties Six Limited Partnership Confidential
Memorandum, prepared by Daniels & Associates, L.P., dated July 1999;
- Northland Cable Properties Six Limited Partnership Bid Instructions
Letter, dated August 6, 1999 from Daniels & Associates, L.P.;
- Northland Cable Properties Six Limited Partnership Buyer List, prepared
by Daniels & Associates, dated August 20, 1999;
- Northland Cable Properties Six Limited Partnership Bid Summary, dated
August 20, 1999;
- NCP-Six Draft Proxy Statement dated December 9, 1999;
- Northland Cable Properties Six Limited Partnership Confidential
Memorandum, prepared by Daniels & Associates, L.P., dated June, 2000;
- Northland Cable Properties Six Limited Partnership Bid Instructions
Letter, dated July 27, 2000 from Daniels & Associates, L.P.;
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- Bid Procedures Letter from Daniels & Associates, L.P., dated July 18,
2000 and Proposed Asset Purchase Agreement;
- Northland Cable Properties Six Limited Partnership Prospective Buyers
List, prepared by Daniels & Associates, dated July 28, 2000;
- Northland Cable Properties Six Limited Partnership Updated Bid Book,
dated August 16, 2000;
- Follow-up Bid Instruction Letters to Bidder AA from Daniels &
Associates, L.P., dated July 28, 2000 and August 3, 2000;
- Affidavits from Hubbard & Johnson, P.C., signed August 10, 2000 and
August 17, 2000;
- Proposed Asset Purchase and Sale Agreement by and Between Northland
Cable Properties Six Limited Partnership and Bidder AA;
- Proposed Asset Purchase Agreement between Northland Cable Properties
Six Limited Partnership and Northland Communications Corporation, or its
affiliates or assigns;
- Asset Purchase Agreement between Northland Cable Properties Six Limited
Partnership and Northland Cable Networks LLC, dated April , 2001;
- Asset Purchase Agreement between Northland Cable Properties Six Limited
Partnership and Northland Cable Properties, Inc., dated April , 2001;
- Northland Cable Networks LLC, draft Limited Liability Company
Agreement, dated April , 2001;
- BMO Nesbitt Burns term sheet for Northland Cable Properties, Inc.,
dated , 2001;
- Northland Cable Properties Six Limited Partnership Preliminary Proxy
Statement filed with the Securities Exchange Commission on December 21,
2000;
- Northland Cable Properties Six Limited Partnership Subscriber History
from January 1998 to September 2000, dated October 25, 2000;
- Northland Cable Properties Six Limited Partnership Subscriber
Report -- end of month subs as of December 2000;
- Summary of Secondary Trading for units in NCP-Six from inception to
April 16, 2001 from Bloomberg L.P.;
- NCP-Six Subscriber Summary for the first quarter of 2001;
- Franchise Renewal Docket;
- Listing of Property Leases;
- Channel Line-up, printed October 25, 2000;
- NCP-Six Company Summary Three Year Capital Plan dated January 22, 2001;
- Organization Chart for Northland Telecommunications Corporation; and
- publicly available information on the industry, NCP-Six and comparable
companies and transactions;
4. performed appraisals of the assets proposed to be sold in the proposed
transaction which included the following analyses:
- Analysis of comparable transactions;
- Analysis of all previous purchases and sales of cable systems by
NCP-Six;
- Analysis of comparable public companies;
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- Discounted cash flow analysis;
- Review of the returns to the original limited partners and limited
partners from secondary trading;
- Review of the historical and projected financial performance of the
systems;
- Review of the historical subscriber performance of the systems;
- Review of the historical and projected capacity and other technical
aspects of the systems;
- Review of the implied multiples from the proposed transactions; and
- Analysis of the change in valuations of cable systems over time.
The following is a summary of the material financial analyses performed by
Houlihan Lokey in connection with rendering its opinion related to the proposed
transaction.
DISCOUNTED CASH FLOW ANALYSIS
The discounted cash flow approach values a company on a going-concern
basis. The discounted cash flow approach determines the present risk-adjusted
value of the expected future cash flow stream, with expected growth incorporated
into the projections. There are three steps involved in using the discounted
cash flow approach as follows:
- determination of cash flow projections that are supportable in light of
historical performance, industry performance and industry expectations,
and reasonable future expectations of NCP-Six;
- determination of the "terminal value" of NCP-Six at the end of the
projection period; and
- determination of the appropriate discount rate to be used to discount the
projected cash flows.
In its analysis of NCP-Six, Houlihan Lokey used forecasts and projections
for the years ended December 31, 2001 through 2005. Projected capital
expenditures for 2001 to 2003 were based on NCP-Six's detailed three-year
capital plan. Debt-free cash flows are generally defined as representative
debt-free earnings less capital expenditures plus depreciation and amortization
less increases in net working capital. Houlihan Lokey discounted the value of
the debt-free cash flow streams to present values using discount rates ranging
from 13% to 17%. Houlihan Lokey selected the discount rates by estimating the
weighted average cost of capital for the combined operating units of NCP-Six.
The weighted average cost of capital used by Houlihan Lokey in its analysis was
primarily based on the cost of equity for publicly traded cable companies and
the cost of debt for similar risk securities in Northland Communications
Corporation.
In order to determine the terminal value of NCP-Six's assets at the end of
the projection period, Houlihan Lokey utilized a capitalization of operating
cash flow approach. This approach was utilized by applying a 10.0x multiple to
2005 operating cash flow. The terminal multiple of 10.0 was based on the average
multiple for similar transactions. Houlihan Lokey then discounted the terminal
value of the assets associated with the proposed transaction to the present
using the same discount rate range as the interim cash flows. Houlihan Lokey
added together the present value of the interim cash flows and the present value
of the terminal value to arrive at a total enterprise value range of $58.7
million to $67.5 million for the assets associated with the proposed
transaction.
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COMPARABLE TRANSACTION ANALYSIS
Using publicly available information, Houlihan Lokey analyzed the
consideration offered and the implied transaction value multiples paid in the
following selected acquisition transactions in the cable system industry:
PRICE PRICE/ CASH
PAID PER CASH FLOW/
DATE BUYER SELLER SUBSCRIBER FLOW SUBSCRIBER
---- ----- ------ ---------- ------ ----------
June 2000............. Adelphia Tri-Lakes $2,778 13.2 $210
June 2000............. Cable One Telepartners 2,500 11.8 212
June 2000............. Charter Communications Inc. Enstar 6-B 1,720 11.0 156
June 2000............. Gans Multimedia Enstar 1,624 9.5 171
July 2000............. Mediacom Spirit Lake CATV 2,160 10.0 216
July 2000............. Mediacom So. KY Service Corp. 2,100 9.7 216
July 2000............. Omega Rifkin Acquisition Partners 2,111 9.0 235
August 2000........... Gans Multimedia Enstar 1,725 7.0 246
October 2000.......... Mediacom Illinet Cable Systems 1,950 10.0 195
October 2000.......... Time Warner Lewis County Cable and 1,304 8.0 170
Henderson Cable
November 2000......... Mediacom Satellite Cable Services 2,392 7.5 306
February 2001......... Time Warner Cable Texas 2,462 15.1 163
February 2001......... Uvision, LLC Stuck Electric, Inc. 1,391 8.0 174
In analyzing these comparable transactions, Houlihan Lokey compared the
total consideration paid in such transactions as a multiple of the number of
subscribers as well as the latest twelve months and estimated calendar 2000 cash
flows, where available.
The transactions above were relied on more heavily than other transactions
analyzed because they were closer in time to the proposed transaction, similar
in size to the proposed transaction and the acquired companies were located in
similar rural communities. The average multiple of operating cash flows for
these transactions was 10.0 and the median was 9.7. The average price per
subscriber was $2,009 and the median was $2,100.
After reviewing the composite range of multiples indicated for the
comparable transactions, Houlihan Lokey arrived at the following multiple ranges
for NCP-Six:
2000 Cash Flow Multiple Range....................... 9.5 to 10.0
Price per Subscriber Multiple Range................. $1,900 to $2,100
After applying these ranges to NCP-Six's representative values, Houlihan
Lokey arrived at an aggregate valuation range for NCP-Six's assets of $63.6
million to $68.2 million.
OTHER CONSIDERATIONS
In addition to the analyses mentioned above, Houlihan Lokey:
- performed an analysis of all previous purchases and sales of cable
systems by NCP-Six. Houlihan Lokey reviewed previous sales and
acquisitions of cable systems made by NCP-Six including its acquisition of
the Bennettsville and Barnwell operating systems in 1998 at $1,817 per
subscriber.
- reviewed the returns to NCP-Six's original limited partners from
secondary trading. Limited partners in NCP-Six originally purchased units
for $500 per unit. To date, distributions totaling $128 per unit have been
paid by NCP-Six to its limited partners. Distributions to limited partners
resulting from the proposed transaction are forecasted to be $1,220 per
unit, although $473 of that amount is to be paid over three years from
closing. During the life of NCP-Six, Houlihan Lokey's research showed the
pricing of units in the secondary market ranged from a low of $300 to a
high of $870. The highest trade at $870 per unit was for a total of ten
units in May 2000. The highest number of units traded in any given month
was 169 in March 2000 for prices ranging from $800 to $831.
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- analyzed the change in valuations of U.S. cable systems since the date of
the previous appraisals by Daniels & Associates and Communication Equity
Associates. The market price for public cable companies decreased 21%
between April 3, 2001 and July 1, 1999, the date of the previous
appraisals by Daniels & Associates and Communication Equity Associates.
The average appraisal value from Daniels & Associates and Communication
Equity Associates was $73.95 million as of July 1, 1999. Applying a 21%
decrease implies a value of $58.42 million as of April 3, 2001 for the
combined assets to be sold in the proposed transaction. In addition, the
number of total NCP-Six subscribers has decreased from 32,617 at the end
of June 1999 to 31,828 at the end of March 2001. This puts downward
pressure on the current valuation of NCP-Six's assets as compared to July
1999.
- reviewed the implied multiples for the proposed transaction. The implied
multiple per subscriber from the proposed transaction is $2,187. The
implied operating cash flow multiple from the proposed transaction is 9.9.
These multiples were calculated based on an adjusted purchase price. The
adjusted purchase price of $69.2 million was determined by adding the
expected proceeds to be paid to NCP-Six on the closing date to the present
value of the principal and interest payments to be paid over the next
three years on the two promissory notes to be delivered to NCP-Six upon
closing.
- held discussions with Daniels & Associates regarding the sale procedures
and bid processes followed in connection with the sale of the assets of
NCP-Six.
After applying the various approaches and considering the factors mentioned
above, Houlihan Lokey arrived at a valuation range of $61.8 million to $67.8
million. This range is below the $70.2 million valuation of the proposed
transaction. The highest value within this range is also below the adjusted
present value of the proposed transaction which was calculated to equal $69.2
million as of April 3, 2001. As a result, Houlihan Lokey has concluded that the
proposed transaction is fair to NCP-Six from a financial point of view.
COMPENSATION AND MATERIAL RELATIONSHIPS
NCP-Six paid Daniels & Associates and Communications Equity Associates
$50,000 each plus out-of-pocket expenses for their appraisal services. If the
proposed transaction is consummated, NCP-Six will pay Daniels & Associates
$702,000 as a brokerage fee for its efforts in soliciting bids for the assets
from independent third parties.
The managing general partner retained Daniels & Associates and
Communications Equity Associates based on each company's experience and
expertise as a nationally recognized cable brokerage, appraisal and investment
banking firm. Each firm, as part of its investment banking business, is
continuously engaged in the valuation of cable businesses and securities in
connection with mergers and acquisitions, competitive biddings and private
placements. The general partners decided not to retain appraisers other than
Daniels & Associates and Communications Equity Associates, because they believed
Daniels & Associates and Communications Equity Associates had significant
expertise in the rural cable television markets in which NCP-Six's systems are
located. The general partners' belief as to the qualifications of Daniels &
Associates and Communications Equity Associates is based on the managing general
partner's years of experience working in the cable television industry. The
managing general partner's experiences have included negotiating numerous
transactions for cable assets; valuing systems for both operation, purchase and
sale; attending numerous trade shows and industry events; maintaining
relationships with various parties that work in the cable industry, including
parties known to customarily appraise cable assets; and keeping abreast of
industry developments through trade publications and various news sources. Both
Daniels & Associates and Communications Equity Associates are independent of the
companies affiliated with Northland Communications Corporation and NCP-Six.
Neither firm has any ownership interest in or management control over any
Northland Communications Corporation affiliated company although the managing
general partner is aware of one individual at Communications Equity Associates
who owns eight units of limited partnership interest in NCP-Six (out of 29,784
units outstanding). This individual has agreed to not vote his units at the
special meeting. In the past, Daniels & Associates has provided brokerage and
appraisal services to NCP-Six, including assisting in brokering the sale of the
Sandersville, Mississippi system in April 1999. In addition, both Daniels &
Associates and Communications Equity Associates have previously provided
brokerage and appraisal services
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to Northland Communications Corporation and affiliates and it is expected that
they may provide similar services in the future. In all cases, each firm has
received customary fees for the rendering of these services. Both Daniels &
Associates and Communication Equity Associates have consented to the use of
their appraisals in connection with this proxy statement.
NCP-Six paid Houlihan Lokey a fee of $125,000 plus out-of-pocket expenses
for its services in connection with rendering its opinion as to the fairness of
the consideration to be received by NCP-Six in the proposed transaction. The
amount paid to Houlihan Lokey was not conditioned upon the outcome of its
fairness opinion and was negotiated prior to Houlihan Lokey's evaluation of any
of the assets of NCP-Six. NCP-Six retained Houlihan Lokey to evaluate the assets
of NCP-Six and the consideration to be received in the proposed transaction due
to Houlihan Lokey's experience and reputation in evaluating transactions and
rendering fairness opinions for various companies in various industries,
including companies operating in the telecommunications sector. Houlihan Lokey
was ranked number one amongst national investment banking services companies for
the number of fairness opinions rendered in the United States during calendar
year 2000. Prior to this engagement, neither Northland Communications
Corporation nor any of its affiliates had entered into a relationship with
Houlihan Lokey, and to the knowledge of the general partners Houlihan Lokey does
not own any interest in, or have any management control over any Northland
Communications Corporation affiliated company. Houlihan Lokey has consented to
the use of its fairness opinion in connection with this proxy statement.
BACKGROUND OF THE PROPOSED TRANSACTION
HISTORY OF NCP-SIX
NCP-Six was formed on January 22, 1986 and began operating in 1986 with the
acquisition of cable television systems serving several communities and
surrounding areas in Mississippi and North Carolina. In a series of transactions
since then, NCP-Six acquired and now operates the cable television systems of
five operating groups located in the following geographic areas:
- Starkville, Mississippi;
- Philadelphia, Mississippi;
- Highlands, North Carolina;
- Barnwell, South Carolina; and
- Bennettsville, South Carolina.
All of the initial acquisitions were financed through a combination of limited
partners' equity and bank loans, and the later acquisitions were financed
through a combination of NCP-Six cash flow and bank loans.
When NCP-Six was formed, NCP-Six was scheduled to terminate on December 31,
2001. That termination date was approximately fifteen years after most limited
partners first invested in NCP-Six. It was never anticipated that NCP-Six would
be listed on a securities exchange or quotation system. It was also never
anticipated that an active secondary trading market would develop for
partnership units in NCP-Six. Instead, it was anticipated that limited partners
in NCP-Six would receive a return on capital through one or more distributions
resulting from the sale of the NCP-Six's cable television systems, and through
distributions of excess operating capital from time to time, as available.
NCP-Six's general partners now believe that many investors have held their
units for more than 14 years without liquidity and that a significant number of
limited partners desire to liquidate their investment in NCP-Six. There is no
established secondary or public market in which the units are being actively
traded, although the general partners are aware that there has been some recent
private sales activity and offers for NCP-Six limited partnership units, in
addition to transfers in connection with estate and retirement planning, by
will, gift or settlement. Pending a liquidation of NCP-Six, the general partners
believe the units will likely remain an illiquid investment. This lack of a
formal secondary market for the units continues to restrict the
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ability of investors to increase or decrease their investment in response to
changing personal circumstances or the performance of NCP-Six.
Pursuant to the terms of the NCP-Six partnership agreement, NCP-Six is
currently scheduled to terminate on December 31, 2001 unless the NCP-Six
partnership agreement is amended to extend its term. Furthermore, NCP-Six has
always incurred various amounts of borrowing to acquire, develop and operate its
cable systems. NCP-Six's has a $33,000,000 revolving credit facility with a
syndicated lending group led by First Union National Bank as the lending banks'
administrative agent. As of December 31, 2000, NCP-Six had outstanding
approximately $28,215,281 of borrowings from that facility, which as of last
year had a maturity date of December 31, 2000. While the managing general
partner has been successful in negotiating an extension of the credit facility's
maturity date until June 30, 2001, NCP-Six's lenders have indicated that they
are unwilling to further extend the facility's maturity date due to the
impending expiration of NCP-Six's term.
In the spring of 1999, the managing general partner began to explore
potential means to sell NCP-Six's assets to provide a liquidity event for the
limited partners. Those efforts were motivated by the length of time over which
limited partners have held their investment, the belief that limited partners
would welcome the opportunity to liquidate their investment in NCP-Six, and both
the impending maturity date of NCP-Six's credit facility and expiration of
NCP-Six's term.
Neither of the general partners have undertaken any general solicitation or
survey of limited partners to determine the desire of limited partners to
liquidate their investment in NCP-Six. However, based on unsolicited comments
and questions from limited partners with respect to a liquidation of their
investment, the general partners believe that NCP-Six's limited partners may
welcome the opportunity. Furthermore, unlike today, in the late 1980's and early
1990's the market for buying and selling cable systems was significantly
constrained by the lack of available financing and the implementation of
governmental regulations capping rates that cable operators were allowed to
charge for services. Recent industry consolidation, and market interest in cable
systems due to digital and Internet services appear to the managing general
partner to have improved current valuations for cable systems. These events,
coupled with the impending maturity of NCP-Six's credit facility and the
expiration of NCP-Six's term, influenced the general partners' timing in
exploring opportunities to pursue a sale of NCP-Six's assets.
SECONDARY SALES OF LIMITED PARTNERSHIP UNITS
The general partners' actions have also been motivated by activity of
unrelated third parties in making unsolicited offers to purchase units of
NCP-Six at prices which, in the managing general partner's opinion, do not
fairly represent the underlying value of limited partner units in NCP-Six. The
offers that have come to the managing general partner's attention include the
following:
OFFERING PARTY DATES OF OFFER OFFER AMOUNT
-------------- -------------- ---------------
(PER $500 UNIT)
Madison Liquidity Investors........................ January, 2001 $650
Everest Cable Investors LLC........................ January, 2001 $600
June - July, 2001 $500
LP Investors, LLC.................................. January, 2000 $600
Kendall Investment Partners........................ April, 2000 $685
American Partnership Board (Auction Process)....... November, 1999 - April, 2000 $801 - $908
These offers are for amounts below the currently forecasted proceeds to be
received by the limited partners of NCP-Six per partnership unit if the proposed
transaction is consummated. These offers are also for amounts below the general
partners' prior estimated distributions to limited partners of NCP-Six upon
liquidation of NCP-Six based on appraisals of NCP-Six's assets obtained prior to
the date of these offers, and the managing general partner's belief as to the
value of NCP-Six's assets. See "The Proposed Transaction -- Appraisal Process
and Fairness Opinion; Summary of Reports -- Daniels & Associates Appraisal" and
"-- Communications Equity Associates Appraisal."
Northland Communications Corporation currently serves, and in the past has
served, as the managing general partner of several limited partnerships. It has
been Northland Communications Corporation's
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experience that especially as the end of the term of a partnership grows near,
unsolicited offers are made for limited partnership units at values that are
less than the value of the partnership's underlying assets. These offers are
made with the expectation of a positive return upon liquidation of the
partnership at or near the expiration of the partnership's term. The managing
general partner is not familiar with how the parties making unsolicited offers
for limited partnership units in NCP-Six have arrived at their offered price,
nor is the managing general partner familiar with the auction process used by
the American Partnership Board which has resulted in the sale of limited
partnership units in NCP-Six from time to time. The managing general partner
has, however, referred limited partners who have desired to sell their
partnership units to the American Partnership Board since the American
Partnership Board's auction process at various times can provide a mechanism for
the sale of limited partnership units where a secondary market for the sale of
those units does not otherwise exist.
CHRONOLOGY OF EVENTS LEADING UP TO THE PROPOSED TRANSACTION
Beginning in the spring of 1999, the managing general partner started to
research what options were available to provide a liquidity event for the
unaffiliated limited partners of NCP-Six. At that time, representatives of the
managing general partner contacted Cairncross & Hempelmann, NCP-Six's legal
counsel, to discuss options available to NCP-Six to provide an opportunity for
liquidity to the limited partners. Representatives of the managing general
partner held similar discussions with appraisal firms (Daniels & Associates and
Communications Equity Associates), and the managing general partner and the
administrative general partner engaged in general discussions regarding a
liquidity event for the unaffiliated limited partners. During these general
discussions, both the managing general partner and the administrative general
partner expressed a common goal of striving to determine the best means for
selling the assets of NCP-Six for a price that would result in the most
favorable return to the limited partners of NCP-Six. Although the managing
general partner and the administrative general partner are general partners of a
number of other cable television system limited partnerships, the administrative
general partner is independent of Northland Communications Corporation. See
"Information About NCP-Six -- Affiliates of NCP-Six."
The possibility that Northland Communications Corporation or one of its
affiliates might acquire the assets of NCP-Six arose from the outset of these
discussions. Northland Communications Corporation and its affiliates were seen
as possible purchasers of the assets since they are in the business of acquiring
and operating cable television assets similar to those owned by NCP-Six, and
Northland Communications Corporation has previously purchased assets from
various limited partnerships in which it has served as a general partner. John
S. Whetzell and Richard I. Clark, who are senior officers of the managing
general partner and who are each shareholders of Northland Telecommunications
Corporation, the sole shareholder of the managing general partner, were required
to assess the opportunity presented to both NCP-Six and Northland Communications
Corporation by the prospect of a sale or other disposition of the assets. By
virtue of their dual capacity and their ownership interest in the managing
general partner, Messrs. Whetzell and Clark faced a conflict of interest in
making this assessment.
During the spring of 1999, the managing general partner and the
administrative general partner discussed the feasibility of soliciting offers
for the proposed sale of the assets of NCP-Six from third parties. In evaluating
the possibility of Northland Communications Corporation or an independent third
party acquiring the assets, the general partners' primary motivating factor was
their desire to obtain liquidity for the unaffiliated limited partners at a
maximized value. The general partners recognized that the assets might be more
attractive to a Northland Communications Corporation affiliate than to a third
party. Factors identified that could make the acquisition more attractive to a
Northland Communications Corporation affiliate included Northland Communications
Corporation's familiarity with the operation of the assets of NCP-Six and the
ownership by the companies affiliated with Northland Communications Corporation
of other cable television systems in the vicinity of some of NCP-Six's assets.
This proximity may afford the companies affiliated with Northland Communications
Corporation an opportunity to continue benefiting from certain economies of
scale that NCP-Six has been experiencing, including centralized billing,
management, advertising, maintenance, installation, customer service and support
personnel. While other third-party cable system owners and operators have cable
systems adjacent to certain of the assets, NCP-Six is not aware of any single
entity which
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owns or operates cable television systems near all or substantially all of the
systems owned by NCP-Six. Accordingly, a third party may not experience the same
economies of scale as those available to the companies affiliated with Northland
Communications Corporation. A third-party purchaser would also be forced to bear
transaction costs that a Northland Communications Corporation affiliate would
not be required to bear. For example, Northland Communications Corporation's
engineers are currently familiar with the technical aspects of the systems
comprising the assets of NCP-Six, and Northland Communications Corporation's
management is familiar with NCP-Six's on-site operations and administrative
staff. A third-party purchaser presumably would be required to devote additional
management, administrative, human resources and technical attention to the
operation of the assets while gaining the degree of familiarity with the assets
that Northland Communications Corporation has already attained.
In April 1999, after concluding that a sale of the assets of NCP-Six was a
possibility, the general partners determined that it was an appropriate time to
obtain an appraisal of the fair market value of NCP-Six's assets.
Representatives of the managing general partner met with representatives of
Daniels & Associates and Communications Equity Associates to discuss the
potential sale of NCP-Six and an appraisal of NCP-Six's assets. These
discussions focused on the background of NCP-Six and the makeup of NCP-Six's
assets and operations. The nature of these discussions were focused on
instructing both Daniels & Associates and Communications Equity Associates to
determine separate valuations for the assets of NCP-Six based on their
respective independent methodologies. These firms are recognized by the general
partners for their experience in appraising cable television systems and other
media-related businesses and were selected in large part based on their
experience in the cable television industry generally and on their research
capabilities and resources.
Between April 26, 1999 and May 5, 1999, representatives of Daniels &
Associates and Communications Equity Associates met with Mr. Clark to perform
on-site due diligence inspections of the systems and the communities served. On
May 25, 1999, NCP-Six formally engaged Communications Equity Associates to
perform an appraisal of the fair market value of NCP-Six's assets with a
valuation date as of July 1, 1999. On June 25, 1999, NCP-Six formally engaged
Daniels & Associates to also perform an appraisal of the fair market value of
NCP-Six's assets with the same valuation date of July 1, 1999.
In early July 1999, Daniels & Associates and Communications Equity
Associates each delivered its written appraisal to the managing general partner
valuing NCP-Six's assets as of July 1, 1999. The Daniels & Associates appraisal
valued the assets at $73.3 million. The Communications Equity Associates
appraisal valued the assets at $74.6 million.
Concurrently with the appraisal process, the general partners evaluated the
possibility of obtaining third-party bids for the purchase of the assets. While
Northland Communications Corporation had an interest in acquiring the assets of
NCP-Six, that interest was outweighed by other operational priorities of the
companies affiliated with Northland Communications Corporation, and as a result
neither Northland Communications Corporation nor its affiliated companies were
prepared to submit an offer to purchase NCP-Six's assets. Even if the companies
affiliated with Northland Communications Corporation had been prepared to
acquire the assets at the time, the managing general partner determined that a
bid solicitation process would be used in an effort to secure the highest
possible price by involving several potential purchasers. Based on the managing
general partner's experience in connection with transactions involving similar
sized cable television systems, and the physical location of NCP-Six's systems,
the general partners concluded that soliciting third-party purchasers for the
assets would require NCP-Six to retain a broker. In an effort to obtain the best
transaction value for the limited partners, the managing general partner decided
on a strategy whereby NCP-Six would engage a broker to identify qualified
potential buyers and solicit the highest and best offer from each potential
purchaser, after which the general partners would review the dollar amount and
terms of the offers received.
During July 1999, the general partners discussed the formation of a special
committee to review anticipated offers and concluded that the expense of forming
a special committee outweighed any benefits to the limited partners that might
result from independent representation. As part of forming a special committee,
NCP-Six would be required to establish a procedure for selecting representative
unaffiliated limited partners to serve on the committee. NCP-Six would have to
locate limited partners who would be willing to serve and would have to incur
management time and expense in educating the committee as to all
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aspects of NCP-Six's business. NCP-Six would have to pay travel expenses to each
of the systems and travel expenses for committee meetings. NCP-Six would also
have to obtain liability and indemnification insurance for each committee
member. Finally, the general partners determined that a special committee was
not necessary because they believed that the steps being taken to structure the
proposed transaction constituted sufficient safeguards to protect the limited
partners' interests. Those steps included:
- soliciting bids from third parties through an experienced broker of cable
television systems;
- commissioning two independent appraisals of the fair market value of the
assets to be used as a benchmark for evaluating the third-party bids; and
- obtaining approval of a majority of NCP-Six's unaffiliated limited
partners before a sale could be made to the managing general partner or
any of its affiliates.
1999 THIRD-PARTY BID SOLICITATION PROCESS
On July 2, 1999, NCP-Six engaged Daniels & Associates to assist in
brokering the sale of NCP-Six's cable systems to a third party. The managing
general partner, in conjunction with input from Daniels & Associates, developed
the bid process to solicit interest from third-party purchasers. Specifically,
the bid process entailed sending a confidential memorandum to each party deemed
by Daniels & Associates to be a potential purchaser of the assets. That
confidential memorandum included the following:
- an executive summary of NCP-Six's cable systems and geographic location
of those systems;
- a summary of subscribers for each cable system;
- a summary of rates and programming for each system;
- a summary of operations and assets to be sold;
- a summary of technical information describing the systems and their
technological characteristics;
- a description of the markets served by each system; and
- a compilation of historical financial data.
Along with the confidential memorandum, Daniels & Associates included a
proposed form of asset purchase agreement prepared by counsel for NCP-Six.
Bidders were advised that they were free to mark up the proposed asset purchase
agreement form when submitting their bids, but that material deviations from the
proposed form of agreement could have a negative impact on the attractiveness of
their offer. Potential purchasers were instructed to submit their bid to Daniels
& Associates no later than August 20, 1999. They were also invited to tour
NCP-Six's facilities upon confirmation of serious interest.
During July and early August 1999, Daniels & Associates contacted 35
potential purchasers regarding the solicitation of bids for the sale of all or a
portion of NCP-Six's assets. The potential purchasers were selected by Daniels &
Associates based on the broker's expertise in the marketplace and belief as to
purchasers that might be interested in purchasing systems similar to NCP-Six's.
Daniels & Associates provided each of the 35 potential purchasers with a copy of
the confidential memorandum prepared by the managing general partner and Daniels
& Associates.
In early August 1999, two potential purchasers performed on-site due
diligence reviews of NCP-Six's cable systems under the supervision of Daniels &
Associates. On August 20, 1999, the submission date for third-party bids,
Daniels & Associates received offers from three potential purchasers ("Bidder
A," "Bidder B" and "Bidder C"). Neither Northland Communications Corporation nor
any affiliated company submitted a bid. The offer by Bidder A proposed the
purchase of all of NCP-Six's assets for a price of $76 million. The offer
submitted by Bidder B included two options -- first, for all of the assets at a
price of $70.4 million and, second, for all of the Mississippi operating group
assets at a price of $46,635,000. The offer submitted by Bidder C proposed the
purchase of only the Starkville, Mississippi system at a price of $19 million.
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The following table summarizes the four bids submitted, including
identifying the NCP-Six assets subject to the bid, the total purchase price
offered and the purchase price divided by the number of subscribers in the
systems subject to the offer (which in the managing general partner's
professional opinion is an accepted valuation statistic in the cable television
industry):
ESTIMATED PRICE
BID BIDDER ASSETS PURCHASE PRICE PER SUBSCRIBER
- --- -------- ------ -------------- ---------------
1 Bidder A All $76,000,000 $2,303
2 Bidder B All $70,400,000 $2,136
3 Bidder B Mississippi only $46,635,000 $2,389
4 Bidder C Starkville, Mississippi $19,000,000 $2,312
On August 30, 1999, Messrs. Whetzell and Clark, other senior officers of
the managing general partner and representatives of NCP-Six's legal counsel,
Cairncross & Hempelmann, met to review and evaluate the four offers. They
reviewed the scope of the offers, the terms and amounts of the proposed purchase
prices, and other conditions to the four offers. Primary attention was given to
the price offered by Bidder A since it was significantly higher than the other
bids submitted. At the meeting, the terms of each of the offers were evaluated
and a list of questions and clarification points was prepared for follow-up with
Bidder A. Specifically, the points for which clarification was sought from
Bidder A included clarification on conditions to signing a definitive agreement,
financing and the availability of funds, and Bidder A's proposed remedies for
any breach of the definitive agreement once it was signed.
On August 30, 1999, after the meeting of senior officers of the managing
general partner, NCP-Six rejected the bids of Bidder B and Bidder C. NCP-Six
rejected Bidder B's bid for all of the assets because the proposed purchase
price was significantly lower than the purchase price proposed by Bidder A.
NCP-Six rejected Bidder B's bid for the assets of the Mississippi systems, and
rejected Bidder C's bid for the assets of the Starkville system because the
managing general partner felt that selling only a portion of the assets of
NCP-Six without a mechanism for selling the remaining assets of NCP-Six was not
in the best interests of NCP-Six or its limited partners.
The managing general partner's reluctance to sell only a portion of
NCP-Six's assets without a means to sell the remaining assets is based on two
factors. First, a partial asset sale for an amount that is less than NCP-Six's
outstanding debt will not provide liquidity to limited partners since NCP-Six is
subject to certain loan covenants that require it to pay the proceeds from any
sales of assets outside the ordinary course of business towards the cancellation
of debt prior to making any distributions to limited partners. Second, NCP-Six
has reached certain economies of scale based on the number of cable systems and
subscribers it currently services. If only certain of NCP-Six's assets are sold,
NCP-Six's fixed administrative and management expenses will use a higher
percentage of available operating cash flow.
Had Bidder B or Bidder C's bids for only a portion of NCP-Six's assets been
significantly higher (on a per subscriber basis) than the corresponding bid for
all of the assets submitted by Bidder A, the managing general partner
acknowledged that it would consider the sale of a select portion of NCP-Six's
assets, but only under circumstances that would result in obtaining a premium
purchase price. Otherwise, at the August 30, 1999 meeting, the managing general
partner expressed the goal of only selling a portion of NCP-Six's assets in
conjunction with one or more sales that would provide for the combined sale of
the entirety of the assets of NCP-Six and its subsequent liquidation. Given the
extent of the brokerage effort undertaken by Daniels & Associates, the general
partners did not believe any other potential purchasers would come forward to
buy NCP-Six's other systems.
In order to negotiate what, at the time, seemed to be the bid most in line
with the interests of the limited partners of NCP-Six, the general partners
focused their efforts on the offer of Bidder A. Specifically, Bidder A's offer
included the following material terms:
- an all cash purchase price of $76 million for all of the assets of
NCP-Six, subject to certain adjustments;
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- an assumption that at least 33,000 subscribers would be delivered at
closing, and a purchase price adjustment equal to $2,300 multiplied by
the number of NCP-Six subscribers under 33,000 actually delivered;
- prior to closing, a $3.5 million break up fee to be secured by a letter
of credit and to serve as liquidated damages to Bidder A if NCP-Six
breached the agreement prior to closing;
- after closing, a hold-back escrow equal to $3.5 million to secure
NCP-Six's indemnification obligations for one year from the closing date;
On September 3, 1999, the managing general partner responded by letter to
Bidder A, requesting clarification on several threshold matters concerning
Bidder A's proposal. The letter specifically requested clarification on
conditions to signing a definitive agreement, financing and the availability of
funds, and bidder A's proposed remedies for a breach of the definitive
agreement.
On September 9, 1999, Messrs. Whetzell and Clark, other senior officers of
the managing general partner and representatives of Cairncross & Hempelmann met
to discuss oral comments provided by representatives of Bidder A. Those comments
failed to provide a definitive response to the questions posed by the managing
general partner's September 3 letter to Bidder A. The managing general partner
then decided to request from Bidder A a written response to the letter of
September 3, 1999, and set September 17, 1999 as the deadline for that response.
On September 17, 1999, Bidder A responded in writing to the managing
general partner's letter of September 3, 1999. Bidder A confirmed the
willingness to sign a definitive agreement prior to limited partner approval of
the sale on the condition that if limited partner consent was not obtained
NCP-Six would pay Bidder A's costs and expenses. Bidder A's response also
included a new provision for payment of a break-up fee if the transaction was
not consummated due to the failure of the limited partners to approve the
transaction and the assets were subsequently sold to another party within three
years. The break-up fee payment was to be the greater of (i) $3.8 million or
(ii) 50% of the difference between the actual sale price for those assets and
Bidder A's offer. The response also clarified that Bidder A would not require
financing to close because it had adequate funds available.
On September 23, 1999, Messrs. Whetzell and Clark, other senior officers of
the managing general partner, the administrative general partner and
representatives of Cairncross & Hempelmann participated in a conference call to
discuss the offer from Bidder A as revised by its September 17, 1999 letter. The
meeting focused on the terms of the offer, including the break-up fee, payment
terms for the purchase price and the terms of Bidder A's proposed asset purchase
agreement.
Representatives of the general partners exhaustively reviewed the terms of
Bidder A's offer for the NCP-Six assets, including holding discussions with
Daniel & Associates. Based on the nature of the prior oral comments from Bidder
A and discussions between Bidder A and Daniels & Associates, the general
partners concluded that further negotiations with Bidder A would simply result
in additional delay without successful results.
Finally, on September 23, 1999, the general partners rejected the bid of
Bidder A and did not negotiate further with Bidder A. The general partners
determined that the $76 million purchase price proposed by Bidder A provided
excellent value to the limited partners since the proposed purchase price
exceeded the appraised value of the assets as determined by Daniels & Associates
and by Communications Equity Associates. However, the general partners also
concluded that the terms of the purchase agreement submitted by Bidder A under
which the assets would be sold were not as advantageous to NCP-Six and could
significantly decrease the value of the transaction to the limited partners of
NCP-Six. The general partners placed particular emphasis on the break-up fee if
the transaction was not closed, the downward adjustment of the purchase price in
the event of a short-fall in the number of subscribers delivered at closing and
the representations and warranties required by Bidder A. At the time, a company
affiliated with Northland Communications Corporation had not yet made an offer
to purchase the assets of NCP-Six, and the general partners' decision to reject
Bidder A's offer was not based on an expectation that a company affiliated with
Northland Communications Corporation would subsequently attempt to make an offer
for those assets.
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NORTHLAND COMMUNICATIONS CORPORATION'S 1999 EFFORT TO PURCHASE ALL
OF NCP-SIX'S ASSETS
After NCP-Six broke off negotiations with Bidder A because NCP-Six could
not accept Bidder A's terms, Messrs. Whetzell and Clark expressed the
willingness of Northland Communications Corporation to attempt to purchase all
of NCP-Six's operating systems for $76,000,000. This offer was based on the same
valuation proposed by Bidder A, but contemplated that Northland Communications
Corporation's purchase price would be paid in part by delivery of a $3,800,000
promissory note with a term of one year and an interest rate of 6 1/2%. The
amount of the promissory note was substantially equivalent to the $3,500,000
hold-back escrow amount proposed by Bidder A.
Northland Communications Corporation explained that it would undertake an
effort to try to secure financing to purchase the assets for the $76 million
dollar purchase price proposed by Bidder A, but that Northland Communications
Corporation was not sure it could secure such financing at the time because
Northland Communications Corporation and its affiliates were unwilling to
subject themselves to unfavorable borrowing conditions such as unacceptable debt
service levels caused by a higher interest rate or shorter term of borrowing,
and onerous restrictive loan covenants and/or the requirement of loan
guarantees. While Northland Communications Corporation submitted its informal
offer, no definitive agreement was negotiated or signed between Northland
Communications Corporation and NCP-Six since both parties understood that if
suitable financing could not be secured, the transaction would not proceed. At
that time, the general partners both concluded that if Northland Communications
Corporation could not secure acceptable financing for the purchase of the
assets, then a second round of bidding would be solicited.
The general partners compared Northland Communications Corporation's 1999
offer to the offer of Bidder A that had previously been rejected. Several
aspects of Northland Communications Corporation's offer were seen by the general
partners to be more favorable to NCP-Six than the prior offer of Bidder A. The
more favorable aspects of Northland Communications Corporation's 1999 offer
included:
- No Break-Up Fee. A significant factor that lead the general partners to
reject Bidder A's offer was the break-up fee proposed by Bidder A. If the
asset purchase agreement was signed with Bidder A, but the transaction
failed to close because the limited partners failed to approve it, then
NCP-Six would have been liable to Bidder A for its costs and expenses
(including attorneys' fees) incurred with respect to the transaction
(such as due diligence expenses and costs of negotiating the agreement).
In addition, if at any time in the subsequent three years NCP-Six sold
the assets to another party, NCP-Six would have been required to pay to
Bidder A the greater of $3.8 million or 50% of the amount for which the
assets were sold in excess of $76 million. The general partners believed
that these provisions regarding payment of a break-up fee and
reimbursement of costs and attorneys' fees represented a significant
potential liability to NCP-Six had the partnership proceeded with the
transaction with Bidder A. Additionally, the general partners were
concerned that the break-up fee provision may have had the negative
effect of inducing limited partners to approve the transaction,
regardless of its merits, merely to avoid payment of the break-up fee. In
contrast, Northland Communications Corporation's 1999 offer did not
include a break-up fee or a reimbursement of expense provision.
- Limited Representations and Warranties. A significant difference between
Northland Communications Corporation's 1999 offer and Bidder A's bid was
the breadth of the representations and warranties that NCP-Six would be
required to make. It is typical in business asset purchase agreements for
the seller to make extensive representations and warranties about the
seller's business and the assets to be acquired. The accuracy and
completeness of such representations by the seller is a condition to the
buyer's obligation to close the transaction. Claims for indemnification
made by the buyer against the seller after the closing of an asset
purchase transaction are often based on the seller's representations and
warranties. In the proposed asset purchase agreement submitted by Bidder
A, NCP-Six would have been required to make extensive representations and
warranties about the systems, the subscribers and other aspects of its
business. On the other hand, because Northland Communications
Corporation, as managing general partner of NCP-Six, has extensive
knowledge about NCP-Six's operations, Northland Communications
Corporation required NCP-Six to make only a very limited number of
representations and warranties. The representations and warranties
required by Northland Communi-
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49
cations Corporation relating solely to partnership power and
authorization matters, rather than representations about the systems or
the business. The limited number of representations requested of NCP-Six
by Northland Communications Corporation in 1999 were the minimum required
to assist Northland Communications Corporation with its application for
financing.
- No Adjustment for Number of Equivalent Basic Subscribers. Northland
Communications Corporation's 1999 offer did not include any downward
adjustment to the transaction price based on the number of equivalent
basic subscribers served by the systems at closing. In contrast, the bid
submitted by Bidder A included a downward adjustment to the purchase
price of $2,300 for every subscriber delivered at closing below 33,000
subscribers. The general partners felt that this was a significant
negative factor of Bidder A's bid due to the recent historical attrition
in subscriber counts experienced by NCP-Six primarily due to increased
competition from satellite delivered services. As of July 1999, the total
estimated number of equivalent basic subscribers served by NCP-Six's
systems was 32,597, representing an approximate 1.8% decrease in the
number of these subscribers from the estimated total of 33,183 for the
prior year at July 1998. That amount as of July 1999 also represented a
1.1% decrease from the number of equivalent basic subscribers at March
31, 1999 of 32,963. The number of subscribers at March 31, 1999 was
provided to all third-party bidders by Daniels & Associates. Based on the
number of equivalent basic subscribers at July 1999, the purchase price
from Bidder A would have been adjusted downward from $76 million to
approximately $75,073,100, and it would have been subject to further
decrease if the number of subscribers at closing declined from the July
1999 figure.
- No Post-Closing Escrow Deposit by NCP-Six. The offer received from Bidder
A included a provision requiring NCP-Six to deposit $3.5 million of the
sales proceeds into a hold-back escrow account to secure any
indemnification rights of Bidder A after closing. The escrowed funds
would have been released one year from closing to the extent that Bidder
A had not made any claim against them due to a breach of any
representations or warranties associated with the sale of the assets by
NCP-Six. This post-closing escrow would have had the effect of delaying
and possibly reducing the funds payable to the limited partners at
closing. Northland Communications Corporation's 1999 offer did not
require NCP-Six to deposit any amount into an escrow account. Northland's
1999 offer did, however, include a $3.8 million promissory note repayable
on the first anniversary after closing.
- Limitation on Liability of NCP-Six. Northland Communication Corporation's
1999 offer included a maximum cap on NCP-Six's liability for any
indemnification obligations under the purchase agreement in an amount
equal to 4% of the total valuation price (which was approximately $3.04
million). Northland's 1999 offer also included a provision that NCP-Six
would not be liable for indemnification until the total amount of claims
exceeded $250,000. The form asset purchase agreement sent to prospective
third party bidders contained the 4% cap on liability and the $250,000
deductible. However, the bid and further clarification received from
Bidder A indicated that the 4% cap was not acceptable and that the amount
of the cap and the deductible would need to be negotiated.
In addition to the favorable terms described above, the general partners
considered the following factors of Northland Communication Corporation's 1999
offer that were seen as less favorable than the terms of Bidder A's bid to
NCP-Six and its limited partners:
- Terms of the Promissory Note. Northland's 1999 offer included Northland
Communications Corporation's delivery of a $3.8 million promissory note
to NCP-Six for a portion of the purchase price. The $3.8 million
promissory note proposed by Northland Communications Corporation was to
be an unsecured obligation of Northland Communications Corporation and
was to be subordinated to Northland Communications Corporation's senior
debt (including approximately $53 million in then current senior debt and
approximately $66.4 million in additional bank financing that Northland
Communications Corporation would have needed to obtain in connection with
the transaction proposed by Northland Communications Corporation's 1999
offer). Northland Communications Corporation's promissory note was not to
be guaranteed by any other party. The note was also to bear interest at a
fixed rate of 6% per annum. The 6% per annum fixed rate of Northland
Communications Corporation's promissory note was recognized by the
general partners to be below market for similar corporate borrowings.
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50
- No Earnest Money Deposit by Buyer. The form asset purchase agreement sent
to prospective third-party bidders contained a provision that required
the buyer to deposit 5% of the total purchase price into an escrow
account when the asset purchase agreement was signed to secure the
buyer's obligations to close the transaction. The offer received from
Bidder A included an agreement by Bidder A to deposit $3.5 million into
an escrow account. Northland Communications Corporation's offer, however,
did not require it to deposit any amount into an escrow account either at
the time the asset purchase agreement was signed, or at any time prior to
closing.
At the time that Northland Communications Corporation informally submitted
its 1999 offer to acquire the assets of NCP-Six, the general partners did not
compare the likelihood of Northland Communications Corporation obtaining
financing for the transaction against the prior representation of Bidder A that
Bidder A had secured available funds to consummate the purchase of assets
reflected in Bidder A's 1999 bid. Such a determination was not relevant at the
time since Bidder A's offer had already been rejected due to Bidder A's
requirement of a break-up fee, stringent representations and warranties, and a
downward purchase price adjustment in the event of a loss in the number of
subscribers prior to closing.
In October, 1999, representatives of the managing general partner met with
representatives of Cairncross & Hempelmann to discuss a preliminary draft of a
proxy statement soliciting the consent of limited partners to the sale of
NCP-Six's assets to Northland Communications Corporation or one of its
affiliated companies. On December 6, 1999, the general partners filed a
preliminary draft of the corresponding proxy statement with the Securities and
Exchange Commission, while Northland attempted to secure its necessary
financing.
FAILURE OF NORTHLAND COMMUNICATIONS CORPORATION'S 1999 OFFER DUE
TO LACK OF ACCEPTABLE FINANCING
In mid October 1999, Northland Communications Corporation began preliminary
discussions with the agent bank of its lending group regarding the financing of
its 1999 offer. In January 2000, the lenders presented to Northland
Communications Corporate financing terms that were deemed by Northland
Communications Corporation to be unacceptable due to the overall cost of the
debt, and other terms and conditions that were required as part of the proposed
loan commitment.
In January 2000, Northland Communications Corporation's lenders presented a
lending proposal for the financing of Northland Communications Corporation's
1999 offer that included the following specific terms:
- The companies affiliated with Northland Communications Corporation would
have had to restructure into a holding company structure with a new parent
corporation that would have been the senior borrower under proposed credit
facility.
- The newly created holding company would have been required to incur a
first tranche of debt equal to $30 million at a rate of libor plus 6%. In
addition, the lenders would have required a 2% up front fee for this $30
million first tranche of debt.
- Northland Cable Properties, Inc. would have then been allowed to increase
amounts available under its senior credit facility to a credit limit of
$100 million. This $100 million credit facility would have covered
Northland Cable Property, Inc.'s then existing outstanding debt of
approximately $55.8 million, plus additional borrowings necessary to close
the proposed purchase of NCP-Six's assets. This $100 million portion of
the credit facility would have been at an interest rate of libor plus
2.875%. In addition, the lenders would have required up front fees of
1-1/8% to 1-3/8% of borrowings by Northland Cable Properties, Inc. under
this $100 million portion of the credit facility.
Northland Communications Corporation felt that the interest rates proposed
for these borrowings plus the significant up front fees, that were estimated to
be in excess of $1.6 million, was not acceptable especially in light of debt
service coverage covenants also required by the lenders for the proposed credit
facility. When evaluating the cost of debt proposed by its lenders, Northland
Communications Corporation evaluated how debt service payments would correspond
to debt service and debt to equity covenants proposed by its lenders. In the
final analysis, Northland Communications Corporation concluded that the cost of
debt and the covenants required by its lenders provided too little flexibility
for future operations.
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51
When Northland Communications Corporation presented its offer to purchase
the assets of NCP-Six for a valuation of $76 million, Northland Communications
Corporation stated that it had to secure suitable financing to consummate the
purchase, and that at the time Northland Communications Corporation did not know
whether it could secure such financing under acceptable terms. Northland
Communications Corporation's offer was therefore subject to Northland
Communications Corporation securing acceptable financing in Northland
Communications Corporation's sole discretion. At the time, Northland
Communications Corporation was not aware of alternative lending sources that
were likely to provide the financing required to make the purchase based on a
$76 million valuation. As a result, Northland Communications Corporation
rescinded its 1999 offer once Northland Communications Corporation determined
that it could not secure acceptable financing. The preliminary proxy statement
filed on December 6, 1999 was subsequently withdrawn before being submitted to
any unaffiliated limited partners for consideration.
2000 THIRD-PARTY BID SOLICITATION PROCESS
In January 2000, as a result of the general partners' continued belief that
a significant number of limited partners desire to liquidate their investment in
NCP-Six, the managing general partner decided to institute a second round of
bidding in which Northland Communications Corporation would actively
participate. The managing general partner felt that a second round of bidding
was more appealing than contacting only Bidder A and Bidder B in an effort to
reopen negotiation of the offers they made in response to the first bid
solicitation. This conclusion was reached since the general partners had already
determined that further negotiations with Bidder A were not merited, and based
on the amount bid by Bidder B, the general partners had hoped that a second
round of bidding would secure a higher purchase price. Furthermore, both Bidder
A and Bidder B were invited to participate in the second round of bidding in
order to provide them an opportunity to express their willingness to further
negotiate for the purchase of the assets if they expressed an interest to pay
the highest price for those assets.
When considering a second round of bidding the general partners continued
to be motivated by the impending maturity date of NCP-Six's credit facility, the
approaching expiration date of NCP-Six's term, and the continued positive market
environment for cable systems. The second bid solicitation process provided for
the ability to submit bids, on a system by system basis, for the separate cable
systems of NCP-Six, but the goal remained to find a means to sell all of the
systems of NCP-Six for a fair price before the maturity of NCP-Six's debt and
the expiration of NCP-Six's term. Accordingly, NCP-Six once again engaged
Daniels & Associates to assist in brokering the sale of its cable systems.
During June and July 2000, Daniels & Associates again contacted 35
potential purchasers regarding the sale of NCP-Six's systems, including all of
the 1999 bidders. The 35 potential purchasers contacted by Daniels & Associates
were the same purchasers contacted by Daniels & Associates during the first bid
solicitation process. Preparations for Daniels & Associates to solicit the
second round of bidding and the updating of bid books took place between January
2000, the date when the managing general partner decided to solicit a second
round of bids, and the middle of July. On July 18, 2000, Daniels & Associates
provided each of the potential purchasers who expressed an interest in
purchasing some or all of the assets with a form asset purchase agreement and
with information about NCP-Six. Bidders were instructed to submit to Daniels &
Associates, by August 8, 2000, an offer for some or all of the assets of
NCP-Six. Submitted offers were to include the bidder's highest non-negotiable
purchase price and a mark-up of the form asset purchase agreement indicating the
terms on which the purchaser was willing to agree. NCP-Six would evaluate and
review all submitted bids, but would be under no obligation to accept any offer.
Bidders were also advised that Northland Communications Corporation or its
affiliates might bid on some or all of the assets.
In order to avoid the possibility that Northland Communications Corporation
or any other party could learn of the specific terms of a third-party's bid
before Northland Communications Corporation's bid submission, Daniels &
Associates advised all bidders that the bids were to be marked as "confidential"
and then sent only to an independent law firm, Hubbard and Johnson, P.C., who
would hold each bid on a blind bid basis. The bid results would then only be
disclosed after the deadline for submission of bids had passed. Similar
procedural safeguards were not followed in the 1999 bidding process. On July 28,
2000, Daniels & Associates sent each of the potential bidders follow-up bid
instructions advising them that if bidders submitted
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offers within 2% of the top bid (as separately evaluated for each operating
system), those bidders would be invited to resubmit second offers for each
operating system for which their bids were within the 2% threshold.
On August 8, 2000, Daniels & Associates received bids for NCP-Six's assets
from four different bidders, including Northland Communications Corporation. Of
those bids, only Northland Communications Corporation offered to purchase all of
the assets of NCP-Six. The other three bidders limited their offers to between
one and two operating systems.
The following table summarizes the four bids received in 2000, including
identifying the NCP-Six assets subject to each bid, the total purchase price
offered and the purchase price divided by the number of subscribers in the
systems subject to each offer:
ESTIMATED
PURCHASE PRICE
BID BIDDER ASSETS PRICE PER SUBSCRIBER
--- -------------- ------ -------------- ---------------
1 Bidder AA Bennettsville, South Carolina $ 7,922,000 $1,661
2 Bidder BB Starkville, Mississippi $26,300,000 $2,113
Philadelphia, Mississippi $13,700,000 $1,982
TOTAL FOR MISSISSIPPI SYSTEMS $40,000,000 $2,067
3 Bidder CC Starkville and Philadelphia, $40,000,000 $2,067
Mississippi (Combined)
TOTAL FOR MISSISSIPPI SYSTEMS
4 Northland Starkville, Mississippi $32,750,000 $2,632
Communications Philadelphia, Mississippi $13,500,000 $1,953
Corporation TOTAL FOR MISSISSIPPI SYSTEMS $46,250,000 $2,389
Highlands, North Carolina $ 4,600,000 $1,767
Barnwell, South Carolina $11,400,000 $1,896
Bennettsville, South Carolina $ 7,950,000 $1,667
TOTAL FOR ALL SYSTEMS $70,200,000 $2,144
On August 9, 2000, Messrs. Whetzell and Clark, other senior officers of the
managing general partner, and legal counsel from Cairncross & Hempelmann met to
review and evaluate the four offers. They reviewed the scope of the offers, the
terms and amounts of the proposed purchase prices, and other conditions of the
four offers.
Because Bidder AA and Northland Communications Corporation's bids for the
Bennettsville system were within 2% of one another, Daniels & Associates
contacted both Bidder AA and Northland Communications Corporation. Daniels &
Associates informed Bidder AA and Northland Communications Corporation of their
respective opportunities to submit follow-up bids for the Bennettsville system
by August 15, 2000. In response, Northland Communications Corporation confirmed
the terms of its original bid, but did not increase its offer for Bennettsville.
Bidder AA instead increased its offer to $8,388,000.
Similarly, Bidder BB's bid of $13,700,000 for the Philadelphia, Mississippi
system was higher than, but still within 2% of, Northland Communications
Corporation's second highest bid for that system. As a result, both Bidder BB
and Northland Communications Corporation were invited to submit their second
round bids for the Philadelphia, Mississippi system. Northland Communications
Corporation responded by confirming its original bid without change, while
Bidder BB replied that it was only interested in the Philadelphia system if it
could also acquire the Starkville, Mississippi system, and based on Northland
Communications Corporation's combined offer for both the Starkville and
Philadelphia systems, Bidder BB withdrew from further bidding.
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On August 16, 2000, the second round of bidding was closed. The following
table shows the winning bids from Daniels & Associates 2000 bid solicitation
process are shown in the following table.
ESTIMATED PRICE
BIDDER ASSETS PURCHASE PRICE PER SUBSCRIBER
------ ------ -------------- ---------------
Bidder AA Bennettsville, South Carolina $ 8,388,000 $1,759
Northland Starkville, Mississippi $32,750,000 $2,632
Communications Philadelphia, Mississippi $13,500,000 $1,953
Corporation TOTAL FOR MISSISSIPPI SYSTEMS $46,250,000 $2,389
Highlands, North Carolina $ 4,600,000 $1,767
Barnwell, South Carolina $11,400,000 $1,896
TOTAL NORTHLAND BID $62,250,000 $2,275
On August 17, 2000, the general partners determined that it was in the best
interest of NCP-Six to accept the offers of Bidder AA and Northland
Communications Corporation, subject to unaffiliated limited partner approval in
the case of the Northland Communications Corporation offer. The general partners
based their determination to accept Bidder AA and Northland Communications
Corporation's offers on their conclusion that Bidder AA and Northland
Communications Corporation submitted the highest bid for the assets covered by
their respective offers. The general partners also believed that Bidder AA and
Northland Communications Corporation's offers proposed the best terms and
conditions for consummation of their respective sales. While Bidder AA proposed
a hold back escrow, which was one of the reasons the general partners finally
rejected Bidder A's offer in the 1999 bid solicitation process, Bidder AA's
offer did not include the break-up fee previously required by Bidder A. Lastly,
the general partners believed that the sale to Northland Communications
Corporation would result in lower transaction costs due to Northland
Communication Corporation's existing familiarity with the assets and operations
proposed to be purchased by Northland Communications Corporation.
When the general partners accepted the offer submitted by Northland
Communications Corporation in the 2000 bid solicitation, they took into account
that Northland Communications Corporation's offer was less than its previously
rescinded offer to acquire all of the assets of NCP-Six for a valuation of $76
million. This revised purchase price, however, reflected the maximum amount that
Northland Communications Corporation was willing to pay for the assets following
Northland Communications Corporation's prior analysis of available financing.
In the second bid solicitation process, bidders were advised that all cash
offers would be considered more favorable than offers that included a deferment
of part of the purchase price through promissory notes or other financing. When
evaluating Northland Communications Corporation's offer for the Mississippi
systems, the general partners took into account that Northland Communications
Corporation's offer included a proposed $9,875,000 promissory note with a 6 1/2%
interest rate. That rate was below what would customarily be charged in the
marketplace. The managing general partner performed a present value analysis of
Northland Communications Corporation's offer for the Mississippi systems using a
discount factor for Northland Communications Corporation's note equal to the
approximate 14.8% rate then in effect for Northland Communications Corporation's
outstanding unsecured subordinated bond obligations. After discounting the
promissory note to present value using this rate, the general partners
determined that Northland Communications Corporation's bid for the Mississippi
systems was equivalent to an all cash bid of approximately $45,569,000.
Similarly, the managing general partner performed a present value analysis of
Northland Communications Corporation's total bid using the same 14.8% discount
factor, leading the general partners to determine that Northland Communications
Corporation's total bid was equivalent to an all cash bid of approximately
$61,144,000. In either case, Northland Communications Corporation's bid was
superior to all other bids submitted during the 2000 bidding for those assets
covered by Northland Communications Corporation's bid.
Consideration was also given to the ability of Northland Communications
Corporation to obtain necessary financing. The general partners evaluated the
outcome of previous discussions held by Northland Communications Corporation
with prospective lenders regarding the current lending environment and specific
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parameters the lenders advised would be necessary to finance Northland
Communications Corporation's purchase. These parameters included certain
financial covenants such as the ratio of overall debt to operating cash flow,
the ratio of operating cash flow to interest expense, limits on the level of
capital expenditures and the period over which the debt could reasonably be
expected to be repaid. Northland Communications Corporation then prepared
projections incorporating these parameters and reported to the general partners
that it had determined the necessary financing could most likely be obtained to
support its current bid.
PREPARATIONS FOR SALES TO BIDDER AA AND NORTHLAND COMMUNICATIONS
CORPORATION
On September 28, 2000, Messrs. Whetzell and Clark, other senior officers of
the managing general partner and legal counsel from Perkins Coie LLP met to
discuss a preliminary draft of this proxy statement. Pursuant to an engagement
letter dated October 21, 2000, the managing general partner, on behalf of
NCP-Six, engaged Houlihan Lokey to conduct a fairness analysis of the
consideration to be received by NCP-Six in the sale to Northland Communications
Corporation, and separately in the sale to Bidder AA.
On December 20, 2000, the general partners filed a preliminary draft of
this proxy statement with the Securities and Exchange Commission. Then on
February 16, 2001, the general partners met with Houlihan Lokey at Northland
Communications Corporation's office for Houlihan Lokey's formal presentation of
its findings with regards to their preliminary fairness analysis. At the
meeting, Houlihan Lokey advised that in its opinion the consideration to be
received by NCP-Six in the sale to bidder AA, and separately in the sale to
Northland Communications Corporation, was fair from a financial point of view.
NEGOTIATIONS WITH BIDDER AA
The managing general partner commenced negotiations with Bidder AA to
finalize the terms of a definitive asset purchase agreement for NCP-Six's
Bennettsville, South Carolina assets in September 2000. Negotiations continued
through the middle of March 2001. By that time, the managing general partner
felt that the final terms of the asset purchase agreement had been negotiated
with Bidder AA and that Bidder AA had only to sign the agreement. Bidder AA,
however did not sign the agreement. Instead, by letter dated March 14, 2001 to
Mr. Whetzell, Bidder AA advised NCP-Six that Bidder AA would proceed with the
transaction only if the purchase price for the Bennettsville, South Carolina
system was lowered to $1,600 per subscriber.
Messrs. Whetzell and Clark, and senior officers of the managing general
partner met to evaluate the status of negotiations with Bidder AA and to review
Bidder AA's March 14 correspondence. Those present at the meeting expressed
frustration at Bidder AA's recent position in light of the protracted
negotiations that had already taken place. Messrs. Whetzell and Clark also
sought clarification on Bidder AA's most recent position and instructed the
managing general partner's in house legal department to draft a letter to Bidder
AA seeking clarification.
On April 4, 2001, the managing general partner sent a letter to Bidder AA's
deputy general counsel. That letter advised Bidder AA that NCP-Six's most recent
records reflected that the Bennettsville system had 4,948 equivalent basic
subscribers and inquired whether Bidder AA was willing to pay $1,600 for each
subscriber delivered at closing, or whether Bidder AA was simply lowering its
original offer to $1,600 per subscriber without an upward adjustment for any
subscribers that had been added since the 2000 bids were received. The letter
also requested Bidder AA to make an earnest money deposit of 5% of the purchase
price to secure further execution of a definitive agreement before April 30,
2001.
On April 9, 2001, Bidder AA's deputy general counsel responded to the
managing general partner's April 4 letter. Bidder AA clarified that it would
only pay $1,600 per subscriber for up to a maximum of 4,660 subscribers. If at
closing NCP-Six delivered less than 4,660 subscribers, the purchase price would
be adjusted downward by an amount equal to $1,600 for each subscriber under
4,660. No corresponding upward adjustment would be allowed. The result would be
a maximum purchase price of $7,456,000, with the possibility of a downward
adjustment if subscribers fell below 4,660. In its April 9 letter, Bidder AA
also refused to make an earnest money deposit.
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On April 12, 2001, Messrs. Whetzell and Clark, and the chief financial
officer of the managing general partner discussed Bidder AA's April 9 letter and
concluded that Bidder AA's revised maximum purchase price of $7,456,000 was
materially less than Northland Communications Corporation's $7,950,000 bid for
the Bennettsville system. The general partners also concluded that the bid was
subject to a possible downward adjustment if less than 4,660 subscribers were
delivered at closing. Finally, they determined that despite the managing general
partner's extensive efforts to negotiate a definitive asset purchase agreement
with Bidder AA, that agreement remained unsigned and Bidder AA was now trying to
lower the purchase price. Without some form of an earnest money deposit being
paid to NCP-Six, Messrs. Whetzell and Clark felt that further negotiations had a
much greater likelihood of failure than success. In response, the managing
general partner determined that it should recommend calling off any further
negotiations with Bidder AA in order to provide Northland Communications
Corporation the opportunity to purchase the Bennettsville system for its
$7,950,000 bid.
Following the April 12 discussion with Mr. Whetzell, Mr. Clark spoke with
the administrative general partner to discuss whether the administrative general
partner agreed with terminating further negotiations with Bidder AA in order to
proceed with Northland Communications Corporation's offer to purchase the
Bennettsville system for $7,950,000. In response, the administrative general
partner and the managing general partner both agreed to terminate further
negotiations with Bidder AA. The general partners then offered the Bennettsville
system to Northland Communications Corporation for Northland Communications
Corporation's $7,950,000 bid.
NORTHLAND COMMUNICATIONS CORPORATION'S 2000 OFFER TO PURCHASE ALL OF
NCP-SIX'S ASSETS
Northland Communications Corporation submitted in the second round of
bidding offers to purchase all of NCP-Six's operating systems for an aggregate
consideration of $70,200,000. The specific amounts offered for NCP-Six's various
systems are set forth above under "2000 Third-Party Solicitation Process." The
bids from Northland Communications Corporation were the highest bids received
during the 2000 bidding, except for the revised bid of $8,388,000 for the
Bennettsville, South Carolina system tendered by Bidder AA. Based upon these
bids, NCP-Six commenced negotiations with Northland Communications Corporation
to purchase all of its systems except Bennettsville, South Carolina, and with
Bidder AA to purchase the Bennettsville, South Carolina system. However, as
negotiations with Bidder AA began to stall, Northland Communications Corporation
reconfirmed its interest in purchasing the Bennettsville, South Carolina system
if NCP-Six was unable to secure a signed purchase agreement from Bidder AA. Once
NCP-Six called off further negotiations with Bidder AA, NCP-Six revived
negotiations with Northland Communications Corporation regarding the purchase of
its Bennettsville operating system for $7,950,000, which is the amount of the
initial 2000 bid by Northland Communications Corporation for that system.
Northland Communications Corporation advised the managing general partner
that it desired to structure the acquisition of NCP-Six's operating assets as
follows:
(a) NCP-Six would distribute in-kind to the managing general partner
at closing an undivided interest in all NCP-Six's operating systems in full
satisfaction of the managing general partner's right to participate in
distributions of proceeds from the proposed transaction. This in-kind
distribution represents the cash amount that NCP-Six would otherwise
distribute to the managing general partner if all operating systems were
sold at a value of $70,200,000. This value in-kind distribution is valued
at $5,913,978 based on NCP-Six's expenses and liabilities equaling
NCP-Six's pro forma expenses and liabilities set forth under the "Projected
Cash Available from Liquidation" section below.
(b) Northland Cable Properties, Inc., a wholly-owned subsidiary of
Northland Communications Corporation, would purchase NCP-Six's remaining
interest in the Highlands, North Carolina and Barnwell and Bennettsville,
South Carolina systems for an aggregate purchase price of $20,036,022.
(c) Northland Cable Networks LLC, a newly-formed limited liability
company in which Northland Communications Corporation has an initial 12.5%
equity interest, would purchase from NCP-Six its remaining interest in the
Philadelphia and Sparkville, Mississippi systems for an aggregate purchase
price of $44,250,000.
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The consideration payable for these operating systems is to be made through
a combination of cash and promissory notes, as described in detail under
"Specific Terms of The Proposed Transaction." Northland Communications
Corporation's 2000 bid originally proposed that the promissory notes to be
delivered to NCP-Six would be paid through two equal principal installments,
together with accrued interest, payable on the first and second anniversary of
the closing. However, after discussions with potential lenders, Northland
Communications Corporation determined that it would be necessary to extend the
term of the promissory notes from two years to three years in response to
concerns raised by the lending banks.
Immediately following closing, the managing general partner will contribute
its undivided interest in the operating systems received through the in-kind
distribution from NCP-Six to the two affiliated purchasers. The two purchasers
will then own an undivided 100% interest in their respective systems.
The managing general partner expressed concern about extending the term of
the purchasers' promissory notes for an additional year, especially in light of
the 6 1/2% rate on those promissory notes. Northland Communications Corporation
then offered to increase the interest rate on the promissory notes to be
delivered by the purchasers to NCP-Six at closing from 6 1/2% to 8%, provided
the term of the notes was increased from two to three years. Northland
Communications Corporation then reiterated that without extending the term of
those promissory notes, there was a likelihood that the purchasers would be
unable to obtain the bank financing required to close the proposed transaction.
The managing general partner determined that the one year extension of the term
of the promissory notes coupled with the increase in the interest rate from
6 1/2 to 8% did not materially change the present value of the proposed
transaction compared to Northland Communications Corporation's 2000 bid. The
general partners did not conclude that the 8% rate of the promissory notes was
equivalent to the market rate for equivalent loans to borrowers with similar
risk characteristics as the purchasers. Instead, the general partners accepted
that the 8% rate as a necessary term of Northland Communications Corporation's
bid.
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SPECIFIC TERMS OF THE PROPOSED TRANSACTION
GENERAL STRUCTURE
The proposed transaction is to be made pursuant to the terms and conditions
of the Northland Cable Networks LLC and Northland Cable Properties Inc. asset
purchase agreements, copies of which are attached as Exhibits E and F,
respectively. Northland Communications Corporation's combined offers value
NCP-Six's assets at $70,200,000. Utilizing this valuation, the proposed
transaction consists of the following:
(a) Immediately prior to the sale, NCP-Six will make an in-kind
distribution to the managing general partner of its pro rata share of all
NCP-Six assets. The in-kind distribution will satisfy in full the managing
general partner's right to receive further distributions from NCP-Six, so
that all subsequent distributions will be made exclusively to the other
partners in NCP-Six. The in-kind distribution is valued at $5,913,978,
based on NCP-Six's expenses and liabilities equalling the pro forma
expenses and liabilities set forth under the "Projected Cash Available from
Liquidation" section below.
(b) Northland Cable Networks LLC will pay to NCP-Six $44,250,000 for
NCP-Six's remaining interest in its Mississippi operating systems. This
purchase price will be paid at closing to NCP-Six through a cash payment of
$38,175,000 and delivery of a promissory note in the principal amount of
$6,075,000.
(c) Northland Cable Properties, Inc. will pay to NCP-Six $20,036,022
for NCP-Six's remaining interest in its Highlands, North Carolina, and
Barnwell and Bennettsville, South Carolina operating systems. This purchase
price will be paid at closing to NCP-Six through a cash payment of
$14,286,022 and delivery of a promissory note in the principal amount of
$5,750,000 issued by Northland Communications Corporation.
Accordingly, at closing NCP-Six will receive aggregate cash payments of
$52,461,000, and will receive two unsecured subordinated promissory notes, one
in the amount of $6,075,000 from Northland Cable Networks LLC, and the second in
the principal amount of $5,750,000 from Northland Communications Corporation.
The economic terms of those promissory notes are identical and described below
under "Terms of Promissory Notes."
POTENTIAL PURCHASE PRICE ADJUSTMENTS
Northland Communications Corporation's $70,200,000 valuation of NCP-Six's
assets is based on the following assumptions:
(i) NCP-Six will transfer its assets free and clear of all liens and
encumbrances;
(ii) the purchasers will assume no debts and liabilities of NCP-Six
(other than obligations arising from the acquired assets after closing);
(iii) the purchaser will not receive any of NCP-Six's closing cash
balances, accounts receivable, prepaid expenses or certain other immaterial
assets.
Northland Cable Networks LLC and Northland Cable Properties, Inc. may,
however, assume certain of NCP-Six's liabilities at closing. If one of the
purchasers assumes an NCP-Six liability the amount of such assumption will have
no impact on the net cash available to NCP-Six for distribution to the
administrative general partner and the limited partners. To the extent such
liabilities are not assumed by the purchasers, NCP-Six will be required to pay
off its liabilities out of the net proceeds received in the proposed
transaction.
TERMS OF PROMISSORY NOTES
As noted above, NCP-Six will receive at closing, as partial consideration
for the sale of its assets, (i) a promissory note in the principal amount of
$6,075,000 from Northland Cable Networks LLC, and (ii) a promissory note in the
principal amount of $5,750,000 from Northland Communications Corporation. While
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these promissory notes will be from different issuers, they will have
substantially identical terms. Each promissory note will:
- be payable through three equal payments of principal, together with
accrued but unpaid interest, due on the first, second, and third
anniversaries of closing;
- bear interest at a fixed rate of 8% per annum;
- be prepayable, at any time, without penalty or premium;
- constitute a fully recourse but unsecured obligation of the issuer; and
- be subordinated to senior debt incurred by the issuer; provided, however,
that such senior debt will permit payments to be made upon such promissory
note as long as there is not an event of default under the senior debt.
SENIOR DEBT OF NORTHLAND CABLE NETWORKS LLC
Northland Cable Networks LLC is a newly-formed limited liability company.
Northland Communications Corporation owns approximately 12.5% of its outstanding
equity, and unaffiliated third-party investors own the balance of the
outstanding equity. However, under the terms of Northland Cable Networks LLC's
organizational documents, management personnel of Northland Communications
Corporation may acquire up to an additional 12.5% of Northland Cable Networks
LLC's outstanding equity under an employee incentive plan. To finance the
$38,175,000 cash payment due to NCP-Six at closing, Northland Cable Networks LLC
plans to borrow up to $25,000,000 from a senior lender that will acquire a first
lien on all assets of Northland Cable Networks LLC, including the assets
acquired from NCP-Six. Northland Cable Networks LLC may incur from time to time
additional senior debt for its operations and future acquisitions. All senior
debt incurred by Northland Cable Networks LLC will have priority over payment of
the promissory note delivered by Northland Cable Networks LLC to NCP-Six at the
closing. If Northland Cable Networks LLC defaults on any of its senior debt, it
will be prohibited from making payments on the promissory note given to NCP-Six
until the default is cured. Furthermore, since the senior debt will be secured
by the assets of Northland Cable Networks LLC, its senior lienholders will be
able to realize upon the collateral value of such assets, before its collateral
is available to pay amounts owing to NCP-Six.
SENIOR DEBT OF NORTHLAND COMMUNICATIONS CORPORATION
Northland Communications Corporation has guaranteed all senior debt that
has been or may be incurred by Northland Cable Properties, Inc. Northland Cable
Properties, Inc. has a commitment from its current lenders to increase its
existing senior credit facility to a maximum of $85,000,000. Northland Cable
Properties, Inc. expects to utilize this expanded credit facility to finance the
cash portion of the purchase price due to NCP-Six and, after borrowing such
additional funds, it anticipates having an outstanding senior debt of
approximately $52,300,000. Separate and apart from its guarantee of this senior
debt, Northland Communications Corporation has, as of December 31, 2000,
outstanding senior debt of approximately $1,600,000. Both the direct and
guaranteed debt of Northland Communications Corporation will be senior to the
amounts owing under the promissory note that Northland Communications
Corporation will deliver to NCP-Six at closing.
CONDITIONS TO COMPLETION OF THE PROPOSED TRANSACTION
The obligations of Northland Cable Networks LLC and Northland Cable
Properties, Inc. to consummate the proposed transaction are subject to certain
material closing conditions, including the following:
- the proposed transaction must be approved by holders of a majority of the
outstanding limited partnership units of NCP-Six;
- there must be no action, suit or other proceeding pending or threatened
to prevent or restrict the proposed transaction;
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- the Hart-Scott-Rodino Act waiting period must have expired or terminated;
- the necessary consents from all franchising authorities and from the FCC
must be obtained;
- the necessary financing must be obtained;
- there must be no material change in the financial condition of NCP-Six;
and
- both acquisitions must close concurrently.
These closing conditions are for the benefit of the purchasers. As a
consequence, the proposed transaction may not close if one or more of these
conditions are not satisfied or waived by the applicable purchaser, even if the
proposed transaction is approved by limited partners holding a majority of
NCP-Six's limited partnership units.
In addition, a closing condition for the benefit of NCP-Six is that none of
NCP-Six's assets will be sold to either Northland Cable Networks LLC or
Northland Cable Properties, Inc. if at any time prior to closing the managing
general partner determines that the cumulative distributions to limited partners
may be reduced by more than $702,000 from the current projected distribution (an
amount that represents 1% of the total proposed transaction valuation). If, as
of closing, this condition is not satisfied, NCP-Six will not sell its assets to
the purchasers, nor to any of their affiliates without again obtaining limited
partner approval.
OTHER ACQUISITION TERMS
The definitive purchase and sale agreements contain certain representations
and warranties by NCP-Six as the seller, and Northland Cable Networks LLC and
Northland Cable Properties, Inc., as the purchasers. The definitive agreements
also provide for the termination of the proposed sales if all closing conditions
are not satisfied or waived, or if the closing does not occur within 180 days of
the date of the special meeting.
DISTRIBUTIONS TO GENERAL AND LIMITED PARTNERS
Under the NCP-Six partnership agreement, partnership distributions are to
be allocated in the following order of priority:
- first, until the limited partners receive cumulative distributions equal
to their capital contributions, 99% to the limited partners and 1% to the
managing general partner; and
- thereafter, 75% to the limited partners, 5% to the administrative general
partner, and 20% to the managing general partner.
Limited partners will participate in the distributions that are to be made
to them in proportion to the number of limited partnership units they hold.
The proposed sale contemplates that the managing general partner will
receive its share of distributions resulting from the proposed transaction
through an in-kind distribution of a pro rata undivided share of NCP-Six's
operating systems. The administrative general partner and the limited partners
will instead receive their respective shares of the net liquidation proceeds
through cash payments. Since the NCP-Six partnership agreement does not
contemplate concurrent in-kind and cash distributions to different classes of
partners, the managing general partner seeks the limited partners' approval of
proposed Amendment No. 2 to the NCP-Six partnership agreement to permit the
concurrent distributions to be made. A copy of proposed Amendment No. 2 to the
NCP-Six partnership agreement is attached to this proxy statement as Exhibit D.
This amendment is required for the proposed transaction.
APPLICATION OF NET CASH PROCEEDS
NCP-Six and the liquidating trust, after it is formed, will apply NCP-Six's
available cash to discharge unpaid NCP-Six liabilities. The managing general
partner has estimated the amount of NCP-Six's total liabilities on a pro forma
basis, assuming that the sales had occurred as of December 31, 2000. See
"Projected Cash Available for Distribution." While NCP-Six's actual liabilities
will differ from those set forth in the pro
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forma statement, the managing general partner does not anticipate that NCP-Six's
actual liabilities, either at closing or thereafter, will be materially greater
than those set forth in the pro forma statement. The pro forma statement
includes a reserve of $750,000 for contingent and unknown expenses that arise
after the closing.
The net cash proceeds will be applied to cover NCP-Six's expenses, whether
or not such expenses are greater or less than those set forth in the pro forma
statement before cash distributions are made to the administrative general
partner or the limited partners. The balance of the net sale proceeds will then
be distributed to the administrative general partner and limited partners in
proportion to their rights under the NCP-Six partnership agreement. The amounts
of these distributions are estimated to be in the range of those amounts as set
forth under "Projected Cash Available From Liquidation" below.
The pro forma statement was used to compute the managing general partner's
share of NCP-Six's expenses (and used as the basis for assigning a value to the
in-kind distribution to be made to the managing general partner). See "Projected
Cash Available from Liquidation." The definitive agreements do not provide for
an adjustment to such valuation to take into account differences between
NCP-Six's actual and pro forma expenses. If NCP-Six's actual expenses and
liabilities exceed the pro forma amounts, the managing general partner will not
bear its pro rata share of such excess. On the other hand, if the actual
expenses are less than the pro forma amounts, the managing general partner will
bear more than its pro rata share.
TIMING OF DISTRIBUTIONS TO THE ADMINISTRATIVE GENERAL PARTNER AND LIMITED
PARTNERS
As soon as is reasonably practicable after the sale, NCP-Six intends to
distribute to the administrative general partner and the limited partners their
respective shares of the net cash proceeds then available, after discharging all
known NCP-Six liabilities and setting up a $750,000 reserve for contingent
liabilities. NCP-Six expects these cash distributions to be made within 120 days
of the closing.
As described below under "Dissolution and Liquidation Consequences of The
Proposed Transaction -- Description of The NCP-Six Liquidating Trust," NCP-Six
intends to establish a liquidating trust. The liquidating trust will receive the
three subsequent installments of the purchase price (the amounts due under the
two promissory notes), discharge liquidating trust liabilities and any NCP-Six
liabilities arising after NCP-Six's dissolution, administer the $1,000,000
hold-back escrow required by Northland Cable Networks LLC and distribute the
balance of the funds to the administrative general partner and the limited
partners as available. NCP-Six expects the balance of the net proceeds to be
distributed through three annual installments, each within approximately sixty
days after the payment date on the promissory notes and the release date of the
hold-back escrow.
See "Projected Cash Available from Liquidation" for estimates of the
amounts distributable to the limited partners if the proposed transaction is
approved. Considering this arrangement, limited partners should bear in mind
that the pro forma statement includes projected expenses of $750,000 for unknown
and contingent liabilities. The managing general partner considers this estimate
to be reasonable, but such expenses and liabilities may exceed that amount.
TIMING OF DISTRIBUTION TO MANAGING GENERAL PARTNER
If the limited partners approve the proposed transaction and it is
consummated, NCP-Six will make the in-kind distribution to the managing general
partner at closing. This arrangement favors the managing general partner in two
respects. First, the managing general partner will receive its full pro rata
share of NCP-Six's net liquidation value at closing, in contrast to the
installment method used to distribute the cash payable to the administrative
general partner and limited partners. Second, the managing general partner will
not run the risk the administrative general partner and the limited partners
will face that a share of the distributable assets will be reduced due to a
default in payment of one or both of the promissory notes, and/or a successful
claim by Northland Cable Networks LLC against the hold-back escrow.
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DISSOLUTION AND LIQUIDATION CONSEQUENCES OF THE PROPOSED TRANSACTION
DISSOLUTION PROCEDURES
If the proposed transaction closes, the managing general partner will
commence dissolution of NCP-Six during the fourth quarter of 2001. NCP-Six will
continue to file periodic reports with the Securities and Exchange Commission
under the Securities Exchange Act of 1934. until it is dissolved. Upon its
dissolution NCP-Six will file a Certification and Notice of Termination on Form
15 with the Securities and Exchange Commission, and will thereafter no longer be
subject to the Securities Exchange Act and will cease filing periodic reports
with the Securities and Exchange Commission. NCP-Six will have completed the
dissolution process when it has discharged all known NCP-Six liabilities, and
disposed of all NCP-Six assets, other than NCP-Six's rights to receive payments
on the two promissory notes received in the proposed transaction, rights to the
$1,000,000 hold-back escrow required by Northland Cable Networks LLC, and a cash
reserve of $750,000 for contingent and unknown liabilities. At that time,
NCP-Six will transfer such assets to the liquidating trust described below.
DESCRIPTION OF THE NCP-SIX LIQUIDATING TRUST
After NCP-Six is wound up and a certificate of cancellation is filed with
the Washington Secretary of State, the two promissory notes received in the
proposed transaction will be assigned to a liquidating trust created and
maintained for the benefit of the administrative general partner and the limited
partners. The liquidating trust will be governed by the NCP-Six Liquidating
Trust Agreement, a copy of which is attached as Exhibit L. In addition to the
notes, NCP-Six's rights to the $1,000,000 hold-back escrow required in the
Northland Cable Networks LLC purchase will be transferred to the trust. NCP-Six
will also deposit $750,000 from the cash received upon closing the proposed
transaction with the trust to secure any contingent or unknown liabilities.
The trust will permit NCP-Six to dissolve after it ceases operations and
will facilitate administration and distribution of the proceeds of the notes to
the administrative general partner and limited partners. The trust is prohibited
from conducting a trade or business and from making investments (other than
short-term investments in demand or time deposits or similar temporary
investments) and will not hold itself out as an investment company. The trust
will terminate the sooner of the date upon which the trustee has disbursed all
of the proceeds of the two notes, the expected to occur within 60 days of the
third anniversary of closing, or December 31, 2005.
Income and expenses of the trust will be allocated among the administrative
general partner and the limited partners as beneficiaries of the trust according
to their percentage interest in NCP-Six. The trust is designed as a "spendthrift
trust" and expressly precludes voluntary transfer of a beneficiary's interests
in the trust, whether by assignment or otherwise. Although the terms of the
trust also prohibit involuntary transfer of beneficial interests in the trust,
whether by creditors, judgment or operation of law, there can be no assurance
that these provisions will be enforceable in all circumstances. Subject to the
restrictions on the trust's actions as described above, the trustee of the trust
has all rights and authorities granted to trustees generally under Washington
law.
The trust will not be required to file periodic reports with the Securities
and Exchange Commission.
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PROJECTED CASH AVAILABLE FROM LIQUIDATION
The following table sets forth an estimate of the cash available for
distribution to the limited partners if the proposed transaction is closed. The
table provides estimates based on an initial $500 and $1,000 investment in
NCP-Six. It projects net sale proceeds from the proposed transaction, including
payments of principal and interest on the two promissory notes, of $2,443 per
$1000 investment and rounded to $1,220 per $500 investment. It also shows the
overall return of an investment in NCP-Six, from inception to liquidation, of
$2,698 per $1000 investment and rounded to $1,350 per $500 investment.
The estimates are computed on a pro forma basis and based upon a number of
assumptions. The projected net cash available assumes that the proposed
transaction occurs on December 31, 2000, and reflects payments of principal and
interest on NCP-Six indebtedness and certain accrued receipts and costs as of
December 31, 2000. The current estimated total expenses in the proposed
transaction are approximately $1,100,000 (including transaction and proxy costs,
and NCP-Six administrative expenses), but such estimate does not include
administrative costs of dissolving and winding up the NCP-Six. Although these
expenses will vary depending on the timing and structure of the sales
transaction, the expenses incurred would likely be equal to or greater than
those set forth in the table. Other expenses, such as NCP-Six administrative
costs and miscellaneous costs, represent expenses that would be incurred by
NCP-Six regardless of the parties to or structure of a sale of NCP-Six's assets.
The estimated expenses include a $750,000 reserve to be held by NCP-Six in the
liquidating trust to pay contingent and unknown liabilities and indemnification
obligations of NCP-Six.
Pursuant to the terms of the Northland Cable Networks LLC purchase
agreement, $1,000,000 of the purchase price will be held in escrow to secure
contingent liabilities and indemnification obligations arising out of the
Northland Cable Networks LLC purchase for a period of one year from closing. It
is assumed that these proceeds will be distributed in full with the first
installment payment from the two promissory notes.
THE ESTIMATES SET FORTH ON THE FOLLOWING TABLE ARE PROVIDED ON A PRO FORMA
BASIS AS OF DECEMBER 31, 2000, AND ARE BEING PROVIDED FOR ILLUSTRATIVE PURPOSES
ONLY. THE GENERAL PARTNERS CURRENTLY ANTICIPATE CLOSING OF THE PROPOSED
TRANSACTION TO OCCUR IN JUNE 2001. ACTUAL AMOUNTS WILL VARY FROM THE ESTIMATES
INCLUDED ON THE FOLLOWING TABLE. THE AMOUNT OF CASH ACTUALLY DISTRIBUTED TO
LIMITED PARTNERS WILL ALSO VARY FROM THESE ESTIMATES. THE AMOUNT OF THE VARIANCE
WILL DEPEND ON A VARIETY OF FACTORS, INCLUDING, BUT NOT LIMITED TO, THE ACTUAL
DATE OF CLOSING, THE RESULTS OF OPERATIONS OF NCP-SIX PRIOR TO SUCH DATE, AND
THE INCURRENCE OF UNEXPECTED LIABILITIES. THE AMOUNT OF THE VARIANCE COULD BE
SIGNIFICANT. IF AT ANY TIME PRIOR TO CLOSING THE GENERAL PARTNERS BELIEVE THAT
THE AMOUNT OF CASH TO BE DISTRIBUTED TO THE LIMITED PARTNERS MAY BE REDUCED BY
MORE THAN $702,000 FROM THESE ESTIMATES (AN AMOUNT THAT REPRESENTS ONE PERCENT
OF THE VALUATION ASSIGNED TO THE NCP-SIX'S ASSETS), THE GENERAL PARTNERS WILL
NOT PROCEED WITH THE PROPOSED TRANSACTION WITHOUT AGAIN OBTAINING THE CONSENT OF
LIMITED PARTNERS HOLDING A MAJORITY OF OUTSTANDING LIMITED PARTNER UNITS.
Although the figures are presented on a pro forma basis as if the proposed
transaction occurred on December 31, 2000, the managing general partner does not
currently anticipate that any events will occur between December 31, 2000 and
the closing date of the proposed transaction that will materially affect the
figures.
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PROJECTED CASH AVAILABLE FOLLOWING CLOSING THE PROPOSED TRANSACTION
PROJECTIONS FOR ENTIRETY OF NCP-SIX:
Gross valuation for proposed transaction.................. $ 70,200,000
Adjustments to gross valuation:
Current liabilities assumed(1)............................ 489,628
Combined adjusted gross valuation......................... 69,710,372
Plus (less) partnership liabilities and other assets:
Receivables and other assets(2)........................ 810,629
Cash on hand........................................... 1,281,380
Broker expenses(3)..................................... (702,000)
Transaction and proxy costs(4)......................... (500,000)
Partnership administrative costs(5).................... (100,000)
Debt repayment to others(6)............................ (29,534,215)
Other costs; contingencies(7).......................... (750,000)
------------
Projected net cash value(8)(9)............................ 40,216,167
Less projected value of distributions to general
partners(9)............................................... 7,364,456
============
Projected cash available for distribution to limited
partners(9)............................................ 32,851,711
PER $500
PARTNERSHIP
PER $1,000 UNIT
INVESTMENT (ROUNDED)
---------- -----------
PROJECTED DISTRIBUTIONS FOR EACH LIMITED PARTNER UNIT
(AND $1,000 INVESTMENT):
Initial distribution from closing the proposed
transaction...................................... $1,381 $ 691
Distribution from the first note payments and the
Northland Cable Networks LLC hold-back escrow,
excluding interest............................... 319 159
Distributions from the second note payments,
excluding interest............................... 253 127
Distributions from the third note payments,
excluding interest............................... 253 127
Previously received cash distributions.............. 255 128
North Carolina, South Carolina, and Mississippi
nonresident tax paid on behalf of the limited
partners -- (treated as a cash
distribution)(10)................................ 115 58
Aggregate interest on first, second and third note
payments......................................... 122 60
------ ------
Total overall potential return over the life of the
partnership (including interest)................. $2,698 $1,350
====== ======
- -------------------------
(1) Includes advance subscriber payments and deposits.
(2) Includes NCP-Six's (i) accounts receivable of $725,123 and (ii) prepaid
expenses of $85,506, all of which were determined as of December 31, 2000.
(3) Under NCP-Six's agreement with Daniels & Associates, NCP-Six is obligated
to pay Daniels & Associates a fee equal to $702,000 for its brokerage
services, which amount represents one percent of the gross valuation of the
assets being sold.
(4) Estimated costs of this proxy solicitation and closing of the proposed
transaction, including legal fees and expenses of approximately $200,000,
fees and costs associated with the issuance of a fairness opinion for the
proposed transaction of approximately $150,000, printing costs of
approximately $125,000, mailing expenses of approximately $10,000 and
Securities and Exchange Commission filing fees of
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approximately $15,000. NCP-Six will be responsible for all of these costs.
No significant auditing or solicitation costs are expected to be incurred
in connection with the proposed transaction.
(5) General and administrative, auditing, accounting, legal, reporting and
other costs have been estimated through the final distribution, which is
assumed to occur in June 2004. It is estimated that approximately $50,000
of this amount will be payable to the managing general partner for its
services in the dissolution and winding up of NCP-Six. Services provided by
the managing general partner will include ongoing accounting and legal
services as well as administrative and investor relations services during
the dissolution and winding up of NCP-Six. The amount to be paid to the
managing general partner represents an estimate of the actual cost incurred
by the managing general partner to provide these services to NCP-Six.
(6) Consists of (i) notes payable of $28,215,281 to NCP-Six's lender, (ii)
management fees and other operating costs of $21,349 payable to the
managing general partner and affiliates, and (iii) accounts payable,
accrued expenses and other liabilities of $1,297,584, all of which were
determined as of December 31, 2000.
(7) This amount will be set aside to cover unknown and contingent liabilities
that may exist after closing the proposed transactions and will be held in
NCP-Six's liquidating trust.
(8) "Projected net cash value" includes the partners' distributive share of
cash and the value of the in-kind distribution of assets to the managing
general partner.
(9) The difference between "projected net cash value" and "limited partners'
projected cash available" represents the projected value of (i) the assets
to be distributed to the managing general partner in-kind, less the
managing general partner's share of liabilities, and (ii) the projected
cash to be distributed to the administrative general partner. These amounts
were calculated using the applicable formula found in Article 16(d) of the
NCP-Six partnership agreement. That formula applies to the calculation of
the share of distributable proceeds to be paid to the general partners and
limited partners upon dissolution of NCP-Six. The formula generally
provides that distributions to the general partners are capped at 1% until
the limited partners receive 100% return of their capital contribution.
Thereafter, distributions are made 75% to the limited partners and 25% to
the general partners. The following tables illustrate the application of
the formula to the projected proceeds from the proposed transaction.
EXCESS OF LIMITED PARTNERS' CAPITAL CONTRIBUTIONS OVER PRIOR CASH
DISTRIBUTIONS:
This table shows the amount to be distributed to the limited partners in
order to return 100% of their capital contributions.
PER $1,000
PER UNIT INVESTMENT AGGREGATE
-------- ---------- -----------
Original combined capital contributions for all
outstanding limited partner units....................... $500.00 $1,000 $14,892,000
(Less prior cash distributions paid to limited
partners)............................................ 127.50 255 3,797,460
======= ====== ===========
Remaining balance of capital contributions to be returned
to limited partners..................................... $372.50 $ 745 $11,094,540
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PROJECTED VALUE OF DISTRIBUTION
This table shows the calculation of estimated amounts to
be distributed to the general partners based on the
proposed transaction's value.
Projected net cash value.................................... $40,311,986
Less distributions to the general partners capped at 1%
until limited partners receive 100% return of their
capital contributions pursuant to Article 16(d)(iii) of
the NCP-Six partnership agreement...................... (112,066)
Less projected value of assets to be distributed to the
managing general partner and cash to be distributed to
the administrative general partner, minus share of
liabilities as determined after the limited partners
receive 100% return of their aggregate capital
contributions pursuant to Section 16(d)(iv) of the
NCP-Six partnership agreement.......................... 7,252,390
-----------
Resulting projected cash available for limited partner
distributions............................................. $32,851,711
===========
BREAK DOWN OF DISTRIBUTIONS BETWEEN GENERAL PARTNERS AND GENERAL LIMITED
LIMITED PARTNERS PARTNERS PARTNERS TOTAL
- -------------------------------------------------------- ---------- ----------- -----------
This table shows the calculation of estimated
aggregate distributions to be made to the general
partners and limited partners based on the proposed
transaction's value.
Pursuant to Article 16(d)(iii) of the NCP-Six
partnership agreement:
Return to limited partners of excess of capital
contributions over prior cash distributions...... -- $11,094,540(a) $11,094,540
Distributions to the general partners equal to 1%
until limited partners receive 100% return of
capital contributions............................ $ 112,066 -- $ 112,066
Pursuant to Article 16(d)(iv) of the NCP-Six partnership
agreement:
Balance distributed 75% to the limited partners and
25% to the general partners......................... $7,252,390 21,757,171 $29,009,561
---------- ----------- -----------
Combined distribution of projected net cash value..... $7,364,456 $32,851,711 $40,216,167
========== =========== ===========
- -------------------------
(a)Results in a projected distribution of $372.50 per limited partnership unit.
(10)NCP-Six has operating assets in the states of Mississippi, North Carolina
and South Carolina. These states impose an income tax on the net income
earned by nonresident partners from property located in the state. NCP-Six
is required to compute and pay this tax on behalf of its limited partners.
This tax will be paid on behalf of the limited partners out of proceeds from
the proposed transaction that could otherwise be distributed directly to the
limited partners. A limited partner residing in Mississippi, North Carolina
or South Carolina may be entitled to refund of a portion of this tax paid on
their behalf. See "Federal and State Income Tax Consequences -- of the
Proposed Transaction -- State Income Tax Considerations" below for a more
detailed discussion of this state tax.
FEDERAL AND STATE INCOME TAX CONSEQUENCES OF THE PROPOSED TRANSACTION
The following discussion provides a general summary of the financial income
tax consequences of a disposition of NCP-Six assets as applicable to NCP-Six.
This summary is based on the Internal Revenue Code of 1986 (the "Code"), as
amended by various subsequent tax acts. It is not possible to discuss all of the
provisions of the Code and tax acts applicable to a limited partner's investment
in this proxy statement. Moreover, in many areas the Code and tax acts
specifically authorize the United States Treasury Department to promulgate
regulations to govern certain transactions and it is not known what positions
any of the regulations not yet issued will take. In addition, since the proposed
transaction is not expected to close until
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June 2001, Congress could pass further legislation that could significantly
change the tax consequences of the proposed transaction from that discussed
below. The following constitutes a general summary of some of the provisions of
the Code and tax acts. The following discussion of tax consequences represents
the managing general partner's best knowledge and belief, based on its
experience in reporting the tax consequences of transactions similar to the
disposition of assets described in this proxy statement. The general partners
have not sought, nor will we receive, a legal opinion as to the matters
discussed below.
YOU ARE STRONGLY ENCOURAGED TO REVIEW THE CODE, THE TAX ACTS AND THIS
SECTION OF THE PROXY STATEMENT WITH YOUR PERSONAL TAX ADVISORS.
TAX CONSIDERATIONS
Certain material tax consequences to NCP-Six's limited partners will result
from the proposed transaction. In order to avoid the additional expense, NCP-Six
has not obtained a tax opinion in connection with the proposed transaction. The
table below sets forth certain estimated federal income tax consequences per
$1,000 investment if the proposed transaction closes as contemplated. The table
relates only to persons who purchased units in NCP-Six's initial offering and
have an initial tax basis of $500 per unit. The table does not reflect estimated
federal income tax consequences for those persons who received their interests
through transfer from other limited partners or have tax basis adjustments to
their interests in NCP-Six arising from transactions other than the operations
of NCP-Six.
The table below sets forth the amount of long-term capital gain and
ordinary income that is expected to result from the disposition of the assets
and the liquidation of NCP-Six. For this purpose it is assumed that the entire
amount of Code Section 1231 gain allocated by NCP-Six to the limited partners
will be treated as long-term capital gain income on the recipient's individual
tax return. The dollar amounts reflect allocations as required pursuant to the
NCP-Six partnership agreement and are based on the 29,784 units ($500/unit) of
limited partnership interests in NCP-Six outstanding as of December 31, 2000.
ALL FIGURES SET FORTH IN THE FOLLOWING TABLE ARE NECESSARILY IMPRECISE AND
REPRESENT ONLY THE MANAGING GENERAL PARTNER'S ESTIMATE OF CERTAIN TAX EFFECTS,
ASSUMING THAT THE LIMITED PARTNERS HAVE NO OTHER CAPITAL GAINS OR PASSIVE
ACTIVITY TRANSACTIONS. ACTUAL TAX CONSEQUENCES WILL DEPEND ON THE INDIVIDUAL
LIMITED PARTNER'S TAX SITUATION. ALL LIMITED PARTNERS ARE STRONGLY ENCOURAGED TO
REVIEW THE FOLLOWING TABLE, THIS SECTION OF THE PROXY STATEMENT AND THEIR
INDIVIDUAL TAX SITUATIONS WITH THEIR PERSONAL TAX ADVISORS.
TAX RESULTS FROM DISPOSITION OF ASSETS IN THE PROPOSED TRANSACTION AND RESULTING
LIQUIDATION
(Per $1,000 Investment)
Overall ordinary income per $1,000 investment(1)(2)......... $1,559
Overall long-term capital gain per $1,000
investment(2)(3).......................................... $ 531
- -------------------------
(1) Assumes that depreciation recapture per $1,000 investment will be equal to
$1,559.
(2) If available, current or suspended passive activity losses from other
passive activities (other than suspended tax basis losses) may also be used
to offset income or gain.
(3) Aggregate of capital gain and loss from the disposition of assets and
liquidation of NCP-Six. Assumes that the limited partners' remaining basis
in NCP-Six may be used upon termination of NCP-Six to offset capital gain
from the disposition of the assets of $145 per $1,000 investment.
TAX CONSEQUENCES OF DISPOSITION OF THE ASSETS AND LIQUIDATION OF NCP-SIX
Upon the disposition of the assets, taxable income will be recognized by
NCP-Six to the extent that the amount realized from the disposition exceeds the
adjusted tax basis of the assets disposed of. The taxable gain from the sale
will be allocated among the partners in accordance with the NCP-Six partnership
agreement. The allocation of gain to the limited partners will increase their
adjusted tax basis in NCP-Six and increase their "amount at risk" with respect
to NCP-Six's activity. Suspended or current passive activity losses from a
limited partner's other passive activities may be used to offset gain from the
disposition of the assets. See "-- Tax Consequences of a Decision Not to Sell"
below for a discussion of passive activity loss limitations and
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suspended losses. The general partners believe that these allocations will have
"substantial economic effect," as required by regulations issued by the Treasury
Department. In the event the Internal Revenue Service ("IRS") should prevail in
any contention that the taxable gain from the sale should be allocated
differently from the manner reported by the general partners, the amounts of
capital gain (or loss) and ordinary income (or loss) of the limited partners
would be adjusted in equal offsetting amounts.
The majority of assets being sold by NCP-Six will be treated as "Section
1231 assets." Section 1231 assets are general defined as depreciable and
amortizable assets used in a trade or business, which have been held by the
taxpayer for more than one year. The assets comprising the distribution systems
of NCP-Six, including franchise rights and associated intangible assets, are
section 1231 assets. A limited partner's share of gain or loss on the sale of
the assets (excluding ordinary income depreciation recapture, discussed below)
will be combined with any other Section 1231 gain or loss the limited partner
incurs in that taxable year and the limited partner's net Section 1231 gain or
loss will be taxed as capital gain or ordinary loss, as the case may be.
However, Section 1231 gain will be converted into ordinary income to the extent
a limited partner has net Section 1231 losses in the five most recent tax years
("non-recaptured net Section 1231 losses"). The tax treatment of Section 1231
gains will depend on the limited partner's tax situation. In addition, cost
recovery deductions which have been taken with respect to certain assets will be
subject to recapture as ordinary income upon the sale to the extent of gain on
the sale, and each limited partner will be allocated a share of this ordinary
income depreciation recapture in proportion to the cumulative net losses
previously allocated to the limited partner under the NCP-Six partnership
agreement. It is estimated that ordinary income of $779 per partnership unit (or
$1,559 per $1,000 investment) will be allocated to the limited partners. Each
limited partner will also recognize gain or loss upon the liquidation of NCP-Six
following the disposition of the assets to the extent that the cash distributed
in the liquidation exceeds or is less than the limited partner's adjusted tax
basis in its partnership interest. See "-- Other Tax Law Changes" below for a
discussion of the applicable tax rates for ordinary income and capital gains.
Neither NCP-Six nor any partner is allowed to deduct or to amortize amounts
paid for syndication expenses. Syndication expenses are amounts which were paid
or incurred by NCP-Six in connection with the issuance and marketing of the
units of limited partnership interest, including sales costs. Upon liquidation
of NCP-Six the treasury regulations also provide that NCP-Six may not deduct the
capitalized syndication expenses. However, there is uncertainty in the law
concerning whether a limited partner may claim a capital loss for the remaining
portion of their tax basis in NCP-Six which is attributable to the capitalized
syndication costs. For purposes of the calculations presented in the "Tax
Results from Disposition of the Assets and Resulting Liquidation" table above,
the general partners have assumed that the limited partners' remaining basis in
NCP-Six's capitalized syndication costs may be used upon the termination of
NCP-Six to offset capital gain from the sale of the partnership's assets. The
IRS may contend, however, that the limited partners are not entitled to use this
offset because they should have instead reduced their basis in their partnership
interests by an amount equal to their allocated share of the capitalized
syndication fees. In such event, the IRS may also contend that the limited
partners should recognize an additional amount of capital gain. YOU SHOULD
CONSULT WITH YOUR INDIVIDUAL TAX ADVISOR WITH RESPECT TO YOUR TREATMENT OF
SYNDICATION COSTS UPON TERMINATION OF NCP-SIX.
If the IRS were to argue successfully that the allocations of taxable
income among the partners should differ from the allocations that are reported
on NCP-Six's tax returns, the amounts of ordinary income and loss and capital
gain and loss limited partners report will change. Notwithstanding the managing
general partner believes this change will not have a material adverse effect on
limited partner in NCP-Six.
There will be no federal tax consequences to NCP-Six resulting from the
proposed transaction. All federal tax consequences are instead imposed on the
partners of NCP-Six. Northland Communications Corporation, as managing general
partner, will not recognize taxable gain or loss on the proposed transaction,
but rather will receive its proportionate interest in NCP-Six as a distribution
in-kind of cable system assets. This in-kind distribution is anticipated to be a
tax free event. FN Equities Joint Venture, as administrative general partner,
will recognize taxable income to the extent of its share of proceeds from the
proposed transaction, as determined under the NCP-Six partnership agreement. In
general, FN Equities Joint Venture
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will receive 5% of the proceeds after the limited partners have been returned
the balance of their capital contributions.
UNRELATED BUSINESS TAXABLE INCOME
Unrelated business taxable income ("UBTI") will be generated by the sale of
the assets and allocated to limited partners that are qualified retirement plans
and tax exempt trusts ("Plans") as defined by the Code and subject to the
Employment Retirement Income Security Act of 1974 (i.e., IRAs, Keoghs, pension
plans, etc.).
Generally, partnership allocations of ordinary income, Section 1231 gains
and capital gains will result in UBTI to Plans and generate an unrelated
business income tax. The Code allows an exempt entity a specific deduction for
UBTI of up to $1,000 per year and thus the annual UBTI generated by the Plans
will be taxed to the extent it exceeds $1,000. If the Plan has net operating
loss and suspended basis loss carryovers, the UBTI may also first be reduced by
these carryover losses.
The following table illustrates the impact of UBTI to Plans as the result
of the sale of assets in the proposed transaction. The table is based on an
assumption that a $5,000 IRA investment is the sole UBTI investment of the Plan.
It also assumes that a limited partner has properly reported and is carrying
over net operating losses generated in the early years of NCP-Six.
PER INITIAL NCP-SIX IRA INVESTMENT OF $5,000
Cash distributions received over the life of NCP-Six,
excluding interest payments to be made in 2002, 2003 and
2004 pursuant to the purchasers' promissory notes to be
delivered at closing (projected to total $62 in interest
per $1,000 investment).................................... $12,455
UBTI tax liability in 2001.................................. (1,922)
-------
Net cash after taxes to IRA Investor........................ $10,533
=======
This analysis indicates that due to loss carryovers and the annual UBTI
exemption referred to above, an IRA investor would not be subject to UBTI tax
until the year of sale (2001). In addition, should the IRA be able to utilize a
capital loss in 2001, the remaining basis in NCP-Six in the year of termination
(2001) would result in a $725 tax deduction due to the capital loss (not shown).
TAX CONSEQUENCES OF A DECISION NOT TO SELL
The general consequence of a decision not to sell and to continue to
operate NCP-Six as a partnership is that each limited partner will continue to
be allocated its share of NCP-Six's income, deduction, gain and loss, and will
be distributed its share of cash available for distribution as determined under
the NCP-Six partnership agreement. In general, income or loss from operations of
NCP-Six constitutes ordinary income or loss and is allocated to limited partners
in accordance with the NCP-Six partnership agreement. Cash distributions to
limited partners are not taxable unless they exceed the adjusted tax basis of
the limited partner's partnership interest. Limited partners may not deduct
losses allocated to them to the extent the losses exceed the adjusted tax basis
of their partnership interest. These unused losses may be carried forward and
utilized in future years, subject to the same limitation based on the limited
partner's tax basis in its NCP-Six interest.
With respect to the deductibility of partnership losses by a limited
partner the Code does not allow a taxpayer to use losses and credits from a
business activity in which he or she does not materially participate (e.g., a
limited partner in a limited partnership) to offset other income such as salary,
active business income, dividends, interest, royalties and investment capital
gains. However, passive activity losses can be used to offset passive activity
taxable income from another passive activity. In addition, disallowed losses and
credits from one tax year may be suspended and carried forward by a taxpayer and
used to offset income from passive activities in the future. The disallowed
losses will be allowed in full when the taxpayer recognizes gain or loss
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upon a taxable disposition of his or her entire interest in the passive
activity. A limited partner should note that the Treasury Department prescribed
regulations that will recharacterize certain income as "portfolio" income and
restrict the offset of that income by losses from a passive activity. These
regulations could impact the use of passive activity losses or income from
NCP-Six. For example, the Treasury Department has issued regulations holding
that interest earned on partnership cash balances represents portfolio income,
and thus may not be offset by passive activity losses.
If a decision is made not to sell, the losses (if any) allocated to the
limited partners in NCP-Six will be subject to the passive loss rules discussed
above. Unless the limited partner has income from other passive activities, the
losses allocated by NCP-Six will not be currently deductible. In addition, the
limited partner could be allocated interest income or other portfolio income
that could not be offset by passive activity losses.
YOU SHOULD NOTE THAT THE EFFECT OF PASSIVE ACTIVITY LOSS LIMITATIONS MAY
VARY FROM ONE TAXPAYER TO ANOTHER DEPENDING ON EACH TAXPAYER'S INDIVIDUAL TAX
SITUATION. THEREFORE, YOU SHOULD CONSULT YOUR PERSONAL TAX ADVISOR WITH RESPECT
TO THE APPLICATION OF THE PASSIVE ACTIVITY LOSS LIMITATIONS TO YOUR PARTICULAR
TAX SITUATION.
With respect to the recovery of capital expenditures eligible personal
property placed in service after December 31, 1986 is assigned to a three-year
class, five-year class, seven-year class, ten-year class, or twenty-year class.
The depreciation method applicable to the three-year, five-year, seven-year and
ten-year classes is the 200 percent declining balance method. The cost of
non-residential real property is recovered using the straight-line method over
39 years. Partnership equipment that is placed in service after December 31,
1986 is classified as seven-year or five-year property and the purchase price
for that equipment is depreciated over the applicable period.
The Code has eliminated the investment tax credit for all property placed
in service after December 31, 1985, subject to certain transitional rules that
do not currently apply to NCP-Six.
OTHER TAX LAW CHANGES
The following discussion relates primarily to individual taxpayers.
Different tax rules may apply to other taxpayers (e.g., corporations, estates,
trusts, etc.). The Code and tax acts generally provide for five taxable income
brackets and five tax rates (15%, 28%, 31%, 36%, and 39.6%) for years after
1992. The benefits of certain itemized deductions and personal exemptions are
phased out for certain higher income taxpayers. Capital gain income, including
net Section 1231 gains treated as capital gains, may receive favorable tax
treatment as discussed below.
Capital gains from sales of certain property held more than one year are
now taxed at maximum tax rates that vary from 10% to 28%, depending on the type
of property sold, the taxpayer's marginal tax rate and the holding period of the
property. In summary, capital gain assets held for more than one year
("long-term gains") are taxed at a maximum tax rate of 20% for taxpayers
otherwise in the 28% or higher tax bracket. The maximum tax rate is 10% for
those gains that would otherwise be taxed at the taxpayer's 15% tax bracket.
Capital gain assets held for one year or less continue to be taxed at the
taxpayer's ordinary income tax rate as was the case under prior law. Long-term
capital gain arising from the sale of certain designated assets (works of art,
antiques, gems, coins and other collectibles) are taxed at a maximum rate of
28%. Finally, long-term capital gains from the sale of depreciable real estate
are taxed at a maximum tax rate of 25% to the extent the gain is attributable to
prior depreciation deductions not recaptured as ordinary income under the
depreciation recapture rules discussed above.
The large majority of NCP-Six's assets will have been held by NCP-Six for
more than one year at the time of the proposed transaction. None of NCP-Six's
assets are collectibles. Therefore the capital gain income (including the
Section 1231 gains) recognized by the limited partners will constitute long-term
gains eligible for the 20% or 10% tax rates, as applicable. As discussed above,
to the extent that a limited partner has non-recaptured net Section 1231 losses,
their Section 1231 gain will be treated as ordinary income and will not receive
the favorable capital gain tax rates. Also as discussed above, gain attributable
to prior depreciation and amortization deductions on personal property will be
taxed as ordinary income under the depreciation
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recapture rules. Finally, a small portion of NCP-Six gain may be attributable to
depreciable real estate that would be subject to the 25% tax rate.
Tax legislation has increased the alternative minimum tax rate from 24% to
26% and 28% depending on the level of the alternative minimum taxable income.
The favorable capital gain tax rates discussed above also apply for alternative
minimum tax purposes. The tax acts also expanded the tax preference items
included in the alternative minimum tax calculation. Accelerated depreciation on
all property placed in service after 1986 is a preference to the extent
different from alternative depreciation (using the 150 percent declining balance
method, and using longer lives for personal property placed in service before
1999). Certain other tax preferences also have been modified and new preference
items added. The alternative minimum tax exemption amount is increased to
$45,000 for joint filers and $33,750 for unmarried individuals. However, the
exemption amount is phased out once a taxpayer's alternative minimum taxable
income exceeds certain threshold amounts. A taxpayer paying alternative minimum
tax after 1986 is allowed a tax credit for the alternative minimum tax liability
attributable to timing differences. In general, this minimum tax credit can be
carried forward and used against the taxpayer's regular tax liability to the
extent the taxpayer's regular tax liability exceeds his or her minimum tax
liability. Upon the sale of NCP-Six's assets, limited partners will be allocated
an adjustment amount that will reduce their taxable gain for alternative minimum
tax purposes. This adjustment amount arises because the prior depreciation
deductions claimed for regular tax purposes will have exceeded the amount of
depreciation claimed for alternative minimum tax purposes. It is estimated this
amount will be $23 per limited partnership unit (or $46 per $1,000 investment).
An individual taxpayer generally is not allowed a deduction for investment
interest expense in excess of net investment income. Net investment income
generally includes interest, dividends, annuities, royalties and short-term
capital gains, less expenses attributable to the production of the income.
Long-term capital gains from investment property are not generally included in
net investment income, however a taxpayer may elect to forego the favorable tax
rates available for long-term gains and include them in net investment income.
Long-term gains from business property (such as NCP-Six's assets) are not
included in net investment income. Therefore, the gain allocated to a limited
partner from the proposed transaction will not increase his or her net
investment income. Investment interest expense includes all interest paid or
accrued on indebtedness incurred or continued to purchase or carry property held
for investment. Investment interest does not include interest that is taken into
account in determining a taxpayer's income or loss from a passive activity
provided, however, that interest expense which is properly attributable to
portfolio income from the passive activity is treated as investment interest.
Any interest a limited partner incurred to acquire units in NCP-Six is treated
as a passive activity deduction, and not investment interest.
Personal interest is not deductible except for interest expense for debt
incurred on a taxpayer's principal or second residence, subject to certain
restrictions. In Notice 89-35, the IRS ruled that, in general, the character of
debt incurred by a partnership to make distributions to partners would be
determined by the use of the distributed proceeds by the partners unless NCP-Six
elects to allocate the distributed debt and related interest expense to one or
more partnership expenditures made during the year of the distribution. The
election is not available to the extent the distributed debt proceeds exceed
partnership expenditures during the year. When applicable, NCP-Six has made the
election under Notice 89-35.
STATE INCOME TAX CONSIDERATIONS
In addition to the federal income tax considerations outlined above, the
proposed transaction has state income tax consequences. Limited partners who are
residents of states imposing income taxes should consult their own tax advisor
or their own state law to determine the state tax consequences and their state's
filing requirements.
THE FOLLOWING IS ONLY A BRIEF SUMMARY OF THE POTENTIAL STATE TAX
CONSIDERATIONS OF THE PROPOSED TRANSACTION FOR NONRESIDENTS OF NORTH CAROLINA,
MISSISSIPPI AND SOUTH CAROLINA. YOU SHOULD CONSULT YOUR OWN TAX ADVISORS
CONCERNING THE APPLICATION OF EACH STATE'S INCOME TAX LAWS AND OTHER STATE AND
LOCAL LAWS TO YOUR SPECIFIC SITUATION.
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NORTH CAROLINA
The State of North Carolina, where certain of NCP-Six's assets are located,
imposes an income tax on the net income earned by nonresident partners from
property located in North Carolina or from a business operation conducted in the
state of North Carolina. This includes property owned or a business conducted
through a partnership. This state tax applies to the limited partners of
NCP-Six.
NCP-Six is responsible for reporting each nonresident partner's share of
the income derived from North Carolina, and is required to compute and pay the
tax due for each nonresident partner. The tax will be based on the income
generated by NCP-Six's operations, including the income to be generated by the
proposed transaction, as apportioned to North Carolina under state law. The
North Carolina personal income tax rates increase on a graduated scale,
beginning at 6% up to a maximum marginal tax rate of 7.75%. NCP-Six anticipates
making the required tax calculations on behalf of its limited partners when the
North Carolina partnership income tax return is prepared. The tax paid on a
limited partner's behalf will be reported on their Schedule K-1 for 2001, and
will be treated for federal income tax purposes as cash distributed to that
limited partner.
A nonresident individual partner is not required to file a North Carolina
income tax return when the only income from North Carolina sources is the
nonresident's share of income from a partnership doing business in North
Carolina, and the partnership pays the tax due for the nonresident partner.
Payment of the tax due by the partnership on behalf of corporations,
partnerships, trusts or estates does not relieve those taxpayers from filing a
North Carolina return. Accordingly, nonresident limited partners who are neither
corporations, partnerships, trusts or estates will not be required to file a
North Carolina income tax return unless they have North Carolina income from
sources other than partnerships which have paid the requisite tax on their
behalf. Any limited partner in NCP-Six may however file a North Carolina income
tax return if they so choose. If a limited partner files in North Carolina, the
tax paid by NCP-Six on the limited partner's behalf may be claimed as a credit
towards the limited partner's North Carolina tax liability.
MISSISSIPPI
The State of Mississippi, where certain of NCP-Six's assets are located,
imposes an income tax on the net income earned by nonresident partners from
property located in Mississippi or from a business operation conducted in the
State of Mississippi. This includes property owned or a business conducted
through a partnership. This state tax applies to the limited partners of
NCP-Six.
NCP-Six is responsible for reporting each non-resident partner's share of
the income derived from Mississippi, and will withhold 5% of the net gain or
profit allocated to each non-resident partner and remit it to the Mississippi
State Tax Commission. The tax will be based on the income generated by NCP-Six's
operations, including the income to be generated by the proposed transaction, as
apportioned to Mississippi under state law. The Mississippi personal income tax
rates increase on a graduated scale, beginning at 3% up to a maximum marginal
tax rate of 5%.
The Mississippi tax paid on behalf of an NCP-Six limited partner will be
reported on their Schedule K-1 for 2001, and will be treated for federal income
tax purposes as cash distributed to them. A limited partner should claim the
amount withheld as estimated tax paid on their Mississippi individual tax return
for the year of withholding.
SOUTH CAROLINA
The State of South Carolina, where certain of NCP-Six's assets are located,
imposes an income tax on the net income earned by nonresident partners from
property located in South Carolina or from a business operation conducted in the
State of South Carolina. This includes property owned or a business conducted
through a partnership. This state tax applies to the limited partners of
NCP-Six.
South Carolina tax will be based on the income generated by NCP-Six's
operations, including the income to be generated by the proposed transaction, as
apportioned to South Carolina under state law. South Carolina allows individuals
a deduction equal to 44% of net capital gains with a two year holding period
reported as
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South Carolina income on the South Carolina tax return. The South Carolina
personal income tax rates increase on a graduated scale, beginning at 2.5%, up
to a maximum marginal tax rate of 7%. NCP-Six is required to withhold 5% of the
South Carolina taxable income of partners who are nonresidents of South
Carolina, and remit it to the South Carolina Department of Revenue.
The South Carolina tax paid on behalf of an NCP-Six limited partner will be
reported on their Schedule K-1 for 2001, and will be treated for federal income
tax purposes as cash distributed to them. A limited partner should claim the
amount withheld as estimated tax paid on their South Carolina individual income
tax return for the year of withholding.
RISK FACTORS PERTAINING TO THE PROPOSED TRANSACTION
While the general partners believe the proposed transaction is fair to
NCP-Six and its limited partners, their deliberations have made them aware of
certain risks associated with the proposed transaction. In order to apprise you
of these risks, the general partners wish to draw your attention to the
following factors.
ALTHOUGH THE GENERAL PARTNERS BELIEVE THAT THE TOTAL PRICE TO BE RECEIVED
BY NCP-SIX FOR ITS ASSETS REPRESENTS FAIR VALUE FOR THOSE ASSETS, THOSE
ASSETS MAY INCREASE IN VALUE PRIOR TO CLOSING.
The general partners believe that the proposed transaction is fair to the
limited partners and they have taken steps to structure the proposed transaction
in a manner they believe provides the limited partners with fair value. While
the general partners believe that the total transaction price represents fair
value for NCP-Six's assets, the purchase price to be paid for NCP-Six's cable
systems is fixed in the definitive agreements and is not to be adjusted for
either increases or decreases in value that might occur prior to closing. The
amount of the purchase price was determined in August, 2000. If the closing
occurs in or about June 2001, ten months will have lapsed between the fixing of
the purchase price and the closing.
The general partners do not intend to obtain an updated appraisal from
either Daniels & Associates or Communications Equity Associates, nor do they
intend to resolicit third-party bids prior to closing. Assuming the proposed
transaction closes in June 2001, at closing those two appraisals will be more
than 25 months out of date and the closing will take place almost 12 months
after receipt of the most recent third-party bid. The general partners are
choosing not to update the appraisals because they relied on the appraisals
primarily as a benchmark to evaluate the offers received in the third-party bid
solicitation process and because they have since obtained a fairness opinion
regarding the offered consideration. That fairness opinion is dated as of
, 2001.
BECAUSE AFFILIATES OF THE MANAGING GENERAL PARTNER WILL ACQUIRE NCP-SIX'S
OPERATING SYSTEMS IF THE PROPOSED TRANSACTION IS APPROVED, THE TERMS OF THE
TRANSACTION WERE NOT NEGOTIATED BETWEEN UNAFFILIATED THIRD PARTIES, AND THE
MANAGING GENERAL PARTNER'S INTEREST IN OBTAINING THESE ASSETS MAY HAVE
ADVERSELY AFFECTED, FROM THE LIMITED PARTNERS' PERSPECTIVE, THE PRICING AND
STRUCTURE OF THE PROPOSED TRANSACTION.
There are a number of ways in which the managing general partner will
benefit from closing the proposed transaction:
(a) Affiliates of the managing general partner will acquire NCP-Six's
operating system, allowing those operating systems to remain within the
control of the managing general partner.
(b) The sale of NCP-Six's operating systems will result in the in-kind
distribution of a portion of NCP-Six's assets to the managing general
partner, allowing it to secure an economic benefit from its equity interest
in NCP-Six.
(c) Affiliates of the managing general partner will be able to finance
a significant amount of their purchase by delivering unsecured subordinated
promissory notes with interest rates of 8% to NCP-Six.
(d) The managing general partner will not bear the risk that all or
part of the payments under the promissory notes will go unpaid, or that
future liabilities of NCP-Six will negatively impact the net proceeds
available for cash distributions to the administrative general partner and
the limited partners.
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Such conflicts of interest may have led the managing general partner to
propose to the limited partners a transaction in which the purchase price is
lower than that which could have been obtained from an unaffiliated third-party.
The proposed transaction's deal terms may also be less favorable than those that
would have been obtained in a transaction negotiated between independent parties
negotiating at arm's length.
THE MANAGING GENERAL PARTNER'S POTENTIAL INTEREST IN ACQUIRING NCP-SIX'S
OPERATING SYSTEMS MAY HAVE INFLUENCED THE MANNER IN WHICH IT CONDUCTED THE
1999 AND 2000 PUBLIC BIDDING PROCESSES FOR THE SALE OF NCP-SIX'S OPERATING
SYSTEMS.
To insure fair treatment of the limited partners, the managing general
partner caused NCP-Six to solicit in 1999, and again in 2000, third-party bids
for NCP-Six's. The managing general partner believes it acted in good faith and
in a manner consistent with its fiduciary duties in designing the bidding
process, responding to third parties' inquiries and bids, and negotiating with
the highest bidders. Still, the managing general partner's potential interest in
NCP-Six's operating systems might have, directly or indirectly, affected the
independence with which it dealt with unaffiliated third party purchasers.
THE ADMINISTRATIVE GENERAL PARTNER HAS A CONFLICT OF INTEREST IN THE
PROPOSED TRANSACTION.
Unlike the managing general partner and its affiliates, the administrative
general partner will have no economic or ownership interest in the assets
following the closing of the proposed transaction, other than its right,
together with that of the limited partners, to receive its share of the net
liquidation proceeds. Nonetheless, consummation of the transaction will result
in the administrative general partner receiving distributions that otherwise
would be deferred until NCP-Six could arrange for the disposition of the assets
to other parties. See "Projected Cash Available from Liquidation" for a detailed
discussion of the relative distributions expected to be made to the general
partners and the limited partners upon liquidation of NCP-Six.
THE MANAGING GENERAL PARTNER DID NOT FORM A LIMITED PARTNER COMMITTEE OR
DESIGNATE AN UNAFFILIATED THIRD-PARTY TO REPRESENT THE LIMITED PARTNERS'
INTEREST IN STRUCTURING THE PROPOSED TRANSACTION. HAD SUCH REPRESENTATION
BEEN ARRANGED, THE TERMS OF THE PROPOSED TRANSACTION MIGHT HAVE BEEN MORE
FAVORABLE TO THE LIMITED PARTNERS.
It is not uncommon, where conflicts of interest exist, for a fiduciary to
designate an independent third-party to safeguard the interest of limited
partners. The managing general partner did not form a limited partner committee,
or designate an independent unaffiliated third-party, to specifically represent
the interest of the limited partners even though it was negotiating the
transaction with affiliates. The managing general partner took a number of
procedural steps, as described in "Fairness of the Proposed Transaction -- The
General Partners' Belief as to Fairness" above, to protect the limited partners
from potential overreaching that could result from the managing general
partner's control over the negotiation process with its affiliated purchasers.
The general partners have commissioned two independent appraisals of the
systems, undertaken an extensive sealed third-party bid solicitation process,
secured a favorable fairness opinion and are submitting the proposed transaction
to the partnership's unaffiliated limited partners for approval. These
procedural steps, however, may not have afforded limited partners the same level
of protection that they would have received if an independent third-party had
been negotiating the proposed transaction's terms on their behalf.
THE PROPOSED TRANSACTION HAS NOT BEEN SOLICITED BY UNAFFILIATED LIMITED
PARTNERS.
While the general partners believe that unaffiliated limited partners are
interested in a means of liquidating their investment in NCP-Six, no
unaffiliated limited partner in NCP-Six has solicited the sale or other
disposition of NCP-Six's assets. The general partners have not taken any survey
of the unaffiliated limited partners to determine their desire to liquidate
their investment. However, based on unsolicited comments and questions from
unaffiliated limited partners with respect to a liquidation of their investment,
the general partners believe that unaffiliated limited partners may welcome the
opportunity to liquidate their investment at this time. The general partners
have not solicited or received comments from any unaffiliated limited partners
regarding any alternative investment strategies or liquidation proposals.
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A LIMITED PARTNER DOES NOT HAVE ANY DISSENTERS' OR APPRAISAL RIGHTS IN THIS
TRANSACTION.
A limited partner is not entitled to dissenters' or appraisal rights under
either the NCP-Six partnership agreement or Washington law with respect to the
proposed transaction, or the subsequent liquidation of NCP-Six. NCP-Six will not
voluntarily provide any similar rights in connection with the proposed
transaction. Therefore, even if a limited partner disapproves of the proposed
transaction and votes against it, the proposed transaction will proceed if it
receives the requisite limited partner approval, and the limited partner, though
disapproving, will not be able to demand that the assets be appraised to
determine their fair value.
IF A MAJORITY OF THE HOLDERS OF LIMITED PARTNERSHIP UNITS APPROVE THE
PROPOSED TRANSACTION, EACH LIMITED PARTNER WILL BE BOUND BY THAT DECISION,
EVEN IF THE LIMITED PARTNER VOTES TO "DISAPPROVE" THE PROPOSED TRANSACTION.
Under NCP-Six's partnership agreement and Washington law, NCP-Six may
proceed with the proposed transaction if its general partners and a majority in
interest of its limited partners approve the proposed transaction. If this
majority approval is obtained, each limited partner will be bound by the
decision of the majority, even if the limited partner disapproves of the
proposed transaction and votes against it or abstains from voting.
THE FOLLOWING SPECIFIC TERMS MAY POSE SPECIAL RISKS TO LIMITED PARTNERS:
(A) THE TWO PROMISSORY NOTES TO BE ISSUED AS PARTIAL CONSIDERATION FOR
NCP-SIX'S ASSETS WILL BE UNSECURED, SUBORDINATED OBLIGATIONS OF NORTHLAND
CABLE NETWORKS LLC AND NORTHLAND COMMUNICATIONS CORPORATION.
If the proposed transaction occurs, NCP-Six will receive from the
purchasers two promissory notes in an aggregate principal amount of $11,825,000,
representing approximately 18.5% of the distributable proceeds payable to the
administrative general partner and limited partners upon liquidation of NCP-Six.
These promissory notes will be unsecured obligations of their respective issuers
and subordinated to repayment of the issuers' respective current and future
senior debt. There are no restrictions upon the amount of senior debt that may
be incurred by either of those issuers. At the closing, each issuer will have
significant senior debt, and each expects to incur significant additional senior
debt in the future. This senior debt will be secured, allowing the senior
secured lenders to foreclose upon their interest in the issuer's collateral
before the value of such collateral could be used to repay amounts due NCP-Six
under the promissory notes. No assurance can be given that either of the issuers
will not default in the payment of its obligations under existing or future
senior debt.
(B) THE 8% FIXED INTEREST RATE ON THE PROMISSORY NOTES TO BE GIVEN TO
NCP-SIX IS LOWER THAN THE INTEREST RATE THAT MIGHT BE EXPECTED ON DEBT
INSTRUMENTS FROM AN ISSUER HAVING SIMILAR CHARACTERISTICS TO NORTHLAND
CABLE NETWORKS LLC AND NORTHLAND COMMUNICATIONS CORPORATION.
The promissory notes to be given to NCP-Six in the proposed transaction
will bear interest at 8% per annum. The 8% interest rate of the notes is likely
lower than the interest rate on unsecured subordinated debts of other comparable
issuers. It is not expected than an unaffiliated third party would loan funds to
either Northland Cable Networks LLC or Northland Communications Corporation, on
similar terms at an 8% interest rate. A higher interest rate would be expected
to compensate the lender for the unsecured subordinated nature of the debt.
(C) AS THE PROPOSED TRANSACTION IS STRUCTURED, THE MANAGING GENERAL PARTNER
WILL RECEIVE ITS PRO RATA SHARE OF THE NET LIQUIDATION PROCEEDS AT CLOSING,
WHILE THE ADMINISTRATIVE GENERAL PARTNER AND LIMITED PARTNERS WILL RECEIVE
THEIR PAYMENTS THROUGH A CLOSING CASH PAYMENT AND THREE SUBSEQUENT ANNUAL
PAYMENTS.
This deal term leaves the administrative general partner and the limited
partners exposed to the risk that the three annual installment payments due on
the two promissory notes given to NCP-Six are not paid when due. A comparable
risk is not borne by the managing general partner.
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(D) IF NORTHLAND CABLE NETWORKS LLC MAKES A SUCCESSFUL CLAIM AFTER CLOSING
AGAINST THE $1,000,000 HOLD-BACK ESCROW REQUIRED BY NORTHLAND CABLE
NETWORKS LLC, THAT CLAIM WILL DECREASE THE DISTRIBUTIONS RECEIVED BY THE
ADMINISTRATIVE GENERAL PARTNER AND THE LIMITED PARTNERS, BUT IT WILL NOT
DECREASE THE IN-KIND DISTRIBUTION RECEIVED BY THE MANAGING GENERAL PARTNER.
The general partners have utilized the pro forma estimate of net
liquidation proceeds (set forth under "Projected Cash Available for
Liquidation") to determine the value assignable to the in-kind distribution to
be made to the managing general partner in full satisfaction of its interest in
NCP-Six. The pro forma estimate does not include any deduction for a successful
claim against the $1,000,000 hold-back escrow required by Northland Cable
Networks LLC in its asset purchase agreement with NCP-Six. Any funds remaining
in the hold-back escrow following the first anniversary of closing the proposed
transaction will be released from the escrow and will be made available for
distribution to the administrative general partner and the limited partners in
proportion to their respective interests in NCP-Six. A successful claim against
the hold back escrow by Northland Cable Networks LLC will decrease or possibly
even exceed the amount left in the hold-back escrow. The result would be that
less money will be available for distribution to the administrative general
partner and the limited partners than was anticipated when the value of the
managing general partner's in-kind distribution was calculated.
(E) IF NCP-SIX'S AGGREGATE LIABILITIES EXCEED THE PRO FORMA LIABILITIES
(SET FORTH UNDER "PROJECTED CASH AVAILABLE FOR LIQUIDATION"), THE MANAGING
GENERAL PARTNER WILL NOT HAVE BORNE ITS PRO RATA SHARE OF SUCH LIABILITIES.
The general partners have utilized the pro forma estimate of net
liquidation proceeds (set forth under "Projected Cash Available for
Liquidation") to determine the value assignable to the in-kind distribution to
be made to the managing general partner in full satisfaction of its interest in
NCP-Six. The proposal does not provide for that valuation to be increased or
decreased if NCP-Six's actual expenses are greater or less than the pro forma
expenses. As a consequence, if NCP-Six's actual expenses and liabilities exceed
the pro forma expenses and liabilities, the managing general partner will not
bear its pro rata share of the excess. Conversely, if the actual expenses and
liabilities are less than the pro forma expenses and liabilities, the managing
general partner will bear more than its pro rata share of such expenses. The
managing general partner has established a $750,000 reserve for unexpected
liabilities (which reserve was treated as an expense for purposes of assigning a
value to the managing general partner's in-kind distribution). The managing
general partner considers such estimate to be reasonable and has no reason to
believe that the unexpected expenses will exceed this amount.
(F) NORTHLAND CABLE NETWORKS LLC AND NORTHLAND COMMUNICATIONS CORPORATION
SHALL HAVE THE RIGHT TO OFF-SET AGAINST THEIR PROMISSORY NOTES
INDEMNIFICATION OBLIGATIONS OF NCP-SIX UNDER RESPECTIVE ASSET PURCHASE
AGREEMENTS WITH NCP-SIX, TO THE EXTENT THOSE INDEMNIFICATION OBLIGATIONS
EXCEED NCP-SIX'S RETAINED FUNDS.
NCP-Six plans to retain $750,000 from amounts paid at the closing of the
proposed transaction in order to have available funds to satisfy expenses and
liabilities associated with winding up NCP-Six. Such potential liabilities
include indemnity claims that might be brought by either Northland Cable
Networks LLC or Northland Cable Properties, Inc. under their respective asset
purchase agreements. If such indemnity claims exceed the amounts in the cash
reserve, the claimants will have the right to offset such indemnity claims
against the amounts otherwise due under the promissory notes given to NCP-Six.
THE AMOUNT AND TIMING OF FINAL DISTRIBUTIONS TO LIMITED PARTNERS MAY BE
AFFECTED BY UNANTICIPATED OR CONTINGENT LIABILITIES, INCLUDING ANY
POTENTIAL LITIGATION ARISING OUT OF THE PROPOSED TRANSACTION.
The managing general partner is not aware of any contingent liabilities
that are likely to exceed the $750,000 reserve to be established to cover
unknown liabilities. Notwithstanding, such liabilities might arise. If, for
example, claims were brought against the general partner for breaches of
fiduciary duty, securities law violations, or other claims, such actions would
likely give rise to indemnity claims by such persons against NCP-Six, possibly
reducing the amounts available for distribution to its limited partners. In this
regard, limited partners should be aware that Northland Communications
Corporation serves, and has served, as
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managing general partner of other limited partnerships involved in the cable
television industry. In June 1998, the limited partners of one such limited
partnership, Northland Cable Properties Five Limited Partnership, voted by a 74%
majority vote to approve the disposition of that partnership's assets to a
company affiliated with Northland Communications Corporation and the subsequent
liquidation of that partnership. A class action lawsuit was subsequently filed
against that partnership and its general partners alleging various claims,
including that the purchase price paid did not represent fair value and breaches
of fiduciary duties in the transaction. That action was ultimately settled and
dismissed. If the unaffiliated limited partners of NCP-Six vote to approve the
proposed transaction and the proposed transaction closes, and if a similar
lawsuit is brought against NCP-Six, such lawsuit may have the effect of delaying
payment of or reducing the amount of cumulative distributions.
THE PROPOSED TRANSACTION WILL BE A TAXABLE EVENT FOR U.S. FEDERAL INCOME
TAX PURPOSES. THIS MAY RESULT IN SUBSTANTIAL RECOGNITION OF GAIN TO
NCP-SIX'S LIMITED PARTNERS.
The receipt of cash in the proposed transaction will be a taxable
transaction for federal income tax purposes and may also be a taxable
transaction under applicable state, local and foreign tax laws. Accordingly,
limited partners will recognize a gain or loss on the payment of cash on limited
partnership units to the extent of the difference between the amount realized
and the limited partner's adjusted tax basis in their units. Upon closing of the
proposed transaction and dissolution of NCP-Six, any net losses of NCP-Six that
were suspended under the passive loss rules of the Internal Revenue Code may be
used to offset income and gain in the transaction.
EVEN IF THE REQUISITE MAJORITY OF THE LIMITED PARTNERS OF NCP-SIX VOTE TO
APPROVE THE PROPOSED TRANSACTION, THE PROPOSED TRANSACTION MAY NOT CLOSE
DUE TO A LACK OF REQUIRED FINANCING.
Both Northland Cable Networks LLC and Northland Cable Properties, Inc.'s
agreements to consummate the proposed transaction are subject to their obtaining
financing on satisfactory terms. Therefore, even if the requisite majority of
the limited partners of NCP-Six vote to approve the proposed transaction, the
proposed transaction may not close due to a lack of required financing.
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INFORMATION ABOUT NCP-SIX
GENERAL
NCP-Six is a Washington limited partnership consisting of two general
partners and approximately 1,795 limited partners as of December 31, 2000.
Northland Communications Corporation, a Washington corporation, is the managing
general partner of NCP-Six. FN Equities Joint Venture, a California general
partnership, is the administrative general partner of NCP-Six.
MANAGING GENERAL PARTNER
Northland Communications Corporation was initially formed in March 1981.
Northland Communications Corporation is principally involved in the ownership
and management of cable television systems. Northland Communications Corporation
currently manages the operations and serves as the general partner for cable
television systems owned by four limited partnerships. Northland Communications
Corporation is the parent company of Northland Cable Properties, Inc., which was
formed in February 1995 and is principally involved in direct ownership of cable
television systems. Northland Cable Properties, Inc. is the managing member of
Northland Cable Ventures, LLC. Northland Communications Corporation is also a
minority member of Northland Cable Networks LLC and will manage Northland Cable
Networks LLC's operation under a management services contract. Northland
Telecommunications Corporation is the parent company of Northland Communications
Corporation. Other direct and indirect subsidiaries of Northland
Telecommunications Corporation include:
- Northland Cable Television, Inc. -- formed in October 1985 -- is
principally involved in the direct ownership of cable television systems;
Northland Cable Television, Inc. is the sole shareholder of Northland
Cable News, Inc.
- Northland Cable News, Inc. -- formed in May 1994 -- is principally
involved in the production and development of local news, sports and
informational programming.
- Northland Cable Services Corporation -- formed in August 1993 -- is
principally involved in the development and production of computer
software used in billing and financial record keeping for
Northland-affiliated cable systems; Northland Cable Services Corporation
is the sole shareholder of Cable Ad-Concepts, Inc.
- Cable Ad-Concepts, Inc. -- formed in November 1993 -- is principally
involved in the sale, development and production of video commercial
advertisements that are cablecast on Northland-affiliated cable systems.
- Northland Media, Inc. -- formed in April 1995 -- is a holding company
that serves as the sole shareholder of Statesboro Media, Inc. and
Corsicana Media, Inc.:
- Statesboro Media, Inc. -- formed in April 1995 -- is principally involved
in operating an AM radio station serving the community of Statesboro,
Georgia and surrounding areas.
- Corsicana Media, Inc. -- purchased in September 1998 from an
affiliate -- is principally involved in operating an AM radio station
serving the community of Corsicana, Texas and surrounding areas.
- Northland Cable Networks LLC -- formed in April 2001 -- is a new entity
that was formed to acquire the Starkville, Mississippi and Philadelphia,
Mississippi assets from NCP-Six.
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NCP-SIX'S BUSINESS
NCP-Six was formed on January 22, 1986 and began operations in 1986 with
the acquisition of cable television systems serving several communities and
their surrounding areas in Mississippi and North Carolina. In a series of
transactions since then, NCP-Six acquired and now operates cable television
systems through five operating groups located in the following geographic areas:
- Starkville, Mississippi;
- Philadelphia, Mississippi;
- Highlands, North Carolina;
- Barnwell, South Carolina; and
- Bennettsville, South Carolina.
NCP-Six's revenues are derived primarily from monthly payments received
from cable television subscribers. Subscribers are divided into three
categories: basic subscribers, tier subscribers and premium subscribers. "Basic
subscribers" are households that subscribe to the basic level of service, which
generally provides access to the four major television networks (ABC, NBC, CBS
and Fox), a few independent local stations, PBS (the Public Broadcasting System)
and certain satellite programming services, such as ESPN, CNN or The Discovery
Channel. "Tier subscribers" are households that subscribe to an additional level
of programming services the content of which varies from system to system.
"Premium subscribers" are households that subscribe to one or more "pay
channels" in addition to the basic service. These pay channels include services
such as Showtime, Home Box Office, Cinemax or The Movie Channel.
As of December 31, 2000, the total number of basic subscribers served by
NCP-Six's systems was approximately 31,633. As of December 31, 2000, NCP-Six's
penetration rate (basic subscribers as a percentage of the total number of
estimated homes passed by NCP-Six's cable distribution system) was approximately
62%. NCP-Six's systems are located in rural areas, which to some extent do not
offer consistently acceptable signals capable of being received by an "off air"
antenna. This factor, combined with the existence of fewer entertainment
alternatives than in large markets contributes to a higher penetration rate in
rural areas than in larger more urban areas.
NCP-Six has 38 non-exclusive franchises to operate its systems. These
franchises, which will expire at various dates through the year 2017, have been
granted by local, county, state and other governmental authorities in the areas
in which NCP-Six's systems currently operate. Annual franchise fees are paid to
the granting governmental authorities. These fees vary between 2% and 5% of the
respective gross revenues of the system derived from the system's operations in
a particular community. The franchises may be terminated for failure to comply
with their respective conditions.
NCP-SIX OPERATING SYSTEMS
NCP-Six operates five groups or "clusters" of cable systems serving the
communities of and areas surrounding Starkville and Philadelphia, Mississippi;
Highlands, North Carolina; and Barnwell and Bennettsville, South Carolina. The
following is a description of these operating groups.
STARKVILLE, MISSISSIPPI
The Starkville operating group serves the communities of and areas
surrounding Starkville and Kosciusko, Mississippi. The city of Starkville is the
home of Mississippi State University with an enrollment of approximately 12,000
students. Mississippi State University's 10 colleges and schools comprise 58
departments that offer more than 120 majors. Mississippi State University is
also the largest employer in Starkville, with nearly 1,300 faculty members or
professionals and 1,450 support staff. Also located in Starkville is the
Mississippi Research and Technology Park, which is a long-range economic
development project initiated through the joint efforts of the city of
Starkville, Oktibbeha County, Mississippi State University and the local
business community. Mississippi Research and Technology Park is located on
approximately 220 acres across
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from the entrance to Mississippi State University and will enhance
high-technology research for application to the economic sector. The developers
and businesses that comprise Mississippi Research and Technology Park intend to
work hand in hand with research efforts at Mississippi State University, and
companies that locate in Mississippi Research and Technology Park will have the
benefit of Mississippi State University facilities and faculty.
The following provides subscriber information regarding the Starkville,
Mississippi operating group as of December 31, 2000:
Basic Subscribers........................................... 11,961
Tier Subscribers............................................ 6,063
Premium Subscribers......................................... 4,010
Estimated Homes Passed...................................... 16,525
PHILADELPHIA, MISSISSIPPI
The Philadelphia operating group serves the communities of and areas
surrounding Philadelphia and Forest, Mississippi. The systems are located in
central Mississippi in an area where the local economies are based primarily in
manufacturing. The region has excellent highway and railroad transportation, a
year-round mild climate, and the availability of a trained, cost-effective labor
force. One of the main industries in the area is poultry. Nearly two million
birds are dressed weekly in the city of Forest, which ranks as the
second-largest producer of broilers in the nation. Other industries in the area
include apparel, ready mix concrete, frozen food products, lumber, small
appliances, electronic assembly, steel and meat processing.
The following provides subscriber information regarding the Philadelphia,
Mississippi operating group as of December 31, 2000:
Basic Subscribers........................................... 6,677
Tier Subscribers............................................ 2,971
Premium Subscribers......................................... 2,690
Estimated Homes Passed...................................... 8,910
HIGHLANDS, NORTH CAROLINA
The Highlands operating group serves an area located on the high plateau of
the Blue Ridge Mountains where the corners of Georgia, North Carolina and South
Carolina meet. Highlands has long offered a cool and beautiful summer retreat
for affluent families from such southern cities as Atlanta, New Orleans and
Tampa. The Highlands region is almost encircled by the 200,000 acres of the End
National Forest, and boasts a lush mixture of hardwoods and evergreens because
of an abundant rainfall. Highlands has an average altitude of over 4,000 feet,
and thus maintains a temperate summer climate. The influx of tourists increases
Highland's year-round population of approximately 2,000 to over 20,000 between
May and October.
The Highlands area is perhaps best known for its exclusive golf clubs.
There are three beautiful golf courses in the Highlands area, the oldest being
the Highlands Country Club. About half the land in the Highlands area is under
private ownership; the rest is part of the End National Forest and is open for
hiking, fishing, hunting, camping and other outdoor activities. The private land
near the golf courses consists largely of exclusive housing developments, many
of which feature rambling, ranch-style vacation homes with values ranging from
$200,000 to $500,000. The Great Smokey Mountains National Park and the Blue
Ridge Parkway are within easy driving distance of Highlands. Several lakes in
the area offer swimming, boating, skiing, fishing and other water sports.
Rafting is also popular in the area due to the close proximity of the Chattooga
and Cullasaja Rivers.
The following provides subscriber information regarding the Highlands
system as of December 31, 2000:
Basic Subscribers........................................... 2,664
Premium Subscribers......................................... 582
Estimated Homes Passed...................................... 4,190
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BARNWELL, SOUTH CAROLINA
The Barnwell operating group serves the communities of and areas
surrounding Barnwell, Bamberg and Allendale, South Carolina. The region served
by the Barnwell operating group is located approximately sixty miles south of
Columbia, South Carolina. The economy is based primarily on agricultural and
manufacturing activities.
The following provides subscriber information regarding the Barnwell system
as of December 31, 2000:
Basic Subscribers........................................... 5,849
Premium Subscribers......................................... 3,767
Estimated Homes Passed...................................... 12,125
BENNETTSVILLE, SOUTH CAROLINA
The Bennettsville operating group serves the community of and area
surrounding Bennettsville, South Carolina. The region served by the
Bennettsville operating group is located approximately 100 miles northeast of
Columbia, South Carolina and serves as the county seat of Marlboro County. The
economy is primarily driven by agriculture and manufacturing. Three of the
largest employers in Bennettsville are Mohawk Carpet, United Technologies
Automotive and Willamette Industries.
The following provides subscriber information regarding the Bennettsville
system as of December 31, 2000:
Basic Subscribers........................................... 4,482
Premium Subscribers......................................... 2,953
Estimated Homes Passed...................................... 9,090
EMPLOYEES
NCP-Six had 48 employees as of December 31, 2000. Management of these
systems is handled through offices located in the towns of Starkville, Forest,
Kosciusko and Philadelphia, Mississippi; Highlands, North Carolina; and Barnwell
and Bennettsville, South Carolina.
CUSTOMERS
The business of NCP-Six is not dependent on a single customer or a few
customers, so the loss of any one or more customers would not have a material
adverse effect on its business. No customer accounts for 10% or more of
revenues. No material portion of NCP-Six's business is subject to renegotiation
of profits or termination of contracts or subcontracts at the election of any
governmental unit, except that franchise agreements may be terminated or
modified by the local franchising authorities. See "-- Regulation and
Legislation."
SEASONALITY
NCP-Six's cable television business is generally not seasonal, with the
exception of the Highlands system, which is subject to seasonal fluctuations in
its number of subscribers.
NCP-SIX'S COMPETITION
NCP-Six currently experiences competition from several sources, including
broadcast television (digital and analog); cable overbuilds by cable operators,
municipalities, private electric utilities and telephone companies; direct
broadcast satellite services; private cable; and multichannel multipoint
distribution service systems. NCP-Six is also in competition in various degrees
with other communications and entertainment media, including motion pictures,
home video cassette recorders (including digital video recorders that have the
capability to pause live television programs and digitally record television
shows without the use of videotape), Internet data delivery and Internet video
delivery. The following provides a summary description of these sources of
competition.
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Broadcast Television. NCP-Six has traditionally competed with broadcast
television, which consists of television signals that the viewer is able to
receive directly on the viewer's television without charge using an "off-air"
antenna. The extent of this competition is dependent in part upon the quality
and quantity of signals available by antenna reception as compared to the
services provided by the local cable system. Accordingly, NCP-Six have found it
less difficult to obtain higher penetration rates in rural areas (where signals
available off-air are limited) than in metropolitan areas where numerous high
quality off-air signals are often available without the aid of cable television
systems. Licensing of digital spectrum by the Federal Communications Commission
has provided incumbent broadcast licensees with the ability to deliver high
definition television pictures and multiple digital-quality program streams, as
well as advanced digital services such as subscription video.
Overbuilds. NCP-Six's franchises are not exclusive, so that more than one
cable television system may be built in the same area. This is known as an
"overbuild." Overbuilds have the potential to result in loss of revenues to the
operator of the original cable television system. Constructing and developing a
cable television system is a capital intensive process, and it is often
difficult for a new cable system operator to create a marketing edge over the
existing system. Generally, an overbuilder would be required to obtain
franchises from the local governmental authorities, although in some instances,
the overbuilder could be the local government itself. In any case, an
overbuilder would be required to obtain programming contracts and, in most
cases, would have to build a complete cable system such as headends, trunk lines
and drops to individual subscriber's homes throughout the franchise areas.
Private Electric Utilities and Telephone Companies. Federal
cross-ownership restrictions historically limited entry by local telephone
companies into the cable television business. The 1996 Telecom Act eliminated
this cross-ownership restriction. See "-- Regulation and Legislation" below. It
is therefore possible for companies with considerable resources to overbuild
existing cable operators and enter the business. Several telephone companies
have secured cable television franchises from local governmental authorities and
constructed cable television systems, although those efforts recently have
declined. NCP-Six cannot predict at this time the extent of telephone company
competition that will emerge in areas served by NCP-Six's cable television
systems. The entry of telephone companies as direct competitors, however, is
likely to continue over the next several years and could adversely affect the
profitability and market value of NCP-Six's systems. The entry of electric
utility companies into the cable television business, as now authorized by the
1996 Telecom Act, could have a similar adverse effect on NCP-Six future
competitiveness.
Direct Broadcast Satellite ("DBS") Service. High powered direct-to-home
satellites have made possible the wide-scale delivery of programming (including
Internet services) to individuals throughout the United States using small
roof-top or wall-mounted antennas. The two leading DBS providers have
experienced dramatic growth over the last several years and together now serve
over 13 million customers nationwide. These developments have the potential to
impact NCP-Six's existing subscriber base. Companies offering DBS service use
video compression technology to increase channel capacity of their systems to
more than 100 channels and to provide packages of movies, satellite networks and
other program services which are competitive to those of cable television
systems. DBS companies historically faced significant legal and technological
impediments to providing popular local broadcast programming to their customers.
Recent federal legislation reduced this competitive disadvantage. Nevertheless,
technological limitations still affect DBS companies, and it is expected that
DBS companies will offer local broadcast programming only in the top 50 to 100
U.S. markets for the foreseeable future. The same legislation reduced the
compulsory copyright fees paid by DBS companies and allowed them to continue
offering distant network signals to rural customers. In addition to emerging
high-powered DBS competition, cable television systems face competition from
several low-powered providers, whose service requires use of much larger home
satellite dishes. The availability of DBS equipment at reasonable prices, and
the relative attractiveness of the programming options offered by the cable
television industry and DBS competitors will impact the ability of DBS service
providers to compete successfully with NCP-Six and its fixed line cable systems.
Private Cable. NCP-Six is also susceptible to competition provided by
private cable television systems, known as satellite master antenna television,
serving multi-unit dwellings such as condominiums, apartment complexes and
private residential communities. These private cable systems may enter into
exclusive
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agreements with apartment owners and homeowners associations which may preclude
operators of franchised systems from serving residents of these private
complexes. Operators of private cable which do not cross public rights of way
are free from the federal, state and local regulatory requirements imposed on
franchised cable television operators. In addition, recent Federal Communication
Commission and court rulings suggest that private cable operators can lease
distribution capacity from local telephone companies that cross public rights of
way and provide service without obtaining a cable franchise.
Multichannel, Multipoint Distribution Service ("MMDS") Systems. NCP-Six
also competes with wireless program distribution services such as MMDS systems,
commonly called wireless cable, which are licensed to serve specific areas. MMDS
systems use low-power microwave frequencies to transmit television programming
over-the-air to paying subscribers. MMDS is less capital intensive than the
cable television industry, and it is therefore more practical to construct
systems using this technology in areas of lower subscriber penetration.
APPLICABLE REGULATIONS AND LEGISLATION
SUMMARY
The following summary addresses the key regulatory developments and
legislation affecting NCP-Six and its systems. Other applicable existing federal
legislation and regulations, copyright licensing and, in many jurisdictions,
state and local franchise requirements are currently the subject of a variety of
judicial proceedings, legislative hearings and administrative and legislative
proposals. Resulting development could change, in varying degrees, the manner in
which NCP-Six must operate. Neither the outcome of these proceedings nor their
impact upon the cable television industry or NCP-Six can be predicted at this
time.
NCP-Six expects to adapt its business to adjust to the changes that may be
required under any scenario of regulation. At this time, NCP-Six cannot assess
the effects, if any, that present regulation may have on NCP-Six's operations
and potential appreciation of its systems. There can be no assurance that the
final form of regulation will not have a material adverse impact on NCP-Six's
operations.
The operation of a cable system is extensively regulated at the federal,
local and, in some instances, state levels. The Cable Communications Policy Act
of 1984, the Cable Television Consumer Protection and Competition Act of 1992
(the "1992 Cable Act"), and the 1996 Telecommunications Act (the "1996 Telecom
Act") establish a national policy to guide the development and regulation of
cable television systems. The Federal Communications Commission has principal
responsibility for implementing the policies of the cable acts. Many aspects of
such regulations are currently the subject of judicial proceedings and
administrative or legislative proposals. Legislation and regulations continue to
change, and NCP-Six cannot predict the impact of future developments on the
cable television industry. Future regulatory and legislative changes could
adversely affect NCP-Six's operations.
CABLE RATE REGULATION
The 1992 Cable Act imposed an extensive rate regulation regime on the cable
television industry, which limits the ability of cable companies, including
NCP-Six, to increase subscriber fees. Under that regime, all cable systems are
subject to rate regulation, unless they face "effective competition" in their
local franchise area. Federal law now defines "effective competition" on a
community-specific basis as requiring satisfaction of conditions rarely
satisfied in the current marketplace.
Although the Federal Communications Commission established the underlying
regulatory scheme, local government units commonly referred to as local
franchising authorities are primarily responsible for administering the
regulation of the lowest level of cable service called the basic service tier.
The basic service tier typically contains local broadcast stations and public,
educational and government access channels. Local franchising authorities also
have primary responsibility for regulating cable equipment rates. Under federal
law, charges for various types of cable equipment must be unbundled from each
other and from monthly charges for programming services. Before a local
franchising authority begins basic service rate regulation it
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must certify to the Federal Communications Commission that it will follow
applicable federal rules. Many local franchising authorities have voluntarily
declined to exercise their authority to regulate basic service rates.
As of December 15, 2000, approximately 14% of NCP-Six's local franchising
authorities were certified to regulate basic service tier rates. The 1992 Cable
Act permits communities to certify and regulate rates at any time so it is
possible that additional localities served by the systems may choose to certify
and regulate rates in the future.
The Federal Communications Commission itself historically administered rate
regulation of cable programming service tiers, which represent the expanded
level of non-"basic" and "premium" programming services. The 1996 Telecom Act,
however, provided immediate rate relief for small cable operators offering cable
programming service tiers. All of NCP-Six's systems qualified for this cable
programming service tier deregulation. The elimination of cable programming
service tier regulation afforded NCP-Six substantially greater pricing
flexibility.
Under the rate regulations of the Federal Communications Commission, most
cable systems were required to reduce their basic service tier and cable
programming service tier rates in 1993 and 1994, and have since had their rate
increases governed by a complicated price cap scheme that allows for the
recovery of inflation and certain increased costs as well as providing some
incentive for expanding channel carriage. The Federal Communications Commission
has modified its rate adjustment regulations to allow for annual rate increases
and to minimize previous problems associated with regulatory lag. Operators also
have the opportunity to bypass this "benchmark" regulatory scheme in favor of
traditional "cost-of-service" regulation in cases where the latter methodology
appears favorable. Cost of service regulation is a traditional form of rate
regulation under which a utility is allowed to recover its costs of providing
the regulated service plus a reasonable profit.
In a particular effort to ease the regulatory burden on small cable
systems, the Federal Communications Commission created special rate rules
applicable for systems with fewer than 15,000 subscribers owned by an operator
with fewer than 400,000 subscribers. The special rate rules allow for simplified
cost-of-service regulation. All of NCP-Six's systems are eligible for these
simplified cost-of-service rules and have calculated rates generally in
accordance with those rules.
Under the Federal Communications Commission's rate rules, premium cable
services offered on a per-channel or per-program basis remain unregulated as do
affirmatively marketed packages consisting entirely of new programming product.
However, federal law requires that the basic service tier be offered to all
cable subscribers and limits the ability of operators to require purchase of any
cable programming service tier if a customer seeks to purchase premium services
offered on a per-channel or per-program basis, subject to a technology exception
which sunsets in 2002. The 1996 Telecom Act also relaxes existing "uniform rate"
requirements by specifying that uniform rate requirements do not apply where the
operator faces "effective competition," and by exempting bulk discounts to
multiple dwelling units, although complaints about predatory pricing still may
be made to the Federal Communications Commission.
Regulation by the Federal Communications Commission of cable programming
service tier rates for all systems, regardless of size, sunset under the 1996
Telecom Act on March 31, 1999. Certain legislators, however, have called for new
rate regulations. Should this occur, all rate deregulation, including that
applicable to small operators like NCP-Six, could be jeopardized.
CABLE ENTRY INTO TELECOMMUNICATIONS
The 1996 Telecom Act creates a more favorable environment for NCP-Six to
provide telecommunications services beyond traditional video delivery. It
provides that no state or local laws or regulations may prohibit or have the
effect of prohibiting any entity from providing any interstate or intrastate
telecommunications service. A cable operator is authorized under the 1996
Telecom Act to provide telecommunications services without obtaining a separate
local franchise. States are authorized, however, to impose "competitively
neutral" requirements regarding universal service, public safety and welfare,
service quality and consumer protection. State and local governments also retain
their authority to manage the public rights-of-way and may
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require reasonable, competitively neutral compensation for management of the
public rights-of-way when cable operators provide telecommunications service.
The favorable pole attachment rates afforded NCP-Six under federal law can
be gradually increased by utility companies owning the poles beginning in 2001,
if the operator provides telecommunications services as well as cable services
over its plant. The Federal Communications Commission recently clarified that a
cable operator's favorable pole rates are not endangered by the provision of
Internet services, but the U.S. Court of Appeals for the 11th Circuit recently
ruled in Gulf Power Co. v. FCC, 208 F.3d 1263 (11th Cir. 2000) ("Gulf Power")
that the Federal Communications Commission has no authority to regulate pole
rents for cable systems providing Internet services (because, the court ruled,
Internet services are not telecommunications services or cable services). The
court subsequently stayed the issuance of the mandate in Gulf Power pending the
filing of and final action on a petition for writ of certiorari seeking review
of the Gulf Power decision in the U.S. Supreme Court. The stay allows for the
orderly review of the decision in the U.S. Supreme Court. In the interim, the
Federal Communications Commission may continue to process pending pole
attachment complaints under its existing rules and procedures. If the 11th
Circuit decision goes into effect, it could significantly increase pole
attachment rates and adversely impact cable operators.
Cable entry into telecommunications will be affected by the regulatory
landscape now being fashioned by the Federal Communications Commission and state
regulators. One critical component of the 1996 Telecom Act to facilitate the
entry of new telecommunications providers (including cable operators) is the
interconnection obligation imposed on all telecommunications carriers. The
Supreme Court effectively upheld most of the Federal Communications Commission's
interconnection regulations. Nevertheless, the 8th Circuit Court of Appeals
vacated certain portions of the Federal Communications Commission's rules.
Subsequently, the 9th Circuit Court of Appeals ruled in the Federal
Communications Commission's favor on these same rules, creating a split in
authority that may be resolved by the U.S. Supreme Court. Although these
regulations should enable new telecommunications entrants to reach viable
interconnection agreements with incumbent carriers, many issues remain
unresolved, including which specific network elements the Federal Communications
Commission can mandate that incumbent carriers make available to competitors.
Similarly, if another Federal Communications Commission decision requiring
that incumbent telephone companies permit colocation of competitors' equipment
on terms more favorable to competitors is sustained on administrative and
judicial appeal, this decision, too, would make it easier for new entrants,
including NCP-Six, to provide telecommunications service.
INTERNET SERVICE
There is at present no significant federal regulation of NCP-Six's ability
to deliver Internet services. Furthermore, the Federal Communications Commission
recently issued several reports finding no immediate need to impose this type of
regulation. However, this situation may change as cable systems expand their
broadband delivery of Internet services. In particular, proposals have been
advanced at the federal level that would require cable operators to provide
access to unaffiliated Internet-service providers and online service providers.
Some local franchising authorities unsuccessfully tried to impose mandatory
Internet access or "open access" requirements as part of cable franchise
renewals or transfers. In AT&T Corp. v. City of Portland, No. 99-35609 (9th
Cir., June 22, 2000), the federal court of appeals for the Ninth Circuit
overturned a ruling by the federal district court in Portland, Oregon that local
franchising authorities have the lawful authority to impose these type of
conditions. The lower court had ruled that the city of Portland had inherent
authority to require, as a condition of its consent to the transfer of TCI's
cable franchise to AT&T, that AT&T provide "open access" to the "cable modem
platform" of the Excite@Home Internet service. On appeal, the court of appeals
rejected the city of Portland's attempt to impose "open access" conditions on
AT&T's delivery of Internet service over the cable system because that service,
according to the court of appeals, is not a cable service, but a
"telecommunications service." The potential regulatory state and federal
implications of this rationale are unclear given the various regulatory
requirements for the provision of telecommunications services. There have been
at least two additional court rulings that have rejected local imposition of
"open
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access" conditions on cable-provided Internet access, but those rulings have
employed very different legal reasoning. A federal court in Virginia found that
Internet service was a cable service, but as such was exempt from local "open
access" regulation. Another federal court in Florida even more recently ruled
that "open access" could not be imposed on local operators because doing so
would violate the First Amendment. Other local authorities have imposed or may
impose mandatory Internet access requirements on cable operators. These
developments could, if they become widespread, burden the capacity of cable
systems and complicate any plans NCP-Six may have or develop for providing
Internet service.
TELEPHONE COMPANY ENTRY INTO CABLE TELEVISION
The 1996 Telecom Act allows telephone companies to compete directly with
cable operators by repealing the historic telephone company cable
cross-ownership ban. Local exchange carriers, including the regional telephone
companies, can now compete with cable operators both inside and outside their
telephone service areas with certain regulatory safeguards. Because of their
resources, local exchange carriers could be formidable competitors to NCP-Six.
Various local exchange carriers currently are providing video programming
services within their telephone service areas through a variety of distribution
methods, including both the deployment of broadband wire facilities and the use
of wireless transmission.
Under the 1996 Telecom Act, local exchange carriers providing video
programming should be regulated as traditional cable operators, subject to local
franchising and federal regulatory requirements, unless the local exchange
carrier elects to deploy its plant as an open video system. To qualify for
favorable open video system status, the competitor must reserve two-thirds of
the system's activated channels for unaffiliated entities. The U.S. Fifth
Circuit Court of Appeals reversed certain of the Federal Communications
Commission's open video system rules, including its preemption of local
franchising. The Federal Communications Commission recently revised its open
video systems rules to eliminate this general preemption, thereby leaving
franchising discretion to local and state authorities. It is unclear what effect
this ruling will have on the entities pursuing open video system operation.
Although local exchange carriers and cable operators can now expand their
offerings across traditional service boundaries, the general prohibition remains
on local exchange carrier buyouts of co-located cable systems. Cable operator
buyouts of co-located local exchange carrier systems, and joint ventures between
cable operators and local exchange carriers in the same market are also
prohibited. The 1996 Telecom Act provides a few limited exceptions to this
buyout prohibition, including a carefully circumscribed "rural exemption." The
1996 Telecom Act also provides the Federal Communications Commission with the
limited authority to grant waivers of the buyout prohibition.
ELECTRIC UTILITY ENTRY INTO TELECOMMUNICATIONS AND CABLE TELEVISION
The 1996 Telecom Act provides that registered utility holding companies and
subsidiaries may provide telecommunications services, including cable
television, notwithstanding the Public Utility Holding Company Act. Electric
utilities must establish separate subsidiaries, known as "exempt
telecommunications companies" and must apply to the Federal Communications
Commission for operating authority. Like telephone companies, electric utilities
have substantial resources at their disposal, and could be formidable
competitors to traditional cable systems. Several of these utilities have been
granted broad authority to engage in activities which could include the
provision of video programming.
OWNERSHIP RESTRICTIONS
The 1996 Telecom Act eliminates statutory restrictions on broadcast cable
cross-ownership, but leaves in place existing Federal Communications Commission
regulations prohibiting local cross-ownership between co-located television
stations and cable systems. The 1996 Telecom Act leaves in place existing
restrictions on cable cross-ownership with satellite master antenna television
and multichannel multipoint distribution service facilities, but lifts those
restrictions where the cable operator is subject to effective competition.
Federal Communications Commission regulations permit cable operators to own and
operate satellite master antenna
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television systems within their franchise area, provided that their operation is
consistent with local cable franchise requirements.
Pursuant to the 1992 Cable Act, the Federal Communications Commission
adopted rules precluding a cable system from devoting more than 40% of its
activated channel capacity to the carriage of affiliated national video program
services. Although the 1992 Cable Act also precluded any cable operator from
serving more than 30% of all U.S. domestic cable subscribers, this provision is
still subject to judicial review.
MUST CARRY AND RETRANSMISSION CONSENT
The 1992 Cable Act contains broadcast signal carriage requirements.
Broadcast signal carriage is the transmission of broadcast television signals
over a cable system to cable customers. These requirements, among other things,
allow local commercial television broadcast stations to elect once every three
years between "must carry" status or "retransmission consent" status. Less
popular stations typically elect must carry, which is the broadcast signal
carriage rule that allows local commercial television broadcast stations to
require a cable system to carry the station. Must carry requests can dilute the
appeal of a cable system's programming offerings because a cable system with
limited channel capacity may be required to forego carriage of popular channels
in favor of less popular broadcast stations electing must carry. More popular
stations, such as those affiliated with a national network, typically elect
retransmission consent, which is the broadcast signal carriage rule that allows
local commercial television broadcast stations to negotiate terms (such as
mandating carriage of an affiliated cable network) for granting permission to
the cable operator to carry the stations. Retransmission consent demands may
require substantial payments or other concessions.
NCP-Six has been able to reach agreements with all of the broadcasters who
elected retransmission consent. To date, compliance with the "retransmission
consent" and "must carry" provisions of the 1992 Cable Act has not had a
material effect on NCP-Six, although these provisions may affect the future
operations of NCP-Six depending on factors such as market conditions, the
introduction of digital broadcasts, channel capacity and similar matters when
these arrangements are negotiated or renegotiated.
The burden associated with must carry provisions may increase substantially
if broadcasters proceed with planned conversion to digital transmission and the
Federal Communications Commission determines that cable systems must carry all
analog and digital broadcasts in their entirety. This burden would reduce
capacity available for more popular video programming and new Internet and
telecommunications offerings. The broadcast industry continues to press the
Federal Communications Commission on the issue of digital must carry. A
rulemaking regarding must carry obligations during the transition from analog to
digital broadcasting remains pending before the Federal Communications
Commission. It remains unclear when a final decision will be released.
ACCESS CHANNELS
Local franchising authorities can include franchise provisions requiring
cable operators to set aside certain channels for public, educational and
governmental access programming. Federal law also requires cable systems to
designate a portion of their channel capacity, up to 15% in some cases, for
commercial leased access by unaffiliated third parties. The Federal
Communications Commission has adopted rules regulating the terms, conditions and
maximum rates a cable operator may charge for commercial leased access use.
Requests made to NCP-Six to date for commercial leased access carriage have been
relatively limited.
ACCESS TO PROGRAMMING
To spur the development of independent cable programmers and competition to
incumbent cable operators, the 1992 Cable Act imposed restrictions on the
dealings between cable operators and cable programmers. Of special significance
from a competitive business posture, the 1992 Cable Act precludes video
programmers affiliated with cable companies from favoring their cable operators
over new competitors and requires these programmers to sell their
satellite-delivered programming to other multichannel video distributors. This
provision limits the ability of vertically integrated cable programmers to offer
exclusive programming arrangements to cable companies. There also has been
interest expressed in further restricting
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the marketing practices of cable programmers, including subjecting programmers
who are not affiliated with cable operators or programmers who deliver their
service by terrestrial means (rather than by satellite) to the program access
requirements. These changes should not have a dramatic impact on NCP-Six, but
may limit potential competitive advantages NCP-Six enjoys.
INSIDE WIRING; SUBSCRIBER ACCESS
In an order issued in 1997, the Federal Communications Commission
established rules that require an incumbent cable operator upon expiration of a
multiple dwelling unit service contract to sell, abandon or remove "home run"
wiring that was installed by the cable operator in a multiple dwelling unit
building. These inside wiring rules are expected to assist building owners in
their attempts to replace existing cable operators with new programming
providers who are willing to pay the building owner a fee, where this fee is
permissible. The Federal Communications Commission has also proposed abrogating
all exclusive multiple dwelling unit service agreements held by incumbent
operators.
With limited exceptions, existing Federal Communications Commission
regulations prohibit any state or local law or regulation, or private covenant,
private contract, lease provision, homeowners' association rule or similar
restriction, impairing the installation, maintenance or use of certain video
reception antennas on property within the exclusive control of a tenant or
property owner.
OTHER APPLICABLE REGULATIONS OF THE FEDERAL COMMUNICATIONS COMMISSION
In addition to the Federal Communications Commission regulations noted
above, there are other Federal Communications Commission regulations to which
NCP-Six is subject covering such areas as:
- equal employment opportunity;
- subscriber privacy;
- programming practices, including, among other things;
- syndicated program exclusivity;
- network program nonduplication;
- local sports blackouts;
- indecent programming;
- lottery programming;
- political programming;
- sponsorship identification;
- children's programming advertisements;
- closed captioning;
- registration of cable systems and facilities licensing;
- maintenance of various records and public inspection files;
- aeronautical frequency usage;
- lockbox availability;
- antenna structure notification;
- tower marking and lighting;
- consumer protection and customer service standards;
- technical standards;
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- consumer electronics equipment compatibility; and
- emergency alert systems.
The Federal Communications Commission also recently ruled that all cable
customers, including NCP-Six, must be allowed to purchase cable converters from
third parties. The Federal Communications Commission established a multi-year
phase-in during which security functions, which remain in the operator's
exclusive control, shall be unbundled from basic converter functions. The
security functions can then be satisfied by third party vendors.
The Federal Communications Commission has the authority to enforce its
regulations through the imposition of substantial fines, the issuance of cease
and desist orders and/or the imposition of other administrative sanctions, such
as the revocation of Federal Communications Commission licenses needed to
operate certain transmission facilities used in connection with cable
operations.
COPYRIGHT
NCP-Six is subject to federal copyright licensing covering carriage of
television and radio broadcast signals. In exchange for filing certain reports
and contributing a percentage of its revenues to a federal copyright royalty
pool, NCP-Six can obtain blanket permission to retransmit copyrighted material
included in broadcast signals. Effective July 1, 2000, the Federal Copyright
Office increased the cable compulsory license rates used to calculate cable
systems' copyright payments under the cable compulsory license. The possible
modification or elimination of this compulsory copyright license is the subject
of continuing legislative review and could adversely affect NCP-Six's ability to
obtain desired broadcast programming. NCP-Six cannot predict the outcome of this
legislative activity.
Cable operators distribute locally originated programming and advertising
that use music controlled by the two principal major music performing rights
organizations, the American Society of Composers, Authors and Publishers (ASCAP)
and Broadcast Music, Inc. (BMI). The cable industry has had a long series of
negotiations and adjudications with both organizations. A prior voluntarily
negotiated settlement with BMI has now expired, and is subject to further
proceedings. The governing rate court recently set retroactive and prospective
cable industry rates for ASCAP music based on the previously negotiated BMI
rate. Although NCP-Six cannot predict the ultimate outcome of these industry
proceedings or the amount of any license fees NCP-Six may be required to pay for
past and future use of association-controlled music, NCP-Six does not believe
these license fees will be significant to its business and operations.
STATE AND LOCAL REGULATION
NCP-Six's cable television systems generally are operated pursuant to
nonexclusive franchises granted by a municipality or other state or local
government entity in order to cross public rights-of-way. Federal law now
prohibits local franchising authorities from granting exclusive franchises or
from unreasonably refusing to award additional or renew existing franchises.
Cable franchises generally are granted for fixed terms and in many cases
include monetary penalties for non-compliance and may be terminable if the
franchisee fails to comply with material provisions. The specific terms and
conditions of franchises vary materially among jurisdictions. Each franchise
generally contains provisions governing cable operations, service rates,
franchising fees, system construction and maintenance obligations, system
channel capacity, design and technical performance, customer service standards
and indemnification protections. A number of states subject cable systems to the
jurisdiction of centralized state governmental agencies, some of which impose
regulation of a character similar to that of a public utility. Although local
franchising authorities have considerable discretion in establishing franchise
terms, there are certain federal limitations. For example, local franchising
authorities cannot insist on franchise fees exceeding 5% of the system's gross
cable-related revenues, cannot dictate the particular technology used by the
system, and cannot specify video programming other than identifying broad
categories of programming.
Federal law contains renewal procedures designed to protect incumbent
franchisees against arbitrary denials of renewal. Even if a franchise is
renewed, the local franchising authority may seek to impose new and
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more onerous requirements, such as significant upgrades in facilities and
service or increased franchise fees as a condition of renewal. Similarly, if a
local franchising authority's consent is required for the sale of a cable system
or franchise, the local franchising authority may attempt to impose more
burdensome or onerous franchise requirements in connection with a request for
consent. Franchising authorities are required to act on any franchise transfer
request within 120 days after receipt by the franchising authority of all
required information. Approval is deemed to be granted if the franchising
authority fails to act within such 120-day period. Historically, most of
NCP-Six's franchises have been renewed and transfer consents granted.
LEGAL PROCEEDINGS
NCP-Six is not subject to any material legal proceedings.
NCP-SIX'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
The proposed transaction is not a result of insufficient working capital or
declining results of operations. NCP-Six has historically generated significant
net losses due, in part, to non-cash charges to income for depreciation and
amortization. Prior to the deduction of these non-cash items, NCP-Six has
generated sufficient operating income to service its debt and achieve certain
levels of cash distributions to limited partners in prior years. Although
quarterly cash distributions are not currently being made to limited partners,
it is anticipated that quarterly distributions could possibly be reinstated in
the future if the proposed transaction is not consummated and certain amendments
to NCP-Six's bank loan agreements can be negotiated. The amounts and timing of
any future distributions are dependent in part on NCP-Six's ability to increase
cash flow from operations.
NCP-Six's current senior revolving credit facility matures on June 30, 2001
with a projected outstanding principal balance of approximately $28,215,000 due
and payable on that date. Should NCP-Six continue its operations beyond this
date an amendment to the existing loan agreement will be required to extend the
loan maturity and revise certain financial covenants. An agreement was reached
with NCP-Six's lenders to extend the loan maturity to June 30, 2001 to allow
sufficient time to close the proposed transaction. It is probable that any
agreement by the lenders to further extend the loan maturity beyond June 30,
2001 will be conditioned upon an amendment to the NCP-Six partnership agreement
to extend the life of NCP-Six, which currently expires on December 31, 2001.
This proxy statement solicits approval for an amendment to the NCP-Six
partnership agreement aimed at effectuating an extension of NCP-Six for six
additional years until December 31, 2007. In the managing general partner's
opinion, amendments to NCP-Six's loan agreement can likely be obtained from
NCP-Six's lenders at a cost and on terms that will not adversely affect
NCP-Six's ability to continue operating as a going concern, but only if
NCP-Six's life is first extended.
NCP-Six generates the majority of its revenue from subscriber fees. The
following table displays historical average rate information for various
services offered by the partnership's systems (amounts per subscriber per
month):
2000 1999 1998 1997 1996 1995
------ ------ ------ ------ ------ ------
Basic Rate............................. $28.50 $26.50 $24.20 $23.00 $22.24 $21.53
Tier Rate.............................. 8.95 8.50 7.65 6.90 6.35 5.95
HBO Rate............................... 10.30 10.25 10.50 11.35 11.25 11.10
Cinemax Rate........................... 8.25 7.70 7.30 8.70 8.50 8.25
Showtime Rate.......................... 8.15 7.95 6.30 4.50 8.45 8.45
Movie Channel Rate..................... 6.20 6.00 6.60 -- -- 7.00
Disney Rate............................ -- 6.50 6.20 5.10 6.00 6.75
Encore Rate............................ 1.10 1.50 1.50 -- -- --
Starz Rate............................. 6.25 8.50 8.50 -- -- --
Service Contract Rate.................. 2.25 2.30 2.35 2.60 2.65 2.65
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RESULTS OF OPERATIONS FOR YEAR 2000
Total Revenue. NCP-Six's revenues totaled $15,221,887 for the year ended
December 31, 2000, representing an increase of approximately 1% over the same
period in 1999. Of these revenues, $11,025,826 (72%) was derived from basic
service charges, $1,379,913 (9%) from premium services, $948,969 (6%) from tier
services, $331,125 (2%) from installation charges, $397,470 (3%) from service
maintenance contracts, $581,281 (4%) from advertising and $557,303 (4%) from
other sources. NCP-Six's April 1999 disposition of its Sandersville, Mississippi
system decreased revenues by approximately $189,000 or 1%. Assuming the
Sandersville, system was disposed of at the beginning of each of the respective
periods, revenues would have increased approximately 2%. The growth in revenue
is attributable to rate increases implemented in NCP-Six's systems.
Operating Expenses. NCP-Six's operating expenses totaled $1,161,419 for
the year ended December 31, 2000, representing a decrease of approximately 12%
over the same period in 1999. Excluding the impact of the Sandersville,
Mississippi system disposition, operating expenses would have decreased
approximately 10% for the year ended December 31, 2000. The decrease in
operating expenses is primarily due to decreased regional management expense and
system maintenance costs. Salary and benefit costs are a major component of
operating expenses. Employee wages are reviewed annually and, in most cases,
increased based on cost of living adjustments and other factors. As a result,
operating expenses are expected to increase in future years.
General and Administrative Expenses. NCP-Six's general and administrative
expenses totaled $4,035,555 for the year ended December 31, 2000, representing a
decrease of approximately 1% over the same period in 1999. Excluding the impact
of the Sandersville, Mississippi system disposition, general and administrative
expenses would have increased approximately 1.3% for the year ended December 31,
2000. This increase is primarily attributable to (i) increases in salary and
benefit costs due to cost of living adjustments, and (ii) increases in revenue
based expenses such as management fees and franchise fees as well as increased
property taxes. Significant general and administrative expenses are calculated
as a percentage of NCP-Six's revenues. As NCP-Six's revenues increase, its
administrative expenses increase proportionately.
Programming Expenses. NCP-Six's programming expenses totaled $3,968,492
for the year ended December 31, 2000, representing a 1% increase over the same
period in 1999. Adjusting for the Sandersville, Mississippi system disposition,
programming expenses would have increased approximately 4% for the year ended
December 31, 2000 compared to the same period in 1999. This increase is mainly
due to higher costs charged by various program suppliers offset by reduced local
programming expenses. Programming expenses consist mainly of payments made to
the suppliers of various cable programming services. Since these costs are based
on the number of subscribers served, future subscriber increases will cause the
trend of increasing programming costs to continue. Additionally, rate increases
from program suppliers, as well as new fees associated with the launch of
additional channels will contribute to further increased programming costs.
Depreciation and Amortization Expenses. NCP-Six's depreciation and
amortization expenses totaled $4,468,532 for the year ended December 31, 2000,
representing a 2% increase over the same period in 1999. This increase is mainly
due to depreciation on plant and equipment acquired during the last year offset
by assets becoming fully depreciated during the year.
Interest Expense. NCP-Six's interest expense for the year ended December
31, 2000 increased approximately 5% over the same period in 1999. The average
bank debt decreased from $30,169,000 in 1999 to $28,590,000 during 2000, and
NCP-Six's effective interest rate increased from 8.18% in 1999 to 8.59% in 2000.
RESULTS OF OPERATIONS YEAR ENDED 1999
Total Revenue. NCP-Six's total revenue reached $15,005,218 for the year
ended December 31, 1999, representing an increase of approximately 2% over 1998.
Of the 1999 revenue, $10,781,941 (72%) is derived from subscriptions to basic
services, $1,509,949 (10%) from subscriptions to premium services, $846,215 (6%)
from subscriptions to tier services, $507,932 (3%) from advertising, $384,380
(3%) from service
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maintenance revenue, $367,300 (2%) from installation charges and $607,501 (4%)
from other sources. The increase in revenue is attributable primarily to rate
increases placed into effect in August 1999 as well as new product services
introduced in 1999. In April 1999, NCP-Six sold the cable television system and
assets relating to its Sandersville, Mississippi system, resulting in the
disposition of approximately 1,400 subscribers and decreased revenues of
approximately $200,000 or 2%. Assuming the Sandersville, Mississippi system was
disposed of at the beginning of each of the respective periods, revenues would
have increased approximately 4%.
Operating Expenses. NCP-Six's operating expenses totaled $1,320,255 for
the year ended December 31, 1999, representing an increase of approximately 5%
over the same period in 1998. Excluding the impact of the disposition of the
Sandersville, Mississippi system, operating expenses would have increased
approximately 9% for the year. This increase was primarily due to increased
operating salaries and pole rental expense offset by decreased system
maintenance expenses and drop materials.
General and Administrative Expenses. NCP-Six's general and administrative
expenses totaled $4,064,866 for the year ended December 31, 1999, representing
an increase of approximately 7% over the same period in 1998. Excluding the
impact of the Sandersville, Mississippi system disposition, general and
administrative expenses would have increased approximately 10% compared to the
same period in 1998. This increase was due to higher revenue based expenses such
as management fees and franchise fees as well as increased utilities, legal
expenses, property taxes and bad debt expense offset by reduced billing
expenses, marketing expenses and copyright fees.
Programming Expenses. NCP-Six's programming expenses totaled $3,915,701
for the year ended December 31, 1999, representing an increase of approximately
3% over 1998. Adjusting for the Sandersville, Mississippi system disposition,
programming expenses would have increased approximately 6% compared to the same
period in 1998. This increase was mainly due to higher costs charged by various
program suppliers as well as increased advertising expenses and production
expenses.
Depreciation and Amortization Expenses. NCP-Six's depreciation and
amortization expenses totaled $4,392,073 for the year ended December 31, 1999,
representing an increase of approximately 2% over the same period in 1998. This
increase was due to depreciation and amortization on purchases of plant and
equipment in 1999 offset by assets becoming fully depreciated.
Interest Expense. NCP-Six's interest expense for 1999 decreased
approximately 7% over 1998. The average bank debt decreased from $31,373,000
during 1998 to $30,169,000 during 1999, offset by an increase to NCP-Six's
effective interest rate from 7.88% in 1998 to 8.18% in 1999.
SELECTED QUARTERLY FINANCIAL DATA
The following unaudited selected quarterly financial data for each of the
four quarters ending in years 2000 and 1999 has been prepared by the managing
general partner.
QUARTERS ENDED
-------------------------------------------------------------------------------------
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31, DECEMBER 31, SEPTEMBER 30,
2000 2000 2000 2000 1999 1999
------------ ------------- ---------- ---------- ------------ -------------
Revenue.................. $3,852,433 $3,812,503 $3,803,536 $3,753,415 $3,798,006 $3,709,213
Operating income......... $ 188,723 $ 477,807 $ 465,645 $ 455,714 $ 93,778 $ 429,065
Gain (loss) on retirement
of assets.............. $ (162,743) $ (108,898) $ -- $ 4,708 $ (273,689) $ (58,045)
Net income (loss)........ $ (636,562) $ (309,847) $ (195,891) $ (184,093) $ (795,894) $ (261,347)
Net income (loss) per
limited partner unit
(weighted average)..... $ (21) $ (10) $ (7) $ (6) $ (26) $ (9)
QUARTERS ENDED
-----------------------
JUNE 30, MARCH 31,
1999 1999
---------- ----------
Revenue.................. $3,765,208 $3,732,791
Operating income......... $ 441,461 $ 348,019
Gain (loss) on retirement
of assets.............. $1,662,267 $ --
Net income (loss)........ $1,467,256 $ (311,159)
Net income (loss) per
limited partner unit
(weighted average)..... $ 49 $ (10)
LIQUIDITY AND CAPITAL RESOURCES
NCP-Six's primary sources of liquidity include cash flow from operations
and the $8,000,000 revolving credit line portion of NCP-Six's senior credit
facility with its syndicated lending group led by First Union
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National Bank as administrative agent. As of December 31, 2000 approximately
$5,650,00 in principal was outstanding on that revolving credit line portion,
and approximately $28,215,000 in principal was outstanding under the entire
senior credit facility. Based on management's analysis, NCP-Six's cash flow from
operations and amounts available for borrowing under NCP-Six's revolving credit
line are sufficient to cover operating costs and planned capital expenditures up
to the expected liquidation date of NCP-Six.
Under the terms of NCP-Six's senior credit facility agreement, all amounts
outstanding under the senior credit facility become due and payable on June 30,
2001. NCP-Six's continuing operations will not provide sufficient liquidity to
satisfy this obligation at its stated maturity. Alternatives available to
NCP-Six include a sale of a portion or all of its assets to generate proceeds
sufficient to repay the outstanding debt or to renegotiate the terms of the
credit agreement with its lenders to extend the maturity date. Management
believes agreement by NCP-Six's lenders to extend the maturity date will first
require limited partner approval to extend the expiration of NCP-Six, which
currently expires on December 31, 2001. This proxy statement solicits approval
for that extension. If approved, the term of NCP-Six will be extended until
December 31, 2007. Based on preliminary discussions with the lenders currently
providing NCP-Six with its senior credit facility, management believes that
NCP-Six can arrange financing to continue its operations if necessary, assuming
NCP-Six's term is extended, there is no deterioration in NCP-Six's operations
and bank credit markets remain open.
The general partners are currently formulating a proposal to liquidate the
assets of NCP-Six. In the opinion of the managing general partner the proposal
will provide sufficient proceeds to retire all the NCP-Six's debt obligations.
The proposed transaction requires approval of a majority in interest of
NCP-Six's limited partners. Approval for the proposed transaction is solicited
in this proxy statement. If the proposed transaction is approved and closed, it
is anticipated that NCP-Six will be liquidated as a partnership during the
fourth quarter of 2001 regardless of whether NCP-Six's term is extended.
During the year ended December 31, 2000, NCP-Six's primary source of
liquidity was cash provided from operations. NCP-Six generates cash on a monthly
basis through the monthly billing of subscribers for cable services. Losses from
uncollectible accounts have not been material. During the year ended December
31, 2000, cash generated from monthly billings was sufficient to meet NCP-Six's
needs for working capital, capital expenditures and scheduled debt service.
Under the terms of NCP-Six's senior credit facility NCP-Six has agreed to
restrictive covenants which require the maintenance of certain financial
performance ratios. These ratios include a senior debt to annualized operating
cash flow ratio of no more than 5.25 to 1.00, and an annual operating cash flow
to interest expense ratio of not less than 2.25 to 1.00. As of December 31,
2000, NCP-Six was in compliance with its required financial covenants.
As of April 31, 2001, the balance under NCP-Six's senior credit facility
was $28,215,281. Certain fixed rate swap agreements that previously provided
NCP-Six with a fixed interest rate on certain borrowings expired during the
third quarter of 2000. As a result, indebtedness under NCP-Six's senior credit
facility is currently subject to an adjustable rate of interest. As of April 31,
2001, that interest rate was a Libor based rate of 7.75% expiring May 29, 2001
on a principal balance of $27,815,281, and prime on an additional principal
balance of $400,000. This rate includes a margin paid to the lender based on
overall leverage and may increase or decrease as NCP-Six's leverage fluctuates.
CAPITAL EXPENDITURES AND IMPROVEMENTS
Cable television systems require continuous upgrades and maintenance to
remain competitive.
NCP-Six does not, however, have any current plans to accelerate any maintenance
or improvements to its systems. Instead, all currently scheduled capital
improvements are within the ordinary course of NCP-Six's standard operations. As
of February 1, 2001, NCP-Six's scheduled capital improvements included digital
programming equipment for the Starkville, Philadelphia and Highlands systems at
an estimated cost of $863,000.
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During 2000, NCP-Six incurred approximately $2,054,000 of capital
expenditures. Those expenditures included:
- an ongoing upgrade to the Starkville, Mississippi system, including the
launch of digital programming services in Starkville;
- an ongoing upgrade to the Forest, Mississippi system; and
- an ongoing upgrade to the Barnwell, South Carolina system.
During 1999, NCP-Six incurred approximately $2,660,000 in capital
expenditures. Those expenditures included:
- an ongoing upgrade to 550 MHz to the Starkville, Mississippi system;
- a vehicle replacement for the Starkville, Mississippi system;
- the completion of an upgrade to 450 MHz to the Kosciusko, Mississippi
system;
- an ongoing upgrade to 450 MHz to the Philadelphia, Mississippi system,
including channel additions;
- a vehicle replacement for the Philadelphia, Mississippi system;
- an ongoing deployment of fiber optic cable in the Highlands, Mississippi
system;
- a vehicle replacement and addition of a stand-by generator for the
Bennettsville, South Carolina system;
- an ongoing upgrade to 450 MHz in the Barnwell, South Carolina system;
- a vehicle replacement for the Barnwell, South Carolina system; and
- an ongoing extension of service lines for all of NCP-Six's systems.
During 1998, NCP-Six incurred approximately $2,820,000 in capital
expenditures. Those expenditures included:
- an ongoing deployment of fiber optic cable in the Starkville, Mississippi
system;
- an ongoing upgrade to 450 MHz to the Kosciusko, Mississippi system;
- a vehicle replacement for the Philadelphia, Mississippi system;
- an ongoing upgrade to 450 MHz to the Philadelphia, Mississippi system;
- an ongoing deployment of fiber optic cable in the Highlands, Mississippi
system;
- an upgrade of computer hardware and software in the Bennettsville, South
Carolina system;
- a new office building purchase for the Barnwell, South Carolina system;
- an upgrade to 450 MHz to the Barnwell, South Carolina system; and
- an ongoing extension of service lines for all of NCP-Six's systems.
RECENT ACQUISITIONS AND DISPOSITIONS
On April 30, 1999, NCP-Six sold the assets of its cable television system
serving approximately 1,400 subscribers in and around the community of
Sandersville, Mississippi. The sales price for the system was $1.9 million and
the net proceeds were utilized to reduce outstanding debt. NCP-Six determined to
sell the Sandersville system due to a significant "overbuild" situation facing
the system and the surrounding geographic area. Due to the overbuild and lack of
other interested purchasers for the system, NCP-Six sold the Sandersville system
to the overbuilder.
On January 2, 1998, NCP-Six purchased cable television systems serving
approximately 11,200 subscribers in and around the communities of Allendale,
Bamberg, Barnwell and Bennettsville, South Carolina. The purchase price of these
systems was $20.5 million. NCP-Six borrowed approximately $20.47 million to
finance the acquisition of the South Carolina cable systems. That borrowing was
made under NCP-Six's outstanding senior credit facility.
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MANAGEMENT AND BENEFICIAL OWNERSHIP OF NCP-SIX
MANAGEMENT OF NCP-SIX
NCP-Six is a Washington limited partnership with no directors or officers.
The managing general partner of NCP-Six is Northland Communications Corporation,
a Washington corporation. The administrative general partner of NCP-Six is FN
Equities Joint Venture, a California general partnership.
The principal business of Northland Communications Corporation historically
has been locating cable television systems, negotiating for their acquisition,
forming limited partnerships to own the systems, arranging for the sale of
limited partnership interests to investors, managing limited partnerships,
including NCP-Six, and liquidating partnership assets upon dissolution.
Northland Communications Corporation is a wholly-owned subsidiary of Northland
Telecommunications Corporation, a Washington corporation. The address of the
principal executive offices of each of Northland Communications Corporation and
Northland Telecommunications Corporation is 1201 Third Avenue, Suite 3600,
Seattle, Washington 98101.
The sole partners of the administrative general partner are FN Equities,
Inc., and FN Network Partners, Ltd., a California limited partnership. John S.
Simmers is the sole owner of FN Equities, Inc. The principal business of each of
the administrative general partner and FN Equities, Inc. is to provide
administrative services as administrative general partner of cable television
limited partnerships. FN Network Partners, Ltd. is an investment partnership.
The address of the principal executive offices of each of the administrative
general partner, FN Equities, Inc., FN Network Partners, Ltd. and John S.
Simmers is 2780 SkyPark Drive, Suite 300, Torrance, California 90505.
OFFICERS AND DIRECTORS OF NORTHLAND COMMUNICATIONS CORPORATION
The following table sets forth information about the executive officers and
directors of Northland Communications Corporation:
NAME AGE POSITION
---- --- --------
John S. Whetzell........................... 59 Board Chairman and President
Richard I. Clark........................... 43 Director, Vice President, Treasurer and
Assistant Secretary
John E. Iverson............................ 64 Director and Secretary
Gary S. Jones.............................. 43 Vice President and Chief Financial Officer
Richard J. Dyste........................... 55 Vice President, Technical Services
H. Lee Johnson............................. 57 Divisional Vice President
R. Gregory Ferrer.......................... 45 Vice President and Treasurer
Matthew J. Cryan........................... 36 Vice President, Budgets and Planning
Laura N. Williams.......................... 34 Vice President and Senior Counsel
Rick J. McElwee............................ 39 Vice President and Controller
JOHN S. WHETZELL is the founder of Northland Communications Corporation and
has been President since its inception and a Director since March 1982. Mr.
Whetzell became Chairman of the Board of Directors in December 1984. He also
serves as President and Chairman of the Board of Northland Telecommunications
Corporation and each of its subsidiaries. He has been involved with the cable
television industry for over 26 years. Between March 1979 and February 1982, he
was in charge of Ernst & Whinney's national cable television consulting
services. Mr. Whetzell first became involved in the cable television industry
when he served as the Chief Economist of the Cable Television Bureau of the
Federal Communications Commission from May 1974 to February 1979. He provided
economic studies to support the deregulation of cable television both in federal
and state arenas. He participated in the formulation of accounting standards for
the industry and assisted the Federal Communications Commission in negotiating
and developing the pole attachment rate formula for cable television. His
undergraduate degree is in economics from George Washington University, and he
has an MBA degree from New York University.
RICHARD I. CLARK, an original incorporator of Northland Communications
Corporation, serves as Vice President, Assistant Secretary and Treasurer of
Northland Communications Corporation. He also serves as
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Vice President, Assistant Secretary and Treasurer of Northland
Telecommunications Corporation. Mr. Clark has served on the Board of Directors
of both Northland Communications Corporation and Northland Telecommunications
Corporation since July 1985. In addition to his other responsibilities, Mr.
Clark is responsible for the administration and investor relations activities of
Northland Communications Corporation, including financial planning and corporate
development. From July 1979 to February 1982, Mr. Clark was employed by Ernst &
Whinney in the area of providing cable television consultation services and has
been involved with the cable television industry for nearly 22 years. He has
directed cable television feasibility studies and on-site market surveys. Mr.
Clark has assisted in the design and maintenance of financial and budget
computer programs and he has prepared documents for major cable television
companies in franchising and budgeting projects through the application of these
programs. In 1979, Mr. Clark graduated cum laude from Pacific Lutheran
University with a Bachelor of Arts degree in accounting.
JOHN E. IVERSON is the Secretary of Northland Communications Corporation
and has served on its Board of Directors since December 1984. He also is the
Secretary and serves on the Board of Directors of Northland Telecommunications
Corporation and each of its subsidiaries. He is currently a member of the law
firm of Ryan, Swanson & Cleveland P.L.L.C. He is a member of the Washington
State Bar Association and American Bar Association and has been practicing law
for more than 38 years. Mr. Iverson is the past president and a Trustee of the
Pacific Northwest Ballet Association. Mr. Iverson has a Juris Doctor degree from
the University of Washington.
GARY S. JONES is Vice President and Chief Financial Officer for Northland
Communications Corporation. Mr. Jones joined Northland Communications
Corporation in March 1986 as Controller and has been Vice President of Northland
Telecommunications Corporation and each of its subsidiaries since October 1986.
Mr. Jones is responsible for cash management, financial reporting and banking
relations for Northland and is involved in the acquisition and financing of new
cable systems. Prior to joining Northland Communications Corporation, Mr. Jones
was employed by the Certified Public Accounting firm of Laventhol & Horwath from
1980 to 1986. Mr. Jones received his Bachelor of Arts degree in Business
Administration with a major in accounting from the University of Washington in
1979.
RICHARD J. DYSTE has served as Vice President -- Technical Services of
Northland Communications Corporation and each of its subsidiaries since April
1987. Mr. Dyste is responsible for planning and advising all Northland cable
systems with regard to technical performance as well as system upgrades and
rebuilds. He is a past president and current member of the Society of Cable
Telecommunications Engineers, Inc. Mr. Dyste joined Northland Communications
Corporation in 1986 as an engineer and served as Operations Consultant to
Northland Communications Corporation from August 1986 until April 1987. From
1977 to 1985, Mr. Dyste owned and operated Bainbridge TV Cable. He is a graduate
of Washington Technology Institute.
H. LEE JOHNSON has served as Divisional Vice President for Northland
Communications Corporation's Statesboro, Georgia regional office since March
1994. He is responsible for the management of systems serving subscribers in
Alabama, Georgia, Mississippi, North Carolina and South Carolina. Prior to his
association with Northland he served as Regional Manager for Warner
Communications, managing four cable systems in Georgia from 1968 to 1973. Mr.
Johnson has also served as President of Sunbelt Finance Corporation and was
employed as a System Manager for Statesboro CATV when Northland purchased the
system in 1986. Mr. Johnson has been involved in the cable television industry
for over 32 years and is a current member of the Society of Cable Television
Engineers. He is a graduate of Swainsboro Technical Institute and has attended
numerous training seminars, including courses sponsored by Jerrold Electronics,
Scientific Atlanta, The Society of Cable Television Engineers and CATA.
R. GREGORY FERRER joined Northland Communications Corporation in March 1984
as Assistant Controller and serves as Vice President and Treasurer of Northland
Communications Corporation. Mr. Ferrer also serves as Vice President and
Assistant Treasurer of Northland Telecommunications Corporation. Mr. Ferrer is
responsible for coordinating all of Northland's property tax filings, insurance
requirements and system programming contracts as well as interest rate
management and other treasury functions. Prior to joining Northland, he was a
Certified Public Accountant at Benson & McLaughlin, a local public accounting
firm,
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from 1981 to 1984. Mr. Ferrer received his Bachelor of Arts in Business
Administration from Washington State University with majors in marketing in 1978
and accounting and finance in 1981.
MATTHEW J. CRYAN is Vice President -- Budgets and Planning and has been
with Northland Communications Corporation since September 1990. Mr. Cryan is
responsible for the development of current and long-term operating budgets for
all Northland entities. Additional responsibilities include the development of
financial models used in support of acquisition financing, analytical support
for system and regional managers, financial performance monitoring and reporting
and programming analysis. Prior to joining Northland, Mr. Cryan was employed as
an analyst with NKV Corp., a securities litigation support firm located in
Redmond, Washington. Mr. Cryan graduated from the University of Montana in 1988
with honors and holds a Bachelor of Arts in Business Administration with a major
in finance.
LAURA N. WILLIAMS is Vice President and Senior Counsel for Northland
Communications Corporation and has served in this role since August 2000. Prior
to this time, she served as Associate Counsel for each of the Northland entities
from August 1995. She is a member of the Washington State Bar Association,
American Bar Association and Women in Telecommunications. Ms. Williams received
her Bachelor of Science degree in Business Administration with a major in
finance and an M.B.A. from California State University, Long Beach, and has a
Juris Doctor degree from Seattle University School of Law.
RICK J. MCELWEE is Vice President and Controller for Northland
Communications Corporation. He joined Northland in May 1987 as System Accountant
and was promoted to Assistant Controller of Northland Cable Television, Inc. in
1993. Mr. McElwee became Divisional Controller of Northland Telecommunications
Corporation in 1997 and in January 2001, he was promoted to Vice President and
Controller of Northland Telecommunications Corporation. Mr. McElwee is
responsible for managing all facets of the accounting and financial reporting
process for the Northland companies. Prior to joining Northland, he was employed
as an accountant with Pay n' Save Stores, Inc., a regional drugstore chain. Mr.
McElwee graduated from Central Washington University in 1985 and holds a
Bachelor of Science degree in Business Administration with a major in
accounting.
OFFICERS AND DIRECTORS OF FN EQUITIES JOINT VENTURE
The following table sets forth information about the executive officers and
directors of FN Equities, Inc.:
NAME AGE POSITION
---- --- --------
Miles Z. Gordon................ 52 President and Director
John S. Simmers................ 49 Vice President, Secretary and Director
MILES Z. GORDON is President of FN Equities, Inc. and President and Chief
Executive Officer of Financial Network Investment Corporation (FNIC), and has
held those positions since 1983. From 1979 through April 1983 he was President
of University Securities Corporation. In 1978, Mr. Gordon was engaged in the
private practice of law, and from 1973 through 1978, he was employed by the
Securities and Exchange Commission. He presently serves as Chairman of the
Securities Industry Association Independent Contractor Firms Committee. Mr.
Gordon was also Chairman and a member of the NASD District Business Conduct
Committee and a former member of the NASD Board of Governors. He is past
president of the California Syndication Forum and has also served on several
committees for the Securities Industry Association.
JOHN S. SIMMERS is Vice President and Secretary of FN Equities, Inc. and
Executive Vice President and Chief Operating Officer of Financial Network
Investment Corporation and has held those positions since 1983. From June 1980
through April 1983, he was Executive Vice President of University Securities
Corporation, Vice President of University Capital Corporation and Vice President
of University Asset Management Group. From 1974 through May 1980, he was
employed by the National Association of Securities Dealers.
90
97
BENEFICIAL OWNERSHIP
Security ownership of management in NCP-Six as of September 30, 2000 is as
follows:
PERCENT OF AMOUNT AND NATURE OF
NAME AND ADDRESS OF BENEFICIAL OWNER TITLE OF CLASS BENEFICIAL OWNERSHIP
- ------------------------------------ -------------- --------------------
Northland Communications Corporation General Partner's Interest (See Note A)
1201 Third Avenue (See Note A)
Suite 3600
Seattle, WA 98101
FN Equities Joint Venture General Partner's Interest (See Note B)
2780 Skypark Dr. (See Note B)
Suite 300
Torrance, CA 90505
- -------------------------
Note A: Northland Communications Corporation has a 1% interest in NCP-Six, which
increases to a 20% interest in NCP-Six when NCP-Six's limited partners
have received 100% return of their aggregate capital contributions. The
natural person who exercises voting and/or investment control over these
interests is John S. Whetzell.
Note B: FN Equities Joint Venture has no interest in NCP-Six until NCP-Six's
limited partners have received 100% return of their aggregate capital
contributions, at which time FN Equities Joint Venture will have a 5%
interest in NCP-Six. The natural person who exercises voting and/or
investment control over these interests is John S. Simmers.
CHANGES IN CONTROL
Northland Communications Corporation has pledged its ownership interest as
managing general partner of NCP-Six to NCP-Six's lenders as collateral pursuant
to the terms of the senior credit facility agreement between NCP-Six and its
syndicated group of lenders, led by First Union National Bank as administrative
agent.
91
98
FINANCIAL STATEMENTS
Included with this proxy statement, starting on the following page, are
NCP-Six's audited financial statements for fiscal years ending as of December
31, 2000, 1999 and 1998. Financial statements for prior years and periods have
previously been distributed to the limited partners on an ongoing basis.
If a limited partner desires any additional information regarding financial
statements, please contact the managing general partner.
92
99
NORTHLAND CABLE PROPERTIES SIX LIMITED PARTNERSHIP
AUDITED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDING AS OF DECEMBER 31, 2000, AND 1999
TOGETHER WITH AUDITORS' REPORT
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of
Northland Cable Properties Six Limited Partnership:
We have audited the accompanying balance sheets of Northland Cable
Properties Six Limited Partnership (a Washington limited partnership) as of
December 31, 2000 and 1999, and the related statements of operations, changes in
partners' deficit and cash flows for each of the three years in the period ended
December 31, 2000. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Northland Cable Properties
Six Limited Partnership as of December 31, 2000 and 1999, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States.
/s/ ARTHUR ANDERSEN LLP
Seattle, Washington
January 26, 2001
(Except for paragraph three
of note 10 for which the
date is March 14, 2001)
93
100
NORTHLAND CABLE PROPERTIES SIX LIMITED PARTNERSHIP
BALANCE SHEETS
DECEMBER 31, 2000 AND 1999
2000 1999
------------ ------------
ASSETS
Cash........................................................ $ 1,281,380 $ 556,962
Accounts receivable, including $14,109 and $24,885 due from
affiliates in 2000 and 1999, respectively................. 739,232 806,712
Prepaid expenses and other assets........................... 85,506 78,012
Investment in cable television properties:
Property and equipment.................................... 30,285,589 28,912,812
Less -- Accumulated depreciation.......................... (16,325,363) (14,639,656)
------------ ------------
13,960,226 14,273,156
Franchise agreements (net of accumulated amortization of
$15,438,907 and $13,309,803 in 2000 and 1999,
respectively)............................................. 11,788,486 13,917,591
Acquisition costs (net of accumulated amortization of
$154,766 and $107,709 in 2000 and 1999, respectively)..... 82,806 129,862
Loan fees and other intangibles (net of accumulated
amortization of $1,067,714 and $911,862 in 2000 and 1999,
respectively)............................................. 591,176 841,238
------------ ------------
Total investment in cable television properties...... 26,422,694 29,161,847
------------ ------------
Total assets......................................... $ 28,528,812 $ 30,603,533
============ ============
LIABILITIES AND PARTNERS' DEFICIT
Liabilities:
Accounts payable.......................................... $ 188,372 $ 607,156
Other current liabilities................................. 1,109,212 719,404
Due to general partner and affiliates..................... 35,458 46,388
Deposits.................................................. 29,590 35,422
Subscriber prepayments.................................... 460,038 412,628
Note payable.............................................. 28,215,281 28,965,281
------------ ------------
Total liabilities.................................... 30,037,951 30,786,279
------------ ------------
Commitments and Contingencies (Note 8)
Partners' Deficit:
General partners --
Contributed capital, net............................... (37,565) (37,565)
Accumulated deficit.................................... (104,541) (91,277)
------------ ------------
(142,106) (128,842)
------------ ------------
Limited partners --
Contributed capital, net -- 29,784 units in 2000 and
1999................................................. 8,982,444 8,982,444
Accumulated deficit.................................... (10,349,477) (9,036,348)
------------ ------------
(1,367,033) (53,904)
------------ ------------
Total liabilities and partners' deficit.............. $ 28,528,812 $ 30,603,533
============ ============
The accompanying notes are an integral part of these balance sheets.
94
101
NORTHLAND CABLE PROPERTIES SIX LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
2000 1999 1998
----------- ----------- -----------
REVENUE............................................. $15,221,887 $15,005,218 $14,746,766
----------- ----------- -----------
Expenses:
Operating (including $270,067, $286,365 and
$285,212, net, paid to affiliates in 2000, 1999
and 1998, respectively)........................ 1,161,419 1,320,255 1,262,672
General and administrative (including $1,505,136,
$1,575,500 and $1,632,936, net, paid to
affiliates in 2000, 1999 and 1998,
respectively).................................. 4,035,555 4,064,866 3,790,975
Programming (including $95,703, $233,163 and
$241,521, net, paid to affiliates in 2000, 1999
and 1998, respectively)........................ 3,968,492 3,915,701 3,784,358
Depreciation and Amortization Expense............. 4,468,532 4,392,073 4,287,623
----------- ----------- -----------
Operating income............................... 1,587,889 1,312,323 1,621,138
Other Income (Expense):
Interest income................................... 45,351 26,668 17,932
Interest expense.................................. (2,495,892) (2,379,744) (2,566,743)
(Loss) gain on disposal of assets................. (266,933) 1,330,533 (229,940)
Amortization of loan fees and other............... (196,808) (190,924) (211,988)
----------- ----------- -----------
Net (loss) income.............................. $(1,326,393) $ 98,856 $(1,369,601)
=========== =========== ===========
Allocation of Net (Loss) Income:
General partners.................................. $ (13,264) $ 989 $ (13,696)
=========== =========== ===========
Limited partners.................................. $(1,313,129) $ 97,867 $(1,355,905)
=========== =========== ===========
Net (Loss) Income Per Limited Partnership Unit...... $ (44) $ 3 $ (46)
=========== =========== ===========
The accompanying notes are an integral part of these statements.
95
102
NORTHLAND CABLE PROPERTIES SIX LIMITED PARTNERSHIP
STATEMENTS OF CHANGES IN PARTNERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
GENERAL LIMITED
PARTNERS PARTNERS TOTAL
--------- ----------- -----------
BALANCE, December 31, 1997........................... $(116,135) $ 1,212,134 $ 1,095,999
Repurchase of limited partnership units............ -- (4,000) (4,000)
Net loss........................................... (13,696) (1,355,905) (1,369,601)
--------- ----------- -----------
BALANCE, December 31, 1998........................... (129,831) (147,771) (277,602)
Repurchase of limited partnership units............ -- (4,000) (4,000)
Net income......................................... 989 97,867 98,856
--------- ----------- -----------
BALANCE, December 31, 1999........................... (128,842) (53,904) (182,746)
Net loss........................................... (13,264) (1,313,129) (1,326,393)
--------- ----------- -----------
BALANCE, December 31, 2000........................... $(142,106) $(1,367,033) $(1,509,139)
========= =========== ===========
The accompanying notes are an integral part of these statements.
96
103
NORTHLAND CABLE PROPERTIES SIX LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
2000 1999 1998
----------- ----------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income................................ $(1,326,393) $ 98,856 $ (1,369,601)
Adjustments to reconcile net (loss) income to net
cash provided by operating activities:
Depreciation and amortization expense......... 4,468,532 4,392,073 4,287,623
Amortization of loan costs.................... 196,808 190,923 182,859
Loss (gain) on disposal of assets............. 266,933 (1,330,533) 229,940
Changes in certain assets and liabilities
Accounts receivable........................... (122,520) 131,092 (278,190)
Prepaid expenses and other assets............. (7,494) (120,998) 153,371
Accounts payable and other current
liabilities................................. (28,976) 144,817 224,658
Due to general partner and affiliates......... (10,930) (121,243) (12,090)
Deposits...................................... (5,832) (21,635) (35,036)
Subscriber prepayments........................ 47,410 (82,549) 85,225
----------- ----------- ------------
Net cash provided by operating
activities............................. 3,477,538 3,280,803 3,468,759
----------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment............... (2,054,270) (2,659,141) (2,820,143)
Acquisition of cable system...................... -- -- (20,500,000)
Proceeds from disposal of assets................. 202,700 1,726,026 500
Purchase of intangibles.......................... (151,550) (59,887) (77,199)
----------- ----------- ------------
Net cash used in investing activities.... (2,003,120) (993,002) (23,396,842)
----------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable...................... -- -- 20,473,427
Principal payments on notes payable.............. (750,000) (2,407,567) --
Repurchase of limited partnership units.......... -- (4,000) (4,000)
Loan fees and other costs........................ -- (26,179) (7,471)
----------- ----------- ------------
Net cash (used in) provided by financing
activities............................. (750,000) (2,437,746) 20,461,956
----------- ----------- ------------
Increase (Decrease) in Cash........................ 724,418 (149,945) 533,873
Cash, beginning of year............................ 556,962 706,907 173,034
----------- ----------- ------------
Cash, end of year.................................. $ 1,281,380 $ 556,962 $ 706,907
=========== =========== ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest........... $ 2,489,075 $ 2,373,440 $ 2,562,492
=========== =========== ============
The accompanying notes are an integral part of these statements.
97
104
NORTHLAND CABLE PROPERTIES SIX LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2000
1. ORGANIZATION AND PARTNERS' INTERESTS:
Formation and Business
Northland Cable Properties Six Limited Partnership (the Partnership), a
Washington limited partnership, was formed on January 22, 1986. The Partnership
was formed to acquire, develop and operate cable television systems. The
Partnership began operations on November 3, 1986 by acquiring a cable television
system in Mississippi. Subsequently, additional cable television systems were
acquired in Mississippi, North Carolina and South Carolina. The Partnership has
35 nonexclusive franchises to operate cable systems for periods, which will
expire at various dates through 2017.
Northland Communications Corporation is the Managing General Partner (the
General Partner or Northland) of the Partnership. Certain affiliates of the
Partnership also own and operate other cable television systems. In addition,
the General Partner manages cable television systems for other limited
partnerships for which it is General Partner.
FN Equities Joint Venture, a California joint venture, is the
Administrative General Partner of the Partnership.
Contributed Capital, Commissions and Offering Costs
The capitalization of the Partnership is set forth in the accompanying
statements of changes in partners' deficit. No limited partner is obligated to
make any additional contribution.
The general partners purchased their 1% interest in the Partnership by
contributing $1,000 to Partnership capital.
Pursuant to the Partnership Agreement, brokerage fees paid to an affiliate
of the Administrative General Partner and other offering costs paid to the
General Partner were recorded as a reduction of limited partners' capital. The
Administrative General Partner received a fee for providing certain
administrative services to the Partnership.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Property and Equipment
Property and equipment are stated at cost. Replacements, renewals and
improvements are capitalized. Maintenance and repairs are charged to expense as
incurred.
Depreciation of property and equipment is provided using the straight-line
method over the following estimated service lives:
Buildings................................................... 20 years
Distribution plant.......................................... 10 years
Other equipment and leasehold improvements.................. 5 - 20 years
The Partnership periodically reviews the carrying value of its long-lived
assets, including property, equipment and intangible assets, whenever events or
changes in circumstances indicate that the carrying value may not be
recoverable.
Allocation of Cost of Purchased Cable Television Systems
The Partnership allocated the total contract purchase price of cable
television systems acquired as follows: first, to the estimated fair value of
net tangible assets acquired; then, to the franchise and other determinable
intangible costs; then any excess is allocated to goodwill.
98
105
NORTHLAND CABLE PROPERTIES SIX LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
Intangible Assets
Costs assigned to franchise agreements, loan fees, acquisition costs and
other intangibles are being amortized using the straight-line method over the
following estimated useful lives:
Franchise agreements........................................ 10 - 20 years
Acquisition costs........................................... 5 years
Loan fees and other intangibles............................. 1 - 10 years
Revenue Recognition
Cable television service revenue, including service maintenance, is
recognized in the month service is provided to customers. Installation revenue
is recognized to the extent of direct selling costs when the installation is
complete. Advance payments on cable services to be rendered are recorded as
subscriber prepayments. Revenues resulting from the sale of local spot
advertising are recognized when the related advertisements or commercials appear
before the public. Local spot advertising revenues earned were $581,280,
$507,932 and $456,007, respectively, in 2000, 1999 and 1998.
Derivatives
The Partnership has only limited involvement with derivative financial
instruments and does not use them for trading purposes. They are used to manage
well-defined interest rate risks. The Partnership periodically enters into
interest rate swap agreements with major banks or financial institutions
(typically its bank) in which the Partnership pays a fixed rate and receives a
floating rate with the interest payments being calculated on a notional amount.
Gains or losses associated with changes in fair values of these swaps and the
underlying notional principal amounts are deferred and recognized against
interest expense over the terms of the agreement in the Partnership's statement
of operations.
Recently Issued Accounting Pronouncements
Statement of Financial Accounting Standards (SFAS) No. 133 -- In June 1998,
the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," and in June 2000 issued SFAS
138, "Accounting for Certain Derivative Instruments and Hedging Activities," an
amendment of SFAS 133. The statement establishes accounting and reporting
standards requiring that every derivative instrument (including certain
derivative instruments embedded in other contracts) be recorded in the balance
sheet as either an asset or liability measured at its fair value. The statement
requires that changes in the derivative's fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. Special accounting
for qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the statement of operations, and requires that a
company must formally document, designate, and assess the effectiveness of
transactions that are subject to hedge accounting.
Pursuant to SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities -- Deferral of the Effective Date of FASB No. 133 -- an
Amendment to FASB Statement No. 133," the effective date of SFAS No. 133 has
been deferred until fiscal years beginning after January 15, 2000. SFAS No. 133
cannot be applied retroactively. SFAS No. 133 must be applied to (a) derivative
instruments and (b) certain derivative instruments embedded in hybrid contracts
that were issued, acquired, or substantively modified after December 31, 1998
(and, at the company's election, before January 1, 1999).
The Partnership had no outstanding interest rate swaps or other derivative
financial instruments at December 31, 2000.
99
106
NORTHLAND CABLE PROPERTIES SIX LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
Estimates Used in Financial Statement Presentation
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
3. TRANSACTIONS WITH GENERAL PARTNER AND AFFILIATES:
Management Fees
The General Partner receives a fee for managing the Partnership equal to 6%
of the gross revenues of the Partnership, excluding revenues from the sale of
cable television systems or franchises. The amount of management fees charged by
the General Partner was $913,313, $900,313 and $884,806 in 2000, 1999 and 1998,
respectively.
Income Allocation
All items of income, loss, deduction and credit are allocated 99% to the
limited partners and 1% to the general partners until the limited partners have
received aggregate cash distributions in an amount equal to aggregate capital
contributions. Thereafter, the general partners receive 25% and the limited
partners are allocated 75% of partnership income and losses. Prior to the
general partners receiving a distribution in any year, the limited partners must
receive distributions equal to at least 50% of their allocable share of net
income for such year, based on projections by the Managing General Partner of
the net income of the Partnership for the year. If cash distributions to the
general partners are deferred because of this 50% limitation, those deferred
cash distributions will be paid to the general partners in subsequent years or
upon liquidation of the Partnership. Any distributions other than from cash
flow, such as from the sale or refinancing of a system or upon dissolution of
the Partnership, will be determined according to contractual stipulations in the
Partnership Agreement.
The limited partners' total initial contributions to capital were
$15,000,000 ($500 per partnership unit). As of December 31, 2000, $3,817,997
($127.50 per partnership unit) has been distributed to the limited partners, and
the Partnership has repurchased $100,475 of limited partnership units (173 units
at $500 per unit and 43 units at $325 per unit).
Reimbursements
The General Partner provides or causes to be provided certain centralized
services to the Partnership and other affiliated entities. The General Partner
is entitled to reimbursement from the Partnership for various expenses incurred
by it or its affiliates on behalf of the Partnership allocable to its management
of the Partnership, including travel expenses, pole and site rental, lease
payments, legal expenses, billing expenses, insurance, governmental fees and
licenses, headquarters' supplies and expenses, pay television expenses,
equipment and vehicle charges, operating salaries and expenses, administrative
salaries and expenses, postage and office maintenance.
The amounts billed to the Partnership are based on costs incurred by
affiliates in rendering the services. The costs of certain services are charged
directly to the Partnership, based upon the personnel time spent by the
employees rendering the service. The cost of other services is allocated to the
Partnership and affiliates based upon relative size and revenue. Management
believes that the methods used to allocate services to the Partnership are
reasonable. Amounts charged for these services were $769,480, $719,456 and
$663,191 for 2000, 1999 and 1998, respectively.
100
107
NORTHLAND CABLE PROPERTIES SIX LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
In 2000, 1999 and 1998, the Partnership paid installation charges and
maintenance fees for billing system support provided by an affiliate, amounting
to $75,798, $73,965 and $79,590, respectively.
The Partnership has entered into operating management agreements with
affiliates managed by the General Partner. Under the terms of these agreements,
the Partnership or an affiliate serves as the executive managing agent for
certain cable television systems and is reimbursed for certain operating and
administrative expenses. The Partnership paid $25,788, $160,722 and $290,147,
net, under the terms of these agreements during 2000, 1999 and 1998,
respectively.
The Partnership pays monthly program license fees to Northland Cable News,
Inc. (NCN), an affiliate of the General Partner, for the rights to distribute
programming developed and produced by NCN. Total license fees paid to NCN during
2000, 1999 and 1998 were $0, $178,797 and $165,147, respectively.
Cable Ad Concepts, Inc. (CAC), an affiliate of the General Partner, was
formed in 1993 and began operations in 1994. CAC was organized to assist in the
development of local advertising markets and management and training of local
sales staff. CAC billed the Partnership $85,895, $69,752 and $57,611 in 2000,
1999 and 1998, respectively, for these services.
Due to General Partner and Affiliates
DECEMBER 31,
------------------
2000 1999
------- -------
Reimbursable operating costs and other................... 25,534 12,417
Other amounts due to affiliates, net..................... 9,924 33,971
------- -------
$35,458 $46,388
======= =======
4. PROPERTY AND EQUIPMENT:
DECEMBER 31,
--------------------------
2000 1999
----------- -----------
Land and buildings................................ $ 880,611 $ 858,198
Distribution plant................................ 27,278,014 26,230,081
Other equipment................................... 1,775,523 1,738,465
Leasehold improvements............................ 43,020 40,550
Construction in progress.......................... 308,421 45,518
----------- -----------
$30,285,589 $28,912,812
=========== ===========
5. OTHER CURRENT LIABILITIES:
DECEMBER 31,
----------------------
2000 1999
---------- --------
Programmer license fees.............................. $ 317,339 $ 52,159
Accrued property taxes............................... 263,174 133,728
Accrued franchise fees............................... 261,775 253,003
Other................................................ 266,924 280,514
---------- --------
$1,109,212 $719,404
========== ========
101
108
NORTHLAND CABLE PROPERTIES SIX LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
6. NOTE PAYABLE:
The Partnership's note payable consisted of a revolving credit and term
loan agreement, collateralized by a first lien position on all present and
future assets of the Partnership. The note's fair value is approximate to its
book value. Interest rates vary based on certain financial covenants, and is
currently 8.50%. The maturity of the note has been extended to June 30, 2001 at
which time it is due in full.
Under the terms of the revolving credit and term loan agreement, the
Partnership has agreed to restrictive covenants which require the maintenance of
certain ratios, including an Annual Operating Cash Flow to Interest Expense
Ratio greater than 2.25 to 1, and a Senior Debt to Annualized Operating Cash
Flow Ratio of no more than 5.25 to 1, among others. The General Partner submits
quarterly debt compliance reports to the Partnership's creditor under this
agreement. As of December 31, 2000, the Partnership was in compliance with the
terms of the loan agreement.
7. INCOME TAXES:
Income taxes payable have not been recorded in the accompanying financial
statements because they are obligations of the partners. The federal and state
income tax returns of the Partnership are prepared and filed by the General
Partner.
The tax returns, the qualification of the Partnership as such for tax
purposes, and the amount of distributable partnership income or loss are subject
to examination by federal and state taxing authorities. If such examinations
result in changes with respect to the Partnership's qualification or in changes
with respect to the income or loss, the tax liability of the partners would
likely be changed accordingly.
There was no taxable income to the limited partners in any of the three
years in the periods ended December 31, 2000. Generally, subject to the
allocation procedures discussed in the following paragraph, taxable income to
the limited partners is different from that reported in the statements of
operations principally due to differences in depreciation and amortization
expense allowed for tax purposes and the amount recognizable under generally
accepted accounting principles. Traditionally, there are no other significant
differences between taxable income and net income reported in the statements of
operations.
The Partnership agreement provides that tax losses may not be allocated to
the Limited Partners if such loss allocation would create a deficit in the
Limited Partners' Capital Account. Such excess losses are reallocated to the
General Partner ("Reallocated Limited Partner Losses"). In general, in
subsequent years, 100% of the Partnership's net income is allocated to the
General Partner until the General Partner has been allocated net income in
amounts equal to the Reallocated Limited Partner Losses.
In general, under current federal income tax laws, a partner's allocated
share of tax losses from a partnership is allowed as a deduction on their
individual income tax return only to the extent of the partner's adjusted basis
in their partnership interest at the end of the tax year. Any excess losses over
adjusted basis may be carried forward to future tax years and are allowed as a
deduction to the extent the partner has an increase in his adjusted basis in the
Partnership through either an allocation of partnership income or additional
capital contributions to the Partnership.
In addition, the current tax law does not allow a taxpayer to use losses
from a business activity in which they do not materially participate (a "passive
activity," e.g., a limited partner in a limited partnership) to offset other
income such as salary, active business income, dividends, interest, royalties
and capital gains. However, such losses can be used to offset income from other
passive activities. In addition, disallowed losses can be carried forward
indefinitely to offset future income from passive activities. Disallowed losses
can be used in full when the taxpayer recognizes gain or loss upon the
disposition of their entire interest in the passive activity.
102
109
NORTHLAND CABLE PROPERTIES SIX LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
8. COMMITMENTS AND CONTINGENCIES:
Lease Arrangements
The Partnership leases certain tower sites, office facilities and pole
attachments under leases accounted for as operating leases. Rental expense
included in operations amounted to $231,248, $214,581 and $209,627 in 2000, 1999
and 1998, respectively. Minimum lease payments through the end of the lease
terms are as follows:
2001....................................................... $12,431
2002....................................................... 3,133
2003....................................................... 1,083
2004....................................................... 283
2005....................................................... 283
Thereafter................................................. 1,671
-------
$18,884
=======
Effects of Regulation
On February 8, 1996, the Telecommunications Act of 1996 (the 1996 Act) was
enacted. This act dramatically changed federal telecommunications laws and the
future competitiveness of the industry. Many of the changes called for by the
1996 Act will not take effect until the Federal Communications Commission (FCC)
issues new regulations which, in some cases, may not be completed for a few
years. Because of this, the full impact of the 1996 Act on the Partnership's
operations cannot be determined at this time. A summary of the provisions
affecting the cable television industry, more specifically those affecting the
Partnership's operations, follows.
Cable Programming Service Tier Regulation. FCC regulation of rates for
cable programming service tiers has been eliminated for small cable systems
owned by small companies. Small cable systems are those having 50,000 or fewer
subscribers which are owned by companies with fewer than 1% of national cable
subscribers (approximately 600,000) and having no more than $250 million in
annual revenue. The Partnership qualifies as a small cable company and all of
the Partnership's cable systems qualify as small cable systems. Basic tier rates
remain subject to regulations by the local franchising authority under most
circumstances until effective competition exists. The 1996 Act expands the
definition of effective competition to include the offering of video programming
services directly to subscribers in a franchised area served by a local
telephone exchange carrier, its affiliates or any multichannel video programming
distributor which uses the facilities of the local exchange carrier. The FCC has
not yet determined the penetration criteria that will trigger the presence of
effective competition under these circumstances.
Telephone Companies. The 1996 Act allows telephone companies to offer
video programming services directly to customers in their service areas
immediately upon enactment. They may provide video programming as a cable
operator fully subject to any provision of the 1996 Act, or a radio-based
multichannel programming distributor not subject to any provisions of the 1996
Act, or through nonfranchised "open video systems" offering nondiscriminatory
capacity to unaffiliated programmers, subject to select provisions of the 1996
Act. Although management's opinion is that the probability of competition from
telephone companies in rural areas is unlikely in the near future, there are no
assurances that such competition will not materialize.
The 1996 Act encompasses many other aspects of providing cable television
service including prices for equipment, discounting rates to multiple dwelling
units, lifting of anti-trafficking restrictions, cable-telephone cross ownership
provisions, pole attachment rate formulas, rate uniformity, program access,
scrambling and censoring of Public, Educational and Governmental and leased
access channels.
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NORTHLAND CABLE PROPERTIES SIX LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
Self-Insurance
The Partnership began self-insuring for aerial and underground plant in
1996. Beginning in 1997, the Partnership began making quarterly contributions
into an insurance fund maintained by an affiliate which covers all Northland
entities and defrays a portion of any loss should the Partnership be faced with
a significant uninsured loss. To the extent the Partnership's losses exceed the
fund's balance, the Partnership absorbs any such loss. If the Partnership were
to sustain a material uninsured loss, such reserves could be insufficient to
fully fund such a loss. The capital cost of replacing such equipment and
physical plant, could have a material adverse effect on the Partnership, its
financial condition, prospects and debt service ability.
Amounts paid to the affiliate, which maintains the fund for the Partnership
and its affiliates, are expensed as incurred and are included in the statements
of operations. To the extent a loss has been incurred related to risks that are
self-insured, the Partnership records an expense and an associated liability for
the amount of the loss, net of any amounts to be drawn from the fund. For 2000,
1999 and 1998, respectively, the Partnership was charged $19,456, $20,197 and
$20,878 by the fund. As of December 31, 2000, the fund had a balance of
$509,135.
9. ACQUISITION OF SYSTEMS AND DISPOSITION OF ASSETS:
On January 2, 1998, the Partnership purchased cable television systems
located in and around the communities of Allendale, Bamberg, Barnwell and
Bennettsville, all in the state of South Carolina. The purchase price of these
systems was $20,500,000. The systems are operated from four headends and serve
11,200 subscribers.
The Partnership borrowed an additional $20,473,427 under an amended and
restated revolving credit and term loan agreement with its lender to finance the
acquisition of the South Carolina cable systems.
On April 30, 1999, the Partnership sold cable television systems serving
approximately 1,400 subscribers in and around the communities of Sandersville,
Heidelberg and Laurel, Mississippi. The system was sold at a sales price of
$1,900,000 of which the Partnership received $1,710,000. The remaining balance
of $190,000 was held in escrow for one year from the date of sale. The
Partnership used net proceeds of $1,540,000 to pay down the existing bank debt.
Pro Forma operating results of the Partnership for 1999 and 1998, assuming
the disposition described above had been completed as of the beginning of 1998,
follows:
FOR THE YEAR ENDED
DECEMBER 31,
--------------------------
1999 1998
----------- -----------
(UNAUDITED) (UNAUDITED)
Revenue........................................... $14,183,800 $14,183,431
=========== ===========
Net loss.......................................... $(1,482,272) $(1,271,034)
=========== ===========
Net loss per limited partnership unit............. $ (50) $ (43)
=========== ===========
10. SUBSEQUENT EVENT:
The Partnership has filed a Preliminary Proxy Statement (Proxy) with the
Securities and Exchange Commission (SEC) which solicits votes for two separate
proposals. Upon clearance from the SEC, the Proxy will be delivered to the
limited partners for their vote. A vote of more than 50% of the outstanding
limited partnership units is required to approve each proposal. The first
proposal is to extend the term of the Partnership for six years until December
31, 2007. The second proposal will provide authority to sell all of its
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NORTHLAND CABLE PROPERTIES SIX LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 2000
existing assets, excluding the Bennettsville system, which is being sold to a
third-party in a separate transaction, to the Managing General Partner, or its
affiliates, for an aggregate price of $62,250,000. The Partnership's current
revolving credit and turn loan facility matures on June 30, 2001. Should the
Partnership continue its operations beyond this date, an amendment to the
existing loan agreement would be required to extend the loan maturity and revise
certain financial covenants. In the event the sale is not approved, management
believes it will be able to renegotiate the terms of the note payable, at a cost
and on terms that would not adversely affect the Partnership's ability to
continue operating as a going concern, as long as the limited partners have
approved the extension of the partnership term. It is management's opinion that
the likelihood that both of these proposals would not be approved by a majority
of the limited partners is remote.
Once the sale proposal is approved, the financial statement disclosure
thereafter will be on the liquidation basis.
Per a letter dated March 14, 2001 the third party disclosed above revoked
their bid to purchase all existing assets of the Bennettsville system. As the
general partner submitted the second highest bid for the Bennettsville assets,
the general partner, or its affiliates, will purchase those assets for an
aggregate purchase price of $7,950,000.
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EXHIBIT A
PROXY CARD
NORTHLAND CABLE PROPERTIES SIX LIMITED PARTNERSHIP
The undersigned hereby acknowledges receipt of the Notice of Special
Meeting of limited partners of NORTHLAND CABLE PROPERTIES SIX LIMITED
PARTNERSHIP ("NCP-Six") and accompanying Proxy Statement, each dated April 15,
2001 ("Proxy Materials"). The undersigned appoints John S. Whetzell and Richard
I. Clark, or either of them, as proxies, each with full power to appoint his
substitute. The undersigned represents that he or she holds of record as of
December 31, 2000 the number of units of limited partnership interest in NCP-Six
set forth below and authorizes the proxies to represent and to vote, as
designated below, all of such interest at the special meeting of limited
partners to be held on May 31, 2001 and at any postponements or adjournments
thereof. THIS PROXY IS BEING SOLICITED ON BEHALF OF THE MANAGING GENERAL PARTNER
OF NCP-SIX.
The undersigned directs the proxies to vote on the following proposals as
follows:
PROPOSED AMENDMENT NO. 1
To authorize the extension of the term of NCP-Six for an additional six
years so that its current expiration date of December 31, 2001 is changed to a
future expiration date of December 31, 2007 as described in the Proxy Materials.
APPROVE [ ] DISAPPROVE [ ] ABSTAIN [ ]
PROPOSED AMENDMENT NO. 2
To authorize NCP-Six and its general partners to consummate the Proposed
Transaction as described in the Proxy Materials and to take any and all steps
necessary to complete such transaction.
APPROVE [ ] DISAPPROVE [ ] ABSTAIN [ ]
This proxy will be voted as directed by the undersigned. The
above-referenced proposals are independent of one another. Therefore, a vote for
or against one of the two proposals does not dictate how a limited partner must
vote for the other proposal. Notwithstanding, limited partners may not vote for
or against individual elements of either proposal, but must vote either for or
against the proposed amendment in its entirety. IF THIS PROXY IS EXECUTED AND
RETURNED AND NO DIRECTION IS INDICATED, THIS PROXY WILL BE VOTED TO APPROVE BOTH
OF THE ABOVE-REFERENCED PROPOSALS. SIMILARLY, IF THIS PROXY IS EXECUTED AND
RETURNED AND DIRECTION IS INDICATED AS TO ONLY ONE OF THE TWO PROPOSALS, THIS
PROXY WILL BE VOTED TO APPROVE THE PROPOSAL FOR WHICH NO DIRECTION IS INDICATED.
When limited partner interests are held by joint tenants, both should sign.
When signing as attorney, executor, administrator, trustee or guardian, give
full title as such. A corporation should sign in full corporate name by its
president or other authorized officer, and a partnership should sign in full
partnership name by its authorized representative.
Dated: , 2001
Number of Limited Partnership $500 Units Held: ____________
X
--------------------------------------
(SIGNATURE)
X
--------------------------------------
(SIGNATURE, IF HELD JOINTLY)
PLEASE COMPLETE, SIGN, DATE AND RETURN PROMPTLY
IN THE ENCLOSED ENVELOPE.
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EXHIBIT B
AMENDED AND RESTATED
CERTIFICATE AND AGREEMENT OF LIMITED PARTNERSHIP
OF
NORTHLAND CABLE PROPERTIES SIX LIMITED PARTNERSHIP
THIS AMENDED AND RESTATED CERTIFICATE AND AGREEMENT OF LIMITED PARTNERSHIP
(the "Agreement") is made and entered into by and between NORTHLAND
COMMUNICATIONS CORPORATION ("Northland"), a Washington corporation, FN EQUITIES
JOINT VENTURE ("FNEJV"), a California joint venture (Northland and FNEJV
collectively referred to herein as the "General Partners"), RICHARD I. CLARK
(the "Original Limited Partner"), and remaining parties who now or hereafter
from time to time are accepted by the Managing General Partner as Limited
Partners (the "Limited Partners") of NORTHLAND CABLE PROPERTIES SIX LIMITED
PARTNERSHIP (the "Partnership"). Northland shall be the managing general partner
("Managing General Partner") and FNEJV shall be the administrative general
partner ("Administrative General Partner") of the Partnership. This Agreement
amends and restates the Certificate and Agreement of Limited Partnership of
Northland Cable Properties Six Limited Partnership filed with the office of the
Secretary of State of the State of Washington on January 22, 1986, as amended as
of the date hereof.
The Partnership is formed pursuant to the Washington Uniform Limited
Partnership Act.
1. Formation of Limited Partnership. The parties do hereby agree to operate
as a limited partnership pursuant to the Washington Uniform Limited Partnership
Act on the terms and conditions set forth in this Agreement. The General
Partners will cause this Agreement to be duly recorded forthwith in the office
of the Secretary of the State of Washington, in accordance with the provisions
of the Washington Uniform Limited Partnership Act, and will qualify the
Partnership as a limited partnership in other jurisdictions, as required, where
the Partnership shall do business. The General Partners shall not be required to
deliver or -- mail a copy of the "filed" Agreement to the Limited Partners.
2. Name. The name under which the Partnership business shall be con-ducted
is NORTHLAND CABLE PROPERTIES SIX LIMITED PARTNERSHIP. The General Partners will
cause, wherever necessary or appropriate, the execution of a fictitious business
name statement and cause such statement to be published and filed where
appropriate.
3. Office and Principal Place of Business. The office and principal place
of business for the Partnership shall be 3500 One Union Square Building,
Seattle, Washington 98101, or at such other place or places as the Managing
General Partner may from time to time determine. The Managing General Partner
may establish and maintain such other offices and places of business of the
Partnership, either in the state of Washington or elsewhere, as the Managing
General Partner may from time to time determine.
4. Agent for Service. The agent of the Partnership for service of process
in the state of Washington shall be Northland Communications Corporation, a
Washington corporation having its principal place of business at 3500 One Union
Square Building, Seattle, Washington 98101. The agent of the Partnership for
service of process in any other state requiring an agent shall be as designated
by the Managing General Partner.
5. Purpose and Nature of Business. The purpose and primary business of the
Partnership is (a) to acquire, develop and operate cable television systems in
the United States, (b) to provide any or all services and products related to
that business, (c) to own, lease or otherwise acquire, encumber and dispose of
any or all assets and services related to such business, and (d) to do any other
act necessary or convenient in connection therewith.
6. Definitions. The defined terms used in this Agreement shall, unless the
context otherwise requires, have the meanings specified in this Article 6.
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"Administrative General Partner" means FN Equities Joint Venture, or its
successors as designated in accordance with the terms of this Agreement.
"Affiliate" of another person means (a) any person directly or indirectly
owning, controlling, or holding with power to vote 10% or more of the
outstanding voting securities of such other person; (b) any person 10% or more
of whose outstanding voting securities are directly or indirectly owned,
controlled, or held with power to vote, by such other person; (c) any person
directly or indirectly controlling such other person; (d) any officer, director
or partner of such other person; and (e) if such other person is an officer,
director or partner, any company for which such person acts in any such
capacity.
"Agreement" means this Amended and Restated Certificate and Agreement of
Limited Partnership, as amended, modified or supplemented from time to time.
"Capital Account" means the account established and maintained on the books
of the Partnership for each Partner pursuant to Article 10.
"Capital Contribution" means all cash actually contributed (but not loans)
to the Partnership by a Partner.
"Cash Available for Distribution" means cash funds of the Partnership in
excess of amounts reasonably required for the repayment of Partnership
borrowings, interest thereon, other liabilities, Partnership working capital and
reserves which the Managing General Partner deems to be reasonably required or
appropriate for the proper operation of the business of the Partnership.
"Cash Distributions" shall include cash and property, at its net fair
market value, distributed to the Partners.
"Cash Flow" means Gross Revenues for a given period less all operating and
other expenses actually incurred and related to the Gross Revenues for such
period.
"Code" means Internal Revenue Code of 1954, as amended.
"General Partners" means Northland Communications Corporation, a Washington
corporation; FN Equities Joint Venture, a California joint venture; and any
other person or entity which is subsequently admitted to the Partnership as a
General Partner in accordance with the terms of this Agreement.
"Gross Revenues" means all revenues and receipts actually received from the
service of providing secondary transmissions of primary broadcast transmitters
and from related activities including, but not limited to the full amount of
monthly (or other periodic) service fees for any and all basic and pay services
or tiers of basic and pay services, additional set fees, converter fees,
installation (including connection, relocation, disconnection or reconnection)
fees, separate charges for security, alarm or facsimile services, charges for
late payments, charges for program origination services and advertising
revenues.
"Limited Partner" means any person or entity accepted by the General
Partners as a limited partner of the Partnership pursuant to the terms of this
Agreement and who is named on Schedule A hereto.
"Majority Vote of the Limited Partners" means a vote by Limited Partners
who collectively hold of record more than 50% of the Units.
"Managing General Partner" means Northland Communications Corporation, or
its successor as duly designated in accordance with the terms of this Agreement.
"Net Income and Net Losses" means the amount of the aggregate Partnership
taxable income or loss (including items requiring separate computation under
Section 702 of the Code) as determined for federal income tax purposes.
"Noncash Additions" means the sum of all increases to a Partner's Capital
Account other than increases for the contribution of money or property to the
Partnership.
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"Noncash Reductions" means the sum of all reductions to a Partner's Capital
Account other than reductions for the distribution of cash or property to such
Partner.
"Offering and Organization Costs" means the costs of offering and marketing
the Units and organizing the Partnership (not including sales commissions or due
diligence fees), including printing costs and legal, accounting and other
professional fees incurred in connection with any offering documents and this
Agreement, and related filing and recordation costs, and the registration, or
application for exemption therefrom, of the Units under applicable federal and
state securities laws.
"Partners" means, collectively, the Limited Partners, as constituted from
time to time, and the General Partners.
"Partnership" means Northland Cable Properties Six Limited Partnership, a
Washington limited partnership.
"Substitute Limited Partner" means a transferee of a limited partnership
interest who has been admitted to the Partnership in accordance with the terms
of this Agreement.
"Systems" means, collectively, the cable television systems which will be
owned, directly or indirectly, by the Partnership.
"Units" means participation interests in the Partnership owned by Limited
Partners. Each Unit represents a $500 Capital Contribution.
7. Term of the Partnership. The Partnership commenced as of the date of
filing and recording the original certificate of limited partnership of the
Partnership and shall continue until the date of the first of the following
events:
(a) December 31, 2001; or
(b) Dissolution as provided in Article 16 of this Agreement.
8. Capital Contributions.
(a) Contributions by General Partners. The Managing General Partner shall
contribute $1,000 as the collective Capital Contribution of the General Partners
to the Partnership. The General Partners shall have no further obligation to
make any Capital Contributions to the Partnership, except as may be required by
paragraph (e) of Article 16.
(b) Contribution by Original Limited Partner. The Original Limited Partner
shall contribute $100 to the Partnership as his Capital Contribution. Upon
admission of additional Limited Partners, the Original Limited Partner shall
withdraw from the Partnership and his Capital Contribution shall then be
refunded to him; provided, however, that he may again become a Limited Partner
in accordance with the provisions of paragraph (d) below. Notwithstanding the
provisions of Articles 15 and 16 and other provisions of this Agreement to the
contrary, the interest of the Original Limited Partner, as such, in income,
gain, loss, deduction, credit distributions or capital shall not exceed one
percent of the total of any of such amount and the balance shall be allocated or
distributed to, or owned by, the General Partners.
(c) Offering and Organization Costs. The Managing General Partner, or any
agent thereof, is hereby authorized to take any and all actions as may in its
judgment be necessary or advisable in order to raise the capital authorized in
this Article, including, without limitation, the filing of such documents or
instruments as are necessary or advisable to claim exemption from the
registration requirements of federal or state securities laws, the registration
and/or qualification of the Units under federal and state securities laws, the
qualification of the Partnership as a foreign limited partnership in any
jurisdiction wherein the Partnership does business, the engagement of legal
counsel, accountants, or any other experts necessary for the preparation of any
documents required in connection with the Units, or the engagement of one or
more broker-dealers to assist with the offering of the Units. The Partnership
will pay all Offering and Organization Costs up to a maximum of 3.5% of the
aggregate Capital Contributions from Limited
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Partners. All Offering and Organization Costs in excess of 3.5% of aggregate
Capital Contributions from Limited Partners shall be borne by the General
Partners.
The Partnership shall also pay Financial Network Investment Corporation, an
Affiliate of the Administrative General Partner, a selling commission and due
diligence fee equal in the aggregate to 10.5% of aggregate Capital Contributions
from Limited Partners, provided, however, that no such commission or fee shall
be payable with respect to Units purchased by the Managing General Partner or
its Affiliates, officers, directors, employees or agents.
(d) Limited Partners. The Partnership shall offer 30,000 Units, at $500 per
Unit, to be subscribed for by the Limited Partners to be admitted subsequent to
the original formation of the Partnership. The minimum purchase is eight Units
($4,000). The Managing General Partner reserves the right, however, in its sole
discretion, to accept subscriptions for less than eight Units but not less than
four Units ($2,000) from Individual Retirement Accounts (IRAs) or HR-10 (Keogh)
plans. The Managing General Partner does not intend to accept subscriptions for
more than twenty percent (20%) of the Units from IRAs, Keogh plans or other
"tax-exempt entities", as defined in Section 168(j)(4) of the Code, or from any
pass-thru entities (as defined in Code Section 267(e)(2) in which a tax-exempt
entity has an interest. The General Partners may purchase Units of limited
partnership interest on the same basis as other investors and hold such Units as
a Limited Partner. Such Limited Partners as subscribe for Units shall be
admitted to the Partnership in accordance with paragraph (f) below upon the
conditions contained herein. No Limited Partners shall be admitted pursuant to
this paragraph (d) unless subscriptions for at least 2,000 Units have been
received and accepted by the Managing General Partner by July 31, 1987.
Limited Partners shall make their Capital Contributions to the Partnership
in cash at the time of subscription.
(e) Withdrawal of Capital Contributions. No Partner shall have the right to
withdraw or reduce the amount of his or her Capital Contribution, except to the
extent that any such withdrawal or reduction may be required or expressly
permitted by this Agreement. In addition, no part of any Capital Contribution
shall be withdrawn until all obligations and liabilities of the Partnership
(except such as may be due to the General Partners and to the Limited Partners
on account of their Capital Contributions) have been paid or unless, in the
opinion of the Managing General Partner, sufficient assets for the payment of
such obligations and liabilities have been set aside and designated for that
purpose.
(f) Acceptance of Subscriptions. Acceptance of each subscription for Units
shall be discretionary with the Managing General Partner, and the Managing
General Partner may reject any subscription for any reason it deems appropriate.
Upon acceptance of a Limited Partner's subscription and the release from the
escrow account of his or her subscription funds to the Partnership or the direct
deposit of such subscription funds in the Partnership's general business
account, the Managing General Partner shall file an amendment to this Agreement
in accordance with the Washington Uniform Limited Partnership Act together with
a list of the names, addresses and interests of the newly-admitted Limited
Partners pursuant to paragraph (d) of Article 19.
(g) Additional Capital. The General Partners are authorized to raise at any
time additional capital for the Partnership, in addition to that authorized by
paragraph (d) above, by selling additional limited partnership interests upon
terms and conditions and for such prices as the Managing General Partner may
determine; provided, however, that the General Partners must first offer such
interests to the then current Limited Partners in proportion to their then
current ownership upon such terms and conditions and for such price as the
Managing General Partner proposes to sell such interests to third parties. Any
person who is not a then current Limited Partner and who acquires an interest in
the Partnership which has been offered in accordance with the provisions of this
paragraph (g) shall be admitted to the Partnership as a new Limited Partner upon
acceptance by the Managing General Partner, and no further consent to such
admission by the then current Partners or any execution of documents by them
shall be required.
(h) Initial Investment. Pending initial investment of its funds, or to
provide a source from which to meet contingencies, the Partnership may
temporarily invest its funds in short-term, highly liquid
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investments that provide appropriate safety of principal, such as bank
certificates of deposit, money market funds, short-term debt obligations and
interest-bearing accounts.
(i) Priority and Return of Capital. Except as expressly provided by the
provisions of this Agreement, no Partner shall have priority over any other
Partner, either as to the return of Capital Contributions or as to net income,
net losses or Cash Distributions. No Partner shall be entitled to the return of
any amount contributed by such Partner to the capital of the Partnership out of
any assets other than the assets of the Partnership and then only in accordance
with the provisions of this Agreement.
9. Advances by General Partners. A General Partner, or any Affiliate
thereof, may in its discretion advance monies to the Partnership for use in
acquiring the Systems or other assets or funding Partnership operations when the
Partnership is in need of such monies. The aggregate amount of such advances
shall become an obligation of the Partnership to such General Partner or
Affiliate, and shall be paid with interest; provided, that the interest rate or
other finance charges and fees with respect to any such loan shall be payable at
a per annum rate not greater than the average interest rate charged, from time
to time, to such General Partner or Affiliate by the financial institution which
principally finances the activities and affairs of such entity or, if the source
of the loan funds is an unaffiliated third-party lender that has loaned such
funds to such General Partner or Affiliate, the per annum rate charged, from
time to time, with respect to such funds by such unaffiliated lender to such
General Partner or Affiliate; and provided, further, that no repayment charge or
penalty shall be imposed with respect to any such loan, except to the extent
that such prepayment charge or penalty is attributable to an underlying
encumbrance.
10. Capital Accounts.
(a) Establishment of Capital Accounts. The Partnership shall establish and
maintain a Capital Account for each Partner in accordance with Treasury
Regulations promulgated under Code Section 704(b).
(b) Adjustments to Capital Accounts. The Capital Account of each Partner
shall be increased to reflect (i) such Partner's cash contributions, (ii) the
fair market value of property contributed by such Partner (net of liabilities
securing such contributed property that the Partnership is considered to assume
or take subject to under Code Section 752), (iii) the Partner's share of the Net
Income (including all gain as calculated pursuant to Section 1001 of the Code)
of the Partnership, (iv) such Partner's share of income and gain exempt from
tax, and (v) such Partner's share of any basis increase pursuant to Code Section
48(q)(2). The Capital Account of each Partner shall be reduced to reflect (i)
the amount of money distributed to such Partner, (ii) the fair market value of
property distributed to such Partner (net of liabilities securing such
distributed property that such Partner is considered to assume or take subject
to under Section 752), (iii) such Partner's share of noncapitalized expenditures
not deductible by the Partnership in computing its taxable income as determined
under Code Section 705(a)(2)(B), (iv) such Partner's share of the amount of any
basis adjustment pursuant to Code Sections 48(q)(1) and 48(q)(3), (v) such
Partner's share of Net Losses, and (vi) such Partner's share of amounts paid or
incurred to organize the Partnership or to promote the sale of Partnership Units
to the extent that an election under Code Section 709(b) has not properly been
made for such amounts. The Managing General Partner shall determine the fair
market value of all Partnership property which is distributed in kind, and the
Capital Accounts of the Partners shall be adjusted on the basis of such fair
market value determination by the Managing General Partner as though the
property had been sold for its fair market value and the proceeds (net of
liabilities) had been distributed to the Partner receiving the property in kind.
In the event of a contribution or distribution of property with a fair market
value which is not equal to its adjusted basis (as determined for federal income
tax purposes), the Partnership shall maintain both "tax" and "book" capital
accounts in accordance with the rules prescribed in Treasury Regulations
promulgated under Code Section 704.
11. Management of Partnership Activities and Indemnification. The General
Partners shall conduct, direct and exercise full control over all the activities
of the Partnership. The Limited Partners shall have no power over the conduct of
the affairs of the Partnership except as specifically set forth herein.
Notwithstanding anything in this Agreement to the contrary, in the event of a
dispute between the
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Managing General Partner and the Administrative General Partner, the Managing
General Partner shall control.
(a) General Powers of the General Partners. Subject to the provisions of
paragraphs (b) and (c) of Article 12, and in addition to the powers granted to
general partners of a limited partnership under the laws of the State of
Washington, or which are granted to the General Partners under other provisions
of this Agreement, and within the limitations of the purposes for which the
Partnership has been formed, the General Partners shall have full power to do
all things deemed necessary, appropriate or desirable by them to conduct the
business of the Partnership, including, but not limited to:
(i) The making of expenditures and the incurring of any obligations
they deem necessary or desirable to implement the purposes of the
Partnership; the employment of such personnel as they deem desirable for
the conduct of such activities, including permanent, temporary, or
part-time employees, themselves, and outside consultants or contractors,
and the determination of their compensation and other terms of employment;
provided, however, that any contract for services with the General Partners
or their Affiliates may be cancelled upon a Majority Vote of the Limited
Partners.
(ii) Subject only to any express limitations contained in this
Agreement, the acquisition and the disposition, exchange, mortgage, or
other hypothecation of any or all of Assets of the Partnership, including
the Systems, the borrowing of monies, and the use of the revenues or
borrowing proceeds of the Partnership for any purpose and on any terms the
General Partners see fit, including, without limitation, the financing of
the activities of the Partnership (with or without the pledge of the
Partnership's revenues or other assets), the repayment of borrowings, the
lease or purchase of properties and equipment, and the conduct of
additional activities by the Partnership, provided that assets and revenues
attributable to the interests of the Limited Partners shall not be pledged
or used for the benefit of the General Partners or their Affiliates, and
provided that (except upon dissolution of the Partnership) a Majority Vote
of the Limited Partners shall be required for the sale or hypothecation of
all, or substantially all, of the Partnership's assets in connection with
any transaction not in the normal and ordinary course of Partnership
business, and provided further that no lender shall be required to look to
the application of proceeds hereunder and shall be entitled to rely on the
representations of the General Partners as to their authority to enter into
financing arrangements and shall be entitled to deal with the General
Partners as if they were the sole party in interest therein, both legally
and beneficially.
Notwithstanding any other provisions herein limiting the General Partners'
power to borrow on behalf of the Partnership or hypothecate all or substantially
all of the Partnership's assets in connection with such borrowing, the General
Partners may, on behalf of the Partnership, borrow and secure said borrowings
with Partnership assets for the express purpose of providing funds to the
Partnership for Cash Distributions to the Partners in accordance with Article
15.
No creditor who makes a non-recourse loan to the Partnership shall have or
acquire at any time as a result of making such loan any direct or indirect
interest in the profits, capital, or property of the Partnership other than as a
secured creditor.
The amount of Partnership cash flow used in any calendar year to acquire
Systems will in no event exceed 50% of the Net Income before depreciation
allocated to Limited Partners for that year.
(iii) The negotiation and execution on any terms deemed desirable by
them of all necessary agreements, or other instruments required or deemed
beneficial to implement the powers granted under this Agreement.
(iv) The formation of any further limited or general partnerships,
joint ventures, or other relationships which they deem desirable, provided
that the Partnership shall not invest in any other partnership or joint
venture or engage in any other relationship except for the purpose of
operating the Systems and unless it has a controlling interest in such
venture or partnership; and provided that neither the General Partner nor
any Affiliate shall receive any fees or compensation from such venture
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or partnership; and provided that all Systems owned by the Partnership
shall be owned directly, and not indirectly through an ownership interest
in any limited or general partnership, joint venture or other entity.
(v) The execution of operating, management or agency agreements with
any parties selected by them to supervise or assist in the operation of any
activities undertaken by the Partnership and the making of agreements for
the conduct of operations, or the furnishing of facilities, services and
personnel.
(vi) The lease or sale of any assets of the Partnership for any
Partnership purpose, including but not limited to franchises or similar
operating authorizations of any portion of the Systems, except to the
General Partners or their Affiliates and subject to the limitations in
subparagraph (ii) above; provided, however, that notwithstanding anything
else herein, upon a Majority Vote of the Limited Partners approving the
terms of the transaction, all or any portion of the Partnership's assets
may be sold to the Managing General Partner or its Affiliates; and
provided, further, no Majority Vote of the Limited Partners shall be
required for the sale to the Managing General Partner or its Affiliates of
a System previously acquired by the Partnership if (a) the Managing General
Partner or its Affiliates had advanced funds to the Partnership in order to
enable the Partnership to acquire the System and an amount equal to at
least 50% of the funds so advanced remains an outstanding obligation of the
Partnership to the Managing General Partner or its Affiliates at the time
of the proposed acquisition of the System by the Managing General Partner
or its Affiliates and (b) the purchase price to be paid to the Partnership
by the Managing General Partner or its Affiliates is equal to or in excess
of the purchase price originally paid by the Partnership for the System.
(vii) The exercise on behalf of the Partnership, in such manner as
they in their sole judgment deem appropriate, of all rights, elections, and
obligations granted to or imposed upon the Partnership by agreements
entered into by it, including but not limited to elections permitted the
Partnership by any taxing authority.
(viii) The establishment and maintenance of bank accounts on behalf of
the Partnership, provided that the General Partners will employ all funds
and assets of the Partnership for the Partnership's sole benefit and use
and will not commingle the Partnership's funds with the funds of any other
person.
(ix) The control of any matters affecting the rights and obligations
of the Partnership or its Partners, including the employment of attorneys
and others, the incurring of legal expenses and the prosecution, defense,
compromise, arbitration or settlement of claims and litigation.
Any transaction which the General Partners are authorized hereby to enter
into on behalf of the Partnership, including but not limited to the acquisition,
disposition, exchange, mortgage or other hypothecation of Partnership assets and
revenues, the borrowing of monies, the formation of general or limited
partnerships, joint ventures, or other relationships, and the making of
operating, agency, management or other agreements for the conduct of operations
or the furnishing of goods, facilities, services or personnel, may be entered
into by the Partnership with the General Partners or their Affiliates provided
that (a) the fees and prices charged are in accordance with paragraph (d) of
Article 12 herein, if applicable, and competitive with the fees, prices and
compensation of any other person who is rendering comparable services or selling
or leasing comparable goods which could reasonably be made available to the
Partnership, and (b) any such agreement may be terminated upon a Majority Vote
of the Limited Partners without penalty upon 60 days' notice. Further, the
General Partners will not engage in any practices such as rebates, give-ups or
reciprocal arrangements in connection with providing such services or goods. The
General Partners also may subcontract and delegate all or any part of their
duties hereunder to any agency chosen by them, including an Affiliate, but such
delegation by them shall not relieve them of their responsibilities hereunder.
In no event will a General Partner or its Affiliates engage in any real estate
transactions with the Partnership where such General Partner or Affiliate is a
principal without an affirmative Majority Vote of the Limited Partners, unless
the General Partner or Affiliate is selling such real estate to the Partnership
at cost and on identical terms.
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(b) Other Activities of the General Partners. The General Partners shall
devote such part of their time as they, in their sole discretion, deem necessary
to carry out the operations contemplated under this Agreement and shall make
available at reasonable times their respective offices, organizations and
facilities to carry out the purposes of the Partnership. Each of the parties
hereto may engage in whatever other activities it chooses. It is specifically
recognized that the General Partners and their Affiliates will each engage in
the cable television business both for their own account and for others, and
nothing contained herein shall be deemed to prevent such parties from engaging
in such activities individually, jointly with others, or as a partner of any
other partnership, joint venture, or other entity to which they are or may
become a party, in any locale, fields or areas of operation, including those in
which the Partnership may likewise be active, or from dealing with the
Partnership as independent parties or through any other entity in which they may
be interested, including the sale or lease of goods and equipment to, and the
performance of accounting, technical and management services for, the
Partnership at a profit, nor as requiring them to permit the Partnership or any
Partner thereof to participate in any such operations in which they may be
interested, except as indicated herein. Neither the General Partners nor their
Affiliates shall be obligated to present any particular investment opportunity
to the Partnership or the Partners even if such opportunity is of a character
which, if presented to the Partnership, could be taken by the Partnership, and
each of the General Partners shall have the right to take such investment for
his or its own account (individually or on behalf of others) or to recommend to
others any particular investment opportunity. A Limited Partner, because of his
or her interest in the Partnership, shall not acquire any rights or interest in
any other partnership managed, operated or otherwise affiliated with the General
Partners or their Affiliates. Nothing in this paragraph (b) shall be deemed to
diminish the General Partners' fiduciary obligations nor waive any rights that
the Partnership or the Limited Partners may have against the General Partners.
(c) Indemnification. Neither the General Partners nor any director,
officer, partner, employee, agent or Affiliate thereof shall be liable,
responsible or accountable in damages or otherwise to the Partnership or any of
the Partners for, and the Partnership and any receivers and/or trustees thereof
shall hold harmless, indemnify and defend the General Partners and such other
persons from and against, any claim, liability, loss, damage or expense
(including, without limitation, reasonable attorneys' fees) suffered by the
General Partners or such other persons by virtue of any act performed or omitted
to be performed in connection with the Partnership's activities, provided that
if such claim, liability or expense arises out of any action or inaction by a
General Partner or such other persons, the Managing General Partner must have
determined, in good faith, that such course of conduct was carried out in a
manner reasonably believed to be in the best interest of the Partnership, and
that such course of conduct did not constitute fraud, negligence or breach of
fiduciary duty by the General Partners. All judgments against the Partnership,
the General Partners, or such other persons, wherein the General Partners or
such other persons are entitled to indemnification, must first be satisfied from
Partnership assets before the General Partners or such other persons are
responsible for obligations.
Notwithstanding anything herein to the contrary, the General Partners and
their Affiliates, shareholders, directors, officers or other employees shall not
be indemnified for liability imposed or expenses incurred in connection with any
claim arising out of a violation of the Securities Act of 1933, as amended, with
respect to the offer and sale of the Units, unless: (1) the General Partners are
successful in defending such action; or (2) a final adjudication that such
indemnification is contrary to public policy as expressed in said Act has not
been made by a court of appropriate jurisdiction.
Subject to the above, expenses incurred by a General Partner or any
Affiliate, shareholder, partner, director, officer, agent or other employee, in
defending any claim with respect to which such General Partner or such other
person may be entitled to indemnification by the Partnership hereunder, may be
advanced by the Partnership prior to the final disposition of such claim, upon
receipt of an undertaking by or on behalf of such General Partner or other
person to repay the advanced amount of such expenses unless it is determined
ultimately that such General Partner or other person is entitled to
indemnification by the Partnership under this paragraph (c).
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Any indemnification hereunder shall be made only to the extent of the
Partnership's assets, and no Partner shall be personally liable on such
indemnification; provided, however, that nothing contained in this paragraph (c)
shall be deemed to excuse any General Partner from liability to the other
General Partner with respect to any claim described herein, where such General
Partner would otherwise be so liable in the absence of the indemnification
contained in this paragraph (c).
(d) Failure to Take Action. Except in the event of any act for which they
would not be entitled to indemnification under paragraph (c) above, the General
Partners and their Affiliates, shareholders, directors, partners, officers,
agents and other employees will not be liable to any of the Limited Partners for
failure to take any action on behalf of the Partnership (including, but not
limited to, any action which may prevent the foreclosure of all or any portion
of the assets of the Partnership) due to the Partnership's lack of sufficient
funds for the payment of its debts, provided the General Partners give the
Limited Partners prior notice thereof, so that the Limited Partners may, but
shall not be obligated to, contribute such funds if they then desire that such
action be taken. Moreover, in the event that after such notice is given funds
are not contributed to the Partnership by the Limited Partners, the General
Partners shall have the power, but shall not be obligated, to (1) sell all or
any portion of the assets of the Partnership in order to raise such funds, or
(2) cause the dissolution of the Partnership or the abandonment of all or any
portion of its assets, or both.
(e) Tax Matters Partner. For the purpose of Code Section 6223(a), Northland
Communications Corporation, the Managing General Partner, is hereby designated
as "Tax Matters Partner" ("TMP"). In the event that at any time the TMP
determines that it cannot act as the TMP, it shall notify all Partners and
unless another General Partner is designated by the General Partners as the TMP
a meeting shall be called pursuant to the provisions of paragraph (g) of Article
20 herein for the purpose of the Limited Partners appointing a Partner as the
new TMP. The TMP, if notified by the Internal Revenue Service of a "final
partnership administrative adjustment" ("FPAA"), shall inform the Limited
Partners and provide them with a copy of such notice within fifteen (15) days of
its receipt. Within ninety (90) days after the day on which such FPAA notice is
received by the TMP, the TMP shall notify the Limited Partners of the position
that the TMP is taking in connection with such notice or that it is taking no
position. The General Partners shall not be liable to the Partnership or the
Limited Partners for any act performed or omitted to be performed by the TMP in
connection with its position as TMP with respect to the federal income tax
consequences of Partnership transactions, unless the TMP was grossly negligent
or failed to act in good faith with respect to such tax matters.
12. General Partners' Duties, Management Fees and Partnership Expenses.
(a) Acquisition Fee. Northland shall receive an acquisition fee equal to
6.5% of the Capital Contributions from Limited Partners pursuant to the offering
described in paragraph (d) of Article 8 herein as compensation for investigating
the acquisition of the Systems and for initial management services rendered by
the executive officers of the Managing General Partner to the Partnership. Such
fee shall be paid when and as such Capital Contributions are released to the
Partnership, and is in addition to the management fee payable pursuant to
paragraph (b) below and reimbursable amounts payable pursuant to paragraph (d)
below.
(b) Managing General Partner's Duties and Management Fees. The Managing
General Partner shall be responsible for the overall management of the
Partnership, including:
(i) Determination and implementation of Partnership policies;
(ii) Review of Partnership budget, surveys, cash flow and working
capital requirements;
(iii) Review and approval of Partnership reports and financial
statements, including those filed with regulatory agencies and including
those prepared and distributed pursuant to paragraph (f) of Article 16 and
paragraphs (b) through (g) of Article 18; and
(iv) Supervision of professionals and others employed by the
Partnership in connection with the above.
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For the services of the executive officers of the Managing General Partner
in connection with such supervision and management, the Managing General Partner
shall also receive a management fee equal to 6% of the gross revenues of the
Partnership, not including revenues from the sale or refinancing of the Systems
or any portion thereof. Such fee shall be calculated and paid monthly. This fee
is in addition to reimbursable amounts payable pursuant to paragraph (d) below.
(c) Administrative General Partner's Duties and Management Fees. The
Administrative General Partner shall have responsibility for overall
administration of the Partnership in all respects and in all matters, and shall
make administrative decisions. In return for the compensation described below,
the Administrative General Partner shall actively engage in ongoing consultation
with and shall provide assistance to the Managing General Partner regarding
operations of the Partnership, including, but not limited to, acquisition of
properties, financing, analysis of System demographics and System planning. In
addition, the Administrative General Partner shall have responsibility to
perform, or cause to be performed, the following services:
(i) Establishment of books of account, record and payment procedures,
including individual Capital Accounts of the Partners;
(ii) Provision of bookkeeping and other related services for the
Partnership;
(iii) Disbursement of the original Capital Contributions of the
Partners for the purposes set forth in this Agreement;
(iv) Disbursement of all receipts and the making of all necessary
payments and expenditures in accordance with the terms of this Agreement;
(v) Making of all reports to the Limited Partners required by this
Agreement or by law;
(vi) Admission of an assignee of a Limited Partner's interest as a
Substitute Limited Partner, without the consent of any Limited Partner; and
(vii) To the extent that funds of the Partnership are, in the Managing
General Partner's judgment, not required for the conduct of the
Partnership's business, the temporary investment of the excess funds in the
manner set forth in paragraph (h) of Article 8.
For its services in connection with such administration, the Administrative
General Partner shall receive an administrative fee equal to 1% of the Capital
Contributions from Limited Partners pursuant to the offering of Units described
in paragraph (d) of Article 8, payable when and as the Limited Partners' Capital
Contributions are released to the Partnership. This fee is in addition to
reimbursable amounts payable pursuant to paragraph (d) below.
(d) Partnership Expenses; Reimbursement of Expenses Incurred on Behalf of
the Partnership. The Partnership shall pay or reimburse the General Partners and
their Affiliates for expenses of every kind incurred, including expenses
involved in the acquisition of the Systems. Such expenses to be paid or
reimbursed by the Partnership include, but are not limited to: (i) all costs of
personnel employed by the Partnership, and all personnel employed by the
Managing General Partner and its Affiliates who perform accounting, marketing
and engineering services for the Partnership, for which personnel the
Partnership will reimburse the Managing General Partner and its Affiliates for
salaries and other employment costs of such personnel; (ii) all costs of
borrowed money, taxes, insurance, and assessments against Partnership assets or
applicable to the Partnership or its assets; (iii) legal, appraisal, audit,
accounting, brokerage and other fees; (iv) printing, engraving and other
expenses and taxes incurred in connection with the transfer, issuance,
registration and recording of documents evidencing ownership of an interest in
the Partnership or in connection with the business of the Partnership; (v) costs
for goods and materials, whether purchased by the Partnership directly or by the
General Partners or their Affiliates, on behalf of the Systems or the
Partnership; (vi) expenses of revising, amending, converting, modifying or
terminating the Partnership; (vii) expenses in connection with distributions
made by the Partnership to, and communications and bookkeeping work necessary in
maintaining relations with, Limited Partners, including the cost of printing and
mailing to such persons reports of meetings of the Partnership, and of
preparation of proxy statements
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and solicitations of proxies in connection therewith; (viii) expenses in
connection with preparing and mailing reports required to be furnished to
Limited Partners for investor, tax reporting or other purposes, or other reports
which the Managing General Partner deems to be in the best interest of the
Partnership; (ix) costs of any accounting, statistical or bookkeeping equipment
necessary for the maintenance of the books and records of the Partnership; (x)
the cost of preparation and dissemination of the informational material and
documentation relating to the Partnership; (xi) costs of any computer services
or equipment or services of personnel used for or by the Partnership; (xii)
expenses in connection with the disposition, replacement, alteration, repair,
remodeling, refurbishment, leasing, refinancing, operation and expansion of the
Systems and of maintenance of the Systems; (xiii) costs of any litigation in
which the Partnership is involved, as well as costs of any examination,
investigation, or other proceeding conducted by any regulatory agency in
connection with the Partnership, including legal and accounting fees incurred in
connection therewith; and (xiv) expenses of professionals employed by the
Partnership in connection with any of the foregoing, including attorneys,
accountants, computer specialists, engineers, brokers and appraisers. With
respect to Offering and Organization Costs, such reimbursement shall not exceed
3.5% of the Capital Contributions from Limited Partners; to the extent Offering
and Organization Costs exceed 3.5% of the aggregate Capital Contributions from
Limited Partners, the Managing General Partner shall be responsible for the
difference.
In addition, the Partnership will reimburse the Managing General Partner
and its Affiliates for all ordinary and necessary expenses incurred on the
Partnership's behalf, including expenses listed above which are advanced by the
Managing General Partner or its Affiliates, which shall not include charges for
overhead (except for centralized billing [if applicable], bookkeeping, telephone
and postage, copy and computer charges, which shall be reimbursed at the lower
of competitive price or cost, including allocation for overhead). All charges
for expenses and fees, whether charged by the Managing General Partner, its
Affiliates or any other party, will be billed directly to the Partnership.
13. Limited Partners.
(a) Rights and Obligations of the Limited Partners. No Limited Partner
shall be personally liable for any debts, liabilities or obligations of the
Partnership beyond the amount of his or her Capital Contribution plus his or her
share of undistributed income and the amount of any distribution (including the
return of any Capital Contribution) made to him or her that must be returned to
the Partnership pursuant to the Washington Uniform Limited Partnership Act or
other applicable state law, nor shall he or she be obligated to restore the
capital of the Partnership or repay to the Partnership any distribution made to
such person as a Limited Partner except as may be required by law. No Limited
Partner, as such, shall take part in the control of the Partnership's business
or transact any business for the Partnership.
(b) Names and Addresses of Limited Partners. The General Partners shall
keep at the principal place of business of the Partnership a list containing the
name, address and interest of each Limited Partner. Within thirty (30) days
after the admission of any Limited Partner or the receipt by the Partnership of
a written notice of change of address or transfer of interest (pursuant to
Article 14) from any Limited Partner, the General Partners shall cause such list
to be corrected to reflect such admission, transfer or change of address. Within
fifteen (15) days after receiving a written request therefor from any Limited
Partner or his or her representative, the Partnership shall send a copy of such
list to such Limited Partner; provided, however, that the Partnership may charge
for such copy its cost of reproducing the same. Any Limited Partner or his or
her representative shall have the right to inspect and copy (at his or her own
cost) at the Partnership's principal place of business the names, addresses and
interests of the Limited Partners.
(c) General Partner as Limited Partner. A General Partner, or any Affiliate
of a General Partner, may at any time invest in or acquire Limited Partner
interest in the Partnership and thereby acquire the same rights and obligations
as other Limited Partners.
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14. Transfer of Limited Partner Units.
(a) Assignment of Limited Partner Units. Following payment in full of cash
for his or her Units, a Limited Partner shall have the right to assign any or
all of the Units held by such Limited Partner, and the Partnership shall
recognize any such assignment, subject to the following conditions:
(i) In the event an assignor makes an assignment of less than all of
his or her interest in the Partnership, then, after such assignment,
neither the assignor nor the assignee shall hold less than one full Unit
except for assignments by gift, inheritance, intra-family assignments and
family dissolutions;
(ii) Such assignment shall not violate any applicable federal or state
securities law or regulation, including, without limitation, any
restriction imposed thereby with respect to the financial suitability of,
or minimum purchase requirements by, any transferee for consideration;
(iii) Such assignment is made by written instrument of assignment,
executed by the assignor, the terms of which do not contravene any of the
terms of this Agreement;
(iv) Notice of such assignment, including an executed copy of such
instrument of assignment, the name, address and taxpayer identification
number of the assignee and the number of Units assigned, has been delivered
to the Partnership.
(v) Such assignment does not jeopardize the status of the Partnership
for federal income tax purposes nor cause a termination of the Partnership
for federal income tax purposes as determined under Section 708 of the
Code; and
(vi) The assignee of such interest in the Partnership is not a
tax-exempt entity, as such term is defined in Section 168(j)(4) of the
Code, and is not a pass-thru entity, as defined in Section 267(e)(2) of the
Code, in which a tax-exempt entity holds an interest, unless the original
subscriber for such Unit was a tax-exempt entity, provided, however, that
in no event will tax-exempt entities own in the aggregate more than 20% of
the Partnership Units.
An assignment of Units satisfying the conditions specified in this
paragraph (a) shall, subject to the provisions of paragraph (d) below, entitle
the assignee to receive all Cash Distributions and allocations of Net Income and
Net Losses made with respect to the assigned Units after the "Acceptance Date,"
as defined in paragraph (c) below, but shall not entitle such assignee to any of
the other rights and privileges of a Limited Partner hereunder unless such
assignee becomes a Substitute Limited Partner in accordance with paragraph (h)
below. In the event the Partnership or its counsel determines that an assignment
does not satisfy the conditions specified in this paragraph (a), the General
Partners shall promptly notify the assignor of such determination; provided,
however, nothing contained in this paragraph (a) shall obligate the General
Partners or their counsel to make any independent examination or investigation
to determine whether such conditions have been satisfied.
(b) Transfers of Limited Partner Units by Operation of Law. Upon any
transfer of Units by operation of law (including, without limitation, transfers
at death, whether testamentary or otherwise), either the transferee or
transferor (or the transferor's personal representative) shall promptly give the
Partnership written notice of such transfer, stating by what means it occurred.
The Partnership shall recognize any such transfer of which it receives such
notice, provided such transfer also satisfies the condition set forth in clause
(ii) of paragraph (a) above. A transferee of Units satisfying the conditions
specified in this paragraph (b) shall, in accordance with paragraph (d) below,
be entitled to receive all Cash Distributions and all allocations of Net Income
and Net Losses made with respect to the transferred Units after the Acceptance
Date for such transfer, but shall not be entitled to any of the other rights and
privileges of a Limited Partner hereunder unless such transferee becomes a
Substitute Limited Partner in accordance with paragraph (h) below.
(c) Acceptance Date for Assignments and Other Transfers. The "Acceptance
Date" for any assignment or other transfer of Units satisfying the conditions
set forth in paragraph (a) or (b) above, and paragraph (d) below, of this
Article shall mean the first day of the calendar month succeeding the month in
which the Partnership receives written notice of such assignment or other
transfer (in accordance with
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the provisions of paragraph (a) or (b) above). If an assignment does not comply
with paragraph (a) above because such assignment would cause a termination of
the Partnership for federal income tax purposes under Section 708 of the Code,
then such assignment shall be deferred until the day after the last day of the
next ensuing calendar month during which such acceptance would not risk such a
termination for tax purposes. If, at any time, more than one such assignment or
other transfer is so deferred, the deferred assignments and transfers shall
subsequently be recognized (to the extent all of them cannot be recognized in
the same calendar month) in the same order as the Partnership received written
notice thereof. Whenever the Partnership determines that it will not recognize
an assignment or other transfer of Units for the reasons set forth in this
paragraph (c), the General Partners shall promptly give written notice thereof
to all of the Limited Partners.
(d) Rights and Obligations of Assignees or Transferees. Any assignee or
transferee of a Limited Partner interest hereunder shall be bound by the
provisions of this Agreement. Prior to recognizing any assignment of a Limited
Partner's interest that has been transferred in accordance with this Article,
the General Partners, at their sole discretion, may require the transferring
Limited Partner to execute and acknowledge a written instrument of assignment in
form and substance satisfactory to the General Partners, may require an opinion
of counsel satisfactory to the General Partners that such transfer will not be
in violation of the various securities laws or otherwise adversely affect the
Partnership or the Limited Partners, and may require the assignee to execute an
amendment to the Agreement and to assume all obligations of the assigning
Limited Partner. Any assignee who is not an existing Partner at the time of an
assignment in accordance with paragraph (a) or (b) of this Article shall be
entitled to the allocations and distributions attributable to the interest
assigned to it and to transfer and assign such interest in accordance with the
terms of this Agreement; provided, however, such assignee shall not be entitled
to the other rights of a Limited Partner unless and until it becomes a
Substitute Limited Partner in accordance with paragraph (h) below.
Notwithstanding the above, the Partnership and the General Partners shall incur
no liability for allocations and distributions made in good faith to the
transferring Limited Partner until the written instrument of assignment has been
received by the Partnership and recorded on its books and the Acceptance Date of
the assignment has passed. In the event of any transfer which shall result in
multiple ownership of the transferring Limited Partner's aggregate interest, the
General Partners may require one or more trustees or nominees to be designated
to represent the entire interest for the purpose of receiving all notices which
may be given and all payments which may be made under this Agreement and
exercising all rights which such transferees have pursuant to this Agreement.
(e) Assignees Not Limited Partners. No assignee of a Limited Partner's
interest is entitled to become a Substitute Limited Partner, except as set forth
in paragraph (h) below.
(f) Continuation of Obligations After Transfer. No transfer of an interest
by a Limited Partner, including a transfer of less than all its rights hereunder
or the transfer of all its rights hereunder to more than one party, shall
relieve such Limited Partner of his or her obligations hereunder arising prior
to such transfer, or unless the transferee(s) become(s) a Substitute Limited
Partner(s) pursuant to paragraph (h) below, arising subsequent to such transfer.
(g) Termination of Rights Upon Transfer. At the time of a transfer of a
Limited Partner's interest in accordance with this Article, all the rights
possessed as a Limited Partner in connection with the transferred interest,
which rights otherwise would be held either by the transferor or the transferee,
shall terminate unless the transferee is admitted to the Partnership as a
Substitute Limited Partner pursuant to the provisions of paragraph (h) below,
except that such transferee shall be entitled to receive the economic rights
described in paragraph (e) above.
(h) Admission of Substitute Limited Partners. An assignee or transferee of
Units recognized under this Article may become a Substitute Limited Partner in
place of his or her assignor or transferor, to the extent of the Units assigned
or transferred, only if:
(i) The written and executed instrument of assignment delivered to the
Partnership with respect to such assignment sets forth the intention of the
assignor that the assignee become a Substitute Limited Partner in his or
her place, to the extent of the Units assigned;
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(ii) The assignee or transferee of such Units executes, acknowledges
and delivers to the Partnership a written agreement to become a party to
and be bound by the provisions of this Agreement, in a form satisfactory to
the General Partners, as well as such other instruments as the General
Partners may deem necessary or appropriate with respect to the admission of
such assignee or transferee as a Substitute Limited Partner;
(iii) Such assignee or transferee tenders to the Partnership a
transfer fee, in an amount determined by the General Partners in their sole
discretion sufficient to cover all reasonable expenses incurred by the
Partnership in connection with admission of a Substitute Limited Partner;
and
(iv) The Managing General Partner gives its written consent to the
admission of such assignee or transferee as a Substitute Limited Partner,
which consent may be given or arbitrarily withheld in the sole discretion
of the Managing General Partner (except that, without limiting the
foregoing, the Managing General Partner shall not consent to any such
admission which, in its opinion, would jeopardize the status of the
Partnership as a partnership for federal income tax purposes or would cause
a termination of the Partnership within the meaning of Section 708(b) of
the Code).
It is expressly understood that the Managing General Partner's absolute
discretion to consent or to refuse to consent to the admission of an assignee or
transferee of Units as a Substitute Limited Partner is granted to the Managing
General Partner for the benefit of the Limited Partners in order to negate the
corporate characteristic of free transferability of interests and that exercise
of such discretion is not subject to any standard, including, without
limitation, any standard based on lack of arbitrariness, consistency,
reasonableness, fairness or the best interests of any assignor/transferor or
assignee/transferee of Units. No consent of any of the Limited Partners shall be
required to effect the admission of such an assignee or transferee as a
Substitute Limited Partner except (in the case of an assignment) the consent of
the Limited Partner making such assignment (which shall be evidenced as provided
in clause (i) of paragraph (h) above). The admission date for any Substitute
Limited Partner shall be the last day of the calendar quarter in which the
Managing General Partner gives written consent to the admission of such
Substitute Limited Partner, and on or within 30 days after such admission date
the Managing General Partner shall cause the Agreement to be amended and, as so
amended, filed to reflect the admission of such Substitute Limited Partner.
(i) Allocations of Cash Distributions, Net Income and Net Losses between
Transferors and Transferees. Any assignment or transfer shall be deemed to be
effective as of the first day of the calendar month succeeding the month in
which all of the requirements of this Article are met. Distributions to Limited
Partners allocable to any month shall be paid, with respect to any Unit, to the
person shown on the Partnership's books as holding such Unit on the first day of
such month. Net Income and Net Losses for any period of the Partnership during
which any Unit is assigned or otherwise transferred shall be allocated between
the assignor/transferor and assignee/transferee of such Unit in proportion to
the number of days during such period that each was recognized as the holder of
such Unit, except that extraordinary, nonrecurring items shall be allocated
entirely to the Partners recognized as holding the interest as of the date such
extraordinary event occurs. The Partnership shall not have any obligation to
make payment of any Cash Distributions or allocation of any Net Income or Net
Losses to any assignee or other transferee of Units until and unless such
transfer is recognized by the Partnership in accordance with the provisions of
paragraph (a) or (b) and paragraph (d) above.
(j) Redemptions. Upon the written request of a Limited Partner, the
Partnership may, at the sole discretion of the Managing General Partner, redeem
all or a portion of the Units held by such Limited Partner at a redemption price
equal to the original issuance price, i.e., $500 per Unit.
15. Allocation of Net Income and Net Losses and Cash Distributions.
(a) Allocation of Net Income and Net Losses from Operations.
(i) For all purposes of this Agreement, Net Income and Net Losses
shall be calculated utilizing the method of accounting and depreciation
utilized by the Partnership for federal income tax purposes. Except as
specifically provided in paragraphs (d), (e), (f), (g), (h) and (i) of this
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Article 15 and paragraph (c) of Article 16, Net Income and Net Losses from
operations shall be allocated as follows:
(1) First, the General Partners shall be allocated 1% and the
Limited Partners shall be allocated 99% of Partnership Net Income, Net
Losses, other Noncash Reductions, other Noncash Additions and credits
until such time as the Limited Partners have received aggregate Cash
Distributions in an amount equal to 100% of their aggregate Capital
Contributions; and
(2) Thereafter, the General Partners shall be allocated 25%, and
the Limited Partners shall be allocated 75% of Partnership Net Income,
Net Losses, other Noncash Reductions, other Noncash Additions and
credits from operations.
(ii) As between the General Partners, they shall share in the 1%
allocation pursuant to clause (1) above in the following ratio: the entire
1% to the Managing General Partner. Subject to paragraph (c) of Article 17,
the General Partners shall share in the 25% allocation pursuant to clause
(2) above in the following ratio: one-fifth, or 5%, to the Administrative
General Partner and four-fifths, or 20%, to the Managing General Partner.
(b) Allocations and Election for Tax Purposes. With respect to Partnership
tax years beginning on or after January 1, 1988, Net Income, Net Losses, other
Noncash Reductions, other Noncash Additions and credits for any year shall be
prorated among the Partners on a daily basis, based upon the number of days in
such Partnership tax year that each Partner has been recognized as such by the
Managing General Partner, except that all extraordinary, nonrecurring items
shall be allocated entirely to the Partners recognized as holding the interests
as of the date such extraordinary event occurs.
With respect to the Partnership tax years ending on December 31, 1986 and
December 31, 1987, each Partner's varying interest in the Partnership's Net
Income, Net Losses, other Noncash Reductions, other Noncash Additions and
credits for each year shall be determined by an interim closing of the
Partnership books as of each date that any new Partners are recognized as
Partners by the Managing General Partner during the year. Partners who are
admitted on or before the last day of any calendar month in 1986 and 1987 shall
be recognized as Partners by the Managing General Partner as of the first day of
such month.
All allocations set forth in this Agreement of Net Income, Net Losses and
other items shall govern the reporting of such by the Partnership for federal
income tax purposes. The Partnership shall also be permitted to prepare
financial statements in accordance with generally accepted accounting
principles. For purposes of such financial statements, the Managing General
Partner may provide for such allocation of income and losses as it deems
appropriate and shall not be bound by the tax allocations set forth herein,
except that such financial statements shall not materially distort the financial
interests in and ownership of the Partnership.
Except as set forth in paragraphs (d), (e), (f), (g), (h) and (i) of this
Article and paragraph (c) of Article 16, all items of special tax significance,
whether or not entering into taxable income, including but not limited to gains,
losses and tax credits, shall be allocated in accordance with the Net Income
percentages then in effect under paragraph (a) above.
No election shall be made by the Partnership, the General Partners or any
Limited Partner for the Partnership to be excluded from the application of the
provisions of Subchapter K of the Code.
In the event of the transfer of an interest in the Partnership or upon the
death of an individual party hereto, or in the event of the distribution of
property to any party hereto, the Partnership, if it is deemed by the Managing
General Partner to be in the best interest of a majority of the Limited Partners
or if the Managing General Partner in its sole discretion otherwise determines
to do so, may file an election, in accordance with applicable Treasury
regulations, to cause the basis of the Partnership assets to be adjusted for
federal income tax purposes as provided in Sections 734 and 743 of the Code.
(c) Cash Distributions. The Managing General Partner will determine at
least annually the amount of Cash Available for Distribution, if any, after
payment of all Partnership expenses, current debt service and the establishment
of such reserves as it reasonably deems to be appropriate. Subject to paragraph
(c)
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of Article 16, Cash Available for Distribution will be paid to the Limited
Partners and the General Partners in accordance with the allocation of Net
Losses then in effect, as set forth in paragraph (a) above, without regard to
paragraphs (d), (e), (f), (g), (h) and (i) of this Article. Notwithstanding
anything in this Agreement to the contrary, prior to the General Partners
receiving Cash Distributions for any year, the Limited Partners must receive
Cash Distributions equal to at least 50% of the Limited Partners' allocable
share of the Net Income for such year, based on projections by the Managing
General Partner of the Net Income of the Partnership for such year. If Cash
Distributions would be made to the General Partners except for the limitation in
the preceding sentence, such deferred Cash Distributions shall be made to the
General Partners as soon as possible in subsequent years from the Cash Available
for Distribution for those years (subject to the 50% limitation for such years)
or from the distribution of assets upon liquidation. This payment of the
deferred Cash Distributions shall be in addition to Cash Distributions otherwise
payable to the General Partners in such subsequent years or the amount of assets
which would otherwise be distributed to the General Partners upon liquidation.
(d) Installment Sales. In the event of a sale of all or any portion of the
Partnership assets where payment of a portion of the sales price is deferred and
the Partnership uses the installment sale method to report such gain, the
Capital Accounts of the Partners shall be fully adjusted upon closing of the
sale in accordance with paragraph (a) of this Article or paragraph (c) of
Article 16, as applicable, as though the full sales price had been received by
the Partnership in cash at closing. Upon ultimate receipt of such deferred sales
proceeds, gain shall be allocated among the Partners in proportion to the amount
of the excess, if any, of the gain credited to each Partner's Capital Account at
the time of the sale over the amount of gain recognized for federal income tax
purposes at the time of such sale, but such allocation of gain upon receipt of
proceeds shall not increase (again) the Partners' Capital Accounts. Interest
income earned or accrued by the Partnership on an installment obligation
subsequent to the closing of an installment sale shall be allocated among the
Partners in proportion to their relative positive Capital Account balances after
adjustment of such accounts in accordance with this paragraph (d) and as
reduced, from time to time, for Cash Distributions made by the Partnership to
the Partners.
(e) Recapture Amounts. Notwithstanding anything to the contrary, in the
case of ordinary income upon disposition of Partnership assets resulting from
the application of Section 1245 or 1250 of the Code, for purposes of paragraph
(a) of this Article and paragraph (c) of Article 16, such ordinary income shall
be allocated as follows:
(i) first, to each of the Partners proportionately in an amount equal
to the excess, if any, of the cumulative Net Losses allocated to such
Partner pursuant to this Article over the cumulative Net Income allocated
to such Partner pursuant to this Article; and
(ii) thereafter, 75% to the Limited Partners and 25% to the General
Partners.
(f) Negative Capital Account Limitation. No Partner shall be allocated Net
Losses or other Noncash Reductions if such allocation would cause a deficit
balance in such Partner's Capital Account unless the Capital Account balances of
all other Partners are equal to zero. Capital Account balances for the purposes
of this paragraph shall be treated as having been reduced for (i) allocations of
losses and deductions which are reasonably expected to be made as of the end of
the taxable year to such Partner pursuant to Code Section 704(e)(2), Code
Section 706(d) and Treas. Reg. Sec. 1.751-l(b)(2)(ii), and (ii) for
distributions which at the end of the taxable year are reasonably expected to be
made to such Partner to the extent that said distributions exceed offsetting
increases to such Partner's Capital Account that are reasonably expected to
occur during (or prior to) the taxable years in which such distributions are
reasonably expected to be made. Net Losses and other Noncash Reductions which
are subject to the limitation of this paragraph shall be reallocated among the
Partners with positive Capital Account balances until such time as all Partners
have zero balances in their Capital Accounts and, thereafter, Net Losses and
other Noncash Reductions will be allocated among the Partners pursuant to
paragraph (a) of this Article to the extent such allocations are permitted under
paragraph (g) of this Article. For purposes of this paragraph and paragraph (h)
of this Article, each Partner shall be treated as having already contributed any
amount for which such Partner has a mandatory contribution obligation (including
the
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amount of any Capital Account deficit such Partner is obligated to restore upon
liquidation) provided that such contribution must be made in all events within
90 days of liquidation of the Partnership ("Mandatory Obligation").
(g) Cumulative Loss Allocations.
(i) Notwithstanding anything contained in this Article to the contrary,
cumulative allocations of Net Losses to any Limited Partner shall not exceed the
cumulative sum of the following amounts determined as of the end of each taxable
year of the Partnership: (a) the amount of such Limited Partner's Capital
Contribution determined pursuant to Article 8 plus the amount of such Limited
Partner's uncontributed Mandatory Obligation less the amount of any cash or
property distributed to such Limited Partner; and (b) such Limited Partner's
cumulative share of Net Income or other Noncash Allocations. To the extent the
foregoing limitation results in non-allocation to a Limited Partner of
Partnership Net Losses which would otherwise be allocated to him, such Net
Losses shall be allocated pro rata to other Limited Partners to the extent each
such other Limited Partner may be allocated further Net Losses under the
foregoing limitation, and any remaining Net Losses for the taxable year in
question shall be allocated to the General Partners.
(ii) To the extent the foregoing limitation in clause (i) immediately above
results in a non-allocation to the Limited Partners of Partnership Net Losses
and in an allocation of such Net Losses to the General Partners ("Reallocated
Limited Partners' Losses"), the General Partners shall be allocated, in
subsequent taxable years, all Partnership Net Income until such time as they
have been allocated Net Income in an amount equal to the Reallocated Limited
Partners' Losses plus the Net Income the General Partners would have otherwise
been allocated notwithstanding this clause (ii).
(iii) Notwithstanding the limitation in clause (i) above, the Managing
General Partner may elect to have Net Losses continue to be allocated 99% to the
Limited Partners and 1% to the General Partners, provided that the Managing
General Partner obtains an opinion from tax counsel that such an allocation is a
reasonable interpretation of the requirements of Section 704(b) of the Code and
Treasury Regulations promulgated thereunder, provided that if Net Losses
otherwise subject to the limitation of clause (i) above are subsequently
disallowed and reallocated to the General Partners; the General Partners shall
then be allocated all future Partnership Net Income until such time as they have
been allocated additional future Net Income equal to such disallowed and
reallocated Net Losses.
(h) Qualified Income Offset. Notwithstanding anything contained in this
Article to the contrary, there shall be reallocated to each Limited Partner with
a negative balance in his or her Capital Account (determined after the
allocation of income, gain and loss under this Article for such year) each item
of Partnership gross income (unreduced by any deductions) and gain until such
time as the deficit in his or her Capital Account is eliminated. In the event
that for any taxable year Partnership gross income or gain is less than the
deficit balances of all the Limited Partners, such gross income or gain shall be
allocated in proportion to the relative deficit balances of the respective
Limited Partners.
(i) Modifications to Partnership Allocations. It is the intent of the
Partners that each Partner's distributive share of income, gain, loss,
deduction, or credit (or items thereof) shall be determined and allocated in
accordance with this Article and Article 16 to the fullest extent permitted by
Section 704(b) of the Code. In order to preserve and protect the determinations
and allocations provided for in this Article and Article 16, the Managing
General Partner shall be, and hereby is, authorized and directed, upon receipt
of an opinion of counsel, to allocate income, gain, loss, deduction, or credit
(or items thereof) arising in any year different from the manner otherwise
provided for in this Article and Article 16 if, and to the extent that,
allocating income, gain, loss, deduction, or credit (or items thereof) in the
manner provided for in this Article and Article 16 would cause the determination
and allocation of each Partner's distributive share of income, gain, loss,
deduction, or credit (or items thereof) not to be permitted by Section 704(b) of
the Code and Treasury Regulations promulgated thereunder ("Treasury
Regulations"). Any allocation made pursuant to this paragraph (i) (including all
three clauses thereof) shall be deemed to be a complete substitute for any
allocation otherwise provided for in this Article and Article 16 and no
amendment of this Agreement or approval of any Partner shall be required.
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16. Dissolution and Winding Up of the Partnership.
(a) Dissolution. The Partnership shall be dissolved at the expiration of
the term of the Partnership as set forth in Article 7 unless sooner terminated
upon any of the events as hereinafter set forth:
(i) A Majority Vote of the Limited Partners to dissolve and wind up;
or
(ii) The adjudication of bankruptcy, incompetency, removal, withdrawal
(which withdrawal shall take effect sixty (60) days after written notice
thereof is given to all other Partners), or termination of the existence of
a General Partner, unless (a) at the time there is at least one other
General Partner who consents to carry on the business, or (b) within ninety
(90) days after the occurrence of any such event all the Limited Partners
agree in writing to continue the business of the Partnership and to the
appointment of a substitute General Partner. In the event of removal or
withdrawal of the Administrative General Partner, the Managing General
Partner may, in its sole discretion, elect a substitute Administrative
General Partner without the consent of the Limited Partners.
Subject to paragraph (c) of Article 17, a General Partner may not
assign its interest as a General Partner in the Partnership without the
consent of a majority in interest of the Limited Partners; provided,
however nothing herein shall prohibit a General Partner from substituting
another corporation or entity as a General Partner and assigning its
interest in the Partnership to such other corporation or entity in
connection with an acquisition by or merger with such corporation or entity
so long as such corporation or entity assumes all the obligations of such
General Partner with regard to the Partnership; provided, further, nothing
herein shall prohibit a General Partner from pledging or otherwise
assigning its interest (but not its right to manage the Partnership) as
collateral for any loan;
(iii) The Partnership becomes insolvent or bankrupt;
(iv) The disposition, sale or abandonment of all or substantially all
of the assets of the Partnership other than in the ordinary course of
business; or
(v) The occurrence of any event that makes it unlawful for the
business of the Partnership to be continued.
(b) Winding Up. Upon the occurrence of an event causing the termination
and/or dissolution of the Partnership, the General Partners shall wind up the
business and affairs of the Partnership. In the event there is no remaining
General Partner because of bankruptcy, incompetency, withdrawal, removal,
resignation or termination of the existence of both General Partners, the
Limited Partners shall elect, by Majority Vote of the Limited Partners, a
trustee to wind up the business and affairs of the Partnership and shall
determine such trustee's compensation.
(c) Allocation of Gain and Loss. Upon sale or other disposition of the
Partnership's assets other than in the ordinary course of business, including by
reason of dissolution, involuntary conversion or condemnation, the gain or loss
of the Partnership attributable to such disposition shall be determined and loss
shall be allocated pro rata to those Partners having positive Capital Account
balances in proportion to and to the extent of such positive balances, and
thereafter to the General Partners, and gain shall be allocated as follows:
(i) First, to those Partners having negative Capital Account balances
in proportion to such negative balances until such negative balances are
eliminated and the balances are restored to zero. In determining the size
of the negative balance in a Partner's Capital Account and the amount of
the gain that needs to be allocated to restore said account to zero,
distributions of sale proceeds resulting from the transaction that produced
the gain and any allocations made pursuant to the remaining provisions of
this paragraph (c) shall be disregarded;
(ii) Second, 99% to the Limited Partners and 1% to the General
Partners until such time as the Limited Partners' aggregate Capital Account
balances equal the excess, if any, of their aggregate Capital Contribution
over the sum of the aggregate Cash Distributions made by the Partnership to
the
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Limited Partners prior to the sale or other disposition (such excess, if
any, shall be referred to as the "Limited Partners' Unreturned Capital
Contributions");
(iii) Third, to the General Partners until such time as the General
Partners' aggregate Capital Account balances equal the sum of 1.01% of the
Limited Partners' Unreturned Capital Contributions plus one-third ( 1/3) of
the excess, if any, of the Limited Partners' aggregate Capital Account
balances over the Limited Partners' Unreturned Capital Contributions;
(iv) Finally, the balance of the remaining portion of gain shall be
allocated among the General Partners and Limited Partners in accordance
with the Net Income allocation percentages set forth in clause (a)(i)(2) of
Article 15.
(d) Distribution of Assets Upon Liquidation and Winding Up of the
Partnership. Upon the sale of all or substantially all of the Partnership's
assets and/or the dissolution and winding up of the Partnership, the cash and
unsold assets of the Partnership, if any, shall be distributed in the following
order of priority (after the allocations of gains and losses to the Partners'
Capital Accounts are made pursuant to paragraph (c) of this Article):
(i) First, to payment of all loans and obligations of the Partnership,
including loans made by a General Partner and any Affiliates of the General
Partners and any deferred management fees not previously paid;
(ii) Second, to the setting up of any reserves which the Managing
General Partner in its sole discretion deems reasonably necessary for any
contingent liabilities or obligations of the Partnership or of the General
Partners arising out of or in connection with the Partnership. Such
reserves shall be placed in escrow by the Managing General Partner to be
held for the purpose of disbursing such reserves in payment of any such
contingencies, and, at the expiration of such period as the Managing
General Partner in its sole discretion deems advisable, distributing the
remaining balance in the manner hereinafter provided;
(iii) Third, to the Partners pro rata in the amount of their positive
Capital Account balances after such balances have been fully adjusted in
accordance with paragraph (c) of this Article and Article 15; and
(iv) Finally, the balance, if any, to the Partners in proportion to
the Net Income allocation percentages as set forth in clause (a)(i)(2) of
Article 15.
(e) Deficit Capital Accounts at Liquidation. It is understood and agreed
that one purpose of the provisions of Articles 15 and 16 is to ensure that none
of the Partners has a negative Capital Account balance after liquidation and to
ensure that all allocations under Article 15 will be respected by the Internal
Revenue Service. The Partners and the Partnership do not intend nor expect that
any Partner will have a negative Capital Account balance after liquidation, and
the provisions of this Agreement shall be construed and interpreted to give
effect to such intention. However, except as provided below, no Partner shall
have any obligation upon dissolution of the Partnership or at any other time to
restore a negative Capital Account balance other than to contribute any amounts
required under Article 8 that remain uncontributed. Notwithstanding the
foregoing sentence, upon dissolution of the Partnership the General Partners
shall be obligated to make a Capital Contribution to the Partnership equal to
the lesser of (i) the negative aggregate balances in the General Partners'
Capital Accounts after such accounts have been fully adjusted for all
Partnership items pursuant to Article 15 and paragraph (c) of this Article, and
(ii) the excess of 1.01% of the total Capital Contributions made by all Partners
to the Partnership over the total of all Capital Contributions made to date by
the General Partners.
(f) Responsibility of the General Partners or Trustee in Liquidating and
Winding Up the Partnership. Upon dissolution and winding up of the Partnership,
the General Partners or trustee, as the case may be, shall have a certified
public accountant complete a review of the books and prepare an unaudited
statement which shall be furnished to all Partners. The Limited Partners shall
look solely to the assets of the Partnership and not to the General Partners or
the trustee for the return of any portion of their capital.
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17. Limited Partners' Removal of a General Partner.
(a) Election to Remove.
(i) Limited Partners holding 10% of the Units of the Partnership may
request, in writing to the General Partners, a vote for the purpose of
removing a General Partner and/or cancelling any contract for services with
it or its Affiliates, or for adding a new General Partner(s).
(ii) Within 10 days of the General Partners' receipt of such request,
the General Partners shall furnish the Limited Partners with a written
ballot to vote on whether to take such action. The ballot will require that
it be received by the General Partners within 30 days after the date of
mailing as specified in the ballot in order to be valid and counted; and
(iii) The affirmative Majority Vote of the Limited Partners to take
such action, including Units held by Limited Partners who do not vote or
whose ballots were invalid, shall be necessary to remove a General Partner
and/or to cancel any contract for services with it or its Affiliates, or to
add a new General Partner(s).
(b) General Partners' Interest Upon Removal.
(i) In the event a General Partner is removed pursuant to this
Article, it shall be relieved of any and all liabilities as permitted under
the Washington Uniform Limited Partnership Act.
(ii) Upon removal, the General Partner shall be entitled to the fair
market value of its interest at the time of removal as determined by an
independent appraiser. The fair market value shall include prospective
values under Article 15 and paragraphs (c) and (d) of Article 16, to the
extent appropriate. The independent appraiser shall be mutually agreed upon
by the removed Genera} Partner and a Majority Vote of the Limited Partners
or a representative thereof elected by a Majority Vote of the Limited
Partners. In the event the Partners cannot within 15 days of such removal
agree on an appraiser, then the valuation of the removed General Partner's
interest shall be submitted to arbitration in accordance with paragraph (j)
of Article 20; and
(iii) Upon removal, the removed General Partner shall be paid the
value of its interest, as determined in subparagraph (b)(ii) above, in cash
or by the issuance of a promissory note bearing interest at 12% per annum
to be paid in five equal annual installments beginning with the end of the
first fiscal year during which such removal occurs.
(c) Withdrawal of Administrative General Partner. Notwithstanding anything
else in this Agreement to the contrary, in the event (a) John S. Simmers
withdraws as a joint venture partner of FN Equities Joint Venture and is not
replaced by Miles Z. Gordon or another individual or entity satisfactory to the
Managing General Partner in its sole discretion, or (b) John S. Simmers and
Miles Z. Gordon no longer serve as directors of FN Equities, Inc., then, at the
request of the Managing General Partner: (i) FN Equities Joint Venture shall
immediately withdraw without compensation as Administrative General Partner of
the Partnership, and shall no longer have any rights or interest in the
Partnership; (ii) all compensation, all allocations of Net Income, Net Losses,
other Noncash Reductions, other Noncash Additions, credits, net gains and net
losses, and all Cash Available for Distribution and other distributions to which
the Administrative General Partner would otherwise be entitled (including but
not limited to all amounts allocable pursuant to subparagraph (a)(ii) of Article
15) (collectively, "FNEJV Compensation") shall be allocated and distributed to
the Managing General Partner from the date the Managing General Partner
requested that the Administrative General Partner withdraw; and (iii) the
Managing General Partner shall assume all duties, responsibilities and authority
previously granted to the Administrative General Partner; provided, however,
that the Managing General Partner may, in its sole discretion, grant all or any
portion of the FNEJV Compensation to any individual or entity, including but not
limited to Messrs. Simmers or Gordon or FN Equities Joint Venture, in return for
which such individual or entity shall render administrative services to the
Partnership.
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18. Records and Reports.
(a) Books and Records. The books and records of the Partnership shall be
maintained in accordance with the method determined by the General Partners in
their sole discretion to be in the best interests of the Partnership.
(b) Quarterly Reports. The Limited Partners will receive quarterly reports
for the first two years of Partnership operations. Such reports shall set forth
all fees received by the General Partners and their Affiliates during the
quarter period.
(c) Semi-Annual Reports. The Limited Partners will receive, in addition to
the quarterly reports indicated above, within sixty (60) days after the
Partnership's first six-month period of operations and each six-month period
following the end of the Partnership's fiscal year, an unaudited balance sheet,
statement of income and cash flow statement covering such period.
(d) Annual Report. Within one hundred twenty (120) days after the end of
the Partnership's fiscal year, the General Partners shall prepare and cause to
be distributed to each Limited Partner an audited statement of the Partnership's
operations for such year, including a balance sheet as of the end of the fiscal
year and statements of income, partners' equity and changes in financial
position, a cash flow statement for such year and a report of the activities of
the Partnership during such year. Said statements will be audited either
according to generally accepted accounting principles and will be accompanied by
an auditor's report containing an opinion of independent certified public
accountants.
(e) Additional Reports. The General Partners may distribute to Limited
Partners such additional reports as they believe, in their sole discretion, are
appropriate.
(f) Tax Information. Within 75 days after the end of the Partnership's
fiscal year, the General Partners shall furnish each Limited Partner such
information as is necessary for the proper preparation of the Limited Partner's
federal income tax returns.
(g) Filings with Regulatory Authorities. All reports required by regulatory
authorities shall be filed within a reasonable time period, including such of
the above reports as are required pursuant to the rules and regulations of any
applicable state securities authority.
19. Amendment of the Certificate and Agreement of Limited Partnership.
(a) Amendments by General Partners Without Consent of Limited Partners. The
General Partners may amend this Agreement, without the consent of any of the
Limited Partners, to (i) admit any Limited Partner, Substitute Limited Partner
or additional Limited Partner in accordance with the provisions of Article 8 or
14, (ii) change the name and/or principal place of business of the Partnership,
or (iii) cure any ambiguity, or correct or supplement any provision hereof which
may be inconsistent with any other provision hereof, or to make amendments with
respect to any matter or question arising under this Agreement so long as such
additional provision is not inconsistent herewith; provided, however, that no
amendment shall be adopted pursuant to this Article unless the adoption thereof
(i) is for the benefit of or not adverse to the interests of the Limited
Partners, (ii) does not alter, adversely to the Limited Partners or any of them,
the allocations of Cash Distributions, Net Income or Net Losses among the
Limited Partners or between the Limited Partners and the General Partners, and
(iii) does not affect the limited liability of the Limited Partners or the
status of the Partnership as a partnership for federal income tax purposes.
(b) Amendment by Majority Vote of the Limited Partners Without Consent of
the General Partners. The Limited Partners may amend this Agreement pursuant to
a Majority Vote of the Limited Partners without the consent of the General
Partners, except that the Limited Partners may not so amend:
(i) Any provision of this Agreement that affects the rights of or
payments, allocations, compensation and reimbursements to the General
Partners without the consent of the General Partners; and
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(ii) Any provision of this Agreement so as to convert a Limited
Partner's interest into a General Partner's interest or otherwise modify
the limited liability of Limited Partners without the consent of each
Limited Partner adversely affected thereby; provided, further, that this
paragraph (b) may be amended only by the consent of all of the Partners.
(c) Amendments by General Partners with a Majority Vote of the Limited
Partners. In addition to any amendment otherwise authorized herein, this
Agreement may be amended by the General Partners with the consent, pursuant to a
Majority Vote, of the Limited Partners; provided, however, that this Agreement
may not be amended so as to convert a Limited Partner's interest into a General
Partner's interest or otherwise modify the limited liability of a Limited
Partner without the consent of each Limited Partner adversely affected thereby;
provided further that this paragraph (c) may be amended only by the consent of
all of the Partners.
(d) Execution and Recording of Amendments. Any amendment to this Agreement
adopted in accordance with the provisions of this Article or in accordance with
any other provisions of this Agreement shall be executed by the Managing General
Partner for itself and as attorney-in-fact for the other Partners pursuant to
the power of attorney contained in paragraph (f) of Article 20 (except that any
such amendment requiring the consent of a Limited Partner under paragraph (b) or
(c) above, other than the consent of a Limited Partner to the admission of an
assignee of any of his or her Units as a Substitute Limited Partner, shall be
executed by such Limited Partner personally, or by the Managing General Partner
as attorney-in-fact for such Limited Partner under a power of attorney given
expressly with respect to such amendment). After the execution of such
amendment, the General Partners shall prepare and record or file any certificate
or other document which may be required to be recorded or filed with respect to
such amendment; either under the Washington Uniform Limited Partnership Act or
under the law of any other applicable jurisdiction.
20. Miscellaneous Provisions.
(a) Notices. All notices or statements required to be given under this
Agreement by any party to any other party shall be in writing, sent by telegram
or certified mail and, if to the Limited Partners, addressed as shown opposite
the signature on the Signature Page and Power of Attorney to the Subscription
Agreement; if to the General Partners, addressed as follows:
Managing General Partner:
Northland Communications Corporation
3500 One Union Square Building
Seattle, Washington 98101
Administrative General Partner:
FN Equities Joint Venture
3858 Carson Street, Suite 300
Torrance, California 99503
Notices shall be given and any applicable time shall run from the date such
notice is placed in the mails or delivered to the telegraph company as to any
notice given by a General Partner, and when received as to any notice given by
any other party.
Any notice to a party other than the General Partners, including a notice
requiring concurrence or nonconcurrence, shall be effective, and any failure to
respond binding, irrespective of whether or not such notice is actually
received, and irrespective of any disability or death on the part of the notice,
whether or not known to the party giving such notice.
The address of any party hereto may be changed by written notice to the
Limited Partners in the event of a change of address by the General Partners, or
to the General Partners in the event of change of address by a Limited Partner;
provided, that in the event of a transfer of interest hereunder, no notice to
any such transferee shall be required, nor shall such transferee have any rights
hereunder, until notice
B-22
135
thereof shall have been given to the General Partners. Any transfer of interests
hereunder shall not increase the duty to give notice, and in the event of a
transfer of less than all of a party's interest hereunder or the transfer of
interest hereunder to more than one party, notice to any owner of any portion of
such transferred interests shall be notice to all owners thereof.
(b) Applicable Law. Notwithstanding the place where this Agreement may be
executed by any of the parties hereto, the parties expressly agree that all the
terms and provisions hereof shall be construed under the internal laws of the
State of Washington and that the Washington Uniform Limited Partnership Act as
now adopted or as may be hereafter amended shall govern the partnership aspects
of this Agreement.
(c) Captions. Headings used herein are for reference purposes only and do
not affect the meaning or interpretation of this Agreement.
(d) Execution in Counterparts. This Agreement may be executed in any number
of counterparts with the same effect as if the parties hereto had all signed the
same document, and all of such counterparts shall constitute one and the same
document.
(e) Successors in Interest. Subject to the restrictions against assignment
as herein contained, this Agreement shall inure to the benefit of and shall be
binding upon successors in interest, personal representatives, estates, heirs,
or assignees hereto.
(f) Power of Attorney. Each Partner, including the Administrative General
Partner, hereby makes, constitutes and appoints the Managing General Partner,
with full power of substitution and resubstitution, his or her true and lawful
attorney-in-fact, for him or her and in his or her name, place and stead and for
his or her use and benefit, to sign, acknowledge, file and record: (a) this
Agreement, as well as amendments thereto, under the laws of the State of
Washington or the laws of any other state in which such Agreement or amendment
is required to be filed; (b) any other instrument or document which may be
required to be filed by the Partnership under the laws of any state or of any
governmental agency, or which the General Partners deem it advisable to file;
(c) any instruments or documents which may be required to effect the
continuation of the Partnership, or the dissolution and termination of the
Partnership, provided such continuation or dissolution and termination are in
accordance with the terms of this Agreement; (d) any instrument or documents
relating to the acquisition of Partnership properties, including, but not
limited to, purchase and sale agreements and loan documents relating to the
financing of the acquisition of Partnership properties; (e) any instruments or
documents relating to operating, management or agency agreements; (f) contracts,
instruments, agreements or other documents with utilities, franchise or similar
operating authorities; and (g) all agreements or other instruments required or
deemed beneficial to implement the power granted to the General Partners under
this Agreement.
Each of the Partners, including the Administrative General Partner, does
hereby further agree, whenever requested to do so, personally to sign, swear or
affirm under oath, acknowledge and deliver any such instrument or document
provided for under this paragraph (f), and to sign, swear or affirm under oath,
acknowledge and deliver whatever further documents or instruments may be
required by the Managing General Partner.
The power of attorney granted hereunder to the Managing General Partner:
(i) Is a special power of appointment coupled with an interest, is
irrevocable, and shall (to the extent permitted by applicable law) survive
the death or disability of the Partner;
(ii) Shall survive the delivery of an assignment by a Limited Partner
of all or any portion of his or her Units; except where the assignee
thereof has been approved by the Managing General Partner for admission to
the Partnership as a Substitute Limited Partner, the power of attorney
shall survive the delivery of such assignment for the sole purpose of
enabling the Managing General Partner to execute, acknowledge and file any
instrument necessary to effect such substitution; and
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136
(iii) May be exercised by the Managing General Partner for each
Partner by a facsimile signature or by listing all of the Partners
executing any instrument with a single signature as attorney-in-fact for
all of them.
(g) Meetings. At any time, or from time to time, Limited Partners owning
ten percent (10%) or more of the Units may require, by written notice to the
General Partners specifying in general terms the subjects to be considered, the
General Partners to call, or the General Partners may on their own motion call,
a special meeting of the Limited Partners; and the General Partners, within ten
(10) days after any such notice is received, shall give notice of such special
meeting to all Limited Partners whose addresses are on record with the
Partnership, including in such notice a copy of the notice requiring the call.
Meetings may be held within or without the state of Washington and not sooner
than five nor more than twenty days after the giving of such notice, and votes
at such meetings may be accomplished either in person or by proxy.
(h) Gender and Headings. The use of any gender herein shall be deemed to be
or include the other and the use of the singular herein shall be deemed to be or
include the plural (and vice versa) wherever appropriate.
(i) Arbitration. Any controversy between the parties hereto arising out of
this Agreement shall be submitted to arbitration before any arbitrator or
arbitrators chosen in accordance with the rules of the American Arbitration
Association. Such arbitration shall take place in Seattle, Washington unless the
parties mutually agree otherwise.
(j) No Third Party Beneficiaries. Unless explicitly stated to the contrary
herein, there shall be no third party beneficiaries to this Agreement.
21. Addresses. The addresses of the General Partners, the Original Limited
Partner and the additional Limited Partners are as follows:
Managing General Partner
Northland Communications Corporation
3500 One Union Square Building
Seattle, Washington 98101
Administrative General Partner:
FN Equities Joint Venture
3858 Carson Street, Suite 300
Torrance, California 90503
Original Limited Partner:
Richard I. Clark
3500 One Union Square Building
Seattle, Washington 98101
Limited Partners:
(Set forth on attached Schedule A)
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DATED as of the 3rd day of
November, 1986.
Managing General Partner: NORTHLAND COMMUNICATIONS
CORPORATION
By
-----------------------------------
John S. Whetzell, President
Administrative General Partner: FN EQUITIES JOINT VENTURE
By: FN Equities, Inc., General
Partner
----------------------------------
By
-----------------------------------
Its Executive Vice President
Original Limited Partner,
hereby withdrawing: ------------------------------------
Richard I. Clark
By: NORTHLAND COMMUNICATIONS
CORPORATION,
as attorney-in-fact
Limited Partners (as set
forth on the attached
Schedule A): By
-----------------------------------
John S. Whetzell, President
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138
EXHIBIT C
PROPOSED AMENDMENT NO. 1 TO THE AMENDED AND RESTATED
CERTIFICATE AND AGREEMENT OF LIMITED PARTNERSHIP OF
NORTHLAND CABLE PROPERTIES SIX LIMITED PARTNERSHIP
This amendment to the Amended and Restated Certificate and Agreement of
Limited Partnership (the "Amendment") of Northland Cable Properties Six Limited
Partnership, a Washington limited partnership ("NCP-Six"), is entered into by
and between Northland Communications Corporation, a Washington corporation, as
the managing general partner of NCP-Six, and a majority in interest of all of
the limited partners of NCP-Six. The parties agree as follows:
1. Amendment. The Amended and Restated Certificate and Agreement of
Limited Partnership of Northland Cable Properties Six Limited Partnership,
dated November 3, 1986 (the "Agreement"), is hereby amended by replacing
Article 7 in its entirety with the following new Article 7:
"7. Term of Partnership. The Partnership commenced as of the date
of filing and recording the original certificate of limited partnership
of the Partnership and shall continue until the date of the first of the
following events:
(a) December 31, 2007; or
(b) Dissolution as provided in Article 16 of this Agreement."
2. Effect of Amendment. Except as expressly amended by this Amendment,
the Agreement shall remain in full force and effect.
DATED this day of , 2001.
NORTHLAND COMMUNICATIONS CORPORATION,
as both managing general partner of
Northland Cable Properties Six Limited
Partnership, and as attorney-in-fact
for a majority in interest of the
limited partners of Northland Cable
Properties Six Limited Partnership.
By:
------------------------------------
John S. Whetzell, President
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EXHIBIT D
PROPOSED AMENDMENT NO. 2 TO THE AMENDED AND RESTATED
CERTIFICATE AND AGREEMENT OF LIMITED PARTNERSHIP OF
NORTHLAND CABLE PROPERTIES SIX LIMITED PARTNERSHIP
This amendment to the Amended and Restated Certificate and Agreement of
Limited Partnership (the "Amendment") of Northland Cable Properties Six Limited
Partnership, a Washington limited partnership ("NCP-Six"), is entered into by
and between Northland Communications Corporation, a Washington corporation
("Northland"), as the managing general partner of NCP-Six, and a majority in
interest of all of the limited partners of NCP-Six. The parties agree as
follows:
1. Amendment. The Amended and Restated Certificate and Agreement of
Limited Partnership of Northland Cable Properties Six Limited Partnership,
dated November 3, 1986 (the "Agreement"), is hereby amended by adding a new
Article 22 as follows:
"22. Sale and Distribution to Northland Communications Corporation.
"(a) Authority for Agreement. The Partnership is hereby
authorized to enter into an agreement (the "Northland Agreement")
with Northland Communications Corporation or its assigns
("Northland") to (i) sell to Northland the undivided portion of the
franchises and operating assets of the Partnership (collectively, the
"Assets") that are attributable to the Limited Partners' collective
interest in the Partnership, and (ii) distribute in kind to Northland
the undivided portion of the Assets that are attributable to the
general partner's interest in the Partnership. The terms and
conditions of the Northland Agreement shall be substantially as
described in the proxy statement of the Partnership dated April 15,
2001 (the "Proxy Statement"). This Article 22 relates only to the
acquisition of the Assets by Northland and shall not, in any respect,
restrict or otherwise affect the authority of the general partner to
sell or otherwise dispose of the Assets to unaffiliated third parties
in accordance with Article 11.
"(b) Allocation of Gain and Cash Distributions. Gain from the
sale by the Partnership to Northland of the undivided portion of the
Assets that are attributable to the Limited Partners' collective
interest in the Partnership shall be allocated solely to the Limited
Partners in accordance with paragraph 16(c) of this Agreement.
Distributions on and following the Closing Date shall be made in
accordance with paragraph 16(d) of this Agreement, except that any
liquidating distributions to the general partner shall be in kind and
shall include the in-kind distribution to Northland of the undivided
portion of the Assets that are attributable to the general partner's
interest in the Partnership, and any liquidating distributions to the
Limited Partners shall be monetary and shall include the net proceeds
from the sale to Northland. The promissory note to be paid by
Northland as part of the purchase price for the Assets shall be
distributed to a liquidating trust as set forth in the Proxy
Statement. All other allocations of income, gain or loss and
distributions of cash shall be made to all the Partners in accordance
with this Agreement.
"(c) Reports. The general partner shall not be obligated to
furnish quarterly, semi-annual or annual reports pursuant to
paragraph 18(b), (c) or (d) of this Agreement for the year in which
such liquidation occurs."
2. Amendment. Paragraph 16(f) of the Agreement is further amended, to
be consistent with new Article 22 above, to read in its entirety as
follows:
"(f) Responsibility of the General Partner or Trustee in
Liquidating and Winding Up the Partnership. The Limited Partners
shall look solely to the assets of the Partnership and not to the
General Partner or the trustee, as the case may be, for the return of
any portion of their capital.
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Notwithstanding anything else in this Agreement to the contrary,
except as provided in and in accordance with Article 22 below, no assets
of the Partnership will be distributed in kind to the Partners in
liquidation unless a liquidating trust or similar vehicle is used in
connection with such distribution."
3. Authorization of General Partner. The general partner is authorized
to take all other and further action deemed by it necessary or appropriate
to effect the foregoing, including but not limited to the creation of a
liquidating trust for purposes of collecting note payments, taking all
other actions generally described in the Proxy Statement, and carrying on
other appropriate business following dissolution of NCP-Six.
4. Effect of Amendment. Except as expressly amended by this Amendment,
the Agreement shall remain in full force and effect.
DATED this day of , 2001.
NORTHLAND COMMUNICATIONS CORPORATION,
as both managing general partner of
Northland Cable Properties Six Limited
Partnership, and as attorney-in-fact
for a majority in interest of the
limited partners of Northland Cable
Properties Six Limited Partnership.
By:
------------------------------------
John S. Whetzell, President
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EXHIBIT E
NORTHLAND CABLE NETWORKS LLC
ASSET PURCHASE AGREEMENT
[SUBJECT TO NEGOTIATION -- FINAL FORM TO FOLLOW]
E-1
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EXHIBIT F
NORTHLAND CABLE PROPERTIES, INC.
ASSET PURCHASE AGREEMENT
[SUBJECT TO NEGOTIATION -- FINAL FORM TO FOLLOW]
F-1
143
EXHIBIT G
PROMISSORY NOTE
$6,075,000 , 2001
Seattle, Washington
FOR VALUE RECEIVED, NORTHLAND CABLE NETWORKS LLC (the "Maker"), promises to
pay to NORTHLAND CABLE PROPERTIES SIX LIMITED PARTNERSHIP, a Washington limited
partnership ("NCP-Six"), upon the terms and conditions stated herein, the
principal sum of Six Million Seventy-Five Thousand Dollars ($6,075,000), which
sum shall be payable in three equal payments of principal, plus accrued
interest, due annually commencing on the first anniversary of the date of this
Note. Payments shall be made in lawful money of the United States, at such place
as NCP-Six may designate in writing. Maker shall have the privilege of prepaying
all or any portion of this Note without premium or penalty.
This Note is issued in connection with that certain Asset Purchase
Agreement between the Maker and NCP-Six dated as of , 2001 (the
"Agreement"). The Maker may be entitled to the right of offset, as provided in
the Agreement, and may, without being in default under this Note, effect such
offset against any amounts payable under this Note.
The principal sum of this Note shall bear interest at a per annum rate of
eight percent (8%). If any portion of this Note shall not be paid when due, then
the principal balance of the Note shall thereafter bear interest at the rate of
twelve percent (12%) per annum, from the date of such default. A default shall
exist as to any failure of the Maker to make any payment required hereunder in a
timely manner; provided, however, there shall be no default and no payment shall
be due hereunder if the Maker is effecting an offset to account for any
prorations or other adjustments provided for pursuant to the Agreement.
In the event a suit is commenced to enforce the payment of this Note, the
Maker hereby agrees to pay all costs of collection, including a reasonable sum
as the fees of attorneys and certified public accountants.
The indebtedness and all other obligations evidenced by this Note are
subordinated to the prior payment in full in cash of all obligations of the
Maker from time to time outstanding in respect of all other indebtedness of the
Maker, other than any indebtedness which by its terms is expressly subordinated
to this Note, including, without limitation, amounts that would become due
except for the operation of the automatic stay under sec. 362(a) of the
Bankruptcy Code, 11 U.S.C. sec. 362(a), and interest, fees, charges and other
amounts that, but for the filing of a petition in bankruptcy with respect to the
Maker, would accrue on such indebtedness whether or not a claim is allowed
against the Maker for the same in such proceeding (collectively, "Senior Debt").
The Maker agrees that upon the occurrence and during the continuance of any
default under any Senior Debt or upon any distribution of the assets or
readjustment of the obligations of the Maker whether by reason of voluntary or
involuntary liquidation, dissolution, winding up, composition, bankruptcy,
reorganization, arrangement, receivership, assignment for the benefit of
creditors or any marshalling of its assets or the readjustment of its
liabilities, whether partial or total, the holders of the Senior Debt shall be
entitled to receive cash payment in full of lawful money of the United States of
America of all of the Senior Debt in accordance with their respective terms
prior to payment of, or other distribution in respect of, all or any part of the
indebtedness or other obligations hereunder. NCP-Six agrees, by its acceptance
of this Note, that at any time that payment under this Note is prohibited by
operation of this paragraph, it shall not take any action to enforce or
otherwise collect any such payment and in the event that, notwithstanding the
foregoing, NCP-Six shall have received any payment under or in respect of this
Note at a time when such payment is prohibited, then such payment shall be
received and held in trust for the benefit of the holders of the Senior Debt and
shall be paid over and delivered to such holders or their agent to the extent
necessary to pay the Senior Debt in full in cash after giving effect to any
other concurrent payment or distribution to such holders in respect of the
Senior Debt.
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THIS NOTE IS AND SHALL FOR ALL PURPOSES BE DEEMED NONASSIGNABLE AND
NONNEGOTIABLE; provided, however, that NCP-Six may assign its rights and
delegate its duties and obligations under this Note, including without
limitation the right to receive payment hereunder, to a liquidating trust
established for the purpose of distributing amounts due hereunder for the
benefit of the beneficiaries of such liquidating trust.
This Note is to be construed in all respects and enforced according to the
laws of the State of Washington.
ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN MONEY, EXTEND CREDIT, OR TO FORBEAR
FROM ENFORCING REPAYMENT OF A DEBT ARE NOT ENFORCEABLE UNDER WASHINGTON LAW.
MAKER: NORTHLAND CABLE NETWORKS LLC
By: NORTHLAND COMMUNICATIONS
CORPORATION
Its: Sole Manager and a Member
By:
--------------------------------------
Its:
--------------------------------------
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145
EXHIBIT H
NORTHLAND COMMUNICATIONS CORPORATION
PROMISSORY NOTE
$5,750,000 , 2001
Seattle, Washington
FOR VALUE RECEIVED, NORTHLAND COMMUNICATIONS CORPORATION (the "Maker"),
promises to pay to NORTHLAND CABLE PROPERTIES SIX LIMITED PARTNERSHIP, a
Washington limited partnership ("NCP-Six"), upon the terms and conditions stated
herein, the principal sum of Five Million Seven Hundred Fifty Thousand Dollars
($5,750,000), which sum shall be payable in three equal payments of principal,
plus accrued interest, due annually commencing on the first anniversary of the
date of this Note. Payments shall be made in lawful money of the United States,
at such place as NCP-Six may designate in writing. Maker shall have the
privilege of prepaying all or any portion of this Note without premium or
penalty.
This Note is issued in connection with that certain Asset Purchase
Agreement between the Maker or one of its affiliates or assigns and NCP-Six
dated as of , 2001 (the "Agreement"). The Maker may be entitled to
the right of offset, as provided in the Agreement, and may, without being in
default under this Note, effect such offset against any amounts payable under
this Note.
The principal sum of this Note shall bear interest at a per annum rate of
eight percent (8%). If any portion of this Note shall not be paid when due, then
the principal balance of the Note shall thereafter bear interest at the rate of
twelve percent (12%) per annum, from the date of such default. A default shall
exist as to any failure of the Maker to make any payment required hereunder in a
timely manner; provided, however, there shall be no default and no payment shall
be due hereunder if the Maker is effecting an offset to account for any
prorations or other adjustments provided for pursuant to the Agreement.
In the event a suit is commenced to enforce the payment of this Note, the
Maker hereby agrees to pay all costs of collection, including a reasonable sum
as the fees of attorneys and certified public accountants.
The indebtedness and all other obligations evidenced by this Note are
subordinated to the prior payment in full in cash of all obligations of the
Maker from time to time outstanding in respect of all other indebtedness of the
Maker, other than any indebtedness which by its terms is expressly subordinated
to this Note, including, without limitation, amounts that would become due
except for the operation of the automatic stay under sec. 362(a) of the
Bankruptcy Code, 11 U.S.C. sec. 362(a), and interest, fees, charges and other
amounts that, but for the filing of a petition in bankruptcy with respect to the
Maker, would accrue on such indebtedness whether or not a claim is allowed
against the Maker for the same in such proceeding (collectively, "Senior Debt").
The Maker agrees that upon the occurrence and during the continuance of any
default under any Senior Debt or upon any distribution of the assets or
readjustment of the obligations of the Maker whether by reason of voluntary or
involuntary liquidation, dissolution, winding up, composition, bankruptcy,
reorganization, arrangement, receivership, assignment for the benefit of
creditors or any marshalling of its assets or the readjustment of its
liabilities, whether partial or total, the holders of the Senior Debt shall be
entitled to receive cash payment in full of lawful money of the United States of
America of all of the Senior Debt in accordance with their respective terms
prior to payment of, or other distribution in respect of, all or any part of the
indebtedness or other obligations hereunder. NCP-Six agrees, by its acceptance
of this Note, that at any time that payment under this Note is prohibited by
operation of this paragraph, it shall not take any action to enforce or
otherwise collect any such payment and in the event that, notwithstanding the
foregoing, NCP-Six shall have received any payment under or in respect of this
Note at a time when such payment is prohibited, then such payment shall be
received and held in trust for the benefit of the holders of the Senior Debt and
shall be paid over and delivered to such holders or their agent to the extent
necessary to pay the Senior Debt in full in cash
H-1
146
after giving effect to any other concurrent payment or distribution to such
holders in respect of the Senior Debt.
THIS NOTE IS AND SHALL FOR ALL PURPOSES BE DEEMED NONASSIGNABLE AND
NONNEGOTIABLE; provided, however, that NCP-Six may assign its rights and
delegate its duties and obligations under this Note, including without
limitation the right to receive payment hereunder, to a liquidating trust
established for the purpose of distributing amounts due hereunder for the
benefit of the beneficiaries of such liquidating trust.
This Note is to be construed in all respects and enforced according to the
laws of the State of Washington.
ORAL AGREEMENTS OR ORAL COMMITMENTS TO LOAN MONEY, EXTEND CREDIT, OR TO FORBEAR
FROM ENFORCING REPAYMENT OF A DEBT ARE NOT ENFORCEABLE UNDER WASHINGTON LAW.
MAKER: NORTHLAND COMMUNICATIONS CORPORATION
By:
--------------------------------------------
Its:
--------------------------------------------
By:
--------------------------------------------
Its:
--------------------------------------------
H-2
147
EXHIBIT I
APPRAISAL OF DANIELS & ASSOCIATES
NORTHLAND CABLE PROPERTIES SIX LIMITED PARTNERSHIP
APPRAISAL ANALYSIS SUMMARY
INTRODUCTION
Northland Cable Properties Six Limited Partnership (the "Partnership") is a
Washington limited partnership consisting of two general partners (the "General
Partners") and approximately 1,865 limited partners. Northland Communications
Corporation ("Northland"), a Washington corporation, is the Managing General
Partner of the Partnership. The Partnership was formed on January 22, 1986 and
began operations in 1986 with the acquisition of the cable television systems
serving the communities surrounding Starkville, Maben and Mathiston,
Mississippi, six additional communities in central Mississippi and the community
of and areas surrounding Highlands, North Carolina. As the result of subsequent
acquisitions made between July 1988 and January 1998 as well as sales of certain
systems, the Partnership currently owns and operates seven cable television
system groups ("System Operating Groups"), comprised of twelve headends, serving
numerous communities in Mississippi, South Carolina and North Carolina (referred
to in the aggregate as the "Systems"). As of March 31, 1999, the Systems passed
an estimated 50,060 homes and served approximately 32,963 equivalent basic
subscribers ("EBUs").
Based on information provided by Northland for the three month period ended
March 31, 1999, annualized run-rate revenue and operating cash flow for the
Systems are estimated to be approximately $14.3 million and $6.7 million,
respectively. This equates to average monthly revenue per EBU of $36.07 and
average annual cash flow per EBU of $203.15.
A summary of the Partnership's System Operating Groups is presented in the
following table.
EST.
3/31/99 ESTIMATED ANNUALIZED
SYSTEM MILES OF PLANT/ EST. ESTIMATED 3/31/99 3/31/99 ANNUALIZED RUN-RATE
OPERATING NUMBER OF HOMES/ HOMES EBUS/ PAY UNITS/ RUN-RATE CASH FLOW/
GROUP HEADENDS MILE PASSED PENETRATION PENETRATION REVENUE MARGIN
--------- --------------- ------ --------- ----------- ----------- ----------- ---------------
Starkville, MS.............. 194.5/2 57 11,085 8,097/73.0% 2,930/36.2% $ 3,680,744 $1,895,951/51.5%
Philadelphia, MS............ 170/1 26 4,395 3,851/87.6% 1,450/37.7% 1,617,933 731,306/45.2%
Kosciusko, MS............... 125.8/2 43 5,440 4,350/80.0% 1,371/31.5% 1,854,490 952,651/51.4%
Forest, MS.................. 154/2 24 3,735 3,222/86.3% 1,442/44.8% 1,390,976 689,646/49.6%
Subtotal, MS.............. 644.3/7 38 24,655 19,520/79.2% 7,193/36.9% 8,544,143 4,269,554/50.0%
Highlands, NC............... 128/1 33 4,190 2,584/61.7% 482/18.7% 1,036,879 459,752/44.3%
Barnwell, SC................ 308.5/3 39 12,125 5,941/49.0% 4,301/72.4% 2,694,265 1,079,592/40.1%
Bennettsville, SC........... 145/1 63 9,090 4,918/54.1% 3,628/73.8% 1,993,654 887,575/44.5%
Subtotal, SC.............. 453.5/4 47 21,215 10,859/51.2% 7,929/73.0% 4,687,919 1,967,167/42.0%
Total All Systems........... 1,225.8/12 41 50,060 32,963/65.8% 15,604/47.3% $14,268,941 $6,696,473/46.9%
Daniels was retained by Northland to appraise the fair market value of the
assets of the Partnership as of July 1, 1999 (the "Valuation Date"). The
appraisal was performed in conjunction with the anticipated dissolution and
liquidation of the Partnership. This report summarizes Daniels' conclusions and
provides an outline of the scope of the engagement, the process used, an
overview of the Systems by System Operating Group, the valuation methodology,
the assumptions relied upon and an explanation of the values derived.
PROCESS
Daniels prepared an independent appraisal analysis to determine the fair
market value of the operating assets of the Partnership. The Systems were
appraised on a going-concern basis, in conformance with standard appraisal
techniques, utilizing a ten-year discounted net cash flow analysis and applying
relevant market and economic factors. The appraisal assumes that the Systems
have been and will continue to be
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operated as efficiently as comparable cable television systems and that the
franchises and leases of assets used in the operation of the Systems will be
renewed indefinitely without material changes, other than upgrade and/or rebuild
requirements (see "The Systems").
The appraisal process included discussions with the Partnership's
management, due diligence visits to substantially all of the Systems by Daniels'
personnel, research of demographic information concerning the various
communities served by the Partnership and analyses of historical and forecasted
financial and operating information, as well as Daniels' general knowledge about
the cable television industry. From such due diligence, summaries of the
relevant operating, technical, financial and demographic characteristics were
prepared for each of the seven System Operating Groups. These characteristics
were instrumental in determining value.
In order to assess the fair market value of the Partnership's operating
assets, Daniels prepared detailed operating and financial forecasts for each of
the seven System Operating Groups, incorporating the critical elements of
operating revenues and expenses as well as capital expenditure requirements.
These financial forecasts then formed the basis for determining a discounted
cash flow value for each System Operating Group, a standard valuation
methodology used within the cable television industry (the "DCF" valuation
methodology). The combined values of the Systems, by System Operating Group,
pursuant to the DCF, provide a value of the operating assets of the Partnership.
In addition, using the private market transaction multiples methodology, an
aggregate value for the Partnership's cable television assets was derived by
applying value per subscriber and operating cash flow multiples obtained in
private market sales of comparable cable television systems to the respective
statistics of the Systems. The results of the DCF and the private market
transaction multiples valuation methodologies were then analyzed to determine a
final appraised value for the Partnership's operating assets.
THE SYSTEMS
The Systems are comprised of seven System Operating Groups, four of which
are located in Mississippi, two of which are located in South Carolina and one
of which is located in North Carolina. The largest System Operating Group is
Starkville, Mississippi with 8,097 EBUs as of March 31, 1999. The smallest
System Operating Group is Highlands, North Carolina with 2,584 EBUs as of the
same period. As of March 31, 1999, the System Operating Groups had EBU
penetration rates ranging from 49.0% to 87.6%, and a weighted average EBU
penetration level of 65.8%. Subscriber growth rates for the Systems have been
essentially flat to modest for the past several years.
In the seven System Operating Groups, there are a total of 12 headends and
1,226 plant miles, of which approximately 89% is aerial and 11% is underground.
Based on information provided by Northland, approximately 10% of the plant miles
are at 300 MHz; 42% are at 330 MHz; 1% are at 400 MHz; 36% are at 450 MHz; and
11% are at 550 MHz. According to Northland, none of the Systems are currently
addressable, and pay-per-view service is offered on an event-only basis.
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TECHNICAL SUMMARY
MILES OF PLANT AT VARIOUS BANDWIDTHS AS OF MARCH 31, 1999
300 MHz 330 MHz 400 MHz 450 MHz 550 MHz TOTAL
SYSTEM OPERATING MILES MILES MILES MILES MILES MILES
---------------- ------- ------- ------- ------- ------- -------
Starkville, MS................... 194.5 194.5
Philadelphia, MS................. 51 119 170
Kosciusko, MS.................... 125.8 125.8
Forest, MS....................... 17 137 154
Subtotal, MS................... 17 382.5 244.8 644.3
Highlands, NC.................... 128 128
Barnwell, SC..................... 111.2 197.3 308.5
Bennettsville, SC................ 6 139 145
Subtotal, SC................... 111.2 6 197.3 139 453.5
TOTAL ALL SYSTEMS................ 128.2 510.5 6 442.1 139 1,225.8
Percent of Total............ 10.5% 41.6% 0.5% 36.1% 11.3% 100.0%
The reality of competition from DBS, SMATV and MMDS and the lack of excess
channel capacity in certain of the Partnership's Systems suggest that a rebuild
or upgrade of all of the Systems with a current capacity of less than 450 MHz
would be prudent over the next several years. The Partnership plans to upgrade
substantially all of the Systems to a bandwidth of at least 450 MHz over the
next three years; however, there are no current franchise requirements to
rebuild or upgrade any of the Systems. None of the Systems are currently
addressable.
The quality of broadcast signals that can be received off-air varies among
the different System Operating Groups from good to poor, and the communities
that receive good off-air signals typically have a lower subscriber penetration
rate. Selected subscribers in the Starkville System Operating Group have the
option of receiving service from Wireless One, a MMDS operator. Management of
the Partnership does not believe that MMDS operators will have a further
material negative effect on the Systems in the future. Additionally, selected
homes in the community of Sapphire Valley in the Highlands system have been
overbuilt by a small operator. Although competition from DBS providers exists in
areas served by the Systems, such competition has not had a material effect on
the Partnership's operations to date.
On May 5, 1995, the Federal Communications Commission ("FCC") announced the
adoption of a simplified set of rate regulation rules that will apply to "small"
cable systems, defined as a system serving 115,000 or fewer subscribers, that
are owned by "small" companies, defined as a company serving 400,000 or fewer
subscribers. Under the FCC's definition, the Partnership is a "small" company
and each of the Partnership's Systems are "small" systems. Maximum permitted
rates under these revised rules are dependent on several factors including the
number of regulated channels offered, net asset basis of plant and equipment
used to deliver regulated services, the number of subscribers served and a
reasonable rate of return.
On February 8, 1996, the Telecommunications Act of 1996 (the "1996 Act")
became law. The 1996 Act eliminated all rate controls on cable programming
service tiers ("CPSTs") of "small" cable systems, defined by the 1996 Act as
systems serving fewer than 50,000 subscribers owned by operators serving fewer
than 1% of all subscribers in the United States (approximately 600,000
subscribers). Under the 1996 Act, all of the Partnership's Systems qualify as
"small" cable systems.
As of March 31, 1999, six of the Partnership's Systems have received
notification that local franchising authorities have elected to certify to
regulate basic rates. Based on Northland's analysis, the rates charged by the
Systems are within the maximum rates allowed under FCC rate regulations.
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STARKVILLE, MISSISSIPPI
The Starkville, Mississippi System Operating Group is the largest of the
seven System Operating Groups with subscribers located in Oktibbeha County,
Mississippi, which is approximately 125 miles northeast of Jackson, Mississippi.
The City of Starkville serves as the County Seat and is the home of Mississippi
State University, which has an enrollment of approximately 12,000 students and
features a leading, nationally recognized veterinary medicine program. The
University is the largest employer in Starkville. Also located in Starkville is
the Mississippi Research and Technology Park, a long-range economic development
project initiated through the joint efforts of the City of Starkville, Oktibbeha
County, Mississippi State University and local businesses.
As noted previously, the Starkville system faces limited competition from
Wireless One, a MMDS operator. Additionally, the City of Starkville has formed
an exploratory committee to assess the feasibility of building a cable system.
In consideration of the fact that the City also owns the local power company,
there is at least a potential threat that the City will move forward with a
hardwire overbuild of the Starkville system with a bundled telecommunications
strategy. Additionally, there is a small independent cable operator who has
overbuilt approximately 12 homes in a low density area of Oktibbeha County.
As of March 31, 1999, the Starkville System Operating Group passed 11,085
estimated homes and served 8,097 equivalent basic subscribers, for a penetration
rate of 73.0%. This penetration rate is the fourth highest of the seven System
Operating Groups. There are currently five franchises covering this group, with
franchise expiration dates ranging from November 7, 2005 to June 30, 2010. The
Starkville System Operating Group accounts for approximately 25% of the
Partnership's equivalent basic units.
The Starkville System Operating Group is comprised of two systems, each
with one headend, located in Starkville and Maben, Mississippi. The Starkville
System Operating Group was acquired in 1986 and has approximately 195 miles of
plant, 97% of which is aerial. Currently, 100% of the plant is capable of
passing 330 MHz. Within a period of two years, the Partnership will complete its
rebuild of the Starkville system to 550 MHz and the Maben system to 400 MHz. The
financial forecasts prepared by Daniels take into account such capital projects,
among others.
The Starkville system offers three levels of non-premium service: Economy
Basic service, consisting of 11 primarily broadcast and local origination
channels, for $14.00; Standard Basic service, consisting of the 11 Economy Basic
channels plus an additional 21 satellite channels, for $25.95; and Specialty
Tier service, consisting of the 32 Standard Basic channels plus an additional
eight satellite channels, for $34.45. The Maben system offers 29 channels of
Standard Basic service for $25.50. Both systems offer HBO and Showtime, while
the Starkville system also offers Cinemax and The Disney Channel. The last rate
increase was implemented on August 1, 1998.
BARNWELL, SOUTH CAROLINA
The Barnwell System Operating Group was acquired by the Partnership in
January 1998. Barnwell is the second largest System Operating Group, passing
12,125 estimated homes in the communities of Barnwell, Allendale and Bamberg,
South Carolina and serving 5,941 equivalent basic subscribers as of March 31,
1999. The areas served by the Barnwell System Operating Group are located in
Southern South Carolina, approximately 60 miles south of Columbia, South
Carolina. The economy is based primarily on manufacturing and agricultural
activities. The largest employer in the area is the Savannah River Site nuclear
plant. Other major employers that employ in excess of 500 people include Sara
Lee, Ducane Heating Corporation and Dixie Narco, a soft drink vending machine
manufacturer. The overall penetration rate in this System Operating Group is
49.0%. The Barnwell System Operating Group is covered by 12 franchises which
expire between January 8, 2000 and July 16, 2012. The Barnwell System Operating
Group accounts for approximately 18% of the Partnership's equivalent basic
subscribers.
The Barnwell System Operating Group is comprised of three systems, each
with one headend, located in Barnwell, Allendale and Bamberg, South Carolina.
The Barnwell System Operating Group includes 309 miles of plant, of which
approximately 84% is aerial. Approximately 64% of the plant is capable of
passing
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450 MHz, and approximately 36% can pass 300 MHz. Over the next two years, the
Partnership will complete its rebuild of the entire System Operating Group to
450 MHz. The financial forecasts prepared by Daniels take into account such
capital projects, among others.
The Barnwell system offers two levels of non-premium service: Economy Basic
service, consisting of 13 primarily broadcast and local origination channels,
for $10.26; and Standard Basic service, consisting of the 13 Economy Basic
channels plus an additional 15 satellite channels, for $29.65. Both the
Allendale and Bamberg systems offer Economy Basic service, comprised of 12
channels, for $10.40; and Standard Basic service, comprised of 12 Economy Basic
channels plus an additional 24 channels, for $30.58. The Barnwell system offers
HBO, The Disney Channel, Showtime and The Movie Channel. The Allendale and
Bamberg systems offer the four aforementioned premium channels plus Cinemax. The
last rate increase was implemented on March 1, 1998.
BENNETTSVILLE, SOUTH CAROLINA
The Bennettsville System Operating Group was acquired by the Partnership in
January 1998. The city of Bennettsville is located approximately 100 miles
northeast of Columbia, South Carolina and is the county seat of Marlboro County.
The economy is based primarily on manufacturing and agricultural activities,
with the three largest employers being Mohawk Carpet, United Technologies
Automotive and Williamette Industries. As of March 31, 1999, the Bennettsville
System Operating Group passed 9,090 estimated homes and served 4,918 equivalent
basic subscribers, for a penetration rate of 54.1%. The Bennettsville System
Operating Group represents a single headend located in Bennettsville, South
Carolina, and covers five franchised areas. The five franchises covering this
System Operating Group expire between June 10, 2006 and August 30, 2007. The
Bennettsville System Operating Group accounts for approximately 15% of the
Partnership's equivalent basic subscribers.
The Bennettsville System Operating Group includes 145 miles of plant, of
which approximately 81% is aerial. Approximately 96% of the plant is capable of
passing 550 MHz and approximately 4% can pass 400 MHz. By the end of 2000, the
Partnership is planning to upgrade the small portion of the system that is
currently not capable of passing 550 MHz. The financial forecasts prepared by
Daniels take into account this capital project, among others.
The Bennettsville system offers three levels of non-premium service:
Economy Basic service, consisting of 11 primarily broadcast and local
origination channels, for $7.57; Standard Basic service, consisting of the 11
Economy Basic channels plus an additional 18 satellite channels, for $19.10; and
Super Basic service, consisting of the 29 Standard Basic channels plus an
additional 19 satellite channels, for $26.67. The Bennettsville system offers
HBO, Cinemax, The Disney Channel, Showtime, The Movie Channel and Encore. The
last rate increase was effective May 1, 1998. Service rates at Bennettsville are
lower than the average rates charged by the Systems due to the aggressive
pricing strategy effected by the system's prior owner in response to entry into
the market by an overbuilder, who has subsequently ceased operating in the
market. Northland indicates that significant rate adjustments will be
implemented over the next few years to get the Bennettsville system more in line
with average rates charged by the Systems.
KOSCIUSKO, MISSISSIPPI
Kosciusko is the fourth largest of the seven System Operating Groups,
consisting of two systems, each with one headend, located in Kosciusko and
Carthage, Mississippi, approximately 70 miles northeast of Jackson, Mississippi.
The local economy is based primarily on manufacturing and agricultural
activities with three of the largest employers being Choctaw Maid Farms, Inc.,
Choctaw Manufacturing Enterprise and Interstate Industries, Inc. The Kosciusko
System passes 5,440 estimated homes and serves 4,350 equivalent basic
subscribers as of March 31, 1999, for a penetration rate of 80.0%. There are
three franchise agreements covering the Kosciusko System Operating Group,
expiring between March 13, 2003 and April 4, 2010. The Kosciusko System
Operating Group accounts for approximately 13% of the Partnership's equivalent
basic subscribers.
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The Kosciusko System Operating Group consists of 126 miles of plant, of
which approximately 94% is aerial. Both the Kosciusko and Carthage plants are
capable of passing 450 MHz. The Partnership currently has no plans for a rebuild
of the systems.
The Kosciusko and Carthage systems offer three levels of non-premium
service: Economy Basic service, consisting of 12 primarily broadcast and local
origination channels, for $15.00; Standard Basic service, consisting of the 12
Economy Basic channels plus an additional 19 satellite channels, (18 for
Carthage), for $25.95 in Kosciusko and $25.50 in Carthage; and Specialty Tier
service, consisting of the 31 Standard Basic channels (30 for Carthage) plus an
additional 10 satellite channels, for $34.45 in Kosciusko and $34.00 in
Carthage. Both Systems offer HBO, Cinemax, The Disney Channel and Showtime. The
last rate increase was implemented on August 1, 1998.
PHILADELPHIA, MISSISSIPPI
The Philadelphia System Operating Group serves communities in central
Mississippi through a single headend located in Philadelphia, Mississippi. The
city of Philadelphia is located approximately 80 miles northeast of Jackson,
Mississippi and is the County Seat. Philadelphia's economy is based primarily on
manufacturing with the largest employer being U.S. Electrical Motors.
Additionally, the gaming industry, highlighted by the Silver Star Casino and
Hotel (500+ rooms), owned by the Choctaw Indian Reservation, has added growth to
the local economy. As of March 31, 1999, the Philadelphia System Operating Group
passed 4,395 estimated homes and served 3,851 equivalent basic subscribers, for
a penetration rate of 87.6%. This penetration rate is the highest of the seven
System Operating Groups. The Philadelphia System Operating Group includes a
single headend located in Philadelphia, Mississippi, and has four franchise
agreements expiring between March 20, 2009 and June 3, 2017. The Philadelphia
System Operating Group accounts for approximately 12% of the Partnership's
equivalent basic subscribers, resulting largely from the Silver Star Casino
Hotel.
The Philadelphia System Operating Group includes 170 miles of plant, of
which approximately 96% is aerial. Approximately 70% of the plant is capable of
passing 450 MHz and approximately 30% can pass 330 MHz. Over the next two years,
the Partnership is planning to complete a rebuild of the entire system to 450
MHz. The financial forecasts prepared by Daniels take into account this capital
project, among others.
The Philadelphia system offers three levels of non-premium service: Economy
Basic service, consisting of 12 primarily broadcast and local origination
channels, for $15.00; Standard Basic service, consisting of the 12 Economy Basic
channels plus an additional 16 satellite channels, for $25.50; and Specialty
Tier service, consisting of the 28 Standard Basic channels plus an additional 10
satellite channels, for $34.75. The Philadelphia system offers HBO, Cinemax,
Showtime, Starz and Encore. The last rate increase was implemented on August 1,
1998 for all services and the Specialty Tier service rate was increased again on
May 1, 1999.
FOREST, MISSISSIPPI
The Forest, Mississippi System Operating Group serves communities in
central Mississippi. The local economy is primarily based on agricultural and
manufacturing activities. One of the largest industries in the area is poultry.
Nearly two million birds are dressed per week in Forest, which ranks as the
second-largest producer of broilers in the nation. As of March 31, 1999, the
Forest System Operating Group passed 3,735 estimated homes and served 3,222
equivalent basic subscribers for a penetration rate of 86.3%. This penetration
rate is the second highest of the seven System Operating Groups. There are
currently four franchises covering this System Operating Group, with franchise
expiration dates ranging from February 20, 2003 to October 17, 2010. The Forest
System Operating Group accounts for approximately 10% of the Partnership's
equivalent basic subscribers.
The Forest System Operating Group includes two systems, each with one
headend, located in Forest and Raleigh, Mississippi. The Forest System Operating
Group includes 154 miles of plant, 95% of which is aerial. Currently, 89% of the
plant is capable of passing 330 MHz and 11% is capable of passing
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300 MHz. Over the next two years, the Partnership is planning to rebuild the
Forest system to 550 MHz. The small Raleigh system currently has no plans for
further upgrade. The financial forecasts prepared by Daniels take into account
such capital projects, among others.
The Forest system offers three levels of non-premium service: Economy Basic
service, consisting of 13 primarily broadcast and local origination channels,
for $15.00; Standard Basic service, consisting of the 13 Economy Basic channels
plus an additional 17 satellite channels, for $25.95; and Specialty Tier
service, consisting of the 30 Standard Basic channels plus an additional eight
satellite channels, for $33.90. The Raleigh system offers 25 channels of
Standard Basic service for $23.95. The Forest system offers HBO, Cinemax,
Showtime, Encore and Starz, while the Raleigh system offers only HBO. The last
rate increase was implemented on August 1, 1998.
HIGHLANDS, NORTH CAROLINA
The Highlands System Operating Group is the smallest of the seven System
Operating Groups and serves the community of and areas surrounding Highlands,
North Carolina. The city of Highlands is located on a plateau of the Blue Ridge
Mountains where Georgia, North Carolina and South Carolina meet. The Highlands
region has long been a vacation destination for affluent families from many
Southern cities. The area is encircled by 200,000 acres of the End National
Forest. One of the main attractions of Highlands is the area's exclusive golf
clubs. As of March 31, 1999, the Highlands System Operating Group passed 4,190
estimated homes and served 2,584 equivalent basic subscribers, for a penetration
rate of 61.7%. The Highlands System Operating Group includes a single headend
located in Highlands, North Carolina, and has four franchise agreements expiring
between October 3, 1999 and June 2, 2013. The Highlands System Operating Group
accounts for approximately 8% of the Partnership's equivalent basic subscribers.
In keeping with the fluctuating occupancy of the area's homes throughout the
year, the system experiences seasonality in its subscriber base.
The Highlands System Operating Group includes 128 miles of plant, of which
approximately 78% is aerial. Currently, 100% of the plant is capable of passing
330 MHz. Over the next two years, the Partnership is planning to rebuild the
system to 450 MHz. The financial forecasts prepared by Daniels take into account
this capital project, among others.
The Highlands system offers two levels of non-premium service: Economy
Basic service, consisting of 17 primarily broadcast and local origination
channels, for $17.50; and Standard Basic service, consisting of the 17 Economy
Basic channels plus an additional 19 satellite channels, for $33.20. The
Highlands system offers HBO, Cinemax, The Disney Channel and Encore. The last
rate increase was effective February 1, 1999.
VALUATION METHODOLOGY
In order to appraise the fair market value of the assets of the
Partnership, Daniels applied two valuation methodologies to each of the seven
System Operating Groups: (i) discounted cash flow valuation; and (ii) comparable
private market transaction multiples analysis. The respective aggregate fair
market values of the Partnership's operating assets derived from each valuation
methodology were then compared, and a final value was derived.
DISCOUNTED CASH FLOW
The discounted cash flow valuation methodology ("DCF") measures the present
value of an entity's forecasted free cash flow from operations, defined as
pre-tax earnings before interest, taxes, depreciation and amortization
("EBITDA"), less capital expenditures ("Free Cash Flow"). The forecasted Free
Cash Flow was determined through a 10-year financial forecast prepared by
Daniels for each of the seven System Operating Groups, which provides for
detailed forecasts of revenue and operating expenses. In addition to Free Cash
Flow, and based upon the 10-year financial forecasts discussed above, a terminal
enterprise value was estimated for each of the seven System Operating Groups
assuming a sale at the end of year 10 (the "Terminal Enterprise Value"). This
Terminal Enterprise Value was based on a multiple of
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terminal EBITDA which Daniels determined to be reasonable in light of comparable
private market transaction multiples of EBITDA.
The revenue forecasts for each of the seven System Operating Groups were
based upon Daniels' forecasts of homes passed, subscriber penetration levels and
rates and non-subscriber based revenue sources. Expense forecasts were based
primarily on assumed rates of inflation over the forecast period and were
adjusted for particular growth characteristics of each of the seven System
Operating Groups. Capital expenditure forecasts were based upon costs associated
with the construction of new miles of plant, plant maintenance and
rebuild/upgrade requirements. Daniels did not include telephony or commercial
data services revenue, expenses or capital costs in its forecasts. Daniels did,
however, include residential data services revenue and expenses in its forecast
where warranted.
The forecasted Free Cash Flow and the Terminal Enterprise Value (together,
the "Forecasted Net Cash Flows") resulting from the 10-year financial forecasts
prepared by Daniels were discounted back to the present at a discount rate
representing the weighted average cost of capital for an array of entities
within the cable television industry that are capable of consummating an
acquisition similar in size to the acquisition of the Systems. The weighted
average cost of capital is a company's required rate of return necessary to
satisfy the expectations of both the debt and equity investors of a company.
Theoretically, an entity will be willing to pay a price for an investment as
high as the value that will allow it to equal or exceed its weighed average cost
of capital requirements.
Borrowing costs are different for every entity, depending primarily upon
the overall credit quality of the borrower and the quality of the collateral, if
any. In the cable television industry, many lending institutions often use the
prime rate as a benchmark for determining loan interest rates. Some borrowers
pay interest rates above the prime rate, while others are able to borrow at more
favorable rates below the prime rate. Daniels, therefore, has assumed that the
prime rate is a fair benchmark, within a margin of 25 to 50 basis points, of the
average cost of debt of an array of entities willing and financially able to
consummate an acquisition similar in size to an acquisition of the Systems. The
cost of equity was determined by sampling the current estimated private market
cost of equity for cable television investments and blending that with equity
return objectives of large publicly traded companies in this industry. Such
equity returns are those which would be required by experienced private equity
investors and publicly traded companies in cable television investments with
characteristics similar to those of the Systems. The weighted average cost of
capital Daniels derived for each of the discounted cash flow analyses was
13.50%. Listed below are the estimates of the costs of debt and equity in the
capitalization structure as of the Valuation Date used to determine the discount
rate.
ASSUMED CAPITAL STRUCTURE % OF TOTAL CAPITAL COST OF CAPITAL
------------------------- ------------------ ---------------
Debt............................................ 60.0% 7.5%
Equity.......................................... 40.0% 22.5%
Estimated Weighted Average Cost of Capital...... 100.0% 13.5%
The combined aggregate fair market value of the Systems derived from this
analysis is $73.3 million, which is equal to 10.9x estimated annualized run-rate
cash flow and $2,200 per equivalent basic subscriber.(1)
MULTIPLE OF ANNUALIZED
DISCOUNTED CASH FLOW RUN-RATE CASH
VALUATION FLOW(1) VALUE PER EBU(1)
- -------------------- ---------------------- ----------------
$73,300,000 10.9x $2,200
- ---------------
(1) Annualized run-rate cash flow for the three months ended 3/31/99 and EBUs as
of 3/31/99 have been adjusted for seasonality of the Highlands system. The
adjusted annualized run-rate cash flow for the Systems is estimated to be
$6.7 million and the adjusted EBU for the Systems is estimated to be 33,313.
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COMPARABLE PRIVATE MARKET TRANSACTION MULTIPLES
In addition to the DCF valuation methodology, Daniels also utilized the
comparable private market transaction multiples methodology, which is another
generally accepted valuation methodology used to correlate and validate the
findings of the DCF with the realities of the private market. Under this
methodology, Daniels has compared selected market multiples reported in sales of
cable television systems of similar size, markets and technical condition as the
Systems to selected operating statistics of the Systems. In the case of cable
television system transactions, the most commonly used market multiples are: (i)
a multiple of trailing three or six months annualized operating cash flow; and
(ii) the price per subscriber. The Systems' annualized operating cash flow for
the quarter ended March 31, 1999 will be used as a comparable statistic to the
annualized statistics reported in the comparable group of transactions.
COMPARABLE CABLE TELEVISION SYSTEM SALES
AGGREGATE VALUE/ CLOSE
SYSTEM BUYER SELLER SUBS. VALUE(SM) SUB. VALUE/CF DATE
- ----------------------- ------------ -------------- ------ --------- ------ -------- --------
Riverside Co., CA Century Act 5 19,000 $ 33.0 $1,737 9.2x Contract
Various, SD Mediacom Zylstra 14,300 21.5 1,500 9.4 Contract
Nitro, WV & Various TX Fanch Harmon 18,300 50.0 2,732 14.0 Jun-99
Various, MI Millennium Horizon 43,000 112.0 2,605 11.2 May-99
Buffalo, MN Bresnan Jones 14,550 27.0 1,856 9.8 Mar-99
CA-based MSO USA Media WestStar Comm. 45,000 84.0 1,867 9.0 Mar-99
Livingston County, MI Fanch Multi- 16,000 42.0 2,625 10.0 Feb-99
Cablevision
Various, LA, TX Star Cable Illini 12,000 18.0 1,500 10.9 Feb-99
Cablevision
Hotsprings, Deadwood, TCl Duhamel 16,400 28.3 1,726 9.0 Feb-99
Blackhawk, SD Cable Frc.
Hanover, PA Susquehanna Hanover Cable 16,700 33.4 2,000 11.5 Jan-99
Various, MI Bresnan Omega 25,900 40.0 1,545 9.0 Jan-99
Various, GA Jones Bresnan 24,000 50.0 2,083 10.0 Dec-98
Communications
Payson, AZ NPG Cable/AZ Mark Twain 12,350 21.6 1,750 9.2 Sep-98
Various, TX, OK, KS, MO Classic CableOne 28,000 44.0 1,600 9.0 Aug-98
Communications
Total/Average 21,821 $604.8 $1,940 10.0x
The comparable private market transactions analysis yields a cash flow
multiple range of 9.0x to 14.0x cash flow, with a weighted average of 10.0x cash
flow. Value per subscriber ranges from $1,500 to $2,732, with a weighted average
of $1,940 per subscriber.
MATERIAL RELATIONSHIPS
Daniels has no ownership position in Northland or the Partnership; however,
Daniels has at various times sold cable television systems to Northland while
representing other cable television operators and has sold cable television
systems on behalf of Northland. Daniels does not believe that these prior
relationships in any way affect its ability to fairly and impartially render the
opinion of value expressed herein.
VALUATION SUMMARY
Based on the analysis using the valuation methodologies described above,
the estimated fair market value of the Systems as of the Valuation Date is
$73,300,000, representing 10.9x estimated annualized run-rate operating cash
flow and value per equivalent basic subscriber of $2,200.
THE CASH FLOW MULTIPLE IS SLIGHTLY HIGHER THAN THE WEIGHTED AVERAGE
MULTIPLE BUT WELL WITHIN THE RANGE OF MULTIPLES DERIVED FROM THE COMPARABLE
PRIVATE MARKET TRANSACTIONS ANALYSIS, AND EQUAL TO THE MULTIPLE DERIVED FROM THE
DCF ANALYSIS. THE VALUE PER EQUIVALENT BASIC
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SUBSCRIBER IS ALSO ABOVE THE WEIGHTED AVERAGE VALUE BUT WELL WITHIN THE RANGE OF
VALUES DERIVED FROM THE COMPARABLE PRIVATE MARKET TRANSACTIONS ANALYSIS, AND
EQUAL TO THE VALUE PER SUBSCRIBER DERIVED FROM THE DCF ANALYSIS. IT IS WORTH
NOTING THAT DANIELS IS CURRENTLY ACTING AS AN ADVISOR ON SEVERAL COMPARABLE,
NON-PUBLIC TRANSACTIONS WITH IMPLIED VALUATION STATISTICS THAT SUPPORT OUR
ANALYSIS OF VALUE OF THE SYSTEMS.
OUR OPINION OF VALUE EXPRESSED IN THIS APPRAISAL IS BASED ON FINANCIAL AND
OPERATING INFORMATION PROVIDED TO DANIELS BY THE PARTNERSHIP, AS WELL AS
PUBLISHED DEMOGRAPHIC INFORMATION PERTAINING TO THE PARTNERSHIP'S SERVICE AREAS.
WHILE DANIELS BELIEVES SUCH SOURCES TO BE RELIABLE AND ACCURATE, IT HAS NOT
INDEPENDENTLY VERIFIED ANY SUCH INFORMATION. THE VALUATION IS BASED ON
INFORMATION AVAILABLE TO DANIELS AS OF THE LATEST PRACTICABLE DATE. DANIELS
UNDERTAKES NO RESPONSIBILITY FOR UPDATING THIS OPINION TO REFLECT CHANGES IN THE
VALUE OF THE ASSETS SUBSEQUENT TO THE DATE OF THIS APPRAISAL, SUCH AS MARKET,
ECONOMIC, TECHNOLOGICAL, OPERATIONAL, GOVERNMENTAL AND OTHER CHANGES.
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EXHIBIT J
APPRAISAL OF
COMMUNICATIONS EQUITY ASSOCIATES
JULY 1, 1999
Northland Cable Properties Six Limited Partnership
1201 Third Avenue, Suite 3600
Seattle, WA 98101
Communications Equity Associates, Inc. ("CEA") is pleased to submit the
results of our valuation analysis of the assets of the cable television systems
(the "Cable Systems") owned by Northland Cable Properties Six Limited
Partnership ("NCP-Six" or the "Partnership") as of the date of this report. It
is our understanding that the values determined by this analysis will be used in
connection with the anticipated dissolution and liquidation of the Partnership.
We hereby express our opinion of the fair market value of the assets of the
Cable Systems, free and clear of all liens, liabilities and encumbrances. "Fair
Market Value" is defined as the price which could be negotiated in an arm's
length free market transaction between a willing seller and a willing buyer,
neither of whom is under undue pressure of compulsion to complete the
transaction. We hereby express no opinion as to the fairness of any transaction
involving the Cable Systems.
Based on the analysis detailed in this report and subject to the limiting
conditions listed in this report, it is the opinion of Communications Equity
Associates that, as of the date of this report the fair market value of the
assets of the Cable Systems is $74,600,000.
This valuation is intended solely for your use for the purpose stated
above, and is not intended for general publication or circulation. Since these
value conclusions are the result of certain specific assumptions, and since
these assumptions may not be relevant for other purposes, these values should
not be used for any other purpose.
In performing this analysis, CEA relied substantially on financial and
operational information provided by management of the Partnership and by Cable
System personnel. CEA did not independently verify this information and can
therefore accept no responsibility as to its accuracy.
The fee CEA has been paid for the valuation services performed is in no way
contingent upon the results of CEA's analysis. CEA is independent of both
Northland and NCP-Six, and neither CEA nor any of its employees involved in this
valuation have a financial interest in Northland nor any of its affiliated
companies, in NCP-Six, nor in the Cable Systems. To the best of CEA's knowledge
and belief, all statements contained in this report are true and correct, and no
important information has been knowingly withheld. This valuation has been
prepared to conform with the Uniform Standards of Professional Appraisal
Practice as promulgated by the American Society of Appraisers.
Respectfully submitted,
/s/ COMMUNICATIONS EQUITY ASSOCIATES, INC.
--------------------------------------------
COMMUNICATIONS EQUITY ASSOCIATES, INC.
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LIMITING CONDITIONS
1. CEA offers no opinions on either the potential effect of current or
future FCC regulations on the cash flow of the Cable Systems, or on the
Partnership's strategy in dealing with these regulations. The value conclusions
derived herein were based on the assumption that the current rates of the Cable
Systems are in compliance with current FCC regulations, and that no future
refund liability is associated with the Cable Systems.
2. This valuation is based on CEA's assessment of market conditions as of
the date of this report, and assumes that market, regulatory and other
conditions remain static. Changes in the economy as well as additional
rule-making by the FCC could have a material effect on the values herein
derived.
3. CEA cannot guarantee that a buyer could be found for the Cable Systems
at the value herein determined, or at any rational price.
4. As part of this analysis, CEA relied substantially on historical and
projected financial and operational information provided by management of the
Partnership. CEA did not independently verify this information and can therefore
accept no responsibility as to its accuracy.
5. CEA hereby expresses no opinion as to the fairness of any transactions
involving the Cable Systems or the shares of the Partnership.
6. CEA specifically prohibits the use of these value conclusions in all
matters related to the solvency of the Partnership. Since we have not undertaken
an analysis of the debt of the Partnership, we can make no representations as to
whether the fair salable value of the Partnership's assets exceeds the
Partnership's debt, whether the Partnership will be able to meet its debt
obligations as they come due, or whether the Partnership is reasonably
capitalized.
7. CEA did not conduct a detailed technical evaluation of the Cable
Systems, but instead relied on information provided by management of the
Partnership and Cable Systems' employees in assessing the technical condition of
the Cable Systems.
8. CEA has assumed that the Cable Systems, as currently operated, are in
material compliance with all franchise, regulatory, and FCC requirements. CEA
did not independently verify compliance with these requirements.
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TABLE OF CONTENTS
PAGE
----
SECTION
1. OVERVIEW OF ANALYSIS..................................... J-3
-- BACKGROUND AND DESCRIPTION OF ANALYSIS................ J-3
-- DEFINITION OF FAIR MARKET VALUE....................... J-3
-- DESCRIPTION OF VALUATION METHODOLOGY.................. J-4
2. CABLE SYSTEMS OVERVIEW................................... J-5
-- STARKVILLE, MS........................................ J-5
-- PHILADELPHIA, MS...................................... J-5
-- KOSCIUSKO, MS......................................... J-6
-- FOREST, MS............................................ J-6
-- HIGHLANDS, NC......................................... J-6
-- BARNWELL, SC.......................................... J-6
-- BENNETTSVILLE, SC..................................... J-7
-- FINANCIAL SUMMARY..................................... J-7
3. VALUATION................................................ J-8
-- DISCOUNTED CASH FLOW APPROACH......................... J-8
-- MARKET APPROACH....................................... J-8
-- VALUE CONCLUSION...................................... J-9
-- CABLE SYSTEM STATISTICS............................... J-9
1. OVERVIEW OF ANALYSIS
-- BACKGROUND AND DESCRIPTION OF ANALYSIS
-- DEFINITION OF FAIR MARKET VALUE
-- DESCRIPTION OF VALUATION METHODOLOGY
OVERVIEW OF ANALYSIS
BACKGROUND AND DESCRIPTION OF ANALYSIS
Communications Equity Associates ("CEA") has been retained by Northland
Cable Properties Six Limited Partnership ("NCP-Six" or the "Partnership") to
determine the fair market value of the assets of the cable television systems
(the "Cable Systems") owned by the Partnership as of the date of this report. It
is CEA's understanding that the values determined by this analysis will be used
in connection with the anticipated dissolution and liquidation of the
Partnership.
As part of this analysis, CEA requested and obtained from Partnership
management detailed historical and projected financial and operating information
pertaining to the Cable Systems. Additionally, CEA visited and toured
significant portions of the cable service area and had discussions regarding the
operations of the Cable Systems with Partnership management and employees. CEA
has not conducted a technical analysis of the cable plant, and has therefore
relied on assertions made by Cable Systems' management regarding the technical
performance of the cable plant.
DEFINITION OF FAIR MARKET VALUE
For the purpose of this appraisal, "Fair Market Value" is defined as the
price which could be negotiated in an arm's length free market transaction
between a willing seller and a willing buyer, neither of whom is under undue
pressure of compulsion to complete the transaction.
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DESCRIPTION OF VALUATION METHODOLOGY
CEA used the discounted cash flow approach and the market approach in
determining the fair market value of the assets of the Cable Systems. In the
discounted cash flow approach, the value of an asset is determined by
calculating the total present value of the future cash flows generated by the
asset. In the case of the assets of cable television systems, the value is
usually calculated as the present value of the free cash flow (operating cash
flow less capital expenditures) of the system, using a weighted average cost of
debt and equity capital as the discount rate, with a terminal value at the end
of the projection period calculated based on a multiple of the operating cash
flow of the cable system. In the market approach, the value of an asset is
determined based on a comparison with market transactions involving comparable
assets. In order to facilitate this comparison, the respective purchase prices
of the comparable assets are expressed as ratios based on a relevant operating
statistic, typically earnings or cash flow. In the case of cable television
systems, the purchase price of a system is usually expressed as a multiple of
the operating cash flow of the system. The appropriate multiple is then applied
to the operating cash flow of the subject system in order to determine its
value.
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2. CABLE SYSTEMS OVERVIEW
-- STARKVILLE, MS
-- PHILADELPHIA, MS
-- KOSCIUSKO, MS
-- FOREST, MS
-- HIGHLANDS, NC
-- BARNWELL, SC
-- BENNETTSVILLE, SC
-- FINANCIAL SUMMARY
CABLE SYSTEMS OVERVIEW
The Partnership owns Cable Systems that serve certain areas of Mississippi
and the Carolinas. In Mississippi, the Partnership owns cable systems that serve
the operating regions of Starkville, Philadelphia, Kosciusko and Forest, as well
as several nearby smaller towns. In the Carolinas, the Partnership's operating
areas serve Highlands, NC; Barnwell, SC and nearby areas, and Bennettsville, SC.
Relevant statistics for each of these system groups as of March 31, 1999 are
displayed in the system statistics table attached to this report.
STARKVILLE, MS
The Starkville, MS operating group consists of two cable systems that serve
the towns of Starkville and Maben, MS. At March 31, 1999, the Starkville group
passed an estimated 11,085 homes with approximately 195 miles of plant, for an
overall estimated home density of 57 homes per mile. At that time, the group
served 8,097 basic subscribers from two headends, for a basic penetration of
73.0%.
The Starkville area is home to Mississippi State University, and the area
benefits from the school's economic impact. Home growth in the Starkville area
has been steady as the growth of the university has led to the need for new
housing for students, teachers and support staff, as well as new roads and other
community growth. In Starkville, the cable system competes in certain areas with
Wireless One, an MMDS operator, and has also seen competition from DBS.
Both the Starkville and the Maben cable systems operate at 330 MHz. The
Starkville system offers 44 channels, while the Maben system offers 31 channels.
The systems are not addressable and do not offer pay-per-view services. The
Partnership plans to upgrade both systems to a minimum of 550 MHz and 400 MHz,
respectively during the next two years.
PHILADELPHIA, MS
The Philadelphia, MS cable system is served from one headend. At March 31,
1999, the Philadelphia system passed an estimated 4,395 homes with approximately
170 miles of plant, for an overall estimated home density of 26 homes per mile.
At that time the cable system served 3,851 basic subscribers, for a basic
penetration of 87.6%.
While the city of Philadelphia is growing moderately, the cable service
area includes the nearby Choctaw Indian reservation, which is experiencing
significant home growth. The area benefits economically from the Silver Star
Casino, which is located on the reservation.
The Philadelphia system currently operates at 330 MHz, but the Partnership
is in the process of upgrading the system to 450 MHz, with about 70% of the
upgrade complete at this time, and the rest to be done within the next few
years. The Philadelphia system currently offers 43 channels of programming, with
no pay-per-view.
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KOSCIUSKO, MS
The Kosciusko, MS operating group consists of two cable systems that serve
the towns of Kosciusko and Carthage, MS. At March 31, 1999, the Kosciusko group
passed an estimated 5,440 homes with approximately 126 miles of plant, for an
overall estimated home density of 43 homes per mile. At that time, the group
served 4,350 basic subscribers from two headends, for a basic penetration of
80.0%.
Both the Kosciusko and the Carthage cable systems operate at 450 MHz, and
the systems offer 45 and 44 channels of programming, respectively. The Kosciusko
system is designed at 550 MHz, while the Carthage system is designed at 450 MHz.
Neither system is addressable.
FOREST, MS
The Forest, MS operating group currently consists of two cable systems that
serve the towns of Forest and Raleigh, MS. At March 31, 1999, the Forest group
passed an estimated 3,735 homes with approximately 154 miles of plant, for an
overall estimated home density of 24 homes per mile. At that time, the group
served 3,222 basic subscribers from two headends, for a basic penetration of
86.3%.
Forest is located east of Jackson, MS along interstate 20. The area's
economy includes several large poultry processing plants. Forest and Raleigh are
the county seats of Scott County and Smith County, respectively. The Forest
system also serves the town of Morton, MS.
The Forest and the Raleigh systems operate at 330 MHz and 300 MHz,
respectively. The Forest system offers 43 channels of programming, while the
Raleigh system offers just 25 channels. Neither system is addressable. The
Partnership plans to rebuild the Forest system in the near future to a 550 MHz
design, with activation at 450 MHz. The smaller Raleigh system currently has no
plans for further upgrade.
HIGHLANDS, NC
The Highlands, NC cable system is served from a single headend. At March
31, 1999, the Highlands system passed an estimated 4,190 homes with
approximately 128 miles of plant, for an overall estimated home density of 33
homes per mile. At that time, the system served 2,584 basic subscribers for a
basic penetration of 61.7%.
Highlands is a resort area located in western North Carolina near the
Georgia state line. The system operates at 330 MHz and offers 40 channels of
programming. The Partnership plans to rebuild the Highlands system to 450 MHz,
with the rebuild slated for completion by late in the year 2000.
BARNWELL, SC
The Barnwell, SC operating group includes three cable systems that serve
the towns of Barnwell, Allendale and Bamberg, SC. At March 31, 1999, the
Barnwell operating group passed an estimated 12,125 homes with approximately 309
miles of plant, for an overall estimated home density of 39 homes per mile. At
that time, the group served 5,941 basic subscribers from three headends, for a
basic penetration of 49.0%.
The Barnwell group was purchased by the Partnership in 1998. The towns
served by the group are not growing and some show signs of economic decline. The
service area is located near the Savannah River in Barnwell, Allendale and
Bamberg Counties, with the systems three main towns being the county seats of
those counties.
The cable plant in Allendale and Bamberg has been rebuilt to 450 MHz, with
550 MHz spacing. The Barnwell plant is in the process of being rebuilt, with
about 25 percent of the plant at 450 MHz, and the remainder at 300 MHz. The
Barnwell rebuild is planned to continue through 2001. The Barnwell system
currently offers 32 channels of programming, while the Bamberg and Allendale
systems currently offer 41 channels each.
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BENNETTSVILLE, SC
The Bennettsville, SC cable system is served from one headend. At March 31,
1999, the Bennettsville system passed an estimated 9,090 homes, with
approximately 145 miles of plant, for an overall estimated home density of 63
homes per mile. At that time the cable system served 4,918 basic subscribers,
for a basic penetration of 54.1%.
Bennettsville is located in northeastern South Carolina near the North
Carolina state line. It is the county seat of Marlboro County and the only town
of its size in the county. The area has experienced economic difficulty lately,
with an unemployment rate in the high teens and a declining downtown area.
The Bennettsville system is in the process of being rebuilt to 550 MHz,
with about 96% of the rebuild completed at this time. The system offers 54
channels of programming.
FINANCIAL SUMMARY
For the three months ended March 31, 1999, the Cable Systems generated
combined annualized revenue of $14,363,656, or $36.31 per basic subscriber. The
Cable Systems for the same period had combined annualized operating cash flow of
$6,731,196, resulting in a 47% operating cash flow margin.
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3. VALUATION
-- DISCOUNTED CASH FLOW APPROACH
-- MARKET APPROACH
-- VALUE CONCLUSION
-- CABLE SYSTEM STATISTICS
VALUATION
DISCOUNTED CASH FLOW APPROACH
Financial projections, including all assumptions regarding operations and
future capital expenditures were prepared by CEA based on historical and
projected financial and operational information provided by the Partnership.
The discount rate used in this analysis was derived using a weighted
average cost of capital. Based on CEA's recent experience in the cable system
transaction market, it is CEA's opinion that equity investors in cable systems
would likely require a 25 percent return in order to justify the equity
investment. Additionally, based on CEA's recent experience in raising debt
financing for cable operators, a lender would likely charge an interest rate of
approximately 8 percent and would likely be willing to lend up to 60 percent of
asset value at that rate. Thus, the likely typical weighted average cost of
capital that a buyer would experience in purchasing the assets of the subject
Cable Systems can be calculated as follows:
60 percent debt at a rate of 8% = .60 X 8% = 4.8%
40 percent equity at a rate of
25% = .40 X 25% = 10.0%
Weighted Average Cost of Capital = 14.8%
The terminal value of the Cable Systems was calculated by multiplying the
free cash flow of the Cable Systems in the final year of the projection period
by an appropriate cash flow multiple.
The application of the discounted cash flow approach resulted in a total
present value indication for the Cable Systems of $74,600,000. This value is
equivalent to 11.1 times running rate operating cash flow for the Cable Systems,
or $2,263 per basic subscriber.
MARKET APPROACH
In the first six months of 1999, prices paid for cable television systems
increased dramatically over past prices, as the consolidation of the industry
accelerated rapidly. In recent years, prices paid for cable television systems
have generally ranged from 8 to 12 times operating cash flow. During 1999, this
cash flow multiple range increased and widened to a level of 11 to 19 times cash
flow.
Many of the transactions announced during this time period were very large
transactions involving target companies with over 1 million subscribers. The
increase in prices was attributable to, among other things, the advent of
Internet service, the desire of top players in the industry to increase their
size quickly, and the recent increase in cable public stock values, which gave
these large players an inexpensive currency with which to buy.
With the larger buyers focused on increased size and the smaller potential
buyers unable to pay higher prices, there have been fewer transactions involving
cable systems of comparable size and markets to the subject Cable Systems, and
as a result, the prices paid in such transactions have not increased as
dramatically as the prices paid for the very large cable operators.
J-8
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The table below highlights several transactions involving systems of
similar size and markets to the subject Cable Systems. In these transactions,
the prices paid range from 9.2 to 12.7 times operating cash flow, with a
weighted average of 10.8 and a median of 11.3. Prices per subscriber range from
$1,500 to $2,755 with a weighted average of $2,313 and a median of $2,134.
PRICE CF VALUE/
DATE SYSTEM SELLER BUYER (MIL) SUBS MULTIPLE SUB
---- ------ ------ ----- ----- ---- -------- ------
May 99 NC, SC, MS, OK, GA Genesis Benchmark $128 51,000 12.1 $2,510
Feb 99 CA, NM, CO, ND, etc. Scott Cable Interlink 165 77,000 9.2 $2,134
Feb 99 Various LA, TX Illini Cablevision Star Cable 18 12,000 10.9 $1,500
Feb 99 MI, IN Michiana Cable Ohio Cablevision 11 6,000 11.3 $1,909
Jan 99 Various PA Raystay Lenfest 92 33,000 12.7 $2,755
Wt. Average 10.8 $2,313
Median 11.3 $2,134
Based on these transactions, as well as on CEA's current experience in the
cable system transaction market, it is CEA's opinion that a cash flow multiple
of 11.0 is appropriate in valuing the Cable Systems. Applying this multiple to
the Cable Systems' annualized operating cash flow of $6,731,196 yields a value
indication from the market approach of $74,043,156. This value, which is
equivalent to $2,246 per subscriber, correlates well with the results of the
discounted cash flow approach.
VALUE CONCLUSION
CEA used the discounted cash flow approach and the market approach to
determine the fair market value of the assets of the Cable Systems. Based on
this analysis and Subject to the limiting conditions listed in this report, it
is the opinion of Communications Equity Associates that, as of the date of this
report the fair market value of the assets of the Cable Systems is $74,600,000.
NCP SIX CABLE SYSTEM STATISTICS
AS OF MARCH 31, 1999
STARKVILLE, PHILADELPHIA, KOSCIUSKO, FOREST, HIGHLANDS, BARNWELL, BENNETTSVILLE,
MS MS MS MS NC SC SC
----------- ------------- ---------- ---------- ---------- ------------- --------------
HOMES PASSED.......... 11,085 4,395 5,440 3,735 4,190 12,125 9,090
BASIC SUBSCRIBERS..... 8,097 3,851 4,350 3,222 2,584 5,941 4,918
Basic Pen %.......... 73.0% 87.6% 80.0% 86.3% 61.7% 49.0% 54.1%
PAY UNITS............. 2,930 1,450 1,371 1,442 482 4,301 3,628
Pay Pen %............ 36.2% 37.7% 31.5% 44.8% 18.7% 72.4% 73.8%
MILES OF PLANT........ 194.5 170 125.8 154 128 308.5 145
Home/Mile Density.... 57 26 43 24 33 39 63
HEADENDS.............. 2 1 2 2 1 3 1
PLANT CAPACITY:
Headend 1............ 330 MHz 450 MHz - 70% 450 MHz 330 MHz 330 MHz 300 MHz - 75% 550 MHz - 96%
330 MHz - 30% 450 MHz - 35% 440 MHz - 4%
Headend 2............ 330 MHz 450 MHz 300 MHz 450 MHz
Headend 3............ 450 MHz
1ST Q ANNUALIZED......
REVENUE.............. $3,645,756 $1,633,004 $1,848,480 $1,414,784 $1,036,216 $2,706,144 $2,079.272
Rev/Sub/Mo......... $ 37.51 $ 35.54 $ 35.46 $ 36.59 $ 32.86 $ 38.67 $ 35.59
OCF (PRE CAP.)........ $1,753,776 $ 681,828 $ 885,716 $ 723,800 $ 423,652 $ 990,764 $ 853,812
Margin............... 48.1% 41.8% 47.9% 51.2% 40.9% 36.6% 41.1%
Annual OCF/Sub....... $ 217 $ 178 $ 204 $ 225 $ 161 $ 170 $ 175
OCF (AFTER
CAPITALIZATION)......
Margin...............
Annual OCF/Sub.......
TOTAL
-----------
HOMES PASSED.......... 50,060
BASIC SUBSCRIBERS..... 32,963
Basic Pen %.......... 65.8%
PAY UNITS............. 15,604
Pay Pen %............ 47.3%
MILES OF PLANT........ 1,226
Home/Mile Density.... 41
HEADENDS.............. 12
PLANT CAPACITY:
Headend 1............
Headend 2............
Headend 3............
1ST Q ANNUALIZED......
REVENUE.............. $14,363,656
Rev/Sub/Mo......... $ 36.31
OCF (PRE CAP.)........ $ 6,313,348
Margin............... 44.04%
Annual OCF/Sub....... $ 192
OCF (AFTER
CAPITALIZATION)...... 6,731,196
Margin............... 47%
Annual OCF/Sub....... $ 205
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EXHIBIT K
FAIRNESS OPINION OF HOULIHAN LOKEY
[SUBJECT TO NEGOTIATION -- FINAL FORM TO FOLLOW]
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EXHIBIT L
NCP-SIX LIQUIDATING TRUST AGREEMENT
THIS AGREEMENT is made and entered into by and among NORTHLAND
COMMUNICATIONS CORPORATION ("NCC"), as agent for the Limited Partners of
NORTHLAND CABLE PROPERTIES SIX LIMITED PARTNERSHIP ("NCP-Six"), a Washington
limited partnership ("Trustors"), and RICHARD I. CLARK ("the Trustee").
1. Transfer of Property. The Trustors are contemporaneously herewith
transferring to the Trustee the right to receive payment and other rights
associated with that certain Promissory Note, dated , 2001,
in the principal amount of $9,875,000, made by NCC in favor of NCP-Six. The
amount payable under said Promissory Note is subject to adjustment in accordance
with its terms and the terms of that certain Proxy Statement dated
, 2001 (the "Proxy Statement"). The Trustors are also
contemporaneously herewith transferring to the Trustee the right to receive up
to $1,000,000 from the "hold back escrow" established pursuant to section of
the Asset Purchase Agreement dated , 2001 by and between
NCP-Six and Adelphia Communications Corporation. In addition, the Trustors are
depositing contemporaneously herewith $750,000 cash in accordance with the terms
of the Proxy Statement. These sums, together with other property that may be
added to the trust created herein, shall be held, managed and distributed by the
Trustee as herein provided. This trust shall be known as the NCP-Six Liquidating
Trust. The purpose of the Trust shall be to hold and administer for the benefit
of the beneficiaries the amounts owing to the beneficiaries in accordance with
the terms of the Proxy Statement.
2. Identification of Beneficiaries. The beneficiaries of the Trust (each a
"Beneficiary") are the limited partners of NCP-Six, whose names and whose
proportionate shares of the Trust are set forth on Exhibit A.
3. Allocation of Property. The Trustee shall allocate the property
described in Article 1, and the income and expenses of the Trust, among the
Beneficiaries in the proportions set forth on Exhibit A.
4. Distribution of Principal and Income. The Trustee may distribute to each
Beneficiary such portion or all of such Beneficiary's share of the principal and
income of the Trust at such time and in such manner as the Trustee shall
determine, until the termination of the Trust. At least annually, the Trustee
shall distribute to the Beneficiaries any income from investments, net of any
expenses of the Trust.
5. Distribution of Principal and Termination of Trust. To the extent that
each trust has not been distributed sooner, the entire balance of the Trust
shall be distributed to the Beneficiaries no later than December 31, 2005.
6. Death of Beneficiary. In the event of the death of any Beneficiary prior
to that time, the Beneficiary is entitled to receive a full distribution of the
balance of the trust estate, and any part of such trust still being held shall
be distributed as the Beneficiary shall appoint by Last Will and Testament.
7. Purpose of Trust. The purpose of the Trust is solely to hold and invest
temporarily the proceeds attributable to Trustors from the liquidation of
NCP-Six, and to make payment of any claims and/or contingent liabilities arising
from the business formerly conducted by NCP-Six. The Trust is not intended to
continue or engage in the conduct of the business formerly conducted by NCP-Six.
8. Successor Trustee. In the event the Trustee should die, resign or
otherwise become incapable of serving hereunder, a Successor Trustee shall be
elected by a majority of the Beneficiaries, voting in accordance with their
respective proportionate interests in the Trust.
9. Spendthrift Provision. Neither the income nor the principal of the
trusts created hereunder, nor any portion thereof, shall be alienable by any
Beneficiary, either by assignment or by any other method, and the same shall not
be subject to be taken by the creditors of any such Beneficiary by any process
whatsoever.
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168
10. Trustee's Powers. In addition to the rights, powers and authority
incident to the office or required in or convenient to the Trust otherwise
vested in or impliedly conferred on the Trustee, the Trustee shall have all of
the rights, powers and authority with respect to the Trust created hereunder
provided under Washington law.
10.1 Without limiting the generality of the foregoing, the Trustee is
expressly authorized to:
(a) Determine what is principal or income, which authority shall
specifically include the right to make any adjustments between principal
and income for premiums, discounts, depreciation or depletion.
(b) To hold and retain in the same form as received any and all
property transferred to the Trustee for administration hereunder (and
additions thereto), even though such property may not be of a nature or
character authorized under the laws of the State of Washington or of any
other state or jurisdiction for trust investments, or be unsecured,
unproductive, underproductive, overproductive or be of a wasting nature, or
be inconsistent with the usual concepts of diversification of trust assets.
(c) Rely with acquittance on advice of counsel on questions of law.
(d) Employ persons to advise or assist the Trustee in the performance
of his duties, and to pay reasonable compensation therefore.
10.2 Notwithstanding the foregoing, the Trustee is expressly
prohibited from:
(a) Investing trust assets except in demand and time deposits in
banks, or temporary investments such as short-term certificates of deposit
or Treasury bills.
(b) Receiving any transfer of any listed or unlisted stocks or
securities, any general or limited partnership interest, or any operating
assets of a going business.
(c) Receiving or retaining cash in excess of a reasonable amount to
meet claims and contingent liabilities.
11. Accounting. The Trustee shall file income tax returns for the Trust as
a grantor trust pursuant to Section 1.671-4(a) of the Income Tax Regulations.
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12. Governing Law. The validity and construction of any provision of this
trust agreement shall be governed by the internal laws of the State of
Washington, and this trust shall be deemed to have its status in the State of
Washington.
DATED , 2001.
TRUSTORS:
NORTHLAND COMMUNICATIONS CORPORATION,
agent for the Limited Partners of
NORTHLAND CABLE PROPERTIES SIX LIMITED
PARTNERSHIP
By:
------------------------------------
Its:
------------------------------------
TRUSTEE:
--------------------------------------
Richard I. Clark
L-3