-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DDwCeg5lN27R2UnqCHCSJ8t/6ZiBr95uHvm7YUh/dz8n4ZCEHePffo7y6k7yACVV YQKaxiF2gF8PNEtz3Zb4aw== 0000927356-98-000945.txt : 19980610 0000927356-98-000945.hdr.sgml : 19980610 ACCESSION NUMBER: 0000927356-98-000945 CONFORMED SUBMISSION TYPE: SC 13E3 PUBLIC DOCUMENT COUNT: 8 FILED AS OF DATE: 19980609 SROS: NONE SUBJECT COMPANY: COMPANY DATA: COMPANY CONFORMED NAME: CABLE TV FUND 12-C LTD CENTRAL INDEX KEY: 0000782975 STANDARD INDUSTRIAL CLASSIFICATION: RADIO TELEPHONE COMMUNICATIONS [4812] IRS NUMBER: 840970000 STATE OF INCORPORATION: CO FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC 13E3 SEC ACT: SEC FILE NUMBER: 005-51655 FILM NUMBER: 98644514 BUSINESS ADDRESS: STREET 1: 9697 E MINERAL AVE STREET 2: PO BOX 3309 CITY: ENGLEWOOD STATE: CO ZIP: 80155 BUSINESS PHONE: 3037923111 MAIL ADDRESS: STREET 1: P O BOX 3309 CITY: ENGLEWOOD STATE: CO ZIP: 80155-3309 FILED BY: COMPANY DATA: COMPANY CONFORMED NAME: JONES INTERCABLE INC CENTRAL INDEX KEY: 0000275605 STANDARD INDUSTRIAL CLASSIFICATION: CABLE & OTHER PAY TELEVISION SERVICES [4841] IRS NUMBER: 840613514 STATE OF INCORPORATION: CO FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC 13E3 BUSINESS ADDRESS: STREET 1: 9697 EAST MINERAL AVENUE CITY: ENGLEWOOD STATE: CO ZIP: 80112 BUSINESS PHONE: 3037923111 MAIL ADDRESS: STREET 1: 9697 EAST MINERAL AVENUE CITY: ENGLEWOOD STATE: CO ZIP: 80112 SC 13E3 1 SC 13E3 FOR CABLE TV FUND 12-C, LTD. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 RULE 13e-3 TRANSACTION STATEMENT (Pursuant to Section 13(e) of the Securities Exchange Act of 1934 and Rule 13e-3 thereunder) Cable TV Fund 12-C, Ltd. ------------------------ (Name of the Issuer) Jones Intercable, Inc. (File No. 0-8947) and Cable TV Fund 12-C, Ltd. (File No. 0-13964) ------------------------------------------- (Name of Person(s) Filing Statement) Limited Partnership Interests ----------------------------- (Title of Class of Securities) Elizabeth M. Steele, Esq. Vice President and General Counsel Jones Intercable, Inc. 9697 E. Mineral Avenue Englewood, Colorado 80112 (303) 784-8400 -------------------------------------------------------- (Name, Address and Telephone Number of Person Authorized to Receive Notices and Communications on Behalf of Person(s) Filing Statement) This statement is filed in connection with (check the appropriate box): a. X The filing of solicitation materials or an information statement _____ subject to Regulation 14A, Regulation 14C or Rule 13e-3(c) under the Securities Exchange Act of 1934. b. _____ The filing of a registration statement under the Securities Act of 1933. c. _____ A tender offer. d. _____ None of the above. THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE FAIRNESS OR MERITS OF SUCH TRANSACTION NOR UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION CONTAINED IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL. Check the following box if the soliciting materials or information statement referred to in checking box (a) are preliminary copies: X _____ Calculation of Filing Fee TRANSACTION VALUATION* AMOUNT OF FILING FEE - --------------------- -------------------- $20,730,780 $4,146 X Check box if any part of the fee is offset as provided by Rule 0- _____ 11(a)(2) and identify the filing with which the offsetting fee was previously paid. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. Amount Previously Paid: $4,146 Form or Registration No.: Schedule 14A Filing Party: Cable TV Fund 12-C, Ltd. Commission File No. 0-13964 Date Filed: Concurrently with this Rule 13e-3 Transaction Statement on Schedule 13E-3. *Pursuant to Rule 0-11(c)(2), the transaction valuation is based upon Cable TV Fund 12-C, Ltd.'s 15 percent interest in the $138,205,200 sales price that is to be paid to Cable TV Fund 12-BCD Venture by Jones Intercable, Inc. in connection with the transaction that is the subject of the proxy solicitation. INTRODUCTION ------------ This Rule 13e-3 Transaction Statement is being filed jointly by Cable TV Fund 12-C, Ltd., a Colorado limited partnership, and by Jones Intercable, Inc., a Colorado corporation that is the general partner of Cable TV Fund 12-C, Ltd., in connection with the sale of assets of Cable TV Fund 12-BCD Venture to Jones Intercable, Inc. upon the terms and subject to the conditions of a Purchase and Sale Agreement by and between Cable TV Fund 12-BCD Venture and Jones Intercable, Inc. The sale may be a transaction subject to Rule 13e-3 because it will result in the sale of certain assets of Cable TV Fund 12-BCD Venture to Jones Intercable, Inc. The transaction also involves a vote of the limited partners of Cable TV Fund 12-C, Ltd., which is subject to Regulation 14A of the Securities Exchange Act of 1934, and the information contained in the preliminary proxy statement filed pursuant thereto is incorporated by reference in answer to the items of this Rule 13e-3 Transaction Statement. Attached as an exhibit to this Rule 13e-3 Transaction Statement are the preliminary proxy solicitation materials that have been filed simultaneously herewith. The cross-reference sheet that follows shows the location in the preliminary proxy statement of the information incorporated by reference in response to the items of this Rule 13e-3 Transaction Statement, as permitted by General Instruction F to Schedule 13E-3. -3- CROSS-REFERENCE SHEET --------------------- (Pursuant to General Instruction F to Schedule 13E-3)
Schedule 13E-3 Item Caption in the Number and Caption Proxy Statement ------------------ --------------- 1. Issuer and Class of Security Subject to the Transaction. (a)................... Vote of the Limited Partners of Cable TV Fund 12-C, Ltd.; Certain Information About the Partnership and the General Partner. (b)-(c)............... Vote of the Limited Partners of Cable TV Fund 12-C, Ltd. (d)................... Special Factors, Prior Acquisition and Sales. (e)................... [Not applicable.] (f)................... [Not applicable.] 2. Identity and Background. (a)-(d), (g).......... Vote of the Limited Partners of Cable TV Fund 12-C, Ltd.; Certain Information About the Partnership and the General Partner; Schedule 1. (e)-(f)............... [The answers to these items are in the negative; pursuant to the Instruction following Item 2(f), negative answers to Items 2(e) and 2(f) have not been furnished to limited partners in the proxy statement.]
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Schedule 13E-3 Item Caption in the Number and Caption Proxy Statement ------------------ --------------- 3. Past Contracts, Transactions or Negotiations. (a)(1)................ Certain Related Party Transactions. (a)(2)................ [None.] (b)................... [None.] 4. Terms of the Transaction. (a)................... Proposed Sale of Assets. (b)................... [Not applicable.] 5. Plans or Proposals of the Issuer or Affiliate. (a)................... Vote of the Limited Partners of Cable TV Fund 12-C, Ltd.; Certain Information About the Partnership and the General Partner. (b)-(e)............... [Not applicable.] (f)-(g)............... Vote of the Limited Partners of Cable TV Fund 12-C, Ltd,; Certain Information About the Partnership and the General Partner. 6. Source and Amounts of Funds or Other Consideration. (a)................... Proposed Sale of Assets, The Purchase and Sale Agreement; Proposed Sale of Assets, Purchase Price.
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Schedule 13E-3 Item Caption in the Number and Caption Proxy Statement ------------------- --------------- (b)................... Special Factors, The Appraisals; Special Factors, Costs of the Transaction. (c)................... Proposed Sale of Assets, The Purchase and Sale Agreement. (d)................... [Not applicable.] 7. Purpose(s), Alternatives, Reasons and Effects. (a)................... Special Factors, The Partnership's Investment Objectives; Special Factors, The General Partner's Objectives; Special Factors, Reasons for the Timing of the Sale. (b)................... Special Factors, Reasons for the Timing of the Sale; Special Factors, Recommendation of the General Partner and Fairness of the Proposed Sale of Assets. (c)................... Special Factors, The Partnership's Investment Objectives; Special Factors, Reasons for the Timing of the Sale; Special Factors, Recommendation of the General Partner and Fairness of the Proposed Sale of Assets.
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Schedule 13E-3 Item Caption in the Number and Caption Proxy Statement ------------------- --------------- (d)................... Special Factors, Certain Effects of the Sale; Special Factors, Recommendation of the General Partner and Fairness of the Proposed Sale of Assets; Federal and State Income Tax Consequences. 8. Fairness of the Transaction. (a)-(b)............... Vote of the Limited Partners of Cable TV Fund 12-C, Ltd.; Special Factors, Recommendation of the General Partner and Fairness of the Proposed Sale of Assets; Special Factors, The Appraisals. (c)................... Vote of the Limited Partners of Cable TV Fund 12-C, Ltd.; Special Factors, Relevant Provisions of the Partnership Agreement; Proposed Sale of Assets, Conditions to Closing. (d)-(e)............... Special Factors, Recommendation of the General Partner and Fairness of the Proposed Sale of Assets. (f)................... [Not applicable.] 9. Reports, Opinions, Appraisals and Certain Negotiations. (a)................... Vote of the Limited Partners of Cable TV Fund 12-C, Ltd.
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Schedule 13E-3 Item Caption in the Number and Caption Proxy Statement ------------------- --------------- (b)................... Special Factors, Recommendation of the General Partner and Fairness of the Proposed Sale of Assets; Special Factors, The Appraisals. (c)................... Special Factors, The Appraisals; Available Information. 10. Interest in Securities of the Issuer (a)................... Vote of the Limited Partners of Cable TV Fund 12-C, Ltd.; Schedule 1. (b)................... [None.] 11. Contracts, [None.] Arrangements or Understandings with Respect to the Issuer's Securities. 12. Present Intention and Recommendation of Certain Persons with Regard to the Transaction. (a)................... Vote of the Limited Partners of Cable TV Fund 12-C, Ltd. (b)................... Vote of the Limited Partners of Cable TV Fund 12-C, Ltd.; Special Factors, Recommendation of the General Partner and Fairness of the Proposed Sale of Assets.
-8- Schedule 13E-3 Item Caption in the Number and Caption Proxy Statement -------------------- --------------- 13. Other Provisions of the Transaction. (a)................... Special Factors, Certain Effects of the Sale. (b)................... [Not applicable.] (c)................... [Not applicable.] 14. Financial Information. (a)(1)................ [Pursuant to General Instruction D to Schedule 13E-3, the audited financial statements of Cable TV Fund 12-C, Ltd. for the fiscal years ended December 31, 1997 and 1996 are incorporated by reference from Cable TV Fund 12-C, Ltd.'s Annual Report on Form 10-K/A No. 1 for the fiscal year ended December 31, 1997, which is filed as an exhibit to this Schedule 13E-3.] (a)(2)................ [Pursuant to General Instruction D to Schedule 13E-3, the unaudited financial statements of Cable TV Fund 12-C, Ltd. for its first 1998 fiscal quarter are incorporated by reference from Cable TV Fund 12-C, Ltd.'s Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1998, which is filed as an exhibit to this Schedule 13E-3.] (a)(3)................ [Not applicable.] (a)(4)................ Special Factors, Recommendation of the General Partner and Fairness of the Proposed Sale of Assets. (b)................... Unaudited Pro Forma Financial Information of Cable TV Fund 12-C, Ltd. -9-
Schedule 13E-3 Item Caption in the Number and Caption Proxy Statement ------------------- --------------- 15. Persons and Assets Employed, Retained or Utilized. (a)................... Vote of the Limited Partners of Cable TV Fund 12-C, Ltd. (b)................... [None.] 16. Additional Special Factors, Relevant Provisions of the Information. Partnership Agreement. - ------------------------------------------------------------------------------- 17. Materials Filed as Exhibits: (a)................... Jones Cable Holdings II, Inc.'s Credit Facility. (b)(1)................ Appraisal of the Palmdale System by Strategis Financial Consulting, Inc. (b)(2)................ Appraisal of the Palmdale System by Waller Capital Corporation (b)(3)................ Appraisal of the Palmdale System by Bond & Pecaro, Inc. (c)................... [Not applicable.] (d)(1)................ Preliminary Proxy Statement to be furnished to the limited partners of Cable TV Fund 12-C, Ltd. (d)(2)................ Cable TV Fund 12-C, Ltd.'s Annual Report on Form 10-K/A No. 1 for the fiscal year ended December 31, 1997. (d)(3)................ Cable TV Fund 12-C, Ltd.'s Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1998. (e)................... [Not applicable.] (f)................... [Not applicable.]
-10- SIGNATURES ---------- After due inquiry and to the best of my knowledge and belief, I certify that the information set forth in this statement is true, complete and correct. JONES INTERCABLE, INC., a Colorado corporation Dated: June 4, 1998 By:/s/ Elizabeth M. Steele ----------------------- Elizabeth M. Steele Vice President CABLE TV FUND 12-C, LTD., a Colorado limited partnership By: Jones Intercable, Inc., a Colorado corporation, as general partner Dated: June 4, 1998 By:/s/ Elizabeth M. Steele ----------------------- Elizabeth M. Steele Vice President -11- EX-99.(A) 2 JONES CABLE HOLDINGS II, INC. CREDIT FACILITY EXHIBIT 99.(a) CREDIT AGREEMENT [Tranche A] among JONES CABLE HOLDINGS II, INC., as the Borrower THE SEVERAL LENDERS FROM TIME TO TIME PARTIES HERETO THE BANK OF NOVA SCOTIA, NATIONSBANK OF TEXAS, N.A. and SOCIETE GENERALE, as the Managing Agents THE BANK OF NOVA SCOTIA, as the Administrative Agent NATIONSBANK OF TEXAS, N.A., as the Documentation Agent and SOCIETE GENERALE, as the Syndication Agent Dated as of October 29, 1996 TABLE OF CONTENTS -----------------
Page ---- SECTION 1. DEFINITIONS..................................................................1 1.1 Defined Terms..............................................................1 1.2 Other Definitional Provisions.............................................20 SECTION 2. AMOUNT AND TERMS OF COMMITMENTS.............................................21 2.1 Commitments...............................................................21 2.2 Notes.....................................................................21 2.3 Procedure for Borrowing...................................................21 2.4 Repayment of Loans........................................................22 SECTION 3. LETTERS OF CREDIT...........................................................23 3.1 L/C Commitment............................................................23 3.2 Procedure for Issuance of Letters of Credit...............................23 3.3 Fees, Commissions and Other Charges.......................................23 3.4 L/C Participations........................................................24 3.5 Reimbursement Obligation of the Borrower..................................25 3.6 Obligations Absolute......................................................26 3.7 Letter of Credit Payments.................................................26 3.8 Application...............................................................26 SECTION 4. GENERAL PROVISIONS APPLICABLE TO LOANS AND LETTERS OF CREDIT.....................................................27 4.1 Interest Rates and Payment Dates..........................................27 4.2 Optional and Mandatory Commitment Reductions and Prepayments..............27 4.3 Commitment Fees, etc......................................................29 4.4 Computation of Interest and Fees..........................................30 4.5 Conversion and Continuation Options.......................................30 4.6 Minimum Amounts of Tranches...............................................31 4.7 Inability to Determine Interest Rate......................................31 4.8 Pro Rata Treatment and Payments...........................................31 4.9 Requirements of Law.......................................................32 4.10 Taxes.....................................................................33 4.11 Indemnity.................................................................35 4.12 Change of Lending Office..................................................36
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Page ---- SECTION 5. REPRESENTATIONS AND WARRANTIES..............................................36 5.1 Financial Condition........................................................36 5.2 No Change..................................................................37 5.3 Existence; Compliance with Law.............................................37 5.4 Power; Authorization; Enforceable Obligations..............................37 5.5 No Legal Bar...............................................................38 5.6 No Material Litigation.....................................................38 5.7 No Default.................................................................39 5.8 Ownership of Property; Intellectual Property...............................39 5.9 No Burdensome Restrictions.................................................39 5.10 Taxes......................................................................39 5.11 Federal Regulations........................................................39 5.12 ERISA......................................................................40 5.13 Investment Company Act; Other Regulations..................................40 5.14 Subsidiaries...............................................................40 5.15 Insurance..................................................................40 5.16 Certain Cable Television Matters...........................................41 5.17 Environmental Matters......................................................41 5.18 Accuracy of Information....................................................43 5.19 Security Documents.........................................................43 5.20 Solvency...................................................................43 5.21 Indebtedness...............................................................43 5.22 Labor Matters..............................................................43 5.23 Prior Names................................................................44 5.24 Franchises.................................................................44 5.25 Chief Executive Office; Chief Place of Business............................45 5.26 Full Disclosure............................................................45 5.27 Intercompany Subordinated Debt.............................................45 SECTION 6. CONDITIONS PRECEDENT........................................................45 6.1 Conditions to Initial Extensions of Credit.................................45 6.2 Conditions to Each Extension of Credit.....................................47 SECTION 7. AFFIRMATIVE COVENANTS.......................................................48 7.1 Financial Statements.......................................................48 7.2 Certificates; Other Information............................................49 7.3 Payment of Obligations.....................................................50 7.4 Conduct of Business and Maintenance of Existence, etc......................50 7.5 Maintenance of Property; Insurance.........................................50
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Page ---- 7.6 Inspection of Property; Books and Records; Discussions.....................50 7.7 Notices....................................................................51 7.8 Environmental Laws.........................................................51 7.9 Collateral.................................................................52 7.11 New Subsidiaries...........................................................53 SECTION 8. NEGATIVE COVENANTS..........................................................53 8.1 Financial Condition Covenants..............................................54 8.2 Limitation on Indebtedness.................................................54 8.3 Limitation on Liens........................................................55 8.4 Limitation on Fundamental Changes..........................................56 8.5 Limitation on Sale of Assets...............................................56 8.6 Restricted/Unrestricted Designation of Subsidiaries........................57 8.7 Limitation on Restricted Payments; Other Payment Limitations...............58 8.8 Limitation on Acquisitions.................................................58 8.9 Investments, Loans, Etc....................................................59 8.10 Limitation on Transactions with Affiliates.................................60 8.11 Certain Intercompany Matters...............................................60 8.12 Limitation on Restrictions on Subsidiary Distributions.....................60 8.13 Limitation on Lines of Business............................................60 8.14 No Negative Pledge.........................................................60 8.15 Tax Sharing Agreement......................................................61 8.16 Limitation on the Borrower's Ownership of Assets...........................61 8.17 Limitation on Issuance of Capital Stock....................................61 SECTION 9. EVENTS OF DEFAULT...........................................................61 SECTION 10. THE ADMINISTRATIVE AGENT....................................................64 10.1 Appointment................................................................64 10.2 Delegation of Duties.......................................................65 10.3 Exculpatory Provisions.....................................................65 10.4 Reliance by the Administrative Agent.......................................65 10.5 Notice of Default..........................................................66 10.6 Non-Reliance on the Administrative Agent and the Other Lenders.............66 10.7 Indemnification............................................................66 10.8 The Administrative Agent in Its Individual Capacity........................67 10.9 Successor Administrative Agent.............................................67 10.10 Managing Agents and Co-Agents..............................................68 SECTION 11. NEW RESTRICTED SUBSIDIARIES.................................................69
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Page ---- SECTION 12. MISCELLANEOUS..............................................................69 12.1 Amendments and Waivers...................................................69 12.2 Notices..................................................................70 12.3 No Waiver; Cumulative Remedies...........................................70 12.4 Survival of Representations and Warranties...............................71 12.5 Payment of Expenses and Taxes............................................71 12.6 Successors and Assigns; Participations and Assignments...................71 12.7 Adjustments; Set-off.....................................................75 12.8 Counterparts; When Effective.............................................75 12.9 Severability.............................................................75 12.10 Integration..............................................................76 12.11 GOVERNING LAW............................................................76 12.12 SUBMISSION TO JURISDICTION; WAIVERS......................................76 12.13 Acknowledgements.........................................................77 12.14 WAIVERS OF JURY TRIAL....................................................77 12.15 Confidentiality..........................................................77
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SCHEDULES - --------- Schedule 1.1 Commitments and Addresses of the Lenders Schedule 5.1 Financial Disclosure Schedule 5.4 Required Consents and Authorizations Schedule 5.6 Litigation Disclosure Schedule 5.14 Subsidiaries and Designation Schedule 5.24 Franchise Agreements Schedule 5.25 Chief Executive Office/Chief Places of Business Schedule 6.1(f) Stock Ownership of the Borrower and the Restricted Subsidiaries Schedule 8.10 Existing Affiliated Transactions EXHIBITS - -------- A Form of Assignment and Acceptance B Form of Compliance Certificate C Form of Intercompany Subordinated Debt Agreement D-1 Jones Cable Holdings II, Inc. Negative Pledge Agreement D-2 Restricted Subsidiary Negative Pledge Agreement E Form of Intercompany Subordinated Note F Form of Pledge Agreement(s) G Form of Note H-1 Form of Notice of Borrowing H-2 Form of Notice of Conversion/Continuation I Form of Closing Certificate J Form of Legal Opinion of the General Counsel or the acting General Counsel of the Borrower K Form of FCC Opinion L Form of Alternative Note
-v- THIS CREDIT AGREEMENT [TRANCHE A] is entered into as of October 29, 1996, among JONES CABLE HOLDINGS II, INC., a Colorado corporation (the "Borrower"), the several lenders from time to time parties to this Agreement -------- (the "Lenders"), THE BANK OF NOVA SCOTIA, NATIONSBANK OF TEXAS, N.A. and SOCIETE ------- GENERALE, as the Managing Agents (in such capacity, the "Managing Agents"), THE --------------- BANK OF NOVA SCOTIA, as the Administrative Agent for the Lenders hereunder, NATIONSBANK OF TEXAS, N.A., as the Documentation Agent (in such capacity, the "Documentation Agent") and SOCIETE GENERALE, as the Syndication Agent (in such ------------------- capacity, the "Syndication Agent"). ----------------- WITNESSETH: ---------- WHEREAS, (i) the Borrower has purchased or will purchase from Jones Cable Holdings, Inc., a Colorado corporation ("JCH") 100% of the Capital --- Stock of Jones Communications of Georgia/South Carolina, Inc. ("JCG") and Jones --- Communications of Arizona, Inc. ("JCA") and (ii) prior to or contemporaneously --- with the purchase of such Capital Stock by the Borrower, JCH will sell to JCG the Cable Systems serving North Augusta, South Carolina, Augusta, Georgia and Savannah, Georgia and sell to JCA the Cable System serving Pima County, Arizona (the transactions described in subsections (i) and (ii) above being collectively referred to herein as the "Stock Purchase"); and -------------- WHEREAS, the Borrower has requested the Lenders to furnish the extensions of credit provided for herein, which shall be used by the Borrower (a) to finance a portion of the cost to purchase the Capital Stock of JCG and JCA and to finance other permitted acquisitions, (b) for capital expenditures to expand and upgrade the Cable Systems, (c) to make dividends or distributions permitted under this Agreement and (d) for general corporate purposes; NOW, THEREFORE, in consideration of the premises and the mutual agreements contained herein, the parties hereto agree as follows: SECTION 1. DEFINITIONS 1.1 Defined Terms. As used in this Agreement, the following terms ------------- shall have the following meanings: "ABR": for any day, a rate per annum (rounded upwards, if necessary, --- to the next 1/16 of 1%) equal to the greater of (a) the Prime Rate in effect on such day and (b) the Federal Funds Effective Rate in effect on such day plus 1/2 of 1%. For purposes hereof: "Prime Rate" shall mean the rate of ---------- interest per annum publicly announced from time to time by the Administrative Agent as its prime rate in effect at its principal office in New York City (the Prime Rate not being intended to be the lowest rate of interest charged by the Administrative Agent in connection with extensions of credit to debtors); and "Federal Funds ------------- 1 Effective Rate" shall mean, for any day, the weighted average of the rates -------------- on overnight federal funds transactions with members of the Federal Reserve System arranged by federal funds brokers, as published on the next succeeding Business Day by the Federal Reserve Bank of New York, or, if such rate is not so published for any day which is a Business Day, the average of the quotations for the day of such transactions received by the Administrative Agent from three federal funds brokers of recognized standing selected by it. Any change in the ABR due to a change in the Prime Rate or the Federal Funds Effective Rate shall be effective as of the opening of business on the effective day of such change in the Prime Rate or the Federal Funds Effective Rate, respectively. "ABR Loans": Loans the rate of interest applicable to which is based --------- upon the ABR. "Acquired Assets": as defined in Section 7.9(c). --------------- -------------- "Acquired Systems": the Cable Systems serving North Augusta, South ---------------- Carolina, Augusta, Georgia, Savannah, Georgia and Pima County Arizona, transferred by JCH to certain of the Restricted Subsidiaries of the Borrower on or before the Initial Funding Date. "Administrative Agent": Scotiabank, together with its affiliates, as -------------------- the agent for the Lenders under this Agreement and the other Loan Documents. "Affiliate": as to any Person, any other Person which, directly or --------- indirectly, is in control of, is controlled by, or is under common control with, such Person. A Person shall be deemed to control another Person if such Person (acting alone or with a group of Persons acting in concert) possesses, directly or indirectly, the power to direct or cause the direction of the management and policies of such other Person, whether through ownership of voting securities, by contract or otherwise. "Aggregate Outstanding Extensions of Credit": as to any Lender at any ------------------------------------------ time, an amount equal to the sum of (a) the aggregate principal amount of all Loans made by such Lender then outstanding and (b) such Lender's Specified Percentage of the L/C Obligations then outstanding. "Agreement": this Credit Agreement [Tranche A], as amended, --------- supplemented or otherwise modified from time to time. "Alternative Note": as defined in Section 12.6(d). ---------------- --------------- "Alternative Noteholder": as defined in Section 12.6(e). ---------------------- --------------- "Annualized Operating Cash Flow": for the most recently ended fiscal ------------------------------ quarter, an amount equal to Operating Cash Flow for such period multiplied ---------- by four. -- 2 "Applicable Margin": at the time of any determination thereof, for ----------------- purposes of all Loans, the margin of interest over the ABR or the Eurodollar Rate, as the case may be, which is applicable at the time of any determination of interest rates under this Agreement, which Applicable Margin shall be subject to adjustment (upwards or downwards, as appropriate) based on the Leverage Ratio, as follows:
---------------------------------------------------------------------------------- Applicable Margin Applicable Margin for Leverage Ratio for ABR Loans Eurodollar Rate Loans ---------------------------------------------------------------------------------- Greater than or equal to 5.50 to 0.250% 1.250% 1.00 ---------------------------------------------------------------------------------- Less than 5.50 to 1.00 but greater than or equal to 5.00 to 1.00 0.000% 1.000% ---------------------------------------------------------------------------------- Less than 5.00 to 1.00 but greater than or equal to 4.50 to 1.00 0.000% 0.750% ---------------------------------------------------------------------------------- Less than 4.50 to 1.00 0.000% 0.500% ----------------------------------------------------------------------------------
For the purposes of this definition, the Applicable Margin shall be determined as at the end of each of the first three quarterly periods of each fiscal year of the Borrower and as at the end of each fiscal year of the Borrower, based on the relevant financial statements delivered pursuant to Section 7.1(a) or (b) and the Compliance Certificate delivered pursuant -------------- --- to Section 7.2(b); changes in the Applicable Margin shall become effective -------------- on the date which is the earlier of (i) two Business Days after the date the Administrative Agent receives such financial statements and the corresponding Compliance Certificate and (ii) the 60th day after the end of each of the first three quarterly periods of each fiscal year or the 120th day after the end of each fiscal year, as the case may be, and shall remain in effect until the next change to be effected pursuant to this definition; provided, that (a) until the first such financial statements and Compliance -------- Certificate are delivered after the date hereof, the Applicable Margin shall be determined by reference to the Leverage Ratio set forth in the Closing Certificate delivered to the Administrative Agent pursuant to Section 6.1(b) -------------- and (b) if any financial statements or the Compliance Certificate referred to above are not delivered within the time periods specified above, then, for the period from and including the date on which such financial statements and Compliance Certificate are required to be delivered to but not including the date on which such financial statements and Compliance Certificate are delivered, the Applicable Margin as at the end of the fiscal period that would have been covered thereby shall be deemed to be the Applicable Margin which would be applicable when the Leverage Ratio is greater than or equal to 5.50 to 1.00. "Application": an application, in form and substance consistent with ----------- this Agreement and mutually satisfactory to the Borrower and the Issuing Lender, requesting the Issuing Lender to open a Letter of Credit. 3 "Assignee": as defined in Section 12.6(c). -------- --------------- "Assignment and Acceptance": an Assignment and Acceptance ------------------------- substantially in the form of Exhibit A. --------- "Authorizations": all filings, recordings and registrations with, and -------------- all validations or exemptions, approvals, orders, authorizations, consents, Licenses, certificates and permits from, the FCC, applicable public utilities and other Governmental Authorities, including, without limitation, Franchises, FCC Licenses and Pole Agreements. "Available Commitment": at any time, as to any Lender, an amount equal -------------------- to (a) the amount of such Lender's Commitment at such time, minus (b) such ----- Lender's Aggregate Outstanding Extensions of Credit at such time. "BCI": Bell Canada International Inc. --- "Board": the Board of Governors of the Federal Reserve System or any ----- successor. "Borrower": as defined in the preamble hereto. -------- "Borrowing Date": any Business Day specified in a notice pursuant to -------------- Section 2.3 as a date on which the Borrower requests the Lenders to make Loans - ----------- hereunder. "Business": as defined in Section 5.17(c). -------- --------------- "Business Day": a day other than a Saturday, Sunday or other day on ------------ which commercial banks in New York, New York are authorized or required by law to close and, with respect to Eurodollar Loans, a day on which dealings in Dollar deposits are carried out in the London interbank market. "Cable Systems": all cable television facilities and distribution ------------- systems that are owned, operated and maintained by the Borrower or a Restricted Subsidiary pursuant to the terms of the related licenses, franchises and permits issued under federal, state or municipal laws from time to time in effect, which authorize a person to receive or distribute, or both, by cable, optical, antennae, microwave, satellite or otherwise, audio, video, digital, other broadcast signals or information or telecommunications and visual signals within a defined geographical area for the purpose of providing entertainment or other services, together with all the property, tangible and intangible, owned or used in connection with the services provided pursuant to said licenses, franchises and permits, and each other cable television facility from time to time operated by the Borrower and the Restricted Subsidiaries. A Cable System means one of such Cable Systems. 4 "Capital Lease Obligations": as to any Person, the obligations of such ------------------------- Person to pay rent or other amounts under any lease of (or other arrangement conveying the right to use) real or personal property, or a combination thereof, which obligations are required to be classified and accounted for as capital leases on a balance sheet of such Person under GAAP and, for the purposes of this Agreement, the amount of such obligations at any time shall be the capitalized amount thereof at such time determined in accordance with GAAP. "Capital Stock": any and all shares, interests, participations or ------------- other equivalents (however designated) of capital stock of a corporation, any and all classes of partnership interests (including, without limitation, general, limited and preference units) in a partnership, any and all equivalent ownership interests in a Person (other than a corporation or partnership), and any and all warrants or options to purchase any of the foregoing. "Cash Equivalents": (a) securities with maturities of one year or ---------------- less from the date of acquisition issued or fully guaranteed or insured by the United States Government or any agency thereof, (b) certificates of deposit and eurodollar time deposits with maturities of one year or less from the date of acquisition and overnight bank deposits of any Lender or of any commercial bank having capital and surplus in excess of $500,000,000, (c) repurchase obligations of any Lender or of any commercial bank satisfying the requirements of clause (b) of this definition, having a term of not more than 30 days, with respect to securities issued or fully guaranteed or insured by the United States Government, (d) commercial paper of a domestic issuer rated at least A-1 by Standard and Poor's Ratings Group ("S&P") or P-1 by Moody's Investors Service, --- Inc. ("Moody's"), (e) securities with maturities of one year or less from the ------- date of acquisition issued or fully guaranteed by any state, commonwealth or territory of the United States, or by any political subdivision or taxing authority of any such state, commonwealth or territory, the securities of which state, commonwealth, territory, political subdivision, taxing authority (as the case may be) are rated at least A by S&P or A-2 by Moody's, or (f) shares of money market mutual or similar funds which invest exclusively in assets satisfying the requirements of clauses (a) through (e) of this definition. "Change of Control": shall be deemed to have occurred at such time as ----------------- any of the following occur: (a) if Glenn R. Jones and/or BCI shall no longer have the power to elect a majority of the board of directors of JIC or to direct or cause the direction of the management and policies of JIC through the ownership of voting securities; or (b) (i) if Glenn R. Jones and/or BCI shall no longer have the power, directly or indirectly, to elect a majority of the board of the Borrower or to direct or cause the direction of the management and policies of the Borrower and/or any Restricted Subsidiary or (ii) JIC shall create, incur, assume or suffer to exist any Lien on any Capital Stock of the Borrower. 5 "Closing Certificate": as defined in Section 6.1(b). ------------------- -------------- "Co-Agents": CoreStates Bank, N.A., Credit Lyonnais New York Branch, --------- PNC Bank, National Association, Mellon Bank, N.A., Royal Bank of Canada, The Chase Manhattan Bank, Toronto Dominion (Texas), Inc., Banque Paribas and Bank of America. "Code": the Internal Revenue Code of 1986, as amended from time to ---- time. "Collateral": all Acquired Assets, if any, and all Capital Stock of ---------- all the Restricted Subsidiaries, now owned or hereinafter acquired. "Commitment": as to any Lender, its obligation, if any, to make Loans ---------- to, and/or issue or participate in Letters of Credit issued on behalf of, the Borrower in an aggregate amount not to exceed at any one time outstanding the amount set forth opposite such Lender's name in Schedule 1.1 under the heading ------------ "Commitment" or, in the case of any Lender that is an Assignee, the amount of the assigning Lender's Commitment assigned to such Assignee pursuant to Section ------- 12.6(c) and set forth in the applicable Assignment and Acceptance (in each case, - ------- as the same may be increased, reduced or otherwise adjusted from time to time as provided herein). "Commonly Controlled Entity": an entity, whether or not incorporated, -------------------------- which is under common control with the Borrower within the meaning of Section 4001 of ERISA or is part of a group which includes the Borrower and which is treated as a single employer under Section 414(b) or (c) of the Code. "Compliance Certificate": a certificate of a Responsible Officer of ---------------------- the Borrower, substantially in the form of Exhibit B. --------- "Contractual Obligation": as to any Person, any provision of any ---------------------- security issued by such Person or of any agreement, instrument or other undertaking to which such Person is a party or by which it or any of its property is bound. "Default": any of the events specified in Section 9, whether or not ------- --------- any requirement for the giving of notice, the lapse of time, or both, has been satisfied. "Disposition": as defined in Section 8.5. ----------- ----------- "Documentation Agent": as defined in the preamble hereto. ------------------- "Dollars" and "$": dollars in lawful currency of the United States of ------- - America. "Effective Date": as defined in Section 12.8. -------------- ------------ 6 "Environmental Laws": any and all Federal, state, local or municipal ------------------ laws, rules, orders, regulations, statutes, ordinances, codes, decrees, requirements of any Governmental Authority or other Requirements of Law (including common law) regulating, relating to or imposing liability or standards of conduct concerning protection of human health or the environment, as now or may at any time hereafter be in effect. "ERISA": the Employee Retirement Income Security Act of 1974, as ----- amended from time to time. "Eurocurrency Reserve Requirements": for any day as applied to a --------------------------------- Eurodollar Loan, the aggregate (without duplication) of the rates (expressed as a decimal fraction) of reserve requirements in effect on such day (including, without limitation, basic, supplemental, marginal and emergency reserves under any regulations of the Board or other Governmental Authority having jurisdiction with respect thereto) dealing with reserve requirements prescribed for eurocurrency funding (currently referred to as "Eurocurrency Liabilities" in ------------------------ Regulation D of such Board) maintained by a member bank of the Federal Reserve System. "Eurodollar Base Rate": with respect to each day during each -------------------- Interest Period at which Scotiabank is offered Dollar deposits at or about 11:00 A.M., New York City time, two Business Days prior to the beginning of such Interest Period in the interbank eurodollar market where the eurodollar and foreign currency and exchange operations in respect of its Eurodollar Loans are then being conducted for delivery on the first day of such Interest Period for the number of days comprised therein and in an amount comparable to the amount of its Eurodollar Loan to be outstanding during such Interest Period. "Eurodollar Loans": Loans, the rate of interest applicable to which ---------------- is based upon the Eurodollar Rate. "Eurodollar Rate": with respect to each day during each Interest Period --------------- pertaining to a Eurodollar Loan, a rate per annum determined for such day in accordance with the following formula (rounded upward to the nearest 1/100th of 1%): Eurodollar Base Rate ---------------------------------------- 1.00 - Eurocurrency Reserve Requirements "Event of Default": any of the events specified in Section 9, ---------------- --------- provided that any requirement for the giving of notice, the lapse of time, or - -------- both, or any other condition, has been satisfied. "Facility": the Commitments and the extensions of credit made -------- thereunder. 7 "FCC": the Federal Communications Commission and any successor --- thereto. "FCC License": any community antenna relay service, broadcast ----------- auxiliary license, earth station registration, business radio, microwave or special safety radio service license issued by the FCC pursuant to the Communications Act of 1934, as amended. "Franchise": any franchise, permit, wire agreement or easement, --------- License or other Authorization granted by any Governmental Authority, including all laws, regulations and ordinances relating thereto, for the construction, operation and maintenance of a Cable System or satellite master antenna television system and the reception and transmission of signals by microwave, and shall include, without limitation, all FCC Licenses and all certificates of compliance and cable television registration statements which are required to be issued by or filed with the FCC. "Franchise Agreement": any ordinance, agreement, contract or other ------------------- document stating the terms and conditions of any Franchise, including, without limitation, all exhibits and schedules thereto, all amendments thereof and consents, waivers and extensions issued thereunder, any documents incorporated therein by reference and the application from which such Franchise was granted. "GAAP": generally accepted accounting principles in the United States ---- of America in effect from time to time. "Governmental Authority": any nation or government, any state or other ---------------------- political subdivision thereof and any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government. "Guarantee Obligation": as to any Person (the "guaranteeing person"), -------------------- ------------------- any obligation of (a) the guaranteeing person or (b) another Person (including, without limitation, any bank under any letter of credit) to induce the creation of which the guaranteeing person has issued a reimbursement, counterindemnity or similar obligation, in either case guaranteeing or in effect guaranteeing any Indebtedness, leases, dividends or other obligations (the "primary obligations") ------------------- of any other third Person (the "primary obligor") in any manner, whether --------------- directly or indirectly, including, without limitation, any obligation of the guaranteeing person, whether or not contingent, (i) to purchase any such primary obligation or any property constituting direct or indirect security therefor, (ii) to advance or supply funds (1) for the purchase or payment of any such primary obligation or (2) to maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency of the primary obligor, (iii) to purchase property, securities or services primarily for the purpose of assuring the owner of any such primary obligation of the ability of the primary obligor to make payment of such primary obligation or (iv) otherwise to assure or hold harmless the owner of any such primary obligation against loss in respect thereof; provided, however, that the term -------- ------- Guarantee Obligation shall not include endorsements of 8 instruments for deposit or collection in the ordinary course of business. The amount of any Guarantee Obligation of any guaranteeing person shall be deemed to be the lower of (a) an amount equal to the stated or determinable principal amount of the primary obligation in respect of which such Guarantee Obligation is made and (b) the maximum principal amount for which such guaranteeing person may be liable pursuant to the terms of the instrument embodying such Guarantee Obligation, unless such primary obligation and the maximum principal amount for which such guaranteeing person may be liable are not stated or determinable, in which case the amount of such Guarantee Obligation shall be the principal amount of such guaranteeing person's reasonably anticipated liability in respect thereof as determined by the Borrower in good faith. For the purposes of Section 8.2, Guarantee Obligations by the Borrower or any of the Restricted - ----------- Subsidiaries in respect of Indebtedness of the Borrower or any of the Restricted Subsidiaries shall be calculated without duplication of any other Indebtedness. It is understood that obligations pursuant to indemnities which (a) are granted in the ordinary course of business, are related to officer or director liability for officers and directors of the Borrower or the Restricted Subsidiaries, or made in connection with asset Dispositions and (b) do not cover Indebtedness of the types described in clauses (a) through (d) of the definition thereof shall not constitute "Guarantee Obligations" for the purposes of this Agreement. "Indebtedness": of any Person at any date, (a) all indebtedness of ------------ such Person for borrowed money or which is evidenced by a note, bond, debenture or similar instrument, (b) all indebtedness of such Person for the deferred purchase price of property or services (other than current trade liabilities incurred in the ordinary course of business and payable in accordance with customary practices), (c) all Capital Lease Obligations of such Person, (d) all obligations of such Person in respect of the principal amount of acceptances or letters of credit issued or created for the account of such Person, (e) all Guarantee Obligations of such Person and (f) all liabilities of the type described in clauses (a) through (e) above secured by any Lien on any property owned by such Person even though such Person has not assumed or otherwise become liable for the payment thereof; provided that the amount of any nonrecourse -------- Indebtedness of such Person shall be not more than an amount equal to the fair market value of the property subject to such Lien, as determined by the Borrower in good faith. The Indebtedness of any Person shall include the Indebtedness of any partnership in which such Person is a general partner, other than to the extent that the instrument or agreement evidencing such Indebtedness expressly limits the liability of such Person in respect thereof. "Information": written information, including, without limitation, ----------- certificates, reports, statements (other than financial statements, budgets, projections and similar financial data) and documents. "Initial Funding Date": the date when the initial extensions of -------------------- credit have been made hereunder and all of the conditions precedent set forth in Section 6 have been satisfied in full or waived. - --------- 9 "Insolvency": with respect to any Multiemployer Plan, the condition ---------- that such Plan is insolvent within the meaning of Section 4245 of ERISA. "Insolvent": pertaining to a condition of Insolvency. --------- "Intercompany Subordinated Debt": any Indebtedness of the Borrower ------------------------------ related to or resulting from any loan or advance from, or any non-equity investment in the Borrower by, or any management or similar fees payable by the Borrower to, or any other obligation of the Borrower to pay to, BCI or an Affiliate of the Borrower (excluding a Restricted Subsidiary), and all such present and future Indebtedness of the Borrower owing to, or non-equity investment in the Borrower by, or management or similar fees payable by the Borrower to, or any other obligation of the Borrower to pay to, BCI or an Affiliate of the Borrower (excluding a Restricted Subsidiary) now or hereafter existing (whether created directly or acquired by assignment or otherwise), fixed, contingent, liquidated, unliquidated, joint, several, or joint and several, whether evidenced in writing or not, and interest, premiums and fees, if any, thereon and other amounts payable in respect thereof, and all rights and remedies of such obligees with respect thereto. Notwithstanding the foregoing, Intercompany Subordinated Debt shall not include (a) payments under the agreements described in Schedule 8.10, or (b) payments relating to any purchase, ------------- sale, lease or exchange of property or the rendering of any service, with any Affiliate of the Borrower (other than a Restricted Subsidiary) which is (i) entered into in the ordinary course of the Borrower's business, (ii) the terms of which are fair and reasonable and in the best interests of the Borrower and (iii) which is approved by the Board of Directors of the Borrower. "Intercompany Subordinated Debt Agreement": the agreement executed and ---------------------------------------- delivered pursuant to Section 6.1(a) by and among JIC, the Borrower and any -------------- other Affiliate of the Borrower who becomes a party thereto pursuant to the terms thereof, substantially in the form of Exhibit C. --------- "Intercompany Subordinated Note": a note substantially in the form of ------------------------------ Exhibit E, evidencing Intercompany Subordinated Debt. - --------- "Interest Expense": for any fiscal quarter or fiscal year of the ---------------- Borrower, as applicable, the aggregate of all letter of credit fees, commitment fees and interest accrued or paid by the Borrower or any of the Restricted Subsidiaries, during such period in respect of Total Debt, all as determined on a consolidated basis in accordance with GAAP. "Interest Payment Date": (a) as to any ABR Loan, (i) the last --------------------- Business Day of each March, June, September and December prior to the Termination Date and (ii) the Termination Date, (b) as to any Eurodollar Loan having an Interest Period of three months or less, the last day of such Interest Period and (c) as to any Eurodollar Loan having an Interest Period longer than three months, each day which is three months or a whole multiple thereof, after the first day of such Interest Period and the last day of such Interest Period. 10 "Interest Period": with respect to any Eurodollar Loan: --------------- (a) initially, the period commencing on the borrowing or conversion date, as the case may be, with respect to such Eurodollar Loan and ending one, two, three or six months thereafter (or, to the extent available from all Lenders, nine or twelve months thereafter), as selected by the Borrower in its Notice of Borrowing or Notice of Conversion/Continuation, as the case may be, given with respect thereto; and (b) thereafter, each period commencing on the last day of the next preceding Interest Period applicable to such Eurodollar Loan and ending one, two, three or six months thereafter (or, to the extent available from all Lenders, nine or twelve months thereafter), as selected by the Borrower by irrevocable notice to the Administrative Agent not less than three Business Days prior to the last day of the then current Interest Period with respect thereto; provided that, all of the foregoing provisions relating to Interest Periods are - -------- subject to the following: (i) if any Interest Period would otherwise end on a day that is not a Business Day, such Interest Period shall be extended to the next succeeding Business Day unless the result of such extension would be to carry such Interest Period into another calendar month in which event such Interest Period shall end on the immediately preceding Business Day; (ii) any Interest Period that would otherwise extend beyond the Termination Date shall end on the Termination Date; and (iii) any Interest Period that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last Business Day of a calendar month. "Interest Rate Hedge Agreement": any interest rate protection ----------------------------- agreement, interest rate futures contract, interest rate option, interest rate cap or other interest rate hedge arrangement, to or under which the Borrower or any Restricted Subsidiary is a party or a beneficiary. "Investments": as defined in Section 8.9. ----------- ----------- "Issuing Lender": Scotiabank, provided that, in the event that -------------- -------- Scotiabank shall be replaced as the Administrative Agent pursuant to Section 10.9, (i) no Letter of Credit shall be issued by Scotiabank on or - ------------ after the date of such replacement and (ii) the replacement Administrative Agent shall be an Issuing Lender from and after the date of such replacement. 11 "JCA": as defined in the recitals. --- "JCG": as defined in the recitals. --- "JCH": as defined in the recitals. --- "JIC": Jones Intercable, Inc., a Colorado corporation. --- "JIC Negative Pledge": the Negative Pledge Agreement to be executed and ------------------- delivered by JIC, substantially in the form of Exhibit D-1, as the same may be ----------- amended, supplemented or otherwise modified from time to time, whereby JIC agrees not to create, incur, assume or suffer to exist any Lien upon the Capital Stock of the Borrower nor upon any Intercompany Subordinated Debt from the Borrower in favor of JIC. "L/C Fee Payment Date": the last Business Day of each March, June, -------------------- September and December. "L/C Obligations": at any time, an amount equal to the sum of (a) the --------------- aggregate then undrawn and unexpired amount of the then outstanding Letters of Credit and (b) the aggregate amount of all unpaid Reimbursement Obligations. "Lenders": as defined in the preamble hereto. ------- "Letters of Credit": as defined in Section 3.1(a). ----------------- -------------- "Leverage Ratio": as of the last day of the most recently ended fiscal -------------- quarter, the ratio of (i) Total Debt as of such day to (ii) Annualized Operating Cash Flow based on such fiscal quarter. "License": as to any Person, any license, permit, certificate of need, ------- authorization, certification, accreditation, franchise, approval, or grant of rights by any Governmental Authority or other Person necessary or appropriate for such Person to own, maintain, or operate its business or property, including FCC Licenses. "Lien": any mortgage, pledge, hypothecation, assignment, deposit ---- arrangement, encumbrance, lien (statutory or other), charge or other security interest or any preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever (including, without limitation, any conditional sale or other title retention agreement and any capital lease having substantially the same economic effect as any of the foregoing). "Loan": any loan made by any Lender pursuant to this Agreement. ---- 12 "Loan Documents": this Agreement, the Applications, all Intercompany -------------- Subordinated Notes, the Intercompany Subordinated Debt Agreement, the Notes, the JIC Negative Pledge, all Restricted Subsidiary Negative Pledges, any Interest Rate Hedge Agreements with any of the Lenders and the Security Documents. "Loan Parties": the collective reference to the Borrower and the ------------ Restricted Subsidiaries. "Majority Lenders": at any time when no Loans or L/C Obligations are ---------------- outstanding, the Lenders having Commitments greater than 50% of the Total Commitment, and at any time when Loans or L/C Obligations are outstanding, the Lenders with outstanding Loans and participations in L/C Obligations having an unpaid principal balance and face amount, respectively, greater than 50% of all Loans and L/C Obligations outstanding, excluding from such calculation the Lenders which have failed or refused to fund a Loan or their respective portion of an unpaid Reimbursement Obligation. "Managing Agents": as defined in the preamble hereto. --------------- "Managing Agents Fee Letter": the letter agreement, dated September -------------------------- 25, 1996, among the Borrower, NationsBank, Scotiabank, and Societe. "Material Adverse Effect": a material adverse effect on (a) the ----------------------- business, assets, operations or condition (financial or otherwise) of the Borrower or any of the Restricted Subsidiaries, (b) the ability of any Loan Party to perform its obligations under the Loan Documents or (c) the rights or remedies of the Administrative Agent or the Lenders under this Agreement or any of the other Loan Documents. "Materials of Environmental Concern": any gasoline or petroleum ---------------------------------- (including crude oil or any fraction thereof) or petroleum products or any hazardous or toxic substances, materials or wastes, defined or regulated as such in or under any Environmental Law, including, without limitation, asbestos, polychlorinated biphenyls and urea-formaldehyde insulation. "Maximum Permitted Indebtedness": shall mean, at the date of ------------------------------ determination, an amount equal to the product of (i) Annualized Operating Cash Flow based on the preceding fiscal quarter and (ii) the Leverage Ratio permitted pursuant to Section 8.1(a) on the date of determination. -------------- "Multiemployer Plan": a Plan which is a multiemployer plan as defined ------------------ in Section 4001(a)(3) of ERISA. "NationsBank": NationsBank of Texas, N.A. ----------- 13 "Net Unrestricted Designated Subsidiaries Three Month Cash Flow": -------------------------------------------------------------- shall mean, for any period, the excess, if any, of (i) the Three Month Cash Flow attributable to all Restricted Subsidiaries which have been designated during such period as Unrestricted Subsidiaries pursuant to Section 8.6, ----------- including, if applicable, the Three Month Cash Flow attributable to any Restricted Subsidiary which is then being designated as an Unrestricted Subsidiary pursuant to Section 8.6 (calculated at the time of each such ----------- designation), over (ii) the Three Month Cash Flow attributed to all Unrestricted Subsidiaries which have been designated during such period as Restricted Subsidiaries pursuant to Section 8.6, including, if applicable, ----------- the Three Month Cash Flow attributable to any Unrestricted Subsidiary which is then being designated as a Restricted Subsidiary pursuant to Section 8.6 ----------- (calculated at the time of each such designation). "Non-Excluded Taxes": as defined in Section 4.10(a). ------------------ --------------- "Non-U.S. Lender": as defined in Section 4.10(b). --------------- --------------- "Notes": as defined in Section 2.2. ----- ----------- "Notice of Borrowing": as defined in Section 2.3. ------------------- ----------- "Notice of Conversion/Continuation": as defined in Section 4.5. --------------------------------- ----------- "Obligations": the unpaid principal of and interest on (including, ----------- without limitation, interest accruing after the maturity of the Loans and Reimbursement Obligations and interest accruing after the filing of any petition in bankruptcy, or the commencement of any insolvency, reorganization or like proceeding, relating to any Loan Party, whether or not a claim for post-filing or post-petition interest is allowed in such proceeding) the Loans and Reimbursement Obligations and all other obligations and liabilities of any Loan Party to the Administrative Agent or to any Lender (or, in the case of any Interest Rate Protection Agreement, any affiliate of any Lender), whether direct or indirect, absolute or contingent, due or to become due, or now existing or hereafter incurred, which may arise under, out of, or in connection with, this Agreement, any other Loan Document, the Letters of Credit, any Interest Rate Protection Agreement entered into with any Lender (or any affiliate of any Lender) or any other document made, delivered or given in connection herewith or therewith, whether on account of principal, interest, reimbursement obligations, fees, indemnities, costs, expenses (including, without limitation, all reasonable fees, charges and disbursements of counsel to the Administrative Agent or to any Lender that are required to be paid by any Loan Party pursuant hereto) or otherwise. "Operating Cash Flow": for any period the total revenues ------------------- (excluding the gain on the sale of any assets to the extent included therein) of the Borrower and the Restricted Subsidiaries, less the sum of (a) operating expenses of the Borrower and the Restricted Subsidiaries for such period, and (b) general and administrative expenses of the Borrower 14 and the Restricted Subsidiaries for such period, in each case determined and consolidated in accordance with GAAP and calculated after giving effect to acquisitions, exchanges and dispositions of assets of the Borrower and any of the Restricted Subsidiaries (and designations of the Restricted Subsidiaries and the Unrestricted Subsidiaries) during such period as if such transactions had occurred on the first day of such period; provided, -------- that for purposes of determining Operating Cash Flow for any such period during which (a) the Borrower or any of the Restricted Subsidiaries acquired or disposed of any assets, or (b) any Restricted Subsidiaries were designated Unrestricted Subsidiaries or Unrestricted Subsidiaries were designated Restricted Subsidiaries, then such Operating Cash Flow shall be increased (in the case of asset acquisitions or the designation of a Unrestricted Subsidiary as a Restricted Subsidiary) or reduced (in the case of asset dispositions or the designation of a Restricted Subsidiary as an Unrestricted Subsidiary), by the Operating Cash Flow that would have been contributed by such assets or Restricted Subsidiary or Unrestricted Subsidiary, as the case may be during such period, determined on a pro forma basis in a manner reasonably satisfactory to the Managing Agents, as though the Borrower or the relevant Restricted Subsidiary acquired or disposed of such assets or the designations of the Restricted Subsidiaries or the Unrestricted Subsidiaries took place, on the first day of such period. "Participant": as defined in Section 12.6(b). ----------- --------------- "PBGC": the Pension Benefit Guaranty Corporation established ---- pursuant to Subtitle A of Title IV of ERISA. "Permitted Line of Business": as defined in Section 8.13. -------------------------- ------------ "Person": an individual, partnership, corporation, limited ------ liability company, business trust, joint stock company, trust, unincorporated association, joint venture, Governmental Authority or other entity of whatever nature. "Plan": at a particular time, any employee benefit plan which is ---- covered by ERISA and in respect of which the Borrower or a Commonly Controlled Entity is (or, if such plan were terminated at such time, would under Section 4069 of ERISA be deemed to be) a "contributing sponsor" as defined in Section 4001(a)(13) of ERISA or a member of such contributing sponsor's "control group" as defined in Section 4001(a)(14) of ERISA. "Pledge Agreements": the Pledge Agreements to be executed and ----------------- delivered by the Borrower and each of the Restricted Subsidiaries, substantially in the form of Exhibit F hereto, as the same may be amended, --------- supplemented or otherwise modified from time to time. "Pledged Subsidiary": any Restricted Subsidiary of the Borrower. ------------------ 15 "Pole Agreement": any pole attachment agreement or underground -------------- conduit use agreement entered into in connection with the operation of any Cable System. "Prime Rate": as defined in the definition of "ABR". ---------- "Pro Forma Debt Service": on any date of determination, without ---------------------- duplication, for the succeeding twelve-month period from the end of the most recently ended fiscal quarter, the sum of (a) all Interest Expense scheduled to be paid on Total Debt during such twelve-month period (including without limitation any amounts scheduled to be paid pursuant to any Interest Rate Hedge Agreement), plus (b) all rentals (other than insurance premiums and property taxes) scheduled to be paid under Capital Lease Obligations during such twelve-month period, plus (c) required principal payments on Total Debt and/or payments associated with reductions in the Total Commitment for such twelve-month period; provided that, for -------- purposes of this definition, the rates of interest payable during any period on Total Debt (x) bearing interest at a variable rate or at different fixed rates or (y) on which interest does not become payable until a specified date after the end of such quarter shall, in each case, be the interest rates per annum payable on such Total Debt as of the date for which such calculation is made. "Properties": as defined in Section 5.17(e). ---------- --------------- "Quarterly Percentage Reduction": as defined in Section 4.2(c). ------------------------------ -------------- "Register": as defined in Section 12.6(g). -------- --------------- "Reimbursement Obligations": the obligations of the Borrower to ------------------------- reimburse the Issuing Lender pursuant to Section 3.5 for amounts drawn ----------- under Letters of Credit. "Reorganization": with respect to any Multiemployer Plan, the -------------- condition that such plan is in reorganization within the meaning of Section 4241 of ERISA. "Reportable Event": any of the events set forth in Section 4043(b) ---------------- of ERISA, other than those events as to which the thirty day notice period is waived under Sections .13, .14, .16, .18, .19 or .20 of PBGC Reg. (S) 2615. "Requirement of Law": as to any Person, the Certificate of ------------------ Incorporation and By-Laws or other organizational or governing documents of such Person, and any law, treaty, rule or regulation or determination of an arbitrator or a court or other Governmental Authority (including any Authorization), in each case applicable to or binding upon such Person or any of its property or to which such Person or any of its property is subject. "Responsible Officer": the chief executive officer, the president, ------------------- the chief financial officer or the treasurer of the relevant Loan Party. 16 "Restricted Payments": as defined in Section 8.7. ------------------- ----------- "Restricted Subsidiary": (a) each of the Subsidiaries designated --------------------- as such on Schedule 5.14 attached hereto, (b) any Subsidiary created or ------------- acquired after the Effective Date pursuant to Section 8.9(e), unless and ------------- until designated as an Unrestricted Subsidiary pursuant to Section 8.6 and ----------- (c) as of the date of such designation, any Unrestricted Subsidiary designated as a Restricted Subsidiary pursuant to Section 8.6. ----------- "Restricted Subsidiary Negative Pledge": the Negative Pledge ------------------------------------- Agreement to be executed and delivered by each Restricted Subsidiary in the form of Exhibit D-2, as the same may be amended, supplemented or otherwise ----------- modified from time to time, whereby the Restricted Subsidiaries agree not to create, incur, assume or suffer to exist any Lien upon any of their assets except as permitted under Section 8.3 of the Tranche B Agreement and ----------- this Agreement. "Scotiabank": The Bank of Nova Scotia. ---------- "Scotiabank Fee Letter": the letter agreement, dated September 25, --------------------- 1996, between the Borrower and Scotiabank. "Security Documents": the collective reference to the Pledge ------------------ Agreements and any other security documents hereafter delivered to the Administrative Agent granting a Lien on any asset or assets of any Person to secure the obligations and liabilities of the Borrower hereunder and under any of the other Loan Documents or to secure any guarantee of any such obligations and liabilities. "Single Employer Plan": any Plan which is covered by Title IV of -------------------- ERISA, but which is not a Multiemployer Plan. "Societe": Societe Generale. ------- "Solvent": when used with respect to any Person, means that, as of ------- any date of determination, (a) the amount of the "fair value" or "present fair saleable value" of the assets of such Person will, as of such date, exceed the amount of all "liabilities of such Person, contingent or otherwise", as of such date, as such quoted terms are determined in accordance with applicable federal and state laws governing determinations of the insolvency of debtors, (b) the fair value or present fair saleable value of the assets of such Person will, as of such date, be greater than the amount that will be required to pay the liability of such Person on its debts as such debts become absolute and matured, (c) such Person will not have, as of such date, an unreasonably small amount of capital with which to conduct its business, and (d) such Person will be able to pay its debts as they mature. For purposes of this definition, (i) "debt" means liability on a "claim", (ii) "claim" means any (x) right to payment, whether or not such a right is reduced to judgment, liquidated, unliquidated, fixed, contingent, 17 matured, unmatured, disputed, undisputed, legal, equitable, secured or unsecured or (y) right to an equitable remedy for breach of performance if such breach gives rise to a right to payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured or unmatured, disputed, undisputed, secured or unsecured and (iii) unliquidated, contingent, disputed and unmatured claims shall be valued at the amount that can be reasonably expected to be actual and matured. "Specified Percentage": at any time, as to any Lender, the -------------------- percentage of the Total Commitment then constituted by such Lender's Commitment. "Stock Purchase": as defined in the recitals hereto. -------------- "Subsidiary": as to any Person, a corporation, partnership or ---------- other entity of which shares of stock or other ownership interests having ordinary voting power (other than stock or such other ownership interests having such power only by reason of the happening of a contingency) to elect a majority of the board of directors (or Persons holding equivalent positions) of such corporation, partnership or other entity are at the time owned, or the management and policies of which are otherwise ultimately controlled, directly or indirectly through one or more intermediaries, or both, by such Person. Unless otherwise qualified, all references to a "Subsidiary" or to "Subsidiaries" in this Agreement shall refer to a Subsidiary or Subsidiaries of the Borrower. "Syndication Agent": as defined in the preamble hereto. ----------------- "Tax Sharing Agreement": that certain Jones Intercable, Inc. and --------------------- its Qualifying Subsidiaries Income Tax Sharing Agreement, dated as of October 31, 1995, among JIC and certain of its Subsidiaries, as amended solely to include the Borrower and the Restricted Subsidiaries as parties thereto. "Termination Date": the earlier of (i) December 31, 2005, (ii) the ---------------- date the Lenders' Commitments to lend under this Agreement are otherwise cancelled or terminated and (iii) the date any Note shall become due and payable, whether at stated maturity, by acceleration or otherwise. "Three Month Cash Flow": for a Person or group of Persons or the --------------------- assets of any Person as the context requires that portion of Operating Cash Flow derived from or produced by such Person, Persons or assets for the three-month period ending on the last day of the month immediately preceding the date of designation, transfer, sale or exchange of such Person, Persons or assets or, in the case of the Borrower and the Restricted Subsidiaries, immediately prior to the date of determination thereof. "Total Available Commitment": the sum of the Available Commitments -------------------------- of all the Lenders. 18 "Total Commitment": the sum of the Commitments (in each case, as ---------------- the same may be increased, reduced or otherwise adjusted from time to time as provided herein) not to exceed $300,000,000. "Total Debt": for the Borrower and the Restricted Subsidiaries as ---------- of any date, without duplication, the sum of (a) Indebtedness outstanding on such date excluding any Intercompany Subordinated Debt, provided that -------- the Intercompany Subordinated Debt is unsecured and subordinated pursuant to the terms of the Intercompany Subordinated Debt Agreement, (b) Capital Lease Obligations outstanding on such date and (c) Guarantee Obligations, determined on a consolidated basis in accordance with GAAP. "Total Extensions of Credit": at any time, the sum of the -------------------------- Aggregate Outstanding Extensions of Credit of all of the Lenders at such time. "Tranche": the collective reference to Eurodollar Loans, the then ------- current Interest Periods of which begin on the same date and end on the same later date (whether or not such Loans shall originally have been made on the same day). "Tranche B Agreement": the Credit Agreement [Tranche B] among the ------------------- Borrower, the several Lenders from time to time parties thereto, the Managing Agents, the Syndication Agent, the Documentation Agent and the Administrative Agent, of even date herewith, as amended, supplemented or otherwise modified from time to time. "Transferee": as defined in Section 12.6(i). ---------- --------------- "Type": as to any Loan, its nature as an ABR Loan or a Eurodollar ---- Loan. "Uniform Customs": the Uniform Customs and Practice for --------------- Documentary Credits (1993 Revision), International Chamber of Commerce Publication No. 500, as the same may be amended from time to time. "Unrestricted Subsidiary": (a) any Subsidiary created or acquired ----------------------- after the Effective Date, pursuant to Section 8.9(f) and/or any Subsidiary ------------- that is designated as an Unrestricted Subsidiary in accordance with the terms of Section 8.6 and (b) any Subsidiary of any such Unrestricted ----------- Subsidiary, provided, that (i) at no time shall any creditor of any such -------- Subsidiary have any claim (whether pursuant to a Guarantee Obligation or otherwise) against the Borrower or any of its other Subsidiaries (other than another Unrestricted Subsidiary) in respect of any Indebtedness or other obligation of any such Subsidiary; (ii) neither the Borrower nor any of its Subsidiaries (other than another Unrestricted Subsidiary) shall become a general partner of any such Subsidiary; (iii) no default with respect to any Indebtedness of any such Subsidiary (including any right which the holders thereof may have to take enforcement action against any such Subsidiary) shall permit (upon notice, lapse of time or both) any holder of any Indebtedness of the Borrower or its other Subsidiaries (other 19 than another Unrestricted Subsidiary) to declare a default on such other Indebtedness or cause the payment thereof to be accelerated or payable prior to its final scheduled maturity; (iv) no such Subsidiary shall own any Capital Stock of, or own or hold any Lien on any property of, the Borrower or any other Subsidiary of the Borrower (other than another Unrestricted Subsidiary); (v) no Investments may be made in any such Subsidiary by the Borrower or any of its Subsidiaries (other than another Unrestricted Subsidiary except pursuant to Section 8.9(f)); and (vi) at the ------------- time of such designation, no Default or Event of Default shall have occurred and be continuing or would result therefrom. It is understood that the Unrestricted Subsidiaries shall be disregarded for the purposes of any calculation pursuant to this Agreement relating to financial matters with respect to the Borrower. "Unrestricted Subsidiary Designation": as defined in Section 8.6. ----------------------------------- ----------- "Wholly Owned Subsidiary": as to any Person, any other Person at ----------------------- least 100% of the Capital Stock of which (other than directors' qualifying shares required by law) is owned by such Person directly or indirectly through one or more other Wholly Owned Subsidiaries. 1.2 Other Definitional Provisions. (a) Unless otherwise specified ----------------------------- therein, all terms defined in this Agreement shall have the defined meanings when used in any other Loan Document or any certificate or other document made or delivered pursuant hereto or thereto. (b) Unless otherwise specified herein, all accounting terms used herein (and in any other Loan Document and any certificate or other document made or delivered pursuant hereto or thereto) shall be interpreted, all accounting determinations shall be made, and all financial statements required to be delivered hereunder shall be prepared, in accordance with GAAP as in effect from time to time; provided, however, that if the Borrower notifies the -------- ------- Administrative Agent that the Borrower wishes to amend any covenant in Section 8 --------- to eliminate the effect of any change in GAAP on the operation of such covenant (or if the Administrative Agent notifies the Borrower that the Majority Lenders wish to amend Section 8 for such purpose), then compliance with such covenant --------- shall be determined on the basis of GAAP in effect immediately before the relevant change in GAAP became effective, until either such notice is withdrawn or such covenant is amended in a manner satisfactory to the Borrower and the Majority Lenders. (c) The words "hereof", "herein" and "hereunder" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement, and Section, Schedule and Exhibit references are to this Agreement unless otherwise specified. (d) The meanings given to terms defined herein shall be equally applicable to both the singular and plural forms of such terms. 20 (e) References in this Agreement or any other Loan Document to knowledge by the Borrower or any Restricted Subsidiary of events or circumstances shall be deemed to refer to events or circumstances of which any Responsible Officer has actual knowledge or reasonably should have knowledge. (f) References in this Agreement or any other Loan Document to financial statements shall be deemed to include all related schedules and notes thereto. SECTION 2. AMOUNT AND TERMS OF COMMITMENTS 2.1 Commitments. (a) Subject to and in reliance upon the terms, ----------- conditions, representations and warranties contained in the Loan Documents, each Lender severally agrees to make revolving credit Loans to the Borrower from time to time until the Termination Date, provided that in no event shall the Aggregate Outstanding Extensions of Credit of any Lender at any time exceed such Lender's Commitment. Until the Termination Date, the Borrower may use the Available Commitments by borrowing, prepaying the Loans in whole or in part, and reborrowing, all in accordance with the terms and conditions hereof. (b) The Loans may from time to time be (i) Eurodollar Loans, (ii) ABR Loans or (iii) a combination thereof, as determined by the Borrower and notified to the Administrative Agent in accordance with Sections 2.3 and ------------ 4.5, provided that no Loan shall be made as a Eurodollar Loan after the day - --- -------- that is one month prior to the Termination Date. 2.2 Notes. In order to evidence the Loans, the Borrower will ----- execute and deliver to each Lender a promissory note substantially in the form of Exhibit G, with appropriate insertions as to payee, date and principal amount --------- (each, as amended, supplemented, replaced or otherwise modified from time to time, a "Note"), payable to the order of each Lender and in a principal amount ---- equal to each such Lender's Commitment. Each Note shall (x) be dated the Effective Date or the date of any reissuance of such Note, (y) be stated to mature on the Termination Date and (z) provide for the payment of interest in accordance with Section 4.1. ----------- 2.3 Procedure for Borrowing. Subject to the terms and conditions ----------------------- contained in the Loan Documents, the Borrower may borrow under the Available Commitments, prior to the Termination Date, on any Business Day by delivery to the Administrative Agent of an irrevocable notice substantially in the form of Exhibit H-1 (a "Notice of Borrowing"). A Notice of Borrowing must be received - ----------- ------------------- by the Administrative Agent prior to 12:00 Noon, New York City time, (a) three Business Days prior to the requested Borrowing Date, if all or any part of the requested Loans are to be initially Eurodollar Loans, or (b) on the requested Borrowing Date. A Notice of Borrowing shall specify (i) the amount to be borrowed, (ii) the requested Borrowing Date, (iii) whether the borrowing is to be of Eurodollar Loans, ABR Loans or a combination thereof and (iv) if the borrowing is to be entirely or partly of Eurodollar Loans, the respective amounts of each Tranche and the respective lengths of the initial Interest Periods therefor. Each borrowing under the Total Available Commitment shall be in an amount equal to (x) in the case of ABR Loans, $5,000,000 or 21 a whole multiple of $1,000,000 in excess thereof (or, if the then Total Available Commitment is less than $5,000,000, such lesser amount) and (y) in the case of Eurodollar Loans, $5,000,000 or a whole multiple of $1,000,000 in excess thereof. Upon receipt of any such Notice of Borrowing from the Borrower, the Administrative Agent shall promptly notify each Lender thereof. Each such Lender will make the amount of its pro rata share of each borrowing available to the Administrative Agent for the account of the Borrower at the office of the Administrative Agent specified in Section 12.2 prior to 2:00 P.M., New York City ------------ time, on the Borrowing Date requested by the Borrower in funds immediately available to the Administrative Agent. Such borrowing will then be made available to the Borrower by the Administrative Agent crediting the account of the Borrower as so directed by the Borrower in a Notice of Borrowing with the aggregate of the amounts made available to the Administrative Agent by the Lenders and in like funds as received by the Administrative Agent. 2.4 Repayment of Loans. (a) The Borrower hereby unconditionally ------------------ promises to pay to the Administrative Agent for the account of each Lender, (i) the then unpaid principal amount of each Loan of such Lender, on the Termination Date (or such earlier date on which the Loans become due and payable pursuant to Section 9) and (ii) the amounts specified in Section 4.2, on the dates specified - --------- ----------- in Section 4.2. The Borrower hereby further agrees to pay interest on the ----------- unpaid principal amount of the Loans from time to time outstanding from the date hereof until payment in full thereof at the rates per annum, and on the dates, set forth in Section 4.1. ----------- (b) Each Lender shall maintain in accordance with its usual practice an account or accounts evidencing indebtedness of the Borrower to such Lender resulting from each Loan of such Lender from time to time, including the amounts of principal and interest payable and paid to such Lender from time to time under this Agreement. (c) The Administrative Agent shall maintain the Register pursuant to Section 12.6(g), and a subaccount therein for each Lender, in which shall be -------------- recorded (i) the amount of each Loan made hereunder, the Type thereof and each Interest Period, if any, applicable thereto, (ii) the amount of any principal or interest due and payable or to become due and payable from the Borrower to each Lender hereunder and (iii) both the amount of any sum received by the Administrative Agent hereunder from the Borrower and each Lender's share thereof. (d) The entries made in the Register and the accounts of each Lender maintained pursuant to Section 12.6(g) shall, to the extent permitted by -------------- applicable law, be prima facie evidence of the existence and amounts of the ----- ----- obligations of the Borrower therein recorded; provided, however, that the -------- ------- failure of any Lender or the Administrative Agent to maintain the Register or any such account, or any error therein, shall not in any manner affect the obligation of the Borrower to repay (with applicable interest) the Loans made to the Borrower by such Lender in accordance with the terms of this Agreement. 22 SECTION 3. LETTERS OF CREDIT 3.1 L/C Commitment. (a) Subject to the terms and conditions -------------- hereof, Issuing Lender, in reliance on the agreements of the other Lenders set forth in Section 3.4(a), agrees to issue letters of credit ("Letters of Credit") ------------- ----------------- for the account of the Borrower on any Business Day in such form as may be approved from time to time by such Issuing Lender; provided that Issuing Lender -------- shall not issue any Letter of Credit if, after giving effect to such issuance, either (i) the L/C Obligations would exceed $30,000,000 or (ii) the Total Extensions of Credit would exceed the Total Commitment. Each Letter of Credit shall (i) be denominated in Dollars and shall be either (x) a standby letter of credit issued for the account of the Borrower, which finances the working capital and business needs of the Borrower and/or the Subsidiaries of the Borrower, including, without limitation, good faith deposits in connection with permitted acquisitions by the Borrower and/or the Subsidiaries of the Borrower, or (y) a commercial letter of credit issued for the account of the Borrower in respect of the purchase of goods or services by the Borrower and/or any of the Subsidiaries of the Borrower and (ii) expire no later than the earlier of (x) the Termination Date and (y) the date which is 12 months after its date of issuance. (b) Each Letter of Credit shall be subject to the Uniform Customs and, to the extent not inconsistent therewith, the laws of the State of New York. (c) The Issuing Lender shall not at any time be obligated to issue any Letter of Credit hereunder if such issuance would conflict with, or cause the Issuing Lender or any other Lender to exceed any limits imposed by, any applicable Requirement of Law. 3.2 Procedure for Issuance of Letters of Credit. The Borrower may ------------------------------------------- from time to time request that the Issuing Lender issue a Letter of Credit by delivering to the Issuing Lender, at its address for notices specified herein, an Application therefor, completed to the reasonable satisfaction of the Issuing Lender, and such other certificates, documents and other papers and information as the Issuing Lender may reasonably request. Upon receipt of any Application, the Issuing Lender will process such Application and the certificates, documents and other papers and information delivered to it in connection therewith in accordance with its customary procedures and shall promptly issue the Letter of Credit requested thereby (but in no event shall the Issuing Lender be required to issue any Letter of Credit earlier than three Business Days after its receipt of the Application therefor and all such other certificates, documents and other papers and information relating thereto) by issuing the original of such Letter of Credit to the beneficiary thereof or as otherwise may be agreed by the Issuing Lender and the Borrower. The Issuing Lender shall furnish a copy of such Letter of Credit to the Borrower promptly following the issuance thereof. 3.3 Fees, Commissions and Other Charges. (a) The Borrower shall ----------------------------------- pay to the Administrative Agent, for the account of each Lender, a letter of credit fee with respect to each Letter of Credit, computed for the period from and including the date of issuance of such Letter of Credit to the date such Letter of Credit is no longer outstanding, computed at a percentage rate per annum equal to the Applicable Margin from time to time applicable to Loans bearing interest at the 23 Eurodollar Rate, calculated on the basis of a 360-day year, of the aggregate average daily amount available to be drawn under such Letter of Credit for the period as to which payment of such fee is made, payable on each L/C Fee Payment Date to occur while such Letter of Credit remains outstanding and on the date such Letter of Credit expires, is cancelled or is drawn upon. Such fee shall be nonrefundable. (b) In addition to the foregoing fees, the Borrower shall pay to the Issuing Lender the fees set forth in the Scotiabank Fee Letter. (c) The Administrative Agent shall, promptly following its receipt thereof, distribute to each Lender all fees received by the Administrative Agent for each such Lender's account pursuant to this Section. 3.4 L/C Participations. (a) The Issuing Lender irrevocably agrees ------------------ to grant and hereby grants to each Lender, and, to induce the Issuing Lender to issue Letters of Credit hereunder, each Lender irrevocably agrees to accept and purchase and hereby accepts and purchases from the Issuing Lender, on the terms and conditions hereinafter stated, for such Lender's own account and risk an undivided interest equal to such Lender's Specified Percentage in the Issuing Lender's obligations and rights under each Letter of Credit issued by the Issuing Lender and the amount of each draft paid by the Issuing Lender thereunder. Each Lender unconditionally and irrevocably agrees with the Issuing Lender that, if a draft is paid under any Letter of Credit issued by the Issuing Lender for which the Issuing Lender is not reimbursed in full by the Borrower in accordance with Section 3.5(a), such Lender shall pay to the Issuing Lender upon -------------- demand at the Issuing Lender's address for notices specified herein an amount equal to such Lender's Specified Percentage of the amount of such draft, or any part thereof, which is not so reimbursed. (b) If any amount required to be paid by any Lender to the Issuing Lender pursuant to Section 3.4(a) in respect of any unreimbursed portion of any -------------- payment made by the Issuing Lender under any Letter of Credit is paid to the Issuing Lender within three Business Days after the date such payment is due, such Lender shall pay to the Issuing Lender on demand an amount equal to the product of (i) such amount, times (ii) the daily average Federal Funds Effective ----- Rate during the period from and including the date such payment is required to the date on which such payment is immediately available to the Issuing Lender, times (iii) a fraction the numerator of which is the number of days that elapse - ----- during such period and the denominator of which is 360. If any such amount required to be paid by any Lender pursuant to Section 3.4(a) is not in fact made -------------- available to the Issuing Lender by such Lender within three Business Days after the date such payment is due, the Issuing Lender shall be entitled to recover from such Lender, on demand, such amount with interest thereon calculated from such due date at a rate per annum equal to the ABR plus the Applicable Margin. ---- A certificate of the Issuing Lender submitted to any Lender with respect to any amounts owing under this Section shall be conclusive in the absence of manifest error. 24 (c) Whenever, at any time after the Issuing Lender has made payment under any Letter of Credit and has received from any Lender its pro rata share --- ---- of such payment in accordance with Section 3.4(a), the Issuing Lender receives -------------- any payment related to such Letter of Credit (whether directly from the Borrower or otherwise, including proceeds of Collateral applied thereto by the Issuing Lender), or any payment of interest on account thereof, the Issuing Lender will, if such payment is received prior to 1:00 p.m., New York City time, on a Business Day, distribute to such Lender its pro rata share thereof on the same --- ---- Business Day or if received later than 1:00 p.m. on the next succeeding Business Day; provided, however, that in the event that any such payment received by the -------- ------- Issuing Lender shall be required to be returned by the Issuing Lender, such Lender shall return to the Issuing Lender the portion thereof previously distributed by the Issuing Lender to it. (d) Notwithstanding anything to the contrary in this Agreement, each Lender's obligation to make the Loans referred to in Section 3.5(b) and to -------------- purchase and fund participating interests pursuant to Section 3.4(a) shall be -------------- absolute and unconditional and shall not be affected by any circumstance, including, without limitation, (i) any setoff, counterclaim, recoupment, defense or other right which such Lender or the Borrower may have against the Issuing Lender, the Borrower or any other Person for any reason whatsoever; (ii) the occurrence or continuance of a Default or an Event of Default or the failure to satisfy any of the other conditions specified in Section 6; (iii) any adverse --------- change in the condition (financial or otherwise) of any Loan Party; (iv) any breach of this Agreement or any other Loan Document by any Loan Party or any Lender; or (v) any other circumstance, happening or event whatsoever, whether or not similar to any of the foregoing. 3.5 Reimbursement Obligation of the Borrower. (a) The Borrower ---------------------------------------- agrees to reimburse the Issuing Lender (it being understood that such reimbursement shall be effected by means of a borrowing of Loans unless the Managing Agents shall determine in their sole discretion that such Loans may not be made for such purpose as a result of a Default or Event of Default pursuant to Section 9(f)), upon receipt of notice from the Issuing Lender of the date and ------------ amount of a draft presented under any Letter of Credit and paid by the Issuing Lender, for the amount of (i) such draft so paid and (ii) any taxes, fees, charges or other costs or expenses incurred by the Issuing Lender in connection with such payment. Each such payment shall be made to the Issuing Lender, at its address for notices specified herein in Dollars and in immediately available funds, on the date on which the Borrower receives such notice, if received prior to 1:00 P.M., New York City time, on a Business Day and otherwise on the next succeeding Business Day. (b) Interest shall be payable on any and all amounts remaining unpaid by the Borrower under this Section 3.5, (i) from the date the draft ----------- presented under the affected Letter of Credit is paid to the date on which the Borrower is required to pay such amounts pursuant to paragraph (a) above at a rate per annum equal to the ABR plus the Applicable Margin and (ii) thereafter ---- until payment in full at the rate which would be payable on any Loans which were then overdue. Except as otherwise specified in Section 3.5(a), each drawing -------------- under any Letter of Credit shall constitute a request by the Borrower to the Administrative Agent for a borrowing of Loans that are ABR Loans pursuant to Section 2.3 in the amount of such drawing. The Borrowing Date with - ----------- 25 respect to such borrowing shall be the date of payment of such drawing and the proceeds of such Loans shall be applied by the Administrative Agent to reimburse the Issuing Lender for the amounts paid under such Letter of Credit. 3.6 Obligations Absolute. Subject to the penultimate sentence of -------------------- this Section 3.6, the Borrower's obligations under this Section 3 shall be ----------- --------- absolute and unconditional under any and all circumstances and irrespective of any set-off, counterclaim or defense to payment which the Borrower may have or have had against the Issuing Lender, any Lender or any beneficiary of a Letter of Credit. The Borrower also agrees with the Issuing Lender that the Issuing Lender and the Lenders shall not be responsible for, and the Borrower's Reimbursement Obligations under Section 3.5(a) shall not be affected by, among -------------- other things, (i) the validity or genuineness of documents or of any endorsements thereon, even though such documents shall in fact prove to be invalid, fraudulent or forged, or (ii) any dispute between or among the Borrower and any beneficiary of any Letter of Credit or any other party to which such Letter of Credit may be transferred or (iii) any claims whatsoever of the Borrower against any beneficiary of such Letter of Credit or any such transferee. The Issuing Lender and the Lenders shall not be liable for any error, omission, interruption or delay in transmission, dispatch or delivery of any message or advice, however transmitted, in connection with any Letter of Credit, except for errors or omissions caused by such Person's gross negligence or willful misconduct. The Borrower agrees that any action taken or omitted by the Issuing Lender under or in connection with any Letter of Credit or the related drafts or documents, if done in the absence of gross negligence or willful misconduct and in accordance with the standards of care specified in the Uniform Commercial Code of the State of New York, shall be binding on the Borrower and shall not result in any liability of either the Issuing Lender or any Lender to the Borrower. 3.7 Letter of Credit Payments. If any draft shall be presented for ------------------------- payment under any Letter of Credit, the Issuing Lender shall promptly notify the Borrower and the Lenders of the date and amount thereof. Subject to Section 3.6, ----------- the responsibility of the Issuing Lender to the Borrower in connection with any draft presented for payment under any Letter of Credit shall, in addition to any payment obligation expressly provided for in such Letter of Credit, be limited to determining that the documents (including each draft) delivered under such Letter of Credit in connection with such presentment appear on their face to be in conformity with such Letter of Credit. 3.8 Application. To the extent that any provision of any Application ----------- related to any Letter of Credit is inconsistent with the provisions of this Agreement, the provisions of this Agreement shall apply. 26 SECTION 4. GENERAL PROVISIONS APPLICABLE TO LOANS AND LETTERS OF CREDIT 4.1 Interest Rates and Payment Dates. (a) Each Eurodollar Loan -------------------------------- shall bear interest for each day during each Interest Period with respect thereto at a rate per annum equal to the Eurodollar Rate determined for such day plus the Applicable Margin in effect for such day. - ---- (b) Each ABR Loan shall bear interest for each day that it is outstanding at a rate per annum equal to the ABR for such day plus the ---- Applicable Margin in effect for such day. (c) (i) After the occurrence and during the continuance of an Event of Default, all Loans and Reimbursement Obligations shall bear interest at a rate per annum which is equal to (x) in the case of the Loans, the rate that would otherwise be applicable thereto pursuant to the foregoing provisions of this Section 4.1 plus 2% or (y) in the case of Reimbursement Obligations, at a ----------- ---- rate per annum equal to the ABR plus the Applicable Margin plus 2% and (ii) if ---- ---- all or a portion of any interest payable on any Loan or Reimbursement Obligation or any commitment fee or other amount payable hereunder shall not be paid when due (whether at the stated maturity, by acceleration or otherwise), such overdue amount shall bear interest at a rate per annum equal to ABR plus the Applicable ---- Margin plus 2%, in each case, with respect to clauses (i) and (ii) above, from ---- the date of such non-payment until such amount is paid in full (as well after as before judgment). (d) Interest shall be payable in arrears on each Interest Payment Date, provided that interest accruing pursuant to paragraph (c) of this Section -------- shall be payable from time to time on demand. 4.2 Optional and Mandatory Commitment Reductions and Prepayments. ------------------------------------------------------------ (a) The Borrower may at any time and from time to time prepay the Loans, in whole or in part, without premium or penalty (it being understood that amounts payable pursuant to Section 4.11 do not constitute premium or penalty), upon at ------------ least three Business Days' irrevocable notice to the Administrative Agent (in the case of Eurodollar Loans) or at least one Business Day's irrevocable notice to the Administrative Agent (in the case of ABR Loans), specifying the date and amount of prepayment and whether the prepayment is of Eurodollar Loans, ABR Loans or a combination thereof, and, in each case if a combination thereof, the principal amount allocable to each. Upon the receipt of any such notice the Administrative Agent shall promptly notify each Lender thereof. If any such notice is given, the amount specified in such notice shall be due and payable on the date specified therein, together with interest accrued to the date of such prepayment and (if a Eurodollar Loan is prepaid other than at the end of the Interest Period applicable thereto) any amounts payable pursuant to Section 4.11. Partial prepayments of Loans shall be in an aggregate principal - ------------ amount of $5,000,000 or a whole multiple of $1,000,000 in excess thereof. (b) The Borrower shall have the right, upon not less than three Business Days' notice to the Administrative Agent (which will promptly notify the Lenders thereof), to terminate the Total Commitment or, from time to time, to reduce the amount of the Total Commitment; 27 provided that no such termination or reduction of the Total Commitment shall be - -------- permitted if, after giving effect thereto and to any prepayments of the Loans made on the effective date thereof, the sum of the Aggregate Outstanding Extensions of Credit of all the Lenders then in effect would exceed the aggregate Total Commitment as so reduced. Any such reduction shall be in a minimum amount of $5,000,000 or a whole multiple of $1,000,000 in excess thereof and shall reduce permanently the Total Commitment then in effect. (c) On the last Business Day of each March, June, September and December, commencing March 31, 2000, through the Termination Date, the Total Commitment shall automatically and permanently be reduced by the percentage (the "Quarterly Percentage Reduction") of the original Total Commitment, as set forth ------------------------------ below. Notwithstanding anything contained in this Agreement to the contrary, on the Termination Date the Total Commitment shall automatically reduce to zero.
Quarterly Percentage Total Percentage Reduction Calendar Year Reduction for the Calendar Year ------------- --------- --------------------- 2000 1.875% 7.50% 2001 3.750% 15.00% 2002 4.375% 17.50% 2003 5.000% 20.00% 2004 5.000% 20.00% 2005 5.000% 20.00%
(d) If at any time the sum of the Aggregate Outstanding Extensions of Credit of all the Lenders exceeds the Total Available Commitment then in effect, the Borrower shall, without notice or demand, immediately repay the Loans in an aggregate principal amount equal to such excess, together with interest accrued to the date of such payment or repayment and any amounts payable under Section 4.11. To the extent that, after giving effect to any ------------ prepayment of the Loans required by the preceding sentence, the sum of the Aggregate Outstanding Extensions of Credit of all the Lenders still exceeds the Total Available Commitment then in effect, the Borrower shall, without notice or demand, immediately cash collateralize the then outstanding L/C Obligations in an amount equal to such excess upon terms reasonably satisfactory to the Administrative Agent. (e) In the case of any reduction of the Total Commitment the Borrower shall, if applicable, comply with the requirements of Section 4.2(d). -------------- Each repayment of the Loans under this Section 4.2 shall be accompanied by ----------- accrued interest to the date of such repayment on the amount repaid. Any amounts deposited in any cash collateral account established pursuant to this Section ------- 28 4.2 shall be invested in Cash Equivalents having a one-day maturity or such - --- other Cash Equivalents as shall be acceptable to the Administrative Agent and the Borrower. 4.3 Commitment Fees, etc. (a) The Borrower agrees to pay to the -------------------- Administrative Agent for the account of each Lender, a commitment fee, on the average daily amount of the Total Available Commitment computed at a rate per annum based on the Leverage Ratio in effect for the fiscal quarter preceding the payment date, determined as follows:
Leverage Ratio Commitment Fee -------------- -------------- (greater than) 5.00:1.00 0.375% (less than or equal to) 5.00:1.00 0.250%
For purposes of calculating the commitment fee due hereunder, the Leverage Ratio shall be determined as at the end of each of the first three quarterly periods of each fiscal year of the Borrower and as at the end of each fiscal year of the Borrower, based on the relevant financial statements delivered pursuant to Section 7.1(a) or (b) and the Compliance Certificate delivered pursuant to - -------------- --- Section 7.2(b); changes in the Leverage Ratio shall become effective on the date - -------------- which is the earlier of (i) two Business Days after the date the Administrative Agent receives such financial statements and the corresponding Compliance Certificate and (ii) the 60th day after the end of each of the first three quarterly periods of each fiscal year or the 120th day after the end of each fiscal year, as the case may be, and shall remain in effect until the next change to be effected pursuant to this Section 4.3; provided, that (a) until the ----------- -------- first such financial statements and Compliance Certificate are delivered after the date hereof, the Applicable Margin shall be determined by reference to the Leverage Ratio set forth in the Closing Certificate delivered to the Administrative Agent pursuant to Section 6.1(b), and (b) if any financial -------------- statements or the Compliance Certificate referred to above are not delivered within the time periods specified above, then, for the period from and including the date on which such financial statements and Compliance Certificate are required to be delivered until the date on which such financial statements and Compliance Certificate are delivered, then the Leverage Ratio as at the end of the fiscal period that would have been covered thereby shall be deemed to be greater than 5.00 to 1.00. Such commitment fee shall be (i) payable quarterly in arrears on the last Business Day of each March, June, September and December and on the date on which all of the Commitments shall have terminated and (ii) fully earned and non-refundable upon payment thereof. (b) The Borrower shall pay (without duplication of any other fee payable under this Section 4.3) to the Managing Agents, for their respective ----------- accounts, the fees in the amounts and on the dates agreed to in the Managing Agents Fee Letter. 29 (c) The Borrower shall pay (without duplication of any other fee payable under this Section 4.3) to the Administrative Agent, the fees in the ----------- amounts and on the dates agreed to in the Scotiabank Fee Letter. 4.4 Computation of Interest and Fees. (a) Interest based on the -------------------------------- Eurodollar Rate and fees shall be calculated on the basis of a 360-day year for the actual days elapsed; and interest based on the ABR shall be calculated on the basis of a 365- (or 366-, as the case may be) day year for the actual days elapsed. The Administrative Agent shall as soon as practicable notify the Borrower and the Lenders of each determination of a Eurodollar Rate. Any change in the interest rate on a Loan resulting from a change in the ABR or the Eurocurrency Reserve Requirements shall become effective as of the opening of business on the day on which such change becomes effective. The Administrative Agent shall as soon as practicable notify the Borrower and the Lenders of the effective date and the amount of each such change in interest rate. (b) Each determination of an interest rate by the Administrative Agent pursuant to any provision of this Agreement shall be conclusive and binding on the Borrower and the Lenders in the absence of manifest error. The Administrative Agent shall, at the request of the Borrower, deliver to the Borrower a statement showing in reasonable detail the calculations used by the Administrative Agent in determining any interest rate pursuant to Section 4.1(a). - -------------- 4.5 Conversion and Continuation Options. (a) The Borrower may ----------------------------------- elect from time to time to convert Eurodollar Loans to ABR Loans by giving the Administrative Agent an irrevocable notice substantially in the form of Exhibit H-2 (a "Notice of Conversion/Continuation"), at least one Business Day - ----------- --------------------------------- prior to such election, provided that any such conversion of Eurodollar Loans -------- may only be made on the last day of an Interest Period with respect thereto. The Borrower may elect from time to time to convert ABR Loans to Eurodollar Loans or to continue Eurodollar Loans as Eurodollar Loans by giving the Administrative Agent a Notice of Conversion/Continuation at least three Business Days' prior to such election. Any such Notice of Conversion/Continuation to Eurodollar Loans shall specify the length of the initial Interest Period or Interest Periods therefor. Upon receipt of any such Notice of Conversion/Continuation the Administrative Agent shall promptly notify each Lender thereof. All or any part of outstanding Eurodollar Loans and ABR Loans may be converted as provided herein, provided that (i) no Loan may be converted into a Eurodollar Loan when -------- any Event of Default has occurred and is continuing and (ii) no Loan may be converted into a Eurodollar Loan if the Interest Period selected therefor would expire after the Termination Date. (b) Any Eurodollar Loans may be continued as such upon the expiration of the then current Interest Period with respect thereto by the Borrower giving irrevocable notice to the Administrative Agent, of the length of the next Interest Period to be applicable to such Loans, determined in accordance with the applicable provisions of the term "Interest Period" set forth in Section 1.1, provided that no Eurodollar Loan may be continued as such ----------- -------- (i) when any Event of Default has occurred and is continuing or (ii) after the date that is one month prior to the Termination Date, and provided, further, -------- ------- that if the Borrower shall fail to give any required notice as described 30 above in this paragraph or if such continuation is not permitted pursuant to the preceding proviso such Loans shall be automatically converted to ABR Loans on the last day of such then expiring Interest Period. Upon receipt of any such notice of continuation pursuant to this Section 4.5(b), the Administrative Agent -------------- shall promptly notify each Lender thereof. 4.6 Minimum Amounts of Tranches. All borrowings, conversions, --------------------------- continuations and payments of Loans hereunder and all selections of Interest Periods hereunder shall be in such amounts and be made pursuant to such elections so that, after giving effect thereto, the aggregate principal amount of the Eurodollar Loans comprising each Tranche shall be equal to $5,000,000 or a whole multiple of $1,000,000 in excess thereof. In no event shall there be more than six Tranches outstanding at any time. 4.7 Inability to Determine Interest Rate. If prior to the first ------------------------------------ day of any Interest Period: (a) the Administrative Agent shall have determined (which determination shall be conclusive and binding upon the Borrower) that, by reason of circumstances affecting the relevant market, adequate and reasonable means do not exist for ascertaining the Eurodollar Rate for such Interest Period; or (b) the Administrative Agent shall have received notice from the Majority Lenders that the Eurodollar Rate determined or to be determined for such Interest Period will not adequately and fairly reflect the cost to such Lenders (as conclusively certified by such Lenders) of making or maintaining their affected Loans during such Interest Period, the Administrative Agent shall give facsimile notice thereof to the Borrower and the Lenders as soon as practicable thereafter. If such notice is given (x) any Eurodollar Loans requested to be made on the first day of such Interest Period shall be made as ABR Loans, (y) any Loans that were to have been converted on the first day of such Interest Period to Eurodollar Loans shall be continued as ABR Loans and (z) any outstanding Eurodollar Loans shall be converted, on the first day of such Interest Period, to ABR Loans. Until such notice has been withdrawn by the Administrative Agent or the Majority Lenders, as the case may be, no further Eurodollar Loans shall be made or continued as such, nor shall the Borrower have the right to convert Loans to Eurodollar Loans. 4.8 Pro Rata Treatment and Payments. (a) Each borrowing of Loans ------------------------------- hereunder shall be made, each payment by the Borrower on account of any commitment fee hereunder shall be allocated by the Administrative Agent, and any reduction of the Total Commitment shall be allocated by the Administrative Agent, pro rata according to the respective Specified Percentages of the --- ---- Lenders. Each payment (including each prepayment) by the Borrower on account of principal of and interest on, or commitment fees related to, the Loans or Reimbursement Obligations shall be allocated by the Administrative Agent to the Lenders pro rata according to the respective Specified Percentages of such Loans --- ---- and Reimbursement Obligations then held by the Lenders. All payments (including prepayments) to be made by the Borrower hereunder and under any Notes, whether on 31 account of principal, interest, fees, Reimbursement Obligations or otherwise, shall be made without set-off or counterclaim and shall be made prior to 2:00 P.M., New York City time, on the due date thereof to the Administrative Agent, for the account of the Lenders, at the Administrative Agent's office specified in Section 12.2, in Dollars and in immediately available funds. Payments ------------ received by the Administrative Agent after such time shall be deemed to have been received on the next Business Day. If any payment hereunder becomes due and payable on a day other than a Business Day, the maturity of such payment shall be extended to the next succeeding Business Day, (and, with respect to payments of principal, interest thereon shall be payable at the then applicable rate during such extension) unless, with respect to payments of Eurodollar Loans only, the result of such extension would be to extend such payment into another calendar month, in which event such payment shall be made on the immediately preceding Business Day. (b) Unless the Administrative Agent shall have been notified in writing by any Lender prior to a borrowing that such Lender will not make the amount that would constitute its share of such borrowing available to the Administrative Agent, the Administrative Agent may assume that such Lender is making such amount available to the Administrative Agent, and the Administrative Agent may, in reliance upon such assumption, make available to the Borrower a corresponding amount. If such amount is not made available to the Administrative Agent by the required time on the Borrowing Date therefor, such Lender shall pay to the Administrative Agent, on demand, such amount with interest thereon at a rate equal to the daily average Federal Funds Effective Rate for the period until such Lender makes such amount immediately available to the Administrative Agent. A certificate of the Administrative Agent submitted to any Lender with respect to any amounts owing under this Section 4.8 shall be ----------- conclusive in the absence of manifest error. If such Lender's share of such borrowing is not made available to the Administrative Agent by such Lender within three Business Days of such Borrowing Date, the Administrative Agent shall notify the Borrower of the failure of such Lender to make such amount available to the Administrative Agent and the Administrative Agent shall also be entitled to recover, on demand from the Borrower, such amount with interest thereon at a rate per annum equal to the ABR plus the Applicable Margin in ---- effect on the Borrowing Date. 4.9 Requirements of Law. (a) If the adoption of or any change in ------------------- any Requirement of Law or in the interpretation or application thereof or compliance by any Lender with any request or directive (whether or not having the force of law) from any central bank or other Governmental Authority made subsequent to the date hereof: (i) shall subject any Lender to any tax of any kind whatsoever with respect to this Agreement, any Note or any Eurodollar Loan made by it, or change the basis of taxation of payments to such Lender in respect thereof (except for Non-Excluded Taxes covered by Section 4.10, net income ------------ taxes and franchise taxes (imposed in lieu of net income taxes)); 32 (ii) shall impose, modify or hold applicable any reserve, special deposit, compulsory loan or similar requirement against assets held by, deposits or other liabilities in or for the account of, advances, loans or other extensions of credit by, or any other acquisition of funds by, any office of such Lender which is not otherwise included in the determination of the Eurodollar Rate; or (iii) shall impose on such Lender any other condition; and the result of any of the foregoing is to increase the cost to such Lender, by an amount which such Lender deems to be material, of making, converting into, continuing or maintaining Eurodollar Loans or to reduce any amount receivable hereunder in respect thereof, then, in any such case, the Borrower shall promptly pay such Lender such additional amount or amounts as will compensate such Lender for such increased cost or reduced amount receivable. (b) If any Lender shall have determined in good faith that the adoption of or any change in any Requirement of Law regarding capital adequacy or in the interpretation or application thereof or compliance by such Lender or any corporation controlling such Lender with any request or directive regarding capital adequacy (whether or not having the force of law) from any Governmental Authority made subsequent to the date hereof shall have the effect of reducing the rate of return on such Lender's or such corporation's capital as a consequence of its obligations hereunder to a level below that which such Lender or such corporation could have achieved but for such adoption, change or compliance (taking into consideration such Lender's or such corporation's policies with respect to capital adequacy) by an amount reasonably deemed by such Lender to be material, then from time to time, the Borrower shall promptly pay to such Lender such additional amount or amounts as will compensate such Lender for such reduction. (c) If any Lender becomes entitled to claim any additional amounts pursuant to this Section 4.9, it shall promptly deliver a certificate to the ----------- Borrower (with a copy to the Administrative Agent), setting forth in reasonable detail an explanation of the basis for requesting such compensation. Such certificate as to any additional amounts payable pursuant to this Section 4.9 ----------- submitted by such Lender to the Borrower (with a copy to the Administrative Agent) shall be conclusive in the absence of manifest error. The Borrower shall pay each Lender the amount shown as due on any such certificate delivered by it within 15 days after the Borrower's receipt thereof. The agreements in this Section 4.9 shall survive the termination of this Agreement and the payment of - ----------- the Loans and all other amounts payable hereunder. 4.10 Taxes. (a) All payments made by the Borrower under this ----- Agreement and any Notes shall be made free and clear of, and without deduction or withholding for or on account of, any present or future income, stamp or other taxes, levies, imposts, duties, charges, fees, deductions or withholdings, now or hereafter imposed, levied, collected, withheld or assessed by any Governmental Authority, excluding (i) net income taxes; (ii) franchise and doing business taxes imposed on the Administrative Agent or any Lender as a result of a present or former connection between the Administrative Agent or such Lender and the jurisdiction of the Governmental 33 Authority imposing such tax or any political subdivision or taxing authority thereof or therein (other than any such connection arising solely from the Administrative Agent or such Lender having executed, delivered or performed its obligations or received a payment under, or enforced, this Agreement or any Note); (iii) any Taxes, levies, imposts, deductions, charges or withholdings that are in effect and that would apply to a payment to such Lender as of the Effective Date; and (iv) if any Person acquires any interest in this Agreement or any Note pursuant to the provisions hereof, including without limitation a participation (whether or not by operation of law), or a foreign Lender changes the office in which the Loan is made, accounted for or booked (any such Person or such foreign Lender in that event being referred to as a "Tax Transferee"), -------------- any Taxes, levies, imposts, deductions, charges or withholdings to the extent that they are in effect and would apply to a payment to such Tax Transferee as of the date of the acquisition of such interest or change in office, as the case may be. If any such non-excluded taxes, levies, imposts, duties, charges, fees deductions or withholdings ("Non-Excluded Taxes") are required to be withheld ------------------ from any amounts payable to the Administrative Agent or any Lender hereunder or under any Note, the amounts so payable to the Administrative Agent or such Lender shall be increased to the extent necessary to yield to the Administrative Agent or such Lender (after payment of all Non-Excluded Taxes) interest or any such other amounts payable hereunder at the rates or in the amounts specified in this Agreement, provided, however, that the Borrower shall not be required to -------- ------- increase any such amounts payable to any Non-U.S. Lender if such Lender fails to comply with the requirements of paragraph (b) of this Section. Whenever any Non-Excluded Taxes are payable by the Borrower, as promptly as possible thereafter the Borrower shall send to the Administrative Agent for its own account or for the account of such Lender, as the case may be, a certified copy of an original official receipt received by the Borrower showing payment thereof. If, when the Borrower is required by this Section 4.10(a) to pay any --------------- Non-Excluded Taxes, the Borrower fails to pay such Non-Excluded Taxes when due to the appropriate taxing authority or fails to remit to the Administrative Agent the required receipts or other required documentary evidence, the Borrower shall indemnify the Administrative Agent and the Lenders for any incremental taxes, interest or penalties that may become payable by the Administrative Agent or any Lender as a result of any such failure. (b) Each Lender (or Transferee) that is not a citizen or resident of the United States of America, a corporation, partnership or other entity created or organized in or under the laws of the United States of America, or any estate or trust that is subject to federal income taxation regardless of the source of its income (a "Non-U.S. Lender") shall deliver to the Borrower and the --------------- Administrative Agent (or, in the case of a Participant, to the Lender from which the related participation shall have been purchased) two copies of either U.S. Internal Revenue Service Form 1001 or Form 4224, or, in the case of a Non-U.S. Lender claiming exemption from U.S. federal withholding tax under Section 871(h) or 881(c) of the Code with respect to payments of "portfolio interest", a Form W-8, or any subsequent versions thereof or successors thereto (and, if such Non- U.S. Lender delivers a Form W-8, an annual certificate representing that such Non-U.S. Lender (i) is not a "bank" for purposes of Section 881(c) of the Code (and is not subject to regulatory or other legal requirements as a bank in any jurisdiction, and has not been treated as a bank in any filing with or submission made to any Governmental Authority or rating agency), (ii) is not a 10-percent shareholder (within the meaning of Section 871(h)(3)(B) of the Code) of the Borrower and (iii) is 34 not a controlled foreign corporation related to the Borrower (within the meaning of Section 864(d)(4) of the Code)), properly completed and duly executed by such Non-U.S. Lender claiming complete exemption from, U.S. federal withholding tax on all payments by the Borrower under this Agreement and the other Loan Documents, along with such other additional forms as the Borrower, the Administrative Agent (or, in the case of a Participant, the Lender from which the related participation shall have been purchased) may reasonably request to establish the availability of such exemption. Such forms shall be delivered by each Non-U.S. Lender on or before the date it becomes a party to this Agreement (or, in the case of any Participant, on or before the date such Participant purchases the related participation). In addition, each Non-U.S. Lender shall deliver such forms promptly upon the obsolescence or invalidity of any form previously delivered by such Non-U.S. Lender. Each Non-U.S. Lender shall promptly notify the Borrower at any time it determines that it is no longer in a position to provide any previously delivered certificate to the Borrower (or any other form of certification adopted by the U.S. taxing authorities for such purpose). Notwithstanding any other provision of Section 4.10, a Non-U.S. ------------ Lender shall not be required to deliver any form pursuant to this Section ------- 4.10(b) that such Non-U.S. Lender is not legally able to deliver, it being - ------- understood and agreed that, in the event that a Non-U.S. Lender fails to deliver any forms otherwise required to be delivered pursuant to this Section 4.10(b), --------------- or notifies the Borrower that any previously delivered certificate is no longer in force, the Borrower shall withhold such amounts as the Borrower shall reasonably determine are required by law and shall not be required to make any additional payment with respect thereto to the Non-U.S. Lender, unless such failure to deliver or notify is a result of change in law subsequent to the date hereof. (c) If a Lender (or Transferee) or the Administrative Agent shall become aware that it is entitled to receive a refund in respect of Non-Excluded Taxes paid by the Borrower, or as to which it has been indemnified by the Borrower, which refund in the good faith judgment of such Lender (or Transferee) is allocable to such payment made pursuant to this Section 4.10, it shall ------------ promptly notify the Borrower of the availability of such refund and shall, within 30 days after receipt of a request by the Borrower, apply for such refund. If any Lender (or Transferee) or the Administrative Agent receives a refund in respect of any Non-Excluded Taxes paid by the Borrower, or as to which it has been indemnified by the Borrower, which refund in the good faith judgment of such Lender (or Transferee) is allocable to such payment made pursuant to this Section 4.10, it shall promptly notify the Borrower of such refund and ------------ shall, within 15 days after receipt, repay such refund to the Borrower. The agreements in this Section 4.10 shall survive the termination of this Agreement ------------ and the payment of the Loans and all other amounts payable hereunder. 4.11 Indemnity. The Borrower agrees to indemnify each Lender and to --------- hold each Lender harmless from any loss or expense which such Lender may sustain or incur as a consequence of (a) default by the Borrower in making a borrowing of, conversion into or continuation of Eurodollar Loans after the Borrower has given a notice requesting the same in accordance with the provisions of this Agreement, (b) default by the Borrower in making any prepayment of Eurodollar Loans after the Borrower has given a notice thereof in accordance with the provisions of this Agreement or (c) the making of a prepayment of Eurodollar Loans on a day which is not the last day of an Interest Period with respect thereto. Such indemnification may include an amount equal to the 35 excess, if any, of (i) the amount of interest which would have accrued on the amount so prepaid, or not so borrowed, converted or continued, for the period from the date of such prepayment or of such failure to borrow, convert or continue to, but not including, the last day of such Interest Period (or, in the case of a failure to borrow, convert or continue, the Interest Period that would have commenced on the date of such failure) in each case at the applicable rate of interest for such Loans provided for herein over (ii) the amount of interest (as reasonably determined by such Lender) which would have accrued to such Bank on such amount by placing such amount on deposit for a comparable period with leading banks in the interbank eurodollar market. This covenant shall survive the termination of this Agreement and the payment of the Loans and all other amounts payable hereunder. 4.12 Change of Lending Office. Each Lender agrees that if it makes ------------------------ any demand for payment under Section 4.9 or 4.10(a), it will use reasonable ----------- ------- efforts (consistent with its internal policy and legal and regulatory restrictions and so long as such efforts would not be disadvantageous to it, as determined in its sole discretion) to designate a different lending office if the making of such a designation would reduce or obviate the need for the Borrower to make payments under Section 4.9 or 4.10(a) or would eliminate or ----------- ------- reduce the effect of any adoption or change described in Section 4.9. ----------- SECTION 5. REPRESENTATIONS AND WARRANTIES To induce the Administrative Agent and the Lenders to enter into this Agreement and to make the Loans and to issue Letters of Credit, the Borrower hereby represents and warrants to the Administrative Agent and each Lender that: 5.1 Financial Condition. (a) The consolidated balance sheet of JIC ------------------- and its consolidated Subsidiaries at June 30, 1996 and the related consolidated statements of income and of cash flows for the fiscal year ended on such date, reported on by Arthur Andersen L.L.P., copies of which have heretofore been furnished to each Lender, present fairly in all material respects the consolidated financial condition of JIC and its consolidated Subsidiaries as at such date, and the consolidated results of their operations and their consolidated cash flows for the fiscal year then ended. All such financial statements, including the related schedules and notes thereto, have been prepared in accordance with GAAP applied consistently throughout the periods involved (except as approved by such accountants and as disclosed therein). Neither JIC, the Borrower nor any of their consolidated Subsidiaries had, as of June 30, 1996, any material Guarantee Obligation, contingent liability or liability for taxes, or any long-term lease or unusual forward or long-term commitment, including, without limitation, any interest rate or foreign currency swap or exchange transaction, which is not reflected in the foregoing statements or in the schedules or notes thereto. Except as set forth on Schedule 5.1, ------------ during the period from June 30, 1996 to and including the date hereof there has been no sale, transfer or other disposition by JIC or any of its consolidated Subsidiaries of any material part of its business, assets or property and no purchase or other acquisition of any business, assets or property (including any Capital Stock of any other Person) material in relation to the 36 consolidated financial condition of JIC and its consolidated Subsidiaries at June 30, 1996, other than the Stock Purchase. (b) The financial statements of the Borrower and the Restricted Subsidiaries and other information most recently delivered under Sections 7.1(a) --------------- and (b) were prepared in accordance with GAAP and present fairly the --- consolidated financial condition, results of operations, and cash flows of the Borrower and the Restricted Subsidiaries as of, and for the portion of the fiscal year ending on the date or dates thereof (subject in the case of interim statements only to normal year-end audit adjustments). There were no material liabilities, direct or indirect, fixed or contingent, of the Borrower or the Restricted Subsidiaries as of the date or dates of such financial statements which are not reflected therein or in the notes thereto. Except for transactions directly related to, or specifically contemplated by, the Loan Documents, there have been no changes in the consolidated financial condition of the Borrower or the Restricted Subsidiaries from that shown in such financial statements after such date which could reasonably be expected to have a Material Adverse Effect, nor has the Borrower or any Restricted Subsidiary incurred any liability (including, without limitation, any liability under any Environmental Law), direct or indirect, fixed or contingent, after such date which could reasonably be expected to have a Material Adverse Effect. 5.2 No Change. From June 30, 1996, through and including the --------- Effective Date there has been no development or event which has had or could reasonably be expected to have a material adverse effect on the financial condition and business operations of the Acquired Systems. Since the Effective Date there has been no development or event which has had or could reasonably be expected to have a Material Adverse Effect. 5.3 Existence; Compliance with Law. The Borrower and each of its ------------------------------ Subsidiaries (a) is duly organized, validly existing and, where applicable, in good standing under the laws of the jurisdiction of its organization, (b) has the corporate or partnership power and authority, and the legal right, to own and operate its property, to lease the property it operates as lessee and to conduct the business in which it is currently engaged, (c) is duly qualified and, where applicable, in good standing under the laws of each jurisdiction where its ownership, lease or operation of property or the conduct of its business requires such qualification, except where the failure to be so qualified could not reasonably be expected to have a Material Adverse Effect, and (d) is in compliance with all Requirements of Law except to the extent that the failure to comply therewith could not reasonably be expected to have a Material Adverse Effect. 5.4 Power; Authorization; Enforceable Obligations. Each Loan Party --------------------------------------------- has the power and authority, and the legal right, to make, deliver and perform each of the Loan Documents to which it is a party and, in the case of the Borrower, to borrow hereunder, and has taken all necessary corporate or partnership action to authorize the execution, delivery and performance of each of the Loan Documents to which it is a party and, in the case of the Borrower, to authorize the borrowings on the terms and conditions of this Agreement. Except as set forth on Schedule 5.4, no consent or authorization of, filing ------------ with, notice to or other act by or in respect of, any Governmental Authority or any other Person (including any partner or shareholder of any Loan Party or any 37 Affiliate of any Loan Party) is required to be obtained or made by any Loan Party or any other Person, in connection with the Stock Purchase other than those that have been obtained or made and are in full force and effect; provided, that with respect to third party approvals necessary for the Stock - -------- Purchase, Schedule 5.4 lists only the material third party approvals required. ------------ No consent or authorization of, filing with, notice to or other act by or in respect of, any Governmental Authority or any other Person (including any partner or shareholder of JIC, any Loan Party or any Affiliate of JIC or any Loan Party) is required to be obtained or made by JIC or any Loan Party or any Subsidiary of any Loan Party in connection with the borrowings hereunder or with the execution, delivery, performance, validity or enforceability of the Loan Documents other than those that have been obtained or made and are in full force and effect. Each Loan Document to which JIC and each Loan Party is a party has been duly executed and delivered on behalf of JIC and each such Loan Party. Each Loan Document constitutes a legal, valid and binding obligation of JIC, to the extent JIC is a party thereto, and each Loan Party party thereto enforceable against JIC and each such Loan Party in accordance with its terms, subject to the effects of bankruptcy, insolvency, fraudulent transfer or conveyance, reorganization, moratorium and other similar laws relating to or affecting creditors' rights generally, general equitable principles (whether considered in a proceeding in equity or at law) and an implied covenant of good faith and fair dealing. 5.5 No Legal Bar. The Stock Purchase, the execution, delivery and ------------ performance of the Loan Documents, the borrowings hereunder and the use of the proceeds thereof will not (a) violate, result in a default under or conflict with any Requirement of Law or any material Contractual Obligation, in any material respect, of JIC, JCH, the Borrower or of any of the Restricted Subsidiaries or (b) violate any provision of the charter or bylaws of JIC, JCH, the Borrower or the Restricted Subsidiaries and will not result in a default under, or result in or require the creation or imposition of any Lien on any of their respective properties or revenues pursuant to any such Requirement of Law or Contractual Obligation (other than pursuant to the Security Documents). 5.6 No Material Litigation. Except as set forth on Schedule 5.6, no ---------------------- ------------ litigation, investigation or proceeding of or before any arbitrator or Governmental Authority is pending or, to the knowledge of the Borrower, threatened by or against the Borrower or any of the Restricted Subsidiaries or against any of its or their respective properties or revenues (a) with respect to any of the Loan Documents, the Stock Purchase or any of the transactions contemplated hereby or thereby, or (b) which could reasonably be expected to have a Material Adverse Effect. No attachment, prejudgment or judgment Lien encumbers the Acquired Systems or any asset of the Borrower or any of the Restricted Subsidiaries other than in respect of (i) claims as to which payment in full above any applicable customary deductible is covered by insurance or a bond or (ii) other claims aggregating not more than $10,000,000. No litigation, investigation or proceeding of or before any arbitrator or Governmental Authority is pending or, to the knowledge of the Borrower, threatened by or against (i) JCH with respect to the Stock Purchase or (ii) JIC, with respect to the JIC Negative Pledge. 38 5.7 No Default. Neither JIC, the Borrower nor any of its Restricted ---------- Subsidiaries is in default under or with respect to any of its Contractual Obligations in any respect which could reasonably be expected to have a Material Adverse Effect. No Default or Event of Default has occurred and is continuing. 5.8 Ownership of Property; Intellectual Property. (a) Each of the -------------------------------------------- Borrower and the Restricted Subsidiaries has good record and indefeasible title in fee simple to, or a valid leasehold interest in, all its real property, if any, and good title to, or a valid leasehold interest in, all its other material property, if any, and none of such property is subject to any Lien except as permitted by Section 8.3. Upon the consummation of the Stock Purchase, the ----------- Borrower or the Restricted Subsidiaries, as applicable, will have good record and indefeasible title in fee simple to, or a valid leasehold interest in all of the real property, if any, and all other material property and Franchises associated with the Acquired Systems. (b) The Borrower and the Restricted Subsidiaries have the right to use all trademarks, tradenames, copyrights, technology, know-how or processes ("Intellectual Property") that are necessary for the conduct of the business of - ----------------------- the Borrower or any of the Restricted Subsidiaries. 5.9 No Burdensome Restrictions. No Requirement of Law or -------------------------- Contractual Obligation of JIC, its Subsidiaries, the Borrower or any of its Restricted Subsidiaries could reasonably be expected to have a Material Adverse Effect. 5.10 Taxes. (a) (i) Each of the Borrower and its Subsidiaries has ----- filed or caused to be filed all tax returns which, to the knowledge of the Borrower, are required to be filed and has paid all taxes shown to be due and payable by it on said returns and all other material taxes, fees or other charges (collectively, the "Specified Taxes") imposed on it or any of its --------------- property by any Governmental Authority due and payable by it and (ii) to the knowledge of the Borrower, no material claim is being asserted with respect to any Specified Tax, other than, in each case with respect to this clause (a), Specified Taxes the amount or validity of which are currently being contested in good faith by appropriate proceedings diligently pursued and with respect to which reserves in conformity with GAAP have been provided on the books of the Borrower or the relevant Subsidiary, as the case may be, and (b) no tax Lien has been filed with respect to any Specified Tax. 5.11 Federal Regulations. No part of the proceeds of any Loans will ------------------- be used for "purchasing" or "carrying" any "margin stock" within the respective meanings of each of the quoted terms under Regulation G or Regulation U of the Board as now and from time to time hereafter in effect. If requested by any Lender or the Administrative Agent, the Borrower will furnish to the Administrative Agent and each Lender a statement to the foregoing effect in conformity with the requirements of FR Form G-3 or FR Form U-1 referred to in said Regulation G or Regulation U, as the case may be. 39 5.12 ERISA. Except as, in the aggregate, could not reasonably be ----- expected to result in a Material Adverse Effect: (a) neither a Reportable Event nor an "accumulated funding deficiency" (within the meaning of Section 412 of the Code or Section 302 of ERISA) has occurred during the five-year period prior to the date on which this representation is made or deemed made with respect to any Plan, and each Plan has complied in all material respects with the applicable provisions of ERISA and the Code; (b) no termination of a Single Employer Plan has occurred, and no Lien in favor of the PBGC or a Plan has arisen, during such five-year period; (c) the present value of all accrued benefits under each Single Employer Plan (based on those assumptions used to fund such Plans) did not, as of the last annual valuation date prior to the date on which this representation is made or deemed made, exceed the value of the assets of such Plan allocable to such accrued benefits; (d) neither the Borrower nor any Commonly Controlled Entity has had a complete or partial withdrawal from any Multiemployer Plan, and neither the Borrower nor any Commonly Controlled Entity would become subject to any liability under ERISA if the Borrower or any such Commonly Controlled Entity were to withdraw completely from all Multiemployer Plans as of the valuation date most closely preceding the date on which this representation is made or deemed made; and (e) no such Multiemployer Plan is in Reorganization or Insolvent. 5.13 Investment Company Act; Other Regulations. No Loan Party is an ----------------------------------------- "investment company", or a company "controlled" by an "investment company", within the meaning of the Investment Company Act of 1940, as amended. No Loan Party is subject to regulation under any Federal or State statute or regulation (other than Regulation X of the Board) which limits its ability to incur Indebtedness under this Agreement or the other Loan Documents. 5.14 Subsidiaries. Except for changes permitted by this Agreement ------------ pursuant to Sections 8.6, 8.8 or 8.9, Schedule 5.14 sets forth a true and ------------ --- --- ------------- complete list of each of the Borrower's Subsidiaries and accurately designates as of the date hereof whether each such Subsidiary is a Restricted Subsidiary or an Unrestricted Subsidiary. The Borrower has or will have delivered to the Administrative Agent, an updated Schedule 5.14 within 30 days after any changes ------------- thereto. The outstanding shares of Capital Stock of each Restricted Subsidiary have been duly authorized and validly issued and are fully paid and non- assessable, and all of the outstanding shares of each class of the Capital Stock of each Restricted Subsidiary are owned, directly or indirectly, beneficially and of record, by the Borrower, free and clear of all Liens. 5.15 Insurance. Each Loan Party maintains with financially sound, --------- responsible, and reputable insurance companies or associations (or, as to workers' compensation or similar insurance, with an insurance fund or by self- insurance authorized by the jurisdictions in which it operates) insurance covering its properties and businesses against such casualties and contingencies and of such types and in such amounts (and with co-insurance and deductibles) as is customary in the case of same or similar businesses. 40 5.16 Certain Cable Television Matters. Except as could not -------------------------------- reasonably be expected to result in a Material Adverse Effect: (a) the Borrower and the Restricted Subsidiaries possess all Authorizations necessary to own, operate and construct the Cable Systems or otherwise for the operations of their businesses and are not in violation thereof. All such Authorizations are in full force and effect and no event has occurred that permits, or after notice or lapse of time could permit, the revocation, termination or material and adverse modification of any such Authorization; (b) neither the Borrower nor any of the Restricted Subsidiaries is in violation of any duty or obligation required by the Communications Act of 1934, as amended, or any FCC rule or regulation applicable to the operation of any portion of any of the Cable Systems; (c) there is not pending or, to the best knowledge of the Borrower, threatened, any action by the FCC to revoke, cancel, suspend or refuse to renew any FCC License held by the Borrower or any of the Restricted Subsidiaries. There is not pending or, to the best knowledge of the Borrower, threatened, any action by the FCC to modify adversely, revoke, cancel, suspend or refuse to renew any other Authorization; and (d) there is not issued or outstanding or, to the best knowledge of the Borrower, threatened, any notice of any hearing, violation or complaint against the Borrower or any of the Restricted Subsidiaries with respect to the operation of any portion of the Cable Systems and the Borrower has no knowledge that any Person intends to contest renewal of any Authorization. 5.17 Environmental Matters. Except as could not reasonably be --------------------- expected to result in a Material Adverse Effect: (a) the facilities and properties owned by the Borrower or any of its Subsidiaries (the "Owned Properties") do not contain, and, to the ---------------- knowledge of the Borrower to the extent not owned, leased or operated during the past five years, have not contained during the past five years, any Materials of Environmental Concern in amounts or concentrations which constitute or constituted a violation of, or could reasonably be expected to give rise to liability under, any Environmental Law; (b) the facilities and properties leased or operated by the Borrower or any of its Subsidiaries, but not owned by them (the "Leased and Operated ------------------- Properties"), to the knowledge of the Borrower, do not contain and have not ---------- contained during the past five years, any Materials of Environmental Concern in amounts or concentrations which constitute or constituted a violation of, or could reasonably be expected to give rise to liability under, any Environmental Law; 41 (c) the Owned Properties and all operations at the Owned Properties are in compliance, and, to the knowledge of the Borrower to the extent not owned, leased or operated during the past five years, have in the last five years been in compliance, with all applicable Environmental Laws, and there is no contamination at, under or about the Owned Properties or violation of any Environmental Law with respect to the Owned Properties or the business operated by the Borrower or any of its Subsidiaries (the "Business") which -------- could interfere with the continued operation of the Owned Properties or impair the fair saleable value thereof; (d) to the knowledge of the Borrower, the Leased and Operated Properties and all operations at the Leased and Operated Properties are in compliance, and, in the last five years been in compliance, with all applicable Environmental Laws, and to the knowledge of the Borrower there is no contamination at, under or about the Leased and Operated Properties or violation of any Environmental Law with respect to the Leased and Operated Properties or the Business operated by the Borrower or any of its Subsidiaries which could interfere with the continued operation of the Leased and Operated Properties or impair the fair saleable value thereof; (e) neither the Borrower nor any of its Subsidiaries has received any notice of violation, alleged violation, non-compliance, liability or potential liability regarding environmental matters or compliance with Environmental Laws with regard to any of the Owned Properties or the Leased and Operated Properties (together, the "Properties") or the Business, nor ---------- does the Borrower have any knowledge that any such notice will be received or is being threatened; (f) the Borrower has not transported or disposed of Materials of Environmental Concern nor, to the Borrower's knowledge, have Materials of Environmental Concern been transported or disposed of from the Properties in violation of, or in a manner or to a location which could reasonably be expected to give rise to liability to the Borrower or any Restricted Subsidiary under, any Environmental Law, nor has the Borrower generated any Materials of Environmental Concern nor, to the Borrower's knowledge, have Materials of Environmental Concerns been generated, treated, stored or disposed of at, on or under any of the Properties in violation of, or in a manner that could reasonably be expected to give rise to liability to the Borrower or any Restricted Subsidiary under, any applicable Environmental Law; (g) no judicial proceeding or governmental or administrative action is pending or, to the knowledge of the Borrower, threatened, under any Environmental Law to which the Borrower or any Subsidiary is or will be named as a party with respect to the Properties or the Business, nor are there any consent decrees or other decrees, consent orders, administrative orders or other orders, or other administrative or judicial requirements outstanding under any applicable Environmental Law with respect to the Properties or the Business; and 42 (h) the Borrower has not released, nor, to the Borrower's knowledge, has there been any release or threat of release of Materials of Environmental Concern at or from the Properties, or arising from or related to the operations of the Borrower or any Subsidiary in connection with the Properties or otherwise in connection with the Business, in violation of or in amounts or in a manner that could reasonably be expected to give rise to liability under Environmental Laws. 5.18 Accuracy of Information. (a) All Information made available to ----------------------- the Administrative Agent or any Lender by the Borrower pursuant to this Agreement or any other Loan Document did not, as of the date such Information was made available, contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements contained therein not materially misleading in light of the circumstances under which such statements were made. (b) All pro forma financial information and projections made --- ----- available to the Administrative Agent or any Lender by the Borrower pursuant to this Agreement or any other Loan Document have been prepared and furnished to the Administrative Agent or such Lender in good faith and were based on estimates and assumptions that were believed by the management of the Borrower to be reasonable in light of the then current and foreseeable business conditions of the Borrower and the Subsidiaries. The Administrative Agent and the Lenders recognize that such pro forma financial information and projections --- ----- and the estimates and assumptions on which they are based may or may not prove to be correct. 5.19 Security Documents. The Security Documents are effective to ------------------ create in favor of the Administrative Agent, for the benefit of the Lenders, a legal, valid and enforceable security interest in the Collateral described therein and proceeds thereof and, after satisfaction of the conditions specified in Section 6.1(j), the Security Documents shall constitute a fully perfected -------------- first priority Lien on, and security interest in, all right, title and interest of, the Borrower and the Restricted Subsidiaries in such Collateral and the proceeds thereof (subject to Section 9-306 of the Uniform Commercial Code), as security for the Obligations (and the Obligations under and as defined in the Tranche B Agreement), in each case prior and superior in right to any other Person. 5.20 Solvency. As of the date on which this representation and -------- warranty is made or deemed made, each Loan Party is Solvent, both before and after giving effect to the transactions contemplated hereby consummated on such date and to the incurrence of all Indebtedness and other obligations incurred on such date in connection herewith and therewith. 5.21 Indebtedness. No Loan Party is an obligor on any Indebtedness ------------ except as permitted under Section 8.2. ----------- 5.22 Labor Matters. There are no actual or overtly threatened ------------- strikes, labor disputes, slow downs, walkouts, or other concerted interruptions of operations by the employees of any Loan Party which could reasonably be expected to have a Material Adverse Effect. Hours 43 worked by and payment made to employees of the Loan Parties have not been in violation of the Fair Labor Standards Act or any other applicable law dealing with such matters, other than any such violations, individually or collectively, which could reasonably be expected to have a Material Adverse Effect. All payments due from any Loan Party on account of employee health and welfare insurance have been paid or accrued as a liability on its books, other than any such nonpayments which could not, individually or collectively, reasonably be expected to have a Material Adverse Effect. 5.23 Prior Names. Neither the Borrower nor any Restricted Subsidiary ----------- has used or transacted business under any other corporate or trade name in the five-year period preceding the Effective Date. 5.24 Franchises. Schedule 5.24, as supplemented to reflect any ---------- ------------- renewals and extensions of Franchise Agreements and to reflect any acquisition, lists all Franchise Agreements of the Borrower and the Restricted Subsidiaries relating to the Cable Systems owned by the Borrower and the Restricted Subsidiaries as of the Initial Funding Date and, with respect to the Cable Systems acquired after such date, as of the date of acquisition, at any time thereafter, including but not limited to the Acquired Systems. As of the Initial Funding Date, JCH and all of the Loan Parties shall have taken all action required by applicable Governmental Authorities to lawfully transfer or grant all of the Franchise Agreements relating to the Acquired Systems to the Loan Parties and, with respect to the Cable Systems acquired after the Initial Funding Date, all of the Loan Parties have taken all action required by applicable Governmental Authorities to lawfully transfer or grant such after acquired Franchise Agreement to the Loan Parties. To the knowledge of the Borrower, as of the Initial Funding Date and at all times thereafter, all Franchise Agreements of the Loan Parties were lawfully transferred or granted to the Borrower or a Restricted Subsidiary pursuant to the rules and regulations of applicable Governmental Authorities. The Franchise Agreements authorize the Borrower or a Restricted Subsidiary as indicated on Schedule 5.24 (as ------------- supplemented to reflect any renewals and extensions of Franchise Agreements and to reflect any acquisition) to operate one or more Cable Systems until the respective expiration dates listed on Schedule 5.24 or, will authorize the ------------- Borrower or a Restricted Subsidiary as indicated on Schedule 5.24 (as ------------- supplemented to reflect any renewals and extensions of Franchise Agreements and to reflect any acquisition), and no other further approval, filing or other action of any Governmental Authority is or will be necessary or advisable as of the Initial Funding Date or, with respect to the Cable Systems acquired after such date, as of the date of acquisition, in order to permit the Borrower's or such Restricted Subsidiaries' operation of the Cable Systems in accordance with the terms thereof. Schedule 5.24 (as supplemented from time to time) correctly ------------- identifies the franchisee and accurately describes the franchise area, the exclusive or nonexclusive nature of each such Franchise Agreement and all limitations contained in the Franchise Agreement or related statutes on the assignment, sale or encumbering of the Franchise Agreement or the related Cable System's assets. The Borrower or the Restricted Subsidiary that is the franchisee is in compliance in all material respects with all material terms and conditions of all Franchise Agreements relating to the Cable Systems owned by it, and on and after the date of acquisition of any Cable System will be in compliance in all material respects with all material terms and conditions of all Franchise Agreements relating to such Cable 44 Systems so acquired and no event has occurred or exists which permits, or, after the giving of notice, or the lapse of time or both would permit, the revocation or termination of any Franchise Agreement. 5.25 Chief Executive Office; Chief Place of Business. Schedule 5.25 ----------------------------------------------- ------------- (as supplemented from time to time) accurately sets forth the location of the chief executive office and chief place of business (as such terms are used in the Uniform Commercial Code of each state whose law would purport to govern the attachment and perfection of the security interests granted by the Security Documents) of the Borrower and each Restricted Subsidiary. 5.26 Full Disclosure. There is no material fact or condition --------------- relating to the Loan Documents or the financial condition, business, or property of any Loan Party which could reasonably be expected to have a Material Adverse Effect and which has not been disclosed, in writing, to the Managing Agents and the Lenders. 5.27 Intercompany Subordinated Debt. There is no Intercompany ------------------------------ Subordinated Debt other than the Indebtedness described in Exhibit A (as --------- supplemented from time to time) to the Intercompany Subordinated Debt Agreement. SECTION 6. CONDITIONS PRECEDENT 6.1 Conditions to Initial Extensions of Credit. The agreement of ------------------------------------------ each Lender to make the initial extension of credit requested to be made by it is subject to the satisfaction, immediately prior to or concurrently with the making of such extension of credit of the following conditions precedent: (a) Loan Documents. The Administrative Agent shall have received -------------- (i) this Agreement and the Tranche B Agreement, each duly executed and delivered by the Borrower; (ii) the Notes, duly executed and delivered by the Borrower to each of the Lenders; (iii) the Pledge Agreements, duly executed and delivered by the Borrower and each of the Restricted Subsidiaries; (iv) the JIC Negative Pledge duly executed and delivered by JIC; (v) the Restricted Subsidiary Negative Pledges, duly executed and delivered by each of the Restricted Subsidiaries; and (vi) a copy of the Intercompany Subordinated Debt Agreement duly executed and delivered by the Borrower and JIC. (b) Closing Certificate. The Administrative Agent shall have ------------------- received a certificate (the "Closing Certificate") of each Loan Party and ------------------- JIC, dated the date of the initial extension of credit, substantially in the form of Exhibit I, with appropriate insertions and attachments, in --------- each case reasonably satisfactory in form and substance to the Administrative Agent, executed by a Responsible Officer and the Secretary or any Assistant Secretary of the appropriate Loan Party and JIC. 45 (c) Fees. The Administrative Agent and the Managing Agents shall ---- have received all fees and expenses required to be paid on or before the date hereof referred to in Section 4.3(b) and the Lenders shall have -------------- received all fees required to be paid on or before the date hereof pursuant to the various invitation letters from the Borrower to prospective lenders forwarded with the Confidential Information Memorandum, dated September 19, 1996. (d) Legal Opinions. The Administrative Agent shall have -------------- received, with a counterpart for each Lender, the following executed legal opinions: (i) the executed legal opinion of the General Counsel or the acting General Counsel of the Borrower, substantially in the form of Exhibit J; and --------- (ii) the executed legal opinion of Cole, Raywid & Braverman, L.L.P., substantially in the form of Exhibit K. --------- (e) Financial Statements. The Lenders shall have received -------------------- audited consolidated financial statements of JIC for the 1995 fiscal year, which financial statements shall have been prepared in accordance with GAAP and shall be accompanied by an unqualified report thereon prepared by Arthur Andersen L.L.P. (f) Satisfactory Organizational and Capital Structure. The stock ------------------------------------------------- ownership of the Borrower and each of the Restricted Subsidiaries shall be consistent with the structure described in Schedule 6.1(f). All --------------- necessary intercreditor arrangements shall be satisfactory to the Lenders. (g) Governmental and Third Party Approvals. All governmental -------------------------------------- approvals and material third party approvals necessary in connection with the Stock Purchase shall have been obtained and be in full force and effect. All governmental approvals and material third party approvals necessary in connection with the financing contemplated hereby shall have been obtained and be in full force and effect. (h) No Material Adverse Information. The Lenders shall not have ------------------------------- become aware of any previously undisclosed materially adverse information with respect to (i) the ability of the Loan Parties to perform their respective obligations under the Loan Documents in any material respect or (ii) the rights and remedies of the Lenders. (i) No Material Default Under Other Agreements. There shall ------------------------------------------ exist no material event of default (or condition which would constitute such an event of default with the giving of notice or the passage of time) under any agreements relating to Capital Stock, or any material financing agreements, lease agreements or other material Contractual Obligations, of JIC, the Borrower or any of the Restricted Subsidiaries. 46 (j) Pledged Stock; Stock Powers. The Administrative Agent shall --------------------------- have received the certificates representing the shares of Capital Stock pledged pursuant to each Pledge Agreement of the Borrower and each of the Restricted Subsidiaries, respectively, together with an undated stock power for each such certificate, if any, executed in blank by a duly authorized officer of the Borrower and each of the Restricted Subsidiaries, respectively. (k) Material Adverse Change. There shall exist no material ----------------------- adverse change in the financial condition or business operations of the Acquired Systems since June 30, 1996. (l) Additional Documentation. All other documentation, ------------------------ including, without limitation, any tax sharing agreement, employment agreement, management compensation arrangement or other financing arrangement of the Borrower or any of the Restricted Subsidiaries shall be reasonably satisfactory in form and substance to the Lenders. (m) Lien Termination. All Liens covering the Acquired Systems ---------------- shall have been terminated. (n) The Stock Purchase. The Stock Purchase shall have been ------------------ consummated. (o) Insurance. The Administrative Agent shall have received --------- certificates of insurance naming the Administrative Agent as loss payee for the benefit of the Lenders and as additional insured for the benefit of the Lenders, as required by Section 7.5(b). -------------- (p) Tax Sharing Agreement. The Administrative Agent or the --------------------- Documentation Agent shall have received a copy of the Tax Sharing Agreement. (q) Acquired Systems. The Acquired Systems shall have been sold ---------------- and transferred to JCG and JCA and all governmental approvals and material third party approvals necessary in connection with such sale and transfer shall have been obtained and in full force and effect such that JCG shall own good title to the Cable Systems serving North Augusta, South Carolina, Savannah, Georgia and Augusta, Georgia and JCA will own good title to the Cable System serving Pima County, Arizona. (r) Pro Forma Covenant Compliance. The Managing Agents shall ----------------------------- have received reasonably satisfactory calculations evidencing the Borrower's pro forma compliance with Sections 8.1(a) and (c), after --------------- --- giving effect to the requested borrowing. 6.2 Conditions to Each Extension of Credit. The obligation or -------------------------------------- agreement of each Lender to make any Loan or to issue any Letter of Credit requested to be made or issued by it on any date (including, without limitation, its initial extension of credit) is subject to the satisfaction, immediately prior to or concurrently with the making of such Loans or the issuing of such Letters of Credit, of the following conditions precedent: 47 (a) Initial Conditions Satisfied. Each of the conditions ---------------------------- precedent set forth in Section 6.1 shall have been satisfied and shall ----------- continue to be satisfied on the date of such Loans. (b) No Material Litigation. Except as disclosed on Schedule 5.6, ---------------------- ------------ no litigation, inquiry, injunction or restraining order shall be pending, entered or threatened in writing which could reasonably be expected to have a Material Adverse Effect. (c) No Material Adverse Effect. There shall not have occurred -------------------------- any change, development or event which could reasonably be expected to have a Material Adverse Effect. (d) Representations and Warranties. Each of the representations ------------------------------ and warranties made by any Loan Party or JIC in or pursuant to the Loan Documents to which it is a party shall be true and correct in all material respects on and as of such date as if made on and as of such date, after giving effect to the Loans requested to be made or the Letters of Credit to be issued on such date and the proposed use of the proceeds thereof. (e) No Default. No Default or Event of Default shall have ---------- occurred and be continuing on such date or will occur after giving effect to the extension of credit requested to be made on such date and the proposed use of the proceeds thereof. (f) Notice of Borrowing; Application. The Borrower shall have -------------------------------- submitted a Notice of Borrowing in accordance with Section 2.3 and ----------- certifying to the matters set forth in Section 6.2(a) through and including (e) and/or an Application in accordance with Section 3.2. ----------- Each borrowing by or issuance of a Letter of Credit on behalf of the Borrower hereunder shall constitute a representation and warranty by the Borrower as of the date of such extension of credit that the applicable conditions contained in this Section 6.2 have been satisfied. ----------- SECTION 7. AFFIRMATIVE COVENANTS The Borrower hereby agrees that, so long as any Commitment remains in effect, any Loan or Letter of Credit shall be outstanding or any other Obligation is due and payable to any Lender or the Administrative Agent hereunder or under any other Loan Document, the Borrower shall and shall cause each of its Restricted Subsidiaries to: 7.1 Financial Statements. Furnish to the Administrative Agent -------------------- for subsequent distribution to each Lender: (a) as soon as available, but in any event within 120 days after the end of each fiscal year of the Borrower, a copy of the consolidated balance sheet of the Borrower and the 48 Restricted Subsidiaries as at the end of such year and the related consolidated statements of income and shareholders' capital (deficit) and of cash flows for such year, setting forth in each case in comparative form the figures for the previous year, reported on without a "going concern" or like qualification or exception, or qualification arising out of the scope of the audit, by Arthur Andersen L.L.P. or other independent certified public accountants of nationally recognized standing; and (b) as soon as available, but in any event not later than 60 days after the end of each of the first three fiscal quarterly periods of each fiscal year of the Borrower, the unaudited consolidated balance sheet of the Borrower and the Restricted Subsidiaries as at the end of such quarter and the related unaudited consolidated statements of income and of cash flows for such quarter and the portion of the fiscal year through the end of such quarter, setting forth in each case in comparative form the figures for the previous year, certified by a Responsible Officer as being fairly stated in all material respects (subject to normal year-end audit adjustments). All such financial statements shall be complete and correct in all material respects and shall be prepared in reasonable detail and in accordance with GAAP applied consistently throughout the periods reflected therein and with prior periods (except as approved by such accountants or officer, as the case may be, and disclosed therein). 7.2 Certificates; Other Information. Furnish to the ------------------------------- Administrative Agent for subsequent distribution to each Lender: (a) concurrently with the delivery of the financial statements referred to in Section 7.1(a), a certificate of the independent certified -------------- public accountants reporting on such financial statements stating that in making the examination necessary therefor no knowledge was obtained of any Default or Event of Default, except as specified in such certificate; (b) concurrently with the delivery of the financial statements referred to in Sections 7.1(a) or (b), a Compliance Certificate executed --------------- --- by a Responsible Officer of the Borrower and each of the Restricted Subsidiaries; (c) without duplication of the financial statements delivered pursuant to Section 7.1, within five days after the same are sent, copies ----------- of all financial statements and reports which the Borrower sends to the holders of any class of its debt securities, and within five days after the same are filed, copies of all financial statements and reports which the Borrower may make to, or file with, the Securities and Exchange Commission or any successor or analogous Governmental Authority; and (d) promptly, such additional financial and other information as any Lender may from time to time reasonably request. 49 7.3 Payment of Obligations. Pay, discharge or otherwise satisfy ---------------------- at or before maturity or before they become delinquent, as the case may be, all its material obligations of whatever nature, except where the amount or validity thereof is currently being contested in good faith by appropriate proceedings and reserves in conformity with GAAP with respect thereto have been provided on the books of the Borrower or the relevant Restricted Subsidiary, as the case may be. 7.4 Conduct of Business and Maintenance of Existence, etc. ----------------------------------------------------- (a) Continue to engage in business of the same general type as now conducted by it, except as otherwise permitted by Section 8.13, and preserve, renew and keep ------------ in full force and effect its organizational existence and take all reasonable action to maintain all material rights, privileges and franchises necessary in the normal conduct of its business except as otherwise permitted pursuant to Section 8.4. - ----------- (b) Comply with all Contractual Obligations and applicable Requirements of Law, except to the extent that failure to comply therewith could not reasonably be expected to have a Material Adverse Effect. 7.5 Maintenance of Property; Insurance. (a) Keep all material ---------------------------------- property useful and necessary in its business in good working order and condition (ordinary wear and tear excepted) consistent with customary practices in the cable industry; maintain with financially sound and reputable insurance companies insurance on all its property in at least such amounts and against at least such risks as are usually insured against in the same general area by companies engaged in the same or a similar business; and furnish to the Administrative Agent certificates of insurance from time to time received by it for each such policy of insurance including insurance certificates evidencing compliance with Section 7.5(b). -------------- (b) In the event that the provisions of item (ii) of Section 8.16 apply, then contemporaneously with the Borrower's compliance with - ------------ Section 7.9 the Borrower shall cause (i) the Administrative Agent to be named, - ----------- in a manner reasonably satisfactory to the Administrative Agent, (a) as lender loss payee for the benefit of the Lenders under all policies of casualty insurance maintained by the Borrower and the Restricted Subsidiaries and (b) as an additional insured for the benefit of the Lenders on all policies of liability insurance maintained by the Borrower and the Restricted Subsidiaries; and (ii) all insurance policies to contain a provision that the policy may not be cancelled, terminated or modified without thirty (30) days' prior written notice to the Administrative Agent. 7.6 Inspection of Property; Books and Records; Discussions. Keep ------------------------------------------------------ and maintain a system of accounting established and administered in accordance with sound business practices and keep and maintain proper books of record and accounts; and permit representatives of any Lender to visit and inspect any of its properties and examine and make abstracts from any of its books and records during normal business hours and as often as may reasonably be requested and upon reasonable notice and to discuss the business, operations, properties and financial and other condition of the Borrower and the Restricted Subsidiaries with officers and employees of the 50 Borrower and the Restricted Subsidiaries and with their independent certified public accountants; provided that representatives of the Borrower designated by a Responsible Officer may be present at any such meeting with such accountants. 7.7 Notices. Promptly after the Borrower obtains knowledge ------- thereof, give notice to the Administrative Agent and each Lender of: (a) the occurrence of any Default or Event of Default; (b) any (i) default or event of default under any Contractual Obligation of JIC, the Borrower or any of the Restricted Subsidiaries or (ii) litigation, investigation or proceeding which may exist at any time between JIC, the Borrower or any of the Restricted Subsidiaries and any Governmental Authority, which in either case could reasonably be expected to have a Material Adverse Effect; (c) any litigation or proceeding affecting the Borrower or any of the Restricted Subsidiaries (i) which could reasonably be expected to result in an adverse judgment of $10,000,000 or more and which is not covered by insurance or (ii) in which injunctive or similar relief is sought which in the case of this clause (ii) could reasonably be expected to materially interfere with the ordinary conduct of business of the Borrower or any of the Restricted Subsidiaries; (d) the following events, as soon as possible and in any event within 30 days after the Borrower knows thereof: (i) the occurrence of any Reportable Event with respect to any Plan, a failure to make any required contribution to a Plan, the creation of any Lien in favor of the PBGC or a Plan or any withdrawal from, or the termination, Reorganization or Insolvency of, any Multiemployer Plan or (ii) the institution of proceedings or the taking of any other action by the PBGC or the Borrower or any Commonly Controlled Entity or any Multiemployer Plan with respect to the withdrawal from, or the terminating, Reorganization or Insolvency of, any Plan; and (e) any development or event which could reasonably be expected to have a Material Adverse Effect. Each notice pursuant to this Section shall be accompanied by a statement of a Responsible Officer setting forth details of the occurrence referred to therein and stating what action is proposed to be taken with respect thereto. 7.8 Environmental Laws. (a) Comply with, and use reasonable ------------------ efforts to require compliance by all tenants and subtenants, if any, with, all applicable Environmental Laws and obtain and comply with and maintain, and use reasonable efforts to require that all tenants and subtenants obtain and comply with and maintain, any and all licenses, approvals, notifications, registrations or 51 permits required by applicable Environmental Laws except, in each case, to the extent that failure to do so could not be reasonably expected to have a Material Adverse Effect. (b) Comply with all lawful orders and directives of all Governmental Authorities regarding Environmental Laws except to the extent that the same are being contested in good faith by appropriate proceedings diligently pursued. 7.9 Collateral. (a) To ratably secure full and complete payment ---------- and performance of the Obligations (and the Obligations under and as defined in the Tranche B Agreement), (i) the Borrower shall grant and convey to and create in favor of, the Administrative Agent for the ratable benefit of the Lenders a continuing first priority perfected Lien and security interest in, to and on all of the Capital Stock of each direct or indirect Restricted Subsidiary of the Borrower and any other direct or indirect Restricted Subsidiary of the Borrower, now owned or hereafter acquired and/or designated by the Borrower; and (ii) the Restricted Subsidiaries shall grant and convey to and create in favor of, the Administrative Agent for the ratable benefit of the Lenders a continuing first priority perfected Lien and security interest in, to and on all of the Capital Stock of each Restricted Subsidiary owned by a Restricted Subsidiary, now owned or hereafter acquired. (b) With respect to any new Restricted Subsidiary created, acquired or designated after the date hereof, the Borrower shall and shall cause each such new Restricted Subsidiary, as applicable, to promptly (but in no event later than 30 days after the creation, acquisition or designation of a Restricted Subsidiary) (i) execute and deliver to the Administrative Agent such new Pledge Agreements and/or amendments to existing Pledge Agreements as the Administrative Agent deems necessary or advisable in order to grant to the Administrative Agent, for the benefit of the Lenders, a perfected first priority security interest in the Capital Stock of such Restricted Subsidiary and any Restricted Subsidiaries of such Restricted Subsidiary, (ii) deliver to the Administrative Agent the certificates representing the Capital Stock of such Restricted Subsidiary and any Restricted Subsidiary of such Restricted Subsidiary, together with undated stock powers, in blank, executed and delivered by a duly authorized officer of the Borrower or such Restricted Subsidiary, as applicable, (iii) take such other actions as shall be necessary or advisable to grant to the Administrative Agent for the benefit of the Lenders a perfected first priority security interest in such Capital Stock, including, without limitation, the filing of such Uniform Commercial Code financing statements as may be requested by the Administrative Agent, (iv) execute and deliver to the Administrative Agent a Restricted Subsidiary Negative Pledge and (v) if requested by the Administrative Agent, deliver to the Administrative Agent legal opinions relating to the matters described in the preceding clauses (i), (ii), (iii) and (iv), which opinions shall be in form and substance, and from counsel, reasonably satisfactory to the Administrative Agent. 52 (c) With respect to any assets (other than the Capital Stock of Subsidiaries) from time to time acquired by the Borrower which are not transferred to a Restricted Subsidiary in accordance with Section 8.16 (each, an ------------ "Acquired Asset" and collectively, the "Acquired Assets"), the Borrower shall, -------------- --------------- within 90 days after the date on which the aggregate fair market value of all Acquired Assets owned by the Borrower exceeds $500,000, execute and deliver or cause to be delivered to the Administrative Agent in a form reasonably acceptable to the Administrative Agent (i) one or more mortgages and/or security agreements which grant to the Administrative Agent a first priority perfected security interest in the assets of the Borrower, whether then owned or thereafter acquired (subject to any Liens permitted by Section 8.3) and ----------- (ii) such additional agreements and other documents as the Administrative Agent reasonably deems necessary to establish a valid, enforceable and perfected first priority security interest in such assets (subject to any Liens permitted by Section 8.3). - ----------- (d) Upon request of the Administrative Agent, promptly execute and deliver or cause to be executed and delivered to the Administrative Agent in a form reasonably acceptable to the Administrative Agent such additional agreements and other documents as the Administrative Agent reasonably deems necessary to establish a valid, enforceable and perfected first priority security interest in the Collateral. 7.10 Use of Proceeds. The Borrower shall use the proceeds of the --------------- Loans and the Letters of Credit only for (a) financing permitted acquisitions, (b) capital expenditures to expand and upgrade Cable Systems, (c) dividends or distributions permitted under this Agreement, and (d) general corporate purposes. 7.11 New Subsidiaries. Immediately upon the creation or ---------------- acquisition thereof, the Borrower shall notify the Administrative Agent of the designation of any newly created or acquired Subsidiary as a Restricted Subsidiary or an Unrestricted Subsidiary and shall provide the Administrative Agent with an updated Schedule 5.14 within 30 days of any changes thereto, ------------- provided that no designation of any newly created or acquired Subsidiary as an - -------- Unrestricted Subsidiary shall be permitted (except by another Unrestricted Subsidiary) unless such designation would otherwise be permitted under the definition thereof and Sections 8.6 and 8.9(f). In addition, the Borrower shall ------------ ------ cause any newly created or acquired Restricted Subsidiary to execute and deliver to the Administrative Agent, within 30 days of such creation or acquisition, a Restricted Subsidiary Negative Pledge. SECTION 8. NEGATIVE COVENANTS The Borrower hereby agrees that, so long as any Commitment remains in effect, any Loan or Letter of Credit is outstanding, or any other Obligation is due and payable to any Lender or the Administrative Agent hereunder or under any other Loan Document, the Borrower shall not, and the Borrower shall not permit any of the Restricted Subsidiaries to, directly or indirectly: 53 8.1 Financial Condition Covenants. ----------------------------- (a) Leverage Ratio. Permit the Leverage Ratio at any time during any period set forth below to be greater than the ratio set forth opposite such period below:
Period Ratio ------ ----- Effective Date through and including 6/30/99 6.00 to 1.00 7/01/99 through and including 6/30/2000 5.50 to 1.00 7/01/2000 through and including 6/30/2001 5.00 to 1.00 7/01/2001 and thereafter 4.50 to 1.00
(b) Interest Coverage Ratio. Permit the ratio of Operating Cash Flow for any fiscal quarter of the Borrower ending during any period set forth below to Interest Expense for such fiscal quarter to be less than the ratio set forth opposite such period below:
Period Ratio ------ ----- Effective Date through 6/30/2000 1.50 to 1.00 7/1/2000 and thereafter 2.00 to 1.00
(c) Pro Forma Debt Service Ratio. Permit, at any time, the ratio ---------------------------- of Annualized Operating Cash Flow based on the most recently ended fiscal quarter to Pro Forma Debt Service to be less than 1.10 to 1.00. 8.2 Limitation on Indebtedness. Create, incur, assume or suffer -------------------------- to exist any Indebtedness of the Borrower or any Restricted Subsidiary of the Borrower, except: (a) Indebtedness under this Agreement and the Tranche B Agreement, other than L/C Obligations of the Borrower that are for the benefit of or support the obligations of any Person other than the Borrower or a Restricted Subsidiary; (b) Indebtedness of the Restricted Subsidiaries resulting from any loan or advance from the Borrower; (c) Intercompany Subordinated Debt, provided that the -------- Intercompany Subordinated Debt is unsecured and subordinated pursuant to the terms and conditions of the Intercompany Subordinated Debt Agreement; (d) Interest Rate Hedge Agreements entered into with the Lenders or any of them for the purpose of hedging against interest rate fluctuations with respect to variable rate Indebtedness of the Borrower or any of the Restricted Subsidiaries; and 54 (e) Indebtedness of the Borrower and/or any Restricted Subsidiary not otherwise permitted by this Section 8.2, provided that ----------- -------- immediately prior to and after giving effect to the creation, incurrence or assumption of such Indebtedness (i) the aggregate outstanding principal amount of all such other Indebtedness of the Borrower and the Restricted Subsidiaries, on a combined basis plus (without duplication) the aggregate amount of all Indebtedness secured by Liens permitted under subsection (d) of Section 8.3 shall not at any time exceed 5% of Maximum -------------- ----------- Permitted Indebtedness and (ii) no Default exists and would then be continuing. 8.3 Limitation on Liens. Create, incur, assume or suffer to ------------------- exist any Lien upon any of its property, assets or revenues, whether now owned or hereafter acquired, except for: (a) Liens for taxes, assessments or governmental charges arising in the ordinary course of business which are not yet due and payable or which are being contested in good faith by appropriate proceedings, provided that adequate reserves with respect thereto are maintained on -------- the books of the Borrower or the Restricted Subsidiary, as the case may be, in conformity with GAAP; (b) carriers', warehousemen's, mechanics', materialmen's, repairmen's or other like Liens arising in the ordinary course of business which are not yet due and payable; (c) Liens created pursuant to the Security Documents; (d) other Liens, provided that immediately prior to and after -------- giving effect to the creation of any such Liens (i) the aggregate amount of such Indebtedness secured by Liens permitted under this subsection (d) plus (without duplication) the aggregate amount of all -------------- Indebtedness of the Borrower and the Restricted Subsidiaries permitted under Section 8.2(e) shall not at any time exceed 5% of Maximum Permitted -------------- Indebtedness and (ii) no Default or Event of Default exists and would then be continuing; (e) encumbrances consisting of zoning restrictions, easements, or other restrictions on the use of real property, none of which impair in any material respect the use of such property by the Person in question in the operation of its business, and none of which is violated by existing or proposed structures or land use; and (f) any attachment, prejudgment or judgment Lien in existence less than sixty consecutive calendar days after the entry thereof, or with respect to which execution has been stayed, or with respect to which payment in full above any applicable customary deductible is covered by insurance or a bond. 55 8.4 Limitation on Fundamental Changes. Enter into any merger, --------------------------------- consolidation or amalgamation with any Person, or liquidate, wind up or dissolve itself (or suffer any liquidation or dissolution), or convey, sell, lease, assign, transfer or otherwise dispose of, all or substantially all of its property, business or assets to any Person, or make any material change in its present method of conducting business, except: (a) a Restricted Subsidiary may merge into or be acquired by the Borrower if the Borrower is the survivor thereof; (b) a Restricted Subsidiary may merge into or be acquired by another Restricted Subsidiary; and (c) the Borrower or any Restricted Subsidiary may sell, lease, transfer or otherwise dispose of any or all of its assets in a transaction permitted under Section 8.5. ----------- 8.5 Limitation on Sale of Assets. Convey, sell, lease, assign, ---------------------------- exchange, transfer or otherwise dispose of any of its property, business or assets (including, without limitation, receivables and leasehold interests), whether now owned or hereafter acquired to any Person (a "Disposition"), except: ----------- (a) Dispositions in the ordinary course of business (which shall not be construed to include the Disposition of any License, Franchise or Cable System); (b) subject to the provisions of Section 8.16, Dispositions between ------------ the Borrower and the Restricted Subsidiaries or between the Restricted Subsidiaries; (c) the Borrower may designate any Restricted Subsidiary as an Unrestricted Subsidiary in accordance with Section 8.6 and may make ----------- Restricted Payments in accordance with Section 8.7; and ----------- (d) other Dispositions, provided that all of the following -------- conditions are satisfied: (i) the Borrower or such Restricted Subsidiary receives consideration that represents the fair market value of such property or assets at the time of such Disposition, (ii) any such Disposition shall be on a non-recourse basis, except that the Borrower or such Restricted Subsidiary may make commercially reasonable representations, warranties and indemnities with respect to such properties or assets that are normal and customary in the cable television business ("Permitted Sale Representations"), (iii) no Default or Event of Default ------------------------------ shall have occurred and be continuing either before or after the consummation of such transaction and (iv) either (1) the Leverage Ratio is less than or equal to 3.75 to 1.00 after giving effect to such Disposition or (2) after giving effect to such proposed Disposition (x) the sum, without duplication, of (A) the Net Unrestricted Designated Subsidiaries Three Month Cash Flow for the prior twelve month period (or shorter period commencing on the Effective Date) ending on the date of such proposed transaction, (B) the Three Month Cash Flow attributable to the 56 properties or assets to be sold, leased, transferred, assigned or otherwise disposed of and (C) the Three Month Cash Flow attributable to all properties or assets sold, leased, transferred, assigned or otherwise disposed of during the prior twelve month period (or shorter period commencing on the Effective Date) ending on the date of such proposed transaction shall not exceed 15% of the Three Month Cash Flow of the Borrower and the Restricted Subsidiaries, and (y) the sum, without duplication of (A) the Net Unrestricted Designated Subsidiaries Three Month Cash Flow for the five-year period (or shorter period commencing on the Effective Date) ending on the date of such proposed transaction, (B) the Three Month Cash Flow attributable to the properties or assets to be sold, leased, transferred, assigned or otherwise disposed of and (C) the Three Month Cash Flow attributable to all assets sold, leased, transferred, assigned or disposed of during the five-year period (or shorter period commencing on the Effective Date) ending on the date of such proposed transaction shall not exceed 30% of the Three Month Cash Flow of the Borrower and the Restricted Subsidiaries. Notwithstanding anything to the contrary contained in the foregoing, if the Leverage Ratio is less than or equal to 3.75 to 1.00 for a period of twelve consecutive months all prior Dispositions and Unrestricted Subsidiary Designations shall be excluded from subsequent determinations pertaining to the foregoing clause (y). Upon request by and at the expense of the Borrower, the Administrative Agent shall release any Liens arising under the Security Documents with respect to any Collateral which (i) is permitted to be disposed of pursuant to Section 8.5(a), -------------- (ii) consists of the Capital Stock of a Restricted Subsidiary which is designated as an Unrestricted Subsidiary pursuant to Section 8.6, or (iii) is ----------- sold or otherwise disposed of in compliance with the terms of Section 8.5(d). -------------- 8.6 Restricted/Unrestricted Designation of Subsidiaries. Be --------------------------------------------------- permitted to designate a Restricted Subsidiary as an Unrestricted Subsidiary or an Unrestricted Subsidiary as a Restricted Subsidiary unless (a) the Borrower delivers to the Administrative Agent and the Lenders a written notice, not later than ten (10) days prior to such designation, certifying that all conditions set forth in this Section 8.6 are satisfied as of the proposed effective date of ----------- such designation, which certification shall state the proposed effective date of such designation and shall be signed by a Responsible Officer of the Borrower; (b) no Default or Event of Default shall exist immediately before or after the effective date of such designation; (c) after giving effect to such designation, there shall not be any material and adverse effect on the Borrower and the Restricted Subsidiaries on a consolidated basis with respect to the prospects for the future generation of Operating Cash Flow, the general mix of assets or the condition, quality and development level of technical equipment, and such designation shall not render the Borrower and the Restricted Subsidiaries on a consolidated basis insolvent or generally unable to pay its or their respective debts as they become due; (d) in the case of the designation of an Unrestricted Subsidiary as a Restricted Subsidiary, such notice shall also serve as the certification of the Borrower that, with respect to such Restricted Subsidiary, the representations and warranties contained herein are true and correct on and as of the effective date of such designation; and (e) in the case of the designation of any Restricted Subsidiary as an Unrestricted Subsidiary (an "Unrestricted Subsidiary Designation"), either (1) the Leverage Ratio is less - ------------------------------------ than or equal to 3.75 to 1.00 after giving effect to such Unrestricted Subsidiary Designation 57 or (2) after giving effect to such Unrestricted Subsidiary Designation the following additional conditions are satisfied as of the effective date of such proposed designation: (i) the sum, without duplication, of (x) the Net Unrestricted Designated Subsidiaries Three Month Cash Flow for the prior twelve month period (or shorter period commencing on the Effective Date) ending on the date of such proposed designation and (y) the Three Month Cash Flow attributable to all asset Dispositions made pursuant to Section 8.5(d) during the twelve -------------- month period (or shorter period commencing on the Effective Date) ending on the date of such proposed designation shall not exceed fifteen percent (15%) of the Three Month Cash Flow of the Borrower and the Restricted Subsidiaries, and (ii) the sum, without duplication, of (x) the Net Unrestricted Designated Subsidiaries Three Month Cash Flow for the five-year period (or shorter period commencing on the Effective Date) ending on the date of such proposed designation and (y) the Three Month Cash Flow attributable to all asset Dispositions made pursuant to Section 8.5(d) during the five-year period (or -------------- shorter period commencing on the Effective Date) ending on the date of such proposed designation shall not exceed thirty percent (30%) of the Three Month Cash Flow of the Borrower and the Restricted Subsidiaries. Notwithstanding the foregoing, if the Leverage Ratio is less than or equal to 3.75 to 1.00 for a period of twelve consecutive months, all previous Unrestricted Subsidiary Designations and asset Dispositions shall be excluded from subsequent determinations pertaining to the foregoing clause (ii). 8.7 Limitation on Restricted Payments; Other Payment Limitations. ------------------------------------------------------------ Declare or pay any dividend or distribution in respect of, or make any payment on account of, or set apart assets for a sinking or other analogous fund for, the purchase, redemption, defeasance, retirement or other acquisition of, any shares of or interests in any class of Capital Stock of the Borrower, whether now or hereafter outstanding, either directly or indirectly, whether in cash or property or in obligations of the Borrower or any of its Subsidiaries, or make, or permit any payments of principal, interest, premium or fees on account of Intercompany Subordinated Debt or make any payment in respect of any fees payable to any Person (other than to the Borrower or a Restricted Subsidiary) for management, consulting, oversight or similar services (collectively, "Restricted Payments"), except that the Borrower and the Restricted Subsidiaries ------------------- may make Restricted Payments in cash or Capital Stock so long as both immediately before and after making such Restricted Payment (i) no Default or Event of Default shall have occurred and be continuing or would result therefrom and (ii) the Leverage Ratio is less than 5.50 to 1.00. Notwithstanding anything to the contrary contained in the foregoing, prior to making any Restricted Payment, the Borrower shall provide the Administrative Agent with a pro forma calculation of the Leverage Ratio demonstrating that such Leverage Ratio is less than 5.50 to 1.00 both before and after making such Restricted Payment, which calculation shall be certified to by the Borrower. 8.8 Limitation on Acquisitions. Purchase any stock, bonds, notes, -------------------------- debentures or other securities of or any assets constituting all or any significant part of a business unit of any Person (collectively, "Acquisitions"), except acquisitions (substantially all of which consist of ------------ Cable Systems or telecommunications systems) through the purchase of stock or assets in any Permitted Line of Business, provided, that (i) no such acquisition -------- may be made if a Default or an Event of Default shall have occurred and be continuing or would result therefrom, (ii) prior to such 58 Acquisition, the Borrower provides evidence of pro forma compliance with all of the terms and conditions of this Agreement, and in the case of Acquisitions in excess of $50,000,000 a ten year cash flow projection for any such Cable System or telecommunications system being acquired, demonstrating such compliance and (iii) compliance in a timely manner by the Borrower with Section 8.16. ------------ 8.9 Investments, Loans, Etc. Purchase or otherwise acquire or ------------------------ invest in the Capital Stock of, or any other equity interest in, any Person (including, without limitation, the Capital Stock of the Borrower), or make any loan to, or enter into any arrangement for the purpose of providing funds or credit to, or, guarantee or become contingently obligated in respect of the obligations of or make any other investment, whether by way of capital contribution or otherwise, in, to or with any Person, or permit any Restricted Subsidiary so to do (all of which are sometimes referred to herein as "Investments"), provided that, so long as no Default or Event of Default shall - ------------ -------- have occurred and be continuing or would result therefrom, nothing contained in this Section 8.9 shall be deemed to prohibit the Borrower or any Restricted ----------- Subsidiary from making Investments: (a) in certificates of deposit with maturities of 270 days or less from the date of acquisition and overnight bank deposits of any Lender or of any commercial bank having capital and surplus in excess of $500,000,000; (b) in repurchase obligations of any Lender or of any commercial bank satisfying the requirements of clause (a) of this Section 8.9, having a ----------- term of not more than 30 days, with respect to securities issued or fully guaranteed or insured by the United States Government; (c) in commercial paper of a domestic issuer maturing not in excess of 270 days from the date of acquisition and rated at least A-1 by S&P or P-1 by Moody's; (d) in indebtedness of a domestic issuer maturing not in excess of 270 days from the date of acquisition and having the highest rating by S&P and Moody's; (e) in Restricted Subsidiaries or for the acquisition or creation of new Restricted Subsidiaries, provided that (i) in the case of an -------- acquisition, the Borrower complies with the provisions of Section 8.8, (ii) ----------- such Restricted Subsidiary is organized under the laws of any state of the United States or the District of Columbia and (iii) not less than one hundred percent (100%) of the voting control thereof and not less than one hundred percent (100%) of the overall economic equity therein, at the time of which any determination is being made, is owned, directly or indirectly, beneficially and of record by the Borrower; and (f) in Unrestricted Subsidiaries through Dispositions under Section 8.5, designations under Section 8.6 and Acquisitions under ----------- ----------- Section 8.8, provided that such Investments are in compliance with ----------- -------- Sections 8.5, 8.6 and 8.8. ------------ --- --- 59 8.10 Limitation on Transactions with Affiliates. Enter into any ------------------------------------------ transaction, including, without limitation, any purchase, sale, lease or exchange of property or the rendering of any service, with any Affiliate (other than a Restricted Subsidiary) other than transactions (a) otherwise permitted under this Agreement, (b) entered into in the ordinary course of the Borrower's or such Restricted Subsidiary's business, the terms of which are fair and reasonable and in the best interests of the Loan Party which is party to the transaction and which transaction is approved by the Board of Directors of the Borrower or (c) which are existing transactions set forth on Schedule 8.10 and ------------- future transactions which are in renewal or replacement of the transactions set forth in Schedule 8.10 provided that such future transactions are of a type and ------------- -------- upon terms consistent with the transactions set forth on Schedule 8.10. ------------- 8.11 Certain Intercompany Matters. Fail to (i) satisfy customary ---------------------------- formalities with respect to organizational separateness, including, without limitation, (x) the maintenance of separate books and records and (y) the maintenance of separate bank accounts in its own name; (ii) act solely in its own name and through its authorized officers and agents; (iii) commingle any money or other assets of JIC or any Unrestricted Subsidiary with any money or other assets of the Borrower or any of the Restricted Subsidiaries; or (iv) take any action, or conduct its affairs in a manner, which could reasonably be expected to result in the separate organizational existence of JIC, each Unrestricted Subsidiary, the Borrower and the Restricted Subsidiaries being ignored under any circumstance. 8.12 Limitation on Restrictions on Subsidiary Distributions. ------------------------------------------------------ Enter into or suffer to exist or become effective any consensual encumbrance or restriction on the ability of any Restricted Subsidiary of the Borrower to (a) pay dividends or make any other distributions in respect of any Capital Stock of such Restricted Subsidiary held by, or pay any Indebtedness owed to, the Borrower or any other Restricted Subsidiary of the Borrower, (b) make loans or advances to the Borrower or any other Restricted Subsidiary of the Borrower or (c) transfer any of its assets to the Borrower or any other Restricted Subsidiary of the Borrower, except for such encumbrances or restrictions existing under or by reason of (i) any restrictions existing under the Loan Documents or any other agreements in effect on the date hereof, or (ii) any restrictions with respect to a Restricted Subsidiary imposed pursuant to an agreement which has been entered into in connection with the sale or disposition of all or substantially all of the Capital Stock or assets of such Restricted Subsidiary or any restrictions arising under Franchise Agreements, Pole Agreements or leases entered into in the ordinary course of business. 8.13 Limitation on Lines of Business. Enter into any business, ------------------------------- either directly or through any Restricted Subsidiary, except for the domestic cable and telecommunications business (each, a "Permitted Line of Business"). -------------------------- 8.14 No Negative Pledge. Covenant or agree with any other lender ------------------ or other Person, not to create, or not to allow to be created or otherwise exist, any Lien upon any asset of the Borrower or any of the Restricted Subsidiaries or covenant or agree with any other lenders or other Persons to any other arrangement that is functionally equivalent or similar to a negative pledge. 60 8.15 Tax Sharing Agreement. Pay any Taxes under the Tax Sharing --------------------- Agreement or other similar agreement greater than the lesser of (i) the amount that would have been payable by the Borrower if there were no Tax Sharing Agreement or other similar agreement and (ii) the amount actually paid by JIC in respect of such Taxes. Amend, supplement or in any manner modify, without the written consent of the Majority Banks, the terms of the Tax Sharing Agreement. 8.16 Limitation on the Borrower's Ownership of Assets. The ------------------------------------------------ Borrower shall not be permitted to own any Cable System or other material asset unless the Borrower either (i) transfers any assets it owns or acquires (other than the Capital Stock of a Subsidiary) to a Restricted Subsidiary or (ii) complies with the provisions of Section 7.9 within 90 days after the date on ----------- which the aggregate fair market value of all Acquired Assets (as defined in Section 7.9(c)) owned by the Borrower exceeds $500,000. - -------------- 8.17 Limitation on Issuance of Capital Stock. Issue, sell, --------------------------------------- assign, pledge or otherwise encumber or dispose of any shares of Capital Stock, except (i) the Restricted Subsidiaries may issue or sell Capital Stock to the Borrower, (ii) the Borrower and the Restricted Subsidiaries may pledge the Capital Stock of the Restricted Subsidiaries pursuant to the Pledge Agreements and (iii) the Borrower can issue shares of its Capital Stock so long as both before and after giving effect to such issuance and any related transactions no Default or Event of Default shall have occurred and be continuing or would result therefrom. SECTION 9. EVENTS OF DEFAULT If any of the following events shall occur and be continuing: (a) The Borrower shall fail to pay any principal of any Loan or Reimbursement Obligation when due in accordance with the terms hereof; or the Borrower shall fail to pay any interest on any Loan or Reimbursement Obligation, or any other amount payable hereunder, on or prior to the date which is five days (or, if later, three Business Days) after any such interest or other amount becomes due in accordance with the terms hereof; or (b) Any representation or warranty made or deemed made by JIC, the Borrower or any other Loan Party herein or in any other Loan Document or which is contained in any Information furnished at any time under or in connection with this Agreement or any such other Loan Document shall prove to have been incorrect in any material respect on or as of the date made or deemed made; or (c) The Borrower or any other Loan Party shall default in the observance or performance of any agreement contained in Section 7.7(a) or ------------- Section 8 of this Agreement or in Section 5(b) of the Pledge Agreements; or --------- 61 (d) The Borrower, JIC or any other Loan Party shall default in the observance or performance of any other agreement contained in this Agreement or any other Loan Document (other than as provided in paragraphs (a) through (c) of this Section), and such default shall continue unremedied for a period of 30 days after the Administrative Agent shall have given the Borrower notice thereof; or (e) (i) JIC, the Borrower or any of the Restricted Subsidiaries shall default in making any payment of any principal of any Indebtedness (including, without limitation, any Guarantee Obligation, but excluding the Loans and Reimbursement Obligations) beyond the period of grace or cure, if any, provided in the instrument or agreement under which such Indebtedness was created; or (ii) JIC, the Borrower or any of the Restricted Subsidiaries shall default in making any payment of any interest on any such Indebtedness beyond the period of grace or cure, if any, provided in the instrument or agreement under which such Indebtedness was created; or (iii) JIC, the Borrower or any of the Restricted Subsidiaries shall default in the observance or performance of any other agreement or condition relating to any such Indebtedness or contained in any instrument or agreement evidencing, securing or relating thereto, or any other event shall occur or condition exist, the effect of which default or other event or condition is to cause, or to permit the holder or beneficiary of such Indebtedness (or a trustee or agent on behalf of such holder or beneficiary) to cause, with the giving of notice if required, such Indebtedness to become due or to be purchased or repurchased prior to its stated maturity (or, in the case of any such Indebtedness constituting a Guarantee Obligation, to become payable prior to the stated maturity of the primary obligation covered by such Guarantee Obligation); provided that a -------- default, event or condition described in clause (i), (ii) or (iii) of this paragraph (e) shall not constitute an Event of Default under this Agreement unless, at the time of such default, event or condition one or more defaults, events or conditions of the type described in clauses (i), (ii) and (iii) of this paragraph (e) shall have occurred with respect to Indebtedness the outstanding principal amount of which exceeds in the aggregate $10,000,000; or (f) (i) JIC, the Borrower or any of the Restricted Subsidiaries shall commence any case, proceeding or other action (A) under any existing or future law of any jurisdiction, domestic or foreign, relating to bankruptcy, insolvency, reorganization or relief of debtors, seeking to have an order for relief entered with respect to it, or seeking to adjudicate it a bankrupt or insolvent, or seeking reorganization, arrangement, adjustment, winding-up, liquidation, dissolution, composition or other relief with respect to it or its debts, or (B) seeking appointment of a receiver, trustee, custodian, conservator or other similar official for it or for all or any substantial part of its assets, or JIC, the Borrower or any of the Restricted Subsidiaries shall make a general assignment for the benefit of its creditors; or (ii) there shall be commenced against JIC, the Borrower or any of the Restricted Subsidiaries any case, proceeding or other action of a nature referred to in clause (i) above which (A) results in the entry of an order for relief or any such adjudication or appointment or (B) remains undismissed, undischarged or unbonded for a period of 60 days; or (iii) there shall be commenced against JIC, the Borrower or any of the Restricted Subsidiaries any case, 62 proceeding or other action seeking issuance of a warrant of attachment, execution, distraint or similar process against all or any substantial part of its assets which results in the entry of an order for any such relief which shall not have been vacated, discharged, or stayed or bonded pending appeal within 60 days from the entry thereof; or (iv) JIC, the Borrower or any of the Restricted Subsidiaries shall take any action in furtherance of, or indicating its consent to, approval of, or acquiescence in, any of the acts set forth in clause (i), (ii), or (iii) above; or (v) JIC, the Borrower or any of the Restricted Subsidiaries shall generally not, or shall be unable to, or shall admit in writing its inability to, pay its debts as they become due; or (g) (i) Any Person shall engage in any "prohibited transaction" (as defined in Section 406 of ERISA or Section 4975 of the Code) involving any Plan, (ii) any "accumulated funding deficiency" (as defined in Section 302 of ERISA), whether or not waived, shall exist with respect to any Plan or any Lien in favor of the PBGC or a Plan shall arise on the assets of the Borrower or any Commonly Controlled Entity, (iii) a Reportable Event shall occur with respect to, or proceedings shall commence to have a trustee appointed, or a trustee shall be appointed, to administer or to terminate, any Single Employer Plan, which Reportable Event or commencement of proceedings or appointment of a trustee is, in the reasonable opinion of the Majority Lenders, likely to result in the termination of such Plan for purposes of Title IV of ERISA, (iv) any Single Employer Plan shall terminate for purposes of Title IV of ERISA, (v) the Borrower or any Commonly Controlled Entity shall, or in the reasonable opinion of the Majority Lenders is likely to, incur any liability in connection with a withdrawal from, or the Insolvency or Reorganization of, a Multiemployer Plan or (vi) any other event or condition shall occur or exist with respect to a Plan; and in each case in clauses (i) through (vi) above, such event or condition, together with all other such events or conditions, if any, could reasonably be expected to have a Material Adverse Effect; or (h) One or more judgments or decrees shall be entered against JIC, the Borrower or any of the Restricted Subsidiaries involving in the aggregate a liability (not paid or fully covered by insurance) of $10,000,000 or more, and all such judgments or decrees shall not have been vacated, discharged, stayed or bonded pending appeal within 60 days after the entry thereof; or (i) (i) Any material provision of the Loan Documents shall cease, for any reason, to be in full force and effect, or the Borrower or any other Loan Party shall so assert or (ii) the Lien created by any of the Security Documents shall cease to be enforceable and of the same effect and priority purported to be created thereby; (j) A Change of Control shall occur; (k) The Capital Stock of the Borrower or any portion thereof or any Intercompany Subordinated Debt shall become subject to or covered by the Lien of any Person; or 63 (l) A default or event of default shall occur under the Tranche B Agreement. then, and in any such event, (A) if such event is an Event of Default specified in clause (i) or (ii) of paragraph (f) of this Section 9 with respect to the --------- Borrower, automatically the Commitments shall immediately terminate and the Loans hereunder (with accrued interest thereon) and all other amounts owing under this Agreement and the other Loan Documents (including, without limitation, all amounts of L/C Obligations, whether or not the beneficiaries of the then outstanding Letters of Credit shall have presented the documents required thereunder) shall immediately become due and payable, and (B) if such event is any other Event of Default, either or both of the following actions may be taken: (i) with the consent of the Majority Lenders, the Administrative Agent may, or upon the request of the Majority Lenders, the Administrative Agent shall, by notice to the Borrower declare the Commitments to be terminated forthwith, whereupon such Commitments shall immediately terminate; and (ii) with the consent of the Majority Lenders, the Administrative Agent may, or upon the request of the Majority Lenders, the Administrative Agent shall, by notice to the Borrower, declare the Loans hereunder (with accrued interest thereon) and all other amounts owing under this Agreement and the other Loan Documents (including, without limitation, all amounts of L/C Obligations, whether or not the beneficiaries of the then outstanding Letters of Credit shall have presented the documents required thereunder) to be due and payable forthwith, whereupon the same shall immediately become due and payable. With respect to all Letters of Credit with respect to which presentment for honor shall not have occurred at the time of an acceleration pursuant to this paragraph, the Borrower shall at such time deposit in a cash collateral account opened by the Administrative Agent an amount equal to the aggregate then undrawn and unexpired amount of such Letters of Credit. Amounts held in such cash collateral account shall be applied by the Administrative Agent to the payment of drafts drawn under such Letters of Credit, and the unused portion thereof after all such Letters of Credit shall have expired or been fully drawn upon, if any, shall be applied to repay other Obligations of the Borrower hereunder and under the other Loan Documents. After all such Letters of Credit shall have expired or been fully drawn upon, all Reimbursement Obligations shall have been satisfied, all Loans shall have been paid in full and no other Obligations shall be due and payable, the balance, if any, in such cash collateral account shall be returned to the Borrower (or such other Person as may be lawfully entitled thereto). Except as expressly provided above in this Section, presentment, demand, protest and all other notices of any kind are hereby expressly waived. SECTION 10. THE ADMINISTRATIVE AGENT 10.1 Appointment. Each Lender hereby irrevocably designates and ----------- appoints the Administrative Agent as the agent of such Lender under this Agreement and the other Loan Documents, and each such Lender irrevocably authorizes the Administrative Agent, in such capacity, to take such action on its behalf under the provisions of this Agreement and the other Loan Documents and to exercise such powers and perform such duties as are expressly delegated to the Administrative Agent by the terms of this Agreement and the other Loan Documents, together with 64 such other powers as are reasonably incidental thereto. Notwithstanding any provision to the contrary elsewhere in this Agreement or any other Loan Document, the Administrative Agent shall not have any duties or responsibilities, except those expressly set forth herein, or any fiduciary relationship with any Lender, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Agreement or any other Loan Document or otherwise exist against the Administrative Agent. 10.2 Delegation of Duties. The Administrative Agent may execute any -------------------- of its duties under this Agreement and the other Loan Documents by or through agents or attorneys-in-fact and shall be entitled to advice of counsel concerning all matters pertaining to such duties. The Administrative Agent shall not be responsible for the negligence or misconduct of any agents or attorneys in-fact selected by it with reasonable care. 10.3 Exculpatory Provisions. Neither the Administrative Agent nor ---------------------- any of its officers, directors, employees, agents, attorneys-in-fact or affiliates shall be (i) liable for any action lawfully taken or omitted to be taken by it or such Person under or in connection with this Agreement or any other Loan Document (except for its or such Person's own gross negligence or willful misconduct) or (ii) responsible in any manner to any of the Lenders for any recitals, statements, representations or warranties made by the Borrower or any officer thereof contained in this Agreement or any other Loan Document or in any certificate, report, statement or other document referred to or provided for in, or received by the Administrative Agent under or in connection with, this Agreement or any other Loan Document or for the value, validity, effectiveness, genuineness, enforceability or sufficiency of this Agreement or any other Loan Document or for any failure of the Borrower to perform its obligations hereunder or thereunder. The Administrative Agent shall not be under any obligation to any Lender to ascertain or to inquire as to the observance or performance of any of the agreements contained in, or conditions of, this Agreement or any other Loan Document, or to inspect the properties, books or records of the Borrower. 10.4 Reliance by the Administrative Agent. The Administrative Agent ------------------------------------ shall be entitled to rely, and shall be fully protected in relying, upon any Note, writing, resolution, notice, consent, certificate, affidavit, letter, facsimile, statement, order or other document or conversation believed by it to be genuine and correct and to have been signed, sent or made by the proper Person or Persons and upon advice and statements of legal counsel (including, without limitation, counsel to the Borrower), independent accountants and other experts selected by the Administrative Agent. The Administrative Agent may deem and treat the payee of any Note as the owner thereof for all purposes unless a written notice of assignment, negotiation or transfer thereof shall have been filed with the Administrative Agent. The Administrative Agent shall be fully justified in failing or refusing to take any action under this Agreement or any other Loan Document unless it shall first receive such advice or concurrence of the Majority Lenders as it deems appropriate or it shall first be indemnified to its satisfaction by the Lenders against any and all liability and expense which may be incurred by it by reason of taking or continuing to take any such action. The Administrative Agent shall in all cases be fully protected in acting, or in refraining from acting, under this 65 Agreement and the other Loan Documents in accordance with a request of the Majority Lenders, and such request and any action taken or failure to act pursuant thereto shall be binding upon all the Lenders and all future holders of the Loans. 10.5 Notice of Default. The Administrative Agent shall not be ----------------- deemed to have knowledge or notice of the occurrence of any Default or Event of Default hereunder unless the Administrative Agent has received notice from a Lender (except in the case of a Default under Section 9(a)) or the Borrower ------------ referring to this Agreement, describing such Default or Event of Default and stating that such notice is a "notice of default". In the event that the Administrative Agent receives such a notice, the Administrative Agent shall give notice thereof to the Lenders. The Administrative Agent shall take such action with respect to such Default or Event of Default as shall be reasonably directed by the Majority Lenders; provided that unless and until the Administrative Agent -------- shall have received such directions, the Administrative Agent may (but shall not be obligated to) take such action, or refrain from taking such action, with respect to such Default or Event of Default as it shall deem advisable in the best interests of the Lenders. 10.6 Non-Reliance on the Administrative Agent and the Other ------------------------------------------------------ Lenders. Each Lender expressly acknowledges that neither the Administrative - ------- Agent nor any of its officers, directors, employees, agents, attorneys-in-fact or affiliates has made any representations or warranties to it and that no act by the Administrative Agent hereinafter taken, including any review of the affairs of the Borrower, shall be deemed to constitute any representation or warranty by the Administrative Agent to any Lender. Each Lender represents to the Administrative Agent that it has, independently and without reliance upon the Administrative Agent or any other Lender, and based on such documents and information as it has deemed appropriate, made its own appraisal of and investigation into the business, operations, property, financial and other condition and creditworthiness of the Borrower and made its own decision to make its Loans hereunder and enter into this Agreement. Each Lender also represents that it will, independently and without reliance upon the Administrative Agent or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit analysis, appraisals and decisions in taking or not taking action under this Agreement and the other Loan Documents, and to make such investigation as it deems necessary to inform itself as to the business, operations, property, financial and other condition and creditworthiness of the Borrower. Except for notices, reports and other documents expressly required to be furnished to the Lenders by the Administrative Agent hereunder, the Administrative Agent shall not have any duty or responsibility to provide any Lender with any credit or other information concerning the business, operations, property, condition (financial or otherwise), prospects or creditworthiness of the Borrower which may come into the possession of the Administrative Agent or any of its officers, directors, employees, agents, attorneys-in-fact or affiliates. 10.7 Indemnification. The Lenders agree to indemnify the --------------- Administrative Agent in its capacity as such (to the extent not reimbursed by the Borrower and without limiting the obligation of the Borrower to do so), ratably according to their respective Specified Percentages in effect on the date on which indemnification is sought (or, if indemnification is sought after the date 66 upon which the Loans shall have been paid in full, ratably in accordance with their Specified Percentages immediately prior to such date), from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind whatsoever which may at any time (including, without limitation, at any time following the payment of the Loans) be imposed on, incurred by or asserted against the Administrative Agent in any way relating to or arising out of, the Commitments, this Agreement, any of the other Loan Documents or any documents contemplated by or referred to herein or therein or the transactions contemplated hereby or thereby or any action taken or omitted by the Administrative Agent under or in connection with any of the foregoing; provided that no Lender shall be liable -------- for the payment of any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from the Administrative Agent's gross negligence or willful misconduct. The agreements in this Section shall survive the payment of the Loans and all other amounts payable hereunder. 10.8 The Administrative Agent in Its Individual Capacity. The --------------------------------------------------- Administrative Agent and its affiliates may make loans to, accept deposits from and generally engage in any kind of business with the Borrower as though the Administrative Agent were not the Administrative Agent hereunder and under the other Loan Documents. With respect to the Loans made by it, the Administrative Agent shall have the same rights and powers under this Agreement and the other Loan Documents as any Lender and may exercise the same as though it were not the Administrative Agent, and the terms "Lender" and "Lenders" shall include the Administrative Agent in its individual capacity. 10.9 Successor Administrative Agent. (a) The Administrative ------------------------------ Agent may resign as the Administrative Agent upon 30 days' notice to the Lenders and the appointment of a successor Administrative Agent as hereinafter set forth; provided that concurrently with such resignation the Administrative Agent -------- also resigns as the Administrative Agent for the Tranche B Agreement. If the Administrative Agent shall resign as the Administrative Agent under this Agreement, the other Loan Documents and the Tranche B Agreement, then, unless an Event of Default shall have occurred and be continuing (in which case, the Majority Lenders shall appoint a successor), the Borrower shall appoint from among the Lenders a successor Administrative Agent for the Lenders, which successor Administrative Agent shall be approved by the Majority Lenders (which approval shall not be unreasonably withheld). If no successor Administrative Agent shall have been so appointed by the Borrower (or in the case of an Event of Default, by the Majority Lenders) and such successor Administrative Agent has not accepted such appointment within 30 days after such resignation, then the resigning Administrative Agent may, on behalf of the Lenders, appoint a successor Administrative Agent, which successor Administrative Agent hereunder shall be either a Lender or, if none of the Lenders is willing to serve as successor Administrative Agent, a major international bank having combined capital and surplus of at least $500,000,000. Upon the acceptance of any appointment as the Administrative Agent hereunder by a successor Administrative Agent, such successor Administrative Agent shall succeed to the rights, powers and duties of the Administrative Agent, and the term "Administrative Agent" shall mean such successor Administrative Agent effective upon such appointment and approval, and the former Administrative Agent's rights, powers 67 and duties as the Administrative Agent shall be terminated, without any other or further act or deed on the part of such former Administrative Agent or any of the parties to this Agreement or any holders of the Loans. After any retiring Administrative Agent's resignation as the Administrative Agent, the provisions of this Section 10 shall inure to its benefit as to any actions taken or omitted ---------- to be taken by it while it was the Administrative Agent under this Agreement and the other Loan Documents. (b) In the event that the Administrative Agent shall have breached any of its material obligations to the Lenders hereunder, the Majority Lenders may remove the Administrative Agent as the Administrative Agent hereunder and under the Tranche B Agreement, effective on the date specified by them, by written notice to the Administrative Agent and the Borrower. Upon any such removal, the Borrower, provided that no Event of Default shall have occurred and -------- be continuing (in which case the Majority Lenders shall make the appointment), shall have the right to appoint a successor Administrative Agent hereunder and under the Tranche B Agreement, which successor Administrative Agent shall be approved by the Majority Lenders (which approval shall not be unreasonably withheld). If no successor Administrative Agent shall have been so appointed by the Borrower (or in the case of an Event of Default, by the Majority Lenders) and such successor Administrative Agent has not accepted such appointment within 30 days after notification to the Administrative Agent of its removal, then the retiring Administrative Agent may, on behalf of the Lenders, appoint a successor Administrative Agent hereunder and under the Tranche B Agreement, which successor Administrative Agent shall be either a Lender or, if none of the Lenders is willing to serve as successor Administrative Agent, a major international bank having combined capital and surplus of at least $500,000,000. Such successor Administrative Agent, provided that no Event of Default shall -------- have occurred and be continuing, shall be reasonably satisfactory to the Borrower. Upon the acceptance of any appointment as the Administrative Agent hereunder and under the Tranche B Agreement by a successor Administrative Agent, such successor Administrative Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Administrative Agent, and the retiring Administrative Agent shall be discharged from its duties and obligations under this Agreement and the Tranche B Agreement. The Borrower and the Lenders shall execute such documents as shall be necessary to effect such appointment. After any retiring Administrative Agent's removal hereunder and under the Tranche B Agreement as the Administrative Agent, the provisions of this Section 10.9 and Section 10.9 of ------------ ------------ the Tranche B Agreement, respectively, shall inure to its benefit as to any actions taken or omitted to be taken by it while it was the Administrative Agent under this Agreement, the other Loan Documents and the Tranche B Agreement. If at any time there shall not be a duly appointed and acting Administrative Agent, the Borrower agrees to make each payment due hereunder and under the Notes directly to the Lenders entitled thereto during such time. 10.10 Managing Agents and Co-Agents. No Managing Agent or Co- ----------------------------- Agent in their respective capacities as such shall have any duties or responsibilities hereunder, or any fiduciary relationship with any Lender, and no implied covenants, functions, responsibilities, duties, obligations or liabilities shall be read into this Agreement or otherwise exist against any Managing Agent or Co-Agent in their respective capacities as such. 68 SECTION 11. NEW RESTRICTED SUBSIDIARIES The Borrower and each Restricted Subsidiary hereby agree to promptly, after the creation, acquisition and/or designation of a Restricted Subsidiary, notify the Administrative Agent of the existence thereof and to promptly cause each such new Restricted Subsidiary to execute and deliver to the Administrative Agent a Pledge Agreement in the form of Exhibit F hereto. --------- SECTION 12. MISCELLANEOUS 12.1 Amendments and Waivers. Neither this Agreement nor any ---------------------- other Loan Document, nor any terms hereof or thereof may be amended, supplemented or modified except in accordance with the provisions of this Section 12.1. The Majority Lenders and each relevant Loan Party may, or, with - ------------ the written consent of the Majority Lenders, the Administrative Agent and each relevant Loan Party may, from time to time, (a) enter into written amendments, supplements or modifications hereto and to the other Loan Documents for the purpose of adding any provisions to this Agreement or the other Loan Documents or changing in any manner the rights of the Lenders or of the Loan Parties hereunder or thereunder or (b) waive, on such terms and conditions as the Majority Lenders or the Administrative Agent, as the case may be, may specify in such instrument, any of the requirements of this Agreement or the other Loan Documents or any Default or Event of Default and its consequences; provided, -------- however, that no such waiver and no such amendment, supplement or modification - ------- shall (i) reduce the amount or extend the scheduled date of maturity of any Loan or of any installment thereof, or reduce the stated rate of any interest or fee payable hereunder or extend the scheduled date of any payment thereof or increase the amount or extend the expiration date of any Commitment of any Lender, or make any change in the method of application of any payment of the Loans specified in Section 4.2 or Section 4.8, (ii) waive, extend or reduce any ----------- ----------- mandatory Commitment reduction pursuant to Section 4.2, (iii) amend, modify or ----------- waive any provision of the Intercompany Subordinated Debt Agreement, this Section 12.1 or reduce any percentage specified in the definition of Majority - ------------ Lenders, or consent to the assignment or transfer by any Loan Party of any of its rights and obligations under this Agreement and the other Loan Documents, (iv) release the Collateral except for any Collateral which is (x) permitted to be disposed of pursuant to Section 8.5(a) or (y) the subject of a transaction -------------- permitted under Sections 8.5(c) or (d), which Collateral may be released by the --------------- --- Administrative Agent pursuant to Section 8.5, (v) amend, modify or waive any ----------- condition precedent to any extension of credit set forth in Section 6, in each case of (i), (ii), (iii), (iv) and (v) above, without the written consent of all of the Lenders, (vi) amend, modify or waive any provision of Section 10 without the written consent of the then Administrative Agent or (vii) amend, modify or waive any provision of Section 3 without the written consent of the then Issuing Lender. Any such waiver and any such amendment, supplement or modification shall apply equally to each of the Lenders and shall be binding upon the Loan Parties, the Lenders, the Administrative Agent and all future holders of the Notes. In the case of any waiver, the Loan Parties, the Lenders and the Administrative Agent shall be restored to their former position and rights hereunder and under the other Loan Documents, and any Default or Event of Default 69 waived shall be deemed to be cured and not continuing; but no such waiver shall extend to any subsequent or other Default or Event of Default, or impair any right consequent thereon. 12.2 Notices. All notices, requests and demands to or upon the ------- respective parties hereto to be effective shall be in writing (including by facsimile transmission) and, unless otherwise expressly provided herein, shall be deemed to have been duly given or made (a) in the case of delivery by hand, when delivered, (b) in the case of delivery by mail, three Business Days after being deposited in the mails, postage prepaid, or (c) in the case of delivery by facsimile transmission, when sent and receipt has been confirmed, addressed as follows in the case of the Borrower, the Restricted Subsidiaries and the Administrative Agent, and as set forth in Schedule 1.1 (or, with respect to any ------------ Lender that is an Assignee, in the applicable Assignment and Acceptance) in the case of the other parties hereto, or to such other address as may be hereafter notified by the respective parties hereto: The Borrower: Jones Cable Holdings II, Inc. 9697 East Mineral Avenue Englewood, Colorado 80112 Attention: Treasurer Fax: (303) 790-7324 (with a copy to General Counsel) Fax: (303) 799-1644 The Restricted Subsidiaries: c/o Jones Cable Holdings II, Inc. 9697 East Mineral Avenue Englewood, Colorado 80112 Attention: Treasurer Fax: (303) 790-7324 (with a copy to General Counsel) Fax: (303) 799-1644 The Administrative Agent: The Bank of Nova Scotia One Liberty Plaza New York, New York 10006 Attention: Margot Bright Fax: (212) 225-5091 provided that any notice, request or demand to or upon the Administrative Agent - -------- or the Lenders pursuant to Section 2 or 3 shall not be effective until received. --------- - 12.3 No Waiver; Cumulative Remedies. No failure to exercise and ------------------------------ no delay in exercising, on the part of the Administrative Agent or any Lender, any right, remedy, power or privilege hereunder or under the other Loan Documents shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege hereunder preclude any other 70 or further exercise thereof or the exercise of any other right, remedy, power or privilege. The rights, remedies, powers and privileges herein provided are cumulative and not exclusive of any rights, remedies, powers and privileges provided by law. 12.4 Survival of Representations and Warranties. All ------------------------------------------ representations and warranties made hereunder, in the other Loan Documents and in any document, certificate or statement delivered pursuant hereto or in connection herewith shall survive the execution and delivery of this Agreement and the making of the Loans hereunder. 12.5 Payment of Expenses and Taxes. The Borrower agrees (a) to ----------------------------- pay or reimburse the Administrative Agent for all its reasonable out-of-pocket costs and expenses incurred in connection with the development, preparation and execution of, and any amendment, supplement or modification to, this Agreement and the other Loan Documents and any other documents prepared in connection herewith or therewith, and the consummation and administration of the transactions contemplated hereby and thereby, including, without limitation, the reasonable fees and disbursements of counsel to the Administrative Agent, (b) to pay or reimburse each Lender and the Administrative Agent for all its costs and expenses incurred in connection with the enforcement or preservation of any rights under this Agreement, the other Loan Documents and any such other documents (including costs and expenses incurred in connection with any restructure or workout), including, without limitation, the reasonable fees and disbursements of counsel to each Lender and of counsel to the Administrative Agent, (c) without duplication of amounts payable pursuant to Sections 4.9 and ------------ 4.10, to pay, indemnify, and hold each Lender and the Administrative Agent - ---- harmless from, any and all recording and filing fees and any and all liabilities with respect to, or resulting from any delay in paying, stamp, excise and other taxes, if any, which may be payable or determined to be payable in connection with the execution and delivery of, or consummation or administration of any of the transactions contemplated by, or any amendment, supplement or modification of, or any waiver or consent under or in respect of, this Agreement, the other Loan Documents and any such other documents, and (d) without duplication of amounts payable pursuant to Sections 4.9 and 4.10, to pay, indemnify, and hold ------------ ---- each Lender, each Issuing Lender and the Administrative Agent, and their respective officers, directors, employees, affiliates, advisors, agents and controlling persons (each, an "indemnitee"), harmless from and against any and ---------- all other liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever with respect to the execution, delivery, enforcement, performance and administration of this Agreement, the other Loan Documents and any such other documents or the use of the proceeds of the Loans (all the foregoing in this clause (d), collectively, the "indemnified liabilities"), provided, that the ----------------------- -------- Borrower shall have no obligation hereunder to any indemnitee with respect to indemnified liabilities arising from the gross negligence or willful misconduct of such indemnitee. The agreements in this Section shall survive repayment of the Loans and all other amounts payable hereunder. 12.6 Successors and Assigns; Participations and Assignments. (a) ------------------------------------------------------ This Agreement shall be binding upon and inure to the benefit of the Borrower, the Lenders, the Administrative Agent and their respective successors and assigns, except that neither the Borrower nor the 71 Restricted Subsidiaries may assign or transfer any of its rights or obligations under this Agreement without the prior written consent of each Lender. (b) Any Lender may, in the ordinary course of its business and in accordance with applicable law, at any time sell to one or more banks or other entities ("Participants") participating interests in any Loan owing to such ------------ Lender or any L/C Obligation of such Lender, any Commitment of such Lender or any other interest of such Lender hereunder and under the other Loan Documents. In the event of any such sale by a Lender of a participating interest to a Participant, such Lender's obligations under this Agreement to the other parties to this Agreement shall remain unchanged, such Lender shall remain solely responsible for the performance thereof, such Lender shall remain the holder of any such Loan for all purposes under this Agreement and the other Loan Documents, and the Borrower and the Administrative Agent shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement and the other Loan Documents. In no event shall any Participant under any such participation have any right to approve any amendment or waiver of any provision of any Loan Document, or any consent to any departure by any Loan Party therefrom, except to the extent that such amendment, waiver or consent would reduce the principal of, or interest on, the Loans or any fees payable hereunder, or postpone the date of the final scheduled maturity of the Loans, in each case to the extent subject to such participation. The Borrower agrees that if amounts outstanding under this Agreement are due or unpaid, or shall have been declared or shall have become due and payable upon the occurrence of an Event of Default, each Participant shall, to the maximum extent permitted by applicable law, be deemed to have the right of setoff in respect of its participating interest in amounts owing under this Agreement to the same extent as if the amount of its participating interest were owing directly to it as a Lender under this Agreement, provided that, in purchasing -------- such participating interest, such Participant shall be deemed to have agreed to share with the Lenders the proceeds thereof as provided in Section 12.7(a) as --------------- fully as if it were a Lender hereunder. The Borrower also agrees that each Participant shall be entitled to the benefits of Sections 4.9, 4.10 and 4.11 ------------ ---- ---- with respect to its participation in the Commitments and the Loans outstanding from time to time as if it were a Lender; provided that, in the case of Section -------- ------- 4.10, such Participant shall have complied with the requirements of said Section - ---- and provided, further, that no Participant shall be entitled to receive any -------- ------- greater amount pursuant to any such Section than the transferor Lender would have been entitled to receive in respect of the amount of the participation transferred by such transferor Lender to such Participant had no such transfer occurred. (c) Any Lender may, in the ordinary course of its business and in accordance with applicable law, at any time and from time to time assign to any Person (an "Assignee") all or any part of its rights and obligations under this -------- Agreement and the other Loan Documents pursuant to an Assignment and Acceptance, substantially in the form of Exhibit A, executed by such Assignee and such --------- assigning Lender and delivered to the Administrative Agent for its acceptance and recording in the Register (with a copy to the Borrower); provided that, (i) -------- no such assignment (other than to any Lender or any affiliate thereof) shall be in an aggregate principal amount of less than $5,000,000 and $1,000,000 multiples thereof, (ii) after giving effect to any such assignment, the assigning Lender (together with any Lender which is an affiliate of such assigning Lender) shall 72 retain no less than 51% of its original Commitment, unless otherwise agreed to by the Borrower, (iii) no such assignment may be made unless such assigning Lender also assigns a percentage of its interest in the Tranche B Agreement equal to the percentage of the Total Commitment being assigned by such Lender under this Agreement and to the same Assignee receiving such percentage of its interest hereunder and (iv) each assignment (other than to any Lender or any affiliate thereof) shall be subject to the prior written consent of the Borrower (which consent shall not be unreasonably withheld). Upon such execution, delivery, acceptance and recording, from and after the effective date determined pursuant to such Assignment and Acceptance, (x) the Assignee thereunder shall be a party hereto and, to the extent provided in such Assignment and Acceptance, have the rights and obligations of a Lender hereunder with a Commitment as set forth therein, and (y) the assigning Lender thereunder shall, to the extent provided in such Assignment and Acceptance, be released from its obligations under this Agreement. (d) Any Non-U.S. Lender that could become completely exempt from withholding of any tax, assessment or other charge or levy imposed by or on behalf of the United States or any taxing authority thereof ("U.S. Taxes") in ---------- respect of payment of any Obligations due to such Non-U.S. Lender under this Agreement if the Obligations were in registered form for U.S. federal income tax purposes may request the Borrower (through the Administrative Agent), and the Borrower agrees thereupon, to exchange any promissory note(s) evidencing such Obligations for promissory note(s) registered as provided in paragraph (f) below and substantially in the form of Exhibit L (an "Alternative Note"). Alternative --------- ---------------- Notes may not be exchanged for promissory notes that are not Alternative Notes. (e) Each Non-U.S. Lender that could become completely exempt from withholding of U.S. Taxes in respect of payment of any Obligations due to such Non-U.S. Lender if the Obligations were in registered form for U.S. Federal income tax purposes and that holds Alternative Note(s) (an "Alternative ----------- Noteholder") (or, if such Alternative Noteholder is not the beneficial owner - ---------- thereof, such beneficial owner) shall deliver to the Borrower prior to or at the time such Non-U.S. Lender becomes an Alternative Noteholder a Form W-8 (Certificate of Foreign Status of the U.S. Department of Treasury) (or any successor or related form adopted by the U.S. taxing authorities), together with an annual certificate stating that (i) such Alternative Noteholder or beneficial owner, as the case may be, is not a "bank" within the meaning of Section 881(c) of the Code, is not a 10-percent shareholder (within the meaning of Section 871(h)(3)(B) of the Code) of the Borrower and is not a controlled foreign corporation related to the Company (within the meaning of Section 864(d)(4) of the Code) and (ii) such Alternative Noteholder or beneficial owner, as the case may be, shall promptly notify the Borrower if at any time such Alternative Noteholder or beneficial owner, as the case may be, determines that it is no longer in a position to provide such certification to the Borrower (or any other form of certification adopted by the U.S. taxing authorities for such purposes). (f) An Alternative Note and the Obligation(s) evidenced thereby may be assigned or otherwise transferred in whole or in part only by registration of such assignment or transfer of such Alternative Note and the Obligation(s) evidenced thereby on the Register (and each Alternative 73 Note shall expressly so provide). Any assignment or transfer of all or part of such Obligation(s) and the Alternative Note(s) evidencing the same shall be registered on the Register only upon surrender for registration of assignment or transfer of the Alternative Note(s) evidencing such Obligation(s), duly endorsed by (or accompanied by a written instrument of assignment or transfer duly executed by) the Alternative Noteholder thereof, and thereupon one or more new Alternative Note(s) in the same aggregate principal amount shall be issued to the designated Assignee(s). No assignment of an Alternative Note and the Obligation(s) evidenced thereby shall be effective unless it has been recorded in the Register as provided in this Section 12.6(f). --------------- (g) The Administrative Agent, on behalf of the Borrower, shall maintain at the address of the Administrative Agent referred to in Section 12.2 ------------ a copy of each Assignment and Acceptance delivered to it and a register (the "Register") for the recordation of the names and addresses of the Lenders - --------- (including Alternative Noteholders) and the Commitments of, and principal amounts of the Loans owing to, each Lender from time to time. The entries in the Register shall be conclusive, in the absence of manifest error, and the Borrower, the Administrative Agent and the Lenders may (and, in the case of any Loan or other obligation hereunder not evidenced by a Note, shall) treat each Person whose name is recorded in the Register as the owner of a Loan or other obligation hereunder as the owner thereof for all purposes of this Agreement and the other Loan Documents, notwithstanding any notice to the contrary. Any assignment of any Loan or other obligation hereunder not evidenced by a Note shall be effective only upon appropriate entries with respect thereto being made in the Register. The Register shall be available for inspection by the Borrower or any Lender at any reasonable time and from time to time upon reasonable prior notice. (h) Upon its receipt of an Assignment and Acceptance executed by an assigning Lender and an Assignee together with payment to the Administrative Agent of a registration and processing fee of $3,000, the Administrative Agent shall (i) promptly accept such Assignment and Acceptance and (ii) on the effective date determined pursuant thereto record the information contained therein in the Register and give notice of such acceptance and recordation to the Lenders and the Borrower. (i) Subject to Section 12.15, the Borrower authorizes each Lender to ------------- disclose to any Participant or Assignee (each, a "Transferee") and any ---------- prospective Transferee, subject to the Transferee agreeing to be bound by the provisions of Section 12.15, any and all financial information in such Lender's ------------- possession concerning the Borrower and the Restricted Subsidiaries which has been delivered to such Lender by or on behalf of the Borrower pursuant to this Agreement or which has been delivered to such Lender by or on behalf of the Borrower in connection with such Lender's credit evaluation of the Borrower and its Restricted Subsidiaries prior to becoming a party to this Agreement. (j) For avoidance of doubt, the parties to this Agreement acknowledge that the provisions of this Section concerning assignments of Loans and Notes relate only to absolute assignments and that such provisions do not prohibit assignments creating security interests, 74 including, without limitation, any pledge or assignment by a Lender of any Loan or Note to any Federal Reserve Bank in accordance with applicable law. 12.7 Adjustments; Set-off. (a) If any Lender (a "benefitted -------------------- ---------- Lender") shall at any time receive any payment of all or part of its Loans, or - ------ interest thereon, or receive any collateral in respect thereof (whether voluntarily or involuntarily, by set-off, pursuant to events or proceedings of the nature referred to in Section 9(f), or otherwise), in a greater proportion ------------ than any such payment to or collateral received by any other Lender, if any, in respect of such other Lender's Loans, or interest thereon, such benefitted Lender shall purchase for cash from the other Lenders a participating interest in such portion of each such other Lender's Loan, or shall provide such other Lenders with the benefits of any such collateral, or the proceeds thereof, as shall be necessary to cause such benefitted Lender to share the excess payment or benefits of such collateral or proceeds ratably with each of the Lenders; provided, however, that if all or any portion of such excess payment or benefits - -------- ------- is thereafter recovered from such benefitted Lender, such purchase shall be rescinded, and the purchase price and benefits returned, to the extent of such recovery, but without interest. (b) In addition to any rights and remedies of the Lenders provided by law, each Lender shall have the right, without prior notice to the Borrower, any such notice being expressly waived by the Borrower to the extent permitted by applicable law, upon any amount becoming due and payable by the Borrower hereunder (whether at the stated maturity, by acceleration or otherwise) to set- off and appropriate and apply against such amount, to the extent permitted by applicable law, any and all deposits (general or special, time or demand, provisional or final), in any currency, and any other credits, indebtedness or claims, in any currency, in each case whether direct or indirect, absolute or contingent, matured or unmatured, at any time held or owing by such Lender or any branch or agency thereof to or for the credit or the account of the Borrower. Each Lender agrees promptly to notify the Borrower and the Administrative Agent after any such set-off and application made by such Lender, provided that, to the extent permitted by applicable law, the failure to give - -------- such notice shall not affect the validity of such set-off and application. 12.8 Counterparts; When Effective. This Agreement may be ---------------------------- executed by one or more of the parties to this Agreement on any number of separate counterparts (including by facsimile transmission), and all of said counterparts taken together shall be deemed to constitute one and the same instrument. A set of the copies of this Agreement signed by all the parties shall be lodged with the Borrower and the Administrative Agent. This Agreement shall become effective when the Administrative Agent has received counterparts hereof executed by the Borrower, the Administrative Agent and each Lender (such date herein referred to as the "Effective Date"). -------------- 12.9 Severability. Any provision of this Agreement which is ------------ prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. 75 12.10 Integration. This Agreement and the other Loan Documents ----------- represent the agreement of JIC, the Borrower, the Administrative Agent and the Lenders with respect to the subject matter hereof, and there are no promises, undertakings, representations or warranties by the Administrative Agent or any Lender relative to subject matter hereof not expressly set forth or referred to herein or in the other Loan Documents. 12.11 GOVERNING LAW. THIS AGREEMENT AND THE RIGHTS AND ------------- OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK. 12.12 SUBMISSION TO JURISDICTION; WAIVERS. (a) EACH PARTY HERETO, ----------------------------------- IN EACH CASE FOR ITSELF AND ITS SUCCESSORS AND ASSIGNS, HEREBY IRREVOCABLY AND UNCONDITIONALLY: (i) SUBMITS FOR ITSELF AND ITS PROPERTY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS TO WHICH IT IS A PARTY, OR FOR RECOGNITION AND ENFORCEMENT OF ANY JUDGMENT IN RESPECT THEREOF, TO THE NON-EXCLUSIVE GENERAL JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK, THE COURTS OF THE UNITED STATES OF AMERICA FOR THE SOUTHERN DISTRICT OF NEW YORK, AND APPELLATE COURTS FROM ANY THEREOF; (ii) CONSENTS THAT ANY SUCH ACTION OR PROCEEDING MAY BE BROUGHT IN SUCH COURTS AND WAIVES ANY OBJECTION THAT IT MAY NOW OR HEREAFTER HAVE TO THE VENUE OF ANY SUCH ACTION OR PROCEEDING IN ANY SUCH COURT OR THAT SUCH ACTION OR PROCEEDING WAS BROUGHT IN AN INCONVENIENT COURT AND AGREES NOT TO PLEAD OR CLAIM THE SAME; (iii) AGREES THAT SERVICE OF PROCESS IN ANY SUCH ACTION OR PROCEEDING MAY BE EFFECTED BY MAILING A COPY THEREOF BY REGISTERED OR CERTIFIED MAIL (OR ANY SUBSTANTIALLY SIMILAR FORM OF MAIL), POSTAGE PREPAID, TO IT AT ITS ADDRESS SET FORTH IN SECTION 12.2 OR SCHEDULE 1.1, AS APPLICABLE, OR AT ------------ ------------ SUCH OTHER ADDRESS OF WHICH THE ADMINISTRATIVE AGENT SHALL HAVE BEEN NOTIFIED PURSUANT TO SECTION 12.2; AND ------------ (iv) AGREES THAT NOTHING HEREIN SHALL AFFECT THE RIGHT TO EFFECT SERVICE OF PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR SHALL LIMIT THE RIGHT TO SUE IN ANY OTHER JURISDICTION. 76 (b) THE BORROWER AND EACH SUBSIDIARY WAIVES, TO THE MAXIMUM EXTENT NOT PROHIBITED BY LAW, ANY RIGHT IT MAY HAVE TO CLAIM OR RECOVER IN ANY LEGAL ACTION OR PROCEEDING REFERRED TO IN THIS SECTION ANY SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL DAMAGES. 12.13 Acknowledgements. The Borrower and each Restricted ---------------- Subsidiary hereby acknowledges that: (a) it has been advised by counsel in the negotiation, execution and delivery of this Agreement and the other Loan Documents; (b) neither the Administrative Agent nor any Lender has any fiduciary relationship with or duty to the Borrower or any Subsidiary arising out of or in connection with this Agreement or any of the other Loan Documents, and the relationship between the Administrative Agent and the Lenders, on one hand, and the Borrower or any Subsidiary, on the other hand, in connection herewith or therewith is solely that of debtor and creditor; and (c) no joint venture is created hereby or by the other Loan Documents or otherwise exists by virtue of the transactions contemplated hereby among the Lenders or among the Borrower, the Subsidiaries and the Lenders. 12.14 WAIVERS OF JURY TRIAL. THE BORROWER, THE SUBSIDIARIES, THE --------------------- ADMINISTRATIVE AGENT AND THE LENDERS HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVE TRIAL BY JURY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT AND FOR ANY COUNTERCLAIM THEREIN. 12.15 Confidentiality. Each Lender agrees to keep confidential --------------- all non-public information provided to it by or on behalf of the Borrower or any of the Restricted Subsidiaries pursuant to this Agreement or any other Loan Document; provided that nothing herein shall prevent any Lender from disclosing -------- any such information (i) to the Administrative Agent or any other Lender, (ii) to any Assignee or Participant, (iii) to its employees, directors, agents, attorneys, accountants and other professional advisors, (iv) upon demand of any Governmental Authority having jurisdiction over such Lender, (v) in response to any order of any court or other Governmental Authority or as may otherwise be required pursuant to any Requirement of Law, (vi) which has been publicly disclosed other than in breach of this Agreement, or (vii) in connection with the exercise of any remedy hereunder. [REMAINDER OF PAGE INTENTIONALLY LEFT BLANK. SIGNATURE PAGES FOLLOW.] 77 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered by their proper and duly authorized officers as of the day and year first above written. JONES CABLE HOLDINGS II, INC. By: /s/ J. Roy Pottle ------------------------------------ Name: J. Roy Pottle ---------------------------------- Title: Treasurer --------------------------------- The Administrative Agent, the Documentation ------------------------------------------- Agent and the Syndication Agent: ------------------------------- THE BANK OF NOVA SCOTIA, as the Administrative Agent By: /s/ Margot C. Bright ------------------------------------ Name: Margot C. Bright ---------------------------------- Title: Authorized Signatory --------------------------------- NATIONSBANK OF TEXAS, N.A., as the Documentation Agent By: /s/ David G. Jamel ------------------------------------ Name: David G. Jamel ---------------------------------- Title: Vice President --------------------------------- SOCIETE GENERALE, as the Syndication Agent By: /s/ Elaine I. Khalil ------------------------------------ Name: Elaine I. Khalil ---------------------------------- Title: Vice President --------------------------------- The Managing Agents and the Lenders: ----------------------------------- THE BANK OF NOVA SCOTIA, as a Managing Agent and as a Lender By: /s/ Margot C. Bright ------------------------------------ Name: Margot C. Bright ---------------------------------- Title: Authorized Signatory --------------------------------- NATIONSBANK OF TEXAS, N.A., as a Managing Agent and as a Lender By: /s/ David B. James ------------------------------------ Name: David B. James ---------------------------------- Title: Vice President --------------------------------- SOCIETE GENERALE, as a Managing Agent and as a Lender By: /s/ Elaine I. Khalil ------------------------------------ Name: Elaine I. Khalil ---------------------------------- Title: Vice President --------------------------------- The Co-Agents and the Lenders: ----------------------------- CORESTATES BANK, N.A., as a Co-Agent and as a Lender By: /s/ Philip D. Harrison ------------------------------------ Name: Philip D. Harrison ---------------------------------- Title: Assistant Vice President --------------------------------- CREDIT LYONNAIS NEW YORK BRANCH, as a Co-Agent and as a Lender By: /s/ James E. Morris ------------------------------------ Name: James E. Morris ---------------------------------- Title: Vice President --------------------------------- PNC BANK, NATIONAL ASSOCIATION, as a Co-Agent and as a Lender By: /s/ Christopher Chaplin ------------------------------------ Name: Christopher Chaplin ---------------------------------- Title: Banking Officer --------------------------------- MELLON BANK, N.A., as a Co-Agent and as a Lender By: /s/ Stephen R. Viehe ------------------------------------ Name: Stephen R. Viehe ---------------------------------- Title: Vice President --------------------------------- ROYAL BANK OF CANADA, as a Co-Agent and as a Lender By: /s/ Edward Salazar ------------------------------------ Name: Edward Salazar ---------------------------------- Title: Senior Manager --------------------------------- THE CHASE MANHATTAN BANK, as a Co-Agent and as a Lender By: /s/ Ann B. Kerns ------------------------------------ Name: Ann B. Kerns ---------------------------------- Title: Vice President --------------------------------- TORONTO DOMINION (TEXAS), INC., as a Co-Agent and as a Lender By: /s/ Lisa Allison ------------------------------------ Name: Lisa Allison ---------------------------------- Title: Vice President --------------------------------- BANQUE PARIBAS, as a Co-Agent and as a Lender By: /s/ Sonia Isaacs ------------------------------------ Name: Sonia Isaacs ---------------------------------- Title: Vice President --------------------------------- BANK OF AMERICA, as a Co-Agent and as a Lender By: /s/ Shannon T. Ward ------------------------------------ Name: Shannon T. Ward ---------------------------------- Title: Vice President --------------------------------- ABN AMRO BANK N.V., as a Lender By: /s/ James J. Johnston ------------------------------------ Name: James J. Johnston ---------------------------------- Title: Vice President --------------------------------- By: /s/ Mary L. Honda ------------------------------------ Name: Mary L. Honda ---------------------------------- Title: Vice President --------------------------------- MORGAN GUARANTY TRUST COMPANY OF NEW YORK, as a Lender By: /s/ Donald H. Patrick ------------------------------------ Name: Donald H. Patrick ---------------------------------- Title: Vice President --------------------------------- CREDIT AGRICOLE, as a Lender By: /s/ David Bauhl ------------------------------------ Name: David Bauhl ---------------------------------- Title: Head of Corporate Banking --------------------------------- THE DAI-ICHI KANGYO BANK, LTD., as a Lender By: /s/ Masatsugu Morishita ------------------------------------ Name: Masatsugu Morishita ---------------------------------- Title: Joint General Manager --------------------------------- FIRST HAWAIIAN BANK, as a Lender By: /s/ ------------------------------------ Name: ----------------------------------- Title: ---------------------------------- THE FIRST NATIONAL BANK OF MARYLAND, as a Lender By: /s/ W. Blake Hampson ------------------------------------ Name: W. Blake Hampson ---------------------------------- Title: Vice President --------------------------------- BANK OF TOKYO-MITSUBISHI TRUST COMPANY, as a Lender By: /s/ Augustine Chance Jr. ------------------------------------ Name: Augustine Chance Jr. ---------------------------------- Title: Vice President --------------------------------- SAKURA BANK, as a Lender By: /s/ Ofusa Sato ------------------------------------ Name: Ofusa Sato ---------------------------------- Title: Senior Vice President --------------------------------- THE LONG-TERM CREDIT BANK OF JAPAN, LTD., LOS ANGELES AGENCY, as a Lender By: /s/ Genchi Imai ------------------------------------- Name: Genchi Imai ---------------------------------- Title: Joint General Manager --------------------------------- THE INDUSTRIAL BANK OF JAPAN, LIMITED, as a Lender By: /s/ Shusai Nagai ------------------------------------ Name: Shusai Nagai ---------------------------------- Title: General Manager --------------------------------- COLORADO NATIONAL BANK, as a Lender By: /s/ Leslie M. Kelly ------------------------------------ Name: Leslie M. Kelly ---------------------------------- Title: Vice President --------------------------------- THE FUJI BANK, LIMITED, LOS ANGELES AGENCY, as a Lender By: /s/ Nobuhiro Umemura ------------------------------------ Name: Nobuhiro Umemura ---------------------------------- Title: Joint General Manager --------------------------------- EX-99.(B)(1) 3 APPRAISAL BY STRATEGIS FINANCIAL CONSULTING, INC. EXHIBIT 99(b)(1) APPRAISAL REPORT: FAIR MARKET VALUATION OF CABLE TV FUND 12-BCD VENTURE PALMDALE/LANCASTER, CALIFORNIA As of December 31, 1997 Prepared for: JONES INTERCABLE, INC. Englewood, Colorado Prepared by: STRATEGIS FINANCIAL CONSULTING, INC. 1130 Connecticut Avenue, N.W. Suite 325 Washington, D.C. 20036 (202) 530-7500 February 20, 1998 (C) Copyright 1998 Strategis Financial Consulting, Inc. APPRAISAL REPORT: FAIR MARKET VALUATION OF CABLE TV FUND 12-BCD VENTURE PALMDALE/LANCASTER, CALIFORNIA TABLE OF CONTENTS ----------------- I. EXECUTIVE SUMMARY...................................................1 A. Introduction, Purpose, and Methodology............................1 B. Conclusions.......................................................2 II. PURPOSE OF APPRAISAL...............................................3 III. INDUSTRY OVERVIEW.................................................4 A. Historical Background.............................................4 B. Industry Characteristics..........................................6 1. General Background.............................................6 2. Regulation.....................................................8 3. Financial/Economic.............................................9 4. Competition...................................................10 IV. SYSTEM DESCRIPTION................................................13 A. History and Market...............................................13 B. Services.........................................................15 C. Rates............................................................20 D. Subscribers......................................................22 E. System Mileage...................................................23 F. Physical Plant...................................................23 G. Franchises.......................................................24 H. Management.......................................................25 I. Financial History................................................25 V. TOTAL SYSTEM VALUE.................................................26 A. Valuation Procedure and Methods..................................26 B. Discounted Cash Flow Methodology.................................28 1. Net Cash Flow/Return on Equity................................29 2. Net Cash Flow/Return On Investment............................30 3. Cash Flow Projections.........................................30 4. Residual Value................................................32 5. Discount Rates................................................33 TABLE OF CONTENTS ----------------- C. Direct Income Methodology........................................34 D. Value Conclusions................................................35 VI. CONTINGENCIES AND LIMITING CONDITIONS.............................36 VII. STATEMENT OF VALUE...............................................38 VIII. QUALIFICATIONS..................................................39 A. Qualifications of Strategis Financial Consulting, Inc............39 B. Qualifications of Andrew R. Gefen................................40 C. Qualifications of Elisabeth Boehler..............................41 EXHIBITS: A. Valuation Methods and Summary of Values B-1. Profit and Loss/Sources and Uses-Return on Equity - Low Value B-2. Profit and Loss/Sources and Uses-Return on Equity - High Value C-1. Debt Amortization-Return on Equity - Low Value C-2. Debt Amortization-Return on Equity - High Value D. Return on Investment E. Cable Television Subscribers F. Cable Television Service Rates G. Cash Flow Projections H. Capital Expenditures I. Depreciation Schedule J. Assumptions and Inputs APPRAISAL REPORT: FAIR MARKET VALUATION OF CABLE TV FUND 12-BCD VENTURE PALMDALE/LANCASTER, CALIFORNIA I. EXECUTIVE SUMMARY A. INTRODUCTION, PURPOSE, AND METHODOLOGY Strategis Financial Consulting, Inc. was retained by Jones Intercable, Inc. ("Jones") to conduct a fair market valuation as of December 31, 1997, of the Cable TV Fund 12-BCD Venture cable television system serving Palmdale and Lancaster, California (the "System") and several neighboring communities. This appraisal will be used by Jones as an independent estimate of the fair market value of the System as of December 31, 1997, with the resulting value to be used in conjunction with the purchase of the System by Jones. Fair market value is the cash price a willing buyer would give a willing seller in an arm's length transaction in order to complete the sale. It is assumed that both buyer and seller have been informed of all relevant facts and neither is under any compulsion to conclude the transaction. Strategis Financial Consulting also assumes that the tangible assets will remain in their present location and will continue to be employed in their highest and best use, i.e., the delivery of cable television signals to subscribers. Strategis Financial Consulting used five generally accepted cable television valuation methods using the income approach to valuation in establishing the range of total fair market values of the System as a going concern. The first method used a multiple of the past year's operating income derived from comparable asset values of privately-held and publicly-traded cable companies. The second method used a lower multiple of the annualized current month's operating income. The third method applied a slightly lower multiple of next year's projected operating income. The fourth method 1 was a discounted net cash flow analysis in which a purchase price (estimated fair market value) was calculated to achieve a target after-tax return on equity, given particular operating and financing assumptions specific to the System's assets. The fifth method was a discounted cash flow analysis that measured the net present value of the pre-tax operating cash flows (less capital expenditures, plus the residual value of the System) that represent the return on total investment. B. CONCLUSIONS Strategis Financial Consulting's conclusions as to the range of values are based upon information and data supplied by System management, an onsite inspection by a representative of Strategis Financial Consulting of a representative portion of the System and service area, and general cable industry information. In Strategis Financial Consulting's opinion, the data which support the valuations are reliable and sound. Our estimate of the overall fair market value of the System as a business enterprise, free and clear of any encumbrances, is $140,059,000. 2 II. PURPOSE OF APPRAISAL Strategis Financial Consulting, Inc. was retained by Jones Intercable, Inc. ("Jones") to conduct a fair market valuation as of December 31, 1997 of the Cable TV Fund 12-BCD Venture cable television system (the "System"), serving Palmdale and Lancaster, California. This appraisal will be used by Jones as an independent estimate of the fair market value of the System as of December 31, 1997 in conjunction with the purchase of the System by Jones. Fair market value is the cash price a willing buyer would give a willing seller in an arm's length transaction in order to complete the sale. It is assumed that both buyer and seller have been informed of all relevant facts and neither is under any compulsion to conclude the transaction and that the tangible assets will remain in their present location and will continue to be employed in their highest and best use, i.e., the delivery of cable television signals to subscribers. 3 III. INDUSTRY OVERVIEW A. HISTORICAL BACKGROUND Cable television was born in the late 1940s. The first systems were built during the period 1948 to 1964. Most of these early systems were located in rural areas where off-air television reception was limited and picture quality was poor. The cable system basically provided a reception service, offering up to 12 channels with no unique programming. Systems generally enjoyed high levels of penetration, ranging from approximately 70% to 90% of homes passed. During the period 1965 to 1972, cable systems were built in medium-sized markets, importing distant television signals via terrestrial microwave. Rulings by the Federal Communications Commission (FCC) in 1965 and 1966 initiated a regulatory period that lasted two decades. FCC constraints were placed on importing distant signals which inhibited the construction of systems in the largest 100 markets. The U.S. Supreme Court affirmed the FCC's regulatory authority over the cable television industry. The typical cable television system generally remained a 12- to 24- channel reception service with some additional program selections via imported signals. Programming unique to cable television did not exist. Basic penetrations of between 50% and 60% of homes passed were typical for newly-cabled markets. In 1972, the FCC eased its restrictions on signal importation, thus making it feasible for cable television operators to enter the nation's top 100 markets with differentiated product. Satellite delivered premium television services (HBO, Showtime) and Super Stations (WTBS) were introduced in 1975. Cable exclusive networks, such as ESPN, CNN, USA, and others, soon followed. During the mid- to late-1970's, new 24- to 36-channel cable television systems emerged as a result of these communications satellite services. Significant increases in programming options allowed cable systems to attract ample numbers of subscribers to attain operational profitability even where off-air broadcast reception and leisure-time options were above average. The smallest 50 of the top 100 markets were built first, followed by the larger 4 metropolitan areas. Premium, or pay, services were the primary force behind basic penetration gains reaching 30% to 45% of homes passed in these new markets. During the period 1979 to 1983, the remaining major markets were franchised. Cable channel options increased dramatically, both in pay services (Disney, Cinemax, Bravo, Movie Channel) and basic services (MTV, Lifetime, Nickelodeon, regional sports, CNN, and others). Systems with 54 and more channels were built, offering an abundance of program alternatives. Cable system operators instituted price increases for pay services and established elaborate tiering structures to compensate for local constraints on basic service pricing. In newer cable markets, basic penetrations of homes passed began to edge above the 40% level. In 1984, the U.S. Congress approved and President Reagan signed the Cable Communications Policy Act, the first comprehensive cable legislation to be enacted. The most significant feature of the legislation was the ultimate removal of price controls on basic cable service in all but the very smallest cable systems. Discretionary price increases of up to 5% were allowed in 1985 and 1986, and all price controls were removed in January 1987. During the period 1984 to 1992, the mix of cable offerings and pricing changed as growth in pay subscriptions slowed down and local constraints on basic price increases were removed. Basic penetrations continued to rise in major markets, and nationwide penetration reached 60% of homes passed by cable. New revenue sources emerged in the form of pay-per-view, advertising, and home shopping. The industry emphasized programming quality and marketing in order to increase overall penetration levels above the 60% level. The Cable Television Consumer Protection and Competition Act of 1992 was passed on October 5, 1992, which imposed significant new regulations, particularly on subscriber rates and programming packaging. Generally, programming packages were specifically segregated between the "basic tier" and the "satellite programming tier(s)" since the level of regulation was different for each of them. After the new regulations were implemented, the overall cable industry experienced a slight reduction in revenues in 1993, but learned to cope with the new regulations in 1994 and continued its overall 5 growth due to added services, increased subscriber penetrations and repackaging of programming services. The Telecommunications Act of 1996, passed on February 8, 1996, revised the Communications Act of 1934 and the Cable Act of 1992 in fundamental ways. It highlighted competition in local loop telephone, video distribution, and long distance telephone, and de-regulated cable rates beginning in 1999. The goal was to create a competitive telecommunications marketplace. The FCC is in the process of promulgating regulations to implement the law so its effect is still uncertain. B. INDUSTRY CHARACTERISTICS 1. General Background Cable television is a capital intensive business. The right to operate a cable system is authorized by the local government. Substantial up-front capital is required in plant and equipment with second entrants facing even greater capital construction costs due primarily to space limitations on utility poles. A considerable percentage of total operating costs are fixed. Similar to utilities, once cable television has exceeded its break-even requirements, operating margins grow very rapidly and remain fairly predictable from year to year. Unlike most businesses, market analysis in cable is better pursued on the basis of system type than generic geographic or demographic criteria. The classification of a cable system in any individual market tends to reflect the competitive characteristics and demand dynamics resident in that market. In general, there are two primary categories of cable systems--classic and modern. Classic cable systems are those built in locations where reception of over-the- air television signals has historically been poor or limited. They were the earliest systems built, usually serving communities with lower densities (40 to 90 homes per mile), higher subscriber penetrations (60% to 90% of homes passed), lower average revenues per subscriber ($14 to 20 per month), and higher cash flow margins (45% to 65%) relative to modern systems. They usually were built with fewer channels but may have been upgraded at a later time. Expectations for additional 6 growth in these markets tends to be lower than the industry average. The downside risk of investing in these systems is relatively low. Modern cable systems have been constructed since the introduction of pay and other cable-specific programming in the mid-1970's. They tend to serve urban and suburban communities which have higher densities (70 to 120 and more homes per mile), better quality off-air programming, and more extensive competition for consumers' leisure time. These systems were built with broader channel capacity (36 to 54 or more channels), individual subscriber addressability, local programming capability, and the capacity for advertising sales. They tend to have lower penetration (30% to 55%) than classic systems. More rapid growth has been experienced in these systems than in classic systems because of higher household growth rates, more potential for penetration gains, and greater opportunities for ancillary revenues. They are also more risky because of greater off-air competition and higher overall operating costs. It is estimated that 32,255 communities are served throughout the United States by approximately 13,000 operating cable systems. The industry is structured into over 500 MSOs which manage these systems on a wholly-owned, partially-owned, or management contract basis. Economic forces within the industry are causing significant shifts in the ownership of these companies, resulting in increasing consolidation of the industry into the hands of fewer, larger operators. Management characteristics in the industry vary considerably between the MSO headquarters and system operating levels and between different categories of systems. At the corporate level, nearly all of the mid-to-large sized MSOs have a strong representation of professionally trained and field-seasoned management among their ranks. Strong emphasis is placed on strategic, financial planning and operating control functions at this level, and the staffing reflects those requirements. System-level management requirements vary significantly with the category of system under consideration. Classic cable operations primarily require custodial management to oversee customer service and maintenance functions. Strategic, marketing, and financial management tends to be handled at the corporate level. Billing 7 functions are processed through service bureaus specializing in cable systems. Very little management complexity is left at the system level, and the positions tend to be filled accordingly. Large-scale, urban cable operations are much more dynamic and demanding. They require far more sophisticated and versatile management capabilities. The physical plant, budgets, and operating staffs in these systems are considerably larger. More of the strategic, marketing, and financial planning functions are handled locally. The political liaison requirements with the cities are far more complex. Not surprisingly, the caliber of management found in these systems is substantially higher than that found in classic systems, and tends to be professionally trained, financially aware, and politically astute. 2. Regulation Historically, the extent to which the cable television industry has been regulated at the local, state and federal levels, has varied. Following the deregulation of service prices in the 1984 Cable Communications Policy Act, the next several years saw regulatory constraints on cable reduced at both the local and federal levels. Subsequent public perception of the industry as abusing its newly-won pricing freedom and additional consolidation in the industry led to enactment of the Cable Television Consumer Protection and Competition Act of 1992 on October 5, 1992, ushering in a new period of extensive regulation. Many aspects of such regulation are currently the subject of judicial, administrative or legislative proceedings or proposals. This law required the FCC to regulate the operation of cable television systems in a number of areas, including rates that may be charged by systems. On September 1, 1993, rate changes mandated by the FCC under the 1992 Act went into effect for most systems. The FCC implemented a benchmark rate structure that was intended to reduce the federally regulated portion of the average cable subscriber's monthly bill by 10%. Most of the resulting reductions in subscriber bills were attributable to the decline in equipment and additional outlet charges. However, with the mandated reconfiguration of basic service and the expanded basic tier, some 8 subscribers' bills increased. For cable operators, the effects of the rate change were estimated to reduce revenue by 3% to 5% on an industrywide basis. In February 1994, the FCC announced further rate reductions of 7% in order to fully implement the 1992 Cable Act. As an alternative, cable systems were permitted to file Cost of Service showings if implementation of the mandated rate reductions was not feasible. By yearend 1995, widescale telecommunications reform appeared imminent; although, the extent to which or even whether this reform would entail relief from rate regulation was unclear. The likelihood that providers of cable and telephony services would be allowed engage in both businesses was a near certainty, however, the timetable for these changes was uncertain. The Telecommunications Act of 1996, passed on February 8, 1996, revised the Communications Act of 1934 and the Cable Act of 1992 in fundamental ways. It highlighted competition in local loop telephone, video distribution, and long distance telephone, and de-regulated cable rates beginning in 1999. The goal was to create a competitive telecommunications marketplace. The FCC is in the process of promulgating regulations to implement the law so its effect is still uncertain. 3. Financial/Economic Cable's rapid financial growth and expectations for future growth have drawn the attention of the capital markets and helped fuel consolidation within the industry. With most cable markets already franchised and constructed, growth-oriented MSOs turned to acquisitions as their primary method of expansion. A flurry of acquisitions occurred during the period of 1986 through 1989, with the peak being reached in 1988. Most of these acquisitions were made by companies already in the cable business who were seeking national consolidation or regional clustering of cable television systems to produce greater economies of scale and operating efficiencies. The number of transactions decreased in 1990 due to federal government restrictions on banks pertaining to highly leveraged transactions (HLT), uncertainty about the regulatory environment, and other factors. 9 HLT restrictions caused less money to be available for the expansion, upgrading, and trading of cable systems in 1990 and 1991. These restrictions were subsequently removed in June 1992, and while the number of acquisitions increased, they did not reach the same levels seen in the latter half of the 1980's. Passage of the Cable Television Consumer Protection and Competition Act of 1992 and the resultant rate regulation decreased the overall attractiveness of the cable industry to potential investors. During the early- to mid-1990s, several of the largest MSOs formed or were exploring alliances with both long distance and local telephone companies, as both the cable and telephone industries were planning to enter one another's primary lines of business. Simultaneously, a number of mid-sized MSOs were developing exit strategies based on the belief that success in the evolving cable industry would require a critical mass of subscribers and access to substantial amounts of capital. While the development of voice, video and data delivery technologies holds the promise of substantial new services and revenues for the industry, the near- term outlook based on established programming services continues to be positive. Operators expect to continue to increase operating income by continuing to attract more subscribers, exploit current and additional opportunities for ancillary revenues, and improve operating efficiencies. 4. Competition During the next several years, the cable industry may face additional competition which could emerge in the form of system overbuilds, the introduction of new technologies, and entry into the video distribution business by telephone companies. The long-term viability of overbuilds in most cable markets is questionable at best. An overbuilder splits up the subscriber base, incurring higher costs per subscriber and lower margins overall. Many attempted overbuilders have been bought out by the incumbent or have simply gone out of business. The likelihood of a successful overbuild in all but a few markets is very small. 10 Cable television has begun to face increasing competition from new distribution technologies including direct-broadcast satellite (DBS), satellite master antenna television (SMATV), and multichannel multipoint distribution service (MMDS). The ultimate success or failure of any of these television delivery systems will depend largely on a combination of the three interconnected factors of technology, regulation, and economics. Strategis Financial Consulting anticipates that the threat to cable television by these technologies in the next few years will not be material, although various technologies are proving adept at providing services in certain niche markets. MMDS and SMATV typically have little or no effect on mature cable systems, except in large urban areas where a high percentage of homes passed are in multiple dwelling units (MDUs). DBS presents a greater competitive threat. The DBS industry, which is still very young, has thus far focused on building its customer base in areas not wired for cable television. As of 1994, leaders in the DBS industry predicted that between 10% and 20% of television households nationwide would use their service within ten years. However, DBS is hampered by the fact that it does not carry off-air broadcast signals. Telephone companies have long shown an interest in expanding into video distribution. For the most part, this competition has not materialized as a result of existing regulatory restraints and technical limitations. By the end of 1993, there was widespread recognition that technological developments would force dramatic changes in such regulation, as the telecommunications industry entered a consolidation period characterized by mergers, joint ventures, and acquisitions. Fiber optics are increasingly being utilized as telephone and cable companies begin experimenting with `full service' networks with the capability of delivering voice, video and data services to the home. Several of the largest MSOs, in conjunction with telephone companies, have built these experimental systems to determine their feasibility from both technological and marketing perspectives. As of the mid- to late-1990s, the telephone industry is in the experimental stage with regard to using fiber optic cable to deliver services to the home. Cable companies, for their part, are focusing on the delivery of digital program and data services via hybrid 11 fiber and coaxial cable networks. For technological, financial, and regulatory reasons, the full convergence of telecommunications services and service providers is most likely years away. 12 IV. SYSTEM DESCRIPTION A. HISTORY AND MARKET At the time of the appraisal, the System served 63,527 subscribers in Palmdale, Lancaster, Edwards Air Force Base ("Edwards AFB"), and adjacent portions of Los Angeles County. The provision of cable service was governed by four franchise agreements held with the County of Los Angeles, the cities of Palmdale and Lancaster, and Edwards AFB. As of December 31, 1997, the weighted average remaining life of the four franchise agreements was 6.3 years. Palmdale is located in the Antelope Valley of southern California, approximately 60 freeway miles north of downtown Los Angeles. As of 1996, the City of Palmdale had a population of roughly 112,000. Situated just south of Edwards AFB, the Palmdale area has had a long-history of activity in the aerospace industry. Major employers in the area included defense contractors such as Boeing (aerospace) and Lockheed (aerospace), Edwards AFB, and the Federal Aviation Administration Air Traffic Control Center. Other employers in the area included Lance Campers (manufacturing) as well as warehouse and distribution facilities for Michael's Arts and Crafts and Rite Aid Pharmacies. Many area residents also commuted to downtown Los Angeles, the San Fernando Valley, and surrounding areas, which were also accessible via commuter trains. During the 1980s the Palmdale area was the fastest-growing part of California. Economic development in the Palmdale area declined due to the recession of the early 1990s; but, according to System management, the local economy had largely recovered from the recession and was beginning to expand again. The unemployment rate in the City of Palmdale was 5.5% in December 1997. This rate compared favorably with Los Angeles county unemployment of 5.8%, was the same as the statewide unemployment rate of 5.5%, but was somewhat higher than the national unemployment rate of 4.7% during this period, according to the U.S. Bureau of Labor Statistics. 13 At the time of the appraisal, Direct Broadcast Satellite (DBS) service was available in the Palmdale service area, with EchoStar and DirecTV being the predominant service providers in the market. According to System management, as of December 1997, the number of cable subscribers switching to DBS had significantly slowed from a year earlier. System management estimated that, as of December 31, 1997, DBS operators had a combined penetration of approximately 2.32% of homes in the service area. According to System management, the System did not have any multichannel multipoint distribution service (MMDS, or wireless cable) competitor. However, Pacific Telesis, the Regional Bell Operating Company in the region, operated an MMDS system in nearby communities and could in the future provide MMDS competition in the Palmdale service area, though System management was not aware of any current plans for them to do so. Table I presents demographic data published in Marketing Statistics' Demographics USA 1997 for Los Angeles County. Data for population, households, and Effective Buying Income (EBI) were estimated for 1996 and projected for 2001. Also presented, for comparison purposes, are data for the state of California and the nation as a whole. Los Angeles County, which encompasses the service area, had a population of approximately 9,410,300 in 1996 and its population was forecast to grow at an annual rate of 0.30% through 2001. This growth rate was lower than statewide and nationwide population growth forecasted for the period of 0.88% and 0.84%, respectively. Average household EBI in Los Angeles County was $43,494 in 1995. While this figure was higher than the national average household EBI of $42,191, it was lower than the statewide figure for California of $44,430. Growth in household EBI was forecast at 2.57% annually in Los Angeles County, and at 2.56% and 2.97% throughout California and the U.S. as a whole, respectively. This information is also presented in Table I. 14
TABLE I Annual 1996 2001 Growth Rate Estimate Projection 1996-2001 -------------- -------------- ----------- Los Angeles County, CA - ---------------------- Total Population 9,410,300 9,550,700 0.30% Total Households 3,069,900 3,077,800 0.05% Median Age 32.3 N/A Effective Buying Income (EBI) Total EBI (000's) $ 133,522,302 $ 151,954,394 2.62% Average Household EBI $ 43,494 $ 49,371 2.57% State of California - ------------------- Total Population 32,686,800 34,149,600 0.88% Total Households 11,085,300 11,477,900 0.70% Median Age 33.3 N/A Effective Buying Income (EBI) Total EBI (000's) $ 492,516,991 $ 578,578,779 3.27% Average Household EBI $ 44,430 $ 50,408 2.56% United States of America - ------------------------ Total Population 267,540,600 279,027,700 0.84% Total Households 98,635,500 103,870,800 1.04% Median Age 34.9 N/A Effective Buying Income (EBI) Total EBI (000's) $4,161,512,384 $5,072,856,995 4.04% Average Household EBI $ 42,191 $ 48,838 2.97%
B. SERVICES Tables II (A)-(B) present programming services offered to System subscribers as of the appraisal date. The vast majority of subscribers, except those on Edwards AFB, were able to receive the 65 channel program line-up shown in Table II (A). Limited basic service was comprised of 27 channels, 16 of which were local off-air broadcast signals, two of which carried local access programming, and ten of which were satellite delivered services. One local origination service and one satellite service shared one channel. Expanded basic service encompassed 30 satellite delivered services carried on channels 36-65. Premium services available included Cinemax, HBO, The Movie Channel, The Disney Channel and Showtime. Also offered were two general audience movie/event pay-per-view (PPV) services and The Playboy Channel and Adult Vision for adults.
TABLE II (A) PALMDALE/LANCASTER/LOS ANGELES COUNTY CABLE (Off-Air) NAME OR Channels CALL LETTERS SOURCE DESCRIPTION - -------------------------------------------------------------------------------------------------------- 2 (2) KCBS Los Angeles, CA CBS - -------------------------------------------------------------------------------------------------------- 3 Jones Intercable News/ Local/ Local News/ Odyssey Satellite Religious - -------------------------------------------------------------------------------------------------------- 4 (4) KNBC Los Angeles, CA NBC - -------------------------------------------------------------------------------------------------------- 5 (5) KTLA Los Angeles, CA WBN/Independent - -------------------------------------------------------------------------------------------------------- 6 Great American Country Satellite Country Music Videos - -------------------------------------------------------------------------------------------------------- 7 (7) KABC Los Angeles, CA ABC - -------------------------------------------------------------------------------------------------------- 8 (28) KCET Los Angeles, CA PBS - -------------------------------------------------------------------------------------------------------- 9 (9) KCAL Los Angeles, CA Independent - -------------------------------------------------------------------------------------------------------- 10 Prevue Guide Satellite Pay Movie Previews - -------------------------------------------------------------------------------------------------------- 11 (11) KTTV Los Angeles, CA Fox - -------------------------------------------------------------------------------------------------------- 12 Knowledge TV Satellite Educational - -------------------------------------------------------------------------------------------------------- 13 (13) KCOP Los Angeles, CA UPN/Independent - -------------------------------------------------------------------------------------------------------- 14 (64) KHIZ Barstow, CA Independent - -------------------------------------------------------------------------------------------------------- 15 Antelope Valley Buyers Network Satellite Home Shopping - -------------------------------------------------------------------------------------------------------- 16 WTBS Satellite Independent - Atlanta, GA - -------------------------------------------------------------------------------------------------------- 17 (58) KLCS Los Angeles, CA PBS - -------------------------------------------------------------------------------------------------------- 18 (18) KSCI San Bernadino, CA Independent - -------------------------------------------------------------------------------------------------------- 19 Trinity Broadcasting Network Satellite Religious - -------------------------------------------------------------------------------------------------------- 20 C-SPAN Satellite U.S. Senate Coverage - -------------------------------------------------------------------------------------------------------- 21 Government Access Local Local - -------------------------------------------------------------------------------------------------------- 22 (22) KWHY Los Angeles, CA Independent - -------------------------------------------------------------------------------------------------------- 23 Jones Home Theatre 1 SATELLITE PAY-PER-VIEW MOVIES - -------------------------------------------------------------------------------------------------------- 24 The Playboy Channel/ SATELLITE/ PAY ADULT MOVIES/ Adult Vision SATELLITE PAY ADULT MOVIES - -------------------------------------------------------------------------------------------------------- 25 Jones Home Theatre 2 SATELLITE PAY-PER-VIEW MOVIES - -------------------------------------------------------------------------------------------------------- 26 HBO SATELLITE PAY MOVIES, SPECIALS - -------------------------------------------------------------------------------------------------------- 27 Cinemax SATELLITE PAY MOVIES - -------------------------------------------------------------------------------------------------------- 28 The Disney Channel SATELLITE Pay Movies, Family Shows - -------------------------------------------------------------------------------------------------------- 29 Showtime SATELLITE PAY MOVIES, SPECIALS - -------------------------------------------------------------------------------------------------------- 30 The Movie Channel SATELLITE PAY MOVIES - -------------------------------------------------------------------------------------------------------- 31 KHSC Ontario, CA Home Shopping - -------------------------------------------------------------------------------------------------------- 32 (62) KRCA Riverside, CA Independent - --------------------------------------------------------------------------------------------------------
16
TABLE II (A) CONTINUED PALMDALE/LANCASTER/LOS ANGELES COUNTY CABLE (Off-Air) NAME OR Channels CALL LETTERS SOURCE DESCRIPTION - -------------------------------------------------------------------------------------------------------- 33 (52) KVEA Los Angeles, CA Telemundo - -------------------------------------------------------------------------------------------------------- 34 (34) KMEX Los Angeles, CA Univision - -------------------------------------------------------------------------------------------------------- 35 (38) K38CW Palmdale Low Power Independent - -------------------------------------------------------------------------------------------------------- 36 E! Entertainment Television Satellite Entertainment Information - -------------------------------------------------------------------------------------------------------- 37 American Movie Classics Satellite Classic Movies - -------------------------------------------------------------------------------------------------------- 38 CNBC Satellite Consumer News and Business - -------------------------------------------------------------------------------------------------------- 39 CNN Satellite 24-Hour News - -------------------------------------------------------------------------------------------------------- 40 Fox Sports West 2 Satellite Regional Sports Coverage - -------------------------------------------------------------------------------------------------------- 41 Fox Sports West Satellite Regional Sports Coverage - -------------------------------------------------------------------------------------------------------- 42 ESPN Satellite 24-Hour Sports - -------------------------------------------------------------------------------------------------------- 43 USA Network Satellite Entertainment, Movies - -------------------------------------------------------------------------------------------------------- 44 TNT Satellite Movies, Sports, Variety - -------------------------------------------------------------------------------------------------------- 45 TNN Satellite Country Music Videos - -------------------------------------------------------------------------------------------------------- 46 Lifetime Satellite Women's Programming, Variety - -------------------------------------------------------------------------------------------------------- 47 The Family Channel Satellite Family Programming - -------------------------------------------------------------------------------------------------------- 48 Nickelodeon Satellite Children's Programming - -------------------------------------------------------------------------------------------------------- 49 Cartoon Network Satellite Cartoons - -------------------------------------------------------------------------------------------------------- 50 A&E Satellite Biographies, Mysteries, Specials - -------------------------------------------------------------------------------------------------------- 51 Discovery Channel Satellite Nature, Science, Technology - -------------------------------------------------------------------------------------------------------- 52 BET Satellite Black Entertainment - -------------------------------------------------------------------------------------------------------- 53 MTV Satellite Music Videos, Variety - -------------------------------------------------------------------------------------------------------- 54 VH-1 Satellite Music Videos - -------------------------------------------------------------------------------------------------------- 55 Comedy Central Satellite Comedy Programming - -------------------------------------------------------------------------------------------------------- 56 The Food Network Satellite Culinary Programming - -------------------------------------------------------------------------------------------------------- 57 MSNBC Satellite News, Computer Information - -------------------------------------------------------------------------------------------------------- 58 ESPN 2 Satellite 24-Hour Sports - -------------------------------------------------------------------------------------------------------- 59 The History Channel Satellite Movies, Documentaries - -------------------------------------------------------------------------------------------------------- 60 Eye On People Satellite Entertainment, Interviews - -------------------------------------------------------------------------------------------------------- 61 Sci-Fi Channel Satellite Science Fiction - -------------------------------------------------------------------------------------------------------- 62 Animal Planet Satellite Nature, Pets, Wild Creatures - -------------------------------------------------------------------------------------------------------- 63 The Learning Channel Satellite Educational - -------------------------------------------------------------------------------------------------------- 64 Galavision Satellite Spanish Language Programming - -------------------------------------------------------------------------------------------------------- 65 The Weather Channel Satellite 24-Hour Weather - -------------------------------------------------------------------------------------------------------- 99 Product Information Network Satellite Infomercials - --------------------------------------------------------------------------------------------------------
17 Table II (B) presents the 68 channel line-up available to the approximately 2,070 subscribers served from the Edwards AFB hub site, which was fed by microwave from the headend. These subscribers received programming similar to that offered directly from the headend. The limited basic line-up was the same with the exception of channel 6, which offered the local Command Channel in place of Great American Country, and channel 21, which offered WGN in lieu of Government access . The System's expanded basic service was comprised of 33 satellite-delivered services, while available premium and PPV services were the same as those offered from the headend.
TABLE II (B) EDWARDS AIR FORCE BASE CABLE (Off-Air) Name or Channels CALL LETTERS SOURCE DESCRIPTION - ------------------------------------------------------------------------------------------------------ 2 (2) KCBS Los Angeles, CA CBS - -------------------------------------------------------------------------------------------------------- 3 Jones Intercable News/ Local/ Local News/ Odyssey Satellite Religious - -------------------------------------------------------------------------------------------------------- 4 (4) KNBC Los Angeles, CA NBC - -------------------------------------------------------------------------------------------------------- 5 (5) KTLA Los Angeles, CA WBN/Independent - -------------------------------------------------------------------------------------------------------- 6 Command Channel Local Local - -------------------------------------------------------------------------------------------------------- 7 (7) KABC Los Angeles, CA ABC - -------------------------------------------------------------------------------------------------------- 8 (28) KCET Los Angeles, CA PBS - -------------------------------------------------------------------------------------------------------- 9 (9) KCAL Los Angeles, CA Independent - -------------------------------------------------------------------------------------------------------- 10 Prevue Guide Satellite Pay Movie Previews - -------------------------------------------------------------------------------------------------------- 11 (11) KTTV Los Angeles, CA Fox - -------------------------------------------------------------------------------------------------------- 12 Knowledge TV Satellite Educational - -------------------------------------------------------------------------------------------------------- 13 (13) KCOP Los Angeles, CA UPN/Independent - -------------------------------------------------------------------------------------------------------- 14 (64) KHIZ Barstow, CA Independent - -------------------------------------------------------------------------------------------------------- 15 Antelope Valley Buyers Network Satellite Home Shopping - -------------------------------------------------------------------------------------------------------- 16 WTBS Satellite Independent - Atlanta, GA - -------------------------------------------------------------------------------------------------------- 17 (58) KLCS Los Angeles, CA PBS - -------------------------------------------------------------------------------------------------------- 18 (18) KSCI San Bernadino, CA Independent - -------------------------------------------------------------------------------------------------------- 19 Trinity Broadcasting Network Satellite Religious - -------------------------------------------------------------------------------------------------------- 20 C-SPAN Satellite U.S. Senate Coverage - -------------------------------------------------------------------------------------------------------- 21 WGN Satellite Independent - Chicago - -------------------------------------------------------------------------------------------------------- 22 (22) KWHY Los Angeles, CA Independent - -------------------------------------------------------------------------------------------------------- 23 Jones Home Theatre 1 SATELLITE PAY-PER-VIEW MOVIES - -------------------------------------------------------------------------------------------------------- 24 The Playboy Channel/ SATELLITE/ PAY ADULT MOVIES/ Adult Vision SATELLITE PAY ADULT MOVIES - -------------------------------------------------------------------------------------------------------- 25 Jones Home Theatre 2 SATELLITE PAY-PER-VIEW MOVIES - -------------------------------------------------------------------------------------------------------- 26 HBO SATELLITE PAY MOVIES, SPECIALS - -------------------------------------------------------------------------------------------------------- 27 Cinemax SATELLITE PAY MOVIES - -------------------------------------------------------------------------------------------------------- 28 The Disney Channel SATELLITE PAY MOVIES, FAMILY SHOWS - ------------------------------------------------------------------------------------------------------
18
TABLE II (B) CONTINUED EDWARDS AIR FORCE BASE CABLE (Off-Air) Name or Channels CALL LETTERS SOURCE DESCRIPTION - -------------------------------------------------------------------------------------------------------- 29 Showtime SATELLITE PAY MOVIES, SPECIALS - -------------------------------------------------------------------------------------------------------- 30 The Movie Channel Satellite Pay Movies - -------------------------------------------------------------------------------------------------------- 31 KHSC Ontario, CA Home Shopping - -------------------------------------------------------------------------------------------------------- 32 (62) KRCA Riverside, CA Independent - -------------------------------------------------------------------------------------------------------- 33 (52) KVEA Los Angeles, CA Telemundo - -------------------------------------------------------------------------------------------------------- 34 (34) KMEX Los Angeles, CA Univision - -------------------------------------------------------------------------------------------------------- 35 (38) K38CW Palmdale Low Power Independent - -------------------------------------------------------------------------------------------------------- 36 E! Entertainment Television Satellite Entertainment Information - -------------------------------------------------------------------------------------------------------- 37 American Movie Classics Satellite Classic Movies - -------------------------------------------------------------------------------------------------------- 38 CNBC Satellite Consumer News and Business - -------------------------------------------------------------------------------------------------------- 39 CNN Satellite 24-Hour News - -------------------------------------------------------------------------------------------------------- 40 Fox Sports West 2 Satellite Regional Sports Coverage - -------------------------------------------------------------------------------------------------------- 41 Fox Sports West Satellite Regional Sports Coverage - -------------------------------------------------------------------------------------------------------- 42 ESPN Satellite 24-Hour Sports - -------------------------------------------------------------------------------------------------------- 43 USA Network Satellite Entertainment, Movies - -------------------------------------------------------------------------------------------------------- 44 TNT Satellite Movies, Sports, Variety - -------------------------------------------------------------------------------------------------------- 45 TNN Satellite Country Music Videos - -------------------------------------------------------------------------------------------------------- 46 Lifetime Satellite Women's Programming, Variety - -------------------------------------------------------------------------------------------------------- 47 The Family Channel Satellite Family Programming - -------------------------------------------------------------------------------------------------------- 48 Nickelodeon Satellite Children's Programming - -------------------------------------------------------------------------------------------------------- 49 Cartoon Network Satellite Cartoons - -------------------------------------------------------------------------------------------------------- 50 A&E Satellite Biographies, Mysteries, Specials - -------------------------------------------------------------------------------------------------------- 51 Discovery Channel Satellite Nature, Science, Technology - -------------------------------------------------------------------------------------------------------- 52 BET Satellite Black Entertainment - -------------------------------------------------------------------------------------------------------- 53 MTV Satellite Music Videos - -------------------------------------------------------------------------------------------------------- 54 VH-1 Satellite Music Videos, Movies - -------------------------------------------------------------------------------------------------------- 55 Comedy Central Satellite Comedy Programming - -------------------------------------------------------------------------------------------------------- 56 The Food Network Satellite Culinary Programming - -------------------------------------------------------------------------------------------------------- 57 MSNBC Satellite News, Computer Information - -------------------------------------------------------------------------------------------------------- 58 ESPN 2 Satellite 24-Hour Sports - -------------------------------------------------------------------------------------------------------- 59 The History Channel Satellite Movies, Documentaries - -------------------------------------------------------------------------------------------------------- 60 Eye On People Satellite Entertainment, Interviews - -------------------------------------------------------------------------------------------------------- 61 Sci-Fi Channel Satellite Science Fiction - -------------------------------------------------------------------------------------------------------- 62 Animal Planet Satellite Nature, Pets, Wild Creatures - -------------------------------------------------------------------------------------------------------- 63 The Learning Channel Satellite Educational - -------------------------------------------------------------------------------------------------------- 64 Galavision Satellite Spanish Language Programming - -------------------------------------------------------------------------------------------------------- 65 The Weather Channel Satellite 24-Hour Weather - -------------------------------------------------------------------------------------------------------- 66 NASA Select Satellite NASA Programming - -------------------------------------------------------------------------------------------------------- 67 Headline News Satellite 24-Hour News - -------------------------------------------------------------------------------------------------------- 68 Great American Country Satellite Country Music Videos - -------------------------------------------------------------------------------------------------------- 99 Product Information Network Satellite Infomercials - --------------------------------------------------------------------------------------------------------
19 C. RATES The average monthly programming rates, equipment rental rates, and installation charges to subscribers for the preceding services as of the date of the appraisal, are outlined in Table III. Comparison data for basic service, pay services, and monthly revenue per subscriber were taken from The Strategis Group's publication Cable Trends: 1997, which presents year end 1996 operating and financial data. As shown in Table III, subscribers paid between $11.00 and $13.81 per month for limited basic service and between $6.00 and $12.71 for expanded basic service. Most of the subscribers to the System were served from the Palmdale headend and paid a combined basic and expanded basic rate that was slightly higher, at $26.52, than the average combined basic and expanded basic rate for the nation, which was $25.84 as of 1996. A la carte pay service rates throughout the System ranged from $6.00 for Cinemax, Showtime and The Movie Channel, and $8.00 for The Disney Channel to $10.00 for HBO. Packages of multiple premium services were available at reduced rates. On a nationwide basis, the average revenue per pay unit was $7.77 in 1996, which as higher than the System's average revenue per pay unit of $6.46 in 1997. PPV general audience movies were $3.95 throughout the System. Playboy movies were $6.95, while Adult Vision movies were $5.95. Events were priced individually. Addressable Pioneer converter rentals were $2.15 per month throughout the System, while the non-addressable converter monthly rental rate was $0.66. Installation charges throughout the System were $25.39 for subscribers in pre- wired homes, $35.54 in unwired homes, and $25.39 for reconnection of service. Installation fees for subscribers in Edwards AFB military housing and dormitories were $29.95 and $15.00, respectively. Average revenue per subscriber per month on a nationwide basis was $35.46 as of the end of 1996, according to The Strategis Group research. This figure includes revenues from basic, pay, and PPV services, as well as local advertising, equipment 20 rental, and miscellaneous income. During the twelve months prior to December 31, 1997, the System generated monthly average revenue of $39.27 per subscriber, which was higher than the nationwide average for 1996.
TABLE III EDWARDS UNITED PALMDALE AIR FORCE BASE STATES1 ---------------------------------------------------- Basic Service $13.81 $11.00 N/A Expanded Basic 12.71 6.00 N/A Combined Basic and Expanded Basic $26.52 $17.00 $25.84 ---------------------------------------------------- Pay Services (a la carte) N/A HBO $10.00 $10.00 Disney $ 8.00 $ 8.00 Cinemax $ 6.00 $ 6.00 The Movie Channel $ 6.00 $ 6.00 Showtime $ 6.00 $ 6.00 Monthly Revenue Per Pay Unit $ 6.46 $ 7.77 ---------------------------------------------------- Pay Per View Movies General Audience $ 3.95 $ 3.95 Playboy $ 6.95 $ 6.95 Adult $ 5.95 $ 5.95 N/A ---------------------------------------------------- Converters Addressable $ 2.15 $ 2.15 Non-addressable $ 0.66 $ 0.66 N/A ---------------------------------------------------- Installation Charges: N/A Pre-wired Home $25.39 $25.39 Unwired Home $35.54 $35.54 ---------------------------------------------------- Monthly Revenue Per Subscriber $ 39.27 $ 35.46 ----------------------------------------------------
/1/ Source: The Strategis Group's Cable Trends: 1997 21 D. SUBSCRIBERS Table IV presents the number of homes passed, basic subscribers, expanded basic subscribers, pay units, converter rentals, and addressable homes for the System as of December 31, 1997. These figures are compared with similar figures for the United States as a whole, taken from The Strategis Group's Cable Trends: 1997. At the time of the appraisal, the System's basic penetration rate, at 72.2% of homes passed, was higher than the corresponding rate for the nation of 65.8%. Pay penetration for the System stood at 67.3%, which was below the national average of 76.4%. Addressable home penetration for the System, at 60.8%, was well above the national average of 48.1%.
TABLE IV SYSTEM UNITED STATES/1/ ---------------------------------------- Homes Passed 88,035 95,500,000 --------------------------------------- Basic Subscribers 63,527 62,800,000 % of Homes Passed 72.2% 65.8% --------------------------------------- Expanded Basic Subscribers 56,647 N/A % of Basic Subscribers 89.2% N/A --------------------------------------- Total Pay Units 42,733 48,000,000 % of Basic Subscribers 67.3% 76.4% --------------------------------------- Converters 55,218 N/A % of Basic Subscribers 86.9% N/A --------------------------------------- Addressable Homes 38,619 30,200,000 % of Basic Subscribers 60.8% 48.1% ---------------------------------------
/1/ Source: The Strategis Group's Cable Trends: 1997 22 E. SYSTEM MILEAGE According to System management, mileage figures for the System are based on estimates from System maps. Since a complete walk-out of the current System would be prohibitively expensive, Strategis Financial Consulting used the following approach to corroborate the plant mileage: 1. Interviewed knowledgeable System personnel to ascertain the source and reliability of the mileage estimates. 2. Noted the configuration of the System on area maps and the existence and condition of plant in a representative portion of the area served by the System. 3. Related average density of the System to general observations of densities while inspecting the System and service area. Table V presents management's best estimate of the number of route miles of plant as represented by total strand and trench in the System as of the appraisal date. Coaxial mileage was approximately 36.9% aerial and 63.1% underground. Approximately 7.7% of total plant miles were fiber optic cable. Based upon the above procedures and cost limitations, these estimates appear to be reasonable.
TABLE V Aerial Underground Total ------------- --------------- ----------- Coaxial Miles 373.3 639.5 1012.8 Fiber Optic Miles 80.0 4.0 84.0
F. PHYSICAL PLANT As of the valuation date, the System's administrative offices were located at 41551 10th Street West, Palmdale, California. The headend was located south of Lancaster, on a hill near Soledad Pass. The System maintained one headend and eight microwave hub sites of which one was currently in use, and the other seven were maintained for use as auxiliary standby units. 23 Headend equipment from a variety of manufacturers was in use, however, items made by Scientific-Atlanta (S/A) were predominant. Among these items were S/A 6150 signal processors, 6350 modulators, 6270 demodulators, and 9640 receivers. Other equipment in use included Pioneer BE-2520, BE-3110, and BE- 4140 digital multimode encoders, DX DIR-647 receivers, General Instruments DSR- 4500 receivers, and M/A-Com Videociphers II units. For the fiber optic portion of the distribution plant, the System used Philips 2105-1009 transmitters and a Siecor Lightguide Shelf. Microwave equipment included a Hughes AML 65-Channel High Power microwave system. Off-air and microwave antennas were mounted on four self-supporting towers ranging from 35 feet to 65 feet tall. Four 4.5-meter, one 5-meter and one 6- meter S/A satellite dishes were used for program reception, and emergency power was provided by a Fairbanks and Morse 50 kVa propane generator. As of the appraisal date, the distribution plant capacity was 500 MHz, with a 70-channel capacity. Approximately 30% of the System had recently undergone a rebuild and upgrade to 550 MHz capacity. As of the appraisal date, the plant was in very good condition. Overall, the System passed approximately 88,035 homes with an estimated 1096.7 miles of plant, for an overall density of 80 homes per mile. Addressable homes totaled 38,563 in the System, and there were a total of 55,218 converters in the field. Converters provided to subscribers included Pioneer addressable models, and Panasonic standard set-top models. G. FRANCHISES As of December 31, 1997, the System operated under a total of four franchise agreements with different local government authorities. Table VI identifies each agreement and its expiration date. As of the appraisal date, the weighted average remaining life of the franchise agreements was 6.3 years. 24
TABLE VI Franchise Expiration - --------- ------------------- Lancaster May 1, 2001 Los Angeles County October 1, 2005 Palmdale March 1, 2007 Edwards Air Force Base October 1, 2004 Weighted Average Remaining Life 6.3 Years
H. MANAGEMENT At the time of the appraisal, the System operated with approximately 125 full-time, 10 part-time and 7 part-time temporary employees. The largest group of employees was in Customer Service, with 43 people, including part-time and temporary help. The technical department had 24 employees; there were an additional 12 installers, 9 construction people, and 11 studio technicians. Advertising Sales and Marketing were handled by a staff of 16, plus three direct salespeople. Strategis Financial Consulting's representative met and spoke extensively with the System's General Manager and Engineering Manager. Both were experienced industry professionals and appeared to be well-versed on the System's characteristics, including strengths and weaknesses. I. FINANCIAL HISTORY Unaudited financial statements for the year ending December 31, 1996, showed that the System earned revenues of $27,990,638. Operating expenses totaled $15,431,430, which resulted in operating income of $12,559,208 and an operating profit margin of 44.9%. Unaudited statements for the year ending December 31, 1997 indicated that operating profits of $13,574,648 were generated on revenues of $29,890,452 for an operating margin of 45.4%. 25 V. TOTAL SYSTEM VALUE Strategis Financial Consulting has estimated the fair market value for the System as a business enterprise to be $140,059,000, as of December 31, 1997. Fair market value is the cash price a willing buyer would give a willing seller in an arm's length transaction in order to complete the sale. It is assumed that both buyer and seller have been informed of all relevant facts and neither is under any compulsion to conclude the transaction and that the tangible assets will remain in their present location and will continue to be employed in their highest and best use, i.e., the delivery of cable television signals to subscribers. A. VALUATION PROCEDURE AND METHODS Strategis Financial Consulting used the following basic methodology to determine the overall fair market value of the System: 1. Performed an onsite review to observe a representative portion of the market and homes passed, reviewed the number of subscribers, and determined the quality and attractiveness of the services provided. 2. Made inquiries of management to ascertain and/or verify items relevant to the appraisal. 3. Estimated the availability of additional homes passed and the probability of future growth. 4. Reviewed selected financial records and other documents to verify certain financial data. 5. Estimated the expected changes in operations that a buyer most likely would institute. 6. Applied generally accepted methods of estimating the fair market value of the entity as a whole. A business valuation typically is performed using one or more of three approaches: the cost approach, the market approach, and the income approach. Since 26 the System will be relying to a large degree on intangible assets to generate income, the cost approach is not appropriate in this case. The market, or comparable sales, approach has not been used because of the difficulty in choosing sales that reflect the same profitability, size, and growth as the System. Therefore, this valuation has been based on the income approach to valuation. The income approach is the best approach to valuing the System because it reflects the future earnings potential of the System. There are various established methods of determining a business entity's total fair market value using the income approach. The most commonly accepted methods are as follows: 1. Capitalization of projected net cash flow. 2. Capitalization of single-year operating profit. 3. Dividend capitalization. 4. Market price-to-book equity. 5. Price-earnings multiple. Of the methods listed above, Strategis Financial Consulting normally relies primarily upon the capitalization of projected net cash flow, or "discounted cash flow" approach, to estimate total value. Strategis Financial Consulting generally favors discounted cash flow methodology because it considers the broadest range of factors that will affect both the present and future income, and therefore value, of a cable television system. Accordingly, Strategis Financial Consulting usually gives greater consideration to the discounted cash flow methods in its final judgment concerning the fair market value of a cable television system. Strategis Financial Consulting has prepared two discounted cash flow valuations for the System, one which analyzes the projected return on equity and one which analyzes the projected return on investment. Strategis Financial Consulting also has considered the second general methodology listed above, i.e., capitalization of operating profit, in conducting its valuation of the System. The methodologies are described in 27 Parts V-B and V-C of this report. The values for the overall fair market value of the System are presented in Exhibit A. The remaining methods listed above, although widely used in other industries, generally are inappropriate for valuing cable television systems. Dividend capitalization, based upon actual dividends or capacity, usually is irrelevant since few publicly-traded cable companies pay dividends and earnings (which should be reflective of a dividend capacity) are not reflective of the capacity to generate operating income. A comparison of market price-to-book equity also is not valid usually since book equity varies widely from one company to another as to how much intangible and tangible value is reflected on the books. Finally, an analysis of price-earnings multiples generally is not appropriate because they also vary widely within the industry and are not representative of the financial position of most cable systems. B. DISCOUNTED CASH FLOW METHODOLOGY Strategis Financial Consulting has generated two discounted cash flow models to arrive at a total System value. The return-on-equity model is based upon a hypothetical purchase price that would achieve a target after-tax return on equity based on the present value of the projected net cash flows. The return-on-investment model measures the net present value of the projected pre- tax operating cash flows, less capital expenditures, plus the residual value of the System, that represent the return on total investment. Both the return-on-equity and return-on-investment methods are dependent upon projections of the System's future net cash flow and residual value and on selection of an appropriate discount rate. Strategis Financial Consulting's calculations are based on detailed projections of a variety of factors which will affect future cash flow including housing growth, plant mileage, basic and pay subscriber growth, subscriber rates, operating expenditures, and capital expenditures. The projections and assumptions used in Strategis Financial Consulting's discounted cash flow models are set forth in Exhibits E, F, G, and H. Exhibit E provides details of Strategis Financial Consulting's projections for plant mileage, housing, and subscriber growth. Exhibit F shows the rates subscribers 28 were charged at the time of the appraisal for various services and Strategis Financial Consulting's projections for future growth. Exhibit G lists revenues and operating expenses for all years throughout the projection period, and Exhibit H details capital expenditures anticipated for the System. In addition, Exhibit J includes miscellaneous assumptions such as the average remaining life of the franchises under which the System operates, tax rates, the net fair market value of beginning tangible assets, the breakdown between debt and equity and the interest rate anticipated on the debt, and the multiples and discount rates used in the various appraisal methods. Strategis Financial Consulting's determination and use of these factors is discussed further below. 1. Net Cash Flow/Return on Equity This method involves the use of multiple year projected operations for the System and a predetermined target after-tax return on equity for a hypothetical outside buyer. The seven-year projection period is based on the average remaining franchise life of the System. A complete discussion of the selection of the projection period is provided in Part V-B-3 of this report. Based on the use of typical debt-to-equity ratios and debt services, Strategis Financial Consulting has made certain assumptions concerning the capital structure that a "typical, prudent outside buyer" might experience as well as the probable interest rates that would be applicable in connection with any debt financing that might be incurred, as shown in Exhibit J. To calculate future cash flows, Strategis Financial Consulting has projected future subscribers, revenues, operating expenses, and capital expenditures. Strategis Financial Consulting has then tested various hypothetical purchase prices, i.e., potential fair market values, to determine a value that yields the desired return on equity, as shown in Exhibits C-1 and C-2. Using the return-on-equity model, Strategis Financial Consulting has generated low and high cash flow projections for the System shown in Exhibits B- 1 and B-2. The difference between the two projections reflects the range of potential returns on equity 29 that a buyer could reasonably expect to realize depending upon the initial purchase price paid for the System. 2. Net Cash Flow/Return On Investment This discounted cash flow method, similar to the preceding method, is used to measure the net present value of the pre-tax operating cash flow, less capital expenditures, plus the residual value of the System, that represent the return on the total investment rather than that which could result from an assumed purchase with a predetermined debt-to-equity ratio. To calculate future cash flows, Strategis Financial Consulting has used the same projections for future subscribers, revenues, operating expenses, and capital expenditures as in the return-on-equity method. The projected cash flows for the System, plus the last-year residual value of the System, less capital expenditures, are then discounted to their present value using an acceptable discount factor based on the weighted average cost of money, as shown in Exhibit J. Strategis Financial Consulting has used the return on investment model, like the return on equity model, to generate low and high values for the System. These values, shown in Exhibit D, represent the present value of the future pre-tax operating cash flows and reflect more conservative and more optimistic assumptions, respectively, as to the likely return on investment that the System will generate over time. 3. Cash Flow Projections There are many factors that affect the projections of a specific cable system's cash flow. With respect to the System, Strategis Financial Consulting has analyzed the franchise area, the costs incurred to meet franchise obligations, the length of the franchise period, the degree of competition, and the historic results of the System's operations. Strategis Financial Consulting also has examined factors that affect the industry, such as possibility of regulation, competitive threats, rapid technical changes, and the development of additional programming services. These factors have been incorporated into Strategis Financial Consulting's projections of the System's future cash flows. 30 The most critical factors in the expected cash flow of a specific cable system are the opportunities for growth in the territory in which it operates, i.e., its franchise area and the duration of the franchise. In making its cash flow projections, Strategis Financial Consulting has carefully reviewed the demographics of counties represented in the service area. Demographic information was gathered from direct observation during Strategis Financial Consulting's onsite visit, discussion with System management, Marketing Statistics' Demographics USA 1996, U.S. Census Bureau data, and information obtained from the local Chamber of Commerce. Strategis Financial Consulting also has reviewed information pertaining to the System's franchises in order to calculate their remaining life and made inquiries of System management personnel to ascertain any relevant terms that may affect the value of the System. Strategis Financial Consulting has calculated a weighted average remaining life of 6.3 years for the franchises. The projection period used for the cash flows normally is the weighted average remaining life of the franchises, except when the weighted life of the franchises falls below seven or exceeds ten years. When the franchise life falls below seven years, Strategis Financial Consulting uses a seven-year projection period, amortizing the franchises over fifteen years as mandated by the Internal Revenue Service (IRS). When the franchise life exceeds ten years, a ten-year projection period is used, with the franchises amortized over fifteen years. Strategis Financial Consulting believes that the cash flows realized from a projection period less than seven years generally are not reflective of the value of a system than an investor would consider when utilizing discounted cash flow methodology. Strategis Financial Consulting also believes that the operating income resulting from income and expense projections beyond ten years is increasingly uncertain and might produce less accurate values for the System. Strategis Financial Consulting's cash flow projections are also based in part on historical operating data such as subscriber rates, the ratio of subscribers to homes passed, and the age and condition of the System's distribution plant. Strategis Financial Consulting also has relied on information provided by System management personnel, 32 discussions with System personnel, and Strategis Financial Consulting's familiarity with typical industry expenses and operating trends to project the future financial performance of the System. As shown in Exhibits E through H, Strategis Financial Consulting has projected increases in the number of basic and pay subscribers, projected changes in service rates, and estimated expenditures for future installation of cable plant and other future capital requirements. 4. Residual Value Under both the return-on-equity and the return-on-investment approaches, Strategis Financial Consulting has calculated a residual value for the System following the seven-year projection period. The residual represents the anticipated value of the System at the end of the projection period. This value is added to the System's cash flow stream in the final year of the projection period and then discounted back to present value. The residual is calculated as a multiple of the projected annual net cash flow in the final year of the discounted cash flow analysis. The multiple used reflects the degree of likelihood that the System will have significant future income, and therefore value, at the end of the projection period. If the franchise is likely to be renewed on the same terms as the current franchise, and if there is a realistic expectation of continued growth in income, a higher multiple will be applied. On the other hand, if the franchise is not likely to be renewed, or is renewed on terms and conditions significantly different from the current franchise, or if competitive or technological factors jeopardize the operator's future income, a lower multiple is appropriate. Based on its experience and familiarity with the cable industry, and its analysis of the System, Strategis Financial Consulting has calculated the System's residual value using seventh-year cash flow times a multiple of 9.0, as shown in Exhibit J. This multiple reflects Strategis Financial Consulting's view that the System is likely to have significant value in seven years, but that certain unknowns and uncertainties must be factored into the multiple nonetheless. Currently, the Cable Act of 1984 puts operators 32 in a favorable position in that cable franchises are generally likely to be renewed. However, the 1984 Act provides no guarantee of renewal, and it is expected that the negotiation process required to obtain a renewal will result in new franchises that will be on terms significantly different and probably less favorable than current franchises. In addition, concerns about how re- regulation of the cable industry will affect the Act's renewal provisions could have the effect of reducing or eliminating the operator's expectation of renewal. 5. Discount Rates A critical component of both the return-on-equity and the return-on- investment approaches is the selection of the rate at which future cash flows are discounted to their present value. The discount rate represents the investor's expected return on capital, i.e., the rate of return that reasonably reflects the risk being undertaken by the investor. Considering the relative risk associated with the cable industry in comparison to other industries, and the risk associated with the System in particular, Strategis Financial Consulting has adopted a range of discount rates for its discounted cash flow methods. In the after-tax return-on-equity model, Strategis Financial Consulting has applied a discount rate of 14.0% for its low valuation, and a rate of 12.0% for its high valuation. In the pre-tax return- on-investment model, the low valuation discount rate is 16.6%, while the high valuation rate is 15.1%. The discount rates used in the two discounted cash flow methods are indicated on Exhibit A and summarized in Exhibit J. Strategis Financial Consulting has calculated the discount rate for the return-on-equity model by first establishing a risk-free rate of return (the current rate of return available on Treasury bills or Treasury bonds as of the valuation date) and then adding the historical premium for risk that the market has actually provided the holders of representative cable television stocks. This assumes that using such historical data will provide a reasonable guide to future return expectations after recognition for risk. The discount rate incorporates systematic risk, which is the sensitivity of the return on the subject investment to changes in the return for the market as a whole. 33 Strategis Financial Consulting also has considered in our selection of the discount rates unsystematic risk, which is any risk premium directly associated with the industry, particular company, or the subject system. Thus, internal risk factors, such as the possibility of competition, municipal and customer relations, rate structure, franchise stability, etc., have been examined in our selection of the discount rates. The discount rate used in the return-on-investment model is determined by the "band of investment" method. The rate is based on an average of the rate applicable to equity and the cost of debt weighted in the proportions that are utilized for the particular system. C. DIRECT INCOME METHODOLOGY An alternative valuation method to the discounted cash flow method is the direct income method, in which the estimate of the cable system's value is based on current net operating income times a multiple selected by the appraiser. Strategis Financial Consulting has applied several alternative versions of this method to the System. In the first model, Strategis Financial Consulting used the System's actual annual net operating income for the 12-month period preceding the valuation date, whenever the appropriate data was available. When data was insufficient to ascertain the actual net operating income for the past full year, Strategis Financial Consulting estimated the past year's annual net operating income based on available financial information for the past several months. In the second, the System's current cash flow as of the appraisal date was annualized to create a "running rate" net operating income projection. In the third model, Strategis Financial Consulting used the System's projected net operating income for the twelve months following the appraisal date. The results of these models are set forth in Exhibit A. The multiples applied to each of these income figures are derived from a variety of cable industry data. First, Strategis Financial Consulting has looked at the income and stock value of several publicly traded cable companies as of the appraisal date. From this analysis, Strategis Financial Consulting has derived a range of multiples that it 34 believes are applicable to privately held cable systems, which includes adjustments for control and marketability. Taking into account multiples derived from the sale of other cable television systems, Strategis Financial Consulting has arrived at a composite figure for each model. In the historical income model, Strategis Financial Consulting has applied a low multiple of 10 and a high multiple of 11. The running rate and projected income models use slightly lower multiples to account for the additional risk and uncertainty of using projections rather than historical data. The multiples used in each of the three direct income approaches are indicated in Exhibit A and summarized again in Exhibit J. D. VALUE CONCLUSIONS The valuations yielded by each of the methods described above are shown in Exhibit A. In arriving at a final System valuation, Strategis Financial Consulting considered both discounted cash flow methods, i.e., the return-on- equity and return-on-investment methods, and the direct income methods. Based upon the foregoing analysis and a consideration of the various methods, Strategis Financial Consulting concludes that the fair market value of the System as a business enterprise as of December 31, 1997, was $140,059,000. 35 VI. CONTINGENCIES AND LIMITING CONDITIONS Our conclusions as to the value of the System are based upon the following, which to the best of our knowledge and belief are reliable and sound: 1. Information and data obtained during an onsite inspection by a representative of Strategis Financial Consulting of a representative portion of the System and communities served. 2. Personal and telephone interviews with the System's employees. 3. Selected documents including: a. Various operating data and maps. b. Miscellaneous internal data and documents. The following limiting conditions apply to the subject appraisal: 1. Strategis Financial Consulting is under no obligation to update the appraisal to account for events or additional data subsequent to the appraisal date. The appraisal is based on laws and regulations in place as of December 31, 1997, and does not reflect subsequent changes, if any, in the relevant laws and regulations. 2. Neither this report nor any portions thereof may be used for any purpose other than as stated herein nor may it be reproduced or excerpted without the prior written consent of Strategis Financial Consulting. 3. No copies of this report will be furnished to entities other than the client without the client's specific permission or direction unless ordered by a court of competent jurisdiction. 4. The comments and judgments of Strategis Financial Consulting as to the physical and terminal state of the cable system were made by representatives who are expert in valuing cable television assets but not by qualified cable television engineers. Consequently, readers should not rely on any statement made herein for any purpose other than those set forth in this appraisal. 36 5. Strategis Financial Consulting did not consider, or factor into the appraisal, any impact on value that might be caused by the presence of toxic waste or hazardous material including electromagnetic radiation or other forms of radio frequency radiation. 37 VII. STATEMENT OF VALUE Strategis Financial Consulting certifies that a personal inspection of a representative portion of the communities and System was made by a qualified representative of this firm and that, to the best of our knowledge, the statements contained in this appraisal are correct and that the opinions stated are based on consideration of the relevant factors. In addition, neither Strategis Financial Consulting nor any of its representatives have any current interest or contemplated future interest in the entities appraised. In addition, the fee paid for this report by Jones Intercable, Inc. is in no way dependent on the values determined herein. Based on the various analyses, computations, and considerations discussed in this report, it is our professional judgment, subject to the assumptions and limitations stated in this report, that the range of values as stated in this report are true and correct. Therefore, it is the professional opinion of Strategis Financial Consulting that the fair market value of the Cable TV Fund 12-BCD Venture cable television system serving Palmdale and Lancaster, California as a business enterprise, as of December 31, 1997, free and clear of any encumbrances, is $140,059,000. STRATEGIS FINANCIAL CONSULTING, INC. /s/ Andrew R. Gefen ------------------------------------- By: Andrew R. Gefen President February 20, 1998 38 VIII. QUALIFICATIONS A. QUALIFICATIONS OF STRATEGIS FINANCIAL CONSULTING, INC. Strategis Financial Consulting, Inc. and its corporate parent, The Strategis Group (formerly Malarkey-Taylor Associates-EMCI), have served the communications industry for nearly 30 years specializing in the field of cable, cellular, paging, mobile radio, and broadcasting technologies. Our companies have completed thousands of projects for clients in the communications industry and in the financial and investment communities. Our organizations are composed of a multi-disciplinary team of professionals who combine academic training in accounting, finance, engineering, marketing, management, economics, and law with many years of experience solving problems for hundreds of clients in both the public and private sectors. A large portion of our financial, engineering, and managerial professionals' time is devoted to the appraisal of cable television systems, cellular telephone systems, paging systems, and broadcast stations. Since 1964, we have appraised hundreds of communications properties for purposes of financing, ownership transfers, property tax assessments, and estate planning and probating. Our appraisal experience has included independent fair market valuations and purchase price allocations, including valuation of both tangible assets and intangible assets such as franchises, licenses, subscriber lists, leases, and contracts. Strategis Financial has supplied expert testimony on cable, cellular, paging, and broadcast property values in court and other legal hearings. 39 B. QUALIFICATIONS OF ANDREW R. GEFEN Andrew R. Gefen is the President of Strategis Financial Consulting, Inc. He has provided valuation, financial, accounting and consulting services to numerous cellular telephone, cable television, broadcasting, and paging companies. Mr. Gefen is involved in the fair market valuation and asset appraisal of publicly and privately held cellular telephone systems, cable television systems, broadcast stations, paging systems, programming networks, and Multichannel Multipoint Distribution Service (MMDS) systems. He has valued over 100 cellular telephone systems and over 200 cable television systems with an aggregate value of over $3 billion. Mr. Gefen has provided expert testimony on the valuation of cellular telephone systems, MMDS systems, cable television systems, and paging systems. He has also assisted in the development of a statewide cellular telephone network, and provided consulting services to professional sports leagues, cable television programming networks, and U.S. Government agencies. His work has included valuation and due diligence projects in several countries in Europe and Latin America. He has acquired an in-depth knowledge of the values of cellular systems, cable television systems, broadcast stations, and paging systems, including their market characteristics, growth prospects, construction costs, operating cost structures, and other industry issues. Mr. Gefen has substantial experience in the tax issues arising from the purchase and sale of cable and broadcast properties. In addition, he has supported the taxpayer's values of tangible and intangible assets during Internal Revenue Service reviews. Mr. Gefen was previously with the communications consulting firm of Frazier, Gross & Kadlec, Washington, D.C., as the Manager of the Appraisal Group where he directed and participated in the asset appraisals of over 200 communications properties, primarily in the radio and television industry. EXPERIENCE President, Strategis Financial Consulting, Inc., Washington, D.C., 1988-present. Business Analyst and Project Manager, American Management Systems, Arlington, VA. Planning Consultant, Panelvision Corporation, Pittsburgh, Pennsylvania. Programmer and Chief Announcer, WBRU (FM), Providence, Rhode Island. EDUCATION M.S., Industrial Administration (M.B.A.), Carnegie-Mellon University, Pittsburgh, Pennsylvania. B.A., Economics, Brown University, Providence, Rhode Island. 40 C. QUALIFICATIONS OF ELISABETH BOEHLER Elisabeth Boehler joined Strategis Financial Consulting, Inc. as a Consultant. She conducts financial analyses, financial modeling and research for the telecommunications industry. Ms. Boehler was previously a consultant in the telecommunications industry, providing marketing research and analysis to Internet and satellite communications providers as well as Regional Bell Operating Company and long distance carrier clients. Ms. Boehler has significant experience in financial analysis. While an analyst with the CBS Television Network in New York City, she prepared consolidated network income statements, cash forecasts and budgets, and performed variance and profitability analyses. While at GE Medical Systems Europe she conducted a financial and process audit of their multi-national lease portfolio. EXPERIENCE Analyst/Consultant, Weber and Associates, Sterling, VA, 1997. Analyst, General Electric Medical Systems - Europe, Buc, France, 1994-1995. Senior Financial Analyst, CBS Inc., New York, NY, 1991-1994. Assistant Controller, Melhado, Flynn & Associates, New York, NY, 1990-1991. EDUCATION M.B.A., INSEAD, Fontainebleau, France. B.S.M., Management, Tulane University, New Orleans, Louisiana 41
CABLE TV FUND 12-BCD VENTURE EXHIBIT A ------------------- PALMDALE/LANCASTER, CALIFORNIA AS OF DECEMBER 31, 1997 - ---------------------------------------------------------- VALUATION METHODS - ----------------- LOW HIGH --------------- ------------------- I. MULTIPLE OF PAST YEAR'S OPERATING INCOME OPERATING INCOME, PER BOOKS (12/31/97) $ 13,574,648 $ 13,574,648 VALUATION MULTIPLE 10.0 11.0 ------------ ------------ ESTIMATED FAIR MARKET VALUE $135,746,480 $149,321,128 ------------ ------------ II. MULTIPLE OF "RUNNING RATE" OPERATING INCOME ESTIMATED OPERATING INCOME TOTAL CURRENT YEAR'S REVENUE $ 30,715,440 $ 30,715,440 OPERATING MARGIN, PER BOOKS (12/31/97) 45.4% 45.4% ------------ ------------ "RUNNING RATE" OPERATING INCOME 13,947,881 13,947,881 VALUATION MULTIPLE 9.5 10.5 ------------ ------------ ESTIMATED FAIR MARKET VALUE $132,504,873 $146,452,754 ------------ ------------ III. MULTIPLE OF NEXT YEAR'S OPERATING INCOME OPERATING INCOME $ 15,112,833 $ 15,112,833 VALUATION MULTIPLE 9.0 10.0 ------------ ------------ ESTIMATED FAIR MARKET VALUE $136,015,500 $151,128,333 ------------ ------------ IV. DISCOUNTED CASH FLOW RETURN ON EQUITY TARGET RETURN ON EQUITY 14.0% 12.0% ESTIMATED FAIR MARKET VALUE $134,773,634 $145,249,519 ------------ ------------ V. DISCOUNTED CASH FLOW RETURN ON INVESTMENT TARGET RETURN ON INVSTMT 16.6% 15.1% ESTIMATED FAIR MARKET VALUE $132,642,183 $142,642,182 ------------ ------------ SUMMARY OF VALUES - ----------------- I. MULTIPLE OF PAST YEAR'S OPERATING INCOME $135,746,480 $149,321,128 II. MULTIPLE OF "RUNNING RATE" OPERATING INCOME 132,504,873 146,452,754 III. MULTIPLE OF NEXT YEAR'S OPERATING INCOME 136,015,500 151,128,333 IV. DISCOUNTED CASH FLOW RETURN ON EQUITY 134,773,634 145,249,519 V. DISCOUNTED CASH FLOW RETURN ON INVESTMENT 132,642,183 142,642,182 ------------ ------------ RANGE OF ESTIMATED FAIR MARKET VALUES $134,091,000 $146,027,000 ESTIMATED FAIR MARKET VALUE $140,059,000 ============
- ------------------------------ CABLE TV FUND 12-BCD VENTURE EXHIBIT B PALMDALE/LANCASTER, CALIFORNIA LOW ANALYSIS AS OF DECEMBER 31, 1997 ------------ - ------------------------------ RETURN ON EQUITY METHOD PROFIT AND LOSS - LOW VALUE - ---------------------------
YEAR ENDING DECEMBER 31, 1998 1999 2000 2001 ---- ---- ---- ---- REVENUES $ 31,973,938 $ 34,262,832 $ 36,648,739 $ 39,160,090 OPERATING EXPENSES 16,861,105 17,741,776 18,734,945 19,948,909 ------------ ------------ ------------ ------------ OPERATING INCOME $ 15,112,833 $ 16,521,056 $ 17,913,794 $ 19,211,181 OPERATING MARGIN 0.47 0.48 0.49 0.49 PARENT SERVICES/MGT FEE (5%) 1,598,697 1,713,142 1,832,437 1,958,005 FRANCHISE AMORTIZATION (15) 4,719,533 4,719,533 4,719,533 4,719,533 SUBSCRIBER LIST (7) 3,612,714 3,612,714 3,612,714 3,612,714 NON-COMPETE COVENANTS (0) 0 0 0 0 DEPRECIATION 5,825,519 10,426,269 8,342,439 6,901,809 INTEREST 6,570,012 6,570,012 6,570,012 6,157,774 ------------ ------------ ------------ ------------ PRE-TAX INCOME $ (7,213,643) $ (10,520,615) $ (7,163,342) $ (4,138,655) INCOME TAX (EXPENSE)/BENEFIT 2,452,639 3,577,009 2,435,536 1,407,143 ------------ ------------ ------------ ------------ NET INCOME $ (4,761,004) $ (6,943,606) $ (4,727,806) $ (2,731,512) SOURCES AND USES OF CASH - ------------------------ SOURCES OF CASH - PRE TAX INCOME $ (7,213,643) $ (10,520,615) $ (7,163,342) $ (4,138,655) FRANCHISE AMORTIZATION (15) 4,719,533 4,719,533 4,719,533 4,719,533 SUBSCRIBER LIST (7) 3,612,714 3,612,714 3,612,714 3,612,714 NON-COMPETE COVENANTS (0) 0 0 0 0 DEPRECIATION 5,825,519 10,426,269 8,342,439 6,901,809 EQUITY 65,700,125 DEBT 65,700,125 0 0 0 RESIDUAL VALUE IN YEAR 7 ------------ ------------ ------------ ------------ TOTAL SOURCES OF CASH $ 138,344,374 $ 8,237,902 $ 9,511,345 $ 11,095,402 USES OF CASH - PURCHASE PRICE - CURRENT $ 134,773,634 CAPITAL EXPENDITURES 3,469,822 3,097,108 3,176,438 3,432,407 DEBT RETIREMENT 0 0 4,122,380 4,534,618 TAXES PAID ON NET INCOME 0 0 0 0 TAXES PAID ON SALE (RESIDUAL) ------------ ------------ ------------ ------------ TOTAL USES OF CASH $ 138,243,456 $ 3,097,108 $ 7,298,818 $ 7,967,025 ANNUAL CASH INCREASE/(DECREASE) $ 100,918 $ 5,140,794 $ 2,212,527 $ 3,128,377 CUMULATIVE CASH 100,918 5,241,711 7,454,238 10,582,615 YEAR ENDING DECEMBER 31, 2002 2003 2004 TOTAL ---- ---- ---- ----- REVENUES $ 41,934,909 $ 44,916,657 $ 48,083,687 $ 276,980,852 OPERATING EXPENSES 21,299,477 22,757,524 24,309,734 141,653,470 ------------ ------------ ------------ ------------ OPERATING INCOME $ 20,635,432 $ 22,159,132 $ 23,773,953 $ 135,327,382 OPERATING MARGIN 0.49 0.49 0.49 PARENT SERVICES/MGT FEE (5%) 2,096,745 2,245,833 2,404,184 13,849,043 FRANCHISE AMORTIZATION (15) 4,719,533 4,719,533 4,719,533 33,036,733 SUBSCRIBER LIST (7) 3,612,714 3,612,714 0 21,676,286 NON-COMPETE COVENANTS (0) 0 0 0 0 DEPRECIATION 5,943,274 6,342,028 6,755,970 50,537,309 INTEREST 5,704,313 5,205,505 4,656,816 41,434,445 ------------ ------------ ------------ ------------ PRE-TAX INCOME $ (1,441,148) $ 33,519 $ 5,237,450 $ (25,206,433) INCOME TAX (EXPENSE)/BENEFIT 489,990 (11,396) (1,780,733) 8,570,187 ------------ ------------ ------------ ------------ NET INCOME $ (951,157) $ 22,123 $ 3,456,717 $ (16,636,246) SOURCES AND USES OF CASH - ------------------------ SOURCES OF CASH - $ (1,441,148) $ 33,519 $ 5,237,450 $ (25,206,433) PRE TAX INCOME 4,719,533 4,719,533 4,719,533 33,036,733 FRANCHISE AMORTIZATION (15) 3,612,714 3,612,714 0 21,676,286 SUBSCRIBER LIST (7) 0 0 0 0 NON-COMPETE COVENANTS (0) 5,943,274 6,342,028 6,755,970 50,537,309 DEPRECIATION 65,700,125 EQUITY 0 0 0 65,700,125 DEBT 213,965,577 213,965,577 RESIDUAL VALUE IN YEAR 7 ------------ ------------ ------------ ------------ TOTAL SOURCES OF CASH $ 12,834,373 $ 14,707,795 $ 230,678,530 $ 425,409,721 USES OF CASH - PURCHASE PRICE - CURRENT $ 134,773,634 CAPITAL EXPENDITURES 3,637,853 3,786,689 3,941,802 24,542,120 DEBT RETIREMENT 4,988,080 5,486,888 46,568,158 65,700,125 TAXES PAID ON NET INCOME 0 0 0 0 TAXES PAID ON SALE (RESIDUAL) 45,795,864 45,795,864 ------------ ------------ ------------ ------------ TOTAL USES OF CASH $ 8,625,933 $ 9,273,577 $ 96,305,824 $ 270,811,743 ANNUAL CASH INCREASE/(DECREASE) $ 4,208,440 $ 5,434,218 $ 134,372,706 $ 154,597,979 CUMULATIVE CASH 14,791,055 20,225,273 154,597,979
46 - ------------------------------ CABLE TV FUND 12-BCD VENTURE EXHIBIT B PALMDALE/LANCASTER, CALIFORNIA HIGH ANALYSIS AS OF DECEMBER 31, 1997 ------------- - ------------------------------ RETURN ON EQUITY METHOD PROFIT AND LOSS - HIGH VALUE - ----------------------------
YEAR ENDING DECEMBER 31, 1998 1999 2000 2001 2002 2003 2004 TOTAL ---- ---- ---- ---- ---- ---- ---- ----- REVENUES $ 31,973,938 $ 34,262,832 $36,648,739 $39,160,090 $41,934,909 $44,916,657 $ 48,083,687 $276,980,852 OPERATING EXPENSES 16,861,105 17,741,776 18,734,945 19,948,909 21,299,477 22,757,524 24,309,734 141,653,470 ------------ ------------ ----------- ----------- ----------- ----------- ------------ ------------ OPERATING INCOME $ 15,112,833 $ 16,521,056 $17,913,794 $19,211,181 $20,635,432 $22,159,132 $ 23,773,953 $135,327,382 OPERATING MARGIN 0.47 0.48 0.49 0.49 0.49 0.49 0.49 PARENT SERVICES/MGT FEE (5%) 1,598,697 1,713,142 1,832,437 1,958,005 2,096,745 2,245,833 2,404,184 13,849,043 FRANCHISE AMORTIZATION (15) 4,719,533 4,719,533 4,719,533 4,719,533 4,719,533 4,719,533 4,719,533 33,036,733 SUBSCRIBER LIST (7) 3,612,714 3,612,714 3,612,714 3,612,714 3,612,714 3,612,714 0 21,676,286 NON-COMPETE COVENANTS (0) 0 0 0 0 0 0 0 0 DEPRECIATION 5,825,519 10,426,269 8,342,439 6,901,809 5,943,274 6,342,028 6,755,970 50,537,309 INTEREST 7,121,439 7,121,439 7,121,439 6,674,601 6,183,080 5,642,407 5,047,666 44,912,070 ------------ ------------ ----------- ----------- ----------- ----------- ------------ ------------ PRE-TAX INCOME $ (7,765,069)$(11,072,041)$(7,714,768)$(4,655,481)$(1,919,915)$ (403,383)$ 4,846,600 $(28,684,058) INCOME TAX (EXPENSE)/BENEFIT 2,640,124 3,764,494 2,623,021 1,582,864 652,771 137,150 (1,647,844) 9,752,580 ------------ ------------ ----------- ----------- ----------- ----------- ------------ ------------ NET INCOME $ (5,124,946)$ (7,307,547)$(5,091,747)$(3,072,618)$(1,267,144)$ (266,233)$ 3,198,756 $(18,931,478) SOURCES AND USES OF CASH - ------------------------ SOURCES OF CASH - PRE TAX INCOME $ (7,765,069)$(11,072,041)$(7,714,768)$(4,655,481)$(1,919,915)$ (403,383)$ 4,846,600 $(28,684,058) FRANCHISE AMORTIZATION (15) 4,719,533 4,719,533 4,719,533 4,719,533 4,719,533 4,719,533 4,719,533 33,036,733 SUBSCRIBER LIST (7) 3,612,714 3,612,714 3,612,714 3,612,714 3,612,714 3,612,714 0 21,676,286 NON-COMPETE COVENANTS (0) 0 0 0 0 0 0 0 0 DEPRECIATION 5,825,519 10,426,269 8,342,439 6,901,809 5,943,274 6,342,028 6,755,970 50,537,309 EQUITY 71,214,387 71,214,387 DEBT 71,214,387 0 0 0 0 0 0 71,214,387 RESIDUAL VALUE IN YEAR 7 213,965,577 213,965,577 ------------ ------------ ----------- ----------- ----------- ----------- ------------ ------------ TOTAL SOURCES OF CASH $148,821,471 $ 7,686,476 $ 8,959,919 $10,578,575 $12,355,606 $14,270,893 $230,287,680 $432,960,620 USES OF CASH - PURCHASE PRICE - CURRENT $145,249,519 $145,249,519 CAPITAL EXPENDITURES 3,469,822 3,097,108 3,176,438 3,432,407 3,637,853 3,786,689 3,941,802 24,542,120 DEBT RETIREMENT 0 0 4,468,375 4,915,212 5,406,734 5,947,407 50,476,659 71,214,387 TAXES PAID ON NET INCOME 0 0 0 0 0 0 0 0 TAXES PAID ON SALE (RESIDUAL) 41,051,671 41,051,671 ------------ ------------ ----------- ----------- ----------- ----------- ------------ ------------ TOTAL USES OF CASH $148,719,342 $ 3,097,108 $ 7,644,813 $ 8,347,619 $ 9,044,587 $ 9,734,096 $ 95,470,132 $282,057,697 ANNUAL CASH INCREASE/ (DECREASE) $ 102,130 $ 4,589,368 $ 1,315,106 $ 2,230,956 $ 3,311,019 $ 4,536,797 $134,817,548 $150,902,924 CUMULATIVE CASH 102,130 4,691,497 6,006,603 8,237,559 11,548,578 16,085,376 150,902,924
47 ------------------------------ CABLE TV FUND 12-BCD VENTURE EXHIBIT C PALMDALE/LANCASTER, CALIFORNIA LOW ANALYSIS AS OF DECEMBER 31, 1997 ------------ ------------------------------ RETURN ON EQUITY METHOD DEBT AMORTIZATION - LOW VALUE - -----------------------------
TOTAL YEAR 1 CASH REQUIREMENTS $131,400,250 YEAR 1 DEBT REQUIREMENTS 65,700,125 YEAR I EQUITY REQUIREMENTS 65,700,125 FINANCING AVAILABLE $ 88,235,212 $98,233,417 $107,386,866 $116,439,664 $124,872,675 $134,130,305 $144,034,361 UNUSED LEVERAGE 22,535,087 32,533,292 45,809,121 59,396,537 72,817,629 87,562,147 103,501,780 SENIOR DEBT: 1998 1999 2000 2001 2002 2003 2004 TOTAL ---- ---- ---- ---- ---- ---- ---- ----- BEGINNING DEBT $ 0 $65,700,125 $65,700,125 $61,577,745 $57,043,126 $52,055,046 $46,568,158 DEBT ADDED 65,700,125 0 0 0 0 0 0 65,700,125 TOTAL ANNUAL PAYMENT 6,570,012 6,570,012 10,692,393 10,692,393 10,692,393 10,692,393 10,692,393 66,601,989 INTEREST 6,570,012 6,570,012 6,570,012 6,157,774 5,704,313 5,205,505 4,656,816 41,434,445 PRINCIPAL REPAYMENT 0 0 4,122,380 4,534,618 4,988,080 5,486,888 6,035,577 25,167,544 ENDING BALANCE 65,700,125 65,700,125 61,577,745 57,043,126 52,055,046 46,568,158 40,532,581 LINE OF CREDIT: BEGINNING DEBT $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 BORROWINGS 0 0 0 0 0 0 0 0 PRINCIPAL PAYMENTS 0 0 0 0 0 0 0 0 INTEREST 0 0 0 0 0 0 0 0 SENIOR DEBT COVERAGE 4.3 4.0 3.4 3.0 2.5 2.1 1.7 LOC DEBT COVERAGE 0.0 0.0 0.0 0.0 0.0 0.0 0.0 TOTAL DEBT COVERAGE 4.3 4.0 3.4 3.0 2.5 2.1 1.7
48 - ------------------------------- CABLE TV FUND 12-BCD VENTURE PALMDALE/LANCASTER, CALIFORNIA EXHIBIT C AS OF DECEMBER 31, 1997 HIGH ANALYSIS - ------------------------------- -------------
RETURN ON EQUITY METHOD DEBT AMORTIZATION - HIGH VALUE - ------------------------------ TOTAL YEAR 1 CASH $142,428,774 REQUIREMENTS YEAR 1 DEBT REQUIREMENTS 71,214,387 YEAR 1 EQUITY REQUIREMENTS 71,214,387 FINANCING AVAILABLE $101,809,860 $113,346,250 $123,907,922 $134,353,458 $144,083,856 $154,765,737 $166,193,493 UNUSED LEVERAGE 30,595,473 42,131,863 57,161,910 72,522,658 87,659,790 104,289,077 122,258,982 SENIOR: 1998 1999 200O 2001 2002 2O03 2004 TOTAL ---- ---- ---- ---- ---- ---- ---- ----- BEGINNING DEBT $ 0 $ 71,214,387 $ 71,214,387 $ 66,746,012 $ 61,830,800 $ 56,424,066 $ 50,476,659 DEBT ADDED 71,214,387 0 0 0 0 0 0 $71,214,387 TOTAL ANNUAL PAYMENTS 7,121,439 7,121,439 11,589,813 11,589,813 11,589,813 11,589,813 11,589,813 72,191,945 INTEREST 7,121,439 7,121,439 7,121,439 6,674,601 6,183,080 5,642,407 5,047,666 44,912,070 PRINCIPAL REPAYMENT 0 0 4,468,375 4,915,212 5,406,734 5,947,407 6,542,148 27,279,875 ENDING BALANCE 71,214,387 71,214,387 66,746,012 61,830,800 56,424,066 50,476,659 43,934,512 LINE OF CREDIT: BEGINNING DEBT $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 BORROWINGS 0 0 0 0 0 0 0 0 PRINCIPAL PAYMENTS 0 0 0 0 0 0 0 0 INTEREST 0 0 0 0 0 0 0 0 SENIOR DEBT COVERAGE 4.7 4.3 3.7 3.2 2.7 2.3 1.8 LOC DEBT COVERAGE 0.0 0.0 0.0 0.0 0.0 0.0 0.0 TOTAL DEBT COVERAGE 4.7 4.3 3.7 3.2 2.7 2.3 1.8
49 - ------------------------------ CABLE TV FUND 12-BCD VENTURE EXHIBIT D PALMDALE/LANCASTER, CALIFORNIA --------- AS OF DECEMBER 31, 1997 - ------------------------------ RETURN ON INVESTMENT METHOD PROFIT AND LOSS - ---------------
YEAR ENDING DECEMBER 31, 1998 1999 2000 2001 2002 2003 2004 TOTAL ---- ---- ---- ---- ---- ---- ---- ----- REVENUES $ 31,973,938 $ 34,262,832 $36,648,739 $39,160,090 $41,934,909 $44,916,657 $ 48,083,687 $276,980,852 OPERATING EXPENSES 16,861,105 17,741,776 18,734,945 19,948,909 21,299,477 22,757,524 24,309,734 141,653,140 ------------ ------------ ----------- ----------- ----------- ----------- ------------ ------------ OPERATING INCOME 15,112,833 16,521,056 17,913,794 19,211,181 20,635,432 22,159,132 23,773,953 135,327,382 PLUS RESIDUAL VALUE 213,965,577 213,965,577 LESS CAPITAL EXPENDITURES 3,469,822 3,097,108 3,176,438 3,432,407 3,637,853 3,786,689 3,941,802 24,542,120 ------------ ------------ ----------- ----------- ----------- ----------- ------------ ------------ TOTAL CASH FLOW $ 11,643,011 $ 13,423,948 $14,737,356 $15,778,774 $16,997,578 $18,372,444 $233,797,728 $324,750,839 NET PRESENT VALUE @ 16.6% $132,642,183 ------------ NET PRESENT VALUE @ 15.1% $142,642,182 ------------
50 - ------------------------------ CABLE TV FUND 12-BCD VENTURE EXHIBIT E PALMDALE/LANCASTER, CALIFORNIA --------- AS OF DECEMBER 31, 1997 - ------------------------------ CABLE TELEVISION SUBSCRIBERS
YEAR ENDING DECEMBER 31, 1998 1999 2000 2001 2002 2003 2004 ---- ---- ---- ---- ---- ---- ---- BEGINNING MILES 1,096.7 MILES ADDED 14.5 15.9 18.6 21.3 23.0 23.4 21.8 CUMULATIVE MILES 1,111.2 1,127.1 1,145.6 1,167.0 1,189.9 1,213.3 1,237.1 DENSITY OF ADDITIONAL PLANT 73 73 73 73 73 73 73 HOMES PASSED - BEGINNING 88,035 NEW HOMES & EXTENSIONS 1,056 1,158 1,354 1,557 1,677 1,707 1,738 HOMES PASSED - ENDING 89,091 90,250 91,603 93,161 94,838 96,545 98,262 GROWTH IN HOMES 1.2% 1.3% 1.5% 1.7% 1.8% 1.8% 1.8% BASIC - BEGINNING SUBSCRIBERS 63,527 65,180 66,930 68,392 70,021 71,755 73,529 AVERAGE SUBSCRIBERS 64,354 66,055 67,661 69,206 70,888 72,642 74,437 ENDING SUBSCRIBERS 65,180 66,930 68,392 70,021 71,755 73,529 75,344 PENETRATION 73.2% 74.2% 74.7% 75.2% 75.7% 76.2% 76.7% EXPANDED BASIC - BEGINNING 56,647 58,121 59,682 60,985 62,437 63,984 65,566 AVERAGE SUBSCRIBERS 57,384 58,901 60,333 61,711 63,211 64,775 66,375 ENDING SUBSCRIBERS 58,121 59,682 60,985 62,437 63,984 65,566 67,185 PENETRATION 89.2% 89.2% 89.2% 89.2% 89.2% 89.2% 89.2% PAY TV - BEGINNING UNITS 42,733 41,238 43,014 43,612 44,300 45,398 46,520 AVERAGE UNITS 41,985 42,126 43,313 43,956 44,849 45,959 47,094 ENDING UNITS 41,238 43,014 43,612 44,300 45,398 46,520 47,668 PENETRATION 63.3% 64.3% 63.8% 63.3% 63.3% 63.3% 63.3% PAY PER VIEW - BEGINNING UNITS/MO 6,668 8,162 9,934 11,819 14,367 17,160 20,200 AVERAGE UNITS 7,415 9,048 10,876 13,093 15,763 18,680 21,849 ENDING UNITS 8,162 9,934 11,819 14,367 17,160 20,200 23,499 AVERAGE BUY RATE/MO 20.3% 23.3% 26.3% 30.3% 34.3% 38.3% 42.3% CONVERTER RENTALS - BEGINNING 55,218 57,307 59,515 61,498 63,663 65,599 67,589 AVERAGE SUBSCRIBERS 56,262 58,411 60,507 62,581 64,631 66,594 68,611 ENDING SUBSCRIBERS 57,307 59,515 61,498 63,663 65,599 67,589 69,634 PENETRATION 87.9% 88.9% 89.9% 90.9% 91.4% 91.9% 92.4% ADDRESSABLE HOMES 38,619 40,276 42,696 44,996 47,468 50,079 52,788 AVERAGE HOMES 39,447 41,486 43,846 46,232 48,773 51,433 54,193 ENDING HOMES 40,276 42,696 44,996 47,468 50,079 52,788 55,598 PENETRATION 61.8% 63.8% 65.8% 67.8% 69.8% 71.8% 73.8% BASIC CHURN RATE 39% 39% 39% 39% 39% 39% 39%
51 - ------------------------------- CABLE TV FUND 12-BCD VENTURE EXHIBIT F PALMOALE/LANCASTER, CALIFORNIA --------- AS OF DECEMBER 31, 1997 - ------------------------------- SERVICE RATES - ------------- CURRENT RATES - ------------- BASIC $13.72 EXPANDED BASIC 12.26 PAY 6.46 PAY PER VIEW 11.12 CONVERTER RENTALS 1.99 INSTALLATIONS-NEW 34.85 INSTALLATIONS-CHURN 25.39
YEAR ENDING DECEMBER 31, 1998 1999 2000 2001 2002 2003 2004 ---- ---- ---- ---- ---- ---- ---- PERCENTAGE RATE INCREASES - ------------------------- BASIC 4% 4% 3% 3% 3% 3% 3% EXPANDED BASIC 4% 4% 3% 3% 3% 3% 3% PAY 5% 1% 1% 1% 1% 1% 1% PAY PER VIEW 0% 3% 3% 3% 3% 3% 3% CONVERTER RENTALS 0% 3% 3% 3% 3% 3% 3% INSTALLATIONS-NEW 0% 3% 3% 3% 3% 3% 3% INSTALLATIONS-CHURN 0% 3% 3% 3% 3% 3% 3% AVERAGE RATES - ------------- BASIC $14.28 $14.79 $15.23 $15.69 $16.16 $16.65 $17.14 EXPANDED BASIC 12.80 13.26 13.66 14.07 14.49 14.93 15.37 PAY 6.75 6.81 6.88 6.95 7.02 7.09 7.16 PAY PER VIEW 11.12 11.46 11.80 12.15 12.52 12.89 13.28 CONVERTERS RENTALS 1.99 2.05 2.11 2.17 2.24 2.30 2.37 INSTALLATIONS-NEW 34.85 35.90 36.97 38.08 39.23 40.40 41.62 INSTALLATIONS-CHURN 25.39 26.15 26.94 27.74 28.58 29.43 30.32
52 - ------------------------------ CABLE TV FUND 12-BCD VENTURE EXHIBIT G PALMDALE/LANCASTER, CALIFORNIA --------- AS OF DECEMBER 31, 1997 - ------------------------------
YEAR ENDING DECEMBER 31, 1998 1999 2000 2001 2002 2003 2004 TOTAL ---- ---- ---- ---- ---- ---- ---- ----- REVENUES: BASIC $11,028,024 $11,722,798 $12,368,031 $13,030,002 $13,746,992 $14,509,839 $15,314,354 $ 91,720,039 EXPANDED BASIC 8,811,455 9,373,445 9,889,368 10,418,674 10,991,972 11,601,938 12,245,221 73,332,074 PAY TV 3,399,201 3,444,693 3,577,172 3,666,577 3,778,466 3,910,701 4,047,388 25,824,199 PAY PER VIEW 989,752 1,243,927 1,540,129 1,909,626 2,368,132 2,890,480 3,482,338 14,424,384 CONVERTER RENTALS 1,341,675 1,434,692 1,530,755 1,630,728 1,734,676 1,840,978 1,953,650 11,467,154 INSTALLATIONS 625,075 662,559 688,032 729,419 771,905 814,624 859,672 5,151,286 COMMERCIAL 645,200 664,556 684,493 705,028 726,179 747,964 770,403 4,943,824 ADVERTISING 3,116,541 3,584,022 4,121,625 4,698,653 5,309,477 5,946,615 6,600,742 33,377,674 MISCELLANEOUS 2,017,015 2,132,140 2,249,133 2,371,383 2,507,109 2,653,518 2,809,918 16,740,218 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------- TOTAL REVENUES $31,973,938 $34,262,832 $36,648,739 $39,160,090 $41,934,909 $44,916,657 $48,083,687 $276,980,852 OPERATING EXPENSES OPERATIONS $ 4,284,146 $ 4,532,068 $ 4,794,870 $ 5,070,678 $ 5,371,867 $ 5,693,215 $ 6,032,802 $ 35,779,647 GENERAL & ADMINISTRATIVE 3,540,936 3,715,842 3,895,335 4,080,874 4,280,614 4,492,201 4,714,658 28,720,460 SALES & MARKETING 1,854,587 2,055,240 2,277,689 2,517,063 2,771,122 3,036,695 3,310,819 17,823,214 PROGRAMMING 7,181,435 7,438,626 7,767,051 8,280,294 8,875,874 9,535,414 10,251,455 59,330,149 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------- TOTAL OPERATING EXPENSES $16,861,105 $17,741,776 $18,734,945 $19,948,909 $21,299,477 $22,757,524 $24,309,734 $141,653,470 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------- OPERATING INCOME $15,112,833 $16,521,056 $17,913,794 $19,211,181 $20,635,432 $22,159,132 $23,773,953 $135,327,382 OPERATING MARGIN 47.3% 48.2% 48.9% 49.1% 49.2% 49.3% 49.4% TOTAL REVENUE/BASIC SUB/MONTH $ 41.40 $ 43.23 $ 45.14 $ 47.15 $ 49.30 $ 51.53 $ 53.83 CASH FLOW/BASIC SUB/MONTH $ 19.57 $ 20.84 $ 22.06 $ 21.13 $ 24.26 $ 25.42 $ 26.62 OPERATIONS % OF REVENUE 13% 13% 13% 13% 13% 13% 13% G & A PERCENTAGE OF REVENUE 11% 11% 11% 10% 10% 10% 10% SALES & MARKETING % OF REVENUE 6% 6% 6% 6% 7% 7% 7% PROGRAMMING % OF REVENUE 22% 22% 21% 21% 21% 21% 21%
53 - ------------------------------ CABLE TV FUND 12-BCD VENTURE EXHIBIT H PALMDALE/LANCASTER, CALIFORNIA AS OF DECEMBER 31, 1997 - ------------------------------ CAPITAL EXPENDITURES - --------------------
YEAR ENDING DECEMBER 31, 1998 1999 2000 2001 2002 2003 2004 TOTAL ---- ---- ---- ---- ---- ---- ---- ----- ASSUMPTIONS AND INPUTS - ---------------------- BV OF EXISTING PLANT $37,296,583 ADDITIONAL MILES OF PLANT 14.5 15.9 18.6 21.3 23.0 23.4 23.8 AERIAL PLANT PER MILE $ 32,966 $ 33,625 $ 34,298 $ 34,984 $ 35,683 $ 36,397 $ 37,125 UNDERGROUND PLANT PER MILE $ 39,607 $ 40,399 $ 41,207 $ 42,031 $ 42,872 $ 43,729 $ 44,604 PERCENTAGE OF PLANT AERIAL 0% 0% 0% 0% 0% 0% 0% PERCENTAGE OF PLANT UNDERGROUND 100% 100% 100% 100% 100% 100% 100% AVERAGE COST PER CONVERTER $ 152 $ 155 $ 158 $ 161 $ 165 $ 168 $ 171 PERCENTAGE CONVERTER USE 88% 89% 90% 91% 91% 92% 92% PERCENTAGE REPLACEMENT 8% 5% 4% 4% 4% 4% 4% INSTALLATION COST PER SUBSCRIBER $ 35 $ 36 $ 36 $ 37 $ 38 $ 39 $ 39 MISC CAPITAL PER SUBSCRIBER $ 5 $ 5 $ 5 $ 5 $ 5 $ 6 $ 6 INFLATION FACTOR FOR CAPITALS 0% 2% 2% 2% 2% 2% 2% 113% ANNUAL COSTS - ------------ PLANT ADDITIONS - AERIAL $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 $ 0 - UNDERGROUND 573,379 641,187 764,437 896,945 985,169 1,022,960 1,062,200 5,946,276 PLANT REBUILD/UPGRADE 750,000 459,000 468,180 477,544 487,094 496,836 506,773 3,645,428 AVERAGE COST OF NEW CONVERTERS 220,937 241,237 207,893 238,828 260,901 273,708 287,128 1,730,633 CONVERTER REPLACEMENT 679,176 449,295 380,701 401,210 421,282 442,761 465,301 3,239,726 INSTALLATION COSTS 924,562 969,508 1,003,253 1,050,669 1,099,750 1,149,409 1,201,260 7,398,413 MISC, CAPITAL EXPENDITURES 321,768 336,881 351,973 367,211 383,656 40l,014 419,140 2,581,644 ----------- ---------- ---------- ---------- ---------- ---------- ---------- ----------- TOTAL CAPITAL EXPENDITURES $ 3,469,822 $3,097,108 $3,176,438 $3,432,407 $3,637,853 $3,786,689 $3,941,802 $24,542,120 AS A % OF OPERATING INCOME 23.0% 18.7% 17.7% 17.9% 17.6% 17.1% 16.6%
54 - ------------------------------ CABLE TV FUND 12-BCD VENTURE EXHIBIT I PALMDALE/LANCASTER. CALIFORNIA --------- AS OF DECEMBER 31,1997 - ------------------------------ DEPRECIATION - ------------
YEAR 1 YEAR 2 YEAR 3 YEAR 4 YEAR 5 YEAR 6 YEAR 7 ------ ------ ------ ------ ------ ------ ------ ESTIMATED DEPRECIATION RATES 14.3% 24.5% 17.5% 12.5% 8.9% 8.9% 8.9% DEPRECIATION - BEG. & ADTNS 1998 1999 2000 2001 2002 2003 2004 TOTAL ---- ---- ---- ---- ---- ---- ---- ----- YEAR 1 $ 5,825,519 $ 9,983,693 $7,130,044 $5,091,724 $3,640,440 $3,636,363 $3,640,440 $38,948,224 YEAR 2 442,577 758,482 541,684 386,829 276,572 276,262 2,682,406 YEAR 3 453,913 777,910 555,559 396,737 283,656 2,467,775 YEAR 4 490,491 840,596 600,328 428,708 2,360,123 YEAR 5 519,849 890,910 636,261 2,047,020 YEAR 6 541,118 927,360 1,468,478 YEAR 7 563,284 563,284 ----------- ----------- ---------- ---------- ---------- ---------- ---------- ----------- TOTAL DEPRECIATION $ 5,825,519 $10,426,269 $8,342,439 $6,901,809 $5,943,274 $6,342,028 $6,755,970 $50,537,309
55
CABLE TV FUND 12-BCD VENTURE EXHIBIT J ------------- PALMDALE/LANCASTER, CALIFORNIA AS OF DECEMBER 31, 1997 ASSUMPTIONS AND INPUTS - ---------------------- REMAINING LIFE OF FRANCHISES (YEARS) 6 AVERAGE SUBSCRIBER LIFE (YEARS) 7 INCOME TAX RATE 34% CAPITAL GAIN RATE 34% NET FMV OF EXISTING ASSETS $37,296,583 SUBSCRIBERS IN FRANCHISES 100% LOW HIGH ANALYSIS ANALYSIS -------- ----------- DEBT PERCENTAGE 50% 50% EQUITY PERCENTAGE 50% 50% RESIDUAL MULTIPLE (ROE & ROI) 9.0 9.0 MULT OF PAST YEAR'S OPERATING INCOME 10.0 11.0 MULT OF CURRENT YEAR'S OPERATING INCOME 9.5 10.5 MULT OF NEXT YEAR'S OPERATING INCOME 9.0 10.0 TARGET RETURN ON EQUITY 14.0% 12.0% TARGET RETURN ON INVESTMENT 16.6% 15.1%
56 EX-99.(B)(2) 4 APPRAISAL BY WALLER CAPITAL CORPORATION EXHIBIT 99(b)(2) ============ CONFIDENTIAL (to the 3 Fund 12 Rule 13e-3 ============ Transaction Statements) JONES INTERCABLE, INC. Valuation of Palmdale/Lancaster System February 23, 1998 WALLER CAPITAL -------------- CORPORATION _______________________________________________________________________________ JONES INTERCABLE, INC. ________________________________________________________________________________ Table of Contents INTRODUCTION.......................................................I STATE OF THE CABLE MARKET.........................................II SYSTEM OVERVIEW..................................................III VALUATION.........................................................IV Scope and Approach Methodology DCF Analysis Summary COMPARABLE TRANSACTION ANALYSIS....................................V APPENDIX..........................................................VI DCF Valuation Comparable Transaction Valuation ________________________________________________________________________________ Waller Capital Corporation ________________________________________________________________________________ JONES INTERCABLE, INC. ________________________________________________________________________________ INTRODUCTION At the request of Jones Intercable, Inc. ("Jones" or the "Company"), Waller Capital Corporation ("Waller Capital") has conducted an appraisal of the fair market value of the cable television system serving the Palmdale/Lancaster area of California which is owned by a joint venture of Cable TV Funds 12-B, 12-C and 12-D (the "System"). This valuation,, as directed, assumes independence from the Littlerock system owned by Cable TV Fund 14-B. As of December 31) 1997,, the System passed 87,773 homes and served 65,447 equivalent basic subscribers for a penetration rate of 72%. Neither Waller Capital nor any of their representatives have any active or contemplated direct interest in Jones, the Cable TV Fund or any of its affiliates, except for incidental shareholdings of Jones. ________________________________________________________________________________ WALLER CAPITAL CORPORATION -1- ________________________________________________________________________________ JONES INTERCABLE, INC. ________________________________________________________________________________ STATEMENT OF APPRAISAL ASSUMPTIONS AND LIMITING CONDITIONS This appraisal has been prepared pursuant to the following general assumptions and general limiting conditions: 1. We assume no responsibility for the legal description or matters including legal or title considerations. Title to the subject assets, properties, and business interests are assumed to be good and marketable unless otherwise stated. 2. The subject assets, properties, and business interests are appraised free and clear of any or all liabilities, liens and encumbrances unless otherwise stated. 3. We assume responsible ownership and competent management with respect to the subject assets, properties, or business interests. 4. The information furnished by others is believed to be reliable. However, we issue no warranty or other form of assurance regarding its accuracy. 5. We assume that there is full compliance with all applicable Federal, state, and local regulations and laws unless noncompliance is stated, defined, and considered in the appraisal report. 6. We assume that all required licenses, certificates of occupancy, consents, or legislative or administrative authority from any local, state or national government, private entity or organization have been or can be obtained or renewed for any use on which the valuation opinion contained in this report is based. 7. Possession of this valuation opinion presentation, or a copy thereof, does not carry with it the right of publication. It may not be used for any purpose by any person other than the party to whom it is addressed without our written consent and, in any event, only with proper written qualifications and only in its entirety. ________________________________________________________________________________ WALLER CAPITAL CORPORATION -2- ________________________________________________________________________________ JONES INTERCABLE, INC. ________________________________________________________________________________ 8. We, by reason of this valuation, are not required to give testimony, or to be in attendance in court with reference to the assets, properties, and business interests in question unless arrangements have been previously made. 9. No part of the contents of this presentation shall be disseminated to the public through advertising, public relations, news, sales, or other media without Waller Capital's prior written consent and approval. 10. We assume no responsibility for any financial reporting judgements which are approximately those of management. Management accepts the responsibility for any related financial reporting with respect to the assets, properties, and business interests encompassed by this appraisal. 11. We have no responsibility to update this presentation for any changes occurring subsequent to issuance. ________________________________________________________________________________ WALLER CAPITAL CORPORATION -3- ________________________________________________________________________________ JONES INTERCABLE, INC. ________________________________________________________________________________ STATE OF THE CABLE MARKET During 1994, the market for cable systems were dictated by regulatory matters. RBOC interest early in the year created a near frenzy in the market. Moreover, the FCC's announced alterations to current rate regulation schemes on February 22nd caused a serious market disruption. The market's bellwether transaction, Bell Atlantic/TCI, collapsed, bringing the market for cable systems down. Southwestern Bell's deal with Cox also unraveled. Other RBOCs were soon to follow Bell Atlantic's lead and the demand for cable systems was greatly reduced. The transaction marketplace stalled until mid-summer 1994, as cable operators once again worked to understand the impact of potential 17% basic rate rollbacks and unclear cost-of-service guidelines. However, as in the prior year, cable operators were willing to focus on acquisition opportunities once they assimilated these changes. Perhaps the forces driving consolidation were now even stronger as competition from telephone companies was more likely. The necessity to amass capital and critical market mass to compete in voice and data telecommunications was more evident. Transaction activity picked up strongly in the second half of 1994 despite generally weak capital markets. Commercial banks were supportive of the largest MSOs, with commercial bank capital in short supply for many smaller and mid- sized operators. The high yield debt market was weak, as rising short-term rates limited demand ________________________________________________________________________________ WALLER CAPITAL CORPORATION -4- ________________________________________________________________________________ JONES INTERCABLE, INC. ________________________________________________________________________________ among high yield buyers. Public equity markets were depressed due to the exodus of RBOCs. However, many sellers were willing to accept securities from buyers, the sale of Times Mirror, Summit Communications and Newhouse Broadcasting being noteworthy. Competitive forces increased their pressures upon the cable industry in late 1994 with two new digital DBS/DSS providers joining the four-year veteran PrimeStar Partners ("PrimeStar") owned by GE American Communications. October saw the launch of GM-Hughes Electronics' DirecTV ("DirecTV") and Hubbard Broadcasting's United States Satellite Broadcasting ("USSB"), both using the much-publicized 18-inch (Ku-band) digital satellite dish technology. The reduced size of these antennae, coupled with broad channel offerings and digital-quality audio, in large measure offset the initial high startup equipment price associated with the new systems, and demand for the dishes was very brisk. While most attractive to rural customers outside cable service areas, the DBS/DSS systems are also very competitive inside cable service areas in the market for premium and tier-level customers. The entry of DirecTV and USSB, along with PrimeStar, has subjected cable MSOs in many areas to effective competition, placing pressure on service rates. This pressure is likely to increase in the future as DBS/DSS providers introduce interactivity to their product offerings. By year-end 1994, the market for systems had stabilized. In addition, the fall elections brought optimism on the regulatory front. Republican Senate Commerce Committee chairman Larry Pressler introduced legislation that ________________________________________________________________________________ WALLER CAPITAL CORPORATION -5- ________________________________________________________________________________ JONES INTERCABLE, INC. ________________________________________________________________________________ aimed to achieve sweeping cable/telecommunications deregulation and reform. The market was enthusiastic that an approved bill would provide for the repeal of the current federally controlled cable rate structure, and fully open the local cable and telephony markets to both MSOs and telcos. In addition, the legislation contemplated allowing the RBOCs to enter long-distance and telecom equipment making markets, as well as relax the restrictive broadcast station ownership rules currently in place. 1995 was a year of restructuring, mergers, acquisitions, strategic joint- ventures, leveraging and the beginning of a what will prove to be a long battle for the multimedia consumer dollar. Telcos, MSOs and long-distance carriers ("LDC"s) formed alliances in an attempt either to protect themselves from unserved areas or to complement their current product offerings: 1) Bell Atlantic/NYNEX (wireless, video programming) ii) U.S. West/Pactel's Airtouch Communications (wireless); iii) AT&T/McCaw Cellular (wireless); iv) Disney/BellSouth/Ameritech/SBC Communications (programming); v) MCI/News Corp. (DBS, Internet); vi) Sprint/TCI/Comcast/Cox (cable, wireline and wireless telephony). Perhaps the last alliance is the most telling of what will be MSO's preferred method of competing in an open playing field where consumers can choose one provider for cable, telephony and long-distance. Senator Pressler's pending telecommunications reform legislation reform has caused cellular providers, MSOs and LDCs to rethink their growth and product strategies in an open, competitive environment and without exclusive franchise areas or protected products. ________________________________________________________________________________ WALLER CAPITAL CORPORATION -6- ________________________________________________________________________________ JONES INTERCABLE, INC. ________________________________________________________________________________ Over $20 billion in mergers were announced or closed in the cable industry during 1995, including Time Warner/Cablevision Industries,, Intermedia/Viacom, TCI/Viacom, Time Warner/Houston Industries (Paragon/KBLCOM), Comcast/E.W. Scripps, Marcus/Sammons and Gannett/Multimedia. Through June 30, 1996, cable systems serving 6.7 million subscribers were sold in deals valued at $13.7 billion, ahead of last years record of $10 billion over the same period. The major deal of 1996 was US West Media's acquisition of Continental's cable systems for $9.2 billion. MSOs faced the key operating decision of whether to consolidate into strategic clusters or to sell to the highest bidder. Access to capital was a key factor in this decision. The enormous expected costs to upgrade cable plant using fiber so that voice and data transmission would be possible prompted MSOs to look for scale economies by growing quickly via acquisitions. While the demand for capital remained strong throughout the year, the supply of capital was also available through private and public debt markets to qualified MSOs. In addition, an abundance of private equity was available to cable companies as demonstrated by the following: 1) Austin Ventures/B.T. Capital extended $20 million to Classic Cable; ii) Calpers extended $250 million to Comcast; iii) Goldman Sachs extended $180 million to Marcus Cable; iv) Hicks Muse extended $115 million to Marcus; v) J.P. Morgan extended $125 million to FrontierVision; vi) Kelso/Charterhouse extended $300 million to Charter Communications; and vii) Spectrum Partners/Fleet Ventures/T.A. Associates extended $50 million to Galaxy. ________________________________________________________________________________ WALLER CAPITAL CORPORATION -7- ________________________________________________________________________________ JONES INTERCABLE, INC. ________________________________________________________________________________ Two significant events have occurred in the regulatory arena which have essentially removed the burdens imposed by the 1992 Cable Act on small cable operators. As a result, small cable operators will have substantial flexibility to increase rates based more on business and market considerations than on regulatory limits. In June, 1995, the Federal Communications Commission issued an order (the "Small Systems Order") adopting new rules that reduce the regulatory burdens of the 1992 Cable Act on small cable systems that own MSOs serving fewer than 400,000 subscribers. Under the Small Systems Order, the regulatory benefits accruing to small cable systems remain effective even if such systems are later acquired by an MSO that serves in excess of 400,000 subscribers. More recently, Congress enacted the 1996 Telecom Act that provides regulatory relief for companies serving fewer than 600,000 subscribers. These two events have allowed qualified MSOs to begin raising cable rates. This bodes well for future growth in the cable industry's revenue and cash flow figures. DBS competition has grown into a credible threat to cable's subscriber base. Primestar, DirecTV, USSB and Echostar have acquired subscribers at an increasing rate. Due to several multi-million dollar marketing campaigns, DBS has become a significant threat to the high-end cable customer. However, the lack of local broadcast stations, the high cost of initial setup and certain logistical problems have hampered wide-scale defections to DBS services. ________________________________________________________________________________ WALLER CAPITAL CORPORATION -8- ________________________________________________________________________________ JONES INTERCABLE, INC. ________________________________________________________________________________ RBOCs have also entered the video market by acquiring wireless cable operators, or MDS/MMDS operators. The markets believe that RBOCs view wireless cable as a short-term, stopgap measure to deliver video to the home, while they are developing a long-term, cost-effective, quality delivery method. During 1997, the cable industry continued to exhibit attractive opportunities for growth and appreciation to well positioned MSOs. Whereas the public equity markets battered MSOs during 1996, 1997 was a boom year. From the reevaluation within the public market to the funds from private equity firms to the lessened costs of high yield financing, MSO's saw increased investment in their companies and within the industry. Cable modems and other data services became more of a reality with an increased focus, improved technologies and increased capital expenditures. Additionally, with refined compression methods, MSOs have been able to increase their channel offerings without extensive capital expenditures. In an effort to achieve economies of scale, clustering and consolidation of systems continued to be the major goals of MSOs. ________________________________________________________________________________ WALLER CAPITAL CORPORATION -9- ________________________________________________________________________________ JONES INTERCABLE, INC. ________________________________________________________________________________ SYSTEM OVERVIEW Overview - -------- The System has one headend and serves Lancaster, Palmdale, Edwards Air Force Base and portions of Los Angeles County and is located in the Antelope Valley of California. As of December 31, 1997, the Systems passed 87,773 homes with 1,012.7 miles of plant (86.7 homes per mile), and served 65,447 equivalent basic subscribers, representing a 72% basic penetration. Equivalent pay units totaled 42,731 representing a 65.0% pay penetration. The largest employers of the area are Edwards Air Force Base, Plant 42, Boeing and Lockheed. Recently, the Antelope Valley has become the West Coast distribution center for Frito Lay, Coca-Cola, UPS, Rite Aid, Lance Campers and Michael's Furniture. Customer Service. - ----------------- The System is operated from one full-service office in Palmdale, California. The System employs 23 full-time and 9 part-time Customer Service representatives. There is a large percentage of walk-in traffic due to the prevalent delay in mail delivery within the area. Technical Profile - ----------------- The System has one headend and eight receive sites. In addition to the 1,012.7 miles of coaxial plant, the system also has 83.95 miles of fiber plant. Currently, the longest trunk amplifier cascade is 10 amps and the longest line ________________________________________________________________________________ WALLER CAPITAL CORPORATION -10- ________________________________________________________________________________ JONES INTERCABLE, INC. ________________________________________________________________________________ extender cascade is 2. Recently, the System completed a 159-mile upgrade/retrofit that increased channel capacity from 450 MHz to 550 MHz. Also included in thus project was a 15 mile fiber extension which reduced amplifier cascades and provides redundancy. ________________________________________________________________________________ WALLER CAPITAL CORPORATION -11- ________________________________________________________________________________ JONES INTERCABLE, INC. ________________________________________________________________________________ SCOPE AND APPROACH The primary purpose of this valuation is to arrive at the fair market value of the System. Fair market value is defined as the amount at which a property would change hands between a willing buyer and a willing seller when neither is acting under compulsion and when both have reasonable knowledge of all the relevant facts. The valuation was determined on a cash-for-assets basis. In arriving at our opinion as to the fair market value of Jones's cable television System, we utilized audited and unaudited financial statements, visited the System, met with the management of Jones to discuss its business, current operations and prospects, analyzed published financial and operating information considered by us to be comparable or related to the Company's cable television System, and made other financial studies, analyses and investigations as we deemed appropriate. ________________________________________________________________________________ WALLER CAPITAL CORPORATION -12- ________________________________________________________________________________ JONES INTERCABLE, INC. ________________________________________________________________________________ POSITIVE AND NEGATIVE OBSERVATIONS As outlined below, numerous elements, both quantitative and qualitative, were factored into our valuation. We highlight below some of these elements that were considered. Positive Observations - --------------------- . Attractive Demographics: Average household income, as calculated by National Decision Systems, is $64,743, significantly higher than the U.S. average ($55,449). Due to the technical profile of the largest employers (aerospace and defense), the residents of the area are also highly educated. . High Growth: As calculated by National Decision Systems, the area has experienced substantial growth in households from 1980 - 1990 (100.88%). The area's households are expected to grow over 3% per year from 1997 to 2000. . Technical Condition: We believe that the market would judge the 550 Mhz capacity to be sufficient for this market for the near future. Negative Observations - --------------------- . Future Competition: While there is no current wireless competition, there exists the potential that a buyer of the PacBell wireless operation, which could be available for acquisition could have a serious impact in the area due to its flat geography. . Economic Diversity: The local economy, while increasingly diversified, still is heavily dependent on the aerospace and defense industries. ________________________________________________________________________________ WALLER CAPITAL CORPORATION -13- ________________________________________________________________________________ JONES INTERCABLE, INC. ________________________________________________________________________________ METHODOLOGY The general methodology of the appraisal was to evaluate the Discounted Cash Flow ("DCF") stream generated by the System over a ten-year period (fiscal 1998 to 2007), applying all relevant market and economic factors. The ten-year projections were prepared by using Company projections as well as Waller Capital's industry estimates. Developing projections required a general understanding of the Company's current business and future plans. This understanding was obtained through on-site due diligence, a review of ii) the 1998 System operations budget prepared by the Company, ii) other operating and subscriber data and projections; and iii) demographic data as it relates to the System's service area. A sale was assumed to occur in the tenth year (2007) of the DCF model. The cash flow sales multiples selected reflect the long-term prospects for cash flow growth and the cash flow quality of the System. The multiple selected also accounted for the presumed technical condition of the System at the time of sale. The multiple selected was applied against the full tenth-year System cash flow. This analysis utilized a discount rate of 14% derived from Waller Capital's Weighted Average Cost of Capital ("WACC") model. The Discount rate was commensurate with a probable buyer's capital structure, operating risk and other factors associated with the operations of Jones. The discount rate used was consistent with the WACCs ________________________________________________________________________________ WALLER CAPITAL CORPORATION -14- ________________________________________________________________________________ JONES INTERCABLE, INC. ________________________________________________________________________________ for an average cable buyers, private or public, and adjusted for certain factors such as size, liquidity, leverage and risk associated with a typically cable System buyer. Waller Capital's analysis was further supported by comparable System sales. Waller Capital examined specific transactions to determine if an appropriate multiple of cash flow could be derived from current market information. Waller Capital examined multiples from announced and completed cable television transactions for 1996 and 1997, relying upon data from transactions executed by Waller Capital, from Paul Kagan Associates, Inc., and general industry information. However, comparable sales data is difficult to generalize from because of the variability of factors such as System size, growth prospects, penetration, location, demographics, technical System condition and franchise terms,, which are often not publicly available. Given these limitations, Waller Capital is of the opinion that comparable sales data offers only an approximation of factors that help devise a fair market value and is used as a reasonableness test of the DCF approach to value. CONCLUSION BASED ON THE INVESTIGATION AND ANALYSIS OUTLINED IN THIS REPORT, THE FAIR MARKET VALUE OF THE SYSTEM, AS OF JANUARY 1, 1998, WAS $142,604,000. ------------- ________________________________________________________________________________ WALLER CAPITAL CORPORATION -15- ________________________________________________________________________________ JONES INTERCABLE, INC. ________________________________________________________________________________ DISCOUNTED CASH FLOW METHODOLOGY A discounted cash flow ("DCF") approach was utilized to value the System as DCF measures the current value of an investment as the present value of its future economic benefits such as earnings and proceeds from disposition. A DCF model was developed for the System. While we considered and implemented some of the projections of revenues and expenses developed by the Company for 1998, industry projections and demographic forecasts were also used in our DCF model. To arrive at System cash flow, operating expenses were deducted from projected revenues. Corporate and regional management allocations were not deducted from revenue because a potential buyer would not incur these costs when managing the System. Cash flows recorded on the balance sheet (capital expenditures) were subtracted from System cash flow to determine debt free net cash flow. In addition, we incorporated our estimates of long-term growth, discount rate, inflation and other factors. Our DCF analysis yielded the value of the System. ________________________________________________________________________________ WALLER CAPITAL CORPORATION -16- ________________________________________________________________________________ JONES INTERCABLE, INC. ________________________________________________________________________________ INCOME STATEMENT SUMMARY Homes Passed and Subscriber Revenues HOMES PASSED: Homes passed growth was projected based on a combination of management's projections, trailing homes passed growth, economic variables, discussions with management, future prospects and unserved areas reachable by existing plant. This analysis resulted in homes passed growth of approximately 1.5% per annum. over the 10-year projection period. BROADCAST/BASIC SUBSCRIBERS: Broadcast and Basic services were combined,, in order to easily evaluate these rates. The Broadcast/Basic tier reflect the subscribers that utilize the most highly penetrated service in the System's rate package. Subscriber growth estimates was based on a combination of factors including management's forecasts, the System's demographics, current penetration, historical trends, availability of off-air signals, local competition, current rates, service offerings, and the technical quality of the System plant. ________________________________________________________________________________ WALLER CAPITAL CORPORATION -17- ________________________________________________________________________________ JONES INTERCABLE, INC. ________________________________________________________________________________ PAY SUBSCRIBERS: Pay subscriber growth was based on a combination of factors including management's projections, the System's demographics,, current penetration, historical trends, availability of off-air signals, other entertainment alternatives, rates, service offerings, and the technical quality of the System plant. PPV MOVIES AND EVENTS: PPV Movies and Events ("PPV") were combined and projected based on management forecasts, discussions with management, economic variables, historical trends, the availability of other entertainment alternatives and the technical quality of the System's plant. Revenues BROADCAST/BASIC REVENUE: For the purposes of this analysis, Broadcast, Basic and NPT rates were combined and analyzed against the number of basic subscribers. Rate growth was projected after considering current rates and a combination of factors including the community's demographics, current penetration, historical trends, availability of off-air signals, service offerings, and the technical quality of the System plant. ________________________________________________________________________________ WALLER CAPITAL CORPORATION -18- ________________________________________________________________________________ JONES INTERCABLE, INC. ________________________________________________________________________________ PAY REVENUE: Pay Revenue was determined by considering current weighted rates and a combination of factors including the System's demographics, current penetration, historical trends, inflation rate, service offerings, and the technical quality of the System plant. PPV Revenue: PPV Revenue was determined by considering current rates and a combination of factors including the System's demographics, current penetration, historical trends, availability of off-air signals, service offerings, and the technical quality of the System plant. ADVERTISING REVENUE: Advertising Revenues were projected based on management's projections, economic variables, discussions with management and historical trends. Advertising revenues were projected using varying growth rates which increased over the I 0- year projection period. OTHER REVENUES: Other Revenues were projected based on management's projections, economic variables, discussions with management, the technical quality of the System plant, and historical trends, as well as, new services potentially ________________________________________________________________________________ WALLER CAPITAL CORPORATION -19- ________________________________________________________________________________ JONES INTERCABLE, INC. ________________________________________________________________________________ offered with the completion of a rebuild. Other Revenues include but are not limited to the following: connection charges, converter rental revenue, late fees and home shopping revenues. Other revenues were projected over the 10-year projection period using varying growth rates and are expected to increase as new services, such as cable modems and telephony services become available. Operating Expenses The following expenses reduced revenues in order to determine System cash flow: PERSONNEL RELATED EXPENSES: Personnel Expenses were determined by growing the 1997 Expense by a factor that reflects inflation and customary increases in wages. SUBSCRIBER RELATED EXPENSES: Subscriber Related Expenses, which includes basic and tier programming costs and customer billing, were determined by growing the 1997 Expense by a factor based on discussions with management, increases in subscribers, the System's channel line-up and the technical quality of the System plant. ________________________________________________________________________________ WALLER CAPITAL CORPORATION -20- ________________________________________________________________________________ JONES INTERCABLE, INC. ________________________________________________________________________________ REVENUE RELATED EXPENSES: Revenue Related Expenses, which includes franchise fees, bad debt expense and premium programming costs, were determined by growing the 1997 Expense by a factor based on discussions with management, increases in subscribers, the System's channel line-up and the technical quality of the System plant. PAY-PER-VIEW EXPENSE: Pay-Per-View Expense was determined by growing the 1997 expense by the inflation rate over the 10-year projection period. SYSTEM PLANT EXPENSES: System Plant Expenses were determined by growing the 1997 Expense by a factor based on historical trends as well as projected increases in subscribers and plant extensions. SYSTEM OFFICE RELATED EXPENSE: System Office Related Expense was determined by growing the 1997 expense by the inflation rate over the I 0-year projection period. ________________________________________________________________________________ WALLER CAPITAL CORPORATION -21- ________________________________________________________________________________ JONES INTERCABLE, INC. ________________________________________________________________________________ MARKETING RELATED EXPENSES: Marketing Expense were based on discussions with management and were driven by such factors as marketing efforts to retain pay subscribers, the growth in local business advertising and technical System upgrades that would provide new products in need of promotion. ADVERTISING: Advertising Expense was determined by growing the 1997 expense by the inflation rate over the I 0-year projection period. ________________________________________________________________________________ WALLER CAPITAL CORPORATION -22- ________________________________________________________________________________ JONES INTERCABLE, INC. ________________________________________________________________________________ CAPITAL EXPENDITURE SUMMARY System cash flow was then reduced by capital expenditures to determine debt free net cash flow. Recently the System was upgraded/retrofitted to increase channel capacity from 450 MHz to 550 MHz. Included through this upgrade was a 15-mile fiber extension that further reduced amplifier cascades and provides redundancy. Currently, the longest trunk amplifier cascade is 10 Amps. In the future, to increase service rates and add new services needed to compete with DBS, such as Internet access or digital services, Jones will need to rebuild its System to 750 MHz. The capital expenditures needed to rebuild the System are spread over 1999 and 2001 at $15,000 per mile. We have assumed a $35 per subscriber cost for maintenance costs per year. ________________________________________________________________________________ WALLER CAPITAL CORPORATION -23- ________________________________________________________________________________ JONES INTERCABLE, INC. ________________________________________________________________________________ TERMINAL VALUE / DISCOUNT RATE Terminal Value The valuation model utilized an exit multiple (which was applied to the 10th year's cash flow) thereby assuming a sale of the System at the end of the DCF projection period. The exit multiple utilized was 9.0x. The exit multiple was determined after analyzing current and projected demographics, System growth prospects, the technical condition of the System at the time of sale and projected financial performance. We also considered the logical buyers for System, which is determined principally by the consolidation that has already occurred in the System's general market, and the characteristics of the System within the Company's market. Discount Rate The resultant debt-free net cash flow streams and terminal value were discounted back to the present value at a 14% discount rate. This discount rate was based on the risk-adjusted industry Weighted Average Cost of Capital ("WACC"). WACC is estimates of the overall rate of return required for an investment by both equity and debt owners. Determination of the weighted average cost of capital required a separate analysis of the cost of equity and the cost of debt. ________________________________________________________________________________ WALLER CAPITAL CORPORATION -24- ________________________________________________________________________________ JONES INTERCABLE, INC. ________________________________________________________________________________ The equity component was determined by using the Capital Asset Pricing Model ("CAPM"). The CAPM incorporates estimates of the risk-free rate for the use of funds, an equity risk premium, an industry premium (Beta), as well as the risks inherent with a specific investment in the System. The debt component of the cost of capital was determined by using the after-tax cost of debt appropriate for the Company. ________________________________________________________________________________ WALLER CAPITAL CORPORATION -25- ________________________________________________________________________________ JONES INTERCABLE, INC. ________________________________________________________________________________ COMPARABLE TRANSACTION ANALYSIS The System has approximately 65,447 subscribers serviced from a single headend. For a comparable System sales analysis, we utilized System of similar size and characteristics of the System. Comparables were selected for a variety of criteria including size, multiple locations, single headends and similar demographics. The following is a summary of the comparable transactions completed in 1996 and 1997. See the Appendix for the complete listing of comparable transactions.
Aggregate Basic Value/ Cash SCF Value Subs Sub Flow Multiple ----- ---- --- ---- -------- ($ million) (000) (millions) 1996 Totals/Weighted Average $468 250 $1,869 $49 9.56x 1997 Totals/Weighted Average $519 295 $1,760 $55 9.42x
Source: Waller Capital Corp.; Paul Kagan Associates ________________________________________________________________________________ WALLER CAPITAL CORPORATION -26- ________________________________________________________________________________ JONES INTERCABLE, INC. ________________________________________________________________________________ The comparable System sales analysis yielded a value per subscriber of $1,810 and a cash flow multiple of 9.5x. This, combined with the better quality of the System, supports and validates Waller Capital's analysis which resulted in an aggregate value for Jones System of $2,179 per subscriber and an 10.5x 1997 cash flow multiple. ________________________________________________________________________________ WALLER CAPITAL CORPORATION -27- ________________________________________________________________________________ WALLER CAPITAL CORPORATION ________________________________________________________________________________ JONES INTERCABLE 23-Feb-98 7:18 PM PALMDALE MSO STATISTICS
----------------------------------------------------------------------------------- Projected -------- FYE 12/31, -------- ----------------------------------------------------------------------------------- Year 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Period 1 2 3 4 5 6 7 8 9 10 - -------------------------------- ----------------------------------------------------------------------------------- OPERATIONS STATISTICS - ------------------------ ---------- % Growth ---------- Homes Passed (1) 87,773 88,380 89,706 91,948 93,328 94,727 96,148 97,591 99,054 100,540 102,048 % Growth N/A See Years 0.7% 1.5% 2.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% Plant Miles 1,013 1,020 1,035 1,061 1,077 1,093 1,109 1,126 1,143 1,160 1,177 Homes Per Mile 86.7 86.7 86.7 86.7 86.7 86.7 86.7 86.7 86.7 86.7 86.7 EQUIVALENT BASIC UNITS 65,447 See Years 66,285 68,176 70,340 71,862 72,940 74,034 75,145 76,272 77,416 78,577 % Growth N/A 1.3% 2.9% 3.2% 2.2% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% % Penetration 74.6% 75.0% 76.0% 76.5% 77.0% 77.0% 77.0% 77.0% 77.0% 77.0% 77.0% Pay Units 42,731 44,391 44,835 45,283 45,736 46,193 46,655 47,122 47,593 48,069 48,550 % Growth N/A See Years 3.9% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% % Basic 65.3% 67.0% 65.8% 64.4% 63.6% 63.3% 63.0% 62.7% 62.4% 62.1% 61.8% PPV 38,833 39,013 39,403 39,797 40,195 40,597 41,003 41,413 41,827 42,245 42,668 % Growth N/A See Years 0.5% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% ---------- - ------------------------ RATE SUMMARY - ------------------------ Basic (1) $24.32 $26.92 $28.00 $29.12 $30.28 $31.49 $32.75 $34.06 $35.42 $36.84 $38.32 % Growth 10.7% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% Pay $7.04 7.62 7.77 7.93 8.09 8.25 8.41 8.58 8.75 8.93 9.11 % Growth 8.2% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% PPV $1.91 2.08 2.16 2.25 2.34 2.43 2.53 2.63 2.74 2.85 2.96 % Growth 8.9% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0% 4.0%
________________________________________________________________________________ WALLER CAPITAL CORPORATION ________________________________________________________________________________ JONES INTERCABLE 23-Feb-98 7:18 PM PALMDALE Discounted Cash Flow Anaysis (000 unless otherwise specified)
---------------------------------------------------------------------------------------- Projected -------- FYE 12/31, -------- ---------------------------------------------------------------------------------------- Year 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Period 1 2 3 4 5 6 7 8 9 10 -------- ---------------------------------------------------------------------------------------- - ------------------------ INCOME STATEMENT SUMMARY - ------------------------ ---------- % GROWTH ---------- REVENUES Basic $19,104 MSO Stats $21,413 $22,905 $24,577 $26,113 $27,565 $29,098 $30,715 $32,423 $34,226 $36,129 % Growth N/A 12.1% 7.0% 7.3% 6.2% 5.6% 5.6% 5.6% 5.6% 5.6% 5.6% Pay 3,610 MSO Stats 4,059 4,182 4,308 4,438 4,572 4,710 4,852 4,999 5,150 5,305 PPV 890 MSO Stats 974 1,023 1,074 1,129 1,185 1,245 1,308 1,374 1,443 1,516 Advertising 2,687 Inflation 2,800 2,884 2,971 3,060 3,151 3,246 3,343 3,444 3,547 3,653 Other 3,599 varies 3,800 3,914 4,227 4,565 4,931 5,325 5,751 6,211 6,397 6,589 ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- TOTAL REVENUE $29,890 $33,046 $34,907 $37,157 $39,305 $41,404 $43,624 $45,970 $48,451 $50,763 $53,193 % Growth N/A 10.6% 5.6% 6.4% 5.8% 5.3% 5.4% 5.4% 5.4% 4.8% 4.8% ----------------------------- Inflation Factor 3.00% ----------------------------- OPERATING EXPENSES Personnel Expenses $ 2,575 5%+Inflation 2,800 3,024 3,266 3,527 3,809 4,114 4,443 4,799 5,183 5,597 Subscriber Related Expenses 5,218 See Growth 5,600 5,936 6,292 6,670 7,070 7,494 7,944 8,420 8,926 9,461 % Growth N/A 7.3% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% 6.0% Revenue Related Expenses 4,470 varies 4,700 5,076 5,482 5,866 6,276 6,716 7,186 7,689 8,227 8,803 Pay-Per-View 523 Inflation 575 592 610 628 647 667 687 707 728 750 System Plant Related Expenses 1,302 varies 1,450 1,494 1,538 1,584 1,632 1,691 1,731 1,783 1,837 1,892 System Office Related Expenses 410 Inflation 450 464 477 492 506 522 537 553 570 587 Marketing Related Expenses 928 varies 1,050 1,082 1,114 1,147 1,182 1,217 1,254 1,291 1,330 1,370 Advertising Related Expenses 891 varies 1,000 1,030 1,061 1,093 1,126 1,159 1,194 1,230 1,267 1,305 System G/A Expenses 2 varies 3 3 3 3 3 3 3 3 3 3 - - - - - - - - - - - Total Operating Expenses $16,318 $17,628 $18,699 $19,843 $21,010 $22,251 $23,573 $24,979 $26,476 $28,071 $29,769 % Growth N/A 8.0% 6.1% 6.1% 5.9% 5.9% 5.9% 6.0% 6.0% 6.0% 6.0% ---------- U.L. SYSTEM CASH FLOW (EBITDA) $13,572 $15,418 $16,209 $17,314 $18,295 $19,153 $20,051 $20,991 $21,974 $22,693 $23,424 % Margin 45.4% 46.7% 46.4% 46.6% 46.5% 46.3% 46.0% 45.7% 45.4% 44.7% 44.0% % Growth N/A 13.6% 5.1% 6.8% 5.7% 4.7% 4.7% 4.7% 4.7% 3.3% 3.2% Revenue/Subscriber /Month $ 38.06 $ 41.54 $ 42.67 $ 44.02 $ 45.58 $ 47.30 $ 49.10 $ 50.98 $ 52.94 $ 54.64 $ 56.41 SCF/Subscriber /Year $207.38 $232.60 $237.73 $246.14 $254.58 $262.58 $270.84 $279.34 $288.11 $293.13 $298.10
- -------------------------------------------------------------------------------- WALLER CAPITAL CORPORATION - -------------------------------------------------------------------------------- Jones Intercable 23-Feb-98 07:18 PM Palmdale Discounted Cash Flow Analysis (000 unless otherwise specified)
------------------------------------------------------------------------------- Projected FYE 12/31, ------ ------------------------------------------------------------------------------- Year 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Period 1 2 3 4 5 6 7 8 9 10 ------ ------------------------------------------------------------------------------- - -------------------------- Summary Valuation Analysis Terminal - -------------------------- Value --------- System Cash Flow (EBITDA) $13,572 $15,418 $16,208 $17,314 $18,295 $19,153 $20,051 $20,991 $21,974 $22,693 $23,424 $210,816 % Growth Upgrade/Rebuild Cap X 15K/Mile 8,321 8,445 Maintenance/New Build Cap X $35/Sub 2,320 2,386 2,462 2,515 2,553 2,591 2,630 2,670 2,710 2,750 ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- Total Capital Expenditures 0 2,320 2,386 2,462 2,515 2,553 10,912 11,075 2,670 2,750 2,832 % of Revenue 0.0% 7.0% 6.8% 6.6% 6.4% 6.2% 25.0% 24.1% 5.5% 5.4% 5.3% Capex/Basic Sub $ 0.0 $ 35.0 $ 35.0 $ 35.0 $ 35.0 $ 35.0 $ 147.4 $ 147.4 $ 35.0 $ 35.5 $ 36.0 Unlevered Free Cash Flow $13,572 $13,098 $13,822 $14,852 $15,779 $16,600 $ 9,139 $ 9,916 $19,305 $19,943 $20,592 Present Value Interest Factor 0.9366 0.8216 0.7207 0.6322 0.5545 0.4864 0.4267 0.3743 0.3283 0.2880 0.2880 ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------- Discounted Cash Flows $12,268 $11,355 $10,703 $ 9,975 $ 9,205 $ 4,446 $ 4,231 $ 7,226 $ 6,548 $ 5,931 $ 60,717 ------------------------ FMV $142,604 ------------------------
- --------------------------------- Assumptions - --------------------------------- Value per Sub Multiple of 1997 Value per Sub Multiple of 1998 Discount rate 14.00% 1997 Cash Flow 1998 Cash Flow Inflation rate 3.0% ------------- ---------------- ------------- ---------------- Exit Multiple (times EBITDA) 9.0% $2,179 10.5 $2,151 9.2 - ---------------------------------
JONES INTERCABLE, INC. - -------------------------------------------------------------------------------- Weighted Average Cost of Capital
Debt/ Debt/ Pfd/ Unlevered Equity Market Total Market (Asset) Company Name Beta (1) Equity Mkt Cap Equity Beta - ------------ -------- ------ ------- ------ --------- Adelphia Communication Corporation 1.16 582.3% 85.3% 0.0% 0.26 Comcast Corporation 1.25 59.7% 37.4% 0.0% 0.92 Cox 0.26 29.0% 22.5% 0.0% 0.22 Century Communications Corp. 0.98 312.1% 75.7% 0.0% 0.34 Cablevision Systems Corporation 1.68 221.0% 68.8% 0.0% 0.72 TCA Cable TV, Inc. 0.81 27.5% 21.6% 0.0% 0.70 Tele-Communications, Inc. 1.16 116.5% 53.8% 0.0% 0.68 Time Warner 1.05 39.5% 28.3% 0.0% 0.85 U S WEST Media 0.77 60.2% 37.6% 0.0% 0.56 -------- ------ ------- ------ ---------- ------------------------------------------------------------------------------------ MEAN 1.01 160.9% 47.9% 0.0% 0.58 MEDIAN 1.05 60.1% 37.6% 0.0% 0.68 ------------------------------------------------------------------------------------
Relevering of Mean Asset Beta (Mean/Median)
Debt/ Pfd/ Relevered Cost of Cost of Cost of Cost of Cost of Equity Equity Beta Debt(P/T) Debt(A/T) Preferred Equity Capital(2) - -------- -------- --------- --------- --------- --------- ------- ---------- 110.0% 0.0% 0.97 7.75% 4.7% 0.0% 24.5% 14.1% 120.0% 0.0% 1.01 7.95% 4.8% 0.0% 25.2% 14.0% 130.0% 0.0% 1.04 8.15% 4.9% 0.0% 25.8% 14.0% 140.0% 0.0% 1.08 8.35% 5.0% 0.0% 26.5% 14.0% 150.0% 0.0% 1.11 8.55% 5.1% 0.0% 27.2% 14.0% - ----------------------------------------------------------------------------------------------------------------------------- 160.0% 0.0% 1.15 8.75% 5.3% 0.0% 27.9% 13.9% - ----------------------------------------------------------------------------------------------------------------------------- 170.0% 0.0% 1.18 8.95% 5.4% 0.0% 28.5% 14.0% 180.0% 0.0% 1.22 9.15% 5.5% 0.0% 29.2% 14.0% 190.0% 0.0% 1.25 9.35% 5.6% 0.0% 29.9% 14.0% 200.0% 0.0% 1.29 9.55% 5.7% 0.0% 30.6% 14.0% 210.0% 0.0% 1.32 9.75% 5.9% 0.0% 31.2% 14.0% FORMULAS ASSUMPTIONS - -------- ----------- Levered Beta D = Debt Unlevered Beta = ----------- ----- ----------- E = Equity Risk Free Rate 5.78% (3) 1 + (D/E)(1-t)+(Pfd/E) t = Marginal Tax Rate Market Risk Premium 19.28% Pfd = Preferred Marginal Tax Rate (t) 40.00% Cost of Equity = Risk Free Rate + Levered Beta * (Market Risk Premium) NOTES: (1) Source BARRA U.S. Equity Model (2) Based in after-tax cost of debt. (3) 10 Year Treasury as of January 2, 1998. - ----------------------------------------------------------------------------------------------------------------------------- Waller Capital Corporation
- -------------------------------------------------------------------------------- WALLER CAPITAL - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- JONES INTERCABLE, INC. - -------------------------------------------------------------------------------- INDUSTRY TRANSACTIONS: ANNOUNCED/PROPOSED CABLE SYSTEM SALES AND TRADES
ANNOUNCE AGGREGATE BASIC VALUE CASH SCF DATE SELLER BUYER LOCATION VALUE SUBS SUB FLOW MULTIPLE - -------- ------------------- ---------------------- -------------- --------- ----- ------- ---------- -------- ($000,000) (000) ($000,000) - ---------------------------------------------------------------------------------------------------------------------------------- 1996 KC CABLE ASS. (CVI) CHARTER LONG BEACH, CA 150 70 2,143 17.4 8.6 - ---------------------------------------------------------------------------------------------------------------------------------- 1996 Meredith Cable Continental MN based MSO 124 74 1,667 12.3 10.1 1996 Jones Intercable Century Comm. LA, Ventura, CA 104 59 1,763 10.5 9.9 - ---------------------------------------------------------------------------------------------------------------------------------- 1996 COLUMBINE/WORLD TCI FORT COLLINS, CO 54 30 1,800 5.3 10.2 - ---------------------------------------------------------------------------------------------------------------------------------- 1996 Jones Partners II Century Comm. Anaheim, CA 36 17 2,118 3.4 10.5 1997 Cablevision Insight Comm. Rockford, IL 97 65 1,492 10.2 9.5 1997 Insight Comm. Cox Comm. Phoenix, AZ 77 36 2,131 8.5 9.1 - ---------------------------------------------------------------------------------------------------------------------------------- 1997 PRIME CABLE CHARTER COMM. HICKORY, NC 69 35 1,957 6.9 10.0 - ---------------------------------------------------------------------------------------------------------------------------------- 1997 Palo Alto Co-Op Sun Country Cbl. Palo Alto, CA 54 27 2,042 4.7 11.5 1997 American Cable LP 5 Mediacom Dagsboro, DE 43 29 1,471 4.8 8.9 1997 Booth Comm Helicon Corp Boone, NC 35 19 1,852 3.7 9.5 1997 Harron Cable Marcus Cable Dallas, TX 35 22 1,601 3.8 9.1 1997 Pegasus Avalon Ptrs. CT, NH 30 15 1,954 3.3 9.0 1997 Auburn Cable Harron Comm Auburn, NY 28 14 1,958 2.8 10.2 1997 Cencom Partners Charter Communications Pelzer, SC 27 21 1,283 3.7 7.5 1997 IntrMeda G Force LLC Kauai, HI 24 12 2,065 2.8 8.6 - ---------------------------------------------------------------------------------------------------------------------------------- 1996 TOTALS AND AVERAGES 5 DEALS $468 250 $1,869 $49 9.56 x 1997 TOTALS AND AVERAGES 11 DEALS $519 295 $1,760 $55 9.42 x - ----------------------------------------------------------------------------------------------------------------------------------
Page 1 of 2 EX-99.(B)(3) 5 APPRAISAL BY BOND & PECARO, INC. Exhibit 99(b)(3) ================================================================================ JONES INTERCABLE CABLE TELEVISION SYSTEM PALMDALE, CALIFORNIA APPRAISAL OF NON-CURRENT ASSETS AS OF DECEMBER 31, 1997 Prepared for: The Jones Group, Ltd. May 29, 1998 BOND & PECARO JONES INTERCABLE CABLE TELEVISION SYSTEM PALMDALE, CALIFORNIA APPRAISAL OF NON-CURRENT ASSETS AS OF DECEMBER 31, 1997 TABLE OF CONTENTS -----------------
Page ---- Introduction 1 System Background 1 Industry Overview 2 Executive Summary 7 Valuation Method 7 Conclusion 10 The Jones Intercable Cable Television System, Palmdale, California System Background 13 Demographic Profile 13 Media Overview 18 Market Analysis 19 Discounted Cash Flow Analysis 24 Comparable Sales Analysis 31 Conclusion 32 Exhibits -------- A. Qualifications of James R. Bond, Jr., Julie A. Kroskin, and Laura R. Stark
JONES INTERCABLE CABLE TELEVISION SYSTEM PALMDALE, CALIFORNIA APPRAISAL OF NON-CURRENT ASSETS AS OF DECEMBER 31, 1997 INTRODUCTION ------------ Bond & Pecaro has been retained to determine the fair market value of the non-current assets of the Jones Intercable cable television system in Palmdale, California, ("the Palmdale System") as of December 31, 1997. Among these assets were towers, electronic equipment, office equipment, vehicles, a cable television distribution plant, cable television franchises, and a cable television subscriber base. System Background - ----------------- The Palmdale System serves Palmdale, Lancaster, Elizabeth Lake, Green Valley, Leona Valley, Quartz Hill, Edwards Air Force Base, and portions of Los Angeles and Kern Counties in California. Most of the system's cable distribution plant operates at 500 mHz with a capacity of 80 channels. Ten vacant channels were available for use as of December 31, 1997. The system is 60% addressable and provides impulse pay-per-view services to subscribers. As of December 31, 1997, the system had 643 miles of underground cable distribution plant and 453 miles of aerial plant. Approximately 87,773 homes are passed by the system's cable distribution plant. -1- As of December 31, 1997, the system had approximately 63,521 basic subscribers, representing a basic subscriber penetration of 72.4%. The system had approximately 42,731 pay subscriptions as of December 31, 1997, yielding a pay to basic ratio of approximately 67.3%. The Palmdale System operates under the provisions of four cable television franchises. The expiration dates associated with each of the franchises are as follows:
Franchise Expiration Date --------- --------------- Lancaster May, 2001 Los Angeles County October, 2005 Palmdale May, 2007 Edwards Air Force Base October, 2004
Industry Overview - ----------------- The cable television industry developed in the late 1940s in order to provide television service to communities in rural Pennsylvania that were too isolated to receive over-the-air broadcasts. Since that time, the industry has grown and diversified to provide a broad range of educational, entertainment, cultural, and sports programming to large urban areas and rural communities alike. According to Broadcasting & Cable Yearbook 1997, the cable industry in the United States consists of approximately 11,800 operating systems serving over 34,000 communities throughout the United States. Approximately 100 additional cable television franchises have been approved but have yet to be constructed. -2- Each system has been granted a franchise by its local municipal government. Franchises are awarded competitively, and the winning bidder must generally provide guarantees that expensive investments in local employment, local programming, and system technical design will be made. The construction of a cable television system is extremely capital intensive. The cost of installing aerial cable often comprises the single largest investment made by a cable television system operator. Underground cable television installation is even more expensive, when considered on a per-mile basis. Additionally, investments must be made in headend facilities, satellite receiving equipment, office facilities, and subscriber equipment such as converter units, that ultimately deliver cable television service to households. Numerous changes have occurred in the development of cable television technology. Original systems used vacuum tube electronics and provided only a few off-air channels to subscribers. By contrast, modern systems are capable of providing over 100 channels of service, including satellite signals and locally originated programs. These systems use solid state amplifiers and addressable converter equipment to control subscriber service levels. Cable television systems provide entertainment, news, music, and other forms of programming to the public. The cable operator must pay a fee, usually calculated on a per-subscriber basis, to program suppliers. These fees may either be determined on a fixed basis or calculated as a percentage of system revenues. -3- In order to cover the costs of operation, systems sell "basic" services such as local television signals, local origination programs, and some satellite services for a fixed monthly fee to all subscribers. Customers also have the option to subscribe to additional "premium" or "pay" services, such as Home Box Office and Showtime, which offer movies, sports, entertainment, and cultural programming. In some cases, cable systems generate additional revenues by selling advertising time to local and national businesses, government agencies, and political organizations which seek to deliver information to the general public. Given the substantial fixed costs resulting from the capital requirements of the business, as well as high programming costs, cable operators seek to maximize system penetration. Two types of system penetration are of paramount importance in the industry. The first is basic penetration, which is a measure of the number of homes subscribing to cable television as a proportion of the homes which are passed by cable; if 400 homes subscribed to cable service in a community of 1,000 homes, basic penetration would be 40%. The second important measure is pay penetration, which gauges the popularity of pay services among those households which subscribe to basic cable service. If each of the 400 cable households in the example subscribed to two pay services, pay penetration would be 200%. Approximately 67% of all households in the United States are currently served by cable television. -4- The linkage between basic penetration, pay penetration, and customer development is fundamental to the cable industry. Operators constantly seek to provide programming and services that will develop the widest appeal among local households. The more effectively the cable operator is able to meet the preferences of the public, the larger the system's subscriber base will be. This relationship between subscribers and revenues is axiomatic in the cable industry and is the primary determinant of success or failure among system operators. The cable industry has become increasingly competitive in recent years. Overall financial performance of the industry has fallen short of expectations that were developed in the early 1980s, when a large number of cable television facilities were constructed. Traditional broadcast stations continue to be the mainstay of television viewing in the United States. In recent years, the FCC has issued many additional licenses for new independent television stations throughout the country. Moreover, cable operators have come under increasing competitive pressure from videocassette rental outlets, satellite program services, and other competing technologies. In order to build the largest possible subscriber base, systems invest heavily in tangible assets, such as distribution equipment and satellite equipment, and intangible assets such as marketing systems and programming agreements. Similarly, investments in equipment and intangible assets, such as managerial talent, may be oriented toward controlling costs and increasing profitability. -5- It is in this marketplace, one defined by heavy capital investment, the relationship between subscriber base size and revenues, and increasing competition, that the Palmdale System operates. In performing this analysis, various sources were employed. These include 1997 Broadcasting & Cable Yearbook; 1997 Television and Cable Factbook; Market Statistics Demographics USA 1997, County Edition; the National Association of Broadcasters and Bond & Pecaro, Inc. The Television Industry: 1997 Television Market-by-Market Review; Paul Kagan Associates Cable TV Investor; other industry publications; internal financial statements and reports provided by the Palmdale System; and financial information and projections supplied by The Jones Group, Ltd. Additionally, the appraiser relied upon information furnished by system management relative to the age, condition, and adequacy of the system's physical plant. These materials are assumed to be accurate with respect to factual matters. -6- JONES INTERCABLE CABLE TELEVISION SYSTEM PALMDALE, CALIFORNIA APPRAISAL OF NON-CURRENT ASSETS AS OF DECEMBER 31, 1997 EXECUTIVE SUMMARY ----------------- An analysis to determine the fair market value of the non-current assets of the Palmdale System has been made. Fair market value is defined as the price in cash or cash equivalents that would be paid by a willing buyer to a willing seller in an arm's-length transaction in which neither party acts under any compulsion to buy or sell. The effective date of this analysis is December 31, 1997. Valuation Method In order to determine the fair market value of the non-current assets of the Palmdale System, a discounted cash flow projection was developed. This income approach measures the expected economic benefits these assets bring to their holder. The fair market value of the assets of the system may therefore be expressed by discounting these future benefits. It is generally accepted that the value of a telecommunications business lies in the fact that it is a "going concern." That is, its value reflects the revenues and, ultimately, the after-tax cash flow that the business may reasonably be expected to generate over a period of years. The potential resale value of the business at the end of that period is also -7- an important factor in the valuation of such properties. A number of factors contribute to going concern value, including the formation of a business plan; the construction of the system headend facility; the development of a functional general, administrative, and technical organization; establishment of a sales and marketing organization; and the coordination of all of these functions into a well defined and efficient operating organization. The market, or comparable sales, approach provides a useful means by which assumptions made in the development of the discounted cash flow analysis can be tested against marketplace transactions. The discounted cash flow model incorporates variables such as capital expenditures, homes passed by the system, basic penetration, pay penetration, system revenue projections, anticipated system operating expenses and profits, and various discount rates. The variables used in the analysis reflect historical system and market growth trends as well as anticipated system performance and market conditions. The capital expenditures provision reflects the amount of investment required to expand and maintain a competitive cable television business in the Palmdale, California area. The discounted cash flow projection period of ten years was judged to be an appropriate time horizon for the analysis. Cable operators and investors typically expect to recover their investments within a ten year period. It is over this period that projections -8- regarding market demographics, system basic and pay penetration, and operating profit margins can be made with the highest degree of accuracy. Over this ten year period, household growth in the Palmdale area, anticipated market penetration percentages, and system operating performance expectations were used to project the system's operating profits. Income taxes were deducted from the projected operating profits to determine after-tax net income. Depreciation and amortization expenses were added back to the after-tax income stream and projected capital expenditures were subtracted to calculate the system's net after-tax cash flow. The stream of annual cash flow was adjusted to present value using a discount rate appropriate for the cable television industry. The discount rate used is based upon an after-tax rate calculated for the cable television industry. Additionally, it was necessary to project the system's residual value at the end of the ten year projection period. In order to determine this value, an operating cash flow multiple was applied to the system's 2007 operating cash flow projection. The terminal value represents the hypothetical value of the system at the end of the projection period. Taxes were deducted from the indicated terminal value. The net terminal value was then discounted to present value. The results of these approaches are considered and given appropriate weight in the consolidation portion of the analysis. In order to verify the results of the discounted cash flow analysis, the appraiser also utilized a comparable sales approach, relying upon an -9- analysis of subscriber multiples. The results of this analysis support the conclusion resulting from application of the income approach. Conclusion Based upon the application of the income and market approaches, the indicated fair market value of the non-current assets of the Palmdale system as of December 31, 1997 is determined to be $131,952,600. Recipients of this report agree that all of the information contained herein is of a confidential nature. This report may not, in whole or in part, be reproduced or distributed to others. Each recipient agrees to treat it in a confidential manner, and will not, directly or indirectly, disclose or permit its agents or affiliates to disclose any such information without the consent of Bond & Pecaro, Inc. This analysis is based upon a number of projections. Projections are inherently subject to varying degrees of uncertainty. Their accuracy depends, among other things, upon the reliability of the underlying assumptions and the occurrence of events beyond the control of Bond & Pecaro, Inc. Certain information and assumptions are based upon historical industry data. Some of the assumptions set forth inevitably will prove not to have been correct. Consequently, the results of operations will vary from those set forth in the projections and such variations may be material. -10- Bond & Pecaro, Inc. makes no representations or warranties as to the accuracy or completeness of the information or projections and assumptions contained herein, or otherwise furnished in connection with this analysis. Neither Bond & Pecaro, Inc. nor its personnel assume any liability for damages, direct or indirect, arising out of or related to this report, the information or assumptions or projections contained herein, any omissions from this report, or any information otherwise provided regarding this report. Neither this firm nor any of its employees has any present or anticipated economic interest in the Jones Intercable cable television system or The Jones Group, Ltd. The compensation received by the firm was in no way contingent upon the values or the conclusions developed herein. This appraisal was prepared for The Jones Group, Ltd. in connection with internal management requirements. The report is not to be otherwise cited or disseminated without the prior written consent of Bond & Pecaro, Inc. -11- All information and conclusions contained in this report are based upon the best knowledge and belief of the undersigned, whose qualifications are attached hereto. BOND & PECARO, INC. BY /s/ James R. Bond, Jr. 1201 Connecticut Ave., N.W. ----------------------------- Suite 450 James R. Bond, Jr. Washington, D.C. 20036 (202) 775-8870 May 29, 1998 BY /s/ Julie A. Kroskin ----------------------------- Julie A. Kroskin BY /s/ Laura R. Stark ----------------------------- Laura R. Stark -12- JONES INTERCABLE CABLE TELEVISION SYSTEM PALMDALE, CALIFORNIA APPRAISAL OF NON-CURRENT ASSETS AS OF DECEMBER 31, 1997 JONES INTERCABLE CABLE TELEVISION SYSTEM ---------------------------------------- SYSTEM BACKGROUND The Palmdale System serves Palmdale, Lancaster, Elizabeth Lake, Green Valley, Leona Valley, Quartz Hill, Edwards Air Force Base, and portions of Los Angeles and Kern Counties in California. The technical operations of the Palmdale System are conducted at nine sites. These consist of a main office located at 41551 10th Avenue West in Lancaster, a headend facility at 3565 Vista View, Tenhi Peak in Palmdale, and seven AML sites located in Lancaster, Palmdale, Quartz Hill, Leona Valley, Elizabeth Lake, and Edwards Air Force Base, all in California. DEMOGRAPHIC PROFILE The Palmdale System is located within the Los Angeles, California television market, which, according to Broadcasting & Cable Yearbook 1997, ranks second in the United States. Population, income, retail sales, employment composition, and other economic characteristics of the market were considered in this analysis. -13- Population Growth The current and projected populations of the Los Angeles market are shown in Table 1. In 1996, the market population was approximately 15.6 million. The population of the market area is projected to increase at an annual rate of 0.7% through the year 2001, based upon forecasts contained in Market Statistics Demographics USA 1997, County Edition. This is slightly below the 0.9% projected annual rate of population growth for the State of California, as well as the 0.8% annual increase projected for the United States. Income Growth Summary income data for the Los Angeles market are also contained in Table 1. Current income levels and projected growth rates for the market are compared with averages for the State of California and for the United States. Total Effective Buying Income ("EBI")/1/ in the Los Angeles market during the 1996-2001 period is projected to increase from approximately $224.2 billion to $260.9 billion. Per capita EBI is projected to increase from $14,357 to $16,102 over the same period. EBI per household is approximately 0.9% lower than the average for the State of California and almost 4.4% higher than the national average. - ------------ /1/ EBI is defined by Market Statistics Demographics USA 1997, County Edition as "personal income less personal tax and non-tax payments." -14- The projected income growth rate for the Los Angeles market is below that of the state and nation. The per capita and per household income growth rates for the market are similar to state levels, but are lower than national rates. In summary, incomes in the Los Angeles area are relatively low in comparison to national averages. In contrast, economic growth rates in the market are also lower than national averages reflecting the modest growth characteristics of the area. Retail Sales Growth Retail sales data provide additional information regarding economic activity in the Los Angeles market. As reflected in Table 1, total, per capita, and per household retail sales for the market are projected to grow at compound annual rates of 2.0%, 1.3%, and 1.5%, respectively, during the 1996-2001 period. Projected retail sales in the area are compared to those for the State of California and the United States. Using these measures, the total retail sales growth in the Los Angeles market falls well below state and national averages. For example, total retail sales growth during the 1996-2001 period is expected to average 2.0% in the Los Angeles market, compared to 2.9% in the State of California, and 4.0% in the United States as a whole. Retail sales per capita of $7,675 in the market are well below the national average of $9,214 and also below the California average of $8,213. -15- Employment Composition Major employers in the market, those with more than 5,000 employees, include county and federal governments, Bank of America, and Kaiser Permanente. Major employers in the Palmdale area include Coca Cola, United Parcel Service, Frito Lay, SST, Rite Aid Drug, and Michael's Crafts. The estimated unemployment rate in the Los Angeles market as of November 1997 was 6.0%, representing a decline from a 7.0% level at the end of 1996./1/ The current rate is higher than the 5.7% unemployment rate for the State of California and considerably higher than the 4.6% national average. - ---------- /1/ Unemployment data from the Bureau of Labor Statistics. -16- Table 1 ------- Demographic and Economic Projections for the Los Angeles DMA, the State of California, and the United States
Annual 1996 2001 Change ---- ---- ------ Population (Thousands) Los Angeles 15,612.4 16,204.8 0.7% California 32,686.8 34,149.6 0.9% U.S. 267,540.6 279,027.7 0.8% Households (Thousands) Los Angeles 5,091.4 5,219.7 0.5% California 11,085.3 11,477.9 0.7% U.S. 98,635.5 103,870.8 1.0% Average Household Size Los Angeles 3.1 3.1 0.0% California 2.9 3.0 0.7% U.S. 2.7 2.7 0.0% Total Effective Buying Income (Millions) Los Angeles 224,152.6 260,924.1 3.1% California 492,517.0 578,578.8 3.3% U.S. 4,161,512.4 5,072,857.0 4.0% EBI per Capita Los Angeles $ 14,357 $ 16,102 2.3% California 15,068 16,942 2.4% U.S. 15,555 18,180 3.2% EBI per Household Los Angeles $ 44,026 $ 49,988 2.6% California 44,430 50,408 2.6% U.S. 42,191 48,838 3.0% Total Retail Sales (Millions) Los Angeles 119,822.0 132,440.8 2.0% California 268,441.8 309,301.4 2.9% U.S. 2,465,147.1 3,004,997.9 4.0% Retail Sales per Capita Los Angeles $ 7,675 $ 8,173 1.3% California 8,213 9,057 2.0% U.S. 9,214 10,770 3.2% Retail Sales per Household Los Angeles $ 23,534 $ 25,373 1.5% California 24,216 26,948 2.2% U.S. 24,992 28,930 3.0%
Source: Market Statistics Demographics USA 1997, County Edition. -17- MEDIA OVERVIEW The Palmdale System faces competition from area television stations, local radio stations, newspapers, direct broadcast satellite ("DBS"), and videocassette rental outlets for audience share and advertising revenues. There are 20 commercial television stations operating in the Los Angeles market:
- -------------------------------------------------------------------------------- Call Letters Channel Affiliation - ------------ ------- ----------- - -------------------------------------------------------------------------------- KCBS-TV 2 CBS KNBC 4 NBC KTLA 5 Independent KABC-TV 7 ABC KCAL 9 Independent KTTV 11 Fox KCOP 13 Independent KSCI 18 Independent KWHY-TV 22 Independent KZKI 30 Independent KVMD 31 Independent KMEX-TV 34 Univision KTBN-TV 40 Independent KRPA 44 Independent KHSC-TV 46 Independent KVEA 52 Telemundo KDOC-TV 56 Independent KSTV-TV 57 Independent KRCA 62 Independent KHIZ 64 Independent - --------------------------------------------------------------------------------
Of the radio stations licensed to the Los Angeles market, 27 achieved a measurable audience share in the last Arbitron rating period, as reported in Duncan's -18- American Radio, Spring 1997. These include six AM radio stations and 21 FM radio stations. The Los Angeles market is also served by the following cable television operators: American Cablesystems of California (206,403 subscribers), Century Southwest Cable TV (170,164 subscribers), and Cox Cable Orange County, Inc. (135,662 subscribers). The major daily newspaper serving the area is the Los Angeles Times, with a total circulation of 967,065 daily and 1,349,889 on Sundays. Three DBS systems are active in the Los Angeles market: Direct TV, USSB, and Prime Star. Additionally, there are numerous videocassette rental outlets in the Los Angeles area. MARKET ANALYSIS Homes Passed The initial parameter upon which the discounted cash flow projection is based is homes passed, or "passings." Two factors affect the number of homes passed, new plant construction and household growth. Plant expansion improves system coverage by allowing the system to offer service to previously unserved areas. Household growth is the result of new construction and occupancies in areas that are already served by the system. -19- It has been assumed that the number of households in the Palmdale System franchise area will increase at a rate equivalent to the average growth projected for the areas served by the system as a whole, or approximately 0.7% per year. Basic and Expanded Basic Penetration Basic and expanded basic subscriber penetration at the system are currently 72.4% and 89.3% (expressed as a ratio of basic subscribers), respectively. It is likely that basic and expanded basic penetration will demonstrate a modest growth trend over the projected 10 year period. For the purpose of this analysis, the appraiser has assumed that basic subscriber penetration will gradually increase from its current level to approximately 76.4% by 2007, as shown in Table 2. Basic subscribers at the system are projected to increase at an annual rate of 1.8% through 2002, which is consistent with management expectations, and 0.7% through 2007, reflecting industry standards. Expanded basic subscribers have been projected to remain at a 89.3% penetration ratio of basic subscribers through 2007. These rates are derived from the historical and anticipated performance of the system and the experience of the cable television industry in general. -20- Pay Penetration As of December 31, 1997, pay penetration at the Palmdale System attained a level of 67.3%. Pay penetration is projected to increase to approximately 90.3% by 2007, as indicated in Table 2. This estimate is reasonable in light of the historical performance of the system and the anticipated performance of the cable television industry in general. Rates System service rates are projected in Table 3. These are based upon prevailing rates in the Palmdale System with provisions for anticipated increases, where appropriate. As of December 31, 1997, monthly rates were $13.81 for basic service, $12.71 for expanded basic service, $6.00 to $10.00 for each pay service, and $1.10 to $2.15 for each converter. Installation fees ranged from $17.00 to $29.00, depending upon the type of installation service performed. Due to regulatory and competitive restrictions, service rates for basic and expanded basic services are expected to grow, while premium channel service rates are expected to remain relatively flat. These assumptions are consistent with management expectations for service rate growth. -21- Table 2 ------- Jones Intercable Cable Television System Subscriber Projections
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 ---- ---- ---- ---- ---- ---- ---- ---- ---- ------ Subscribers - ----------- Homes Passed/1/ 88,387 89,006 89,629 90,257 90,888 91,525 92,165 92,810 93,460 94,114 Basic Subscribers: Beginning of Year 63,521 64,664 65,828 67,013 68,219 69,447 69,933 70,423 70,916 71,412 Net Additions 1,143 1,164 1,185 1,206 1,228 486 490 493 496 500 End of Year 64,664 65,828 67,013 68,219 69,447 69,933 70,423 70,916 71,412 71,912 Average Basic Subscribers/2/ 64,093 65,246 66,421 67,616 68,833 69,690 70,178 70,670 71,164 71,662 Expanded Basic Subscribers (EOY)/2/ 57,745 58,784 59,843 60,920 62,016 62,450 62,888 63,328 63,771 64,217 Premium Subscribers (EOY) 45,006 47,330 49,724 52,188 54,724 56,716 58,733 60,775 62,843 64,937 Basic Service Penetration 73.2% 74.0% 74.8% 75.6% 76.4% 76.4% 76.4% 76.4% 76.4% 76.4% Expanded Basic Penetration (% Subs.) 89.3% 89.3% 89.3% 89.3% 89.3% 89.3% 89.3% 89.3% 89.3% 89.3% Premium Penetration (% Subs.) 69.6% 71.9% 74.2% 76.5% 78.8% 81.1% 83.4% 85.7% 88.0% 90.3%
2005 2006 2007 ---- ---- ---- Subscribers - ----------- Homes Passed/1/ 92,810 93,460 94,114 Basic Subscribers: Beginning of Year 70,423 70,916 71,412 Net Additions 493 496 500 End of Year 70,916 71,412 71,912 Average Basic Subscribers/2/ 70,670 71,164 71,662 Expanded Basic Subscribers (EOY)/2/ 63,328 63,771 64,217 Premium Subscribers (EOY) 60,775 62,843 64,937 Basic Service Penetration 76.4% 76.4% 76.4% Expanded Basic Penetration (% Subs.) 89.3% 89.3% 89.3% Premium Penetration (% Subs.) 85.7% 88.0% 90.3%
- ---------------------- /1/ Number of area households is projected to increase at 0.7% per year. See text. /2/ Basic and expanded basic subscribers are projected to increase at annual rates of 1.8% and 0.7%. See text. -22- Table 3 ------- Jones Intercable Cable Television System Revenue Projections (Dollar Amounts Shown in Thousands)
1998 1999 2000 2001 2002 2003 ---- ---- ---- ---- ---- ---- Service Revenue - --------------- Basic Service Revenue $10,921.4 $11,431.1 $11,963.7 $12,519.8 $13,100.3 $13,631.4 Expanded Basic Service Revenue 8,983.8 9,410.9 9,857.9 10,325.2 10,813.5 11,269.2 Basic Commercial & Pay Revenue/1/ 706.2 776.8 854.5 940.0 1,034.0 1,137.4 Premium Service Revenue 3,679.7 3,872.6 4,070.4 4,274.2 4,483.9 4,673.8 Pay-per-view Revenue/2/ 1,140.1 1,460.5 1,870.9 2,396.6 3,070.0 3,407.7 --------- --------- --------- --------- --------- --------- Subtotal Service Revenue $25,431.2 $26,951.9 $28,617.4 $30,455.8 $32,501.7 $34,119.5 Other Revenue - ------------- Advertising Revenue $ 3,197.2 $ 3,804.7 $ 4,527.6 $ 5,387.8 $ 6,411.5 $ 7,052.7 Installation 575.8 575.8 575.8 575.8 575.8 575.8 Equipment Rentals 1,246.6 1,358.8 1,481.1 1,614.4 1,759.7 1,918.1 Franchise Fees/3/ 1,181.8 1,203.1 1,224.7 1,246.8 1,269.2 1,278.1 FCC Pass Thru Revenue/3/ 32.4 33.0 33.5 34.2 34.8 35.0 Other Revenue 839.6 915.2 997.6 1,087.4 1,185.3 1,292.0 --------- --------- --------- --------- --------- --------- Subtotal Other Revenue $ 7,073.4 $ 7,890.5 $ 8,840.4 $ 9,946.3 $11,236.3 $12,151.7 Total Revenue $32,504.6 $34,842.4 $37,457.8 $40,402.1 $43,738.0 $46,271.2
2004 2005 2006 2007 ---- ---- ---- ---- Service Revenue - --------------- Basic Service Revenue $14,114.2 $14,611.6 $15,123.8 $15,659.6 Expanded Basic Service Revenue 11,679.0 12,101.6 12,537.0 12,993.3 Basic Commercial & Pay Revenue/1/ 1,251.1 1,376.2 1,513.8 1,665.2 Premium Service Revenue 4,841.9 5,012.2 5,184.5 5,359.1 Pay-per-view Revenue/2/ 3,782.5 4,198.6 4,660.4 5,173.0 --------- --------- --------- --------- Subtotal Service Revenue $35,668.7 $37,300.2 $39,019.5 $40,850.2 Other Revenue - ------------- Advertising Revenue $ 7,758.0 $ 8,533.8 $ 9,387.2 $10,325.9 Installation 575.8 575.8 575.8 575.8 Equipment Rentals 2,090.7 2,278.9 2,484.0 2,707.6 Franchise Fees/3/ 1,287.0 1,296.1 1,305.1 1,314.3 FCC Pass Thru Revenue/3/ 35.3 35.5 35.8 36.0 Other Revenue 1,408.3 1,535.0 1,673.2 1,823.8 --------- --------- --------- --------- Subtotal Other Revenue $13,155.1 $14,255.1 $15,461.1 $16,783.4 Total Revenue $48,823.8 $51,555.3 $54,480.6 $57,633.6
- -------------------- /1/ Basic commercial and pay revenue projected to increase at a 10.0% annual rate. /2/ Pay-per-view revenue projected to increase at a 28.1% annual rate for the years 1998-2002 and 11% thereafter. See text. /3/ Franchise Fees and FCC Pass Through Revenue projected to increase based upon a 1998-2002 subscriber growth rate of 1.8% and 0.7% thereafter. See text. -23- DISCOUNTED CASH FLOW ANALYSIS System Revenue Projections Most of the revenue projections appearing in Table 3 are calculated by multiplying the number of subscribers to a particular level of service by the projected rate. Commercial service revenue is projected to increase at an annual rate of 10.0%, based upon management expectations for the system. Similarly, pay-per- view service revenue is projected to increase at a 28.1% annual rate through 2002, based upon system projections, and 11% through 2007, which conforms to industry performance projections. Commercial advertising revenue is projected to increase at a 19.0% annual rate through 2002, consistent with management expectations. This growth rate decreases after 2002, to a level of 10.0%, reflecting industry expectations. Annual installation revenue was projected to remain constant during the projection period. Equipment rental revenues, as well as other revenues, are projected to increase by 9.0% annually through 2007, according to industry estimates. As indicated in Table 3, total system revenues are projected to increase from $32.5 million in 1998 to $57.6 million in 2007. Operating Profit Margins Operating profit margins are based upon historical operating performance of the Palmdale System. Operating profits are defined as profit before interest, depreciation, tax, and corporate allocation charges. During the past three years, system operating profit -24- margins have been within the 44.9% to 46.0% range. For the purposes of this analysis, the system's 1997 operating profit margin of 45.4% has been used in projecting future operating profits. Depreciation Depreciation expense for each year has been determined using the MACRS schedule for Five, Seven, 15, and 39 Year Property, based upon the reported cost of fixed assets present at the system. Federal, State, and Local Tax Rates An estimated tax rate of 41.0% was applied to the projected taxable income of the system. This estimated rate reflects the effective combined federal, state, and local tax rates in effect on December 31, 1997. Subsequent Capital Expenditures Subsequent annual capital expenditures were estimated to approximate 5.0% of the cost of the fixed assets at the Palmdale System as of December 31, 1997. Supplemental provisions were made to incorporate management projections of capital expenditures associated with conversion to digital television. These expenditures are necessary in order to replace assets that become irreparable, technically obsolete, or for other reasons are no -25- longer useful to the system. In addition, as the system matures, additional equipment and facilities will be necessary to improve and expand its productive capacity. Net After-Tax Cash Flow Net after-tax cash flow was determined in two steps. After taxes were subtracted from the system's taxable income, non-cash depreciation expenses were added back to net income to yield after-tax cash flow. From the after-tax cash flow, the provision for subsequent capital expenditures was deducted to calculate net after-tax cash flows. Discount Rate A discount rate of 12.0% was used to calculate the present value of the net after-tax cash flows. In order to account for the risk associated with investments in the cable television industry and the system in particular, a premium was added to a base discount rate to develop the 12.0% rate employed in this analysis. The base rate reflects application of the Weighted Average Cost of Capital ("WACC") model. Residual Cash Flow Multiple The residual cash flow multiple refers to the factor used to estimate the system's value at the end of the projection period. A multiplier of 10.0 was applied to the Year 10 operating cash flow. Generally, multiples used in the valuation of cable television systems of this type range from 8.0 to 12.0 times operating cash flow, depending upon market -26- conditions and profit potential. Exceptional circumstances will warrant multiples outside of this range. The selected multiple of 10.0 was used to estimate the value of the system at the end of the investment period. This multiple reflects the state of the market for cable television systems as of December 31, 1997, tempered by the economic conditions of the system's franchise service area, and the uncertainty introduced by re-regulation of the cable television industry and the prospects for increased competition from wireless cable and DBS operators. Present Value of Residual In the analysis, capital gains taxes were deducted from the discounted terminal value at a rate of 41.0%. This result was then discounted for present value using a rate of 12%. The results of the discounted cash flow analysis are summarized in Tables 4 and 5. Based upon the assumptions outlined above, the indicated fair market value of the system's non-current assets is $131,952,600. This value incorporates the cumulative present value of the net after-tax cash flows of $75,776,400 and the discounted residual value of $56,176,200. -27- Table 4 ------- Jones Intercable Cable Television System Discounted Cash Flow Analysis (Dollar Amounts Shown in Thousands)
1998 1999 2000 2001 2002 2003 ---- ---- ---- ---- ---- ---- Projected System Revenues/1/ $32,504.6 $34,842.4 $37,457.8 $40,402.1 $43,738.0 $46,271.2 Operating Profit Margin/2/ 45.4% 45.4% 45.4% 45.4% 45.4% 45.4% Operating Cash Flow $14,757.1 $15,818.4 $17,005.8 $18,342.6 $19,857.1 $21,007.1 Less: Depreciation 13,476.1 20,023.2 16,627.7 14,542.8 13,746.7 13,877.4 Taxable Income $ 1,281.0 $(4,204.8) $ 378.1 $ 3,799.8 $ 6,110.4 $ 7,129.7 Taxes 525.2 0.0 0.0 0.0 2,494.2 2,923.2 Net Income $ 755.8 $(4,204.8) $ 378.1 $ 3,799.8 $ 3,616.2 $ 4,206.5 Add Back: Depreciation 13,476.1 20,023.2 16,627.7 14,542.8 13,746.7 13,877.4 Net After-Tax Cash Flow $14,231.9 $15,818.4 $17,005.8 $18,342.6 $17,362.9 $18,083.9 Capital Expenditures 3,055.6 4,155.6 4,155.6 5,655.6 5,655.6 5,655.6 Net After-Tax Cash Flow $11,176.3 $11,662.8 $12,850.2 $12,687.0 $11,707.3 $12,428.3 Present Value Net After-Tax Cash Flow $10,560.6 $ 9,839.6 $ 9,679.8 $ 8,532.9 $ 7,030.3 $ 6,663.7 Cum. Present Value Net After-Tax Cash Flow $10,560.6 $20,400.2 $30,080.0 $38,612.9 $45,643.2 $52,306.9 Cum. Present Value Net After-Tax Cash Flow $75,776.4 =========
2004 2005 2006 2007 ---- ---- ---- ---- Projected System Revenues/1/ $48,823.8 $51,555.3 $54,480.6 $57,633.6 Operating Profit Margin/2/ 45.4% 45.4% 45.4% 45.4% Operating Cash Flow $22,166.0 $23,406.1 $24,734.2 $26,165.7 Less: Depreciation 13,942.7 12,335.9 10,219.2 9,718.4 Taxable Income $ 8,223.3 $11,070.2 $14,515.0 $16,447.3 Taxes 3,371.6 4,538.8 5,951.2 6,743.4 Net Income $ 4,851.7 $ 6,531.4 $ 8,563.8 $ 9,703.9 Add Back: Depreciation 13,942.7 12,335.9 10,219.2 9,718.4 Net After-Tax Cash Flow $18,794.4 $18,867.3 $18,783.0 $19,422.3 Capital Expenditures 5,655.6 5,655.6 3,355.6 2,855.6 Net After-Tax Cash Flow $13,138.8 $13,211.7 $15,427.4 $16,566.7 Present Value Net After-Tax Cash Flow $ 6,289.8 $ 5,647.1 $ 5,887.6 $ 5,645.0 Cum. Present Value Net After-Tax Cash Flow $58,596.7 $64,243.8 $70,131.4 $75,776.4 Cum. Present Value Net After-Tax Cash Flow
---------------------- /1/ See Table 3. /2/ Based upon actual 1997 system operating cash flow margin. See text. -28- Table 5 ------- Valuation of Jones Intercable Cable Television System (Income Approach) (Dollar Amounts Shown in Thousands)
Year 10 Operating Cash Flow/1/ $ 26,165.7 10 X Cash Flow Multiple/2/ 261,657.0 Capital Gains Tax $ 87,182.4 ---------- Future Residual Value $174,474.6 Discounted to Present Value @ 12% $ 56,176.2 Plus: Cumulative Present Value Net After-Tax Cash Flow/1/ $ 75,776.4 ---------- Valuation of Palmdale System (Income Approach) $131,952.6 ==========
- ---------------- /1/ See Table 4. /2/ See text. -29- COMPARABLE SALES ANALYSIS The value of $131.9 million yielded by the discounted cash flow analysis of the Palmdale System corresponds to a price per subscriber of $2,077. This multiple is consistent with the range of prices paid by purchasers of similar cable properties and the expectation of increased revenues in the Palmdale area and the prospects for continued market growth. In recent years, there have been many sales of cable television systems in the United States. Table 6 identifies five cable television system sales which occurred within the past year. These sales have been selected based upon their comparability to the Palmdale System. As shown in Table 6, the price per subscriber has been computed for each of these sales. This measure is calculated by dividing the reported purchase price of the cable television system by the total number of basic subscribers. The average price per subscriber paid for the five comparable cable television system sales transactions listed in Table 6 is approximately $2,087. -30- Table 6 ------- Cable Television System Comparable Sales
Price Price Date Location Seller Buyer (mil.) Per Sub - ---- -------- ------ ----- ------ ------- Jan. 97 Palo Alto, CA Palo Alto Co-Op Sun Country Cable $ 54.1 $2,042 Feb. 97 Independence, MO Jones Investments Jones Intercable 171.2 2,004 Aug. 97 Phoenix, AZ Insight Communications Cox Communications 77.0 2,131 Dec. 97 Evansville, IN TCI Insight Communications 131.0 2,098 Dec. 97 Brigham, UT Insight Communications TCI 125.0 2,160 ------ ------ Average $111.6 $2,087 ====== ======
Source: Paul Kagan Associates Cable TV Investor. Note: Price per subscriber calculations are rounded. -31- JONES INTERCABLE CABLE TELEVISION SYSTEM PALMDALE, CALIFORNIA APPRAISAL OF NON-CURRENT ASSETS AS OF DECEMBER 31, 1997 CONCLUSION ---------- Based upon the application of the income approach, employing a discounted cash flow analysis, the fair market value of the non-current assets of Jones Intercable cable television system was determined to be $131,952,600. Assumptions employed in this analysis include market net revenue growth, system market revenue shares, and operating profit margins. These assumptions and the results of the discounted cash flow analysis were confirmed through and independent comparable sales transactions. -32- EXHIBIT A QUALIFICATIONS OF JAMES R. BOND, JR., JULIE A. KROSKIN, AND LAURA R. STARK PROFESSIONAL EXPERIENCE AND QUALIFICATIONS ------------------------------------------ JAMES R. BOND, JR. ------------------ James R. Bond, Jr. is a principal in the consulting firm of Bond & Pecaro, Inc., a Washington based consulting firm specializing in valuations, asset appraisals, and related financial services for the communications industry. In this capacity, he is routinely retained to examine and study economic issues which affect media businesses. Before the formation of Bond & Pecaro, Inc., Mr. Bond was a Vice President with Frazier, Gross & Kadlec, Inc. Mr. Bond joined that firm in 1978, was appointed Manager of Asset Appraisal Services in 1979, and in 1982 was named Vice President. In this capacity he engaged in the development and preparation of asset appraisal reports for owners of broadcast and cable television properties. Mr. Bond has been retained to appraise, for a fee, the assets of over 1,500 radio, television, radio common carrier, and cable television properties. He is a member of the Society of Broadcast Engineers (SBE), the Cable Television Tax Professionals Institute (CTTPI), and the Society of Cable Television Engineers (SCTE). He is a member and director of the Broadcast and Cable Television Financial Management Association (BCFM), and serves on the National Association of Broadcasters (NAB) Tax Advisory Panel and Depreciation Task Force. Mr. Bond is a Certified Senior Radio Broadcast Engineer (SBE), a Certified Senior Television Broadcast Engineer (SBE), and holds an FCC First Class Radiotelephone Operator License. He has testified as an expert witness in connection with numerous telecommunications valuation matters before federal, state, and local courts. Mr. Bond received a Bachelor of Arts degree in Radio, Television, and Motion Pictures for the University of North Carolina at Chapel Hill in 1976. Mr. Bond also holds a Masters Degree in Business Administration for the University of Virginia in Charlottesville, Virginia. PROFESSIONAL EXPERIENCE AND QUALIFICATIONS ------------------------------------------ JULIE A. KROSKIN ---------------- Julie A. Kroskin is an associate in the firm of Bond & Pecaro, Inc., a Washington based consulting firm specializing in valuations, asset appraisals, and related financial services for the communications industry. Ms. Kroskin received a Bachelor of Arts degree in Radio, Television and Film from the University of Maryland at College Park. Prior to her association with Bond & Pecaro, Inc., Ms. Kroskin worked as a customer and technical support representative at American Cablecom in Beltsville, Maryland. PROFESSIONAL EXPERIENCE AND QUALIFICATIONS ------------------------------------------ LAURA R. STARK -------------- Laura R. Stark is an associate with the consulting firm of Bond & Pecaro, Inc., a Washington based consulting firm specializing in valuations, asset appraisals, and related financial services for the communications industry. Ms. Stark received a Bachelor of Arts degree in Telecommunication Arts from the University of Georgia. Prior to her association with Bond & Pecaro, Inc., Ms. Stark worked as a video production assistant at Oppix & Hider, Inc. in Arlington, Virginia and was program director and operations manager for Radio Station WUOG at the University of Georgia in Athens. EX-99.(D)(1) 6 PROXY FOR CABLE TV FUND 12-C, LTD. Exhibit 99(d)(1) [LOGO OF JONES INTERCABLE, INC. APPEARS HERE] 9697 EAST MINERAL AVENUE ENGLEWOOD, COLORADO 80112 NOTICE OF VOTE OF THE LIMITED PARTNERS OF CABLE TV FUND 12-C, LTD. To the Limited Partners of Cable TV Fund 12-C, Ltd.: A special vote of the limited partners of Cable TV Fund 12-C, Ltd. (the "Partnership") is being conducted through the mails on behalf of the Partnership by Jones Intercable, Inc., the general partner of the Partnership, for the purpose of obtaining limited partner approval of the sale of the Palmdale, California cable television system (the "Palmdale System") owned by the Cable TV Fund 12-BCD Venture, a joint venture in which the Partnership has a 15 percent ownership interest, for $138,205,200 in cash, subject to customary working capital closing adjustments that may have the effect of increasing or decreasing the sales price by a non-material amount. The Palmdale System is proposed to be sold to Jones Communications of California, Inc., an indirect wholly owned subsidiary of the General Partner. Information relating to this matter is set forth in the accompanying Proxy Statement. If the limited partners approve the proposed sale of the Palmdale System and if the transaction is closed, the Cable TV Fund 12-BCD Venture will repay all of its remaining indebtedness, which is estimated to total approximately $48,200,000, and then approximately $91,642,700 of net sale proceeds will be distributed to the three constituent partnerships of the Cable TV Fund 12-BCD Venture in proportion to their ownership interests. The Partnership accordingly will receive 15 percent of such proceeds, estimated to total approximately $14,001,000, and the Partnership will distribute this portion of the net sale proceeds to its partners of record as of the closing date of the sale of the Palmdale System. Of this amount, approximately $10,500,750 will be distributed to the limited partners and approximately $3,500,250 will be distributed to the general partner. It is estimated that the limited partners will receive $220 for each $500 limited partnership interest, or $440 for each $1,000 invested in the Partnership. Distributions will be net of California non-resident withholding, if applicable, and distribution checks will be issued to the limited partners' account registration or special payment of record. Once the distribution of the net proceeds from the sale of the Palmdale System has been made, limited partners will have received a total of $775 for each $500 limited partnership interest, or $1,550 for each $1,000 invested in the Partnership, taking into account the prior distributions to limited partners made in 1996 and July 1998. Only limited partners of record at the close of business on July 31, 1998 are entitled to notice of, and to participate in, this vote of limited partners. It is very important that all limited partners participate in the voting. The Cable TV Fund 12-BCD Venture's ability to complete the transaction discussed in the Proxy Statement and the Partnership's ability to make a distribution to its partners of its portion of the net proceeds of the sale of the Palmdale System pursuant to the terms of the Partnership's limited partnership agreement (the "Partnership Agreement") are dependent upon the approval of the transaction by the holders of a majority of the Partnership's limited partnership interests. The proposal that is the subject of this proxy solicitation will be adopted only if approved by the holders of a majority of the limited partnership interests. Each limited partnership interest entitles the holder thereof to one vote on the proposal. Because the Partnership Agreement requires that the proposal to sell the Palmdale System be approved by the holders of a majority of the limited partnership interests, abstentions and non-votes will be treated as votes against the proposal. A properly executed consent returned to the general partner on which a limited partner does not mark a vote will be counted as a vote for the proposed sale of the Palmdale System. Because limited partners do not have dissenters' or appraisal rights in connection with the proposed sale of the Palmdale System, if the holders of a majority of the limited partnership interests approve the proposal, all limited partners will receive a distribution of the net sale proceeds in accordance with the procedures prescribed by the Partnership Agreement regardless of how or whether they vote on the proposal. Jones Intercable, Inc., as the general partner of the Partnership, urges you to sign and return the enclosed proxy card as promptly as possible. The proxy card should be returned in the enclosed envelope. JONES INTERCABLE, INC. General Partner LOGO [SIGNATURE OF ELIZABETH M. STEELE] Elizabeth M. Steele Secretary Dated: August 7, 1998 LOGO 9697 EAST MINERAL AVENUE ENGLEWOOD, COLORADO 80112 PROXY STATEMENT VOTE OF THE LIMITED PARTNERS OF CABLE TV FUND 12-C, LTD. This Proxy Statement is being furnished in connection with the solicitation of the written consents of the limited partners of Cable TV Fund 12-C, Ltd. (the "Partnership") by Jones Intercable, Inc., the general partner of the Partnership (the "General Partner"), on behalf of the Partnership, for the purpose of obtaining limited partner approval of the sale of the Palmdale, California cable television system (the "Palmdale System") owned by the Cable TV Fund 12-BCD Venture (the "Venture"), a joint venture in which the Partnership has a 15 percent ownership interest, for $138,205,200 in cash, subject to customary working capital closing adjustments that may have the effect of increasing or decreasing the sales price by a non-material amount. The Palmdale System is proposed to be sold to Jones Communications of California, Inc., an indirect wholly owned subsidiary of the General Partner. Proxies in the form enclosed, properly executed and duly returned, will be voted in accordance with the instructions thereon. Limited partners are urged to sign and return the enclosed proxy as promptly as possible. Proxies cannot be revoked except by delivery of a proxy dated as of a later date. Officers and other employees of the General Partner may solicit proxies by mail, by fax, by telephone or by personal interview. The deadline for the receipt of proxy votes is September 15, 1998, unless extended, but the vote of the Partnership's limited partners will be deemed to be concluded on the date, at least 20 business days from the date the proxy materials are sent to limited partners, that the General Partner, on behalf of the Partnership, is in receipt of proxies executed by the holders of a majority of the limited partnership interests either consenting to or disapproving of the proposed transaction. The General Partner may extend the deadline for receipt of proxy votes if a majority of the limited partners fail to express an opinion on the transaction by September 15, 1998. If the General Partner extends the deadline for receipt of proxy votes, the limited partners will be informed by mail of the reason for the extension and the new deadline. The cost of the proxy solicitation will be paid by the General Partner. The Partnership has only one class of limited partners and no limited partner has a right of priority over any other limited partner. The participation of the limited partners is divided into limited partnership interests and each limited partner owns one limited partnership interest for each $500 of capital contributed to the Partnership. THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE FAIRNESS OR MERITS OF SUCH TRANSACTION NOR UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION CONTAINED IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL. As of May 31, 1998, the Partnership had 47,626 limited partnership interests outstanding held by 3,243 persons. There is no established trading market for such interests. To the best of the General Partner's knowledge, no person or group of persons beneficially own more than five percent of the limited partnership interests. During the past several years, Smithtown Bay, LLC and Madison Partnership Liquidity Investors XIII, LLC, two firms unaffiliated with the Partnership, the General Partner and each other, have conducted tender offers for interests in the Partnership. As of May 31, 1998, Smithtown Bay, LLC and its affiliates owned 2,331 limited partnership interests, or 4.9 percent of the limited partnership interests. As of such date, Madison Partnership Liquidity Investors XIII, LLC and its affiliates owned 2,302 limited partnership interests, or 4.8 percent of the limited partnership interests. Pursuant to the terms of agreements between the Partnership and the General Partner and such firms, all of the limited partnership interests held by these firms will be voted in the same manner as the majority of all other limited partners who vote on the sale of the Palmdale System. Thus, for example, if the limited partnership interests voted in favor of the transaction constitute a majority of all limited partnership interests voted but not a majority of all limited partnership interests, these firms will be required to vote their limited partnership interests in favor of the transaction, and in such event the votes of these firms could be sufficient to cause the transaction to be approved by a majority of all limited partnership interests, which is the vote necessary to cause the transaction to be approved. The General Partner owns no limited partnership interests. Officers and directors of the General Partner own no limited partnership interests. Only limited partners of record at the close of business on July 31, 1998 will be entitled to notice of, and to participate in, the vote. As of the date of this Proxy Statement, the Partnership's only asset is its 15 percent ownership interest in the Venture. Cable TV Fund 12-B, Ltd. ("Fund 12-B") has a 9 percent ownership interest in the Venture and Cable TV Fund 12- D, Ltd. ("Fund 12-D") has a 76 percent ownership interest in the Venture. As of the date of this Proxy Statement, the Venture owns only the Palmdale System. The Venture sold its cable television system serving Houghton and Hancock, Michigan (the "Houghton/Hancock System") in 1987, the Venture sold its cable television system serving California City, California (the "California City System") in 1992, the Venture sold its cable television system serving Tampa, Florida (the "Tampa System") in 1996 and the Venture sold its cable television system serving Albuquerque, New Mexico (the "Albuquerque System") in June 1998. Upon the consummation of the proposed sale of the Palmdale System, the Venture will repay all of its remaining indebtedness, which, with accrued interest, is estimated to total approximately $48,484,000, and then the Venture will distribute approximately $91,642,700 to the Partnership, Fund 12- B and Fund 12-D in proportion to their ownership interests in the Venture. The Partnership will receive 15 percent of the net sale proceeds, estimated to total approximately $14,001,000, and the Partnership will distribute this portion of the net sale proceeds to its partners of record as of the closing date of the sale of the Palmdale System. Because limited partners have already received distributions in an amount in excess of the capital initially contributed to the Partnership by the limited partners, the Partnership's portion of the net proceeds from the Palmdale System's sale will be distributed 75 percent to the limited partners and 25 percent to the General Partner. Based upon the Venture's financial information as of March 31, 1998, as a result of the Palmdale System's sale, the limited partners of the Partnership, as a group, will receive approximately $10,500,750 and the General Partner will receive approximately $3,500,250. Limited partners will receive $220 for each $500 limited partnership interest, or $440 for each $1,000 invested in the Partnership, from the Partnership's portion of the net proceeds of the Palmdale System's sale. Distributions will be net of California non-resident withholding, if applicable, and distribution checks will be issued to the limited partners' account registration or pursuant to any special payment instruction of record. Once the Partnership has completed the distribution of its portion of the net proceeds from the sale of the Palmdale System, limited partners of the Partnership will have received a total of $775 for each $500 limited partnership interest, or $1,550 for each $1,000 invested in the Partnership, taking into account the prior distributions to limited partners made in 1996 and July 1998 from the net proceeds of the sales of the Tampa System and the Albuquerque System. After the sale of the Palmdale System by the Venture, the Partnership will cease to be a public entity subject to the informational reporting requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). See "Certain Information About the Partnership and the General Partner." 2 Limited partners should note that there are certain income tax consequences of the proposed sale of the Palmdale System, which are outlined herein under the caption "Federal and State Income Tax Consequences." The Board of Directors of the General Partner has approved the proposed sale of the Palmdale System and the General Partner recommends approval of the transaction by the holders of the Partnership's limited partnership interests. In determining the fairness of the proposed transaction, the General Partner followed the procedures mandated by Section 2.3(b)(iv)(b) of the Partnership's limited partnership agreement (the "Partnership Agreement"), which provides that the Partnership's cable television systems may be sold to the General Partner or to one of its affiliates if the price paid by the General Partner or such affiliate is determined by the average of three separate, independent appraisals of the fair market value of the system to be sold. Because the purchase price to be paid to the Venture is equal to the average of three separate, independent appraisals of the fair market value of the Palmdale System, the Board of Directors of the General Partner has concluded that the consideration to be paid to the Venture for the Palmdale System is fair to all unaffiliated limited partners of the Partnership. The proposal that is the subject of this proxy solicitation will be adopted only if approved by the holders of a majority of the limited partnership interests. Each limited partnership interest entitles the holder thereof to one vote on the proposal. Because the Partnership Agreement requires that the proposal to sell the Palmdale System be approved by the holders of a majority of the limited partnership interests, abstentions and non-votes will be treated as votes against the proposal. A properly executed consent returned to the General Partner on which a limited partner does not mark a vote will be counted as a vote for the proposed sale of the Palmdale System. Because limited partners do not have dissenters' or appraisal rights in connection with the proposed sale of the Palmdale System, if the holders of a majority of the limited partnership interests approve the proposal, all limited partners will receive a distribution of the Partnership's portion of the net sale proceeds in accordance with the procedures prescribed by the Partnership Agreement regardless of how or whether they vote on the proposal. The General Partner has also prepared proxy statements that are being delivered to the limited partners of Fund 12-B and Fund 12-D in connection with their votes to approve the sale of the Palmdale System by the Venture. The closing of the sale of the Palmdale System will occur only if the transaction is approved by the holders of a majority of the limited partnership interests of each of the three constituent partnerships of the Venture. Copies of the proxy statements being delivered to the limited partners of the Venture's two other constituent partnerships have been filed with the Securities and Exchange Commission (the "Commission") and can be obtained either from the Commission or from the General Partner upon written request to Elizabeth M. Steele, Secretary, Jones Intercable, Inc., 9697 East Mineral Avenue, Englewood, Colorado 80112, (303) 792-3111. See also "Certain Information About the Partnership and the General Partner." The approximate date on which this Proxy Statement and Form of Proxy are being sent to limited partners is August 7, 1998. SPECIAL FACTORS THE PARTNERSHIP'S INVESTMENT OBJECTIVES The Partnership was formed to acquire, develop, operate and, ultimately, sell cable television systems. The primary objectives of the Partnership have been to obtain capital appreciation in the value of the Partnership's cable television properties; to generate tax losses that could be used to offset taxable income of limited partners from other sources; and to obtain equity build-up through debt reduction. It was contemplated from the outset of the Partnership's existence that capital appreciation in Partnership cable television properties would be converted to cash by a sale of such properties at such time as the General Partner determined that the Partnership's investment objectives had substantially been achieved and after a holding period of approximately five to seven years. It also was contemplated from the outset of the Partnership's existence that the General Partner or one of its affiliates could be the purchaser of the Partnership's cable television properties. 3 The Venture was formed to pool the financial resources of three public partnerships sponsored by the General Partner with identical investment objectives and to enable them to acquire a greater number of and/or larger cable television systems than any one of the partnerships could acquire on their own. The Venture acquired the Palmdale System in April 1986. Based upon the track record of prior public partnerships sponsored by the General Partner that had liquidated or were in the process of liquidating their assets during the period that limited partnership interests in the Partnership were being sold and based upon disclosures made to prospective investors about the Partnership's investment objectives in the Cable TV Fund 12 prospectus and accompanying sales brochure, investors in the Partnership reasonably could have anticipated that the Partnership's investment objectives would be achieved and its assets liquidated after a holding period of approximately five to seven years. Due to the uncertain and then adverse regulatory environment that developed in the early 1990s for the cable television industry, the resultant decline in the prices for cable television systems and the subsequent inactivity in the cable television system marketplace, the General Partner determined that it would be prudent to delay the sale of the Palmdale System until market conditions improved, and as a result the Palmdale System has been held by the Venture for over 12 years. The purpose of the sale of the Palmdale System, from the Partnership's perspective, is to attain the Partnership's primary investment objective with respect to the Palmdale System, i.e., to convert the Partnership's capital appreciation in the Palmdale System to cash. The sale proceeds will be used to repay all of the Venture's debt, and the remaining sale proceeds will be distributed to the three constituent partnerships of the Venture. The Partnership in turn will distribute its portion of the net sale proceeds to the partners of the Partnership in accordance with the distribution procedures established by the Partnership Agreement. The sale of the Palmdale System is thus the necessary final step in the Partnership's accomplishment of its investment objectives with respect to the Palmdale System. PRIOR ACQUISITIONS AND SALES The Partnership was formed in October 1985 as a Colorado limited partnership in connection with a public offering of its limited partnership interests. In March 1986, the Partnership invested all of its limited partner capital contributions in the Venture, through which it acquired a 15 percent ownership interest in the Venture. The Venture ultimately acquired five cable television systems: the Houghton/Hancock System was acquired in May 1986, the California City System was acquired in April 1986, the Albuquerque System was acquired in August 1986, the Palmdale System was acquired in April 1986 and the Tampa System was acquired in December 1986. The Houghton/Hancock System was sold in August 1987 to an unaffiliated cable television system operator for a sales price of $5,000,000 and the California City System was sold in April 1992 to an unaffiliated cable television system operator for a sales price of $2,608,000. The sale proceeds from the Venture's sales of the Houghton/Hancock System and the California City System were used to reduce the Venture's indebtedness. None of the sale proceeds were distributed to the Venture's three constituent partnerships and thus none of the sale proceeds were distributed to the Partnership or its partners. No vote of the limited partners of the Partnership was required in connection with the sale of either of these systems because neither of these systems constituted all or substantially all of the Partnership's assets. The Venture sold the Tampa System in February 1996 to a subsidiary of the General Partner for a sales price of $110,395,667, which price was determined by the average of three separate, independent appraisals of the fair market value of the Tampa System. Because the Venture's debt arrangements did not allow the Venture to make distributions on the sale of Venture assets, in February 1996 the Venture's debt arrangements were amended to permit a $55,000,000 distribution to the Venture's three constituent partnerships from the Tampa System's sale proceeds, and the balance of the Tampa System's sale proceeds was used to reduce Venture indebtedness. The Partnership's portion of this distribution was $8,404,000, all of which was distributed to the limited partners. No vote of the limited partners of the Partnership was required in connection with the sale of the Tampa System because the assets of the Tampa System did not constitute all or substantially all of the Partnership's assets. Immediately following its acquisition of the Tampa System, the subsidiary of the General 4 Partner that had acquired the Tampa System conveyed the Tampa System, along with certain other cable television systems owned by the subsidiary of the General Partner, and cash in the amount of $3,500,000, to Time Warner Entertainment Advance/Newhouse Partnership ("Time Warner"), an unaffiliated cable television system operator, in exchange for cable television systems owned by Time Warner serving communities in Prince Georges County, Maryland and Reston, Virginia. The Venture's sale of the Tampa System and the subsequent exchange of the Tampa System for Time Warner systems are the subject of litigation filed by several limited partners of Fund 12-D. See "Special Factors, Legal Proceedings." The Venture sold the Albuquerque System in June 1998 to a subsidiary of the General Partner for a sales price of $222,963,267, which price was determined by the average of three separate, independent appraisals of the fair market value of the Albuquerque System. Upon the closing of the sale of the Albuquerque System, the Venture settled working capital adjustments that increased proceeds by $3,168,601, repaid its then outstanding Senior Notes balance of $41,544,890 plus $128,195 in accrued interest and a $1,342,455 make whole premium, paid $799,950 in capital lease obligations, and repaid $57,316,378 of the outstanding balance and accrued interest on its credit facility. The Venture then distributed $125,000,000 of the net sale proceeds to the three constituent partnerships of the Venture in proportion to their ownership interests in the Venture. The Partnership's portion of this distribution was $19,097,217, of which $18,214,947 was distributed to the limited partners and $882,270 was distributed to the General Partner. The transaction was approved by the holders of a majority of the Partnership's limited partnership interests in a vote of the limited partners conducted through the mails in May 1998. Limited partners of the Partnership have received distributions from the Tampa System sale and the Albuquerque System sale totaling $26,420,026. All distributions to date have given the Partnership's limited partners an approximate return of $555 for each $500 limited partnership interest, or $1,110 for each $1,000 invested in the Partnership. The Partnership intends to make a distribution of the Partnership's portion of the net proceeds of the sale of the Venture's Palmdale System to its partners. Following this distribution, the Partnership will be liquidated and dissolved. THE GENERAL PARTNER'S OBJECTIVES The purpose of the Palmdale System's sale from the General Partner's perspective is to enable the Venture to sell the Palmdale System at a fair price and to enable the General Partner (through an indirect wholly owned subsidiary) to acquire a cable television system operating in a marketplace in which the General Partner itself desires to own and operate a cable television system. The General Partner currently is one of the ten largest cable television system operators in the United States, with owned and managed systems totaling in excess of 1 million basic subscribers. A key element of the General Partner's strategy is to increase the number of owned subscribers clustered in attractive demographic areas. The General Partner is making progress in clustering its owned subscribers in two primary groups of cable systems. The General Partner's Maryland/Virginia cluster is based primarily on geography. The General Partner's suburban cluster is based on similar market and operating characteristics, rather than geography. The General Partner believes that its clustering strategy may allow it to obtain both economies of scale and operating efficiencies, for example in areas such as marketing, administration and capital expenditures. The General Partner desires to add the Palmdale System to its suburban cluster, which currently includes the cable systems serving the communities of Savannah and Augusta, Georgia, Pima County, Arizona, Albuquerque, New Mexico and Independence, Missouri. In contrast to the Partnership, which is a limited partnership with a finite term and which sought cable television properties with high growth potential during a holding period of approximately five to seven years, the General Partner, a corporation with perpetual existence, is seeking to acquire cable television systems that can generate a steady stream of income and may appreciate in value over a longer holding period. The Palmdale System satisfies this objective of the General Partner. The General Partner also may be in a better position than the Partnership and the Venture to access both debt and equity to finance the long-term development of the Palmdale System. The General Partner may be able to leverage the Palmdale System at a higher level than the Venture has done and, accordingly, the General Partner may be able to generate a greater return on its investment in the Palmdale System than the Partnership and the Venture would be able to do within the same time. Because 5 the General Partner's investment horizon is much longer term than the Partnership's investment horizon, and the General Partner will not need to sell the Palmdale System to achieve its investment objectives, it can better withstand the costs associated with meeting the competition and the regulatory risks inherent in long-term holding and development of the Palmdale System. RELEVANT PROVISIONS OF THE PARTNERSHIP AGREEMENT Section 2.2(k) of the Partnership Agreement provides that the sale of all or substantially all of the Partnership's assets is subject to the approval of the holders of a majority of the Partnership's limited partnership interests. Because its investment in the Venture is the Partnership's sole remaining asset and because the Palmdale System represents 100 percent of the Venture's assets and 100 percent of the Venture's revenues, the sale of the Palmdale System is being submitted for limited partner approval to the limited partners of the Partnership, Fund 12-B and Fund 12-D. Section 2.3(b)(iv)(b) of the Partnership Agreement permits the Partnership to sell any or all of its cable television systems directly to the General Partner or one or more of its affiliates if the system to be sold has been held by the Partnership for at least three years, or if it is part of, or related to, another system that has been held for three years, and provided that the price paid to the Partnership by the General Partner or any such affiliate is determined by the average of three separate, independent appraisals of the particular cable television system or systems being sold, and that the cost of such appraisals is not borne by the Partnership. Because the Palmdale System has been held by the Venture for at least three years and the purchase price to be paid to the Venture is equal to the average of three separate, independent appraisals of the fair market value of the Palmdale System obtained at the General Partner's expense, these requirements of the Partnership Agreement have been satisfied. LEGAL PROCEEDINGS The General Partner is a defendant in a now consolidated civil action filed by limited partners of Fund 12-D derivatively on behalf of the Partnership, Fund 12-B and Fund 12-D in the Arapahoe County District Court in the State of Colorado. The consolidated complaint generally alleges that the General Partner breached its fiduciary duty to the plaintiffs and to the other limited partners of the Partnership, Fund 12-B and Fund 12-D and the Venture in connection with the Venture's sale of the Tampa System to a subsidiary of the General Partner and the subsequent trade of the Tampa System to Time Warner. The consolidated complaint also sets forth a claim for breach of contract and a claim for breach of the implied covenant of good faith and fair dealing. Among other things, the plaintiffs assert that the subsidiary of the General Partner that acquired the Tampa System paid an inadequate price for the Tampa System. The price paid for the Tampa System was determined by the average of three separate, independent appraisals of the Tampa System's fair market value as required by the limited partnership agreements of the Partnership, Fund 12- B and Fund 12-D. The plaintiffs have challenged the adequacy and independence of the appraisals. The consolidated complaint seeks damages in an unspecified amount and an award of attorneys' fees, and the complaint also seeks punitive damages and certain equitable relief. The General Partner has filed its answer to the consolidated complaint and has generally denied the substantive allegations in the complaint and has asserted a number of affirmative defenses. The General Partner intends to defend this lawsuit vigorously. On August 29, 1997, the General Partner moved for summary judgment in its favor on the ground that plaintiffs did not make demand on the General Partner for the relief they seek before commencing their lawsuits or show that such a demand would have been futile. On January 8, 1998, the Court (1) held that plaintiffs did not make demand before commencing their lawsuits or show that such demand would have been futile, (2) stayed the consolidated case and vacated the February 17, 1998 trial date, (3) ordered that plaintiffs make a demand on the General Partner and that the General Partner appoint an independent counsel to review, consider and report on that demand, (4) ordered that the independent counsel be appointed at the March 1998 meeting of the General Partner's Board of Directors, and (5) ordered that the independent counsel will be subject to the approval of the 6 Court. The Court set a new trial date for October 26, 1998 in the event that the case is not resolved through the independent counsel process or otherwise. On March 10, 1998, the General Partner's Board of Directors appointed an independent counsel. The plaintiffs did not object to the General Partner's choice, and the Court has approved the General Partner's choice of independent counsel. Section 2.2 of the Partnership Agreement provides that the General Partner will not be liable to the Partnership or to the limited partners for any act or omission performed or omitted by it in good faith pursuant to the authority granted to the General Partner by the Partnership Agreement. This provision further provides that the General Partner will be liable to the Partnership and to the limited partners only for fraud, bad faith or gross negligence in the performance of the cable television activities of the Partnership or negligence in the management of the internal affairs of the Partnership. Section 9.6 of the Partnership Agreement provides that the Partnership "shall indemnify and save harmless the General Partner and its affiliates and any agent or officer or director thereof, from any loss or damage incurred by them, including legal fees and expenses and amounts paid in settlement by reason of any action performed by the General Partner or any agent, officer or director thereof on behalf of the Partnership or in furtherance of its interest; provided, however, that the foregoing shall not relieve the General Partner of its fiduciary duty to the limited partners or liability for (nor shall the General Partner be indemnified for) its fraud, bad faith or gross negligence in the performance of the cable television activities of the Partnership or negligence in the management of the internal affairs of the Partnership." In accordance with the foregoing provisions of the Partnership Agreement, the Partnership, together with Fund 12-B and Fund 12-D, which have identical partnership agreement provisions with respect to general partner liability and indemnification, will be obligated to indemnify and save harmless the General Partner from any loss incurred by it, including its legal fees and expenses and amounts paid in settlement, in connection with the litigation concerning the Tampa System sale unless the General Partner is found to have breached its fiduciary duty to the limited partners in connection with the Tampa System sale or is found to have committed fraud or to have acted in bad faith or with gross negligence in connection with the Tampa System sale. Amounts reimbursed to the General Partner by the three constituent partnerships of the Venture would be in proportion to their ownership interests in the Venture and such amounts may be significant, but the General Partner expects that any such reimbursement will not have a material adverse effect on the Partnership or the Venture. In voting on the proposed sale of the Palmdale System, limited partners should consider that the General Partner determined both the sales price of the Tampa System and the sales price of the Palmdale System in a substantially similar way, i.e., both prices were determined by averaging three separate, independent appraisals of the fair market value of the respective systems obtained in accordance with the provisions of Section 2.3(b)(iv)(b) of the three partnerships' limited partnership agreements. Limited partners should be aware that The Strategis Group, Inc., one of the firms that rendered appraisals of the Tampa System for purposes of determining the Tampa System's sale price, is the parent company of Strategis Financial Consulting, Inc., which rendered one of the three appraisals of the Palmdale System for purposes of determining the Palmdale System's sale price. Limited partners should also consider that Bond & Pecaro, Inc., another firm that rendered an appraisal of the Palmdale System for purposes of determining the Palmdale System's sale price, also serves as the General Partner's expert witness in the Tampa litigation, aiding the General Partner in the defense of this litigation. REASONS FOR THE TIMING OF THE SALE The Partnership has a finite legal existence of 17 years, almost 13 of which have passed. It was not intended or expected, however, that the Partnership would hold its cable systems for 17 years. Although it was not possible at the outset of the Partnership to determine precisely how quickly the investment objectives with respect to any particular system would be achieved, investors were informed that the General Partner's past experience with prior partnerships had shown that five to seven years was the average length of time from the acquisition of a cable system to its sale. Investors in the Partnership also were able to examine the track record of the General Partner's prior partnerships because such track record was set forth in the prospectus delivered in connection with the Partnership's initial public offering. At the time of the formation of the Partnership, the track record showed that prior partnerships had rarely held their cable systems for any longer than six years. 7 It is the General Partner's publicly announced policy that it intends to liquidate all of its managed partnerships, including the Partnership, as opportunities for sales of partnership cable television systems arise in the marketplace. The General Partner has determined that, as part of this general liquidation plan, it is in the best interests of the Venture and the three constituent partnerships of the Venture to sell the Palmdale System. During the years that the Venture has owned and operated the Palmdale System, senior management of the General Partner, including Glenn R. Jones, the General Partner's Chief Executive Officer, James B. O'Brien, the General Partner's President and Chief Operating Officer, and Kevin P. Coyle, the General Partner's Vice President/Finance and Chief Financial Officer, has monitored the performance of the Palmdale System. The General Partner has overseen the Palmdale System's growth in the number of homes passed, the miles of cable plant and the number of basic and premium subscribers. The General Partner's management has regularly reviewed the Palmdale System's budgets, it has examined the Palmdale System's liquidity and capital needs and it has carefully monitored the Palmdale System's revenue and cash flow growth to confirm that the Partnership's primary investment objective, i.e., capital appreciation in the Palmdale System, was being achieved. The General Partner concluded in January 1998 that, because the Palmdale System met the General Partner's objective of acquiring cable systems with operating characteristics like those of the Palmdale System, the General Partner would exercise its right under Section 2.3(b)(iv)(b) of the Partnership Agreement to acquire the Palmdale System. The General Partner accordingly did not market the system for sale and did not solicit third party buyers for the Palmdale System but instead contracted with independent appraisal firms to prepare appraisals of the fair market value of the Palmdale System so that the General Partner could determine the price it would offer to pay for the Palmdale System. The three appraisals obtained by the General Partner valued the Palmdale System at $140,059,000, $131,952,600 and $142,604,000, respectively. The General Partner's Chief Financial Officer then took the three appraised values and averaged them pursuant to the requirements of Section 2.3(b)(iv)(b) of the Partnership Agreement, and thereby determined that the price the General Partner would offer for the Palmdale System would be $138,205,200. The General Partner's senior management also agreed that this was a fair price and accepted it on behalf of the Venture. See "Special Factors, The Appraisals." No arm's-length negotiations of the terms of the purchase and sale agreement were conducted because neither the Partnership nor the Venture have any employees or management other than the employees and management of the General Partner. When the appraisal process was completed in March 1998, the General Partner prepared the standard purchase and sale agreement that it uses for the acquisition of cable television systems from its managed partnerships. This agreement was executed by officers of the General Partner both on behalf of the General Partner as buyer and on behalf of the Venture as seller. A written memorandum to the General Partner's Board of Directors from the General Partner's management outlining the terms of the transaction, including the means by which management had determined the sales price for the Palmdale System, the results of the three appraisals, the operating and financial statistics of the Palmdale System and the reasons why the General Partner should purchase the Palmdale System, was submitted to the Board of Directors with a recommendation from management that the Board of Directors approve the transaction, which the Board of Directors did on March 10, 1998. The directors also were provided with copies of the three appraisal reports that management had used in determining the sales price and a copy of the draft purchase and sale agreement. As discussed below, the Board of Directors unanimously concluded that the transaction was fair to the unaffiliated limited partners of the Partnership. See "Special Factors, Recommendation of the General Partner and Fairness of the Proposed Sale of Assets." When investing in the Partnership, by virtue of the provisions of Section 2.2(k) of the Partnership Agreement, the limited partners vested in the General Partner the right and responsibility to determine when the Partnership's investment objectives had been substantially achieved. The Palmdale System was acquired by the Venture because, in the opinion of the General Partner at the time of the Palmdale System's acquisition, it had the potential for capital appreciation within a reasonable period of time. It is the General Partner's opinion that during the over 12 years that the Palmdale System has been held by the Venture, the Partnership's investment objectives with respect to the Palmdale System have been achieved. The General Partner used no specific benchmarks or measurement tools in determining that the Partnership's investment objectives have been achieved. The General Partner conducted a subjective evaluation of a variety of factors including the length of 8 the holding period, the prospect for future growth as compared to the potential risks, the cash on cash return to investors, the after-tax internal rate of return to limited partners and the amount of gain to be recognized on the sale of assets. The Palmdale System together with the neighboring California City System was acquired by the Venture in April 1986 for an aggregate purchase price of approximately $55,000,000. In addition, an affiliate of the General Partner received a brokerage fee of approximately $2,100,000 from the Venture in connection with the Palmdale System's acquisition. At acquisition, the Palmdale System together with the neighboring California City System consisted of approximately 470 miles of cable plant passing approximately 44,000 homes and serving approximately 28,000 basic subscribers. The California City System was sold in April 1992 for a sales price of $2,608,000. At the time of its sale, the California City System served approximately 1,645 basic subscribers and the Palmdale System served approximately 51,775 basic subscribers. As of December 31, 1997, the Palmdale System consisted of approximately 1,096 miles of cable plant passing approximately 88,000 homes and serving approximately 63,520 basic subscribers. During the holding period, the Venture used approximately $52,301,000 in capital expenditures to expand the cable plant of the Palmdale System. The increase in the value of the Palmdale System during the holding period is demonstrated by the fact that the Palmdale System together with the neighboring California City System was purchased for $55,000,000 and the Palmdale System alone is proposed to be sold for $138,205,200, a difference of $83,205,200. In evaluating whether now was the time for the Venture to sell the Palmdale System, the General Partner generally considered the benefits to the limited partners that might be derived by the Venture's holding the Palmdale System for an additional period of time. The General Partner assumed that the Palmdale System might continue to appreciate in value and, if so, the Palmdale System would be able to be sold for a greater sales price in the future. The General Partner weighed these assumptions about the Palmdale System's continuing growth against the risks to investors from a longer holding period, i.e., the risks that regulatory, technology and/or competitive developments could cause the Palmdale System to decline in value, which would result in a lesser sales price in the future. A longer holding period would expose investors to the risk that competition from direct broadcast satellite companies, telephone companies and/or neighboring cable companies could diminish the number of subscribers to the Palmdale System's basic and premium services, thereby decreasing the value of the Palmdale System. A longer holding period also would expose investors to the risk that changes in the regulations promulgated by the governmental agencies that oversee cable operations could make cable systems a less desirable investment, thereby decreasing the value of the Palmdale System. The General Partner's decision to sell the Palmdale System was greatly influenced by the fact that the originally contemplated holding period had been exceeded. The General Partner is in a better position than the Partnership to bear the risks of investment in the Palmdale System. The Partnership is limited in its ability to obtain additional equity financing, in part because the limited partnership interests are non-assessable. The Partnership Agreement also contains limits on the amounts that the Partnership can borrow. And the Partnership has only one asset, its interest in the Venture, and the Venture's only asset is the Palmdale System, all of which gives the Partnership limited collateral for borrowings. The General Partner, on the other hand, is one of the nation's largest cable television companies with longer term investment objectives. For example, if significant competition to the Palmdale System were to develop, the General Partner would be in a better position than the Partnership and the Venture to finance the marketing campaigns or technological improvements necessary to meet such competition. Therefore, in light of all of the above factors, the General Partner has determined that now is the appropriate time for the Partnership to convert its capital appreciation in the Palmdale System to cash through the sale of the Venture's Palmdale System. CERTAIN EFFECTS OF THE SALE Upon consummation of the sale of the Palmdale System, the proceeds of the sale will be used to repay all of the Venture's debts and then the Venture will distribute the remaining sale proceeds to the three constituent 9 partnerships of the Venture in proportion to their ownership interests in the Venture, and then the Partnership will distribute its portion of the net sale proceeds (approximately $14,001,000) to its partners of record as of the closing date pursuant to the terms of the Partnership Agreement. Because the limited partners have already received distributions in an amount in excess of the capital initially contributed to the Partnership by the limited partners, the net proceeds from the Palmdale System's sale will be distributed 75 percent to the limited partners and 25 percent to the General Partner. Based upon the Venture's financial information as of March 31, 1998, as a result of the Palmdale System's sale, the limited partners of the Partnership, as a group, will receive approximately $10,500,750 and the General Partner will receive approximately $3,500,250. Limited partners will receive $220 for each $500 limited partnership interest, or $440 for each $1,000 invested in the Partnership, from the Partnership's portion of the net proceeds of the Palmdale System's sale. Once the distributions of the net proceeds from the sale of the Palmdale System have been made, limited partners will have received a total of $775 for each $500 limited partnership interest, or $1,550 for each $1,000 invested in the Partnership, taking into account the prior distributions to limited partners made from the net proceeds of the sales of the Tampa System and the Albuquerque System. Both the limited partners and the General Partner will be subject to federal and state income tax on the income resulting from the sale of the Palmdale System. See the detailed information below under the caption "Federal and State Income Tax Consequences." Another effect of the sale is that it will result in an indirect wholly owned subsidiary of the General Partner acquiring the Palmdale System. Thus, as a result of this transaction, the General Partner will make a substantial equity investment in the Palmdale System and it will have a greater equity ownership interest in the Palmdale System than it does now as the general partner of the three partnerships that comprise the Venture. Instead of the residual 25 percent interest in the net proceeds from the sale of the Palmdale System that the General Partner will receive as the general partner of the three partnerships that comprise the Venture, the General Partner will have a 100 percent interest in any future capital appreciation of the Palmdale System. The General Partner's acquisition of the Palmdale System will advance its goal of increasing the number of owned subscribers in attractive demographic areas and may allow the General Partner to obtain economies of scale and operating efficiencies by adding the Palmdale System to its suburban cluster of systems with similar market and operating characteristics. The General Partner also will bear 100 percent of the risk of system losses and any diminution in system value. As the general partner of the three partnerships that comprise the Venture, the General Partner earns management fees and receives reimbursement of its direct and indirect expenses allocable to the operation of the Palmdale System. The General Partner's right to receive such fees and reimbursements related to the Palmdale System will terminate on the Venture's sale of the Palmdale System. Neither Colorado law nor the Partnership Agreement afford dissenters' or appraisal rights to limited partners in connection with the proposed sale of the Palmdale System. If the proposed transaction is approved by the holders of a majority of limited partnership interests, all limited partners will receive a distribution in accordance with the procedures prescribed by the Partnership Agreement regardless of how or whether they vote on the proposal. RECOMMENDATION OF THE GENERAL PARTNER AND FAIRNESS OF THE PROPOSED SALE OF ASSETS The General Partner believes that the proposed sale of the Palmdale System and the distribution of the net proceeds therefrom are both procedurally and substantively fair to all unaffiliated limited partners of the Partnership, and it recommends that the limited partners approve the transaction. The General Partner's recommendation that the limited partners approve the sale of the Palmdale System and its fairness determination should not be deemed to be free from potential conflicts of interest, however, in light of the fact that one of its subsidiaries is the proposed purchaser of the Palmdale System. Because the purchaser of the Palmdale System would benefit from a lower sales price, the General Partner has an economic interest in conflict with the economic interest of the limited partners. In determining the substantive and procedural fairness of the proposed transaction, the General Partner's Board of Directors on March 10, 1998 considered each of the following factors, all of which had a positive effect on its fairness determination. The factors are listed in descending order of importance, i.e., the first factor listed 10 was given the most weight in the determination that the proposed transaction is fair, although, as a practical matter, this is an approximation of the weight given to each factor because each factor is relevant and the General Partner's Board of Directors was not able to weigh the relative importance of each factor precisely: (i) the limited partnership interests are at present illiquid and the cash to be distributed to limited partners as a result of the proposed sale of the Palmdale System will provide limited partners with liquidity and with the means to realize the appreciation in the value of the Palmdale System; (ii) the sales price represents a fair market valuation of the Palmdale System as determined by the average of three separate appraisals of the Palmdale System by qualified independent appraisers; (iii) the Venture has held the Palmdale System for over 12 years, a holding period beyond that originally anticipated; (iv) the conditions and prospects of the cable television industry in which the Venture is engaged, including the developing threat of competition from DBS services and telephone companies, and the working capital and other financial needs of the Venture if it were to continue to own the Palmdale System; (v) the terms and conditions of the purchase and sale agreement, including the fact that the sales price will be paid in cash, the fact that the Venture was not required to make many of the representations and warranties about the Palmdale System or give indemnities that are customarily given in transactions of this nature, the fact that the purchaser's obligation to close is not contingent upon its ability to obtain financing, and the fact that the Venture will pay no brokerage fees upon the sale of the Palmdale System, which it likely would have paid if the Palmdale System were being sold to an unaffiliated party; and (vi) the sale is being conducted in accordance with the terms of the Partnership Agreement, including the fact that the proposed transaction will not occur unless it is approved by the holders of at least a majority of the limited partnership interests. An officer of The Jones Group, Ltd., the cable brokerage subsidiary of the General Partner, worked with each of the independent appraisers hired to prepare fair market value appraisals of the Palmdale System, providing them with current and historical profit and loss statements for the Palmdale System and with current subscriber reports. Certain officers and all of the directors of the General Partner received the final appraisal reports. The members of the Board of Directors of the General Partner adopted the analyses and conclusions of Strategis Financial Consulting, Inc., which valued the Palmdale System at $140,059,000, because such firm's valuation procedures, assumptions and methodologies most closely approximate the valuation procedures, assumptions and methodologies used by the General Partner's management in evaluating cable television systems. The General Partner's Board of Directors did not specifically adopt the $140,059,000 value placed on the Albuquerque System by Strategis Financial Consulting, Inc., but the Board did consider the fact that the value determined by this appraisal firm was the closest of the three appraisals to the average of the three appraisals and concluded that this fact supported its fairness determination. In making its fairness determination, the General Partner's Board of Directors did not consider that Strategis' overall fair market value of the Palmdale System exceeds the sales price by approximately $1,853,800 or that Strategis' "high" market value estimate exceeds the sales price by approximately $7,821,800. Because it was the methodology for determining the sales price mandated by the partnership agreements, the General Partner's Board of Directors considered the fact that the sales price to be paid to the Venture for the Palmdale System was determined by averaging three independent appraisals of the fair market value of the Palmdale System to be very persuasive evidence of the fairness of the proposed transaction. As provided in Section 2.3(b)(iv)(b) of the Partnerships' three partnership agreements, the General Partner may purchase a cable television system from the Partnerships if the price paid to the Partnerships by the General Partner is determined by the average of three separate, independent appraisals of the cable television system to be sold. It does not provide that the purchase price shall be determined by the highest of the three appraisals. In light of this governing partnership agreement provision, the General Partner's Board of Directors did not consider offering the Venture a sales price equal to Strategis' appraisal values. Whenever a sum is to be determined by the average of three values, there will be, by definition, values that are higher than and values that are lower than the average. This implies to the General Partner that such a process, agreed by all parties, is fair. 11 The General Partner considered the fact that the $138,205,200 purchase price to be paid to the Venture for the Palmdale System was determined by the average of three independent appraisals of the fair market value of the Palmdale System to be very persuasive evidence of the fairness of the proposed transaction. The General Partner reviewed and considered the three appraisals but it did not consider specific comparable transactions in reaching its conclusions that the values for the Palmdale System determined by the three appraisals are within the range of values seen in the marketplace for comparable cable television systems in similar condition. The General Partner is regularly engaged in the sale and/or purchase of cable television systems in the marketplace both for its own account and for the account of its various managed partnerships. It is the cumulative experience of the General Partner's management and Board of Directors in such transactions on which the fairness conclusions were based. The General Partner considered that the fair market valuations of the Palmdale System were done by respected industry appraisers using customary measures of value. Based upon the General Partner's knowledge of and experience in the cable television industry, and its review and consideration of the appraisals, it has concluded that the values for the Palmdale System determined by the three appraisals are fair and within the range of values seen in the marketplace for comparable cable television systems in similar condition. The $138,205,200 purchase price represents the current fair market value of the Palmdale System on a going concern basis. The $138,205,200 purchase price for the Palmdale System also compares favorably to the $38,461,594 net book value of the Palmdale System at March 31, 1998. The liquidation value of a cable television system, i.e., the sale of the system on other than a going concern basis, is not usually considered to be an accurate indicator of the value of a cable television system, primarily because the assets of a cable television system typically are worth less when considered separately than when considered as a going concern. The assets of a cable television system consequently are not normally sold or purchased separately. A fair market valuation of a system should, in the General Partner's view, be a valuation of the system as a going concern. The liquidation value of the Palmdale System therefore was not considered by the General Partner in reaching its determination of fairness. Because there has never been an established trading market for the Partnership's limited partnership interests, the General Partner does not have access to any reliable, official information about the historical or current market prices for the Partnership's limited partnership interests in the very limited secondary market where such interests from time to time have been sold. The General Partner believes that such secondary market deeply discounts the underlying value of the limited partnership interests due to their highly illiquid nature. Therefore, even if trading information were available, the historical or current market prices for the Partnership's limited partnership interests would not necessarily be indicative of the value of the Partnership's 15 percent ownership of the Venture's cable television system assets. For these reasons, the General Partner did not consider the historical or current market prices for the limited partnership interests when reaching its fairness determination. During the past several years, however, several limited partners of the Partnership who are not in any other way affiliated with the Partnership or with the General Partner conducted tender offers for interests in the Partnership at prices ranging from $316 to $385 per $500 limited partnership interest. The $220 per $500 limited partnership interest to be distributed to limited partners from the Partnership's portion of the net proceeds of the Palmdale System's sale compares favorably to these tender offer prices, especially in light of the fact that the tender offer prices theoretically reflected both the distributions made to limited partners from the Partnership's portion of the net proceeds from the Albuquerque System sale ($382 per $500 limited partnership interest) and the distributions to be made to limited partners from the sale of the Palmdale System. The fact that the Venture has held the Palmdale System for a period beyond that originally anticipated was another important factor in the General Partner's fairness determination--the General Partner believes that the transaction is fair because a sale at this time will convert an illiquid investment into a liquid one for all partners. And the current state of the cable television industry also was considered by the General Partner in making its fairness determination because the General Partner believes that it is fair to investors that someone other than the Partnership and the Venture take on the uncertainties and risks involved in continuing to own and operate the Palmdale System. 12 The fairness of the transaction is also demonstrated in an analysis of certain of the terms and conditions of the purchase and sale agreement, which generally are more favorable to the Venture than reasonably could be expected if the purchaser were not an affiliated company. There is no financing contingency to closing. Because of the General Partner's existing extensive knowledge about the Palmdale System, the Venture has not been required to make many of the representations and warranties about the quality of the Palmdale System's tangible assets, the quantity of the Palmdale System's subscribers or the validity of the Palmdale System's intangible assets customarily found in cable television system transactions. The Venture likely would have been required to give such representations and warranties to an unaffiliated party if the Palmdale System were being sold to an unaffiliated party. In addition, the Venture is not required to indemnify the purchaser for defects discovered by the purchaser after the closing. This frees the Venture from having to reserve a portion of the sale proceeds to cover typical indemnification obligations. The Venture also will pay no brokerage fee in connection with the sale of the Palmdale System, which it likely would have paid if the Palmdale System were being sold to an unaffiliated party. This will result in more funds from the sale being available for distribution to the Venture's three constituent partnerships and thus to their partners. The General Partner is aware and considered that although consummation of this transaction will result in a distribution to the Partnership's limited partners of approximately $440 per $1,000 of limited partnership capital invested in the Partnership, there are several potential negative consequences of the transaction to limited partners. For example, the proposed sale will require the limited partners to recognize, for federal income tax purposes, a gain resulting from the sale. And although the three fair market valuations established by the independent appraisals took into account the present value of the projected future growth of the Palmdale System and the sales price (the average of the three appraisals) thus takes into account the present value of the projected future growth of the Palmdale System, the proposed sale will deprive the limited partners of an opportunity to participate in the actual future growth of the Palmdale System, if any. The General Partner nevertheless concluded that the cash distributions to the limited partners of the Partnership from the sale of the Palmdale System outweighed these consequences. As disclosed above, the proposed transaction is subject to various potential conflicts of interest arising out of the Partnership's relationships with the General Partner. Because the General Partner and its affiliates are engaged in the ownership and operation of cable television systems, they are generally in the market to purchase cable television systems for their own account. A potential conflict thus arises from the General Partner's fiduciary duty as general partner of the Partnership and its management's fiduciary duty to the General Partner's shareholders when it determines that Partnership cable television systems will be sold to the General Partner or one of its affiliates and not to an unaffiliated third party. This potential conflict of interest was disclosed to limited partners in the prospectus delivered to investors at the time of the public offering of interests in the Partnership. Prior to the Partnership's public offering, the General Partner entered into negotiations with certain state securities administrators as part of the process of clearing the offering in the "merit" states, i.e., those states that permit the sale of securities only if the state securities administrator deems the offering as a whole to be fair, just and equitable. Several of the merit state securities administrators focused on the potential conflicts of interest in the event that the Partnership were to sell one or more of its cable television systems to the General Partner or one of its affiliates. The General Partner agreed to include the provision in the Partnership Agreement that permits the Partnership to sell its cable television systems directly to the General Partner or one of its affiliates only after a three-year holding period and only if the General Partner or such affiliate pays a purchase price that is not less than the average of three separate independent appraisals of the particular cable television system being sold. The General Partner has concluded that the mechanisms for determining the purchase price to be paid to the Partnership provide sufficient procedural safeguards to minimize the effects of the potential conflicts of interest inherent in any such transaction. The fact that these procedures have been carried out in connection with the Venture's proposed sale of the Palmdale System, together with the fact that the transaction also is conditioned upon receipt of the approval of the holders of a majority of the limited partnership interests in the three partnerships that comprise the Venture, enable the General Partner to conclude that the proposed transaction is both procedurally and financially fair to all partners. 13 The directors of the General Partner who are not employees of the General Partner did not vote separately to approve the transaction, nor did the outside directors retain an unaffiliated representative to act solely on behalf of the limited partners for the purposes of negotiating the terms of the proposed sale of the Palmdale System and/or preparing a report concerning the fairness of the proposed sale. While the directors of the General Partner recognized that the interests of the General Partner and the limited partners may not in all respects necessarily be the same, they recognized also that the purchase price was determined in accordance with the terms of the Partnership Agreement, that is, by averaging three separate independent appraisals of the Palmdale System's fair market value. The members of the Board of Directors relied on the specific right of the General Partner under Section 2.3(b)(iv)(b) of the Partnership Agreement to purchase the Palmdale System. The members of the Board of Directors reviewed and considered the appraisals and, based upon their general knowledge of cable television system transactions undertaken by the General Partner and its affiliates and by unaffiliated cable television companies, concluded that the values for the Palmdale System determined by the appraisers were fair and were within the industry norms for comparable transactions. All 13 directors of the General Partner participated in the March 10, 1998 meeting to discuss and vote on the Partnership's sale of the Palmdale System to the General Partner. Each of Messrs. Glenn R. Jones, James B. O'Brien, Josef J. Fridman, Robert Kearney, Siim A. Vanaselja, James J. Krejci, William E. Frenzel, Donald L. Jacobs, Howard O. Thrall, Robert E. Cole, Raphael M. Solot, Sanford Zisman and Robert B. Zoellick voted to approve the transaction. No director of the General Partner raised any questions or expressed any reservations about the fairness of the transaction to the Venture, to its three constituent partnerships or to the limited partners of the Partnership. It is anticipated that if the proposed transaction is not consummated, the General Partner's current management team will continue to manage the Palmdale System on behalf of the Venture until such time as the Palmdale System could be sold. No other alternatives have been or are being considered. THE APPRAISALS At regular intervals during the holding period, the General Partner obtained appraisals of all of the Partnership's cable television systems so that the General Partner could fulfill its obligation of reporting the Partnership's asset values to trustees and custodians of qualified plans that own limited partner interests in the Partnership. These appraised values also have been reported to all investors in the quarterly and annual reports mailed to limited partners with copies of the Partnership's periodic reports on Forms 10-Q and 10-K. The most recent appraisal of the Palmdale System done prior to the General Partner's decision to buy the system from the Venture was done as of July 31, 1997 by Strategis Financial Consulting, Inc., which valued the Palmdale System as of such date at $136,518,000. This old appraisal was not used by the General Partner's management in determining the sales price that the General Partner would offer for the Palmdale System and it was not considered by the General Partner's Board of Directors in making its fairness determinations. In determining the price that the General Partner would offer for the Palmdale System, in January 1998 the General Partner retained Strategis Financial Consulting, Inc., Bond & Pecaro, Inc. and Waller Capital Corporation to prepare separate appraisals of the fair market value of the Palmdale System as of December 31, 1997. Each of the appraisers were asked to determine the cash price a willing buyer would give a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts, in an arm's-length transaction to acquire the Palmdale System. Upon receipt of the three appraisal reports, management of the General Partner examined each of them and discussed among themselves the merits of the appraisals' assumptions, methodologies and conclusions, and, based on their experience in and knowledge of the cable television industry, they found each of them to be fair and reasonable. The appraisal reports were then submitted to the Board of Directors of the General Partner for review. As disclosed above, the Board of Directors of the General Partner unanimously approved the transaction based upon a price determined by averaging these three appraisals. The written appraisal reports are available for inspection and copying at the offices of the General Partner during regular business hours by any interested limited partner of the Partnership or by his or her authorized representative. Copies of such appraisals will be mailed by the General Partner to any interested limited partner 14 or to his or her authorized representative upon written request to the General Partner at the expense of the requesting limited partner. Copies of these three appraisals also have been publicly filed with the Securities and Exchange Commission and may be inspected at the Commission's public reference facilities and at its World Wide Web site. The General Partner provided each of the appraisers with the same current and historical profit and loss statements for the Palmdale System and with the same current subscriber reports. The appraisers also gathered information about the Palmdale System's subscribers, channel line-up, technology, cable plant, penetration rates and the local economy from questionnaires that each individual appraisal firm prepared and provided to the general manager of the Palmdale System and from conversations with the Palmdale System's management team. From this information, the appraisers used their independent analyses to project cash flow, determine growth of homes passed, the Palmdale System's future penetration and possible rate adjustments. The appraisals thus reflect the application of the appraisers' expertise to the data about the Palmdale System supplied by the General Partner. The General Partner's $138,205,200 offer for the Palmdale System was based on the three separate, independent appraisals of the Palmdale System prepared by Strategis Financial Consulting, Inc., Bond & Pecaro, Inc. and Waller Capital Corporation as of December 31, 1997. Strategis Financial Consulting, Inc. concluded that the Palmdale System's overall fair market value as of December 31, 1997 was $140,059,000. Bond & Pecaro, Inc. concluded that the Palmdale System's overall fair market value as of December 31, 1997 was $131,952,600. Waller Capital Corporation concluded that the Palmdale System's overall fair market value as of December 31, 1997 was $142,604,000. The General Partner believes that the three appraisals were current as of March 10, 1998, the date that the General Partner's Board of Directors made its fairness determination and the date on which the purchase and sale agreement was executed. In the General Partner's view, the assumptions regarding system operations and the cable television system marketplace underlying the three appraisals have generally remained unchanged since the date of the appraisals. The Strategis Appraisal Strategis Financial Consulting, Inc. ("Strategis") has served the communications industry for nearly 30 years. Its team of financial, engineering and managerial professionals devotes a substantial portion of its time to the appraisal of cable television systems, cellular telephone systems, paging systems, mobile radio and broadcast stations. Strategis was selected by the General Partner to render an opinion as to the fair market value of the Palmdale System in light of such overall qualifications. No limitations were imposed with respect to the appraisal to be rendered by Strategis. The firm was selected by the General Partner to prepare an independent appraisal of the Palmdale System because of the General Partner's familiarity with the firm and its good reputation in the cable television industry. Strategis has prepared independent appraisals of other cable television systems owned and/or managed by the General Partner. The principals of Strategis are not affiliated in any way with the General Partner. Strategis used five generally accepted cable television valuation methods using the income approach to valuation in establishing the range of fair market values of the Palmdale System as a going concern. The first method used a multiple of 1997's operating income derived from comparable asset values of privately held and publicly traded cable companies. The second method used a lower multiple of the Palmdale System's December 1997 operating income annualized. The third method applied a slightly lower multiple of 1998's projected operating income. The fourth method was a discounted net cash flow analysis in which a purchase price (estimated fair market value) was calculated to achieve a target after-tax return on equity, given particular operating and financing assumptions unique to the Palmdale System's assets. The fifth method was a discounted cash flow analysis that measured the net present value of the pre-tax operating cash flows (less capital expenditures, plus the residual value of the Palmdale System) that represent the return on total investment. For each valuation method, Strategis established a "high" and a "low" estimated fair market value. 15 The first valuation method used a multiple of 1997's operating income of the Palmdale System derived from comparable asset values of certain cable companies. The cable companies used to generate baseline values for this methodology included Adelphia Communications Corporation, Cablevision Systems Corporation, Century Communications Corp., Comcast Corporation, Cox Communications, C-TEC, EW Scripps, Grupo Televisa, Knight-Ridder, Media General, TCA Cable TV, Inc., Telecommunications, Inc., Time Warner, United International Holdings, US West MediaOne Group, the Washington Post and the General Partner. Strategis determined, based upon its expertise and knowledge of the cable television industry, a "low" multiple of 10 and a "high" multiple of 11, concluding that a system comparable to the Palmdale System would be unlikely to sell for less than 10 times its past year's operating income and would be unlikely to sell for more than 11 times its past year's operating income. These operating income multiples were determined based upon several factors. First, the "pre-determined target returns on equity" developed in connection with the fourth valuation method discussed below were examined for the implied capitalization rate. The capitalization rate is the inverse of the valuation multiple. The basic equation supporting a valuation multiple is a fraction, with one being the numerator and the rate of return minus the growth rate being the denominator. For the rates of return, Strategis refers to the "predetermined (pre-tax) target returns on equity" calculated as follows: 12%/(l-.34) = 18.2% 14%/(l-.34) = 21.2% For the rate of growth estimate, Strategis examined projected growth in the Palmdale System's operating income over the projection term. The average annual growth rate in operating cash flow is approximately 8 percent on Strategis' model. The inverse of the capitalization rate implies multiples of: 1 ------------ (18.2%-8.0%) = 9.8 high 1 ------------ (21.2%-8.0%) = 7.6 low
These calculated multiples were then adjusted by Strategis based on its experience in the cable television industry. According to Strategis, in its judgment, the implied high and low multiples, if applied to trailing twelve months operating cash flow, would not provide an adequate estimate of value for a mature cable system such as the Palmdale System. The multiples ultimately used by Strategis in its first valuation method, 10 and 11, as adjusted from the capitalization rate approach, in Strategis' judgment appropriately reflect the value of the Palmdale System. This method resulted in an estimated fair market value ranging from a low of $135,746,480 to a high of $149,321,128 for the Palmdale System. The second valuation method used a lower multiple of the Palmdale System's December 1997 operating income annualized. Strategis determined, again based on its expertise and knowledge of the cable television industry, a "low" multiple of 9.5 and a "high" multiple of 10.5, concluding that a system comparable to the Palmdale System would be unlikely to sell for less than 9.5 times the dollar amount of its annualized current month's operating income and would be unlikely to sell for more than 10.5 times the dollar amount of its annualized current month's operating income. These multiples are slightly lower than those used in the previous methodology because of the increased risk and time factors involved in using current as compared to historical information. This method resulted in an estimated fair market value ranging from a low of $132,504,873 to a high of $146,452,754 for the Palmdale System. The third valuation method applied a slightly lower multiple of 1998's projected operating income of the Palmdale System. For this valuation, Strategis first estimated, through its own analyses of current financial and operating data provided by the General Partner, 1998's operating income for the Palmdale System. The projection of 1998's operating income for this third valuation method is the sum derived by subtracting projected operating expenses from projected revenues of the Palmdale System to be generated during the first twelve months following the valuation date. Strategis projected growth in residential service revenue based on 16 previously established or reasonably foreseeable patterns of growth in: the marketplace and plant facilities (homes passed); the subscriber base; the amount of programming to be sold to subscribers and the rates charged for programming, associated equipment rentals and service installations. Strategis projected revenue for commercial accounts to increase at a steady but lower rate than residential revenue, while advertising revenue was projected based on Strategis' estimates of the long term potential growth for local advertising in the Palmdale System's market. Operating expenses were projected by Strategis based on the Palmdale System's actual historical expenses and Strategis' familiarity with cable system operating expenses typical for a system of the Palmdale System's size. Line item expenses within the technical- operations, general and administrative, sales and marketing, and programming departments were examined and projected based on their relationship to the number of subscribers or plant miles, whichever was appropriate, and included a general inflation component. Based on its expertise and knowledge of the cable television industry, Strategis set a "low" multiple of 9 and a "high" multiple of 10 concluding that a system comparable to the Palmdale System would be unlikely to sell for less than 9 times the system's projected operating income for the following year and would be unlikely to sell for more than 10 times the system's projected operating income for the following year. These multiples are slightly lower than those used in the previous methodologies because of the increased risk and time factors involved in using projected as compared to historical and current information. This method resulted in an estimated fair market value ranging from a low of $136,015,500 to a high of $151,128,333 for the Palmdale System. The fourth valuation method was a discounted net cash flow analysis in which a purchase price (estimated fair market value) was calculated to achieve a target after-tax return on equity given particular operating and financing assumptions specific to the Palmdale System. This method involved the use of projected operations for the Palmdale System and a pre-determined target return on equity for a hypothetical buyer. Strategis used the Capital Asset Pricing Model ("CAPM") as a guide in developing discount rates used in the discounted cash flow model for the fourth valuation method. The CAPM was developed to estimate the rate of return on equity that would be required by investors to take on the risk of a given investment. Strategis used the CAPM in conjunction with observations of actual market transactions and its judgment. The following illustrates use of the CAPM and the support it provided for the "pre-determined target return on equity" used to value the Palmdale System. To estimate a "pre-determined target return on equity" for the CAPM, Strategis examined movements in stock prices over 1996 and 1997 of the same cable television multiple system operators that it examined in determining the multiples for the first valuation method discussed above. The movements in individual stock prices were compared to movements in the stock market as a whole, as indicated by the price of the Standard & Poor's 500 stock index. The extent to which movements in a particular stock are related to movements in the market overall is reflected in the stock's "beta." Strategis calculated individual betas for the above-listed cable television multiple system operators. Average and median betas for the entire group were then multiplied by the "equity risk premium," which measures the additional return to equity investors over and above the return to holders of non-equity investments. The risk-free rate of investment is then added to determine the required equity return of the investment. The equation is as follows: Beta* (Equity Risk Premium) + Risk-Free Rate = Required Return on Equity In doing this analysis, Strategis found that the average beta for the group of companies it examined was 1.06 and that the median beta for this same group of companies was 1.11. It determined that the equity risk premium was 12.7 percent based upon average annual premiums over 1988 to 1997 as calculated in Ibbotson Associates' Stocks, Bonds, Bills and Inflation (SBBI) Yearbook 1998. Strategis also found that the risk-free rate was 5.7 percent, which was the yield on intermediate term government bonds as of December 1997. This statistic was derived from the SBBI Yearbook 1998. The calculations are as follows: (1.06* 12.7%) + 5.7% = 19.2% Required Return on Equity (1.11* 12.7%) + 5.7% = 19.8% Required Return on Equity 17 Strategis then multiplied these rates by 1 minus the tax rate to calculate the after-tax required return on equity rates as follows: 19.2%* (1-.34) = 12.7% 19.8%* (1-.34) = 13.1.% Based on Strategis' professional judgment, in Strategis' opinion these calculations provide reasonable support for the use of 12% as the high and 14% as the low after-tax "pre-determined target returns on equity." Based on system information made available to Strategis by the General Partner and on information generally available to Strategis about the cable television industry, the firm made assumptions and projections of a variety of factors that will affect future cash flow including housing growth, plant mileage, growth in the number of subscribers for basic and pay television, adjustments in subscriber rates, increases in operating expenses and capital expenditures. Strategis also made specific assumptions concerning the capital structure that a typical, prudent buyer might experience, as well as the probable interest rates that would be applicable in connection with any debt financing that might be incurred. Strategis did a "high" and a "low" analysis. In its "high" analysis, Strategis projected that the Palmdale System's revenues would grow from $31,973,938 in 1998 to $48,083,687 in 2004; that the Palmdale System's operating expenses would grow from $16,861,105 in 1998 to $24,309,734 in 2004; and that net loss of $5,124,946 in 1998 would decrease to become net income of $3,198,756 in 2004. In Strategis' "low" analysis, revenues and operating expenses are projected to increase to the same levels by 2004, but net loss of $4,761,004 in 1998 is projected to become net income of $3,456,717 in 2004. Strategis projected that the Palmdale System would add approximately 14 to 23 miles of cable plant per year between 1998 and 2004, resulting in growth of the Palmdale System's cable plant from 1,096 miles in 1997 to 1,237 miles in 2004. Strategis projected that the number of homes passed by the Palmdale System would grow from 88,035 in 1997 to 98,282 in 2004. Strategis projected that basic subscribers would grow from 63,527 in 1997 to 75,344 in 2004. Strategis projected basic penetration of the Palmdale System increasing from 73.2 percent in 1998 to 76.7 percent in 2004. Strategis projected that premium television subscriptions would grow from 42,733 in 1997 to 47,668 in 2004. Strategis estimated that the Palmdale System would take moderate rate increases between 1998 and 2004, with, for example, a 4 percent increase in basic rates in 1998 and 1999 and 3 percent increases in basic rates each year thereafter, and a 4 percent increase in expanded basic rates in 1998 and 1999, and a 3 percent increase in such rates each year thereafter. Strategis estimated that rate increases for pay television subscriptions would average 1 percent per year after a 5 percent increase in 1998. Strategis estimated that rate increases for pay-per-view showings, converter rentals and installations would average 3 percent per year. These projections, if true, would result in an increase in basic rates from $14.28 in 1998 to $17.14 in 2004, and an increase in the rates for the expanded basic tier from $12.80 in 1998 to $15.37 in 2004. As explained in the preceding paragraphs, the "low" value was determined using a 14 percent return on equity and the "high" value was determined using a 12 percent return on equity. This method resulted in an estimated fair market value ranging from a low of $134,773,634 to a high of $145,249,519 for the Palmdale System. The fifth valuation method was a discounted cash flow analysis that measured the net present value of the pre-tax operating cash flows (less capital expenditures, plus the residual value of the Palmdale System) that represent the return on the total investment rather than those that could result from an assumed "purchase" with a pre-determined debt to equity ratio. The same set of financial projections that the firm prepared and used in the fourth valuation methodology were used for growth in subscribers, revenues, operating expenses and capital expenditures. The projected pre-tax operating cash flows for the Palmdale System, plus the last-year residual value of the Palmdale System less capital expenditures, were discounted to the present time at an acceptable current cost of money. This method indicated the present value of the future pre-tax operating cash flows, using an acceptable discounted factor based on the weighted average cost of money. The "high" value was determined using a 15.1 percent target return on investment and the "low" value was determined using a 16.6 percent target return on investment. This method resulted in an estimated fair market value ranging from a low of $132,642,183 to a high of $142,642,182 for the Palmdale System. 18 Strategis' valuation methodologies resulted in differing values for the Palmdale System. The reason for this is grounded in the basic approach that the firm takes. The five different methods allow five different views of a system's value. The first method looks at past performance, but allows nothing for future performance. The second method looks at the system as it is as of the date of the appraisal. The third method looks at the system's projected operating income in the first year following the date of the appraisal. Both discounted cash flow methods fully consider the future value of the system by recognizing projected operating income and expenses, including capital expenditures. Based upon all of the available information about a system being appraised, the appraiser decides how to weight each of the five methods. The final estimated fair market value is not a straight average of all of the methods. Although the weighting is not shown in the appraisal report, Strategis generally prefers the discounted cash flow methods since they consider a broader range of factors that represent all sources of value, present and future. Strategis accordingly generally gives greater consideration to the discounted cash flow methods in its final judgment concerning the fair market value of a cable television system. Strategis' conclusions as to the range of values were based upon information and data supplied by the General Partner, Strategis' onsite inspection of the Palmdale System in January 1998, interviews with the Palmdale System's onsite management team and general cable television industry information. The fair market value appraisal of $140,059,000 reached by Strategis was based on the various valuations generated by it, and Strategis' general knowledge and expertise in the cable television industry. As compensation for rendering an opinion as to the fair market value of the Palmdale System, the General Partner paid Strategis a fee of $7,885. Such fee was not contingent upon the conclusion reached by Strategis in its opinion. As compensation for rendering opinions as to the fair market value of other cable television systems owned and/or managed by the General Partner and its affiliates, and completing the analysis of the allocations of purchase prices between tangible and intangible assets for various cable television systems owned and/or managed by the General Partner and its affiliates, Strategis has received fees and expense reimbursements totaling $288,621 during the two years ended December 31, 1997. The Bond & Pecaro Appraisal Bond & Pecaro, Inc. ("Bond & Pecaro") is a consulting firm specializing in valuations, asset appraisals and related financial services for the communications industry. The firm has appraised assets of more than 1,500 media properties. Bond & Pecaro was selected by the General Partner to render an opinion as to the fair market value of the Palmdale System in light of such overall qualifications and because of the firm's good reputation in the industry. No limitations were imposed with respect to the appraisal to be rendered by Bond & Pecaro. Bond & Pecaro has prepared independent appraisals of other cable television systems owned and/or managed by the General Partner. Bond & Pecaro also is serving as the General Partner's expert witness aiding the General Partner in its defense of the litigation filed by limited partners of Fund 12-D challenging the terms of the Venture's sale of the Tampa System to a subsidiary of the General Partner. See "Special Factors, Legal Proceedings." The principals of Bond & Pecaro are not affiliated in any way with the General Partner. Bond & Pecaro used both the income and the market methodologies to determine the fair market value of the Palmdale System as of December 31, 1997. The firm developed a discounted cash flow analysis to determine the value of the Palmdale System based upon its economic potential. Bond & Pecaro noted that it is generally accepted that the value of a telecommunications business such as a cable television system lies in the fact that it is a "going concern." That is, a cable system's value reflects the revenues and, ultimately, the after- tax cash flow that the business may reasonably be expected to generate over a period of years. The potential resale value of the business at the end of that period is also an important factor in the valuation of such properties. Bond & Pecaro noted that a number of factors contributed to going concern value, including the formation of a business plan, the construction of the system headend facility, the development of a functional general, administrative and technical organization, the establishment of a sales and marketing organization and the coordination of all of these functions into a well- defined and efficient operating organization. As described below, Bond & Pecaro's discounted cash flow model incorporates variables such as capital expenditures, homes passed by the system, basic penetration, paid penetration, system revenue projections, anticipated system operating expenses and profits and various discount rates. The variables in the analysis reflect historical system and market growth trends as 19 well as anticipated system performance and market conditions. The capital expenditures provision reflects the amount of investment that Bond & Pecaro projected will be required to expand and maintain a competitive cable television business in the Palmdale, California area. Bond & Pecaro's discounted cash flow projection period of ten years was deemed by the firm to be an appropriate time horizon for the firm's analysis because cable operators and investors typically expect to recover their investments within a ten-year period. Thus, it was over this period that projections regarding market demographics, system basic and pay penetration, and operating profit margins were made by Bond & Pecaro. Bond & Pecaro looked at the ten year period to project household growth in the Palmdale area, anticipated market penetration percentages and system operating performance expectations in order to project the Palmdale System's operating profits during the next ten years. The firm deducted income taxes from the projected operating profits to determine after- tax net income. Depreciation and amortization expenses were added back to the after-tax income stream and projected capital expenditures were subtracted to calculate the Palmdale System's net after-tax cash flow. Bond & Pecaro then adjusted the stream of annual cash flow to present value using a discount rate the firm deemed appropriate for the cable television industry. To determine the Palmdale System's residual value at the end of the ten-year projection period, Bond & Pecaro applied an operating cash flow multiple of 10 to the system's 2007 operating cash flow projection. In Bond & Pecaro's opinion the terminal value represents the hypothetical value of the system at the end of the projection period and the net terminal value was discounted to present value. The results of Bond & Pecaro's analysis indicated to the firm that the value of the Palmdale System as of December 31, 1997 was $131,952,600. In order to verify the results of the discounted cash flow analysis, as described below, Bond & Pecaro also utilized a comparable sales approach, relying upon an analysis of subscriber multiples. The results of this analysis supported the firm's conclusions about valuation resulting from application of the income approach. Bond & Pecaro reported that the initial parameter upon which its discounted cash flow projection was based was homes passed. Two factors affect the number of homes passed: new plant construction and household growth. In preparing its projection, Bond & Pecaro assumed that the number of households in the Palmdale System's franchise area will increase at a rate equivalent to the average growth projected for the areas served by the system as a whole, or approximately 0.7 percent per year. Bond & Pecaro concluded that the basic penetration rate would grow gradually over the 10-year projected period from the current 72.4 percent to approximately 76.4 percent by 2007. The firm projected that pay penetration of the Palmdale System will increase from a level of 67.3 percent in December 1997 to approximately 90.3 percent by 2007. Bond & Pecaro concluded that due to regulatory and competitive restrictions, service rates for basic and expanded basic services are expected to grow with inflation while premium channel service rates are expected to remain relatively flat throughout the 10-year projected period. Bond & Pecaro estimated that basic commercial and pay revenue will increase at a 10 percent annual rate through 2007, that pay-per-view service revenue will increase at a 28.1 percent annual rate for the years 1998 through 2002 and at an 11 percent annual rate thereafter, that commercial advertising will increase at a 19.0 percent annual rate through 2002 and at a 10 percent annual rate thereafter, and that annual installation revenue would remain constant during the projection period. The firm concluded that equipment rental revenues as well as other revenues also should increase by 9 percent annually through 2007. Bond & Pecaro concluded that total system revenues would increase from $32,500,000 in 1998 to $57,600,000 in 2007. For purposes of its appraisal, Bond & Pecaro assumed that the Palmdale System would maintain an operating profit margin of 45.4 percent, which was the system's operating profit margin in 1997. Bond & Pecaro used an estimated tax rate of 41.0 percent to project the taxable income of the Palmdale System because the estimated rate reflects the combined federal, state and local tax rates in effect on December 31, 1997. Depreciation expense for each year was determined using the MACRS schedule for 5, 7, 15 and 39 year property based upon the reported cost of fixed assets present at the Palmdale System. Subsequent annual capital expenditures were estimated to approximate 5 percent of the cost of the fixed assets of the Palmdale System as of December 31, 1997. Supplemental provisions were made to incorporate projections of capital expenditures associated with the conversion to digital television. Bond & Pecaro then determined the net after-tax cash flow for the Palmdale System. After taxes were subtracted from the system's taxable income, non-cash depreciation expenses were added back to net income to 20 yield after-tax cash flow. From the after-tax cash flow, the provision for subsequent capital expenditures was deducted to calculate the net after-tax cash flows. Bond & Pecaro used a discount rate of 12 percent to calculate the present value of the net after-tax cash flows. In order to account for the risks associated with investments in the cable television industry and in the Palmdale System in particular, Bond & Pecaro added a premium to a base discount rate to develop the 12 percent rate employed in its analysis. Bond & Pecaro then applied a multiplier of 10 to the Palmdale System's 2007 operating cash flow. Bond & Pecaro's appraisal noted that multiples used in the valuation of cable television systems of a type similar to the Palmdale System range from 8 to 12 times operating cash flow, depending on market conditions and a system's profit potential. Bond & Pecaro noted also that exceptional circumstances will warrant multiples outside of this range. The appraisal report indicated that the selected multiple of 10 was used to estimate the value of the system at the end of the investment period. According to Bond & Pecaro, this multiple reflects the state of the market for cable television systems as of December 31, 1997, tempered by the economic conditions of the system's franchise service area, the uncertainty introduced by re-regulation of the cable television industry and the prospects for increased competition from wireless cable companies and direct broadcast satellite operators. The 10-year discounted cash flow projection of Bond & Pecaro yielded a value of $131,952,600 for the Palmdale System. In order to correlate this statistical valuation with the realities of the marketplace, Bond & Pecaro analyzed the sale of five comparable cable television systems that took place in 1997. The sales examined by Bond & Pecaro were selected based upon their comparability to the Palmdale System. The five cable television system transactions examined by Bond & Pecaro were: (i) the sale of the Palo Alto, California cable television system by one unaffiliated cable television system operator to another for a sales price of $54,100,000 or a price per subscriber of $2,042, (ii) the sale of the Independence, Missouri cable television system by one of the General Partner's managed partnerships to a subsidiary of the General Partner for a sales price of $171,200,000 or a price per subscriber of $2,004, (iii) the sale of the Phoenix, Arizona cable television system by one unaffiliated cable television system operator to another for a sales price of $77,000,000 or a price per subscriber of $2,131, (iv) the sale of the Evansville, Indiana cable television system by one unaffiliated cable television system operator to another for a sales price of $131,000,000 or a price per subscriber of $2,098, and (v) the sale of the Brigham, Utah cable television system by one unaffiliated cable television system operator to another for a sales price of $125,000,000 or a price per subscriber of $2,160. Bond & Pecaro determined that the average price per subscriber paid for the five comparable cable television systems sales was approximately $2,087. As noted above, Bond & Pecaro's discounted cash flow model concluded that the Palmdale System's overall fair market value was $131,952,600. This $131,952,600 value reflects a price of approximately $2,077 per subscriber, which Bond & Pecaro judged to be consistent with prevailing subscriber multiples of comparable sales in 1997. A representative of Bond & Pecaro consulted with system management regarding market factors and system-specific issues that impacted the value of the system's tangible and intangible assets. Specific data provided by the system and the General Partner included historical audited financial statements, operating statistical summaries, system technical data, market demographic data and related materials. Other sources consulted in the preparation of the appraisal included industry factbooks, government publications and similar reference materials. Bond & Pecaro also relied upon information furnished by the Palmdale System's management relating to the age, condition and adequacy of the system's physical plant. As compensation for rendering an opinion as to the fair market value of the Palmdale System, the General Partner paid Bond & Pecaro a fee of $10,375. Such fee was not contingent upon the conclusions reached by Bond & Pecaro in its opinion. As compensation for rendering opinions as to the fair market value of other cable television systems owned and/or managed by the General Partner and its affiliates, Bond & Pecaro has received fees totaling $17,098 during the two years ended December 31, 1997. The Waller Appraisal Waller Capital Corporation ("Waller") is a firm specializing in financial services and asset appraisals for the telecommunications industry. Waller was selected by the General Partner to render an opinion as to the fair market value of the Palmdale System in light of its overall qualifications and because of the firm's good 21 reputation in the cable television industry. No limitations were imposed with respect to the appraisals to be rendered by Waller. Waller has prepared independent appraisals of other cable television systems owned and/or managed by the General Partner. Neither Waller nor any of its representatives have any active or contemplated direct interest in the General Partner, in any of its managed partnerships or in any of its affiliates, except for incidental shareholdings in the General Partner, which is a publicly traded company. In arriving at its opinion as to the fair market value of the Palmdale System, Waller utilized audited and unaudited financial statements, visited the Palmdale System, met with the management of the General Partner to discuss the Palmdale System's business, current operations and prospects, analyzed published financial and operating information and prospects, analyzed published financial and operating information considered by Waller to be comparable or related to the Palmdale System, and made other financial studies, analysis and investigations as Waller deemed appropriate. Waller indicated in its report that the primary purpose of its valuation was to arrive at the fair market value of the Palmdale System, with fair market value defined as the amount at which a property would change hands between a willing buyer and a willing seller when neither is acting under compulsion and when both have reasonable knowledge of the relevant facts. The valuation was determined on a cash-for-assets basis. Numerous elements, both quantitative and qualitative, were factored into Waller's valuation. Waller concluded that the Palmdale System has attractive demographics with, for example, average household income in the area served by the system being significantly higher than the national average. Waller also noted that due to the technical profile of the largest employers in the Palmdale area (aerospace and defense), the residents of the area are also highly educated. The firm further noted that the Palmdale area has experienced substantial growth in households, with the area's households expected to grow over 3 percent per year from 1997 to 2000. Waller also concluded that the technical condition of the system at 550 Mhz capacity will be sufficient for the Palmdale market for the near future. On the negative side, Waller noted that while there is no current wireless competition to the Palmdale System, there exists the potential of wireless competition due to the Palmdale area's flat geography. Waller also noted that the local economy, while increasingly diversified still is heavily dependent on the aerospace and defense industries and a downturn in either of these industries could negatively impact system revenues. The general methodology of Waller's appraisal was to evaluate the discounted cash flow stream generated by the Palmdale System over a ten year period (1998 to 2007), applying all relevant market and economic factors. Waller's ten year projections were prepared using information provided by the General Partner together with Waller's industry estimates. Waller developed its projections through on-sight due diligence, a review of the Palmdale System's 1998 operating budget prepared by the General Partner, other operating and subscriber data and projections and demographic data relating to the Palmdale System's service area. A sale was assumed to occur in the tenth year (2007) of the discounted cash flow model. The cash flow sales multiple selected reflected the long-term prospects for cash flow growth and the cash flow quality of the Palmdale System. The multiple selected also accounted for the presumed technical condition of the Palmdale System at 2007. The multiple selected was applied against the full tenth year cash flow. Waller's analysis utilized a discount rate of 14 percent derived from Waller's weighted average cost of capital ("WACC") model. The discount rate was commensurate with a probable buyers capital structure, operating risk and other factors associated with the operations of the Palmdale System. The discount rate used was consistent with the WACCs for an average cable buyer, private or public, and adjusted for certain factors such as size, liquidity, leverage and risk associated with a typical cable system buyer. The cable companies used to generate the WACC model were Adelphia Communications Corporation, Comcast Corporation, Cox Communications, TCA Cable TV, Inc., Telecommunications, Inc., Time Warner and US Media One Group. Like Strategis and Bond & Pecaro, Waller developed its discounted cash flow model based upon its own assumptions about the Palmdale System. Waller projected that homes passed growth would be approximately 1.5 percent per year over the ten year projection period, growing from 88,380 homes passed in 1998 to 102,048 homes passed in 2007. Waller projected that system plant miles would grow from 1,020 in 1998 to 1,177 in 2007. Waller concluded that subscriber growth would range from 1.3 percent to 3.2 percent in any particular 22 year, with growth generally averaging 1.5 percent per year and that, as a result, subscribers would grow from 66,285 in 1998 to 78,577 in 2007. Waller projected growth in the number of pay units generally averaging 1 percent per year during the ten year projection period, with pay units increasing from 44,391 in 1998 to 48,550 in 2007. Waller also examined growth in rates charged to subscribers, concluding that basic service rates would increase at approximately 4 percent per year, growing from $26.92 in 1998 to $38.32 in 2007. Waller concluded that rates for pay programming would increase approximately 2 percent per year, with rates increasing from $7.62 in 1998 to $9.11 in 2007. Waller concluded that total system revenue would increase from $33,046,000 in 1998 to $53,193,000 in 2007, with growth in basic service revenues the primary reason for such increase. Waller also included that total operating expenses would grow from $17,628,000 in 1998 to $29,769,000 in 2007. Because Waller concluded that expenses would increase at a slightly higher rate than revenue, Waller concluded that expenses would increase at a slightly higher rate than revenue, Waller concluded that the Palmdale System's cash flow would grow less dramatically, from $15,418,000 in 1998 to $23,424,000 in 2007. Waller's analysis was further supported by comparable system sales. Waller examined specific transactions to determine if an appropriate multiple of cash flow could be derived from current market information. Waller examined multiples from announced and completed cable television transactions in 1996 and 1997, relying upon data from transactions executed by Waller, from Paul Kagan & Associates, Inc. and from general industry information sources. Waller acknowledged that comparable sales data is difficult to generalize from because of the variability of factors such as system size, growth prospects, penetration, location, demographics, technical system condition and franchise terms, which information often is not publicly available. Given these limitations, Waller is of the opinion that comparable sales data offers only an approximation of factors that help devise a fair market value and is used as a reasonableness test of the discounted cash flow approach to value. For its comparable system sales analysis, Waller examined transactions involving cable television systems of similar size and characteristics to the Palmdale System. Waller examined five transactions that occurred in 1996 and eleven transactions that occurred in 1997. The five cable television system transactions examined by Waller from 1996 were: (i) the sale of the Long Beach, California cable television system by one unaffiliated cable television system operator to another for a sales price of $150,000,000 or a price per subscriber of $2,143, (ii) the sale a Minnesota system by one unaffiliated cable television system operator to another for a sales price of $124,000,000 or a price per subscriber of $1,667, (iii) the sale of the Walnut Valley, California cable television system by the General Partner to an unaffiliated cable television system operator for a sales price of $104,000,000 or a price per subscriber of $1,763, (iv) the sale of the Fort Collins, Colorado cable television system by one unaffiliated cable television system operator to another for a sales price of $54,000,000 or a price per subscriber of $1,800, and (v) the sale of the Yorba Linda, California cable television system by one of the General Partner's managed partnerships to an unaffiliated cable television system operator for a sales price of $36,000,000 or a price per subscriber of $2,118. The eleven 1997 cable television system transactions examined by Waller were: (i) the sale of the Rockford, Illinois cable television system by one unaffiliated cable television system operator to another for a sales price of $97,000,000 or a price per subscriber of $1,492, (ii) the sale of the Phoenix, Arizona cable television system by one unaffiliated cable television system operator to another for a sales price of $77,000,000 or a price per subscriber of $2,131, (iii) the sale of the Hickory, North Carolina cable television system by one unaffiliated cable television system operator to another for a sales price of $69,000,000 or a price per subscriber of $1,957, (iv) the sale of the Palo Alto, California cable television system by one unaffiliated cable television system operator to another for a sales price of $54,100,000 or a price per subscriber of $2,042, (v) the sale of the Dagsboro, Delaware cable television system by one unaffiliated cable television system operator to another for a sales price of $43,000,000 or a price per subscriber of $1,471, (vi) the sale of the Boone, North Carolina cable television system by one unaffiliated cable television system operator to another for a sales price of $35,000,000 or a price per subscriber of $1,852, (vii) the sale of cable television system serving a portion of Dallas, Texas by one unaffiliated cable television system operator to another for a sales price of $35,000,000 or a price per subscriber of $1,601, (viii) the sale of several small systems in Connecticut and New Hampshire by one unaffiliated cable television system operator to another for a sales price of $30,000,000 or a price per subscriber of $1,954, (ix) the sale of the Auburn, New York cable television system by one unaffiliated cable television system operator to another for a sales price of $28,000,000 or a price per subscriber of $1,958, (x) the 23 sale of the Pelzer, South Carolina cable television system by one unaffiliated cable television system operator to another for a sales price of $27,000,000 or a price per subscriber of $1,283, and (xi) the sale of the Kauai, Hawaii cable television system by one unaffiliated cable television system operator to another for a sales price of $24,000,000 or a price per subscriber of $2,065. Waller determined that the average price per subscriber paid for the comparable cable television system sales was approximately $1,810 and a cash flow multiple of 9.5. Waller concluded that this comparable sales analysis supported and validated Waller's discounted cash flow analysis, which resulted in an aggregate value for the Palmdale System of $2,179 per subscriber and a 10.5 times 1997 cash flow multiple, because the Palmdale System is of better quality than the average comparable system sold. Based on its various analyses and investigations of the Palmdale System, Waller concluded that the fair market value of the Palmdale System as of December 31, 1997 was $142,604,000. As compensation for rendering an opinion as to the fair market value of the Palmdale System, the General Partner paid Waller a fee of $15,212. Such fee was not contingent upon the conclusion reached by Waller in its opinion. Waller received no fees from the General Partner and its affiliates during the two years ended December 31, 1997. COSTS OF THE TRANSACTION The following is a reasonably itemized estimate of all expenses incurred or to be incurred in connection with the proposed sale of the Palmdale System, all of which will be paid by the General Partner, including without limitation the cost of soliciting the votes of the holders of limited partnership interests: Filing fees $ 4,146 Legal fees $10,000 Accounting fees $10,000 Appraisal fees $33,473 Printing costs $30,000 Postage and miscellaneous costs $ 5,000
24 PROPOSED SALE OF ASSETS THE PURCHASE AND SALE AGREEMENT Pursuant to the terms and conditions of a purchase and sale agreement dated as of March 10, 1998 (the "Purchase and Sale Agreement") by and between the Venture as seller and the General Partner as purchaser, the Venture agreed to sell the Palmdale System to the General Partner or to a subsidiary of the General Partner. The General Partner has assigned its rights and obligations as purchaser to Jones Communications of California, Inc., an indirect wholly owned subsidiary. The purchaser intends to finance the acquisition of the Palmdale System using cash on hand and borrowings available under credit facilities dated as of October 29, 1996 among Jones Cable Holdings II, Inc., as the borrower, and several lenders, including The Bank of Nova Scotia, NationsBank of Texas, N.A. and Societe Generale as the managing agents. The maximum amount available under the credit facilities is $600 million. One $300 million facility reduces quarterly beginning March 31, 2000 through the final maturity date of December 31, 2005 and the lenders' revolving commitment under the other $300 million facility terminates on October 27, 1998, at which time any outstanding borrowings convert to a term loan payable in semi-annual installments commencing June 30, 2001 with a final maturity date of December 31, 2005. Interest on amounts outstanding under the credit facilities varies from the "base rate," which generally approximates the prime rate, to the base rate plus 1/4 percent or LIBOR plus 1/2 percent to 1 1/4 percent depending on certain financial covenants. The effective interest rate on the $130,000,000 outstanding at March 31, 1998 was 6.18 percent. The credit facilities are secured by a pledge of the stock of all of the subsidiaries of the borrower. Jones Communications of California, Inc. is a wholly owned subsidiary of Jones Cable Holdings II, Inc., which in turn is a wholly owned subsidiary of the General Partner. Based upon amounts estimated as of March 31, 1998, the aggregate cost of the acquisition of the Palmdale System to the purchaser, including working capital adjustments, will be approximately $138,288,803. Amounts borrowed by the purchaser to acquire the Palmdale System will be repaid from cash generated by the operations of the Palmdale System and other systems owned by Jones Cable Holdings II, Inc. and from other sources of funds, including possible future refinancings. The closing of the sale will occur on a date upon which the Venture and the purchaser mutually agree. It is anticipated that the closing will occur in the fourth quarter of 1998. Because the closing is conditioned upon, among other things, the approval of the limited partners of the Venture's three constituent partnerships and the consent of governmental franchising authorities and other third parties, there can be no assurance that the proposed sale will occur. If all conditions precedent to the purchaser's obligation to close are not eventually satisfied or waived, the purchaser's obligation to purchase the Palmdale System will terminate. THE PALMDALE SYSTEM The assets to be acquired consist primarily of the real and personal, tangible and intangible assets of the Venture's Palmdale System. The purchaser will purchase all of the tangible assets of the Palmdale System, including, among other things, the headend equipment, underground and aboveground cable distribution systems, towers, earth satellite receive stations, and furniture and fixtures of the Palmdale System. The purchaser also will acquire certain of the intangible assets of the Palmdale System, including, among other things, all of the franchises, leases, agreements, permits, licenses and other contracts and contract rights of the Palmdale System. Also included in the sale are any parcels of real estate owned by the Palmdale System, the subscriber accounts receivable of the Palmdale System and all of the Palmdale System's engineering records, files, schematics, maps, reports, promotional graphics, marketing materials and reports filed with federal, state and local regulatory agencies. Certain of the Palmdale System's assets will be retained by the Venture, including cash or cash equivalents on hand and in banks, certain insurance policies and rights and claims thereunder, and any federal or state income tax refunds to which the Venture may be entitled. SALES PRICE Subject to the customary working capital closing adjustments described below, the sales price for the Palmdale System is $138,205,200. The sales price will be reduced by any accounts payable and accrued expenses 25 and vehicle lease obligations existing on the closing date. The sales price will be increased by any accounts receivable existing on the closing date. The sales price for the Palmdale System also will be adjusted as of the closing date with respect to all items of income and expense associated with the operation of the Palmdale System. This adjustment will reflect, in accordance with generally accepted accounting principles, that all expenses and income attributable to the period on or after the closing date are for the account of the purchaser and those prior to the closing date are for the account of the seller. While these adjustments may have the effect of increasing or decreasing the sales price, any adjustment is not expected to be material. Please see Note 5 of the Notes to Unaudited Pro Forma Financial Statements for a detailed accounting of the estimated closing adjustments. CONDITIONS TO CLOSING The purchaser's obligations under the Purchase and Sale Agreement are subject to the following conditions: (a) the Venture shall have obtained all material consents and approvals from governmental authorities and third parties with whom the Venture has contracted that are necessary for the transfer of the Palmdale System, (b) all representations and warranties of the Venture shall be true and correct in all material respects as of the closing date and (c) termination or expiration of the statutory waiting period applicable to the Purchase and Sale Agreement and the transactions contemplated thereby under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"). The Venture must obtain the consents of the four franchising authorities to the transfer of the Palmdale System's cable franchises. The Venture and the General Partner have filed all documents required to obtain the consents of the franchising authorities to the transfer of the Palmdale System's cable franchises. It is anticipated that the Venture will not experience any significant difficulty in obtaining the necessary consents and approvals to the currently proposed sale. If, however, the Venture fails to obtain certain non-material consents and approvals of third parties with whom the Palmdale System has contracted, the purchaser likely will waive this condition to closing. In such circumstances, the purchaser would agree to indemnify the Venture for any liabilities incurred in connection with a closing without prior receipt of all necessary consents. The Venture's obligations under the Purchase and Sale Agreement are subject to the following conditions: (a) the receipt of the purchase price for the Palmdale System, (b) the limited partners of the Partnership, Fund 12-B and Fund 12-D shall have approved the Venture's sale of the Palmdale System to the purchaser on the terms and conditions of the Purchase and Sale Agreement and (c) the statutory waiting periods applicable to the Purchase and Sale Agreement and the transactions contemplated thereby under the HSR Act shall have terminated or shall have expired. FEDERAL AND STATE INCOME TAX CONSEQUENCES The purpose of the following discussion of the income tax consequences of the proposed transaction is to inform the limited partners of the Partnership of the federal and state income tax consequences to the Partnership and to its partners arising from the proposed sale of the Palmdale System. These tax consequences are expected to be incurred in 1998, the year in which the sale is expected to close. The tax information included herein was prepared by the tax department of the General Partner. The tax information is taken from tax data compiled by the General Partner in its role as the Partnership's tax administrator and is not based upon the advice or formal opinion of counsel. The tax discussion that follows is merely intended to inform the limited partners of factual information and should not be considered tax advice. Section 5.3 of the Partnership Agreement specifies that Partnership distributions of cable television system net sale proceeds shall be allocated 100 percent to limited partners until they have received a return of their initial capital contributions and thereafter such distributions will be made 75 percent to the limited partners and 25 percent to the General Partner. Because limited partners have already received distributions in an amount in excess of the capital they initially contributed to the Partnership, all of the net proceeds from the sale of the Palmdale System distributed to the Partnership will be allocated 75 percent to the limited partners and 25 percent to the General Partner. 26 The allocation of gain from the sale of the Palmdale System will be allocated 75 percent to the limited partners and 25 percent to the limited partners in accordance with Section 5.2 of the Partnership Agreement. This allocation follows the underlying economic gain of the partners and hence satisfies the "substantial economic effect" test enacted in IRC Section 704(b) regarding special partnership allocations. Application of the allocation provisions of Section 5.2 ensures that the limited partners' net sum of allocable partnership loss and income during the Partnership's life will equal the net economic gain realized from their investment in the Partnership. The estimated allocable limited partner income from the Palmdale System sale reported below incorporates the application of the special partnership allocation rules of Section 5.2. By the expected date of the Palmdale System's sale in 1998, most of the limited partners will have received certain tax benefits from their investment in the Partnership. Assuming maximum federal income tax rates and no other sources of passive income, original limited partners of the Partnership will have received $3,548,137 in tax benefits from Partnership losses ($149 per $1,000 invested). The sale of the Palmdale System will result in a partnership gain for federal income tax purposes. The amount of this gain allocated to limited partners will be approximately $13,482,815. The General Partner estimates that $11,018,954 ($463 per $1,000 invested) of this gain will be treated as ordinary income. This amount of ordinary income results from the recapture of depreciation on personal property under IRC Section 1245. The General Partner estimates that the remainder of the gain, $2,463,862 ($63 per $1,000 invested), will be treated as long term capital gain under IRC Section 1231. No significant passive loss carryforwards from the Partnership should be available to offset these gain allocations. Assuming the 31 percent rate applies to ordinary income and the 20 percent rate applies to long term capital gain income, as a result of the sale of the Palmdale System, a limited partner will be subject to federal income taxes of $ per $1,000 invested in the Partnership. The taxable income will be recognized in the year of the closing of the sale, which is expected to be 1998. Limited partners that have more recently acquired their partnership interests in the limited partnership secondary market and/or through limited tender offers will have allocable income from the sale in the amounts reported above. Because the Partnership does not have an IRC Section 754 election in effect, the purchase of a limited partnership interest in the Partnership places the new investor in the same position as the limited partner from whom the interest was purchased. However, the new investor will not have the prior investor's passive loss carryforwards or tax basis in the Partnership. Newer investors in the Partnership will likely have a greater reportable net taxable income from the sale of the Palmdale System than investors who have held their limited partnership interests for a longer period of time. Also, recent investors will not have their net tax basis in their partnership interests reflected on their annual Schedule K-1. Such limited partners must track their tax basis by adjusting their original cost by allocable income or loss and partnership distributions. Their adjusted tax basis will be pertinent in the year when they sell their limited partnership interests or when the Partnership is liquidated. Limited partners who are non-resident aliens or foreign corporations ("foreign persons") are subject to a withholding tax on their share of the Partnership's income from the sale of the Palmdale System. The withholding rates are 39.6 percent for individual partners and 35 percent for corporate partners. The tax withheld will be remitted to the Internal Revenue Service and the foreign person will receive a credit on their U.S. tax return for the amount of the tax withheld by the Partnership. The tax withheld will be treated as a distribution to the limited partner. The sale of the Palmdale System will require certain limited partners to report their income to the State of California. The General Partner is required by California law to withhold 7 percent of each domestic non-resident partner's allocable income from the sale of the Palmdale System and 9.3 percent of each foreign non-resident partner's allocable income from the sale of the Palmdale System. This withholding requirement does not apply 27 to residents of the State of California or to tax-exempt entities such as trusts and IRAs. This withholding process will require affected limited partners to file non-resident income tax returns in the State of California for 1998. The General Partner anticipates that most limited partners will likely receive a refund from this reporting process. Detailed California reporting instructions and blank forms will be provided to affected limited partners in their 1998 annual tax reporting package, which will be mailed to limited partners in March 1999. CERTAIN INFORMATION ABOUT THE PARTNERSHIP AND THE GENERAL PARTNER The General Partner acquires, develops and operates cable television systems for itself and for its managed limited partnerships. Based on the number of basic subscribers served by the General Partner's owned and managed cable television systems, the General Partner is one of the larger cable television system operators in the United States serving in excess of 1 million basic subscribers. The principal executive offices of the Partnership and the General Partner are located at 9697 East Mineral Avenue, Englewood, Colorado 80112, and their telephone number is (303) 792-3111. The limited partnership interests of the Partnership are registered pursuant to Section 12(g) of the Exchange Act. As such, the Partnership currently is subject to the informational reporting requirements of the Exchange Act and, in accordance therewith, is obligated to file periodic reports, proxy statements and other information with the Commission relating to its business, financial condition and other matters. Reports and other information filed by the Partnership can be inspected and copied at the public reference facilities maintained by the Commission at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, and at the following regional offices of the Commission: 7 World Trade Center, Suite 1300, New York, New York 10048 and Northwest Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. The Commission also maintains a World Wide Web site that contains reports, proxy statements and information statements of registrants (including the Partnership) that file electronically with the Commission at http://www.sec.gov. The Partnership's registration and reporting requirements under the Exchange Act will be terminated upon the dissolution of the Partnership, which is expected to occur soon after the sale of the Venture's Palmdale System. The General Partner also is subject to the informational filing requirements of the Exchange Act and, in accordance therewith, files periodic reports, proxy statements and other financial information with the Securities and Exchange Commission relating to its business, financial condition and other matters. Information, as of particular dates, concerning the General Partner's directors and officers, their compensation, options granted to them, the principal holders of the General Partner's securities and any material interest of such persons in transactions with the General Partner is required to be disclosed in certain documents filed with the Commission. Such reports, proxy statements and other information may be inspected at the above-listed public reference facilities maintained by the Commission and at the Commission's World Wide Web site. Copies of such materials may be obtained upon payment of the Commission's prescribed charges by writing to the Commission's principal office at 450 Fifth Street, N.W., Washington, D.C. 20549. The name, business address and principal occupation and employment for the past five years of each of the directors and executive officers of the General Partner are set forth in Schedule 1 to this Proxy Statement. To the best knowledge of any of the persons listed on Schedule 1 hereto, except as disclosed on such schedule, no persons listed on such schedule beneficially own any limited partnership interests in the Partnership. Except as disclosed herein, neither the General Partner nor, to the best of its knowledge, any of the persons listed on Schedule 1 hereto, has any contract, arrangement, understanding or relationship with any other person with respect to any limited partnership interest of the Partnership, including, but not limited to, any contract, arrangement, understanding or relationship concerning the transfer or the voting of any of such interests, joint ventures, loan or option arrangements, puts or calls, guaranties of loans, guaranties against loss or the giving or withholding of proxies. 28 CERTAIN RELATED PARTY TRANSACTIONS The General Partner and its affiliates engage in certain transactions with the Venture. The General Partner believes that the terms of such transactions are generally as favorable as could be obtained by the Venture from unaffiliated parties. This determination has been made by the General Partner in good faith, but none of the terms were or will be negotiated at arm's- length and there can be no assurance that the terms of such transactions have been or will be as favorable as those that could have been obtained by the Venture from unaffiliated parties. The purchase price for the Palmdale System was determined in accordance with the provisions of the Partnership Agreement but the proposed sale of the Palmdale System by the Venture to one of the General Partner's subsidiaries was not negotiated at arm's-length and thus there can be no assurance that the terms of such transaction have been or will be as favorable as those that could have been obtained by the Venture from an unaffiliated purchaser. The General Partner charges the Venture a management fee relating to the General Partner's management of the Venture's cable television systems, and the Venture reimburses the General Partner for certain allocated overhead and administrative expenses in accordance with the terms of the Partnership Agreement. These expenses consist primarily of salaries and benefits paid to corporate personnel, rent, data processing services and other facilities costs. Such personnel provide engineering, marketing, administrative, accounting, legal and investor relations services to the Venture. Allocations of personnel costs are based primarily on actual time spent by employees of the General Partner with respect to cable television systems managed. Systems owned by the General Partner and its subsidiaries and all other systems owned by partnerships for which Jones Intercable, Inc. or one of its subsidiaries is the general partner are also allocated a proportionate share of these expenses. No duplicate management or other fees or reimbursements are charged to the Partnership. The General Partner from time to time also advances funds to the Venture and charges interest on the balances payable by the Venture. The interest rate charged the Venture approximates the General Partner's weighted average cost of borrowing. Knowledge TV, Inc. is an affiliate of the General Partner that owns and operates Knowledge TV, a network that provides programming related to computers and technology; business, careers and finance; health and wellness; and global culture and languages. Knowledge TV, Inc. sells its programming to the cable television systems owned by the Venture. Jones Computer Network, Ltd., an affiliate of the General Partner, operated the television network Jones Computer Network. This network provided programming focused primarily on computers and technology. Jones Computer Network sold its programming to the cable television systems owned by the Venture. Jones Computer Network terminated its programming in April 1997. The Great American Country network provides country music video programming to the cable television systems owned by the Venture. This network is owned and operated by Great American Country, Inc., a subsidiary of Jones International Networks, Ltd., an affiliate of the General Partner. Jones Galactic Radio, Inc. is a company owned by Jones International Networks, Ltd., an affiliate of the General Partner, Superaudio, a joint venture between Jones Galactic Radio, Inc. and an unaffiliated entity, provides satellite programming to the cable television systems owned by the Venture. The Product Information Network Venture (the "PIN Venture") is a venture among a subsidiary of Jones International Networks, Ltd., an affiliate of the General Partner, and two unaffiliated cable system operators. The PIN Venture operates the Product Information Network ("PIN"), which is a 24-hour network that airs long-form advertising generally known as "infomercials." The PIN Venture generally makes incentive payments of approximately 60 percent of its net advertising revenue to the cable systems that carry its programming. The Venture's systems carry PIN for all or part of each day. Revenues received by the Venture from the PIN Venture 29 relating to the Venture's owned cable television systems totaled $54,005 for the three months ended March 31, 1998 and $199,997 for the year ended December 31, 1997. The programming fees paid by the Venture to Knowledge TV, Inc., Jones Computer Network, Ltd., Great American Country and Superaudio (collectively, the "affiliated programming providers") are governed by the terms of the various master programming agreements entered into by and between the General Partner and each of the affiliated programming providers. Generally, with respect to most video programming services, cable operators pay to programmers a monthly license fee per subscriber that is based on a number of factors, including the perceived value of the programming, the size of the cable operator and the level of distribution of the programming service within the cable operator's systems and the other terms and conditions under which the programming is provided. The General Partner negotiates master programming agreements with each programming network distributed on any of its owned or managed cable systems. The Venture pays the same per subscriber rate for all of its programming, including the programming provided by affiliates of the General Partner, as the General Partner pays for the programming it provides on cable television systems that it owns itself, i.e., the General Partner does not receive any markup for programming provided to the Venture under its master programming agreements. The master programming agreements entered into by and between the General Partner and the affiliated programming providers were negotiated by officers of the General Partner with representatives of the affiliated programming providers. The charges to the Venture for related party transactions were as follows for the periods indicated:
FOR THE THREE MONTHS ENDED FOR THE YEAR ENDED MARCH 31, 1998 DECEMBER 31, -------------- -------------------------------- 1997 1996 1995 ---------- ---------- ---------- Management fees................ $1,045,622 $4,133,751 $4,118,188 $5,069,985 Allocation of expenses......... 1,138,307 4,615,841 5,491,265 7,183,663 Interest expense............... 0 0 0 220,743 Amount of notes and advances outstanding................... 0 0 0 4,198,739 Highest amount of notes and advances outstanding.......... 0 0 0 4,574,572 Programming fees: Knowledge TV, Inc. .......... 35,982 131,277 126,665 145,598 Jones Computer Network, Ltd. ....................... 0 85,543 248,044 283,339 Great American Country....... 33,988 131,863 141,753 0 Superaudio................... 30,847 118,032 116,710 135,861
30 USE OF PROCEEDS FROM PALMDALE SYSTEM SALE The following is a brief summary of the Venture's estimated use of proceeds and of the Partnership's estimated use of its portion of the proceeds from the Venture's sale of the Palmdale System. All of the following selected financial information is based upon amounts as of March 31, 1998 and certain estimates of liabilities at closing. Final results may differ from these estimates. A more detailed discussion of the financial consequences of the sale of the Palmdale System is set forth below under the caption "Unaudited Pro Forma Financial Information." All limited partners are encouraged to review carefully the unaudited pro forma financial statements and notes thereto. If the holders of a majority of limited partnership interests of the three partnerships that comprise the Venture approve the proposed sale of the Palmdale System and the transaction is closed, the Venture will repay all of its outstanding indebtedness, which, with accrued interest, is estimated to total approximately $48,484,000, and then the approximately $91,642,700 net sale proceeds will be distributed to the three constituent partnerships of the Venture in proportion to their ownership interests in the Venture. The Partnership will receive 15 percent of the net sale proceeds, estimated to total approximately $14,001,000. Pursuant to the terms of the Partnership Agreement, the $14,001,000 distribution will be allocated 75 percent to the limited partners ($10,500,750) and 25 percent to the General Partner ($3,500,250). The Partnership will distribute the $10,500,750 to its limited partners of record as of the closing date of the sale of the Palmdale System. The estimated uses of the sale proceeds are as follows: Contract Sales Price of the Palmdale System.................... $138,205,200 Add:Cash on Hand............................................... 1,837,796 Estimated Net Closing Adjustments.......................... 83,603 Less:Repayment of Debt Plus Accrued Interest................... (48,483,899) ------------ Cash Available for Distribution to Joint Venturers........ 91,642,700 Cash Distributed to Fund 12-B and Fund 12-D............... 77,641,700 ------------ Cash Available for Distribution by the Partnership........ $ 14,001,000 ============ Limited Partners' Share (75%)............................. $ 10,500,750 ============ General Partner's Share (25%)............................. $ 3,500,250 ============
Based upon financial information available at March 31, 1998, below is an estimate of all cash distributions that will have been made to limited partners after the distribution of the proceeds from the sale of the Palmdale System is completed. Summary of Estimated Cash Distributions to Limited Partners: Return of Limited Partners' Initial Capital on the 1996 Sale of the Venture's Tampa System............................... $ 8,404,000 Repayment of amount due the Venture from Distribution Proceeds.................................................... (159,137) Return of Limited Partners' Initial Capital on the 1998 Sale of the Venture's Albuquerque System......................... 15,409,000 Limited Partners' Share of Residual Proceeds on the 1998 Sale of the Venture's Albuquerque System......................... 2,766,163 Limited Partners' Share of Residual Proceeds on the 1998 Sale of the Venture's Palmdale System............................ 10,500,750 ----------- Total Estimated Cash Received by Limited Partners............ $36,920,776 =========== Total Cash Received per $1,000 of Limited Partnership Capital..................................................... $ 1,550 =========== Total Cash Received per $500 Limited Partnership Interest ... $ 775 ===========
31 Based on financial information available at March 31, 1998, the following table presents the estimated results of the Partnership when the Venture has completed the sale of the Palmdale System: Dollar Amount Raised........................................ $ 23,813,000 Number of Cable Television Systems Purchased Directly....... None Number of Cable Television Systems Purchased Indirectly..... Five Date of Closing of Offering................................. December 1985 Date of First Sale of Properties............................ August 1987 Tax and Distribution Data per $1,000 of Limited Partnership Capital: Federal Income Tax Results Ordinary Income (Loss) --from operations....................................... $ (1,663) --from recapture........................................ $ 1,949 Capital Gain (Loss)..................................... $ 264 Cash Distributions to Investors Source (on GAAP basis) --investment income..................................... $ 550 --return of capital..................................... $ 1,000 Source (on cash basis) --sales................................................. $ 1,550
32 UNAUDITED PRO FORMA FINANCIAL INFORMATION OF CABLE TV FUND 12-C, LTD. The following unaudited pro forma financial statements assume that as of March 31, 1998, the Venture had sold the Albuquerque System and the Palmdale System. The sales price for the Palmdale System is $138,205,200. The funds available to the Venture from the sale of the Palmdale System, adjusting for the estimated net closing adjustments, are expected to total approximately $138,288,803. Such funds plus cash on hand will be used to repay all of the Venture's indebtedness and to distribute $91,642,700 to the three constituent partnerships of the Venture pursuant to the percentage ownership interests in the Venture of each partnership and then each partnership will distribute its share of the distribution pursuant to the terms of their partnership agreements. The Partnership will receive $14,001,000 from such distribution. Pursuant to the terms of the Partnership Agreement, the $14,001,000 distribution will be allocated 75 percent to the limited partners ($10,500,750) and 25 percent to the General Partner ($3,500,250). The limited partner distribution of $10,500,750 represents $220 for each $500 limited partnership interest or $440 for each $1,000 invested in the Partnership. The unaudited pro forma financial statements should be read in conjunction with the appropriate notes to the unaudited pro forma financial statements. ALL OF THE FOLLOWING UNAUDITED PRO FORMA FINANCIAL INFORMATION IS BASED UPON AMOUNTS AS OF MARCH 31, 1998 AND CERTAIN ESTIMATES OF LIABILITIES AT CLOSING. FINAL RESULTS MAY DIFFER FROM SUCH INFORMATION. 33 CABLE TV FUND 12-C, LTD. UNAUDITED PRO FORMA BALANCE SHEET MARCH 31, 1998
PRO FORMA PRO FORMA AS REPORTED ADJUSTMENTS BALANCE ----------- ----------- ----------- ASSETS Distribution receivable from cable television joint venture................. $ -- $14,001,000 $14,001,000 ----------- ----------- ----------- Total Assets.......................... $ -- $14,001,000 $14,001,000 =========== =========== =========== LIABILITIES AND PARTNERS' CAPITAL (DEFICIT) Liabilities: Loss in excess of investment in cable television joint venture............... $ 4,522,120 $(4,522,120) $ -- Accrued distribution to Limited Partners............................... -- 10,500,750 10,500,750 Accrued distribution to General Partner. -- 3,500,250 3,500,250 ----------- ----------- ----------- Total Liabilities..................... 4,522,120 9,478,880 14,001,000 ----------- ----------- ----------- Partners' Capital (Deficit): General Partner......................... (24,045) 24,045 -- Limited Partners........................ (4,498,075) 4,498,075 -- ----------- ----------- ----------- Total Partners' Capital (Deficit)..... (4,522,120) 4,522,120 -- ----------- ----------- ----------- Total Liabilities and Partners' Capital (Deficit).............................. $ -- $14,001,000 $14,001,000 =========== =========== ===========
The accompanying notes to unaudited pro forma financial statements are an integral part of this unaudited balance sheet. 34 CABLE TV FUND 12-C, LTD. UNAUDITED PRO FORMA STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997
PRO FORMA PRO FORMA AS REPORTED ADJUSTMENTS BALANCE ----------- ----------- --------- EQUITY IN NET LOSS OF CABLE TELEVISION JOINT VENTURE................................ $(733,076) $733,076 $ -- --------- -------- ------- NET LOSS ..................................... $(733,076) $733,076 $ -- ========= ======== ======= NET LOSS PER LIMITED PARTNERSHIP INTEREST..... $ (15.24) $ -- ========= =======
The accompanying notes to unaudited pro forma financial statements are an integral part of this unaudited statement. 35 CABLE TV FUND 12-C, LTD. UNAUDITED PRO FORMA STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1998
PRO FORMA PRO FORMA AS REPORTED ADJUSTMENTS BALANCE ----------- ----------- --------- EQUITY IN NET LOSS OF CABLE TELEVISION JOINT VENTURE................................ $(208,319) $208,319 $ -- --------- -------- ------- NET LOSS ..................................... $(208,319) $208,319 $ -- ========= ======== ======= NET LOSS PER LIMITED PARTNERSHIP INTEREST..... $ (4.33) $ -- ========= =======
The accompanying notes to unaudited pro forma financial statements are an integral part of this unaudited statement. 36 CABLE TV FUND 12-C, LTD. NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS 1) The Partnership has a 15 percent ownership interest in the Venture through capital contributions made during 1986 of $20,700,000. The following calculations present the sale of the Palmdale System and the resulting estimated distributions to be received by the Partnership. 2) The Venture sold the Albuquerque System for $222,683,739. Such funds were used to repay indebtedness and to distribute $125,000,000 to the three constituent partnerships of the Venture pursuant to the percentage ownership interests in the Venture of each partnership. The Partnership received $19,097,217 from such distribution. Pursuant to the terms of the Partnership Agreement, the Partnership returned to the limited partners the remaining $15,409,000 of capital initially contributed to the Partnership and the remainder was allocated 75 percent to the limited partners ($2,766,163) and 25 percent to the General Partner ($922,054). 3) The unaudited pro forma balance sheet of the Partnership assumes that the Venture had sold the Palmdale System for $138,205,200 as of March 31, 1998. The unaudited statements of operations of the Partnership assumes that the Venture had sold the Palmdale System as of January 1, 1997. 4) The Partnership will receive $14,001,000 from the Venture. Pursuant to the terms of the Partnership Agreement, the $14,001,000 distribution will be allocated 75 percent to the limited partners ($10,500,750) and 25 percent to the General Partner ($3,500,250). The limited partner distribution of $10,500,750 represents $220 for each $500 limited partnership interest or $440 for each $1,000 invested in the Partnership. 5) The estimated gain recognized from the sale of the Palmdale System and corresponding estimated distribution to limited partners as of March 31, 1998 has been computed as follows: GAIN ON SALE OF ASSETS: Contract sales price............................................. $138,205,200 Less: Net book value of investment in cable television properties at March 31, 1998.......................................... (38,461,594) ------------ Gain on sale of assets........................................... $ 99,743,606 ============ Partnership's share of gain on sale of assets.................... $ 15,240,823 ============ DISTRIBUTIONS TO PARTNERS: Contract sales price............................................. $138,205,200 Add:Trade receivables, net....................................... 1,012,541 Prepaid expenses................................................. 658,063 Less:Accrued liabilities......................................... (1,374,377) Subscriber prepayments........................................... (212,624) ------------ Adjusted cash received .......................................... 138,288,803 Less:Outstanding debt plus accrued interest to third parties..... (48,483,899) Add:Cash on hand................................................. 1,837,796 ------------ Cash available for distribution to joint venturers............... 91,642,700 Cash distributed to Fund 12-B and Fund 12-D...................... 77,641,700 ------------ Cash available for distribution by the Partnership............... $ 14,001,000 ============ Limited Partners' share (75%).................................... $ 10,500,750 ============ General Partner's share (25%).................................... $ 3,500,250 ============
37 AVAILABLE INFORMATION The Partnership's Annual Report on Form 10-K/A No.1 for the fiscal year ended December 31, 1997 and the Partnership's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1998 are being mailed to the limited partners of the Partnership together with this Proxy Statement. Copies of the three independent appraisals of the fair market value of the Palmdale System and copies of the Purchase and Sale Agreement between the Venture and the General Partner have been publicly filed with the Securities and Exchange Commission and may be inspected at the Commission's public reference facilities and at its World Wide Web site, and such documents also are available to each limited partner of the Partnership upon written request to Elizabeth M. Steele, Secretary, Jones Intercable, Inc., 9697 East Mineral Avenue, Englewood, Colorado 80112. Copies of these documents will be provided at the expense of the requesting limited partner. A Rule 13e-3 Transaction Statement furnishing certain additional information with respect to the transaction described herein has been jointly filed by the Partnership and the General Partner with the Securities and Exchange Commission. This document may be inspected at the Commission's public reference facilities and at its World Wide Web site. INCORPORATION BY REFERENCE The following documents, which have been filed by the Partnership with the Securities and Exchange Commission pursuant to the requirements of the Exchange Act are hereby incorporated by reference: (i) the Partnership's Annual Report on Form 10-K/A No. 1 for the fiscal year ended December 31, 1997, (ii) the Partnership's Current Report on Form 8-K dated March 10, 1998 and (iii) the Partnership's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1998. 38 SCHEDULE 1 EXECUTIVE OFFICERS AND DIRECTORS OF THE GENERAL PARTNER Set forth below is the name, residence or business address, present principal occupation or employment and five-year employment history of the executive officers and directors of the General Partner. Also set forth is the aggregate number of limited partnership interests of the Partnership beneficially owned by each such person. The present principal occupation of each executive officer of the General Partner is as an executive officer of the General Partner. The Partnership has no officers or employees. All persons listed except for Messrs. Fridman, Kearney and Vanaselja are citizens of the United States. Messrs. Fridman, Kearney and Vanaselja are citizens of Canada.
AGGREGATE NUMBER OF LIMITED PARTNERSHIP INTERESTS NAME AND ADDRESS OCCUPATION OR EMPLOYMENT BENEFICIALLY OWNED ---------------- ------------------------ --------------------- Glenn R. Jones Mr. Jones has served as Chairman of the Board of 0 c/o Jones Intercable, Directors and Chief Executive Officer of the Inc. 9697 E. Mineral General Partner since its formation in 1970. He Avenue Englewood, CO served as President of the General Partner from 80112 1984 to 1988. Mr. Jones has been involved in the cable television business in various capacities since 1961. Robert E. Cole Mr. Cole was appointed a Director of the General 0 c/o Jones Intercable, Partner in March 1996. Mr. Cole is currently Inc. self-employed as a partner of First Variable 9697 E. Mineral Avenue Insurance Marketing and is responsible for Englewood, CO 80112 marketing to National Association of Securities Dealers, Inc. firms in northern California, Oregon, Washington and Alaska. From 1993 to 1995, Mr. Cole was the director of marketing for Lamar Life Insurance Company; from 1992 to 1993, Mr. Cole was senior vice president of PMI Inc., a third party lender serving the special needs of corporate owned life insurance (COLI); and from 1988 to 1992, Mr. Cole was the principal of a specialty investment banking firm that provided services to finance the ownership and growth of emerging companies, productive assets and real property. Kevin P. Coyle Mr. Coyle, Group Vice President/Finance of the 0 c/o Jones Intercable, General Partner, has been the General Partner's Inc. 9697 E. Mineral Chief Financial Officer since 1990. Mr. Coyle Avenue Englewood, CO has been an associate of the finance department 80112 of the General Partner since 1981. William E. Frenzel Mr. Frenzel was appointed a Director of the 0 1775 Massachusetts General Partner in April 1995. He has been a Avenue, NW Guest Scholar since 1991 with the Brookings Washington, DC 20036 Institution, a research organization located in Washington, DC. Until his retirement in January 1991, Mr. Frenzel served for twenty years in the United States House of Representatives.
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AGGREGATE NUMBER OF LIMITED PARTNERSHIP INTERESTS NAME AND ADDRESS OCCUPATION OR EMPLOYMENT BENEFICIALLY OWNED ---------------- ------------------------ --------------------- Josef J. Fridman Mr. Fridman was appointed a director of the 0 c/o BCI Telecom Holding Inc. General Partner in February 1998. He is senior 1000 rue de la vice-president, law and corporate secretary of Gauchetiere Bureau 1100 BCE Inc. Mr. Fridman joined Bell Canada, a Montreal (PQ) wholly owned subsidiary of BCE Inc., in 1969, Canada H3B 4Y8 and he has held increasingly senior positions with Bell Canada and BCE Inc. since such time. He has held his current position since 1991. Donald L. Jacobs Mr. Jacobs was appointed a Director of the 0 60435 Tekampe Road General Partner in April 1995. Mr. Jacobs is a Bend, OR 97702 retired executive officer of TRW. Prior to his retirement in 1992, he was Vice President and Deputy Manager of the Space and Defense Sector; prior to that appointment, he was the Vice President and General Manager of the Defense Systems Group; and prior to that appointment, he was President of ESL, Inc., a subsidiary of TRW. Larry Kaschinske Mr. Kaschinske has been the Controller and Chief 0 c/o Jones Intercable, Accounting Officer of the General Partner since Inc. 9697 E. Mineral 1994. Mr. Kaschinske has been an associate of Avenue Englewood, CO the finance department of the General Partner 80112 since 1984. Robert Kearney Mr. Kearney was appointed a Director of the 0 c/o BCI Telecom Holding General Partner in July 1997. Mr. Kearney is a Inc. retired executive officer of Bell Canada. Prior 1000 rue de la to his retirement in December 1993, Mr. Kearney Gauchetiere was the President and Chief Executive Officer Bureau 1100 of Bell Canada. He served as Chairman of BCE Montreal (PQ) Canadian Telecom Group in 1994 and as Deputy Canada H3B 4Y8 Chairman of BCI Management Limited in 1995. James J. Krejci Mr. Krejci has been a Director of the General 0 3100 Arapahoe Avenue Partner since 1987. Mr. Krejci is President and Boulder, CO 80303 CEO of Imagelink Technologies, Inc., a privately financed company with leading technology in the desktop or personal computer videoconferencing market. Prior to joining Imagelink Technologies in July 1996, he was the President of the International Division of International Gaming Technology headquartered in Reno, Nevada. Prior to joining International Gaming Technology in May 1994, Mr. Krejci had been a Group Vice President of the General Partner since 1987. James B. O'Brien Mr. O'Brien has been President and a Director of 0 c/o Jones Intercable, the General Partner since 1989 and a member of Inc. the Executive Committee of the General 9697 E. Mineral Avenue Partner's Board of Directors since 1993. Englewood, CO 80112 Mr. O'Brien has been with the General Partner since 1982 in various operational management positions.
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AGGREGATE NUMBER OF LIMITED PARTNERSHIP INTERESTS NAME AND ADDRESS OCCUPATION OR EMPLOYMENT BENEFICIALLY OWNED ---------------- ------------------------ --------------------- Raphael M. Solot Mr. Solot was appointed a Director of the 0 501 South Cherry Street General Partner in March 1996. Mr. Solot is an Denver, CO 80222 attorney in private practice. He has practiced law for 34 years with an emphasis on franchise, corporate and partnership law and complex litigation. Cheryl M. Sprague Ms. Sprague joined the General Partner as Group 0 c/o Jones Intercable, Vice President/Human Resources in November Inc. 1997. Prior to November 1997 and since December 9697 E. Mineral Avenue 1995, Ms. Sprague served as Director, Human Englewood, CO 80112 Resources for Westmoreland Coal Company. From October 1993 to December 1995, Ms. Sprague served as President of Peak Executive Resources. From April 1992 to October 1993, Ms. Sprague was Vice President, Human Resources for Penrose-St. Francis Healthcare System. Elizabeth M. Steele Ms. Steele joined the General Partner in 1987 as 0 c/o Jones Intercable, Vice President/General Counsel and Secretary. Inc. Prior to that time, Ms. Steele was a partner at 9697 E. Mineral Avenue Davis, Graham & Stubbs, a Denver, Colorado law Englewood, CO 80112 firm that serves as counsel to the General Partner. Howard O. Thrall Mr. Thrall was appointed a director of the 0 c/o Jones Intercable, General Partner in March 1996 and he had Inc. previously served as a director of the General 9697 E. Mineral Avenue Partner from December 1988 to December 1994. Englewood, CO 80112 Mr. Thrall is now a management and international marketing consultant. From September 1993 through July 1996, Mr. Thrall served as Vice President of Sales, Asian Region, for World Airways, Inc. From 1984 until August 1993, Mr. Thrall was with the McDonnell Douglas Corporation, where he was a Regional Vice President, Commercial Marketing with the Douglas Aircraft Company subsidiary. Siim A. Vanaselja Mr. Vanaselja was appointed a Director of the 0 c/o BCI Telecom Holding General Partner in August 1996. Mr. Vanaselja Inc. joined BCE Inc., Canada's largest 1000 rue de la telecommunications company, in February 1994 Gauchetiere and he has served in various capacities with Bureau 1100 that company and its subsidiaries since that Montreal (PQ) time. He currently serves as Executive Vice Canada H3B 4Y8 President and Chief Financial Officer of Bell Canada International Inc. and Vice President of BCI Telecom Holding Inc., BCE Inc. subsidiaries. Prior to joining BCE Inc., Mr. Vanaselja was a partner in the Toronto office of KPMG Peat Marwick Thorne. Ruth E. Warren Ms. Warren has been Group Vice 0 c/o Jones Intercable, President/Operations of the General Partner Inc. since 1990. Ms. Warren has been with the 9697 E. Mineral Avenue General Partner in various operational Englewood, CO 80112 management positions since 1980.
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AGGREGATE NUMBER OF LIMITED PARTNERSHIP INTERESTS NAME AND ADDRESS OCCUPATION OR EMPLOYMENT BENEFICIALLY OWNED ---------------- ------------------------ --------------------- Cynthia A. Winning Ms. Winning joined the General Partner as Group 0 c/o Jones Intercable, Vice President/Marketing in December 1994. Inc. Prior to joining the General Partner, Ms. 9697 E. Mineral Avenue Winning served in 1994 as the President of PRS Englewood, CO 80112 Inc., a Denver, Colorado sports and event marketing company. From 1979 to 1981 and from 1986 to 1994, Ms. Winning served as the Vice President and Director of Marketing for Citicorp Retail Services, Inc. Sanford Zisman Mr. Zisman was appointed a Director of the 0 3773 Cherry Creek North Drive- General Partner in June 1996. Mr. Zisman is a Denver, CO 80209 principal in the law firm Zisman & Ingraham, P.C. of Denver, Colorado. He has practiced law for 32 years, with an emphasis on tax, business and estate planning and probate administration. Robert L. Zoellick Mr. Zoellick was appointed a Director of the 0 3900 Wisconsin General Partner in April 1995. Mr. Zoellick is Avenue, NW the John M. Olin Professor at the U.S. Naval Washington, DC 20016 Academy for the 1997-1998 term. From 1993 through 1997, he was an Executive Vice President at Fannie Mae, a federally chartered and stockholder-owned corporation that is the largest housing finance investor in the United States. From August 1992 to January 1993, Mr. Zoellick served as Deputy Chief of Staff of the White House and Assistant to the President. From May 1991 to August 1992, Mr. Zoellick served concurrently as the Under Secretary of State for Economic and Agricultural Affairs and as Counselor of the Department of State, a post he assumed in March 1989. From 1985 to 1988, Mr. Zoellick served at the Department of Treasury in a number of capacities, including Counselor to the Secretary.
S-4 [LOGO OF JONES INTERCABLE, INC. APPEARS HERE] 9697 EAST MINERAL AVENUE ENGLEWOOD, COLORADO 80112 PROXY THIS PROXY IS SOLICITED ON BEHALF OF THE PARTNERSHIP BY THE GENERAL PARTNER The undersigned Limited Partner of Cable TV Fund 12-C, Ltd., a Colorado limited partnership, hereby votes on the sale of Cable TV Fund 12-BCD Venture's Palmdale, California cable television system to Jones Communications of California, Inc., an indirect wholly owned subsidiary of Jones Intercable, Inc., for a sales price of $138,205,200 in cash, subject to normal closing adjustments, pursuant to the terms and conditions of that certain Purchase and Sale Agreement dated as of March 10, 1998, as follows: [_] CONSENTS [_] WITHHOLDS CONSENT [_] ABSTAINS (YOU MUST SIGN ON THE REVERSE SIDE OF THIS PROXY CARD FOR YOUR VOTE TO COUNT.) THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY THE UNDERSIGNED LIMITED PARTNER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR THE PROPOSED SALE TRANSACTION. PLEASE SIGN EXACTLY AS NAME APPEARS ON LABEL. DATED: ______________________, 1998 ___________________________________ Beneficial Owner Signature (Investor) ___________________________________ Authorized Trustee/Custodian Signature PLEASE SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY USING THE ENCLOSED ENVELOPE. THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY THE UNDERSIGNED LIMITED PARTNER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR THE PROPOSED SALE TRANSACTION. PLEASE SIGN EXACTLY AS NAME APPEARS ON LABEL. DATED: ______________________, 199 ___________________________________ Beneficial Owner Signature (Investor) ___________________________________ Authorized Trustee/Custodian Signature PLEASE SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY USING THE ENCLOSED ENVELOPE. - -------------------------------------------------------------------------------- [LOGO OF JONES INTERCABLE, INC. APPEARS HERE] 9697 EAST MINERAL AVENUE ENGLEWOOD, COLORADO 80112 PROXY THIS PROXY IS SOLICITED ON BEHALF OF THE PARTNERSHIP BY THE GENERAL PARTNER The undersigned Limited Partner of Cable TV Fund 12-C, Ltd., a Colorado limited partnership, hereby votes on the sale of Cable TV Fund 12-BCD Venture's Palmdale, California cable television system to Jones Communications of California, Inc., an indirect wholly owned subsidiary of Jones Intercable, Inc., for a sales price of $138,205,200 in cash, subject to normal closing adjustments, pursuant to the terms and conditions of that certain Purchase and Sale Agreement dated as of March 10, 1998, as follows: [_] CONSENTS [_] WITHHOLDS CONSENT [_] ABSTAINS (YOU MUST SIGN ON THE REVERSE SIDE OF THIS PROXY CARD FOR YOUR VOTE TO COUNT.) THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY THE UNDERSIGNED LIMITED PARTNER(S). IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR THE PROPOSED SALE TRANSACTION. ALL OWNERS MUST SIGN EXACTLY AS NAME(S) APPEAR ON LABEL. When limited partnership interests are held by more than one person, all owners must sign. When signing as attorney, as executor, administrator, trustee or guardian, please give full title as such. If a corpo-ration, please sign in full corporation name by authorized officer. If a partnership, please sign in partnership name by authorized person. DATED: ______________________, 1998 ___________________________________ Signature - Investor 1 ___________________________________ Signature - Investor 2 ___________________________________ Signature - Investor 3 PLEASE SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY USING THE ENCLOSED ENVELOPE. - -------------------------------------------------------------------------------- EX-99.(D)(2) 7 1997 FORM 10-K/A NO. 1 FOR CABLE TV FUND 12-C, LTD. Exhibit 99 (d)(2) FORM 10-K/A NO. 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) For the fiscal year ended December 31, 1997 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from _________to __________ Commission file number: 0-13964 CABLE TV FUND 12-C, LTD. ------------------------ (Exact name of registrant as specified in its charter) Colorado 84-0970000 -------- ---------- (State of Organization) (IRS Employer Identification No.) P.O. Box 3309, Englewood, Colorado 80155-3309 (303) 792-3111 - --------------------------------------------- -------------- (Address of principal executive office and Zip Code) (Registrant's telephone no. including area code) Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Limited Partnership Interests Indicate by check mark whether the registrants, (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days: Yes X No ---- ------- Aggregate market value of the voting stock held by non-affiliates of the registrant: N/A Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K ((S) 229.405) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X ----- DOCUMENTS INCORPORATED BY REFERENCE: None All statements, other than statements of historical facts, included in this Form 10-K Report that address activities, events or developments that the Partnership, the Venture or the General Partner expects, believes or anticipates will or may occur in the future are forward-looking statements. These forward- looking statements are based upon certain assumptions and are subject to a number of risks and uncertainties. Actual events or results may differ materially from those discussed in the forward-looking statements as a result of various factors. PART I. ------- ITEM 1. BUSINESS ----------------- THE PARTNERSHIP. Cable TV Fund 12-C, Ltd. (the "Partnership") is a Colorado limited partnership that was formed pursuant to the public offering of limited partnership interests in the Cable TV Fund 12 Limited Partnership Program (the "Program"), which was sponsored by Jones Intercable, Inc. (the "General Partner"). Cable TV Fund 12-A, Ltd. ("Fund 12-A"), Cable TV Fund 12-B, Ltd. ("Fund 12-B") and Cable TV Fund 12-D, Ltd. ("Fund 12-D") are the other partnerships that were formed pursuant to that Program. In 1986, the Partnership, Fund 12-B and Fund 12-D formed a general partnership known as Cable TV Fund 12-BCD Venture (the "Venture"), in which the Partnership owns a 15 percent interest, Fund 12-B owns a 9 percent interest and Fund 12-D owns a 76 percent interest. The Partnership and the Venture were formed for the purpose of acquiring and operating cable television systems. The Partnership does not directly own any cable television systems. The Partnership's sole asset is its 15 percent interest in the Venture. The Venture owns the cable television systems serving Palmdale, Lancaster and Rancho Vista and the military installation of Edwards Air Force Base, all in California (the "Palmdale System") and Albuquerque, New Mexico (the "Albuquerque System"). See Item 2. The Palmdale System and the Albuquerque System may collectively be referred to as the "Systems." The Venture has entered into an agreement to sell the Albuquerque System to the General Partner, and the General Partner expects the Palmdale System will also be sold in 1998. PROPOSED DISPOSITION OF CABLE TELEVISION SYSTEM. Pursuant to the terms and conditions of a purchase and sale agreement dated as of July 28, 1997 (the "Purchase and Sale Agreement") by and between the Venture as seller and the General Partner as purchaser, the Venture agreed to sell the Albuquerque System to the General Partner or to a subsidiary of the General Partner. The General Partner has assigned its rights and obligations as purchaser to Jones Communications of New Mexico, Inc., an indirect wholly owned subsidiary. Subject to the customary working capital closing adjustments, the sales price for the Albuquerque System is $222,963,267, which price is based on the average of three separate independent appraisals of the Albuquerque System's fair market value. The closing of the sale will occur on a date upon which the Venture and the purchaser mutually agree. It is anticipated that the closing will occur in the second quarter of 1998 within a few weeks after receipt of the approval of the sale by the limited partners of the Venture's three constituent limited partnerships: the Partnership, Fund 12-B and Fund 12-D. The General Partner anticipates that it will conduct a vote of the limited partners of the Partnership, Fund 12-B and Fund 12-D in March and April 1998. The purchaser's obligations under the Purchase and Sale Agreement are subject to the following conditions: (a) the Venture shall have obtained all material consents and approvals from governmental authorities and third parties with whom the Venture has contracted that are necessary for the transfer of the Albuquerque System, (b) all representations and warranties of the Venture shall be true and correct in all material respects as of the closing date and (c) termination or expiration of the statutory waiting period applicable to the Purchase and Sale Agreement and the transactions contemplated thereby under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"). The Venture's obligations under the Purchase and Sale Agreement are subject to the following conditions: (a) the receipt of the purchase price for the Albuquerque System, (b) the limited partners of the Partnership, Fund 12-B and Fund 12-D shall have approved the Venture's sale of the Albuquerque System and (c) the statutory waiting periods applicable to the Purchase and Sale Agreement and the 2 transactions contemplated thereby under the HSR Act shall have terminated or shall have expired. All waiting periods under the HSR Act have expired, thereby removing this as a condition to closing. Upon the consummation of the proposed sale of the Albuquerque System, the Venture will repay its outstanding Senior Notes balance of $41,544,890 plus a make whole premium that, based on current market interest rates, is estimated to total $2,016,985, plus accrued interest and, pursuant to an amendment to the Venture's credit facility, distribute $125,000,000 to the Partnership, Fund 12-B and Fund 12-D. The remaining proceeds will be used to repay a portion of the outstanding balance and accrued interest on its credit facility. The Partnership will receive 15 percent of the net sale proceeds, estimated to total approximately $19,097,217, and the Partnership will distribute this portion of the net sale proceeds to its partners of record as of the closing date of the sale of the Albuquerque System. Based upon financial information as of December 31, 1997, as a result of the Albuquerque System's sale, the limited partners of the Partnership, as a group, will receive approximately $18,175,163 and the General Partner will receive approximately $922,054. Limited partners will receive $382 for each $500 limited partnership interest, or $763 for each $1,000 invested in the Partnership from the Partnership's portion of the net proceeds of the Albuquerque System's sale. Once the Partnership has completed the distribution of its portion of the net proceeds from the sale of the Albuquerque System, limited partners of the Partnership will have received a total of $555 for each $500 limited partnership interest, or $1,109 for each $1,000 invested in the Partnership, taking into account the prior distributions to limited partners made in 1996 from the net proceeds of the sale of the Tampa System. CABLE TELEVISION SERVICES. The Systems offer to subscribers various types of programming, which include basic service, tier service, premium service, pay-per-view programs and packages including several of these services at combined rates. Basic cable television service usually consists of signals of all national television networks broadcast by their local affiliates, various independent and educational television stations (both VHF and UHF) and certain signals received from satellites. Basic service also usually includes programs originated locally by the system, which may consist of music, news, weather reports, stock market and financial information and live or videotaped programs of a public service or entertainment nature. FM radio signals are also frequently distributed to subscribers as part of the basic service. The Systems offer tier services on an optional basis to its subscribers. A tier generally includes most of the cable networks such as Entertainment and Sports Programming Network (ESPN), Cable News Network (CNN), Turner Network Television (TNT), Family Channel, Discovery and others, and the cable television operators buy tier programming from these networks. The Systems also offer a package that includes the basic service channels and the tier services. The Systems also offer premium services to subscribers, which consist of feature films, sporting events and other special features that are presented without commercial interruption. The cable television operators buy premium programming from suppliers such as HBO, Showtime, Cinemax, Encore and others at a cost based on the number of subscribers served by the cable operator. The per service cost of premium service programming usually is significantly more expensive than the basic service or tier service programming, and consequently cable operators price premium service separately when sold to subscribers. The Systems also offer to subscribers pay-per-view programming. Pay- per-view is a service that allows subscribers to receive single programs, frequently consisting of motion pictures that have recently completed their theatrical exhibitions and major sporting events, and to pay for such service on a program-by-program basis. REVENUES. Monthly service fees for basic, tier and premium services constitute the major source of revenue for the Systems. At December 31, 1997, the Systems' monthly basic service rates ranged from $8.35 to $13.81, monthly basic and tier ("basic plus") service rates ranged from $17.00 to $26.52 and monthly premium services ranged from $1.95 to $10.95 per premium service. In addition, the Venture earns revenues from the Systems' pay-per-view programs and advertising fees. Related charges may include a nonrecurring installation 3 fee that ranges from $4.95 to $35.54; however, from time to time the Systems have followed the common industry practice of reducing or waiving the installation fee during promotional periods. Commercial subscribers such as hotels, motels and hospitals are charged a nonrecurring connection fee that usually covers the cost of installation. Except under the terms of certain contracts with commercial subscribers and residential apartment and condominium complexes, the subscribers are free to discontinue the service at any time without penalty. For the year ended December 31, 1997, of the total fees received by the Systems, basic service and tier service fees accounted for approximately 64% of total revenues, premium service fees accounted for approximately 12% of total revenues, pay-per-view fees were approximately 3% of total revenues, advertising fees were approximately 9% of total revenues and the remaining 12% of total revenues came principally from equipment rentals, installation fees and program guide sales. The Venture is dependent upon the timely receipt of service fees to provide for maintenance and replacement of plant and equipment, current operating expenses and other costs of the Systems. FRANCHISES. The Systems are constructed and operated under non- exclusive, fixed-term franchises or other types of operating authorities (referred to collectively herein as "franchises") granted by local governmental authorities. These franchises typically contain many conditions, such as time limitations on commencement and completion of construction, conditions of service, including the number of channels, types of programming and the provision of free service to schools and certain other public institutions, and the maintenance of insurance and indemnity bonds. The provisions of local franchises are subject to federal regulation. Following are the franchises held by the Venture relating to the Systems and the expiration date of each franchise:
ALBUQUERQUE SYSTEM PALMDALE SYSTEM - ------------------ --------------- Bernalillo County 08/05/2011 Edwards AFB 09/30/2004 City of Albuquerque 09/01/1999 City of Lancaster 05/04/2001 Kirtland AFB 10/01/1999 Los Angeles County 10/29/2005 Sandoval County 03/03/2002 Los Angeles County-Green Valley/ 10/29/2005 Town of Bernalillo 08/17/2001 Elizabeth Lake/Leona Valley Valencia County 01/21/2000 City of Palmdale 02/13/2007 Village of Bosque Farms 10/13/1999 Village of Corrales 04/20/2006 Village of Los Ranchos 05/14/2011
The Venture's franchises provide for the payment of fees to the issuing authorities and generally range from 3% to 5% of the gross revenues of a cable television system. The 1984 Cable Act prohibits franchising authorities from imposing annual franchise fees in excess of 5% of gross revenues and also permits the cable television system operator to seek renegotiation and modification of franchise requirements if warranted by changed circumstances. COMPETITION. Cable television systems currently experience competition from several sources. Broadcast Television. Cable television systems have traditionally --------------------- competed with broadcast television, which consists of television signals that the viewer is able to receive directly on his television without charge using an "off-air" antenna. The extent of such competition is dependent in part upon the quality and quantity of signals available by such antenna reception as compared to the services provided by the local cable system. Accordingly, it has generally been less difficult for cable operators 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. 4 Traditional Overbuild. Cable television franchises are not exclusive, --------------------- so that more than one cable television system may be built in the same area (known as an "overbuild"), with potential loss of revenues to the operator of the original cable television system. The General Partner has experienced overbuilds in connection with certain systems that it has owned or managed for limited partnerships, and currently there are overbuilds in the systems owned or managed by the General Partner but not in any of the systems owned by the Venture. 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 from entertainment programmers and, in most cases, would have to build a complete cable system, including headends, trunk lines and drops to individual subscribers homes, throughout the franchise areas. DBS. High-powered direct-to-home satellites have made possible the --- wide-scale delivery of programming to individuals throughout the United States using small roof-top or wall-mounted antennas. Several companies began offering direct broadcast satellite ("DBS") service over the last few years. Companies offering DBS service use video compression technology to increase channel capacity of their systems to 100 or more channels and to provide packages of movies, satellite network and other program services which are competitive to those of cable television systems. DBS faces technical and legal obstacles to offering its customers local broadcast programming, although at least one DBS provider is now attempting to do so. In addition to emerging high-powered DBS competition, cable television systems face competition from a major medium- powered satellite distribution provider and several low-powered providers, whose service requires use of much larger home satellite dishes. Not all subscribers terminate cable television service upon acquiring a DBS system. The General Partner has observed that there are DBS subscribers that also elect to subscribe to cable television service in order to obtain the greatest variety of programming on multiple television sets, including local programming not available through DBS service. The ability of DBS service providers to compete successfully with the cable television industry will depend on, among other factors, the ability of DBS providers to overcome certain legal and technical hurdles and the availability of equipment at reasonable prices. Telephone and Utilities. Federal cross-ownership restrictions ----------------------- historically limited entry by local telephone companies into the cable television business. The 1996 Telecommunications Act (the "1996 Telecom Act") eliminated this cross-ownership restriction, making it possible for companies with considerable resources to overbuild existing cable operators and enter the business. Several telephone companies have begun seeking cable television franchises from local governmental authorities and constructing cable television systems. The General Partner cannot predict at this time the extent of telephone company competition that will emerge to owned or managed 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 the General Partner's owned and managed 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. The local electric utility in the Washington D.C. area recently announced plans to participate in RCN, a planned video competitor. Private Cable. Additional competition is provided by private cable ------------- television systems, known as Satellite Master Antenna Television (SMATV), serving multi-unit dwellings such as condominiums, apartment complexes, and private residential communities. These private cable systems may enter into exclusive agreements with apartment owners and homeowners associations, which may preclude operators of franchised systems from serving residents of such private complexes. Private cable systems that do not cross public rights of way are free from the federal, state and local regulatory requirements imposed on franchised cable television operators. In some cases, the Venture has been unable to provide cable television service to buildings in which private operators have secured exclusive contracts to provide video and telephony services. The Venture is interested in providing these same services, but expects that the market to install and provide these services in multi-unit buildings will continue to be highly competitive. MMDS. Cable television systems also compete with wireless program ---- distribution services such as multichannel, multipoint distribution service ("MMDS") systems, commonly called wireless cable, which are licensed to serve specific areas. MMDS uses low-power microwave frequencies to transmit television 5 programming over-the-air to paying subscribers. The MMDS industry is less capital intensive than the cable television industry, and it is therefore more practical to construct MMDS systems in areas of lower subscriber penetration. Wireless cable systems are now in direct competition with cable television systems in several areas of the country, including the system in Pima County, Arizona owned by the General Partner. Telephone companies have acquired or invested in wireless companies, and may use MMDS systems to provide services within their service areas in lieu of wired delivery systems. Enthusiasm for MMDS has waned in recent months, however, as Bell Atlantic and NYNEX have suspended their investment in two major MMDS companies. To date, the Venture has not lost a significant number of subscribers, nor a significant amount of revenue, to MMDS operators competing with the Venture's cable television systems. A series of actions taken by the FCC, however, including reallocating certain frequencies to the wireless services, are intended to facilitate the development of wireless cable television systems as an alternative means of distributing video programming. In addition, Local Multipoint Distribution Services ("LMDS"), could also pose a significant threat to the cable television industry, if and when it becomes established. The potential impact, however, of LMDS is difficult to assess due to the newness of the technology and the absence of any current fully operational LMDS systems. Cable television systems are also in competition, in various degrees with other communications and entertainment media, including motion pictures and home video cassette recorders. REGULATION AND LEGISLATION - -------------------------- The operation of cable television systems is extensively regulated by the FCC, some state governments and most local governments. The new 1996 Telecom Act alters the regulatory structure governing the nation's telecommunications providers. It removes barriers to competition in both the cable television market and the local telephone market. Among other things, it also reduces the scope of cable rate regulation. The 1996 Telecom Act requires the FCC to undertake a host of implementing rulemakings, the final outcome of which cannot yet be determined. Moreover, Congress and the FCC have frequently revisited the subject of cable regulation. Future legislative and regulatory changes could adversely affect the Venture's operations and there has been a recent increase in calls to maintain or even tighten cable regulation in the absence of widespread effective competition. This section briefly summarizes key laws and regulations affecting the operation of the Venture's cable systems and does not purport to describe all present, proposed, or possible laws and regulations affecting the Venture. Cable Rate Regulation. The 1992 Cable Act imposed an extensive rate --------------------- regulation regime on the cable television industry. 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 either low penetration (less than 30%) by the incumbent cable operator, appreciable penetration (more than 15%) by competing multichannel video providers ("MVPs"), or the presence of a competing MVP affiliated with a local telephone company. Although the FCC rules control, local government units (commonly referred to as local franchising authorities or "LFAs") are primarily responsible for administering the regulation of the lowest level of cable -- the basic service tier ("BST"), which typically contains local broadcast stations and public, educational, and government ("PEG") access channels. Before an LFA begins BST rate regulation, it must certify to the FCC that it will follow applicable federal rules, and many LFAs have voluntarily declined to exercise this authority. LFAs 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. The 1996 Telecom Act allows operators to aggregate costs for broad categories of equipment across geographic and functional lines. This change should facilitate the introduction of new technology. The FCC itself directly administers rate regulation of any cable programming service tiers ("CPST"), which typically contain satellite-delivered programming. Under the 1996 Telecom Act, the FCC can regulate CPST rates only if an LFA first receives at least two rate complaints from local subscribers and then files a 6 formal complaint with the FCC. When new CPST rate complaints are filed, the FCC now considers only whether the incremental increase is justified and will not reduce the previously established CPST rate. Under the FCC's rate regulations, most cable systems were required to reduce their BST and CPST 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 FCC 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 of bypassing this "benchmark" regulatory scheme in favor of traditional "cost-of-service" regulation in cases where the latter methodology appears favorable. 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. Federal law requires that the BST be offered to all cable subscribers, but limits the ability of operators to require purchase of any CPST before purchasing premium services offered on a per-channel or per-program basis. The 1996 Telecom Act sunsets FCC regulation of CPST rates for all systems (regardless of size) on March 31, 1999. Certain critics of the cable television industry have called for a delay in the regulatory sunset and some have even urged more rigorous rate regulation in the interim, including a limit on operators passing through to their customers increased programming costs. 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 FCC. Cable Entry Into Telecommunications. The 1996 Telecom Act 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. 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 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 cable operators under federal law can be gradually increased by utility companies owning the poles (beginning in 2001) if the operator provides telecommunications service, as well as cable service, over its plant. Cable entry into telecommunications will be affected by the regulatory landscape now being fashioned by the FCC 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. In July 1997, the Eighth Circuit Court of Appeals vacated certain aspects of the FCC's initial interconnection order. That decision is now on appeal to the U.S. Supreme Court. 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 ("LECs"), including the BOCs, can now compete with cable operators both inside and outside their telephone service areas. Because of their resources, LECs could be formidable competitors to traditional cable operators, and certain LECs have begun offering cable service. As described above, the General Partner is now witnessing the beginning of LEC competition in a few of its cable communities. Under the 1996 Telecom Act, a LEC providing video programming to subscribers will be regulated as a traditional cable operator (subject to local franchising and federal regulatory requirements), unless the LEC elects to provide its programming via an "open video system" ("OVS"). To qualify for OVS status, the LEC must reserve two-thirds of the system's activated channels for unaffiliated entities. RCN and affiliates of local power companies recently have been certified to provide OVS service in areas encompassing the General Partner's cable systems in suburban Maryland and Virginia. This OVS potential competition is not yet operational. Although LECs and cable operators can now expand their offerings across traditional service boundaries, the general prohibition remains on LEC buyouts (i.e., any ownership interest exceeding 10 percent) of co-located 7 cable systems, cable operator buyouts of co-located LEC systems, and joint ventures between cable operators and LECs in the same market. 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 FCC with the limited authority to grant waivers of the buyout prohibition (subject to LFA approval). Electric Utility Entry Into Telecommunications/Cable Television. The --------------------------------------------------------------- 1996 Telecom Act provides that registered utility holding companies and subsidiaries may provide telecommunications services (including cable television) notwithstanding the Public Utilities Holding Company Act. Electric utilities must establish separate subsidiaries, known as "exempt telecommunications companies" and must apply to the FCC for operating authority. Again, because of their resources, electric utilities could be formidable competitors to traditional cable systems. Additional Ownership Restrictions. The 1996 Telecom Act eliminates --------------------------------- statutory restrictions on broadcast/cable cross-ownership (including broadcast network/cable restrictions), but leaves in place existing FCC regulations prohibiting local cross-ownership between co-located television stations and cable systems. The 1996 Telecom Act also eliminates the three year holding period required under the 1992 Cable Act's "anti-trafficking" provision. The 1996 Telecom Act leaves in place existing restrictions on cable cross-ownership with SMATV and MMDS facilities, but lifts those restrictions where the cable operator is subject to effective competition. In January 1995, however, the FCC adopted regulations which permit cable operators to own and operate SMATV systems within their franchise area, provided that such operation is consistent with local cable franchise requirements. Pursuant to the 1992 Cable Act, the FCC adopted rules precluding a cable system from devoting more than 40% of its activated channel capacity to the carriage of affiliated national program services. A companion rule establishing a nationwide ownership cap on any cable operator equal to 30% of all domestic cable subscribers has been stayed pending further judicial review, although the FCC recently expressed an interest in reviewing and reimposing this limit. There are no federal restrictions on non-U.S. entities having an ownership interest in cable television systems or the FCC licenses commonly employed by such systems. Section 310(b)(4) of the Communications Act does, however, prohibit foreign ownership of FCC broadcast and telephone licenses, unless the FCC concludes that such foreign ownership is consistent with the public interest. The investment of BCI Telecom Holding Inc. ("BCI") in the General Partner could, therefore, adversely affect any plan to acquire FCC broadcast or common carrier licenses. The Partnership, however, does not currently plan to acquire such licenses. Must Carry/Retransmission Consent. The 1992 Cable Act contains --------------------------------- broadcast signal carriage requirements that allow local commercial television broadcast stations to elect once every three years between requiring a cable system to carry the station ("must carry") or negotiating for payments for granting permission to the cable operator to carry the station ("retransmission consent"). Less popular stations typically elect "must carry," and more popular stations typically elect "retransmission consent." Must carry requests can dilute the appeal of a cable system's programming offerings, and retransmission consent demands may require substantial payments or other concessions. Either option has a potentially adverse affect on the Venture's business. Additionally, cable systems are required to obtain retransmission consent for all "distant" commercial television stations (except for satellite-delivered independent "superstations" such as WGN). The burden associated with "must carry" may increase substantially if broadcasters proceed with planned conversion to digital transmission and the FCC determines that cable systems must carry all analogue and digital broadcasts in their entirety. Access Channels. LFAs 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 FCC has adopted rules regulating the terms, conditions and maximum rates a cable operator may charge for use of the designated channel capacity, but use of commercial leased access channels has been relatively limited. The FCC released revised rules in February 1997 mandating a modest rate reduction. The reduction sparked some increase in part-time use, but did not make commercial leased access substantially 8 more attractive to third party programmers. Certain of those programmers have now appealed the revised rules to the D.C. Court of Appeals. Should the courts and the FCC ultimately determine that an additional reduction in access rates is required, cable operators could lose programming control of a substantial number of cable channels. 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 cable operators over competitors and requires such programmers to sell their 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 recently has been increased interest in further restricting the marketing practices of cable programmers, including subjecting programmers who are not affiliated with cable operators to all of the existing program access requirements. Inside Wiring. The FCC recently determined that an incumbent cable ------------- operator can be required by the owner of a multiple dwelling unit ("MDU") complex to remove, abandon or sell the "home run" wiring it initially provided. In addition, the FCC is reviewing the enforceability of contracts to provide exclusive video service within a MDU complex. The FCC has proposed abrogating all such contracts held by incumbent cable operators, but allowing such contracts when held by new entrants. These changes, and others now being considered by the FCC, would, if implemented, make it easier for a MDU complex owner to terminate service from an incumbent cable operator in favor of a new entrant and leave the already competitive MDU sector even more challenging for incumbent cable operators. Other FCC Regulations. In addition to the FCC regulations noted --------------------- above, there are other FCC regulations 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, and children's programming advertisements), registration of cable systems and facilities licensing, maintenance of various records and public inspection files, frequency usage, lockbox availability, antenna structure notification, tower marking and lighting, consumer protection and customer service standards, technical standards and consumer electronics equipment compatibility. Federal requirements governing Emergency Alert Systems and Closed Captioning adopted in 1997 will impose additional costs on the operation of cable systems. The FCC is currently considering whether cable customers must be allowed to purchase cable converters from third party vendors. If the FCC concludes that such distribution is required, and does not make appropriate allowances for signal piracy concerns, it may become more difficult for cable operators to combat theft of service. The FCC 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 FCC licenses needed to operate certain transmission facilities used in connection with cable operations. Internet Access. Many cable operators have begun offering high speed --------------- internet service to their customers. At this time, there is no significant federal or local regulation of this service. However, as internet services develop, it is possible that new regulations could be imposed. Copyright. Cable television systems are subject to federal copyright --------- licensing covering carriage of television and radio broadcast signals. In exchange for filing certain reports and contributing a percentage of their revenues to a federal copyright royalty pool (that varies depending on the size of the system and the number of distant broadcast television signals carried), cable operators can obtain blanket permission to retransmit copyrighted material on broadcast signals. The possible modification or elimination of this compulsory copyright license is the subject of continuing legislative review and could adversely affect the Venture's ability to obtain desired broadcast programming. In addition, the cable industry pays music licensing fees to BMI and is negotiating a similar arrangement with ASCAP. Copyright clearances for nonbroadcast programming services are arranged through private negotiations. 9 State and Local Regulation. 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 franchise authorities from granting exclusive franchises or from unreasonably refusing to award additional 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 terms and conditions of franchises vary materially from jurisdiction to jurisdiction. Each franchise generally contains provisions governing cable operations, service rates, franchise 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 television 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 LFAs have considerable discretion in establishing franchise terms, there are certain federal limitations. For example, LFAs cannot insist on franchise fees exceeding 5% of the system's gross 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 franchise authority may seek to impose new and more onerous requirements such as significant upgrades in facilities and services or increased franchise fees as a condition of renewal. Similarly, if a franchise authority's consent is required for the purchase or sale of a cable system or franchise, such authority may attempt to impose more burdensome or onerous franchise requirements in connection with a request for consent. Historically, franchises have been renewed for cable operators that have provided satisfactory services and have complied with the terms of their franchises. GENERAL. The Venture's business consists of providing cable television services to a large number of customers, the loss of any one of which would have no material effect on the Venture's business. The Systems have had some subscribers who later terminated the service. Terminations occur primarily because people move to another home or to another city. In other cases, people terminate on a seasonal basis or because they no longer can afford or are dissatisfied with the service. The amount of past due accounts in the Systems is not significant. The Venture's policy with regard to past due accounts is basically one of disconnecting service before a past due account becomes material. The Venture does not depend to any material extent on the availability of raw materials; it carries no significant amounts of inventory and it has no material backlog of customer orders. Neither the Venture nor the Partnership has any employees because all properties are managed by employees of the General Partner. The General Partner has engaged in research and development activities relating to the provision of new services but the amount of the Venture's funds expended for such research and development has never been material. Compliance with federal, state and local provisions that have been enacted or adopted regulating the discharge of materials into the environment or otherwise relating to the protection of the environment has had no material effect upon the capital expenditures, earnings or competitive position of the Venture. 10 ITEM 2. PROPERTIES ------------------- The cable television systems owned by the Venture are described below:
Ownership SYSTEM ACQUISITION DATE --------- ------ ---------------- Cable TV Fund 12-B, Ltd., Cable TV Palmdale System April 1986 Fund 12-C, Ltd. and Cable TV Albuquerque System August 1986 Fund 12-D, Ltd. own a 9%, 15% and 76% interest, respectively, through their interest in Cable TV Fund 12-BCD Venture
The following sets forth (i) the monthly basic plus service rates charged to subscribers and (ii) the number of basic subscribers and pay units for the Systems. The monthly basic service rates set forth herein represent, with respect to systems with multiple headends, the basic service rate charged to the majority of the subscribers within the system. In cable television systems, basic subscribers can subscribe to more than one pay TV service. Thus, the total number of pay services subscribed to by basic subscribers are called pay units. As of December 31, 1997, the Palmdale System operated cable plant passing approximately 87,800 homes, with an approximate 72% penetration rate, and the Albuquerque System operated cable plant passing approximately 236,600 homes, with an approximate 48% penetration rate. Figures for numbers of subscribers and homes passed are compiled from the General Partner's records and may be subject to adjustments.
At December 31, ------------------------ Palmdale System 1997 1996 1995 - --------------- ---- ---- ---- Monthly basic plus service rate $ 26.52 $ 24.77 $ 23.27 Basic subscribers 63,521 63,188 61,993 Pay units 42,731 45,108 46,699
At December 31, ------------------------- Albuquerque System 1997 1996 1995 - ------------------ ---- ---- ---- Monthly basic plus service rate $ 25.35 $ 23.95 $22.85 Basic subscribers 114,553 112,460 109,911 Pay units 68,113 61,210 57,189
ITEM 3. LEGAL PROCEEDINGS -------------------------- David Hirsch, Marty, Inc. Pension Plan (By its Trustee and Beneficiary, ----------------------------------------------------------------------- Martin Ury) and Jonathan Fussner and Eileen Fussner, derivatively on behalf of - ------------------------------------------------------------------------------ Cable TV Fund 12-B, Ltd., Cable TV Fund 12-C, Ltd. and Cable TV Fund 12-D, Ltd. - ------------------------------------------------------------------------------- v. Jones Intercable, Inc. (Arapahoe County District Court, Colorado, Case No. - ------------------------- 96-CV-1800, Division 3). The General Partner is a defendant in a now consolidated civil action filed by limited partners of Fund 12-D derivatively on behalf of the Partnership, Fund 12-B and Fund 12-D. The consolidated complaint generally alleges that the General Partner breached its fiduciary duty to the plaintiffs and to the other limited partners of the Partnership, Fund 12-B and Fund 12-D and the Venture in connection with the Venture's sale of its Tampa, Florida cable television system (the "Tampa System") to a subsidiary of the General Partner and the subsequent trade to Time Warner. The consolidated complaint also sets forth a claim for breach of contract and a claim for breach of the implied covenant of good faith and fair dealing. Among other things, the plaintiffs assert that the subsidiary of the General Partner that acquired the Tampa System paid an inadequate price for the Tampa System. 11 The price paid for the Tampa System was determined by the average of three separate, independent appraisals of the Tampa System's fair market value as required by the limited partnership agreements of the Partnership, Fund 12-B and Fund 12-D. The plaintiffs have challenged the adequacy and independence of the appraisals. The consolidated complaint seeks damages in an unspecified amount and an award of attorneys' fees, and the complaint also seeks punitive damages and certain equitable relief. The General Partner has filed its answer to the consolidated complaint and has generally denied the substantive allegations in the complaint and has asserted a number of affirmative defenses. The General Partner intends to defend this lawsuit vigorously. On August 29, 1997, the General Partner moved for summary judgment in its favor on the ground that plaintiffs did not make demand on the General Partner for the relief they seek before commencing their lawsuits or show that such a demand would have been futile. On January 8, 1998, the Court (1) held that plaintiffs did not make demand before commencing their lawsuits or show that such demand would have been futile, (2) stayed the consolidated case and vacated the February 17, 1998 trial date, (3) ordered that plaintiffs make a demand on the General Partner and that the General Partner appoint an independent counsel to review, consider and report on that demand, (4) ordered that the independent counsel be appointed at the March 1998 meeting of the General Partner's Board of Directors and (5) ordered that the independent counsel will be subject to the approval of the Court. The Court set a new trial date for October 26, 1998 in the event that the case is not resolved through the independent counsel process Section 2.2 of the Partnership's limited partnership agreement (the "Partnership Agreement") provides that the General Partner will not be liable to the Partnership or to the limited partners for any act or omission performed or omitted by it in good faith pursuant to the authority granted to the General Partner by the Partnership Agreement. This provision further provides that the General Partner will be liable to the Partnership and to the limited partners only for fraud, bad faith or gross negligence in the performance of the cable television activities of the Partnership or negligence in the management of the internal affairs of the Partnership. Section 9.6 of the Partnership Agreement provides that the Partnership "shall indemnify and save harmless the General Partner and its affiliates and any agent or officer or director thereof, from any loss or damage incurred by them, including legal fees and expenses and amounts paid in settlement by reason of any action performed by the General Partner or any agent, officer or director thereof on behalf of the Partnership or in furtherance of its interest; provided, however, that the foregoing shall not relieve the General Partner of its fiduciary duty to the limited partners or liability for (nor shall the General Partner be indemnified for) its fraud, bad faith or gross negligence in the performance of the cable television activities of the Partnership or negligence in the management of the internal affairs of the Partnership." In accordance with the foregoing provisions of the Partnership Agreement, the Partnership, together with Fund 12-B and Fund 12-D, which have identical partnership agreement provisions with respect to general partner liability and indemnification, will be obligated to indemnify and save harmless the General Partner from any loss incurred by it, including its legal fees and expenses and amounts paid in settlement, in connection with the litigation concerning the Tampa System sale unless the General Partner is found to have breached its fiduciary duty to the limited partners in connection with the Tampa System sale or is found to have committed fraud or to have acted in bad faith or with gross negligence in connection with the Tampa System sale. Amounts reimbursed to the General Partner by the three constituent limited partnerships of the Venture would be in proportion to their ownership interests in the Venture and such amounts may be significant, but the General Partner expects that any such reimbursement will not have a material adverse effect on the Partnership or the Venture. Maxine Cohen, for herself and all others similarly situated v. Jones -------------------------------------------------------------------- Intercable, Inc., a Colorado corporation for itself, its wholly owned - --------------------------------------------------------------------- subsidiaries, managed partnerships and other affiliated cable television - ------------------------------------------------------------------------ entities (Bernalillo County, New Mexico District Court, Second Judicial - -------- District, Case No. CV-97 09694). This class action Complaint for Declaratory and Injunctive Relief and Restitution was filed on October 27, 1997 in the Bernalillo County District Court, by Maxine Cohen for herself and all others similarly situated. The Complaint basically alleges that the Defendant, Jones Intercable, Inc., for itself, its wholly owned subsidiaries, managed partnerships and other affiliated cable television entities, collected from its cable television subscribers, illegal late payment penalties. 12 Belen Cordova, on behalf of herself and all others similarly situated v. ------------------------------------------------------------------------ Jones Intercable, Inc. (Bernalillo County, New Mexico District Court, Second - ---------------------- Judicial District, Case No. CV-97 10957). This Class Action Complaint for Breach of Contract, Unconscionable Trade Practice and Restitution was filed on December 2, 1997 in the Bernalillo County District Court by Belen Cordova on behalf of herself and all others similarly situated. The Complaint alleges that Jones Intercable, Inc. charges and collects from its cable television subscribers in New Mexico unconscionable late payment penalties. The plaintiffs in the Cohen and Cordova actions have not specified the ----- ------- requested relief in quantitative terms. The plaintiffs have requested that (i) the court determine what is a reasonable late fee under applicable law, (ii) the court order Jones Intercable, Inc. and its affiliates that own and operate cable television systems to reduce their late payment penalties to such level going forward and (iii) the court require Jones Intercable, Inc. and its affiliates that own and operate cable television systems to refund all late fee payments in excess of the "reasonable amount" paid by subscribers, subject to the applicable statutes of limitations. The plaintiff in the Cordova case also seeks treble damages for New Mexico subscribers based on alleged violations of the Deceptive Practices Act. The General Partner currently is opposing plaintiff's motion to certify a nationwide class in the Cohen case, and the General Partner does not ----- expect a trial on the merits of the cases until sometime in 1999. Given the preliminary status of these cases, the General Partner cannot predict whether the Venture or the Partnership will have any material financial obligation to the plaintiffs or whether this litigation will have an adverse effect on the distributions to be made to the limited partners of the Partnership. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ------------------------------------------------------------ None. PART II. -------- ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK ------------------------------------------------- AND RELATED SECURITY HOLDER MATTERS ----------------------------------- While the Partnership is publicly held, there is no public market for the limited partnership interests, and it is not expected that a market will develop in the future. During 1997, limited partners of the Partnership conducted "limited tender offers" for interests in the Partnership at prices ranging from $316 to $332 per interest. As of January 16, 1998, the Partnership had 47,626 limited partnership interests outstanding held by 3,303 persons. 13 Item 6. Selected Financial Data - -------------------------------
For the Year Ended December 31, ---------------------------------------------------------------------------- Cable TV Fund 12-C, Ltd./(a)/ 1997 1996 1995 1994 1993 - ----------------------------- ------------ --------------- ------------- ------------- ------------- Revenues $ - $ - $ - $ - Operating Income - - - - Equity in Net Income (Loss) of Cable Television Joint Venture (733,076) 9,525,374 (1,699,611) (1,967,232) (1,769,867) Net Income (Loss) (733,076) 9,525,374/(b)/ (1,699,611) (1,967,232) (1,769,867) Net Income (Loss) per Limited Partnership Unit (15.24) 195.00/(b)/ (35.33) (40.89) (36.79) Weighted Average Number of Limited Partnership Units Outstanding 47,626 47,626 47,626 47,626 47,626 General Partner's Deficit (21,962) (14,631) (253,008) (236,012) (216,340) Limited Partners' Capital (Deficit) (4,291,839) (3,566,094) (4,608,228) (2,925,613) (978,053) Total Assets - - - - - Debt - - - - - General Partner Advances - - - - - For the Year Ended December 31, ---------------------------------------------------------------------------- Cable TV Fund 12-BCD Venture 1997 1996 1995 1994 1993 - ---------------------------- ------------ ------------ ------------- ------------ ------------ Revenues $ 82,675,018 $ 82,363,752 $101,399,697 $ 92,823,076 $ 89,131,530 Depreciation and Amortization 21,837,251 22,142,809 26,666,735 24,809,654 25,772,299 Operating Income 6,129,688 1,880,308 4,127,622 289,904 779,887 Net Income (Loss) (4,798,248) 62,338,836/(b)/ (11,124,567) (12,876,242) (11,584,416) Partners' Capital (Deficit) (27,189,730) (22,391,482) (29,730,318) (18,605,751) (5,729,509) Total Assets 124,269,504 120,899,336 163,486,029 170,675,914 169,670,552 Debt 144,308,462 138,345,878 180,770,267 180,402,748 167,698,697 Jones Intercable, Inc. Advances - - 4,198,739 616,810 188,430
(a) Activity in Cable TV Fund 12-C, Ltd. is limited to its equity interest in Cable TV Fund 12-BCD Venture. (b) Net income resulted primarily from the sale of the Tampa System by Cable TV Fund 12-BCD Venture in February 1996. 14 Item 7. Management's Discussion and Analysis of Financial Condition and Results - -------------------------------------------------------------------------------- of Operations - ------------- The following discussion of the financial condition and results of operations of Cable TV Fund 12-C, Ltd. (the "Partnership") and Cable TV Fund 12- BCD Venture (the "Venture") contains, in addition to historical information, forward-looking statements that are based upon certain assumptions and are subject to a number of risks and uncertainties. The Partnership's and Venture's actual results may differ significantly from the results predicted in such forward-looking statements. FINANCIAL CONDITION - ------------------- Cable TV Fund 12-C, Ltd. - - ------------------------ The Partnership owns a 15 percent interest in the Venture. The investment in cable television joint venture is accounted for under the equity method. The Partnership's share of losses generated by the Venture have exceeded the Partnership's initial investment in the Venture; therefore, the investment is classified as a liability. This liability increased by $733,076, which represents the Partnership's share of losses incurred by the Venture for the year ended December 31, 1997. Cable TV Fund 12-BCD Venture - - ---------------------------- It is the General Partner's publicly announced policy that it intends to liquidate its managed partnerships, including the partnerships that comprise the Venture, as opportunities for sales of partnership cable television systems arise in the marketplace over the next several years. In accordance with the General Partner's policy, the Venture has sold the Tampa System and has entered into a purchase and sale agreement to sell the Albuquerque System. The General Partner expects that the Palmdale System will be sold in 1998. On July 28, 1997, the Venture entered into a purchase and sale agreement to sell the Albuquerque System to the General Partner for a sales price of $222,963,267, which price represents the average of three separate independent appraisals of the fair market value of the Albuquerque System. The closing of this sale is subject to a number of conditions, including the approval of the holders of a majority of the limited partnership interests in each of the three partnerships that comprise the Venture and necessary governmental and other third party consents. Closing is expected to occur in the second quarter of 1998. Upon the consummation of the proposed sale of the Albuquerque System, the Venture will repay its then outstanding Senior Notes balance of $41,544,890 plus a make whole premium that, based on current market interest rates, is estimated to total $2,016,985, plus accrued interest, and then, pursuant to an amendment to the Venture's credit facility, the Venture will distribute $125,000,000 to the three constituent partnerships of the Venture in proportion to their ownership interests in the Venture. The remaining proceeds will be used to repay a portion of the outstanding balance and accrued interest on its credit facility. The Partnership will receive $19,097,217, or 15 percent of the $125,000,000 distribution, which Partnership will distribute to its partners of record as of the closing date of the sale of the Albuquerque System. As a result of the Albuquerque System's sale, the limited partners of the Partnership, as a group, will receive $18,175,163 and the General Partner will receive $922,054. Such distribution represents $382 for each $500 limited partnership interest, or $763 for each $1,000 invested in the Partnership. Once the Partnership has completed the distribution, limited partners of the Partnership will have received a total of $555 for each $500 limited partnership interest, or $1,109 for each $1,000 invested in the Partnership, taking into account the prior distribution to limited partners made in 1996 from the net proceeds of the sale of the Tampa System. For the year ended December 31, 1997, the Venture generated net cash from operating activities totaling $14,131,916, which was available to fund capital expenditures and non-operating costs. Capital expenditures for the Venture totaled approximately $19,866,800 during 1997. Capital expenditures in the Albuquerque System totaled $13,076,679. Of the Albuquerque System's capital expenditures, approximately 39 percent was for service drops to subscribers' homes, approximately 38 percent was for cable plant extensions and the remainder was for other capital expenditures to maintain the value of the Albuquerque System. Capital expenditures in the Palmdale System totaled $6,790,121. Of the Palmdale System's capital expenditures, approximately 31 percent was for service drops to subscribers' homes, approximately 18 percent was for cable plant extensions, approximately 16 percent was for premium service converters and the remainder was for other capital expenditures to maintain the value of the Palmdale System. These capital expenditures were funded primarily from cash on hand, cash generated from operations and borrowings from the Venture's credit facility. Budgeted capital expenditures for 1998 are approximately $12,682,500. Budgeted capital expenditures in the Albuquerque System are approximately $7,777,800, of which approximately 31 percent is for service 15 drops to customers' homes, approximately 32 percent is for cable plant extensions and the remainder relates to other capital expenditures to maintain the value of the Albuquerque System. Budgeted capital expenditures in the Palmdale System are approximately $4,904,700, of which 48 percent is for service drops to subscribers' homes, approximately 20 percent is for cable plant extensions and the remainder is for other capital expenditures to maintain the value of the Palmdale System. Depending upon the timing of the closing of the sale of the Venture's systems, the Venture will make only the portion of the budgeted capital expenditures scheduled to be made during the Venture's continued ownership of its systems. Funding for these expenditures is expected to be provided by cash on hand, cash generated from operations and borrowings from the Venture's credit facility. The Venture's debt arrangements at December 31, 1997 consisted of $47,479,874 of Senior Notes placed with a group of institutional lenders and a $120,000,000 credit facility with a group of commercial bank lenders. The Senior Notes and the credit facility are equal in standing with the other, and both are equally secured by the assets of the Venture. The Senior Notes and the credit facility contain certain financial covenants. The most restrictive of these covenants is that the ratio of debt to annualized cash flow will not exceed 4.5 to 1. The Venture was in compliance with all covenants at December 31, 1997. The Senior Notes have a fixed interest rate of 8.64 percent and a final maturity date of March 31, 2000. The Senior Notes require payments of interest and accelerating principal through maturity, payable semi-annually in March and September. Semi-annual principal payments of $3,956,656 were made in March and September 1997, respectively. These payments were funded from cash on hand, cash generated from operations and borrowings from the Venture's credit facility. Upon the sale of the Albuquerque System, the Senior Notes will be repaid in full together with a make whole premium. The balance outstanding on the Venture's $120,000,000 credit facility at December 31, 1997 was $95,630,620, leaving $24,369,380 available for future needs. Upon the sale of the Albuquerque System and pursuant to an amendment to the Venture's credit facility, the Venture anticipates repaying a portion of the then outstanding balance of the credit facility and that the commitment will be reduced to $55,000,000. At the Venture's option, the credit facility will be payable in full on December 31, 1999 or will convert to a term loan that matures on December 31, 2004 payable in consecutive quarterly amounts. Interest on the credit facility is at the Venture's option of the London Interbank Offered Rate plus .875 percent, the Prime Rate or the Certificate of Deposit Rate plus 1 percent. The effective interest rates on amounts outstanding on the Venture's credit facility as of December 31, 1997 and 1996 were 6.91 percent and 6.90 percent, respectively. The Venture has sufficient sources of capital available through its ability to generate cash from operations and borrowings under its credit facility to meet its presently anticipated needs until its systems are sold. RESULTS OF OPERATIONS - --------------------- Cable TV Fund 12-C, Ltd. - - ------------------------ All of the Partnership's operations are represented by its 15 percent interest in the Venture. Thus, Management's Discussion and Analysis of Financial Condition and Results of Operations of the Venture should be consulted for pertinent comments regarding the Partnership's performance. 16 Cable TV Fund 12-BCD Venture - - ---------------------------- As a result of the sale of the Tampa System in February 1996, the following discussion of the Venture's results of operations, through operating income, pertains only to the results of operations of the Albuquerque System and the Palmdale System for the periods discussed. Results of operations of each system for 1997 and 1996 are summarized below:
Albuquerque System ---------------------------------------------------- 1997 1996 Inc(Dec) % Inc/(Dec) ----------- ----------- ------------ ------------ Revenues $52,784,567 $49,487,923 $ 3,296,644 7% Costs and expenses Operating expenses 29,842,290 28,754,334 1,087,956 4% ----------- ----------- ----------- Operating cash flow 22,942,277 20,733,589 2,208,688 11% Management fees and allocated overhead from Jones Intercable, Inc. 5,583,053 5,804,631 (221,578) (4%) Depreciation and amortization 15,440,702 12,922,479 2,518,223 19% ----------- ----------- ----------- Operating income $ 1,918,522 $ 2,006,479 $ (87,957) (4%) =========== =========== =========== Palmdale System --------------------------------------------------- 1997 1996 Inc(Dec) % Inc/(Dec) ----------- ----------- ----------- ----------- Revenues $29,890,451 $27,990,637 $ 1,899,814 7% Costs and expenses Operating expenses 16,116,197 15,524,050 592,147 4% ----------- ----------- ----------- Operating cash flow 13,774,254 12,466,587 1,307,667 10% Management fees and allocated overhead from Jones Intercable, Inc. 3,166,539 3,227,757 (61,218) (2%) Depreciation and amortization 6,396,549 8,228,592 (1,832,043) (22%) ----------- ----------- ----------- Operating income $ 4,211,166 $ 1,010,238 $ 3,200,928 317% =========== =========== =========== Total --------------------------------------------------- 1997 1996 Inc(Dec) % Inc/(Dec) ----------- ----------- ----------- ----------- Revenues $82,675,018 $77,478,560 $ 5,196,458 7% Costs and expenses Operating expenses 45,958,487 44,278,384 1,680,103 4% ----------- ----------- ----------- Operating cash flow 36,716,531 33,200,176 3,516,355 11% Management fees and allocated overhead from Jones Intercable, Inc. 8,749,592 9,032,388 (282,796) (3%) Depreciation and amortization 21,837,251 21,151,071 686,180 3% ----------- ----------- ----------- Operating income $ 6,129,688 $ 3,016,717 $ 3,112,971 103% =========== =========== ===========
17 1997 compared to 1996 --------------------- Revenues in the Albuquerque System and the Palmdale System increased $5,196,458, or approximately 7 percent, to $82,675,018 in 1997 from $77,478,560 in 1996. This increase in revenues was primarily due to basic service rate increases implemented in the Venture's systems and an increase in the number of basic service subscribers. Basic service rate increases implemented in the Venture's systems accounted for approximately 52 percent of the increase in revenues in 1997. An increase in the number of basic service subscribers in the Albuquerque System and the Palmdale System accounted for approximately 21 percent of the increase in revenues for 1997. The number of basic service subscribers increased by 2,426 subscribers, or approximately 1 percent, to 178,074 subscribers in 1997 from 175,648 subscribers in 1996. An increase in advertising activity accounted for approximately 11 percent of the increase in revenues for 1997. No other factor was significant to the increase in revenues. Operating expenses consist primarily of costs associated with the operation and administration of the Venture's cable television systems. The principal cost components are salaries paid to system personnel, programming expenses, professional fees, subscriber billing costs, rent for leased facilities, cable system maintenance expenses and marketing expenses. Operating expenses in the Albuquerque System and the Palmdale System increased $1,680,103, or approximately 4 percent, to $45,958,487 in 1997 from $44,278,384 in 1996. Operating expenses represented 56 percent and 57 percent, respectively, of revenues for 1997 and 1996. An increase in programming fees primarily accounted for the increase in operating expenses. No other factor was significant to the increase in operating expenses. The cable television industry generally measures the financial performance of a cable television system in terms of operating cash flow (revenues less operating expenses). This measure is not intended to be a substitute or improvement upon the items disclosed on the financial statements, rather it is included because it is an industry standard. Operating cash flow increased $3,516,355, or approximately 11 percent, to $36,716,531 in 1997 from $33,200,176 in 1996. This increase was due to the increase in revenues exceeding the increase in operating expenses. Management fees and allocated overhead from Jones Intercable, Inc. decreased $282,796, or approximately 3 percent, to $8,749,592 in 1997 from $9,032,388 in 1996. This decrease was primarily due to a decrease in allocated overhead from the General Partner which was partially offset by an increase in management fees. Depreciation and amortization expense increased $686,180, or approximately 3 percent, to $21,837,251 in 1997 from $21,151,071 in 1996. This increase was due to capital additions in 1997. Operating income increased $3,112,971 to $6,129,688 in 1997 from $3,016,717 in 1996. This increase was due to the increase in operating cash flow and decrease in management fees and allocated overhead from Jones Intercable, Inc. exceeding the increase in depreciation and amortization expense. Interest expense decreased $284,385, or approximately 3 percent, to $10,934,909 in 1997 from $11,219,294 in 1996. This decrease was primarily due to lower outstanding balances on the Venture's interest bearing obligations. The Venture recognized a gain of $71,914,391 related to the sale of the Tampa System in February 1996. No similar gain was recognized in 1997. The Venture recognized a net loss of $4,798,248 compared to a net income of $62,338,836 in 1996. This change was primarily due to the gain on the sale of the Tampa System. 1996 compared to 1995 --------------------- Revenues in the Albuquerque System and the Palmdale System increased $4,778,991, or approximately 7 percent, to $77,478,560 in 1996 from $72,699,569 in 1995. This increase in revenues was primarily due to basic service rate increases implemented in the Venture's systems and an increase in the number of basic service subscribers. Basic service rate increases implemented in the Venture's systems accounted for approximately 39 percent of the increase in revenues in 1996. An increase in the number of basic service subscribers in the Albuquerque System and the Palmdale System accounted for approximately 31 percent of the increase in revenues for 1996. The number of basic service subscribers 18 increased by 3,744 subscribers, or approximately 2 percent, to 175,648 subscribers in 1996 from 171,904 subscribers in 1995. No other factor was significant to the increase in revenues. Operating expenses in the Albuquerque System and the Palmdale System increased $3,608,831, or approximately 9 percent, to $44,278,384 in 1996 from $40,669,553 in 1995. Operating expenses represented 57 percent and 56 percent, respectively, of revenues for 1996 and 1995. An increase in programming fees primarily accounted for the increases in operating expenses. No other factor was significant to the increase in operating expenses. Operating cash flow increased $1,170,160, or approximately 4 percent, to $33,200,176 in 1996 from $32,030,016 in 1995. This increase was due to the increase in revenues exceeding the increase in operating expenses. Management fees and allocated overhead from Jones Intercable, Inc. increased $230,923, or approximately 3 percent, to $9,032,388 in 1996 from $8,801,465 in 1995. This increase was due to the increase in revenues, upon which such management fees are based. Depreciation and amortization expense increased $959,513, or approximately 5 percent, to $21,151,071 in 1996 from $20,191,558 in 1995. This increase was due to capital additions in 1996. Operating income increased $20,276, or approximately 1 percent, to $3,016,717 in 1996 from $3,036,993 in 1995. This increase was due to the increase in operating cash flow exceeding the increases in management fees and allocated overhead from Jones Intercable, Inc. and depreciation and amortization expense. Interest expense decreased $4,127,956, or approximately 27 percent, to $11,219,294 in 1996 from $15,347,250 in 1995. This decrease in interest expense was primarily due to the lower outstanding balance and lower effective interest rates on the Venture's interest bearing obligations. A portion of the proceeds from the sale of the Tampa System was used to repay a portion of the Venture's debt. The Venture recognized a gain of $71,914,391 related to the sale of the Tampa System in February 1996. No similar gain was recognized in 1995. The Venture recognized net income of $62,338,836 in 1996 compared to a net loss of $11,124,567 in 1995. This change was primarily due to the gain on the sale of the Tampa System. 19 Item 8. Financial Statements - ----------------------------- 20 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ---------------------------------------- To the Partners of Cable TV Fund 12-C, Ltd.: We have audited the accompanying balance sheets of CABLE TV FUND 12-C, LTD. (a Colorado limited partnership) as of December 31, 1997 and 1996, and the related statements of operations, partners' deficit and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the General Partner's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. 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 Cable TV Fund 12-C, Ltd. as of December 31, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Denver, Colorado, February 27, 1998. 21 CABLE TV FUND 12-C, LTD. ------------------------ (A Limited Partnership) BALANCE SHEETS --------------
December 31, ---------------------------- 1997 1996 ------------ ------------ ASSETS $ - $ - ------ ============ ============= LIABILITIES AND PARTNERS' DEFICIT --------------------------------- LIABILITIES: Loss in excess of investment in cable television joint venture $ 4,313,801 $ 3,580,725 ------------ ------------- Total liabilities 4,313,801 3,580,725 ------------ ------------- PARTNERS' DEFICIT: General Partner- Contributed capital 1,000 1,000 Accumulated deficit (22,962) (15,631) ------------ ------------- (21,962) (14,631) ------------ ------------- Limited Partners- Net contributed capital (47,626 units outstanding at December 31, 1997 and 1996) 19,998,049 19,998,049 Accumulated deficit (16,045,025) (15,319,280) Distributions (8,244,863) (8,244,863) ------------ ------------- (4,291,839) (3,566,094) ------------ ------------- Total liabilities and partners' deficit $ - $ - ============ =============
The accompanying notes to financial statements are an integral part of these balance sheets. 22 CABLE TV FUND 12-C, LTD. ------------------------ (A Limited Partnership) STATEMENTS OF OPERATIONS ------------------------
For the Year Ended December 31, -------------------------------------------------- 1997 1996 1995 -------------- ------------ ------------- EQUITY IN NET INCOME (LOSS) OF CABLE TELEVISION JOINT VENTURE $(733,076) $9,525,374 $(1,699,611) --------- ---------- ----------- NET INCOME (LOSS) $(733,076) $9,525,374 $(1,699,611) ========= ========== =========== ALLOCATION OF NET INCOME (LOSS): General Partner $ (7,331) $ 238,377 $ (16,996) ========= ========== =========== Limited Partners $(725,745) $9,286,997 $(1,682,615) ========= ========== =========== NET INCOME (LOSS) PER LIMITED PARTNERSHIP UNIT $(15.24) $195.00 $ (35.33) ========= ========== =========== WEIGHTED AVERAGE NUMBER OF LIMITED PARTNERSHIP UNITS OUTSTANDING 47,626 47,626 47,626 ========= ========== ===========
The accompanying notes to financial statements are an integral part of these statements. 23 CABLE TV FUND 12-C, LTD. ------------------------ (A Limited Partnership) STATEMENTS OF PARTNERS' DEFICIT -------------------------------
For the Year Ended December 31, ------------------------------------------------------------ 1997 1996 1995 ------------ ------------ ------------ GENERAL PARTNER: Balance, beginning of year $ (14,631) $ (253,008) $ (236,012) Net income (loss) for year (7,331) 238,377 (16,996) ----------- ----------- ----------- Balance, end of year $ (21,962) $ (14,631) $ (253,008) =========== =========== =========== LIMITED PARTNERS: Balance, beginning of year $(3,566,094) $(4,608,228) $(2,925,613) Net income (loss) for year (725,745) 9,286,997 (1,682,615) Distributions - (8,244,863) - ----------- ----------- ----------- Balance, end of year $(4,291,839) $(3,566,094) $(4,608,228) =========== =========== ===========
The accompanying notes to financial statements are an integral part of these statements. 24 CABLE TV FUND 12-C, LTD. ------------------------ (A Limited Partnership) STATEMENTS OF CASH FLOWS ------------------------
For the Year Ended December 31, ------------------------------------------------------------ 1997 1996 1995 ------------ ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $(733,076) $ 9,525,374 $(1,699,611) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Equity in net income (loss) of cable television joint venture 733,076 (9,525,374) 1,699,611 --------- ----------- Net cash provided by operating activities - - - --------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Distributions from Joint Venture - 8,404,000 - Distributions to Limited Partners - (8,244,863) - Repayment of debt - (159,137) - --------- ----------- ----------- Net cash provided by financing activities - - - --------- ----------- ----------- Cash, beginning of year - - - --------- ----------- ----------- Cash, end of year $ - $ - $ - ========= =========== ===========
The accompanying notes to financial statements are an integral part of these statements. 25 CABLE TV FUND 12-C, LTD. ------------------------ (A Limited Partnership) NOTES TO FINANCIAL STATEMENTS ----------------------------- (1) ORGANIZATION AND PARTNERS' INTERESTS ------------------------------------ Formation and Business ---------------------- Cable TV Fund 12-C, Ltd. ("Fund 12-C"), a Colorado limited partnership, was formed on October 9, 1985, under a public program sponsored by Jones Intercable, Inc. Fund 12-C was formed to acquire, construct, develop and operate cable television systems. Jones Intercable, Inc. is the "General Partner" and manager of Fund 12-C. The General Partner and its subsidiaries also own and operate cable television systems. In addition, the General Partner manages cable television systems for other limited partnerships for which it is general partner and, also, for affiliated entities. Fund 12-C owns an interest of 15 percent in Cable TV Fund 12-BCD Venture (the "Venture"), through capital contributions made in 1986 of $20,700,000. The Venture acquired certain cable television systems in New Mexico, California, and Florida during 1986. The Venture incurred a net loss of $4,798,248 in 1997, recognized net income of $62,338,836 in 1996, and incurred a net loss of $11,124,567 in 1995, of which a loss of $733,076, income of $9,525,374, and a loss of $1,699,611, respectively, were allocated to Fund 12-C. Venture Sales of Cable Television Systems ----------------------------------------- On February 28, 1996, the Venture sold the cable television system serving areas in and around Tampa, Florida (the "Tampa System") to a wholly owned subsidiary of the General Partner, for the sales price of $110,395,667, subject to normal working capital closing adjustments. This price represented the average of three separate, independent appraisals of the fair market value of the Tampa System. Because the Venture's debt arrangements did not allow the Venture to make distributions on the sale of Venture assets, in February 1996 the Venture's existing debt arrangements were amended to permit a $55,000,000 distribution to the Venture's partners from the sale proceeds, and the balance of the sale proceeds were used to reduce Venture indebtedness. The Partnership's portion of this distribution was $8,404,000. A portion of Fund 12-C's distribution was used to repay an amount due the Venture, leaving $8,244,863 to be distributed to Fund 12-C's partners. Because the limited partners had not yet received distributions in an amount equal to 100 percent of the capital initially contributed to the Partnership by them, the entire portion of the Partnership's distribution was distributed to the limited partners in March 1996. This distribution gave the Partnership's limited partners an approximate return of $346 for each $1,000 invested in the Partnership. Because the Tampa System did not constitute all or substantially all of the Venture's assets, no vote of the limited partners of the Partnership was required in connection with this transaction. On July 28, 1997, the Venture entered into a purchase and sale agreement to sell the Albuquerque System to the General Partner for a sales price of $222,963,267, which price represents the average of three separate independent appraisals of the fair market value of the Albuquerque System. The closing of this sale is subject to a number of conditions, including the approval of the holders of a majority of the limited partnership interests in each of the three partnerships that comprise the Venture and necessary governmental and other third party consents. Closing is expected to occur in the second quarter of 1998. Upon the consummation of the proposed sale of the Albuquerque System, the Venture will repay its then outstanding Senior Notes balance of $41,544,890 plus a make whole premium that, based on current market interest rates, is estimated to total $2,016,985, plus accrued interest, and then, pursuant to an amendment to the Venture's credit facility, the Venture will distribute $125,000,000 to the three constituent partnerships of the Venture in proportion to their ownership interests in the Venture. The remaining proceeds will be used to repay a portion of the outstanding balance and accrued interest on its credit facility. The Partnership will receive $19,097,217, or 15 percent of the $125,000,000 distribution, which Partnership will distribute to its partners of record as of the closing date of the sale of the Albuquerque System. As a result of the Albuquerque System's sale, the limited partners of the Partnership, as a group, will receive $18,175,163 and the General Partner will receive $922,054. Such distribution represents $382 for each $500 limited partnership interest, or $763 for each $1,000 invested in the Partnership. Once the Partnership has completed the distribution, limited partners of the Partnership will have received a total of $555 for each $500 limited partnership interest, or $1,109 for each $1,000 invested in the Partnership, taking into account the prior distribution to limited partners made in 1996 from the net proceeds of the sale of the Tampa System. 26 Contributed Capital ------------------- The capitalization of Fund 12-C is set forth in the accompanying Statements of Partners' Deficit. No limited partner is obligated to make any additional contributions to partnership capital. The General Partner purchased its interest in Fund 12-C by contributing $1,000 to partnership capital. All profits and losses of Fund 12-C are allocated 99 percent to the limited partners and 1 percent to the General Partner, except for income or gain from the sale or disposition of cable television properties, which will be allocated to the partners based upon the formula set forth in the Partnership Agreement, and interest income earned prior to the first acquisition by Fund 12-C of a cable television system, which was allocated 100 percent to the limited partners. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ------------------------------------------ Accounting Records ------------------ The accompanying financial statements have been prepared on the accrual basis of accounting in accordance with generally accepted accounting principles. Fund 12-C's tax returns are also prepared on the accrual basis. The preparation of financial statements in conformity with generally accepted accounting principles requires the General Partner's management to make estimates and assumptions that affect the reported amounts 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. Investment in Cable Television Joint Venture -------------------------------------------- The investment in the Venture is accounted for under the equity method due to Fund 12-C's influence on the Venture as a general partner. The operations of the Venture are significant to Fund 12-C and should be reviewed in conjunction with these financial statements. (3) TRANSACTIONS WITH THE GENERAL PARTNER AND AFFILIATES ---------------------------------------------------- Management Fees and Distribution Ratios --------------------------------------- The General Partner manages Fund 12-C and the Venture and receives a fee for its services equal to 5 percent of the gross revenues of the Venture, excluding revenues from the sale of cable television systems or franchises. Any partnership distributions made from cash flow (defined as cash receipts derived from routine operations, less debt principal and interest payments and cash expenses) are allocated 99 percent to the limited partners and 1 percent to the General Partner. Any distributions other than interest income on limited partnership subscriptions earned prior to the acquisition of Fund 12-C's first cable television system or from cash flow, such as from the sale or refinancing of a system or upon dissolution of Fund 12-C, will be made as follows: first, to the limited partners in an amount which, together with all prior distributions, will equal the amount initially contributed by the limited partners; the balance, 75 percent to the limited partners and 25 percent to the General Partner. (4) INCOME TAXES ------------ Income taxes have not been recorded in the accompanying financial statements because they accrue directly to the partners. The federal and state income tax returns of Fund 12-C are prepared and filed by the General Partner. Fund 12-C's 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 as such, or in changes with respect to Fund 12-C's recorded income or loss, the tax liability of the general and limited partners would likely be changed accordingly. Taxable loss reported to the partners is different from that reported in the statements of operations due to the difference in depreciation recognized under generally accepted accounting principles and the expense allowed for tax 27 purposes under the Modified Accelerated Cost Recovery System (MACRS). There are no other significant differences between taxable loss and the net loss reported in the statements of operations. (5) COMMITMENTS AND CONTINGENCIES ----------------------------- The General Partner is a defendant in a now consolidated civil action filed by limited partners of Fund 12-D derivatively on behalf of the Partnership, Fund 12-B and Fund 12-D. The consolidated complaint generally alleges that the General Partner breached its fiduciary duty to the plaintiffs and to the other limited partners of the Partnership, Fund 12-B and Fund 12-D and the Venture in connection with the Venture's sale of its Tampa System to a wholly owned subsidiary of the General Partner and its subsequent trade to an unaffiliated third party. The consolidated complaint also sets forth a claim for breach of contract and a claim for breach of the implied covenant of good faith and fair dealing. Among other things, the plaintiffs assert that the subsidiary of the General Partner that acquired the Tampa System paid an inadequate price for the Tampa System. The price paid for the Tampa System was determined by the average of three separate, independent appraisals of the Tampa System's fair market value as required by the limited partnership agreements of the Partnership, Fund 12-B and Fund 12-D. The plaintiffs have challenged the adequacy and independence of the appraisals. The consolidated complaint seeks damages in an unspecified amount and an award of attorneys' fees, and the complaint also seeks punitive damages and certain equitable relief. The General Partner has filed its answer to the consolidated complaint and has generally denied the substantive allegations in the complaint and has asserted a number of affirmative defenses. The General Partner intends to defend this lawsuit vigorously. On August 29, 1997, the General Partner moved for summary judgment in its favor on the ground that plaintiffs did not make demand on the General Partner for the relief they seek before commencing their lawsuits or show that such a demand would have been futile. On January 8, 1998, the Court (1) held that plaintiffs did not make demand before commencing their lawsuits or show that such demand would have been futile, (2) stayed the consolidated case and vacated the February 17, 1998 trial date, (3) ordered that plaintiffs make a demand on the General Partner and that the General Partner appoint an independent counsel to review, consider and report on that demand, (4) ordered that the independent counsel be appointed at the March 1998 meeting of the General Partner's Board of Directors and (5) ordered that the independent counsel will be subject to the approval of the Court. The Court set a new trial date for October 26, 1998 in the event that the case is not resolved through the independent counsel process or otherwise. Section 2.2 of the Partnership's limited partnership agreement (the "Partnership Agreement") provides that the General Partner will not be liable to the Partnership or to the limited partners for any act or omission performed or omitted by it in good faith pursuant to the authority granted to the General Partner by the Partnership Agreement. This provision further provides that the General Partner will be liable to the Partnership and to the limited partners only for fraud, bad faith or gross negligence in the performance of the cable television activities of the Partnership or negligence in the management of the internal affairs of the Partnership. Section 9.6 of the Partnership Agreement provides that the Partnership "shall indemnify and save harmless the General Partner and its affiliates and any agent or officer or director thereof, from any loss or damage incurred by them, including legal fees and expenses and amounts paid in settlement by reason of any action performed by the General Partner or any agent, officer or director thereof on behalf of the Partnership or in furtherance of its interest; provided, however, that the foregoing shall not relieve the General Partner of its fiduciary duty to the limited partners or liability for (nor shall the General Partner be indemnified for) its fraud, bad faith or gross negligence in the performance of the cable television activities of the Partnership or negligence in the management of the internal affairs of the Partnership." In accordance with the foregoing provisions of the Partnership Agreement, the Partnership, together with Fund 12-B and Fund 12-D, which have identical partnership agreement provisions with respect to general partner liability and indemnification, will be obligated to indemnify and save harmless the General Partner from any loss incurred by it, including its legal fees and expenses and amounts paid in settlement, in connection with the litigation concerning the Tampa System sale unless the General Partner is found to have breached its fiduciary duty to the limited partners in connection with the Tampa System sale or is found to have committed fraud or to have acted in bad faith or with gross negligence in connection with the Tampa System sale. Amounts reimbursed to the General Partner by the three constituent limited partnerships of the Venture would be in proportion to their ownership interests in the Venture and such amounts may be significant, but the General Partner expects that any such reimbursement will not have a material adverse effect on the Partnership or the Venture. Maxine Cohen, for herself and all others similarly situated v. Jones -------------------------------------------------------------------- Intercable, Inc., a Colorado corporation for itself, its wholly owned - --------------------------------------------------------------------- subsidiaries, managed partnerships and other affiliated cable television - ------------------------------------------------------------------------ entities (Bernalillo County, - -------- 28 New Mexico District Court, Second Judicial District, Case No. CV-97 09694). This class action Complaint for Declaratory and Injunctive Relief and Restitution was filed on October 27, 1997 in the Bernalillo County District Court, by Maxine Cohen for herself and all others similarly situated. The Complaint basically alleges that the Defendant, Jones Intercable, Inc., for itself, its wholly owned subsidiaries, managed partnerships and other affiliated cable television entities, collected from its cable television subscribers, illegal late payment penalties. Belen Cordova, on behalf of herself and all others similarly situated v. ------------------------------------------------------------------------ Jones Intercable, Inc. (Bernalillo County, New Mexico District Court, Second - ---------------------- Judicial District, Case No. CV-97 10957). This class action Complaint for Breach of Contract, Unconscionable Trade Practice and Restitution was filed on December 2, 1997 in the Bernalillo County District Court by Belen Cordova on behalf of herself and all others similarly situated. The Complaint alleges that Jones Intercable, Inc. charges and collects from its cable television subscribers in New Mexico unconscionable late payment penalties. The plaintiffs in the Cohen and Cordova actions have not specified the ----- ------- requested relief in quantitative terms. The plaintiffs have requested that (i) the court determine what is a reasonable late fee under applicable law, (ii) the court order Jones Intercable, Inc. and its affiliates that own and operate cable television systems to reduce their late payment penalties to such level going forward and (iii) the court require Jones Intercable, Inc. and its affiliates that own and operate cable television systems to refund all late fee payments in excess of the "reasonable amount" paid by subscribers, subject to the applicable statutes of limitations. The plaintiff in the Cordova case also seeks treble damages for New Mexico subscribers based on alleged violations of the Deceptive Practices Act. The General Partner currently is opposing plaintiff's motion to certify a nationwide class in the Cohen case, and the General Partner does not ----- expect a trial on the merits of the cases until sometime in 1999. Given the preliminary status of these cases, the General Partner cannot predict whether the Venture or the Partnership will have any material financial obligation to the plaintiffs or whether this litigation will have an adverse effect on the distributions to be made to the limited partners of the Partnership. 29 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ---------------------------------------- To the Partners of Cable TV Fund 12-BCD Venture: We have audited the accompanying balance sheets of CABLE TV FUND 12-BCD VENTURE (a Colorado general partnership) as of December 31, 1997 and 1996, and the related statements of operations, partners' deficit and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the General Partners' management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. 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 Cable TV Fund 12-BCD Venture as of December 31, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Denver, Colorado, February 27, 1998. 30 CABLE TV FUND 12-BCD VENTURE ---------------------------- (A General Partnership) BALANCE SHEETS --------------
December 31, ---------------------------- ASSETS 1997 1996 ------ ------------- ------------ CASH AND CASH EQUIVALENTS $ 1,742,444 $ 1,514,773 RECEIVABLES: Trade receivables, less allowance for doubtful receivables of $404,821 and $417,017 at December 31, 1997 and 1996, respectively 4,456,904 2,676,246 INVESTMENT IN CABLE TELEVISION PROPERTIES: Property, plant and equipment, at cost 218,189,145 198,322,316 Less- accumulated depreciation (113,368,132) (95,040,023) ------------- ------------ 104,821,013 103,282,293 Franchise costs and other intangible assets, net of accumulated amortization of $63,250,092 and $60,652,010 at December 31, 1997 and 1996, respectively 7,791,062 10,389,144 ------------- ------------ Total investment in cable television properties 112,612,075 113,671,437 DEPOSITS, PREPAID EXPENSES AND DEFERRED CHARGES 5,458,081 3,036,880 ------------- ------------ Total assets $ 124,269,504 $120,899,336 ============= ============
The accompanying notes to financial statements are an integral part of these balance sheets. 31 CABLE TV FUND 12-BCD VENTURE ---------------------------- (A General Partnership) BALANCE SHEETS --------------
December 31, ------------------------------ LIABILITIES AND PARTNERS' DEFICIT 1997 1996 --------------------------------- ------------- ------------- LIABILITIES: Debt $ 144,308,462 $ 138,345,878 Trade accounts payable and accrued liabilities 6,726,286 4,499,549 Subscriber prepayments 424,486 445,391 ------------- ------------- Total liabilities 151,459,234 143,290,818 ------------- ------------- COMMITMENTS AND CONTINGENCIES (Note 7) PARTNERS' DEFICIT: Contributed capital 135,490,944 135,490,944 Distributions (55,000,000) (55,000,000) Accumulated deficit (107,680,674) (102,882,426) ------------- ------------- (27,189,730) (22,391,482) ------------- ------------- Total liabilities and partners' deficit $ 124,269,504 $ 120,899,336 ============= =============
The accompanying notes to financial statements are an integral part of these balance sheets. 32 CABLE TV FUND 12-BCD VENTURE ---------------------------- (A General Partnership) STATEMENTS OF OPERATIONS ------------------------
For the Year Ended December 31, -------------------------------------------------- 1997 1996 1995 ------------- ------------- ------------- REVENUES $ 82,675,018 $ 82,363,752 $101,399,697 COSTS AND EXPENSES: Operating expenses 45,958,487 48,731,182 58,351,692 Management fees and allocated overhead from Jones Intercable, Inc. 8,749,592 9,609,453 12,253,648 Depreciation and amortization 21,837,251 22,142,808 26,666,735 ------------ ------------ ------------ OPERATING INCOME 6,129,688 1,880,308 4,127,622 ------------ ------------ ------------ OTHER INCOME (EXPENSE): Interest expense (10,934,909) (11,219,294) (15,347,250) Gain on sale of cable television system - 71,914,391 - Other, net 6,973 (236,569) 95,061 ------------ ------------ ------------ Total other income (expense), net (10,927,936) 60,458,528 (15,252,189) ------------ ------------ ------------ NET INCOME (LOSS) $ (4,798,248) $ 62,338,836 $(11,124,567) ============ ============ ============
The accompanying notes to financial statements are an integral part of these statements. 33 CABLE TV FUND 12-BCD VENTURE ---------------------------- (A General Partnership) STATEMENTS OF PARTNERS' DEFICIT -------------------------------
For the Year Ended December 31, ------------------------------------------- 1997 1996 1995 ------------- ------------- ------------- CABLE TV FUND 12-B, LTD. (9%): Balance, beginning of year $ (2,151,657) $ (2,825,362) $ (1,804,126) Net income for year (440,479) 5,722,705 (1,021,236) Distributions - (5,049,000) - ------------ ------------ ------------ Balance, end of year $ (2,592,136) $ (2,151,657) $ (2,825,362) ============ ============ ============ CABLE TV FUND 12-C, LTD. (15%): Balance, beginning of year $ (3,580,725) $ (4,702,099) $ (3,002,488) Net income for year (733,076) 9,525,374 (1,699,611) Distributions - (8,404,000) - ------------ ------------ ------------ Balance, end of year $ (4,313,801) $ (3,580,725) $ (4,702,099) ============ ============ ============ CABLE TV FUND 12-D, LTD. (76%): Balance, beginning of year $(16,659,100) $(22,202,857) $(13,799,137) Net income for year (3,624,693) 47,090,757 (8,403,720) Distributions - (41,547,000) - ------------ ------------ ------------ Balance, end of year $(20,283,793) $(16,659,100) $(22,202,857) ============ ============ ============ TOTAL: Balance, beginning of year $(22,391,482) $(29,730,318) $(18,605,751) Net income for year (4,798,248) 62,338,836 (11,124,567) Distributions - (55,000,000) - ------------ ------------ ------------ Balance, end of year $(27,189,730) $(22,391,482) $(29,730,318) ============ ============ ============
The accompanying notes to financial statements are an integral part of these statements. 34 CABLE TV FUND 12-BCD VENTURE ---------------------------- (A General Partnership) STATEMENTS OF CASH FLOWS ------------------------
For the Year Ended December 31, --------------------------------------------- 1997 1996 1995 ------------- -------------- -------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ (4,798,248) $ 62,338,836 $(11,124,567) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 21,837,251 22,142,809 26,666,735 Gain on sale of cable television system - (71,914,391) - Decrease (increase) in trade receivables (1,780,658) 1,788,527 (657,502) Increase in deposits, prepaid expenses and deferred charges (3,332,261) (2,221,806) (351,579) Increase (decrease) in trade accounts payable and accrued liabilities and subscriber prepayments 2,205,832 (3,302,401) (14,766) Increase (decrease) in amount due Jones Intercable, Inc. - (4,198,739) 3,581,929 ------------ ------------- ------------ Net cash provided by operating activities 14,131,916 4,632,835 18,100,250 ------------ ------------- ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment, net (19,866,829) (17,474,134) (21,474,577) Proceeds from sale of cable television system - 110,395,667 - ------------ ------------- ------------ Net cash provided by (used in) investing activities (19,866,829) 92,921,533 (21,474,577) ------------ ------------- ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from borrowings 15,551,159 72,365,824 882,431 Repayment of debt (9,588,575) (114,790,213) (514,912) Distributions to Limited Partners - (41,547,000) - Distributions to Joint Venture Partners - (13,453,000) - ------------ ------------- ------------ Net cash provided by (used in) financing activities 5,962,584 (97,424,389) 367,519 ------------ ------------- ------------ Increase (decrease) in cash and cash equivalents 227,671 129,979 (3,006,808) Cash and cash equivalents, beginning of year 1,514,773 1,384,794 4,391,602 ------------ ------------- ------------ Cash and cash equivalents, end of year $ 1,742,444 $ 1,514,773 $ 1,384,794 ============ ============= ============ SUPPLEMENTAL CASH FLOW DISCLOSURE: Interest paid $ 10,776,074 $ 12,370,892 $ 15,331,071 ============ ============= ============
The accompanying notes to financial statements are an integral part of these statements. 35 CABLE TV FUND 12-BCD VENTURE ---------------------------- (A General Partnership) NOTES TO FINANCIAL STATEMENTS ----------------------------- (1) ORGANIZATION AND PARTNERS' INTERESTS ------------------------------------ Formation and Business ---------------------- On March 17, 1986, Cable TV Fund 12-B, Ltd. ("Fund 12-B"), Cable TV Fund 12-C, Ltd. ("Fund 12-C") and Cable TV Fund 12-D, Ltd. ("Fund 12-D") (collectively, the "Venture Partners") formed Cable TV Fund 12-BCD Venture (the "Venture"). The Venture was formed for the purpose of acquiring certain cable television systems serving Tampa, Florida; Albuquerque, New Mexico; and Palmdale, California. Jones Intercable, Inc. ("Intercable"), the "General Partner" of each of the Venture Partners, manages the Venture. Intercable and its subsidiaries also own and operate cable television systems. In addition, Intercable manages cable television systems for other limited partnerships for which it is general partner and, also, for affiliated entities. Contributed Capital ------------------- The capitalization of the Venture is set forth in the accompanying statements of partners' deficit. All Venture distributions, including those made from cash flow, from the sale or refinancing of Partnership property and on dissolution of the Venture, shall be made to the Venture Partners in proportion to their approximate respective interests in the Venture as follows: Cable TV Fund 12-B, Ltd. 9% Cable TV Fund 12-C, Ltd. 15% Cable TV Fund 12-D, Ltd. 76% ---- 100% ==== Venture Sales of Cable Television Systems ----------------------------------------- On February 28, 1996, the Venture sold the Tampa System to a wholly owned subsidiary of the General Partner. The sales price of the Tampa System was $110,395,667, subject to normal working capital closing adjustments. This price represented the average of three separate, independent appraisals of the fair market value of the Tampa System. In February 1996, the Venture's debt arrangements were amended to permit a $55,000,000 distribution to the Venture's partners from the sale proceeds, and the balance of the sale proceeds were used to reduce Venture indebtedness. The net sales proceeds were distributed as follows: Fund 12-B received $5,049,000; Fund 12-C received $8,404,000 and Fund 12-D received $41,547,000. On July 28, 1997, the Venture entered into a purchase and sale agreement to sell the Albuquerque System to the General Partner for a sales price of $222,963,267, which price represents the average of three separate independent appraisals of the fair market value of the Albuquerque System. The closing of this sale is subject to a number of conditions, including the approval of the holders of a majority of the limited partnership interests in each of the three partnerships that comprise the Venture and necessary governmental and other third party consents. Closing is expected to occur in the second quarter of 1998. Upon the consummation of the proposed sale of the Albuquerque System, the Venture will repay its then outstanding Senior Notes balance of $41,544,890 plus a make whole premium that, based on current market interest rates, is estimated to total $2,016,985, plus accrued interest, and then, pursuant to an amendment to the Venture's credit facility, the Venture will distribute $125,000,000 to the three constituent partnerships of the Venture in proportion to their ownership interests in the Venture. The remaining proceeds will be used to repay a portion of the outstanding balance and accrued interest on its credit facility. The net sales proceeds are expected to be distributed as follows: Fund 12-B will receive $11,474,475, Fund 12-C will receive $19,097,217 and Fund 12-D will receive $94,428,308. 36 (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ------------------------------------------ Accounting Records ------------------ The accompanying consolidated financial statements have been prepared on the accrual basis of accounting in accordance with generally accepted accounting principles. The Venture's tax returns are also prepared on the accrual basis. The preparation of financial statements in conformity with generally accepted accounting principles requires the General Partner's management to make estimates and assumptions that affect the reported amounts 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. Purchase Price Allocation ------------------------- The Venture's acquisitions were accounted for as purchases with the individual purchase prices allocated to tangible and intangible assets based upon an independent appraisal. The method of allocation of purchase price was as follows: first, to the fair value of the net tangible assets acquired; second, to the value of subscriber lists; third, to franchise costs; and fourth, to costs in excess of interests in net assets purchased. Brokerage fees paid to an affiliate of Intercable and other system acquisition costs were capitalized and included in the cost of intangible assets. Property, Plant and Equipment ----------------------------- Depreciation is provided using the straight-line method over the following estimated service lives: Cable distribution systems 5 - 15 years Equipment and tools 3 - 5 years Office furniture and equipment 3 - 5 years Buildings - 30 years Vehicles 3 - 4 years Replacements, renewals and improvements are capitalized and maintenance and repairs are charged to expense as incurred. Property, plant and equipment and the corresponding accumulated depreciation are written off as certain assets become fully depreciated and are no longer in service. Intangible Assets ----------------- Costs assigned to franchises and costs in excess of interests in net assets purchased are amortized using the straight-line method over the following remaining estimated useful lives: Franchise costs 1 - 3 years Costs in excess of interests in net assets purchased 28 - 29 years Revenue Recognition ------------------- Subscriber prepayments are initially deferred and recognized as revenue when earned. Cash and Cash Equivalents ------------------------- For purposes of the Statements of Cash Flows, the Venture considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Reclassifications ----------------- Certain prior year amounts have been reclassified to conform with the 1997 presentation. 37 (3) TRANSACTIONS WITH THE GENERAL PARTNER AND AFFILIATES ---------------------------------------------------- Management Fees, Distribution Ratios and Reimbursements ------------------------------------------------------- The General Partner manages the Venture and receives a fee for its services equal to 5 percent of the gross revenues of the Venture, excluding revenues from the sale of cable television systems or franchises. Management fees paid to the General Partner by the Venture were $4,133,751, $4,118,188 and $5,069,985 during 1997, 1996 and 1995, respectively. The Venture reimburses the General Partner for certain allocated overhead and administrative expenses. These expenses represent the salaries and related benefits paid for corporate personnel, rent, data processing services and other corporate facilities costs. Such personnel provide engineering, marketing, administrative, accounting, legal and investor relations services to the Venture. Such services, and their related costs, are necessary to the operation of the Venture and would have been incurred by the Venture if it was a stand alone entity. Allocations of personnel costs are based primarily on actual time spent by employees of the General Partner with respect to each entity managed. Remaining expenses are allocated based on the pro rata relationship of the Venture's revenues to the total revenues of all systems owned or managed by the General Partner and certain of its subsidiaries. Systems owned by the General Partner and all other systems owned by partnerships for which Intercable is the general partner are also allocated a proportionate share of these expenses. The General Partner believes that the methodology used in allocating overhead and administrative expenses is reasonable. Overhead and administrative expenses allocated to the Venture by the General Partner were $4,615,841, $5,491,265 and $7,183,663 in 1997, 1996 and 1995, respectively. The Venture is charged interest at a rate which approximates the General Partner's weighted average cost of borrowing on any amounts due the General Partner. No interest was charged to the Venture by the General Partner in 1997 and 1996. Total interest charged to the Venture by the General Partner was $220,743 in 1995. Payments to/from Affiliates for Programming Services ---------------------------------------------------- The Venture receives programming from Superaudio, Knowledge TV, Inc., Jones Computer Network, Ltd., Great American Country, Inc. and Product Information Network, all of which are affiliates of the General Partner. Payments to Superaudio totaled $118,032, $116,710 and $135,861 in 1997, 1996 and 1995, respectively. Payments to Knowledge TV, Inc. totaled $131,277, $126,665 and $145,598 in 1997, 1996 and 1995, respectively. Payments to Jones Computer Network, Ltd., whose service was discontinued in April 1997, totaled $85,543, $248,044 and $283,339 in 1997, 1996 and 1995, respectively. Payments to Great American Country, Inc., which initiated service in 1996, totaled $131,863 and $141,753 in 1997 and 1996, respectively. The Venture receives a commission from Product Information Network based on a percentage of advertising sales and number of subscribers. Product Information Network paid commissions to the Venture totaling $199,997, $191,011 and $212,844 in 1997, 1996 and 1995, respectively. The programming fees paid by the Venture to Superaudio, Knowledge TV, Inc., Jones Computer Network, Ltd. and Great American Country (collectively, the "affiliated programming providers") are governed by the terms of the various master programming agreements entered into by and between the General Partner and each of the affiliated programming providers. Generally, with respect to most video programming services, cable operators pay to programmers a monthly license fee per subscriber that is based on a number of factors, including the perceived value of the programming, the size of the cable operator and the level of distribution of the programming service within the cable operator's systems and the other terms and conditions under which the programming is provided. The General Partner negotiates master programming agreements with each programming network distributed on any of its owned or managed cable systems. The Venture pays the same per subscriber rate for all of its programming, including the programming provided by affiliates of the General Partner, as the General Partner pays for the programming it provides on cable television systems that it owns itself, i.e., the General Partner does not receive any markup for programming provided to the Venture under its master programming agreements. The master programming 38 agreements entered into by and between the General Partner and the affiliated programming providers were negotiated by officers of the General Partner with representatives of the affiliated programming providers. (4) PROPERTY, PLANT AND EQUIPMENT ----------------------------- Property, plant and equipment as of December 31, 1997 and 1996, consisted of the following:
December 31, ----------------------------- 1997 1996 ------------- ------------ Cable distribution system $ 199,967,191 $182,058,124 Equipment and tools 5,483,657 4,853,010 Office furniture and equipment 2,842,973 2,189,497 Buildings 5,925,072 5,925,072 Vehicles 3,019,282 2,345,643 Land 950,970 950,970 ------------- ------------ 218,189,145 198,322,316 Less-accumulated depreciation (113,368,132) (95,040,023) ------------- ------------ $ 104,821,013 $103,282,293 ============= ============ (5) DEBT ---- Debt consists of the following: December 31, ---------------------------- 1997 1996 ------------- ------------ Lending institutions- Revolving credit and term loan $ 95,630,620 $ 82,130,620 Senior secured notes 47,479,874 55,393,187 Capital lease obligations 1,197,968 822,071 ------------- ------------ $ 144,308,462 $138,345,878 ============= ============
The Venture's debt arrangements at December 31, 1997 consisted of $47,479,874 of Senior Notes placed with a group of institutional lenders and a $120,000,000 credit facility with a group of commercial bank lenders. The Senior Notes and credit facility are equal in standing with the other, and both are equally secured by the assets of the Venture. The Senior Notes have a fixed interest rate of 8.64 percent and a final maturity date of March 31, 2000. The Senior Notes require payments of interest and accelerating principal through maturity, payable semi-annually in March and September. Semi-annual principal payments of $3,956,656 were made in March and September 1997, respectively. These payments were funded from cash on hand, cash generated from operations and borrowings from the Venture's credit facility. A scheduled principal payment of $5,934,984 will be made on March 31, 1998 and a similar payment is due September 30, 1998. However, upon the sale of the Albuquerque System, the Senior Notes will be repaid in full together with a make whole premium plus accrued interest. The balance outstanding on the Venture's $120,000,000 credit facility at December 31, 1997 was $95,630,620, leaving $24,369,380 available for future needs. Upon the sale of the Albuquerque System, pursuant to an amendment to the Venture's credit facility, the Venture will repay a portion of the then outstanding balance of the credit facility and reduce the commitment to $55,000,000. At the Venture's option, the credit facility will be payable in full on December 31, 1999 or will convert to a term loan that matures on December 31, 2004 payable in consecutive quarterly amounts. Interest on the credit facility is at the Venture's option of the London Interbank Offered Rate plus .875 percent, the Prime Rate or the Certificate of Deposit Rate plus 1 percent. The effective interest rates on amounts outstanding on the Venture's credit facility as of December 31, 1997 and 1996 were 6.91 percent and 6.90 percent, respectively. 39 During 1996, the Venture incurred costs associated with renegotiating its debt arrangements. These costs were capitalized and are being amortized using the straight-line method over the life of the debt agreements. At December 31, 1997, the carrying amount of the Venture's long-term debt did not differ significantly from the estimated fair value of the financial instruments. The fair value of the Venture's long-term debt is estimated based on the discounted amount of future debt service payments using rates of borrowing for a liability of similar risk. (6) INCOME TAXES ------------ Income taxes have not been recorded in the accompanying financial statements because they accrue directly to the partners. The federal and state income tax returns of the Venture are prepared and filed by the General Partner. The Venture's tax returns, the qualification of the Venture as such for tax purposes, and the amount of distributable income or loss are subject to examination by federal and state taxing authorities. If such examinations result in changes with respect to the Venture's qualification as such, or in changes with respect to the Venture's recorded income or loss, the tax liability of the general and limited partners would likely be changed accordingly. Taxable losses reported to the partners is different from that reported in the consolidated statements of operations due to the difference in depreciation allowed under generally accepted accounting principles and the expense allowed for tax purposes under the Modified Accelerated Cost Recovery System (MACRS). There are no other significant differences between taxable income or losses and the losses reported in the consolidated statements of operations. (7) COMMITMENTS AND CONTINGENCIES ----------------------------- Office and other facilities are rented under various long-term lease arrangements. Rent paid under such lease arrangements totaled $384,610, $373,169 and $331,963, respectively, for the years ended December 31, 1997, 1996 and 1995. Minimum commitments under operating leases for the five years in the period ending December 31, 2002 and thereafter are as follows:
1998 $ 534,693 1999 398,715 2000 345,765 2001 345,046 2002 341,700 Thereafter 569,500 ---------- $ 2,535,419 ==========
40 (8) SUPPLEMENTARY PROFIT AND LOSS INFORMATION ----------------------------------------- Supplementary profit and loss information is presented below:
For the Year Ended December 31, ------------------------------------- 1997 1996 1995 ----------- ----------- ----------- Maintenance and repairs $ 734,011 $ 1,104,878 $ 1,182,963 =========== =========== =========== Taxes, other than income and payroll taxes $ 873,053 $ 895,669 $ 1,286,357 =========== =========== =========== Advertising $ 1,288,316 $ 1,183,565 $ 1,298,497 =========== =========== =========== Depreciation of property, plant and equipment $18,824,685 $15,727,639 $20,285,166 =========== =========== =========== Amortization of intangible assets $ 3,012,566 $ 6,265,907 $ 6,381,569 =========== =========== ===========
41 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON --------------------------------------------------------- ACCOUNTING AND FINANCIAL DISCLOSURE ----------------------------------- None. PART III. --------- ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ------------------------------------------------------------ The Partnership itself has no officers or directors. Certain information concerning the directors and executive officers of the General Partner is set forth below. Directors of the General Partner serve until the next annual meeting of the General Partner and until their successors shall be elected and qualified. Glenn R. Jones 68 Chairman of the Board and Chief Executive Officer James B. O'Brien 48 President and Director Ruth E. Warren 48 Group Vice President/Operations Kevin P. Coyle 46 Group Vice President/Finance Christopher J. Bowick 42 Group Vice President/Technology Cheryl M. Sprague 45 Group Vice President/Human Resources Cynthia A. Winning 46 Group Vice President/Marketing Elizabeth M. Steele 46 Vice President/General Counsel/Secretary Larry W. Kaschinske 37 Vice President/Controller Robert E. Cole 65 Director William E. Frenzel 69 Director Josef J. Fridman 52 Director Donald L. Jacobs 59 Director Robert Kearney 61 Director James J. Krejci 56 Director Raphael M. Solot 64 Director Howard O. Thrall 50 Director Siim A. Vanaselja 41 Director Sanford Zisman 58 Director Robert B. Zoellick 44 Director
Mr. Glenn R. Jones has served as Chairman of the Board of Directors and Chief Executive Officer of the General Partner since its formation in 1970, and he was President from June 1984 until April 1988. Mr. Jones is the sole shareholder, President and Chairman of the Board of Directors of Jones International, Ltd. He is also Chairman of the Board of Directors of the subsidiaries of the General Partner and of certain other affiliates of the General Partner. Mr. Jones has been involved in the cable television business in various capacities since 1961, and he is a member of the Board of Directors and of the Executive Committee of the National Cable Television Association. In addition, Mr. Jones is a member of the Board of Education Council of the National Alliance of Business. Mr. Jones is also a founding member of the James Madison Council of the Library of Congress. Mr. Jones has been the recipient of several awards including: the Grand Tam Award in 1989, the highest award from the Cable Television Administration and Marketing Society; the President's Award from the Cable Television Public Affairs Association in recognition of Jones International's educational efforts through Mind Extension University (now Knowledge TV); the Donald G. McGannon Award for the advancement of minorities and women in cable from the United Church of Christ Office of Communications; the STAR Award from American Women in Radio and Television, Inc. for exhibition of a commitment to the issues and concerns of women in television and radio; the Cableforce 2000 Accolade awarded by Women in Cable in recognition of the General Partner's innovative employee programs; the Most Outstanding Corporate Individual Achievement Award from the International Distance Learning Conference for his contributions to distance education; the Golden Plate Award from the American Academy of Achievement for his advances in distance education; the Man of the Year named by the Denver chapter of the Achievement Rewards for College Scientists; and in 1994 Mr. Jones was inducted into Broadcasting and Cable's Hall of Fame. 42 Mr. James B. O'Brien, the General Partner's President, joined the General Partner in January 1982. Prior to being elected President and a Director of the General Partner in December 1989, Mr. O'Brien served as a division manager, director of operations planning/assistant to the CEO, Fund Vice President and Group Vice President/Operations. Mr. O'Brien was appointed to the General Partner's Executive Committee in August 1993. As President, he is responsible for the day-to-day operations of the cable television systems managed and owned by the General Partner. Mr. O'Brien is a board member of Cable Labs, Inc., the research arm of the U.S. cable television industry. He also serves as the Chairman of the Board of Directors of the Cable Television Administration and Marketing Association and as a director and a member of the Executive Committee of the Walter Kaitz Foundation, a foundation that places people of ethnic minority groups in positions with cable television systems, networks and vendor companies. Ms. Ruth E. Warren joined the General Partner in August 1980 and has served in various operational capacities, including system marketing manager, director of marketing, assistant division manager, regional vice president and Fund Vice President, since then. Ms. Warren was elected Group Vice President/Operations of the General Partner in September 1990. Mr. Kevin P. Coyle joined The Jones Group, Ltd. in July 1981 as Vice President/Financial Services. In September 1985, he was appointed Senior Vice President/Financial Services. He was elected Treasurer of the General Partner in August 1987, Vice President/Treasurer in April 1988 and Group Vice President/Finance and Chief Financial Officer in October 1990. Mr. Christopher J. Bowick joined the General Partner in September 1991 as Group Vice President/Technology and Chief Technical Officer. Prior to joining the General Partner, Mr. Bowick worked for Scientific Atlanta's Transmission Systems Business Division in various technical management capacities since 1981, and as Vice President of Engineering since 1989. Mr. Bowick also has served since 1995 as President of Jones Futurex, Inc., a wholly owned subsidiary of the General Partner that manufactures and markets data encryption products. Ms. Cheryl M. Sprague joined the General Partner in November 1997 as Group Vice President/Human Resources. Prior to November 1997 and since December 1995, Ms. Sprague served as Director, Human Resources for Westmoreland Coal Company, where she was responsible for human resources management for said company and three of its subsidiaries. From October 1993 to December 1995, Ms. Sprague served as President of Peak Executive Resources, where she provided consulting services in organizational development and human resources to businesses experiencing organizational transition. From April 1992 to October 1993, Ms. Sprague was Vice President, Human Resources for Penrose-St. Francis Healthcare System, where she was responsible for management of all human resources activities. Mr. Sprague serves as an adjunct instructor at Regis University and has earned the professional designation as a Senior Professional in Human Resources from the Society for Human Resource Management and its affiliate, the Human Resources Certification Board. Ms. Sprague is a past president of the Colorado Human Resource Association and was named by that association as the Colorado Human Resources Administrator of the Year in 1986. Ms. Sprague also serves as a director on the Area VI Board for the Society for Human Resource Management. Ms. Cynthia A. Winning joined the General Partner as Group Vice President/Marketing in December 1994. Previous to joining the General Partner, Ms. Winning served since 1994 as the President of PRS Inc., Denver, Colorado, a sports and event marketing company. From 1979 to 1981 and from 1986 to 1994, Ms. Winning served as the Vice President and Director of Marketing for Citicorp Retail Services, Inc., a provider of private-label credit cards for ten national retail department store chains. From 1981 to 1986, Ms. Winning was the Director of Marketing Services for Daniels & Associates cable television operations, as well as the Western Division Marketing Director for Capital Cities Cable. Ms. Winning also serves as a board member of Cities in Schools, a dropout intervention/prevention program. 43 Ms. Elizabeth M. Steele joined the General Partner in August 1987 as Vice President/General Counsel and Secretary. From August 1980 until joining the General Partner, Ms. Steele was an associate and then a partner at the Denver law firm of Davis, Graham & Stubbs, which serves as counsel to the General Partner . Mr. Larry Kaschinske joined the General Partner in 1984 as a staff accountant in the General Partner's former Wisconsin Division, was promoted to Assistant Controller in 1990, named Controller in August 1994 and was elected Vice President/Controller in June 1996. Mr. Robert E. Cole was appointed a Director of the General Partner in March 1996. Mr. Cole is currently self-employed as a partner of First Variable Insurance Marketing and is responsible for marketing to National Association of Securities Dealers, Inc. firms in northern California, Oregon, Washington and Alaska. From 1993 to 1995, Mr. Cole was the Director of Marketing for Lamar Life Insurance Company; from 1992 to 1993, Mr. Cole was Senior Vice President of PMI Inc., a third party lender serving the special needs of Corporate Owned Life Insurance (COLI) and from 1988 to 1992, Mr. Cole was the principal and co- founder of a specialty investment banking firm that provided services to finance the ownership and growth of emerging companies, productive assets and real property. Mr. Cole is a Certified Financial Planner and a former United States Naval Aviator. Mr. William E. Frenzel was appointed a Director of the General Partner in April 1995. Mr. Frenzel has been a Guest Scholar since 1991 with the Brookings Institution, a research organization located in Washington D. C. Until his retirement in January 1991, Mr. Frenzel served for twenty years in the United States House of Representatives, representing the State of Minnesota, where he was a member of the House Ways and Means Committee and its Trade Subcommittee, the Congressional Representative to the General Agreement on Tariffs and Trade (GATT), the Ranking Minority Member on the House Budget Committee and a member of the National Economic Commission. Mr. Frenzel also served in the Minnesota Legislature for eight years. He is a Distinguished Fellow of the Tax Foundation, Vice Chairman of the Eurasia Foundation, a Board Member of the U.S.-Japan Foundation, the Close-Up Foundation, Sit Mutual Funds and Chairman of the Japan- America Society of Washington. Mr. Josef J. Fridman was appointed a Director of the General Partner in February 1998. Mr. Fridman is currently Senior Vice-President, Law and Corporate Secretary of BCE Inc., Canada's largest telecommunications company. Mr. Fridman joined Bell Canada, a wholly owned subsidiary of BCE Inc., in 1969 and has held increasingly senior positions with Bell Canada and BCE Inc. since such time. In March 1998, Mr. Fridman was named Chief Legal Officer of BCE Inc. and Bell Canada. Mr. Fridman's directorships include Telesat Canada, TMI Communications, Inc. Telebec Itee, BCI Telecom Holding Inc. and BCE Corporate Services Inc. He is a member of the Quebec Bar Association, the Canadian, American and International Bar Associations and the Lord Reading Law Society. Mr. Fridman is a governor of the Quebec Bar. Mr. Donald L. Jacobs was appointed a Director of the General Partner in April 1995. Mr. Jacobs is a retired executive officer of TRW. Prior to his retirement, he was Vice President and Deputy Manager of the Space and Defense Sector; prior to that appointment, he was the Vice President and General Manager of the Defense Systems Group and prior to his appointment as Group General Manager, he was President of ESL, Inc., a wholly owned subsidiary of TRW. During his career, Mr. Jacobs served on several corporate, professional and civic boards. Mr. Robert Kearney was appointed a director of the General Partner in July 1997. Mr. Kearney is a retired executive officer of Bell Canada. Prior to his retirement in December 1993, Mr. Kearney was the President and Chief Executive Officer of Bell Canada. He served as Chairman of BCE Canadian Telecom Group in 1994 and as Deputy Chairman of BCI Management Limited in 1995. During his career, Mr. Kearney served in a variety of capacities in the Canadian, American and International Standards organizations, and he has served on several corporate, professional and civic boards. Mr. James J. Krejci is President and CEO of Imagelink Technologies, Inc., a privately financed company with leading technology in the desktop or personal computer videoconferencing market. Prior to joining 44 Imagelink Technologies in July 1996, Mr. Krejci was President of the International Division of International Gaming Technology, the world's largest gaming equipment manufacturer, with headquarters in Reno, Nevada. Prior to joining IGT in May 1994, Mr. Krejci was Group Vice President of Jones International, Ltd. and was Group Vice President of the General Partner. He also served as an officer of subsidiaries of Jones International, Ltd. until leaving the General Partner in May 1994. Mr. Krejci started his career as an electronics research engineer with the Allen-Bradley Company, then moved to the 3M Company, General Electric and Becton Dickinson until March 1985 when he joined Jones International, Ltd. Mr. Krejci has been a director of the General Partner since August 1987. Mr. Raphael M. Solot was appointed a Director of the General Partner in March 1996. Mr. Solot is an attorney and has practiced law for 34 years with an emphasis on franchise, corporate and partnership law and complex litigation. Mr. Howard O. Thrall was appointed a Director of the General Partner in March 1996. Mr. Thrall had previously served as a Director of the General Partner from December 1988 to December 1994. Mr. Thrall is a management and international marketing consultant, having active assignments with First National Net, Inc., LEP Technologies, Cheong Kang Associates (Korea), Aero Investment Alliance, Inc. and Western Real Estate Partners, among others. From September 1993 through July 1996, Mr. Thrall served as Vice President of Sales, Asian Region, for World Airways, Inc. headquartered at the Washington Dulles International Airport. From 1984 until August 1993, Mr. Thrall was with the McDonnell Douglas Corporation, where he concluded as a Regional Vice President, Commercial Marketing with the Douglas Aircraft Company subsidiary. Mr. Siim A. Vanaselja was appointed a Director of the General Partner in August 1996. He is the Chief Financial Officer of BCI Telecom Holding Inc. Mr. Vanaselja joined BCE Inc., Canada's largest telecommunications company, in February 1994 as Assistant Vice-President, International Taxation. In June 1994, he was appointed Assistant Vice-President and Director of Taxation, and in February 1995, Mr. Vanaselja was appointed Vice-President, Taxation. On August 1, 1996, Mr. Vanaselja was appointed the Chief Financial Officer of Bell Canada International Inc., a subsidiary of BCE Inc. Prior to joining BCE Inc. and since August 1989, Mr. Vanaselja was a partner in the Toronto office of KPMG Peat Marwick Thorne. Mr. Vanaselja has been a member of the Institute of Chartered Accountants of Ontario since 1982 and is a member of the Canadian Tax Foundation, the Tax Executives Institute and the International Fiscal Association. Mr. Sanford Zisman was appointed a director of the General Partner in June 1996. Mr. Zisman is a principal in the law firm of Zisman & Ingraham, P.C. of Denver, Colorado and he has practiced law for 32 years, specializing in the areas of tax, business and estate planning and probate administration. Mr. Zisman was a member of the Board of Directors of Saint Joseph Hospital, the largest hospital in Colorado, serving at various times as Chairman of the Board, Chairman of the Finance Committee and Chairman of the Strategic Planning Committee. Since 1982, he has also served on the Board of Directors of Maxim Series Fund, Inc., a subsidiary of Great-West Life Assurance Company. Mr. Robert B. Zoellick was appointed a Director of the General Partner in April 1995. Mr. Zoellick is the John M. Olin Professor at the U.S. Naval Academy for the 1997-1998 term. From 1993 through 1997, he was an Executive Vice President at Fannie Mae, a federally chartered and stockholder-owned corporation that is the largest housing finance investor in the United States. From August 1992 to January 1993, Mr. Zoellick served as Deputy Chief of Staff of the White House and Assistant to the President. From May 1991 to August 1992, Mr. Zoellick served concurrently as the Under Secretary of State for Economic and Agricultural Affairs and as Counselor of the Department of State, a post he assumed in March 1989. From 1985 to 1988, Mr. Zoellick served at the Department of Treasury in a number of capacities, including Counselor to the Secretary. Mr. Zoellick currently serves on the boards of Alliance Capital and Said Holdings. 45 ITEM 11. EXECUTIVE COMPENSATION -------------------------------- The Partnership has no employees; however, various personnel are required to operate the Systems. Such personnel are employed by the General Partner and, pursuant to the terms of the limited partnership agreement of the Partnership, the cost of such employment is charged by the General Partner to the Partnership as a direct reimbursement item. See Item 13. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGERS ---------------------------------------------------------------------- As of January 16, 1998, no person or entity owned more than 5% of the limited partnership interests of the Partnership. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS -------------------------------------------------------- The General Partner and its affiliates engage in certain transactions with the Venture. The General Partner believes that the terms of such transactions are generally as favorable as could be obtained by the Venture from unaffiliated parties. This determination has been made by the General Partner in good faith, but none of the terms were or will be negotiated at arm's-length and there can be no assurance that the terms of such transactions have been or will be as favorable as those that could have been obtained by the Venture from unaffiliated parties. TRANSACTIONS WITH THE GENERAL PARTNER The General Partner charges the Venture a 5% management fee, and the General Partner is reimbursed for certain allocated overhead and administrative expenses. These expenses represent the salaries and benefits paid to corporate personnel, rent, data processing services and other corporate facilities costs. Such personnel provide engineering, marketing, administrative, accounting, legal and investor relations services to the Venture. Allocations of personnel costs are based primarily on actual time spent by employees of the General Partner with respect to each partnership managed. Remaining expenses are allocated based on the pro rata relationship of the Venture's revenues to the total revenues of all systems owned or managed by the General Partner and certain of its subsidiaries. Systems owned by the General Partner and all other systems owned by partnerships for which Jones Intercable, Inc. is the general partner are also allocated a proportionate share of these expenses. The General Partner from time to time also advances funds to the Venture and charges interest on the balance payable. The interest rate charged approximates the General Partner's weighted average cost of borrowing. TRANSACTIONS WITH AFFILIATES Knowledge TV, Inc., a company owned 67% by Jones Education Group, Ltd., 7% by Mr. Jones and 26% by the General Partner, operates the television network JEC Knowledge TV. JEC Knowledge TV provides programming related to computers and technology; business, careers and finance; health and wellness; and global culture and languages. Knowledge TV. Inc. sells its programming to the cable television systems owned by the Venture. Jones Computer Network, Ltd., a wholly owned subsidiary of Jones Education Group, Ltd., a company owned 64% by Jones International, Ltd., 16% by the General Partner, 12% by BCI and 8% by Mr. Jones, operated the television network Jones Computer Network. This network provided programming focused primarily on computers and technology. Jones Computer Network sold its programming to the cable television systems owned by the Venture. Jones Computer Network, Ltd. terminated its programming in April 1997. The Great American Country network provides country music video programming to the cable television systems owned by the Venture. This network, owned and operated by Great American Country, Inc., a 46 subsidiary of Jones International Networks, Ltd., an affiliate of the General Partner, commenced service in 1996 in the cable television systems owned by the Venture. Jones Galactic Radio, Inc. is a subsidiary of Jones International Networks, Ltd., an affiliate of the General Partner. Superaudio, a joint venture between Jones Galactic Radio, Inc. and an unaffiliated entity, provides audio programming to the cable television systems owned by the Venture. The Product Information Network Venture (the "PIN Venture") is a venture among a subsidiary of Jones International Networks, Ltd., an affiliate of the General Partner, and two unaffiliated cable system operators. The PIN Venture operates the Product Information Network ("PIN"), which is a 24-hour network that airs long-form advertising generally known as "infomercials." The PIN Venture generally makes incentive payments of approximately 60% of its net advertising revenue to the cable systems that carry its programming. The Venture's systems carry PIN for all or part of each day. Revenues received by the Venture from the PIN Venture relating to the Venture's owned cable television systems totaled approximately $199,997 for the year ended December 31, 1997. The programming fees paid by the Venture to Knowledge TV, Inc., Jones Computer Network, Ltd., Great American Country and Superaudio (collectively, the "affiliated programming providers") are governed by the terms of the various master programming agreements entered into by and between the General Partner and each of the affiliated programming providers. Generally, with respect to most video programming services, cable operators pay to programmers a monthly license fee per subscriber that is based on a number of factors, including the perceived value of the programming, the size of the cable operator and the level of distribution of the programming service within the cable operator's systems and the other terms and conditions under which the programming is provided. The General Partner negotiates master programming agreements with each programming network distributed on any of its owned or managed cable systems. The Venture pays the same per subscriber rate for all of its programming, including the programming provided by affiliates of the General Partner, as the General Partner pays for the programming it provides on cable television systems that it owns itself, i.e., the General Partner does not receive any markup for programming provided to the Venture under its master programming agreements. The master programming agreements entered into by and between the General Partner and the affiliated programming providers were negotiated by officers of the General Partner with representatives of the affiliated programming providers. The charges to the Venture for related party transactions are as follows for the periods indicated:
For the Year Ended December 31, ------------------------------------------------------------------- Cable TV Fund 12-BCD 1997 1996 1995 - -------------------------------------------------- --------------------- --------------------- --------------------- Management fees $4,133,751 $4,118,188 $5,069,985 Allocation of expenses 4,615,841 5,491,265 7,183,663 Interest expense 0 0 220,743 Amount of advances outstanding 0 0 4,198,739 Highest amount of advances outstanding 0 0 4,574,572 Programming fees: Knowledge TV, Inc. 131,277 126,665 145,598 Jones Computer Network, Ltd. 85,543 248,044 283,339 Great American Country 131,863 141,753 0 Superaudio 118,032 116,710 135,861
47 PART IV. -------- ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K -------------------------------------------------------------------------
(a)1. See index to financial statements for list of financial statements and exhibits thereto filed as a part of this report. 3. The following exhibits are filed herewith. 4.1 Limited Partnership Agreement for Cable TV Fund 12-C. (1) 4.2 Joint Venture Agreement of Cable TV Fund 12-BCD Venture dated as of March 17, 1986, among Cable TV Fund 12-B, Ltd., Cable TV Fund 12-C, Ltd. and Cable TV Fund 12-D, Ltd. (2) 10.1.1 Copy of a franchise and related documents thereto granting a community antenna television system franchise for Edwards Air Force Base, California (Fund 12-BCD). (3) 10.1.2 Copy of a franchise and related documents thereto granting a community antenna television system franchise for the City of Lancaster, California (Fund 12-BCD). (4) 10.1.3 Copy of a franchise and related documents thereto granting a community antenna television system franchise for Unincorporated portions of Los Angeles County, California (Fund 12-BCD). (4) 10.1.4 Copy of Los Angeles County Code regarding cable tv system franchises (Fund 12-BCD). (5) 10.1.5 Copy of Ordinance 90-0118F dated 10/29/90 granting a cable television franchise to Fund 12-BCD (Fund 12-BCD). (5) 10.1.6 Copy of a franchise and related documents thereto granting a community antenna television system franchise for the Green Valley/Elizabeth Lake/Leona Valley unincorporated areas of Los Angeles County, California (Fund 12-BCD). (2) 10.1.7 Ordinance 88-0166F dated 10/4/88 amending the franchise described in 10.1.5 (Fund 12-BCD). (5) 10.1.8 Copy of a franchise and related documents thereto granting a community antenna television system franchise for the City of Palmdale, California (Fund 12-BCD). (5) 10.1.9 Copy of a franchise and related documents thereto granting a community antenna television system franchise for the City of Albuquerque, New Mexico (Fund 12-BCD). (4) 10.1.10 Copy of a franchise and related documents thereto granting a community antenna television system franchise for the County of Bernalillo, New Mexico (Fund 12-BCD). (4) 10.1.11 Copy of a franchise and related documents thereto granting a community antenna television system franchise for the Town of Bernalillo, New Mexico (Fund 12-BCD). (4)
48
10.1.12 Resolution No. 12-14-87 dated 12/14/87 authorizing the assignment of the franchise to Fund 12-BCD. (5) 10.1.13 Copy of a franchise and related documents thereto granting a community antenna television system franchise for the Village of Bosque Farms, New Mexico (Fund 12-BCD). (4) 10.1.14 Copy of a franchise and related documents thereto granting a community antenna television system franchise for the Village of Corrales, New Mexico (Fund 12-BCD). (4) 10.1.15 Copy of a franchise and related documents thereto granting a community antenna television system franchise for the Kirtland Air Force Base, New Mexico (Fund 12-BCD). (5) 10.1.16 Copy of a franchise and related documents thereto granting a community antenna television system franchise for the Village of Los Ranchos, New Mexico (Fund 12-BCD). (4) 10.1.17 Copy of a franchise and related documents thereto granting a community antenna television system franchise for the County of Sandoval, New Mexico (Fund 12-BCD). (4) 10.1.18 Copy of a franchise and related documents thereto granting a community antenna television system franchise for the County of Valencia, New Mexico (Fund 12-BCD). (4) 10.1.19 Resolution No. 88-23 dated 2/14/88 authorizing assignment of the franchise to Fund 12-BCD. (6) 10.2.1 Note Purchase Agreement dated as of March 31, 1992 between Cable TV Fund 12-BCD Venture and the Noteholders (6) 10.2.2 Amendment No. 1 dated as of March 31, 1994 to the Note Purchase Agreement dated as of March 31, 1992 between Cable TV Fund 12-BCD Venture and the Noteholders (6) 10.2.3 Amendment No. 2 dated as of September 30, 1994 to the Note Purchase Agreement dated as of March 31, 1992 between Cable TV Fund 12-BCD Venture and the Noteholders (6) 10.2.4 Amendment No. 3 dated as of February 12, 1996 to the Note Purchase Agreement dated as of March 31, 1992 between Cable TV Fund 12-BCD Venture and the Noteholders. (6) 10.2.5 Second Amended and Restated Credit Agreement by and among Cable TV Fund 12-BCD Venture, various banks, Corestates Bank, N.A. and Societe Generale, as Managing Agents and Corestates Bank, N.A., as Administrative Agent dated February 12, 1996. (6) 10.3.1 Purchase and Sale Agreement (Albuquerque) dated as of July 28, 1997 between Cable TV Fund 12-BCD Venture and Jones Intercable, Inc. (7)
49
27 Financial Data Schedule __________ (1) Incorporated by reference from Registrant's Report on Form 10-K for the fiscal year December 31, 1985 (Commission File Nos. 0-13193, 0-13807, 0-13964 and 0-14206). (2) Incorporated by reference from Registrant's Report on Form 10-K for the fiscal year ended December 31, 1987 (Commission File Nos. 0-13193, 0-13807, 0-13964 and 0-14206). (3) Incorporated by reference from Registrant's Report on Form 10-K for the fiscal year ended December 31, 1994 (Commission File No. 0-13193). (4) Incorporated by reference from Registrant's Report on Form 10-K for the fiscal year ended December 31, 1986 (Commission File Nos. 0-13193, 0-13807, 0-13964 and 0-14206). (5) Incorporated by reference from Registrant's Report on Form 10-K for the fiscal year ended December 31, 1992 (Commission File Nos. 0-13193, 0-13807, 0-13964 and 0-14206). (6) Incorporated by reference from Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1995. (7) Incorporated by reference from the Registrant's Preliminary Proxy Statement (Commission File No. 0-13964) filed with the SEC on October 2, 1997. (b) Reports on Form 8-K. None.
50 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CABLE TV FUND 12-C, LTD. a Colorado limited partnership By: Jones Intercable, Inc. By: /s/ Elizabeth M. Steele --------------------------------- Elizabeth M. Steele Dated: April 17, 1998 Vice President 51 EX-99.(D)(3) 8 10-Q FOR CABLE TV FUND 12-C, LTD. (MARCH 31, 1998) EXHIBIT 99(d)(3) FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [X] Quarterly report pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 For the quarterly period ended March 31, 1998 -------------- [_] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ______________to _______________ Commission File Number: 0-13964 CABLE TV FUND 12-C, LTD. - ------------------------------------------------------------------------------- Exact name of registrant as specified in charter Colorado 84-0970000 - -------------------------------------------------------------------------------- State of organization I.R.S. employer I.D.# 9697 East Mineral Avenue, P.O. Box 3309, Englewood, Colorado 80155-3309 ----------------------------------------------------------------------- Address of principal executive office (303) 792-3111 ----------------------------- Registrant's telephone number Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ------- CABLE TV FUND 12-C, LTD. ------------------------ (A Limited Partnership) UNAUDITED BALANCE SHEETS ------------------------
March 31, December 31, 1998 1997 ------------- ------------- ASSETS $ - $ - ------ =========== =========== LIABILITIES AND PARTNERS' DEFICIT --------------------------------- LIABILITIES: Loss in excess of investment in cable television joint venture $ 4,522,120 $ 4,313,801 ----------- ----------- Total liabilities 4,522,120 4,313,801 ----------- ----------- PARTNERS' DEFICIT: General Partner- Contributed capital 1,000 1,000 Accumulated deficit (25,045) (22,962) ----------- ----------- (24,045) (21,962) ----------- ----------- Limited Partners- Net contributed capital (47,626 units outstanding at March 31, 1998 and December 31, 1997) 19,998,049 19,998,049 Accumulated deficit (16,251,261) (16,045,025) Distributions (8,244,863) (8,244,863) ----------- ----------- (4,498,075) (4,291,839) ----------- ----------- Total liabilities and partners' deficit $ - $ - =========== ===========
The accompanying notes to unaudited financial statements are an integral part of these unaudited balance sheets. 2 CABLE TV FUND 12-C, LTD. ------------------------ (A Limited Partnership) UNAUDITED STATEMENTS OF OPERATIONS ----------------------------------
For the Three Months Ended March 31, ---------------------------- 1998 1997 ----------- ----------- EQUITY IN NET LOSS OF CABLE TELEVISION JOINT VENTURE $(208,319) $(146,768) -------- -------- NET LOSS $(208,319) $(146,768) ======== ======== ALLOCATION OF NET LOSS: General Partner $ (2,083) $ (1,468) ======== ======== Limited Partners $(206,236) $(145,300) ======== ======== NET LOSS PER LIMITED PARTNERSHIP UNIT $(4.33) $ (3.05) ======== ======== WEIGHTED AVERAGE NUMBER OF LIMITED PARTNERSHIP UNITS OUTSTANDING 47,626 47,626 ======== ========
The accompanying notes to unaudited financial statements are an integral part of these unaudited statements. 3 CABLE TV FUND 12-C, LTD. ------------------------ (A Limited Partnership) UNAUDITED STATEMENTS OF CASH FLOWS ----------------------------------
For the Three Months Ended March 31, ---------------------------- 1998 1997 ------------ ------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $(208,319) $(146,768) Adjustments to reconcile net loss to net cash provided by operating activities: Equity in net loss of cable television joint venture 208,319 146,768 ----------- ----------- Net cash provided by operating activities - - ----------- ----------- Net change in cash - - Cash, beginning of period - - ----------- ----------- Cash, end of period $ - $ - =========== =========== SUPPLEMENTAL CASH FLOW DISCLOSURE: Interest paid $ - $ - =========== ===========
The accompanying notes to unaudited financial statements are an integral part of these unaudited statements. 4 CABLE TV FUND 12-C, LTD. ------------------------ (A Limited Partnership) NOTES TO UNAUDITED FINANCIAL STATEMENTS --------------------------------------- (1) This Form 10-Q is being filed in conformity with the SEC requirements for unaudited financial statements and does not contain all of the necessary footnote disclosures required for a complete presentation of the Balance Sheets and Statements of Operations and Cash Flows in conformity with generally accepted accounting principles. However, in the opinion of management, this data includes all adjustments, consisting only of normal recurring accruals, necessary to present fairly the financial position of Cable TV Fund 12-C, Ltd. (the "Partnership") at March 31, 1998 and December 31, 1997 and its Statements of Operations and Cash Flows for the three month periods ended March 31, 1998 and March 31, 1997. Results of operations for these periods are not necessarily indicative of results to be expected for the full year. The Partnership owns no properties directly. The Partnership owns a 15 percent interest in Cable TV Fund 12-BCD Venture (the "Venture"). The Venture owns and operates the cable television systems serving Albuquerque, New Mexico ("the Albuquerque System") and Palmdale, California (the "Palmdale System"). (2) Jones Intercable, Inc. (the "General Partner"), a publicly held Colorado corporation, manages the Venture and receives a fee for its services equal to 5 percent of the gross revenues of the Venture, excluding revenues from the sale of cable television systems or franchises. Management fees paid by the Venture to the General Partner during the three month periods ended March 31, 1998 and 1997 attributable to the Partnership's 15 percent interest in the Venture were $159,771 and $150,594, respectively. The Venture reimburses the General Partner for certain allocated overhead and administrative expenses. These expenses represent the salaries and related benefits paid for corporate personnel, rent, data processing services, and other corporate facilities costs. Such personnel provide engineering, marketing, administrative, accounting, legal and investor relations services to the Venture. Such services, and their related costs, are necessary to the operation of the Venture and would have been incurred by the Venture if it was a stand alone entity. Allocations of personnel costs are based on actual time spent by employees of the General Partner with respect to each partnership managed. Remaining expenses are allocated based on the pro rata relationship of the Partnership's revenues to the total revenues of all systems owned or managed by the General Partner and certain of its subsidiaries. Systems owned by the General Partner and all other systems owned by partnerships for which Jones Intercable, Inc. is the general partner are also allocated a proportionate share of these expenses. The General Partner believes that the methodology used in allocating overhead and administrative expenses is reasonable. Reimbursements made by the Venture to the General Partner for allocated overhead and administrative expenses during the three month periods ended March 31, 1998 and 1997 attributable to the Partnership's 15 percent interest in the Venture were $173,933 and $203,301, respectively. See Note 4 for disclosure of the total management fees and allocated overhead and administrative expenses paid by the Venture. (3) In July 1997, the Venture entered into a purchase and sale agreement to sell the Albuquerque System to the General Partner for a sales price of $222,963,267, which price represents the average of three separate independent appraisals of the fair market value of the Albuquerque System. The closing of this sale is subject to a number of conditions, including the approval of the holders of a majority of the limited partnership interests in each of the three partnerships that comprise the Venture and necessary governmental and other third party consents. The General Partner currently is conducting a vote of the limited partners on the sale of the Albuquerque System. This vote is expected to be concluded no later than June 15, 1998. Closing is expected to occur by June 30, 1998. Upon the consummation of the proposed sale of the Albuquerque System, the Venture will repay its then outstanding Senior Notes balance of $41,544,890 plus accrued interest, plus a make whole premium that, based on current market interest rates, is estimated to total $1,342,455 and, pursuant to an amendment to the Venture's credit facility, the Venture will distribute $125,000,000 to the three constituent partnerships of the Venture in proportion to their ownership interests in the Venture. The remaining proceeds will be used to repay a portion of the outstanding balance and accrued interest on its credit facility. The Partnership will receive $19,097,217, or 15 percent of the $125,000,000 distribution, which the Partnership will distribute to its partners of record as of the closing date of the sale of the Albuquerque System. 5 This distribution is expected to be made in July 1998. The limited partners of the Partnership, as a group, will receive $18,214,947 and the General Partner will receive $882,270. Such distribution represents $382 for each $500 limited partnership interest, or $764 for each $1,000 invested in the Partnership. In March 1998, the Venture entered into a purchase and sale agreement to sell the Palmdale System to the General Partner for a sales price of $138,205,200, subject to customary closing adjustments. This sales price represents the average of three separate independent appraisals of the fair market value of the Palmdale System. The closing of this sale is subject to a number of conditions, including the approval of the holders of a majority of the limited partnership interests in each of the three partnerships that comprise the Venture and necessary governmental and other third party consents. The General Partner expects to conduct a vote of the limited partners on the sale of the Palmdale System in the third quarter of 1998. Closing is expected to occur in the fourth quarter of 1998. Upon consummation of the proposed sale of the Palmdale System, the Venture will pay all of its remaining indebtedness, which is estimated to total approximately $48,200,000, and then the Venture will distribute the remaining sale proceeds of approximately $91,642,700 to the three constituent partnerships of the Venture in proportion to their ownership interests in the Venture. The Partnership will receive approximately $14,001,000, or 15 percent of the $91,642,700 distribution, which the Partnership will distribute to its partners of record as of the closing date of the sale of the Palmdale System. This distribution is expected to be made before year end 1998. Because the limited partners will have already received distributions in an amount in excess of the capital initially contributed to the Partnership by the limited partners, taking into account the anticipated distribution to the limited partners from the sale of the Albuquerque System, the net proceeds from the Palmdale System's sale will be distributed 75 percent to the limited partners ($10,500,750) and 25 percent to the General Partner ($3,500,250). Limited partners will receive $220 for each $500 limited partnership interest, or $440 for each $1,000 invested in the Partnership, from the Partnership's portion of the net proceeds of the Palmdale System's sale. Since the Palmdale System will represent the only remaining asset of the Venture, the Venture and the Partnership will be liquidated and dissolved after the sale of the Palmdale System. Taking into account the anticipated distributions from the proposed sales of the Albuquerque System and the Palmdale System, together with all prior distributions, the General Partner expects that the Partnership's limited partners will receive $775 for each $500 limited partnership interest, or $1,550 for each $1,000 invested in the Partnership, at the time the Partnership is liquidated and dissolved. 6 (4) Summarized financial information regarding the Venture is presented below. UNAUDITED BALANCE SHEETS ------------------------
ASSETS March 31, 1998 December 31, 1997 ------ -------------- ----------------- Cash and accounts receivable $ 6,742,268 $ 6,199,348 Investment in cable television properties 112,746,777 112,612,078 Other assets 4,084,663 5,458,081 ------------ ------------ Total assets $ 123,573,708 $ 124,269,504 ============ ============ LIABILITIES AND PARTNERS' CAPITAL --------------------------------- Debt $ 148,273,330 $ 144,308,462 Payables and accrued liabilities 3,853,622 7,150,772 Partners' contributed capital 135,490,944 135,490,944 Accumulated deficit (109,044,188) (107,680,674) Distributions (55,000,000) (55,000,000) ------------ ------------ Total liabilities and partners' capital $ 123,573,708 $ 124,269,504 ============ ============
UNAUDITED STATEMENTS OF OPERATIONS ---------------------------------- For the Three Months Ended March 31, ---------------------------- 1998 1997 ------------- ------------- Revenues $ 20,912,442 $ 19,711,225 Operating expenses (11,508,297) (10,953,865) Management fees and allocated overhead from General Partner (2,183,929) (2,316,066) Depreciation and amortization (5,858,534) (4,798,547) Operating income 1,361,682 1,642,747 Interest expense, net (2,675,112) (2,691,262) Other, net (50,084) 87,866 ----------- ----------- Consolidated loss $ (1,363,514) $ (960,649) =========== =========== Management fees and reimbursements for overhead and administrative expenses paid to Jones Intercable, Inc. by the Venture totaled $1,045,622 and $1,138,307, respectively, for the three month period ended March 31, 1998, and $985,561 and $1,330,505, respectively, for the three month period ended March 31, 1997. 7 CABLE TV FUND 12-C, LTD. ------------------------ (A Limited Partnership) MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND --------------------------------------------------------------- RESULTS OF OPERATIONS --------------------- FINANCIAL CONDITION - ------------------- The Partnership owns a 15 percent interest in the Venture. The investment in cable television joint venture is accounted for under the equity method. The Partnership's share of losses generated by the Venture have exceeded the Partnership's initial investment in the Venture; therefore, the investment is classified as a liability. This liability increased by $208,319, which represents the Partnership's share of losses generated by the Venture for the three months ended March 31, 1998. In July 1997, the Venture entered into a purchase and sale agreement to sell the Albuquerque System to the General Partner for a sales price of $222,963,267, which price represents the average of three separate independent appraisals of the fair market value of the Albuquerque System. The closing of this sale is subject to a number of conditions, including the approval of the holders of a majority of the limited partnership interests in each of the three partnerships that comprise the Venture and necessary governmental and other third party consents. The General Partner currently is conducting a vote of the limited partners on the sale of the Albuquerque System. This vote is expected to be concluded no later than June 15, 1998. Closing is expected to occur by June 30, 1998. Upon the consummation of the proposed sale of the Albuquerque System, the Venture will repay its then outstanding Senior Notes balance of $41,544,890 plus accrued interest, plus a make whole premium that, based on current market interest rates, is estimated to total $1,342,455 and, pursuant to an amendment to the Venture's credit facility, the Venture will distribute $125,000,000 to the three constituent partnerships of the Venture in proportion to their ownership interests in the Venture. The remaining proceeds will be used to repay a portion of the outstanding balance and accrued interest on its credit facility. The Partnership will receive $19,097,217, or 15 percent of the $125,000,000 distribution, which the Partnership will distribute to its partners of record as of the closing date of the sale of the Albuquerque System. This distribution is expected to be made in July 1998. The limited partners of the Partnership, as a group, will receive $18,214,947 and the General Partner will receive $882,270. Such distribution represents $382 for each $500 limited partnership interest, or $764 for each $1,000 invested in the Partnership. In March 1998, the Venture entered into a purchase and sale agreement to sell the Palmdale System to the General Partner for a sales price of $138,205,200, subject to customary closing adjustments. This sales price represents the average of three separate independent appraisals of the fair market value of the Palmdale System. The closing of this sale is subject to a number of conditions, including the approval of the holders of a majority of the limited partnership interests in each of the three partnerships that comprise the Venture and necessary governmental and other third party consents. The General Partner expects to conduct a vote of the limited partners on the sale of the Palmdale System in the third quarter of 1998. Closing is expected to occur in the fourth quarter of 1998. Upon consummation of the proposed sale of the Palmdale System, the Venture will pay all of its remaining indebtedness, which is estimated to total approximately $48,200,000, and then the Venture will distribute the remaining sale proceeds of approximately $91,642,700 to the three constituent partnerships of the Venture in proportion to their ownership interests in the Venture. The Partnership will receive approximately $14,001,000, or 15 percent of the $91,642,700 distribution, which the Partnership will distribute to its partners of record as of the closing date of the sale of the Palmdale System. This distribution is expected to be made before year end 1998. Because the limited partners will have already received distributions in an amount in excess of the capital initially contributed to the Partnership by the limited partners, taking into account the anticipated distribution to the limited partners from the sale of the Albuquerque System, the net proceeds from the Palmdale System's sale will be distributed 75 percent to the limited partners ($10,500,750) and 25 percent to the General Partner ($3,500,250). Limited partners will receive $220 for each $500 limited partnership interest, or $440 for each $1,000 invested in the Partnership, from the Partnership's portion of the net proceeds of the Palmdale System's sale. Since the Palmdale System will represent the only remaining asset of the Venture, the Venture and the Partnership will be liquidated and dissolved after the sale of the Palmdale System. 8 Taking into account the anticipated distributions from the proposed sales of the Albuquerque System and the Palmdale System, together with all prior distributions, the General Partner expects that the Partnership's limited partners will receive $775 for each $500 limited partnership interest, or $1,550 for each $1,000 invested in the Partnership, at the time the Partnership is liquidated and dissolved. For the three months ended March 31, 1998, the Venture generated net cash from operating activities totaling $2,656,317, which was available to fund capital expenditures and non-operating costs. Capital expenditures for the Venture totaled $5,727,467 for the three months ended March 31, 1998. Capital expenditures in the Albuquerque System totaled $3,939,916. Of the Albuquerque System's capital expenditures, approximately 53 percent was for service drops to subscribers' homes, approximately 24 percent was for cable plant extensions related to new homes passed and the remainder was for other capital expenditures to maintain the value of the Albuquerque System until it is sold. Capital expenditures in the Palmdale System totaled $1,787,551. Of the Palmdale System's capital expenditures, approximately 53 percent was for service drops to subscribers' homes, approximately 16 percent was for cable plant extensions related to new homes passed and the remainder was for other capital expenditures to maintain the value of the Palmdale System until it is sold. These capital expenditures were funded primarily from cash generated from operations and borrowings from the Venture's credit facility. Budgeted capital expenditures for the remainder of 1998 are approximately $6,955,000. Budgeted capital expenditures in the Albuquerque System for the second quarter are approximately $3,837,900, of which approximately 36 percent is for service drops to customers' homes, approximately 20 percent is for cable plant extensions related to new homes passed and the remainder relates to other capital expenditures to maintain the value of the Albuquerque System. Budgeted capital expenditures for the remainder of 1998 in the Palmdale System are approximately $3,117,100, of which approximately 29 percent is for cable plant extensions related to new homes passed, approximately 25 percent is for service drops to subscribers' homes and the remainder is for other capital expenditures to maintain the value of the Palmdale System. Depending upon the timing of the closing of the sale of the Venture's systems, the Venture will make only the portion of the 1998 budgeted capital expenditures scheduled to be made during the Venture's continued ownership of its systems. Funding for these expenditures is expected to be provided by cash on hand, cash generated from operations and borrowings from the Venture's credit facility. The Venture's debt arrangements at March 31, 1998 consisted of $41,544,890 of Senior Notes placed with a group of institutional lenders and a $120,000,000 credit facility with a group of commercial bank lenders. The Senior Notes and the credit facility are equal in standing with the other, and both are equally secured by the assets of the Venture. The Senior Notes and the credit facility contain certain financial covenants. The most restrictive of these covenants is that the ratio of debt to annualized cash flow will not exceed 4.5 to 1. The Venture was in compliance with all of such financial covenants at March 31, 1998. The Senior Notes have a fixed interest rate of 8.64 percent and a final maturity date of March 31, 2000. The Senior Notes require payments of interest and accelerating principal through maturity, payable semi-annually in March and September. A principal payment of $5,934,984 was made in March 1998. A principal payment of approximately $5,934,984 is due in September 1998; however, upon the sale of the Albuquerque System, which is expected to occur no later than June 30, 1998, the Senior Notes will be repaid in full together with an approximate $1,342,000 make whole premium. The balance outstanding on the Venture's $120,000,000 credit facility at March 31, 1998 was $105,630,620, leaving $14,369,380 available for future needs. Upon the sale of the Albuquerque System and pursuant to an amendment to the Venture's credit facility, the Venture anticipates repaying a portion of the then outstanding balance of the credit facility and that the commitment will be reduced to $55,000,000. At the Venture's option, the credit facility will be payable in full on December 31, 1999 or will convert to a term loan that matures on December 31, 2004 payable in consecutive quarterly amounts. Upon the sale of the Palmdale System, the Venture will repay the then outstanding balance of the credit facility. Interest on the credit facility is at the Venture's option of the London Interbank Offered Rate plus .875 percent, the Prime Rate or the Certificate of Deposit Rate plus 1 percent. The effective interest rates on amounts outstanding on the Venture's credit facility as of March 31, 1998 and 1997 were 6.69 percent and 7.09 percent, respectively. The Venture has sufficient sources of capital available through its ability to generate cash from operations and borrowings under its credit facility to meet its presently anticipated needs. 9 RESULTS OF OPERATIONS - --------------------- As a result of the sale of the Venture's cable television system serving areas in and around Tampa, Florida, in February 1996, the following discussion of the Venture's results of operations, through operating income, pertains only to the results of operations of the Albuquerque System and the Palmdale System for the periods discussed. Results of operations of each system for the three months ended March 31, 1998 and 1997, respectively, are summarized below:
Albuquerque System --------------------------------------------------- 1998 1997 Inc(Dec) % Inc/(Dec) ----------- ----------- ----------- ------------ Revenues $13,480,069 $12,748,434 $ 731,635 6% Operating expenses 7,404,123 6,956,707 447,416 6% ---------- ---------- --------- Operating cash flow 6,075,946 5,791,727 284,219 5% Management fees and allocated overhead from Jones Intercable, Inc. 1,408,460 1,495,844 (87,384) (6%) Depreciation and amortization 4,198,392 3,425,328 773,064 23% ---------- ---------- --------- Operating income $ 469,094 $ 870,555 $ (401,461) (46%) ========== ========== ========= Palmdale System ------------------------------------------------- 1998 1997 Inc(Dec) % Inc/(Dec) ----------- ----------- ---------- ---------- Revenues $ 7,432,373 $ 6,962,791 $ 469,582 7% Operating expenses 4,104,174 3,997,158 107,016 3% ---------- ---------- --------- Operating cash flow 3,328,199 2,965,633 362,566 12% Management fees and allocated overhead from Jones Intercable, Inc. 775,469 820,222 (44,753) (5%) Depreciation and amortization 1,660,142 1,373,219 286,923 21% ---------- ---------- --------- Operating income $ 892,588 $ 772,192 $ 120,396 16% ========== ========== ========= Total ------------------------------------------------- 1998 1997 Inc(Dec) % Inc/(Dec) ----------- ----------- ---------- ---------- Revenues $20,912,442 $19,711,225 $1,201,217 6% Operating expenses 11,508,297 10,953,865 554,432 5% ---------- ---------- --------- Operating cash flow 9,404,145 8,757,360 646,785 7% Management fees and allocated overhead from Jones Intercable, Inc. 2,183,929 2,316,066 (132,137) (6%) Depreciation and amortization 5,858,534 4,798,547 1,059,987 22% ---------- ---------- --------- Operating income $ 1,361,682 $ 1,642,747 $ (281,065) (17%) ========== ========== =========
Revenues in the Albuquerque System and the Palmdale System increased $1,201,217, or approximately 6 percent, to $20,912,442 for the three months ended March 31, 1998 from $19,711,225 for the similar period in 1997. The increase in revenue was primarily due to basic service rate increases implemented in the Venture's systems and an increase in 10 advertising sales revenues. Basic service rate increases implemented in the Venture's systems accounted for approximately 71 percent of the increase in revenues for the three months ended March 31, 1998. Increases in advertising sales revenues accounted for approximately 16 percent of the increase in revenues for the three months ended March 31, 1998. No other factor was significant to the increase in revenues. Operating expenses consist primarily of costs associated with the operation and administration of the Venture's cable television systems. The principal cost components are salaries paid to system personnel, programming expenses, professional fees, subscriber billing costs, rent for leased facilities, cable system maintenance expenses and marketing expenses. Operating expenses in the Albuquerque System and the Palmdale System increased $554,432, or approximately 5 percent, to $11,508,297 for the three months ended March 31, 1998 from $10,953,865 for the similar period in 1997. The increase in operating expenses was primarily due to increases in programming costs. No other factor was significant to the increase in operating expenses. Operating expenses represented 55 percent and 56 percent, respectively, of revenues for the three months ended March 31, 1998 and 1997. The cable television industry generally measures the financial performance of a cable television system in terms of operating cash flow (revenues less operating expenses). This measure is not intended to be a substitute or improvement upon the items disclosed on the financial statements, rather it is included because it is an industry standard. Operating cash flow increased $646,785, or approximately 7 percent, to $9,404,145 for the three months ended March 31, 1998 from $8,757,360 for the similar period in 1997. This increase was due to the increase in revenues exceeding the increase in operating expenses. Management fees and allocated overhead from Jones Intercable, Inc. decreased $132,137, or approximately 6 percent, to $2,183,929 for the three months ended March 31, 1998 from $2,316,066 for the similar period in 1997. This decrease was primarily due to decreases in allocated overhead from the General Partner, which was partially offset by an increase in management fees. Depreciation and amortization expense increased $1,059,987, or approximately 22 percent, to $5,858,534 for the three months ended March 31, 1998 from $4,798,547 for the similar period in 1997. This increase was primarily due to a change in the estimated useful lives of certain assets. Operating income decreased $281,065, or approximately 17 percent, to $1,361,682 for the three month period ended March 31, 1998 from $1,642,747 for the similar period in 1997. This decrease was due to the increase in depreciation and amortization expense exceeding the increase in operating cash flow. Interest expense decreased $16,150, or approximately 1 percent, to $2,675,112 for the three months ended March 31, 1998 from $2,691,262 for the similar period in 1997. This decrease in interest expense was primarily due to lower effective interest rates and lower outstanding balances on the Venture's interest bearing obligations. The Partnership's net loss increased $61,551, or approximately 42 percent, to $208,319 for the three months ended March 31, 1998 from $146,768 for the similar period in 1997. This increase is due to the Venture's increase in depreciation and amortization expense. 11 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K a) Exhibits 27) Financial Data Schedule b) Reports on Form 8-K Report on Form 8-K dated March 10, 1998 reported that on March 10, 1998, the Venture entered into a purchase and sale agreement with the General Partner to sell the Venture's Palmdale System. 12 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. CABLE TV FUND 12-C, LTD. BY: JONES INTERCABLE, INC. General Partner By: /S/ Kevin P. Coyle ----------------------------- Kevin P. Coyle Group Vice President/Finance (Principal Financial Officer) Dated: May 13, 1997 13 -----END PRIVACY-ENHANCED MESSAGE-----