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Resolution 96-123-CCRESOLU'TION I;1fJ, 96—].23—CC C�'lNSEIaI'i' i���+OLU'�"ION AU'CHf3i'tCZING TIIE TRAS�TSFE32. OF CABLE TEI.,�ViSI(�N FRANCIII��. �NU `C'H� AS�ZG�1M�Ni 0�' 'I'��i�: ASSETS AN�77 THE FRANCHIS� AS CO��ATCRA.T.. WHER�t�S, the cabte tetevisian franuhib� �a7 Crant County (the "Franehisa"} is current3.y owned and �}��rated f�y Ma�cus Cabie Associates, L.P, �ihe ".F��ar�chisee"}; �nd 1�%1�,�2.EA�, pursuant ta that certain Asset �'urchase Agreemeat dated as of August l, 199G, (the °Purc��as� A�•e�rrz�r�t") by anci batween Franchisee, as S�Iler, adad Narthland Cable Television, Inc., a Washing�on corporatiUn, as buysr ("'Buyer°'), G��ant County (the "Pranchising �lutho��ity") has received �► r�quest for rrpproval ta a�sigr� the �'ra�aclxis� ax�act ta•arzsfer lhe CATV orclina�lce from the Fr�ncllisee ta Buyer, or at T�uyez•'s eleckian, any aff'tliated e��tity ca�itrottin�, cotltralled by, or uncier corrinno.n cc�ntrUl with �uyer (Buyer, o�• a��y suah entity, a°TransfeY•ee"); �rr1 W���,ii�L;�i.S, Tr�nsferee, as t�e proposed assi�;ne� and tr•ansfecee c�f Francl7isee, from �nd af�er the date c,f th� clasin� c�itl�c �ransactians d�sca•ibed it� the Purc�lase A�reemeszt, shall assume and a�ree to perC'orm eaclx and e��ry o(alz�at�or� of the Franchis�e ur�cler the l�ranchise, �tf7W, 'T�-IERF�,FO�'.E, �3E I'T RESOLV'EI�, ti'at thu sale, t.ransfer and assi�;nment aaf the ri�hts, r�y�c�ns�bilities anci �ene�ts af the Franchise from Fr��ichisee ta Trar�sferee is hexeby perrnitted and approved; �nd �3�; I`Z' �URTI-I�,R RESC}LVEL�3, that the Francliise {ancl the related Cfi'�V ordit7ance} is in fult farac a�zd �ff�ct wilhc�zrt d�fauLt Ch�reunder i�y the Franchisee to the date hereof in accorda��ce with its terms anc3 conditicraYs as set fe�rt�� tlleg•�in a��d tRaat nc� breach has occurrec� c�r is csanti�auing und�r tYre FranGhise; and ,��3 I'I' }�LJTETHk��i. �ESULV�i7, that tixe Franchising Authority waives any ri�hts of first refusai th�tt it anay hav� tca as;�ume t��� I�ranchise upon �ny t�•ansfer con[erri�lated hereunder; �n:d ��; I`%` I�i.JleTi-iF'� RE50L�JEl�, tha# T"r�nsfexee may, at any tix�e arrd fram tirne to time, a�sign csr �ra�i or c�tl�er��vi�e can�rey an� ox m�re liens ar security i�ter�sts in its assets, iancludin� its ri�hts, abligations and be�ae�its in azac� to ���e ��a��rtuilzs� (�he "Cotlaiera!") tc� any l�nd��•(s) {"Secured Party��} providir►g %nancing ta Tra�lsferee, Ta�m tirn� to tinle, that the E"ratachising Authority agrees ihat cor�seni to �t transfer is hereby de�med approved if tt�� Cc��l�ateral is assi�;raed and trat7sfei�reel as a rusult ��' a fc,realasure; and i��; T`T Fi.7RT�-IEii RES�JI,V�17, that the rrancl�ise anci this Itesaiutian w�re and are adopted in acc�+rd��c� with #t�e n,�tic� ant� prpcedure recXuiren�cents oi't1�e taws af the �tate of Washi.ngtan �avernia�g the Fratachisinp ��zil�ority, anr� with the natice and praced�are requirernents prascribed by th� Franchising t�utl�arity> and �vera ai�d �rc a,s�c�pted in accoz•c�ance with and dc� nat c€�nt7ict �ri#h the laws, c�rdinanc�s, resolutians; and �3�; �'�" �{UkT"FIER I�ESbY,VEI�, t�iat the consent ta tr�nsfer herein provided shal! be effective upc�r� and c�nly effec�ive �oi�cu�reY�t witii the closin� of ttae tcansactions described in the F'ui°ahas� Agree�nent ar�d t.he subsc;que�t �ran�f�r of tll� assets relate� to the Franchise to 'T'ransferee an� Transferee shall natify the Franchisin� Aut�iorYty pz•c���ptdy upon the ciasiiig of su,ch transactia�ns. AD�)I'T��3 vy the Franct�isin� Autharity oz1 this lh day of ��p.�n��., i996. � Ctest'_., _m �'�4,�.Is ,„w f _ � GRAN'�' COUI`dT�" �,�,,,.�"' � `� .� 9 ,,, ! $y: i .� w_?�; w.�x.., hlame F'ritited _ Titi�: E��3'i5 1'<age 1 FCC FORM 394 RECEIPT I hereby aclalowledge receipt of two signed originals of FCC Form 394 "Application for I'ranchise Authority Consent to Assignment or Transfer of Control of Cab(e Televisiou Franchise" s�abmitted by Marcus Cable Associates, L.P. as Transferor/Assignor and Northland Cable Television, Inc. as Transferee/Assignee. I'ranchising Authority Name: Signature of Recipient: Printed Name: Date: BA90 NORTHIAND CG9BLE TELEVISION, INC, A subsldiary of Northland 7elecommunicatlons Corporatlon August 21, 1996 Grant County Commissioners 35 C Street NW Ephrata, WA 98823 Dear County Commissioners: 1201 � ���.��� �� ��� � � ���� E3UHhsu y, �(�Bu�Vb�,... . ...,,� �a1�f�M7 G�►UNiY,WASHIIdGTON Third Avenue, Suite 3600 Seattle, Washington 98101 (206) 621-1351 Northlai�d Cable Television, Inc, is pleased to a�mounce that Marcus Cable has entered into an agreement to sell to Northland its cable system serving the community serving Grant County. We are currently worlcing with the local cable system team, Marcus Cable, and community officials to ensure the proper transition. To do this, we lool< forward to worldng with you aud answering any questions or concerns you may have regarding Northland and our services. I hope this pacicage will serve to introduce otrr company as well as lay the groundworlc %r the cable fi�anchise transfer. Northland ai�d its affiliates have owned and operated cable systems in Washingtou since 1985 aud now provide service to over 20 Washington communities, including Port Angeles, Bainbridge Island, and La Comier. Northland provides high quality cable service and is responsive to the needs and desires of its custoiners. So you have more information about Northland, enclosed are the following: Two originals of a completed and signed FCC Porm 394. Under the FCC's rules, we are i•equired to provide this form to you. 2. The 1995 annual report of Northland Telecommunications Corporation, Noi�thland's parent. Also enclosed is ihe form of the consent resolution that we will present to the County at its next Board meeting. This resolution will allow Marcus to assign the cable franchise to Northland. We will have representatives of Northland available at the Board's next meeting to answer any questions. Because we loolc forward to operating the Grant Coui�ty system as sooii as possible we will request that the County adopt the resolution at this meeting. In tlie meantime, if you have any questions or need additional information, p�ease do not hesitate to contact the undersigned, V�ruly yor.trs, � Jolm Waechter Director -- Western Operations JAP/vs/BB66 Printed on recycled paper ����;��1� �. ������. ��-u���sj� ti;"��-��� ASSET PURCI3ASE AGREEMEI'�T between MA.RCUS CABLE ASS4CTATES, L,P. and NORTHLANA CA1�LE TELEVISION, INC. August 1, 1996 DAL02:109116.4 TABLE OF CONTENTS Page ARTICLE I - Purchase and Sale of Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 l.l Assets Subject to Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1.2 Excluded Assets ...................................................2 ARTICLE II Assumption of Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 2.1 Assuinption of Liabili�ies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 2.2 Excluded Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 ARTICLE III - Purchase Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 3.1 Purchase Price ....................................................4 3.2 �inancing Comrnitment or Purchase Price Deposit . . . . . . . . . . . . . . . . . . . . . . . 4 3.3 Payment of Purchase Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 3.4 Adjustinents to Purchase Price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 3.5 Final Adjustment Amount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 3.6 Transfer Taxes ....................................................7 ARTICLE IV - Representations and Warranties of Seller . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 4.1 Due Incorporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 4.2 Authorization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 4.3 No Breach of Statute or Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 4.4 Third-Party Consents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 4.5 Enforceability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 4.6 Assets ...........................................................8 4.7 Claims, Litigation and Disputes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . �. . 9 4.8 Service Rates .....................................................9 4.9 Cable Plant and Customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 4.10 Assumed Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . : : : . . . . . . . 9 4.11 Compliance With Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 4.12 Taxes, Fees and Utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 4.13 Franchises, Licenses and Permits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 4.14 FCC and rranchise Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 4.15 Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 4.16 Brokerage Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 ARTICL� V - Representations and Warranties of Buyer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 5.1 Due Incorporation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 5.2 Authorization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 5.3 No Bxeach of Statute or Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 5.4 Third-Party Consents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 DAL02:109116.4 -1- . � S.5 Ez�forceability ....................................................12 5.& Claims, Litigatian and Disputes . . . . . . . . . . . . . . . . . . . . . . . e . . . . . . . . . . . . . . 12 5.7 Bro�Cerage Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 5.$ Buyer's Investigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . < . . . . . 12 ARTICLE VI - Seller's Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 6.1 Inspection .......................................................13 6.2 Conduct af Business Pcndin� Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 6.3 HSR Act ........................................................i4 6.4 Third-Party Cansents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 6.S Further Assurances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 6.6 Confidentiality . ..... . ...... .. .... .. . .. ........ ... ... .. ... ........ 14 6.7 Commercially R�asonablc Efforts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 ARTICLE VII - Covenants of Buyer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 7.1 Third-Party Consents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 7.2 HSR Act ........................................................15 7.3 Discharge af Assumed Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . e . . . . . . 15 7.4 Canfidentiality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . � 5 7.5 Commereially Reasonable Efforts . . . . . . . . . . . . . . . . . . . > . . . . . . . . . . . . . . . . I S 7.6 Access .........................................................16 7.7 Further Assurances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . e . . . . . . . . . . . < . . . . . . Z 6 ARTICLE VIII - Conditions to Seller's Qbligations . . . . . . . , . . e . . . . . . . . . . . . . . . . . . . . . . . ib 8.1 Buyer's Representations and VJarranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . l6 8.2 Buyer's Covenants ..............................>.................16 8.3 Consents ........................................................16. 8.4 Material Adverse Cllange . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 8.5 No Material Purchase Price Adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 8.6 Buyer's Deliveries . . � . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 ARTICLE IX - Conditions ta Buyer's Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 9.1 Cansents ........................................................17 9.2 Seller's Itepresentations and Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 9.3 Seller's Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 9.4 Materiat Adverse Change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . o . . . . . . 1$ 9.5 Selter's Deliveries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 ARTICLE X - Closing and Terminatian . . . . . . . . . . . . . . . . . . . . . . o . . . . , . . . . . . . . . . . . . o . 18 10.1 Closzng .........................................................18 10.2 Tern�ination .....................................................18 DAL02:109116.4 -11- � ARTICLE XI - Seller's Deliveries at Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 . 11.1 Instruments of Conveyance . . . . . . . . . . . . . . . . . . . . . . . . . . • • • . • • • • • • • • . . . 19 11.2 Bring-Down Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 11.3 Secretary's Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 11.4 Opinion of Cou:nsel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 11.5 Opinion of FCC Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 11.6 Approvals and Consents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 ARTICLE XII - IIuyer's Deliveries at Closing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 12.1 Purchase Price ...................................................20 12.2 Assignment and Assumption Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 12.3 Bring-Down Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 12.4 Secretary's Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 12.5 • Opinion of Counsel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 ARTICLE XIII - Retained Franchises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 13.1 Retained Franchises . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 ARTICLE XIV - Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 14.1 Survival of Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . 23 14.2 Indemnification by Seller . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 14.3 Indemnification by Buyer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . e . . . . . . 23 14.4 Defense of Claims . . . . . . . . a . . . . . . . . . . . . . . . . . . . . . . . . . . . . . o . . . e . . . . . 23 14.5 Tax Effect ..................................................<....24 ARTICLE XV m Miscellaneous . . . . . . . . . . . . . . . .�. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 15.1 Expenses .......................................................24 15.2 Governing Law ..................................................24 15.3 Notices .........................................................24 15.4 Definition of Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 15.5 Headings, Gender, Person . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 15.6 Counterparts......o ..............................................26 15.7 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 15.8 Modifications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 15.9 Assignment and Binding Ef%ct . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 15.10 Schedules .......................................................26 DAL02;1091i6.4 -111- INDEX OF SCH�DULES Schedule 1.2 Schedule 3.7 Schedule 4.4 Schedule 4.6 Schedule 4.7 Schedule 4.8 Schedule 4.9 Schedule 4.10 Schedule 4.11 Schedule 4.13 Schedule 4.14 Schedule 4.15 INDEX OI' EXHIBITS Exhibit A Exhibit B Exhibit C Exhibit D Exhibit E Exhibit F Exhibit G Excluded Assets Allocation of Purchase Price Consents Real Estate and Liens and Other Encumbrances Claims, Litigation and Disputes Service Rates Cable Plant and Customers Assumed Contracts Compliance with Laws Franchises and FCC Licenses FCC and Franchise Reports Financial Statetnents Purchase Price Deposit Escrow Agreement Opinion of Balcer & Botts, L.L.P. Opinion of Seller's Communications Counsel Opinion of Cairncross & Hempelmann Retained Franchises Escrow Agreement Retained Franchises Management Agreement Elements of a Signal Agreement DAL02:109116.4 -1V- ASSET PURCHASE AGREEMENT This Asset Purchase Agreement is made arid entered inta this 1 st day of August, 1996 by and between Marcus Cable Assoc�ates, L.P., a Delaware liznited partnership {"Seller"}, and Northland Cable Television, Inc., a Washington corporation {"Buyer"}. WITNESSETII VJHEREAS, Seller awns and operates three cable teievisiotz systems serving the eommunities of Moses Lake, Othella, Ephrata and Soap Lake and nearby areas o£ Grant County and Adams County, Washington (the "Systems"); and V'�HEREAS, Seller deszres to sell and Buyer desires to i�uy the Systems; NOW TI-�EREI�C}RE, the parties hereta agree as fallows: ARTICLE I �'urchase and Sale of Assets 1.1 Assets Subjeci to Agreement. Selier shall sell, assign, transfer, convey and deliver to Buyer, and Buyer shall purchase, assume and acquire from Seller, ali of Seller's right, title and in.terest in and to the following assets (the "Assets") as the same shall exist an the Ciosing Date (as defined below), provided that the Assets shall not include any oi the assets described in S�ction 1,2: (a) Accounts Receivable. All of Seller's accounts receivable related to the Systems as af fihe Clasing Date; (b) Inven:torv. All of Seller's operating inventory, supplies and other inventories of every kind and nature related to providing cable television services to Customers , The terzn "Customer" as used in this Agreement zneans any person who is paying Seller far cable television services delivered by zneans a�'the Systems; {c} Reai Estate. The real estate, including the land, buildings and other improvements thereon, descrzbed in Sehedu�e 4.b.hexeto {the "Real Estate"}. (d) _ uz ment. All equipment and other persanal praperty of S�ller that is an integral part of the Systems (the "Equipznent"}, including: headend equipment, i�cludin� towers and originatian, transmissian and electronic equipment; distribution equipment, inciuding trunk, dist�ribution and drop lines, amplifiers, power supplies, conduit, vauits, pedestals, grawnding and pale haz�dware; subscriber devices, inciuding canverters, DALQ2:109116.4 encoders, behind television transformers and taps; installer and technician equipment, including vehicles, tools and test equipment; and cable data terminals and modems; (e) Permits and Licenses. Seller's cable television franchises (the "Franchises"); Federal Communications Co�unission ("FCC") permits, licenses and authorizations (the "FCC Licenses") related to the Systems, all as set forth on Schedule 4.13 hereto; state and county highway crossing permits; and railroad crossing permits; (� Assumed Contracts. Seller's real estate leases (the "Real Estate Leases"), Seller's equipment leases (the "Equipment Leases") and Seller's pole attachment agreements (the "Pole Attachment Agreements") related to the Systems, all as set forth on Schedule 4.10 hereto, Seller's agreements with Customers for cable television service as of the Closing Date (the "Customer Agreements") and Seller's unfilled service orders for services to Customers or prospective Customers. The Franchises, FCC Licenses, Rea1 Estate Leases, Equipment Leases, Pole Attachment Agreements, Subscriber Agreements and unfilled service orders are referred to herein as the "Assumed Contracts". and (g) Intangible Propertv. Seller's Customer lists and Custonner records; construction and engineering maps and data, schematics and blueprints; books and financial records pertaining to the operation of the Systems; correspondence and documents pertaining to Customers, governmental authorities and other third parties relevant to the Systems' ongoing relationships with Customers, governmental authorities and other third parties; prepaid expenses to the extent such prepaid expenses result in an adjustment to the Purchase Price (as defined below) under Section 3.3 hereof. 1.2 Excluded Assets. Notwithstanding anyfihing contained in Section 1.1 hereof to the contrary, the Assets will not include any of the following ("Excluded Assets"): (a) Cash. Cash, certificates of deposit, bank or savings and loan accounts, U.S. government securities, any other marketable securities of any kind or nature or notes receivable. (b) Claims. Claims of Seller against third parties, other than System accounts receivable as provided in Section 1.1(a). (c) Programmin� Contracts. Programming contracts used by Seller in tk�e Systems other than those agreements which pernut or require the retransmission of broadcast signals, to the extent necessary for Buyer to operate the System. (d) Bonds and Insurance. Bonds and insurance policies furnished by Seller pursuant to any Franchise, Pole Attachment Agreement or other authorization or agreement, DAL02:109116,4 2 (e) Nonexclusive Use. Assets af Seller nai solely used or reserved solely for use in Seller's awnership ar aperation of tl�e Systerns. {� Name. The "Marcus" name. (g} CJther. A11 other items described in Schedule i.2 hereto. AKTICLE II Assumption of Liabilities 2.1 Assumption of Liabilities, Buyer shalI assume, pay, perform and discharge, az�d forever indemnify and l�old Seller and all of Seller's officers, directors, affiliates, shareholders and partners harmless against and fram the following liabilities and obligations of Seller (tlae "Assumed Liabilities"); provided that the Assumed Liabilities shall not include any of the liabilities described in Section 2.2 hereaf: (a} Assumed Contracts. All of Seller's liabilities and o�ligations under the Assumed Cantracts to be satisfied ar perfarmed on or after the Closing Date. {b} Current at�d Accnzed Liabilities. A11 of Seller's accounts payable reiatzng to the operation of the Sysiezns remaining unpaid an the Closing Date and accr�zed current liabilities as of the Closiz�g Date ta the extent such accounts payabie and accz�ued current liabilities result in an adjustment to the Purchase Price under Sectioa� 3.3 hereof. (c) Operatin� Liabil'zties. All liabilities, abizgations, costs and expenses with respect to claims arising in any way with respect to the operation of the Systems on or after the Closing Date, including, without limitation, any and all franehise fees, pole attachment rentals, copyright fees, federal, state ox local income, sales, use, excise, property or other taxes oi• tort claims arising out of or attributable to the conduct of the Systenns on or after the Closing Date. 2.2 Excluded Li�bilities. Notwithstanding anything contained in Section 2.1 hereof to the contrary, Buyer shall not assume and shall not be obligated to pay, perfarrn ar discharge any af Seller's fallowing liabilities: {a} Operating Liabilities. Except to the extent specifically assumed by Buyer under paragraph 2.1(b) hereto, any liabil'zties, obligatians, costs azad expenses wzth respect ta clazms ariszng zn any way wiih respect to the aperation af the Systems prior to the Closzn� Date, including witi�out iimitation any and all franchzse fees, pole attaehment rentais, capyright feas, federal, state ar lacal income, saies, use, excise, praperty, employment ar other taxes or tort claitns arising out of the �onduct of the Systems before the Ctasing 13ate. r�ni,ox:ro9� i6.a (b} Taxes. Arly of Se31er's liabilities arzd obligations far any federal, state ar lacal incame taxes resuiting from the sale of the Assets hereunder. ARTICLE rII Purchase Price 3.1 Purchase Price. The �urchase price for the Assets (the "�'urchase Price") sha11 �e subject to the adjustments set �orth in Section 3.3 hereof. 3.2 Financin� Commitrnent or Purcl�ase I'rice De�osit. 13uyer sliall use commercially practicable efforts to abtain Firm Cammitments (as defined herein below) providing in the aggregate foz° thc arnaunt af the Purchase Price plus reasonable and customary t'ees at�d expenses associated with the acquisition oi the Assets and the fmancin� thereof (the "Amount to Be Financed"), and shall give notice to Seller together with copies of the �irm Committnents upan receiving the same. In the event that $uyer shall not have received Firm Comznitments in the Amaunt ta Be Financed within forty-five {4S days) of the date of this Agreement; Buyer may either termiz�ate this A reement ursuant to Section 102(b} or deposit the amount of���� �.���� (the "Purchase Price Deposii"} by federal wire transfer to an accaunt destgnated by Texas Cotnmerce Bank, N.A. (the "Purchase Price Deposit Escrow Agent"') in accordance with the terms of an escrow agreemeni among Buyer, Selier and the Purchase Price Deposit Escrow Agent substantiaily in the farm attached hereto as Exhibit A, and shall nati:Cy Se11er that it has made the Purchase Price Depasit and provide Seller with canfirmation by th.e Purchase Price T�eposit �scxow Agent of the same, If Buyer shali faii to give no�ice to Seller in accordan.ce with the tast preceding sentence, this Agreement shall be deemed terminated. For puxposes of this Agreennent, the teram "Firm Commitment" shall mean (i) in the case of equity, a bindin�;, commercially reasonable, executed commitment letter(s) or subscription agreement(s) customary for transactions of this type from an investor or inv�stors reasonably acceptable to Seller to provide, subject ta usual terms and conditions, equity contribution(s) in the arnount stated therein, and (ii) in the case of debt financing, a binding, commercially reasonable, executed cammittnent letter from a financial institution reasonably acceptable to Seller to �xovide, subject ta usual terrns and conditions, senior debt iznancing in the amount stated therein. 3.3 Payment of Purchase Priee. Buyer shall pay the Purchase �'riee, less any payment ta Seller af the Purchase Price Deposit, to Seller an the Closing Uate by federal wire transfer to an accaunt designated by Seller in writing at Ieast �wa days priar to the Clasing Date. DAL02:109116.4 � 3,4 Adjustments to Purchase Price. Tlle Purct�ase Price will be adjusted as follows: (a} Revenues. The Purchase Price shall be adjusted downward ta the extent that the average monthly revenue frt�m basic service, cable program service, pay programming and equzpment for the Systems far the month itnmediately precedin the manth in which the Clasing occurs (the "Actual I2ecurring Revenue") is less than {the "Target Recurring Revenue"). The amot�nt af any such Pt�rchase Pricc reductton s a be a dollar amount equal to the product of �z} the positive remainder, if any, of the Target Recurring Revenue less the Actual Recurring Revenue multiplred by (ii) 66.67. (b) Accaunts Receivable. The Purchase Price shall be increased by an arnount equal ta the sum of the Customer Receivables (as hereinafter defined) and the Advertising Receivables (as hereinafter defined) an Seller's books as af the Closing Date. "Custorner Receivables" means the aggregate accounts receivables due frozn Customers which will have been autstanding no more than two months as of the Closing Date. "Ad�vertising Receivables" means the aggregate accounts receivables due from �dvertisers which have been outstanding no more than three months as af the Closing Date. {c} P aratians and T�eposits. The Purchase Price shalt be increased far prepaid expenses {exc�uding, however, prepaid ex�enses relating to any contracts or agreements that wiil not be assumed by Buyer or relating to Excluded Assets), and sha11 be reduced far accrued expenses and prepaid income, ali as detennined in accordance with generally accepted accounting principles, ta reflect the principle that, except as qualified in this Sectaon, ali incom� and expenses attributable to th� �yst�ms for the period before 12:00 midnight on the izrornin.g of the Closing Date are far the account of Seller, and a1i income and expenses att�zbutable to the Systems far the period after 12:00 midnight on the morning of the Ciosing Date are for the account of Buyer. Payroll expenses, including accrued wages and vacation and sick pay for Seiier's employees shall be paid by Seller to tY�.e Clasing Date and sha11 not be prorated. The Purchase Price shall be increased by the amounC of any monies relating to the Systems that are nn deposit with third parties as security for Seller's �erformance of the Assumed Contracts as of the Closing Date. The Purchase Price shall be decreased by the an�ount of any monies held by Seller as customer deposits, liability for which will be assumed by Buyer. Seller shall grepare and deliver to Buyer, at least five days prior tn the Clasing Date, a statement (the "Estimate Statement") showing the amount reasonably estimated by Seller, in good faith, to be the net aznount, if anyg of the adjustments provided for in this Sectian. Prior to the Closit�gp Seller shali pravide Buyer with copies af ar reasonahie access ta such baoks and records as Buyer may reasonably request for puzposes af verifyiz�g the adjustments set forth in th� Estimate Statement. Selier and Buyer agree to wark together in gaod faith to resolve on or before the Closing Date any disagreement with respect to any matter set farth i� the Estimat� Statement. Th� Pt�rchase Price paid by Buyer at Clasing shail be increased or decreased by the estzznated DAL02;109116.4 5 adjustment amount set forth in the Estimate Statement, adjusted for any changes agreed to by Buyer and Seller prior to Closing, and shall be further adjusted after the Closing, if necessary, pursuant to Section 3.4. 3.5 Final Adjustment Amount. (a) Within 45 days after the Closing Date, Seller shall prepare and deliver to Buyer a statement (the "Final Statement"), setting forth Seller's good faith determination of the actual adjustment to the Purchase Price (the "Final Adjustment Amount"). During the 15-day period following delivery of the Final Statement to Buyer, Seller shall provide Buyer with access during normal business hours to any books, records, working papers or other information reasonably necessary or useful in the review of the Final Statement and the calculation of the Final Adjustment Amount to enable Buyer to verify the accura�y of the Final Statement. The Final Statement shall become final and binding upon all parties hereto on the sixteenth day following delivery thereof (without counting such day of delivery) to Buyer unless the Buyer gives written notice of disagreement wikh the Final Statement (a "Notice of Disagreement") to Seller pr�or to such date. Any Notice of Disagreement shall specify in reasonable detail the nature of any disagreement so asserted and relate solely to the review of the Final Statement and the calculation of the Final Adjustment Amounte (b) If a Notice of Disagreement is given by Buyer in a timely manner, then the Final Statement shall become final and binding upon all parties hereto on the earlier of (x) the date Seller and Buyer resolve in writing any differences they may have with respect to all matters specified in the Notice of Disagreement and (y) the date all disputed matters are finally resolved in writing by the Arbitrator (as hereinafter defined). During the 15-day period following tne delivery of a Notice of Disagreement, Seller and Buyer shall seek in good faith to resolve any differences which they may have with respect to any matter specified in th�e Notice of Disagreement and each shall provide the other with reasonable access to any books, records, working papers or other information reasonably necessary or useful in the preparation or calculation of (i) the Final Adjustment Amount, (ii) the Final Statement, or (iii) the Notice of Disagreement. At the end of such 15-day period if there has been no resolution of the matters specified in the Notice of Disagreement, Seller and Buyer shall submit to an arbitrator (the "Arbitrator") for review and resolution any and all matters arising under this Section which remain in dispute. The Arbitrator shall be Coopers & Lybrand, or if such firm is unable or unwilling to act, such other nationally recognized independent public accounting firm as shall be agreed upon by Seller and Buyer. The Arbitrator sha11 render a decision resolving the matters submitted to the Arbitrator within 30 days following submission thereto (or as soon thereafter as reasonably practicable). The fees and expenses of the Arbitrator pursuant to this Agreement shall be borne by the party identified by the A.rbitrator as the unsuccessful party. DAL02:109116.4 6 (c) If as a result of any adjustments made pursuant to tliis Section 3.4, Buyer is finally determined to owe any amount to Seller, Buyer shall within 5 days pay such amount to Seller, and if Seller is finally determined to owe any amount to B�yer, Seller shall within 5 days pay such amount to Buyer. Any such payments shall be made by federal wire transfer of immediately available funds to an account designated in writin.g by the party receiving payment. 3.6 Transfer Taxes. Any sales, use, transfer, recording and other siix�.ilar ta�ces and filing fees due as a result of the transactions provided for herein shall be paid by Buyer. ARTICLE IV Renresentations and Warranties of Seller Seller represents and warrants to Buyer as follows: 4.1 Due Incor�oration. Seller is a limited partn.ership duly orgazuzed and validly existing under the laws of the State of Delaware and has the partnership power and authority to conduct its business as heretofore conducted and to own or hold under lease its properties and assets. Seller is duly qualified and i.n good standing in every jurisdiction where the character of the properties owned or leased by, or the nature of the business conducted by, Seller makes qualification to do business as a foreign entity necessary, except such jurisdictions where a failure to so qualify could nat reasonably be expected to have a material adverse effect upon Seller, its properties or business. 4.2 Authorization. Seller has full �artnership power to executa and deliver this Agreement and to perform hereunder, and the execution, delivery and performance hereof and the consummation of the transactions contemplated hereby have been duly authorized by all requisite partnership action. No other or further partnership action by Seller or its partners is required in cox�nection herewith. � 4.3 No Breach of Statute or Contract. Subject to the recaipt of the approvals de5cribed on Schedule 4,4 hereto, neither the execution and delivery of this Agreement, nor compliance w�th the terms and provisiozis hereof, on the part of Seller will (a) cause S�ller to breach any statute, ordinance or regulation of any governmezital authority, (b) conflict with or result in a breach of any of the terms, conditions or provisions of any agreement or instrument to which Seller is a parry or by which it may be bound, or constitute a defau�t thereunde�r or (c) other than any liability for any income taxes which may be payableby Seller or its partners as a result of theconsummation of the transactions contemplated hereby, result in the creation of any materiallien, charge or encumbrance of any nature whatsoever, or give to others any interest or rights, including rights of termination or cancel�ation, in or with respect to any of Seller's properties or assets, which DAL02:109116.4 7 breach, conflict, default or creation would have a material adverse effect on the financial condition or business operations of the Systems. 4.4 Third-Part,y Consents. Each person whose consent to the execution, delivery or performance of this Agreement by Seller is legally or contractually required is identified on Schedule 4.4 hereto, to the extent that the failure to obtain such consent would have a material adverse effect on the financial condition or business operations of the Systems or the ability of Seller to consummate the transactions contemplated hereunder. 4.5 Enforceabilitv. This Agreement has been duly executed and delivered by Seller, and constitutes a valid and binding obligation of Seller enforceable in accordance with its ternns, except as may be limited by ba�lkruptcy, insolvency, reorganization, �raudulent conveyance, moratorium or other similar laws affecting creditors' rights generally or by the application of general principles of equity. 4.6 Assets. The Assets are in good working condition. The Assets include all of the rights and properties reasonably necessary to operate the Systems as currently operated and to provide cable television service to the Systems' Customers. Seller has good and marketable title, free and clear of any mortgage, lien, restriction, encumbrance or adverse claim to all of the Assets, except for (a) liens for general taxes and assessments for the year of Closing and subsequent years; (b) minor encumbrances which. do not materially affect the transferability, present use or value thereof; (c) mortgages, judgm.ents and other liens to be satisfied at or before Closing; (d) the liens and exceptions listed on Schedule 4.6 hereto; and (e) in the case of the Real Estate and real estate covered by the Real Estate Leases, (i) the Real Estate Leases, (ii) municipal and zoning ordinances, (iii) such legal highways as do not interfere with the present use of the property, (iv) standard title insurance exceptions and (v) recorded easements for public utilities and governmental authorities, water rights, recorded building and use restrictions and covenants, and other minor encumbrances, provided none of the foregoing materially interfere with the present use of the property subject thereto. Except as disclosed on Schedule 4.6 hereto, Seller is the sole and exclusive owner of the Assets (other than leased Assets) and does not use any of the Assets (other than leased Assets) by the consent of any other person. To Seller's knowledge, the Real Estate and the real estate subject to the Real Estate Leases conforms in all material respects with applicable covenants in all building, zoning, environmental, land use and other laws, ordinances, codes, orders and regulations which affect the Real Estate and the real estate subject to the Real Estate Leases. To Seller's knowledge, all necessary occupancy and other certificates and permits for the present lawful use and occupancy of the Real Estate and the real estate subject to the Real Estate Leases, and the Equipment thereon, have been issued. All notices or orders to correct violations of law, ordinances, codes, orders or regulations issued by any state, county, municipal or a local department having jurisdiction against or affecting any of the Real Estate during Seller's occupancy or use thereof have been complied with. All such Real Estate is accessibl� from public roads and has all utilities and other services necessary to the conduct of the Systems. To Seller's knowledge, there does not exist any standing order, decree, injunction, judgment or writ of any court which affects, concerns or attaches to the Assets. To Seller's knowledge, no legal or administrative action is threatened or pending which could ripen DAL02:1091 I6.4 g into a judgment or give rise to any such order, decree, injtuzction or writ affecting the Assets in any material respect. , 4.7 Claims Liti�ation and Disputes. To Seller's knowledge, except as disclosed in Schedule 4.7 hereto, and except for actions, proceedings or investigations affecting the cable television industry in general, there is no claim or litigation or investigative proceeding pending or threatened (a) against Seller to compel Seller to make any change in the character or location of any of the Assets or (b) which would tnaterially affect (i) Seller's ability to perform hereunder, (ii) the Assets, (iii) the rights granted under the Assumed Contracts, (iv) the financial condition or business operations of the Systems or (v) the ownership, use, maintenance or operation oi the Assets and the Systems by Buyer. Except as disclosed in Schedule 4.7 hereto, there is no strike or unresolved labor dispute affecting any of Seller's employees. . 4.8 Service Rates. Schedule 4.8 hereto sets forth Seller's rates, as of June 1, 1996, for broadcast basic, cable showcase, converter rentals, remote control device rentals and installation and collection fees for each of the cocnmunities served by the Systems. 4.9 Cable Plant and Customers. Schedule 4.9 hereto sets forth approximate information as of the date of this Agreement with respect to (a) the number of Seller's Customers and (b)(i) the number of homes passed, (ii) fully completed miles of plant, aerial and underground and (iii) total homes in service areas. All of the distribution plant described in Schedule 4.9 hereto is fully served by existing headends. 4.10 Assumed Contracts. The Assumed Contracts, together with Seller's state and county highway crossing permits and Seller's railroad crossing pertnits, together with Seller's signal carriage agreements and together with any easements created under the Cable Communications Policy Act of 1984, include all agreements necessary for the operation of the Systems. Except as disclosed in Schedule 4.10 hereto, all of the Assumed Contracts necessary for the operation of the Systems are in good standing, valid and effective as to Seller, and there has been no material breach, violation or default or notice or claim of material breach, violation or default by any party thereto known to Seller, and Seller is not aware of any event which has occurred that with notice or lapse of time or both could constitute a material breach, violation or default by any party thereto. 4.11 Compliance With Laws. Except as disclosed on Schedule 4.11, the Systems are in compliance with all federal, state and local laws, rules and regulations applicable to the Systems, the applicable rules and regulations of the FCC, and the licensing division of the United States Copyright Office and the Federal Aviation Adnninistration with respect to air navigation hazards, except where the failure to be in compliance would not have a material adverse effect on the financial condition or business operations of the Systems. To Seller's knowledge, no claims or investigations alleging any violation by Seller of any such laws, rules and regulations have at any time been made or settled. DAL02:109116.4 9 4.12 Taxes. Fees and Utilities. The Seller has filed with appropriate agenczes all tax returns required by law to be filed by Seller with respect to the existence or operations of the Systems, except where the failure to file would not have a material adverse effect on the iznancial condition or business operations of the Systems. Such tax returns were properly prepared and reflected in all material respects the full amount due thereunder. No audit of any federal, state or municipal retums or other tax returns filed by or on behalf of Seller relating to the operation of the Systems is in progress or, to Seller's knowledge, pending or threatened. There exists no unpaid federal, state or local income or other tax with respect to the operation of the Systems, except for accrued taxes not yet due and payable. The reserves for taxes made by Seller are adequate to cover the tax liabilities of Seller as of the date thereof and nothing has occurred subsequently to make any such reserves inadequate. Seller has paid in full any and all license fees, copyright fees, franchise fees, business permit costs, pole attachment fees, unemployment and worker's compensation insurance contributions and utility bills required to be paid. 4.13 Franchises, Licenses and Permits. Schedule 4.13 contains a true and complete list of all Franchises and FCC Licenses needed to operate the Systems. Except as contained in the Franchises, the Franchises are subject to no conditions or restrictions other than such as may exist by virtue of acts of Congress, the rules and regulations of federal regulatory agencies or laws and rules adopted by the various local governing authorities of the State of Washington. Other than orders, actions, proceedings or investigations generally applicable to the cable television industry in the United States or in the State of Washington, to the Seller's knowledge there are no proceedings pending which would materially and adversely affect the validity of the Franchises or the terms and provisions thereof. Except as disclosed in Schedule 4.13 hereto, the Systems are currently in compliance in all material respects with all of the Franchises. Schedule 4.13 hereto also contains a true and complete list of all currently outstanding licenses, authorizations, permits and orders issued by the FCC to Seller and which are required by the FCC for the current operation of the Systems in accordance with FCC rules and regulations. Except as contained in the FCC Licenses, the FCC Licenses are subject to no conditions or restrictions other than such as may exist by virtue of acts of Congress, the rules and regulations of federal regulatory a.gencies or laws and rules adopted by the various local governing authorities of the State of Washington. Except as disclosed in Schedule 4.13 hereto, the Systems are in material compliance with the provisions of the FCC Licenses. 4.14 FCC and Franchise Reports. Seller has filed or caused to be £'iled all material reports and statements required to be filed with the FCC and franchising authorities with respect to the Systems, and such reports are accurate and complete in all material respects, and, except as disclosed in Schedule 4.14 hereto, all tests required by the regulations of the FCC to be conducted, have been conducted at the times and places so required, and the records pertaining thereto, all of which have been retained as required by law, accurately and completely reflect, in all material respects, the results of such tests. The Seller has filed all m.aterial notices and reports required to be filed with the United States Copyright Office with respect to the Systems, and such reports are accurate and complete in all material res�ects and all fees required to be paid with respect to the Systems under the terms of the United States Copyright Revision Act of 1976 have been properly DAL02:109116.4 1 O computed and paid by Seller, in all material respects. All required certificates, permits and clearances from governmental agencies with respect to all of Seller's towers, microwave transmitters, earth stations, business radios, CARS licenses, if any, and frequencies carried by the Systems have been obtazned, except where the failure to obtain such certificates, permits and clearances w.ould not have a material adverse effect on the iinancial condition or business operations of the Systems. 4.15 Financial Statements. Attached hereto as Schedule 4.15 are unaudited statements of operations of the Systems for the two months ended December 31, 1995 and the four months ended April 30, 1996, each of which was prepared from the books and records of account of Seller kept in the normal course of business and in accordance with generally accepted accounting principles, consistently applied in accordance with Seller's past practices and each of which presents fairly, in all material respects, the results of the Systems' operations for the period covered thereby. The data included in the stateznent of operations %r the period ended December 31, 1995 were included in Seller's audited consolidated statement of operations for 1995. Since April 30, 1996, there has been no material adverse change in the business operations of the Systems. 4.16 Brokera eg Fees. Except for Waller Capital Corporation ("Waller"), whose fee will be paid by Seller pursuant to a separate agreement, no person or other entity acting on behalf of Seller is entitled to any brokerage or finder's fee or commission in connection with this Agreemento ARTICLE V Representations and Warranties of Bu,�r Bu�er represents and warrants to Seller as follows: 5. X Due Incorporation. Buyer is a corporation duly organized and validly existing under the laws of the State of Washington and has the corporate power and authority to conduct its business as heretofore conducted and to own or hold under lease its properties and assets. Buyer is duly qualified and in good standing in every jurisdiction where the character of the properties owned or leased by, or the nature of the business conducted by, Buyer makes qualification to do business as a foreign corporation necessary, except such jurisdictions where a failure to so qualify could not reasonably be expected to have a material adverse effect upon Buyer, its properties or business. 5.2 Authorization. Buyer has full corporate power to execute and deliver this Agreement and to perform hereunder, and the execution, delivery and performance hereof and the consummation of the transactions contemplated hereby have been duly authorized by all requisite corporate action. No other or further corporate action by Buyer, its Bo2rd of Directors or shareholders is required in connection herewith. DAL02:109116.A 1 1 5.3 No Breach of Statute or Contract. Neither the execution and delivery of this Agreement, nor compliance with the terms and provisions hereof, on the part of Buyer will (a) cause Buyer to breach any statute, ordinance or regulation of any governmental authority, domestic or foreign, or (b) conflict with or result in a material breach of any of the terms, conditions or provisions of an agreement or instrument to which Buyer is a party or by which it may be bound, or constitute a default thereunder, which breach, conflict, default or creation would have a material adverse effect on the f nancial condition or business operations of Buyer. 5.4 Third-Partv Consents: - Each �erson whose consent to the execution, delivery or performance of this Agreement by Buyer is legally or contractually required has been obtained. 5.5 Enforceabilitv. This Agreement has been duly executed and delivered by Buyer, and constitutes a valid and binding obligation of Buyer enforceable in accordance with its terms, except as may be limited by b�ilcruptcy, insolvency, reorganization, fraudulent conveyance, moratorium or other similar laws affecting creditors' rights generally or by the application of general principles of ec�uity. 5.6 Claims, Litigation and Disputes. There is no claim or litigation or investigative proceeding pending or threatened against Buyer which would materially affect Buyer's ability to perform hereunder. 5.7 Brokera e� Fees. Except for Waller, no person or other entity acting on behalf of Buyer is entitled tio any brokerage or finder's fee or commission in connection with this Agreement. 5.8 Buver's Investi�ation. Buyer hereby acknowledges that it has conducted an investigation of the physical plant of the Systems which investigation included evaluation of the condition and performance of the physical plant. Notwithstanding anything in this Agreement to the contrary, Buyer acknowledges that it is accepting the Assets in their present conditions and locations and with their present operating capabilities. Buyer acknowledges that Seller makes no warranty, express or implied, as to the condition of the Assets except that Seller does represent that the Assets and Systems are in good working condition. Buyer has not relied upon, and Seller shall not be liable for or bound in any manner by, any express or implied verbal or written information, warranties, guarantees, promises, statements, inducements, representations or opinions pertairung to the Systems or the Assets, except as nnay be contained in this Agreement and certificates delivered hereunder. ARTICLE VI Seller's Covenants Except and to the extent Buyer may otherwise permit in writing, Seller covenants and agrees as follows: DAL02:109116.4 12 6.1 Inspection. Between the date of this Agreement and the Closing, Seller shall give to Buyer,,its ofiicers, agents, employees, counsel, accountants, et�gineers and other represen- tatives, reasonable access to all the premises and books and records relating to the Systems and, to the extent permitted by law, cause Seller's ennployees to furnish to Buyer such information related to the Systems as IIuyer shall from time to time reasonably request; provided, however, that any such investigation shall be conducted (a) through a corporate officer of Seller, (b) during normal business hours and (c) in such a manner as to not unreasonably to interfere with the operation of the Systems by Seller. 6.2 Conduct of Business Pendin C� losing. Until the Closing, Seller sl�all continue to operate the Systems diligently and substantially in the manner as heretofore conducted, and shall not make or initiate any unusual or novel methods of purchase, sale, management, accounting, construction or operation, or malce any adjustments in the pricing of its services not consistent witl� Seller's past business practices in connection therewith. Seller shall use commercially reasonable efforts to preserve the Systenn's existing business relationships with its Customers, suppliers, governmental authorities, employees and others having business relations with Seller in connection with the Systems. Without limiting the scope of the foregoing, Seller shall: (a) Use, preserve and maintain the Assets on a basis consistent with past practice and keep the Assets in good working condition; (b) Maintain adequate insurance covering the Assets in effect as of the date of this Agreement; (c) Pay all debts and obligations incurred by it in the operation of its business in the ordinary course of business consistent with past practice; (d) Not commit any act or omit to do any act, nor permit any act or omission to act, which may cause a material breach of any of the Assumed Contracts; (e) Maintain its books, accounts and records in the usual manner and on a basis consistent with past practice; (� Not enter into any agreement or agreements for the sale of a material amount of any of the Assets except for sales of Equipment provided any item of Equipment sold is replaced with an item of Equiprnent of like value and quality unless such item of Equipment is no longer necessary for the operation of the Systems; (g) Not decrease any of its Customer rates or conduct any sales or marketing programs other than marketing programs consistent with past practices; provided, however, that this Agreement shall not preclude Seller from (i) seeking usual and ordinary rate increases or (ii) decreasing rates in accordance with applicable laws, rules and regulations; and DAL02:109116,4, 13 (h) Bill Customers on a basis consistent with past practices, sending out bills in the nozmal monthly routine. 6.3 HSR Act. Seller agrees to make an appropriate filing of a Notification and Report Form pursuant to the Hart-Scott-Rodino Antitrust Improvennents Act of 1976, as amended (the "HSR Act") with respect to the transactions contemplated hereby within 15 d�ys after the date o� execution of this Agreement and to supply promptly any additional information and documentary material that may be requested pursuant to the HSR Act. Subject to the other provisions of this Section 6.3, the Seller will not take any action that will have the effect of delaying, impairing or innpeding the receipt of any required approvals or consents or the termination of any waiting periods. 6.4 Third-Partv Consents. Seller shall give all notices to governmental authorities and other third parties required to be given by it under the Assumed Contracts or otherwise in connection with the transactions contemplated hereby. In order to facilitate the orderly assignment and transfer of all rights, privileges and Franchises necessary to own and operate the Systems, and to facilitate the securing of all required and necessary approvals by the franchising audiorities or any other governmental authority, Seller shall proceed after the execution of this Agreement, to prepare, file and prosecute each request and application therefor together with such znfortnation as may be necessary and appropriate to effect such approvals. In obtaining such approvals, Seller may agree to commercially. reasonable non-material changes to such Franchises. Nothing herein shall require the expenditwre or payment of any monies (or than in respect of normal and usual filing fees) or the giving of any other consideration by Seller in order to obtain any of such approvals. 6.5 Further Assurances. Seller will at any time after the Closing, at the reasonable request of Buyer, execute any and all such further assurances as Buyer may reasonably request in order to carry out the transactions contemplated hereunder. 6.6 Confidentialitv. Seller acknowledges that Buyer would be irreparably dam.aged if confidential information concerning the business and affairs of Buyer were disclosed to or utilized on behalf of any person not a party to this Agreement. Seller covenants and agrees that it will not, at any time directly or indirectly, except in connection with the transactions contemplated hereby or to the extent required by law, make use of or divulge, or permit any of its agents or employees to make use of or divulge, nonpublic information concerning the business, financial or other affairs of, or any of the methods of doing business used by Buyer. 6.7 Commerciallv Reasonable Efforts. Seller will use commercially reasonable efforts to cause the Closing contemplated hereby to occur, including, without limitation, commercially reasonable efforts to cause all required third-party consents for transfer of the Assets to be obtained. ARTICLE VII Covenants of Buver DAL02:1091 16,4 14 Except and to the extent Seller may otherwise permit in writing, Buyer covenants and agrees as follows: 7.1 Third-Partv Consents. Buyer shall give all notices to governmental authorities and other third parties required to be given by it in connection with the transactions contemplated hereby. In order to facilitate the orderly assignment and transfer of all rights, privileges and Fxanchises necessary to own and operate the Systems, and to facilitate the securing of all required and necessary approvals by franchising authorities or any other governmental entity or authority, Buyer shall cooperate with Seller, and shall provide Seller with such information and complete such application forms as may reasonably be requested by Seller to prepare, file and prosecute each request and application therefor. Buyer shall attend such meetings as Seller may reasonably request in connection with obtaining third-party consents, and Buyer shall provide such financial information as third parties may reasonably request in connection with the review of transfer requests. Buyer acknowledges that it may need to enter into direct agreements with franchising authorities, other governmental entities or authorities or other third parties. 7.2 HSR Act. Buyer agrees to make an appropriate filing of a Notification and Report Form pursuant to the HSR Act with respect to the transactions contemplated hereb� within 15 days after the date of execution of this Agreement and to supply promptly any additional information and documentary material that may be requested pursuant to the HSR Act. Subject to the other provisions of this Section 7.2, the Buyer will not take any action that will have the e�fect of delaying, impairing or impeding the receipt of any required approvals or consents or the termination o� any waiting periods. 7.3 Dischar�e of Assumed Liabilities. Buyer shall pay, perform and discharge the Assumed Liabilities as they become due, including, without limitation, the discharge and performance when due of each and every obligation of Seller under the Assumed Contracts. 7.4 Confidentialitv. Buyer acknowledges that Seller would be irreparably damaged if confidential information concerning the business and affairs of Seller and its affiliates were disclosed to or utilized on behalf of any person not�a party to this Agreement. Buyer covenants and agrees that it will not, at any time, directly or indirectly, except in connection with the transac- tions contemplated hereby or to the extent required by law, make use of or divulge, or permit any of its agents or employees to make use of or divulge, nonpublic information concerning the business, iinancial or other afiairs of or any of the methods of doing business used by Seller or any of its affiliates. 7.5 Commerciall,y Reasonable Efforts. Buyer will use commercially r�asonable efforts to cause the Closing contemplated hereby to occur, including, without limitation, commercially reasonable efforts to cause all required third-pariy consents for transfer of Assets to be obtained. DAL02: I 09116.4 1 5 7.6 Access. Seller shall, for a period of five years from the Closing Date, have access to, and the right to copy, at its expense, for bona fide business purposes and during usual business hours upon reasonable prior notice to Buyer, all books and records relating to the Systems. Buyer shall retain and preserve all such books and records for such seven year period. 7.7 Iiurther Assurances. Buyer will at any time after tl�e Closing execute a�zy and all such further assurances as Seller may reasonably request in order to carry out the transactions contemplated hereunder. ARTICLC VIII Conditions to Seller's Obli at,.� ions Each and every obligation of Seller under this Agreement shall be subject to the fuliillment, priar to or at Closing, of each of the following conditions unless waived by Seller in writing: 8.1 Buver's Re�resentations and Warranties. Each representation and warranty made by Buyer in Article VI hereto shall be true and correct in all material respects on and as of the Closing Date with the same effect as though each such representation or warranty had been made or given on and as of the Closing Date. 8.2 Buver's Covenants. Buyer shall have performed and complied with all of the covenants set forth in Article VIII hereto which are to be performed by it before or as of the Closing Date. 8.3 Consents. (a) Seller shall, with the reasonable cooperation of Buyer, have obtained all consents necessary to effect valid assigcunent of all instruments necessary for operation of each Franchise within its respective jurisdiction and the appropriate authorities shall have issued all instruments necessary for the operation of the Franchises by Buyer; provided, however, that if Seller has obtained consei�ts to assign Franchises covering a number of basic customers equal to or greater than ninety percent (90%) of the total number of basic customers served by the Systems, this condition shall be deemed to have been met. (b) Any waiting period (and any extension thereo:� under the HSR Act applicable to the purchase of the Assets contemplated hereby shall have expired or shall have been terminated, and no action shall have been instituted by any governmental authority with jurisdiction over the enforcement of antitrust laws challenging or seeking to enjoin the consummation of the transactions contemplated under this Agreement which such action shall not have been withdrawn or terminated. DAL02:109116.4 � � 8.4 Material Adverse Chan�e. No material adverse change in the financial condition or results of operations of the Systems shall have occurred since the date of this Agreement. 8.5 No Material Purchase Price Adjustment. The purchase price adjustment pursuant to Section 3.�(a) shall not exceed � � 8.6 Buver's Deliveries. Buyer shal� have delivered the documents referred to in Article XII hereo£ ART�CLE IX Conditions to Buyer's Obli ations Each and every obligation of Buyer under this Agreement shall be subject to the fulfillment, prior to or at Closing, of each of the following conditions unless waived by Buyer in writing: 9.1 Consents. (a) Seller shall, with the reasonable cooperation of Buyer, have obtained all consents necessary to effect valid assignment of all instntments necessary for operation of each Franchise within its respective jurisdiction and the appropriate authorities shall have issued all insttuments necessary for the operation of the Franchises by Buyer; provided, however, that if Seller has obtained consents to assign Franchises covering a number of Basic Customers equal to or greater than ninety percent (90%) of the total number of Basic Customers served by the Systems, this condition shall be deemed to have been met. (b) Seller shall have obtained the consent of each person whose consent to the execution, delivery or performance of this Agreement by Seller is legally or contractually required if the failure to obtain such consent would have a material adverse effect on the financial condition or business operations of the Systems as operated by Buyer (the "Material Consents") . (c) Any waiting period (and any extension thereo fl under the HSR Act applicable to the purchase of the Assets contemplated hereby shall have expired or shall have been terminated, and no action shall have been instituted by any governmental authority with jurisdiction over the en�orcement of an.titrust laws challenging or seeking to enjoin the consummation of the transactions contemplated under this Agreement which such action shall not have been withdrawn or terrriinated. 9.2 Seller's Representations and Warranties. Each representation and warranty made by Seller in Article IV hereof shall be true and correct in all materia� respects on and as of tkle DAL02:109116.4 1 7 Closing Date with the same effect as though each such representation and warranty had been made or given on and as of the Closing Date. 9.3 Seller's Covenants. Except as provided in Section 9.1 hereof, Seller shall have performed and complied with all of the covenants set forth in Article VI hereof which are to be performed by it before or as of the Closing Date. 9.4 Material Adverse Chan�e. No material adverse change in the financial condition or results of operations of the Systems shall have occurred since the date of this Agreement. 9.5 Seller's Deliveries. Seller shall have delivered the documents referred to in Article XI hereof. ARTICLE X Closin� and Termination 10.1 Closin�. The closing (the "Closing") of the purchase and sale of the Assets under this Agreement shall take place on such date as Seller may designate by written notice to Buyer at least ten days prior to the date of such Closing. The Closing will take place at the offices of Baker & Botts, L.L.P., 2001 Ross Avenue, Dallas, Texas 75201 at 10:00 a.m. Dallas, Texas time on such dafe. The date on which the Closing occurs is referred to herein as the "Closing Date." Seller and Buyer shall meet on the date preceding the Closing Date at the offices of Baker & Botts, L.L.P. to conduct a pre-Closing at which all deliveries to be made at Closing will be reviewed by the parties and placed in escrow. At 11:59 p.m. on the date preceding the Closing Date, Seller shall terminate its operation of the Systems. At 12:01 a.m. on the Closing Date, Buyer shall commen�ce operation of the Systems. At 10:00 a.m. on the Closing Date, all instruments and payments held in escrow shall be distributed and disbursed to Seller an;d Buyer, and the Closing shall be consummated. 10.2 Termination. This Agreement (and the transactions contemplated hereby) rnay not be terminated except as follows: (a) Upon the mutual written consent of Seller and Buyer; (b) By Buyer, if it has not received Firm Commitments, for the Amount to Be Financed within foriy-five (45) days of the date of this Agreement and has not made the Purchase Price Deposit as contemplated by Section 3.2, or automatically as provided in Section 3.2 upon Buyer's failure to give Seller the appropriate notice contemplated therebya (c) By Seller, if any of the conditions to Seller's obligations set forth in Article VTII hereof have not been satisfied, as applicable; DAL02:109116.4 18 (d) By Buyer, if any of the conditions fo Buyer's obligations set forth in Article IX hereof have not been satisfied, as applicable; 1997. (e) By either party, if the Closing has not occurred on or before March 31, ARTICLE XI Seller's Deliveries at Closin� At Closing, Seller shall deliver the following to Buyer: 11.1 Instruments of Convevance. Such deeds, bills of sale, assignment and assumption agreements and other instruments of transfer, all dated the Closing Date, as shall be necessary to effectively vest in Buyer good and marketable title in and to the Assets. 11.2 Brin�-Down Certificate. A bring-down certificate executed by Seller to the effect that each representation and warranty made by Seller in Article IV hereof is true and correct in all �material respects on and as of the Closing Date with the same effect as though each such representation or warranty had been made or given on and as of such date, that Seller has performed and complied with all of its covenants set forth in Article VI hereof which az�e to be performed or complied with before or as of the Closing Date, and that a11 of the conditions to Buyer's obligations set forth in Article IX hereof have been satisfied on or before the Closing Date. 11.3 Secretarv's Certificate. A certificate executed on behalf of Seller by the Secretary of Seller's ultimate general partner authenticating Seller's partnership agreement, certifying as to the incumbency, and authenticating the signatures o#', those persons executing this Agreement and certificates delivered hereunder on behalf of Seller, and certifying as to the adoption and contin- uing effect of appropriate resolutions authorizing Seller's execution, delivery and performance of this Agreement. 11.4 Opinion of Counsel. An opinion of Baker & Botts, L.L.P., substantially in the form of Exhibit B hereto. 11.5 Opinion of FCC Counsel. The opinion of communications counsel to Seller, substantially in the form of Exhibit C hereto. 11.6 Approvals and Consents. Evidence that Seller has obtained the consents required pursuant to Section 9.1 hereof. DAL02:109116.4 ARTICLE XII Buver's Deliveries at Closing 19 At Clasing, Buyer shall deliver the following to Seller: 12.1 Purchase Price. Paymetat of tl7e Purchase Price in accordance with Section 3.2(b) hereof. 12.2 Assi�nment and Assum�tion A�re,ements. Sucla Assignment and Assumption Agreeznents, all dated tl�e Closing Date, as sl�all be necessazy to effectively assuzzle Selier's liabilities and obli�ations pursuant to Section 2.1 l�ereof. 12.3 }3rin�-Down Certiftcate. A brizag-dawi3 Certiiicate executed oi� bellalf af Buyer by Buyer's President to tlie effect that each representation and warranty n�ade by i3uyer in Elrticle V 3lereof is true and carrect in all material respects on and as c�f the Closing Date with the same effect as ihough cach such representatio�a or warranty had bcen m�de or given on and as af such date, tiaat Buyer has perfarnried and compiied with ail of its covenants set forth in Article VII hereof whicl� are to be peri'oxzned or complied with before or as af the Closing Date, and that aIl of the conditions to Seller's obli�ations set fortk� in �1.rticie VIII hereof l�ave been satisfied on or before the Closing Date. 12.4 Secretarv's Certiiicate. A certificate executed on behalf of Buyer by Buyer's Secretary authenticating Buyer's charter and bylaws, certifying as to the incurnbency, and authenticating the signatures of, officers executing this Agreement and certiiicates delivered hereunder on behalf of Buyer, and certifying as to the adoption and continuing effect of appropriate resolutions authorrzing Buyer's execution, delivery and perfarmance of this Agreement. 12.5 O�inion of Counsel. An opinion of Cairncross & Hempe�rnann in the form of Exl�ibit D hereto. ARTICLE XIII Retained Francl�ises 13,1 Retained Franchises. Natwitl�standing anytl�in� ta the contrary herein, afCer satzsfactian or waiver (by tlie party for whase benefit the condition is in�posed} of the canditions precedent to Sellers' obligatian to clase as set farth in Article VIIT hereof, and ta Buyer's obli�;ation to close as set forth iti Articie IX hereof, it is understood and agreed as follows: (a} Those �ranchises (inciuding all �,ssets uscd or usefiil in connection therewith, but excluding all headends and business offices wliich are also used in connection with the operations of other Franchises which are being transferred to Buyer) with respect to whicli a required consent shall not have been obtaixled (tlie "Retained Prai�chises") sl�all be retained by Seller, and, subject to tlze tert�:�s and canditions provided for herein, shall be subsequently sold by Seller and purchased by Buyer in accordaticc with th� terms af this Article XIII. L?AL02;14411G.4 2Q (b) Those Franchises (including all Assets used or useful in connection therewith, including all headends and business offices used in corznection with the operations of such Franchises) with respect to which all required consents shall have been obtained shall be sold by Seller and purchased by Buyer at the Closing on the terms and conditions provided for herein. (c) At the Closing, Buyer shall pay to Seller a portion of the Purchase Price to be determined by multiplying the Purchase Price by a fraction, (i) the numerator of which shall be the aggregate number of Basic Customers served by all of the I�ranchises except for the Retained I�ranchises as of the Closing Date and (ii) the denominator of which shall be the number of Basic Customers served by all of the Franchises (including the Retained Franchises) as of the Closing Date. The product resulting dierefrom shall be the Purchase Price paid at Closing. No adjustrnents shall be made pursuant to Section 3.3 hereof to the extent such adjustments are ariributable to a Retained Franchise, and provided further, that adjustments pursuant to Section 3.3 hereof shall be made with respect to any Retained Franchise only as an adjustment to the Purcklase Price to be paid at the actual time of transfer of such Retained Franchise. (d) At the Closing, with respect to the Retained Franchises, Buyer shall deliver to Texas Commerce Bank, N.A. (the "Retained Franchises Escrow Agent") by wire transfer of immediately available federal funds, an amount (the "Retained Franchises Escrow Amount") equal to the difference between (i) the Purchase Price and (ii) the portion of the Purchase Price to be paid at Closing, to be held in escrow (the "Retained Franchises Escrow") pursuant to the terms of an escrow agreement in the form of xhibit E hereto (the "Retained Franchises Escrow Agreement"). Upon any Retained Franchises Transfer (as hereinafter defined), the Escrow Agent shall pay to Seller an amount determined by multiplying (i) the Retained Franchises Escrow Amount by (ii) a fraction (A) the numerator of which shall be the aggregate number of Basic Customers as of the Closing Date of the Retained Franchise which is to be purchased and sold pursuant to such Retained rranchises Transfer and (II) the denominator of which shall be the number of Basic Custotners as of the Closing Date of all of the Retained Franchises. All interest earned on the Retained Franchises Escrow Amount shall be paid to Seller. (e) For a period of 12 months after the Closing, Buyer and Seller shall cooperate fully in obtaining any required consents which have not been obtained. After the Closing, as required consents are received, Seller shall give to Buyer notice of the actual time of transfer of such Retained Franchise (a "Retained rranchises Transfer") with respect to those Retained Franchises for which such required consents relate, which Retained Franchises Transfer shall be on a date within ten days after receipt of such notice from Seller, and the parties hereto shall talce all steps necessary or appropriate on their respective parts to proceed with such Retained Franchises Transfer on the terzns an.d conditions provided for herein. At the end of the 12-month period after the Closing (i) Buyer shall have no further obligation hereunder to purchase any Retained Franchises that were not purchased by Buyer DAL02:109116.4 2' 1 at or prior to such time; (ii) Seller shall have no obligation to sell any Retained I'ranchises that were not purchased by Buyer at or prior to such time; (iii) Buyer shall be entitled fo all of the funds remaining in the Retained Franchises Escrow (other than interest earned on the Retained Franchises Escrow Amount which shall be paid to Seller) and, subject to the terms of the Retained �ranchises Management Agreement (as hereafter defined), to reimburseanent for all capital expenditures made by Buyer with respect to any Retained Franchises not purchased by Buyer at or prior to such time; and (iv) Seller shall retain any Retained Franchises not previously trans%ned to Buyer. (� Concurrent with the Closing hereunder, Buyer and the applicable Seller shall enter into a management agreement (the "Retained Franchises Management Agreement") with respect to the Retained Franchises, which Retained Franchises Management Agreement shall be substantially in the form of Exhibit F l�,ereto. IIuyer shall continue to manage such Retained Franchises pursuant to the Retained Franchises Management Agreement until 12 months after the Closing. (g) It is understood and agreed that if a headend and/or business office serves both certain Franchises which are being sold at a given time and certain Retained Franchises, the Assets related to such headend and/or business oifice shall be conveyed to . Buyer at the time such Assets az'e first purchased by Buyer; provided that Buyer shall be required to provide signal services to Seller after the expiration of the 12-month management period pursuant to a mutually agreeable Signal Agreement having the parameters set forth in Exhibit G hereto. (h) The following provisions shall apply to any Retained Franchises Transfer under this Agreement: (i) The conditions precedent set forth in Articles VIII and IX also shall apply at each Retained Franchises Transfer. (ii) Certificates and other documents contemplated by this Agreement shall be delivered in the form and substance provided for in this Agreement, modified as necessary or appropriate to reflect the provisions of this Article XIII and to relate only to the �ranchises being transferred at a given time. (i) The parties intend that legal and beneficial ownership oiany Retained Franchises shall remain with Seller and sha11 not be transferred to Buyer until the applicable Retained Franchises Transfer of such Retained Franchises, which shall take place only if and when all conditions precedent thereto shall have occurred, including Sellers' receipt of all required consents to the transfer of the Retained Franchises. All pre�Closing covenants herein regarding a Retained Franchises shall continue in full force and effect until the time of the applicable Retained Franchises Transfer. DAL02:109116.4 22 ARTICLE XIV Indemnification 14.1 Survival of Representations and Warranties. The representations and warranties of each party contained in this Agreement or in any document delivered pursuant hereto shall be deemed to be continuing and shall survive the Closing and any investigations heretofore or hereafter made by any party or its representatives for a period of six months. 14.2 Indemnification b_ Sv eller. For a period of six months after the Closing Date, Seller shall indemnify and hold Buyer, its directors, officers, shareholders and agents harmless from and against any loss, cost, expense or other damages suffered by Buyer, its directors, officers, shareholders and agents resulting from, arising out of, or incurred with respect to: (a) the operation of the Systems prior to tl�.e Closing Date, except to the extent such loss, cost, expense ar other damage is specifically assumed by Buyer hereunder; (b) the falsity or breach of any representation or warranty made by Seller herein or any certificate delivered pursuant hereto; or (c) the failure by Seller to comply with any covenant of Seller set forth herein or in any instrument or certificate delivered hereunder, provided that any covenant of Seller to be performed or fulfilled on or before the Closing Date shall be deemed to have been performed or fulfilled unless Buyer shall make a written claim of nonperformance or nonful�'illment as of the Closing Date. Seller's indemnity oblz�ation to Buyer under this Section 14.2 above shall be Buyer's sole remedy against Seller with respect to such matters and shall be subject to the following limitation: (x) Seller shall not be obligated to indemnify Buyer with respect to indemniiication claims made by Buyer under such clause until such time as the aggregate amount of all such claims exceeds the sum of� and (y) if the aggregate amount of all such claims exceeds the suzn of the maximum aggregate amount oi Seller's indemnity obligation to Buyer under such clause vv� respect to such claims shall be limited to the aggregate amount of such clainns in excess of�, provided that in no event shall the maximum amount of Seller's indemnity obligation to Buyer under such clause with z'espect to such claims exceed the sum of� 14.3 Indemnification bv Buver. Buyer shall indemnify and hold Seller, its directors, officers, shareholders and agents harmless from and against any loss, cost, expense or other damages suffered by Seller, its directors, officers, shareholders and agents resulting from, arising out of, or incurred with respect to: (i) the operation of the Systems on or after the Closing Date; (ii) the falsity or breach of any representation or warranty made by Buyer herein or in any certificate delivered pursuant hereto; or (iii) the failure by Buyer to comply with any covenant of Buyer set forth herein or in any certi£'icate delivered hereunder, provided that any covenant of Buyer to be per�ormed or fulfilled on or before the Closing Date shall be deemed to have been performed or fulfilled unless Seller shall make a written claim of nonperformance or nonfulfillment as of the Closing Date. 14.4 Defense of Claims. If any third party shall assert any claim against Seller, Buyer or their respective directors, officers, shareholders, partners or agents, which, if successful, would entitle the latter to indemnification under this Article XIV, the latter (the "Indemnified Party'°) DAL02:1091 16.Q 23 shall give notice of such claim to the party from whom it intends to seek indemnification (the "Indemnifying �'arty") and the Indemnifying Party shall have the right to assume the defe�se of such claim at its expense. If the Indemnifying Party does assume such defense, it shall indemnify and l�old the Indemnified Party harnnless from and against any and all losses, damages and liabilities caused by or arising out of any settlement or judgment of such claim. Tn addition, the Tndemniiied Party shall have the right to participate in the defense of such claim at its expense, in which case (i) the Indemnifying Party shall cooperate in providing information to and consulting with the Indemnified Pariy about the claim; and (ii) the Indemnifying Party shall not consent to the entry of judgment or enter into any settlement without the prior written consent o� the Indemnified Party. If the Indemnifying Party does not assume the defense of any such claim, the Indemnified Party nnay defend against or settle such claim in such manner and on such terms as it in good faith deems appropriate and shall be indemnified by the Indemnifyirig Party for the amount of any judgment or settlement and for all losses or expenses, including attorneys' fees, incurred by the Indemrufied Party in connection with the defense or settlement of such claim. 14.5 Tax Effect. If any Indemnified Party shall be entitled to indemnification hereunder as a result of any loss, cost, expense or other damage for which indemnif'tcation m.ay be claimed under this Article XIV, the determination of the amount of indemnification to which such Indemnified Party is entitled as a result of such loss, cost, expense or other damage shall take into account any benefit, including any tax benefit, derived by the Indemnified Party and arising out of the facts or circumstances which resulted in such loss, cost, expense or other damage. ARTICLE XV Miscellaneous 15.1 Expenses. Except as otherwise expressly provided for in this Section 15.1 or elsewhere in this Agreement, each party herato shall pay its own expenses and costs relating to the negotiation, execution and performance of this Agreement. Seller and Buyer shall each bear all of its own costs and expenses incurred in securing the appropriate governmental approvals to the assignment of the Assumed Contracts. 15.2 Governing Law. This Agreement shall be construed and interpreted according the laws of the State of Delaware without reference to the rules of conflicts o£ law. 15.3 Notices. All notices, requests, demands and other coriununications hereunder shall be in writing and shall be deemed to have been duly given when personally delivered or tele� copied, or iive days after mailed, certified or registered mail, with postage prepaid addressed as follows (or to such other person or address as the party to receive such notice may have designated from time to time by notice in writing pursuant hereto): If to Seller: DAL02:109116,4 24 Marcus Cable Associates, L.P. 2911 Turtle Creek Bl�vd., Suite 1300 Dallas, Texas 75219 Attentioi�: President With copies (which shall not constitute effective z�otice) to: Marcus Cable Associates, L.P. 2911 Turtle Creek Blvd., Suite 1344 Dallas, Texas 752,19 Attentiol�; Generai Caul�sel Baker & Botts, L.L.P. 200 � Rass Avanue I�altas, Texas 75201 Aitentioi�: Michael A. Saslaw If to Buyer: Northland Cable Television, Inc. 1201 Third Avenue, Suite 3600 Seattle, Washington 98101 Attention: President With a copy (which shall not constitute effective notice) to: Cairncross �c Hempelmann 741 Tifth Ave��ue 7Qth Flaor Seattle, Wasllin�ton 98104 Attention: Scott T. Bell 15.4 T3efinition of �.�reement. Unless tlze context cleariy otherwise requires, as used herein, the term "Agreeznent" means this �.greement a�d the Schedules and Exhibits heretoe The wards "herein", "Ilereo�' and "llereunder" and oth�r words oi similar import refer to this Agreement as a whaie and not ta any particular �.rticle, Section, Paragrapl�. or other subdivisior�. 15.5 Headings, CTender. Persoi�. The headings to Articles and Sections of this Agreement are for reference only ai�d shall not be used in canstruing the provisions hereof or otherwise affect the meaning hereof. The use af the neuter pronoun "it" shall also refer to as appropriate to th� rz�asculine and/or ieminine gendcr. The use of the singular herein shall, where appropriate, be deemed to include the plural and vice versa. As used herein, tlie word "person" refers Qn�az: ios � t�.a 25 to any individual, corporation, partnership, trust, governmental body or authority or other organization or entity. 15.6 Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. 15.7 Entire Agreement. This Agreement embodies the entire agreement and understanding between Seller and Buyer and supersedes all prior agreements and understandings related to the subject matter hereo£ There are no representations, warranties, covenants, promises or agreements on the part of either party to the other hereto which are not explicitly set forth herein. 15.8 Modifications. Any modification, amendment or waiver of or with respect to any provision of this Agreement or any agreement, instrument or document delivered pursuant hereto shall not be effective unless it shall be in writing and signed by Seller and Buyer and shall designate speciiically the terms and provisions so modified. 15.9 Assignment and Bindin E� ffect. Neither party may assign this Agreement or any interest herein without the prior written consent of the other party hereto and any purported assignment without such consent shall be void. Subject to the foregoing, this Agreement shall be binding upon and shall inure to the benefit of the parties hereto, thezr respective successors and assigns. 15.10 Schedules. Any matter disclosed on any one Schedule hereto shall be deemed to be disclosed on all other Schedules hereto. DAL02:109116.4 26 IN W�1;`�ik;SS VJI3��OF, the �Saz�ties hereto ha�ve exa�rted �his A�ree�ezzt as ofthe date first abo�ve wzitte€�, MAR.CIJS CABLE AS54CIA,TES, L.P.: . Bv: Marcv�.s Cab�e Qperatiug CamP�Ya �-p-> zts gezzeral partr�e� • By: �arcus �able Com�razzy, L.P-, its gezteral paz�tra,er . By: Marcus Cable Pzopert�es, L.P., its gen�z�l parnaer By: IvZaz�cus Gable �'roperties, Inc., its gezzez�al partri.ez : ; .. NOR�i.AND CA.F3LE TELE�ISIO�N, �IC. • �+� �''."��?'G� r , i . ,.i�,�r.r�►......Ni .,� t _ . ��.�.�uc; � � i , Q I3ALA2:It'Y3i td.i Q#b/E2 3�t�'d BJb� L ZS ir L L= Ct I '�d3Q 'Itl�3"I diid23� Sti�?Itfi�I ; WOc'i3 9S = L T 96- L 0-�fl+d � Federxl Gammunicati«u Coriwr�iss'ron W:sttinato�, O. C. 2055< FCC 394 APPLIC,4TION F(7R FRANCHISE AUTHORITY CONSENT TC► ASSIGNMENT OR TRANSFER C7F CONTROL OF CAE3CC TELEVISt(3t'�) FR�o,NCHiSE s�criaN N. c�rvERa� itiFORn�r�oN r�ATE AUGUST 5, 1996 2, Application for. Q Assignmec►t af Frarkcfiise Appravcd by OMe 3QGQ-0S73 E�ires Q8/31/96 FOR FRANCNtSE ALITNORI7Y LfSE ON�Y 1. Community Unit lderitificatia� Number: ��{�(��(} JQ� �(} � Trans#er af Contrai �. Franchisiag authority: GRANT COtiNTX, WA.SHINGTON 4. Identify community where the system/franthise t�iat is the su6ject of the assignment or tramsfer o¢ cantra! is iocateci. GRANT COUNTX, WASHINGTON 5. [3ate rystem was ac ired or {fo� system's canstructed 6y tfie transferor/assignorj the date an � 1/1 /95 w4iich setvice was prov'�ec! Lo the first subscrifaer in the #ranchise area: 6. Pt�oposcd effective date o# closing af t�e transactiois assigt�ing or transferring awnership of fhe as soon as cc�nsents ha system to transferer/assig�ee: been obtained (approx. '• Attach as an �achibit a ut�edule of a�y and a!! additiona! iafarmation oc materia! filed with this application that is identi�ed in the franchise as required to be provided to tfie franchising �tet}writ+y wfx� reqt�esting its approvai af the iypc of firansactia� Nwt is khe subject of this applicatiari. E"AKT i - TirANSFERORIASSIGNQR t. indicate #he name, mailin� address, and telephone numher of the Legal name of Transferor/Assignor {�f indiv'rdual, (ist last name first) Marclas Cable Assaciates, �.P. Exh�ait t�ta. Assumed name used for doing business (if any} �arcus Cable Mailing street address or PA. 8ox ?991 Tur�le Cre�k Blvd., Suite 1300 City State ZIP Code Te(ephane No, (include area code) Da11�s TX 75219 2141�21-7898 2•i� Attach as an Exhibit a copy of the contract or agreea�estt t�at provides for the assignment or E��� �fl• transfer of controi iincluding any exhibits or schedules thereto necessary in order to understand the 1 terms tE�►ereo�. tf there is oniy an oraR agreement, reduce t#tc terms to writing and atfiach, (Coofidential trade, busi�ess, pricing or marketiag inforn�atic3n, or o#i�er information �ot ofherwise p�liciy availabie, may kse redacted). t�; Daes the contract submitted in �esporese to {a) abave emtfady the fut# and comptete agreement between the transferorlassignor and the transfereelassignee? Schedules and Exhibi�s to tkie con�ract tf No, exptain in an E�ibit. have not been provided, but will be provi.ded upon reques�. � Yes Q No . , . — e �'5 ay= SECTION i. TRANSFEREE'S/ASSIGNEE'S LEGAL QUALIFICATIONS 1. TransfereelAssignee is: � ❑� Corporation a. Jurisdictio� of incorporation: WASHINGTON b. Date of incorporation: OCTOBER 25, 1985 c. For profit or �ot-for-profit: FOR PROFZT Limited Partnership � a. �urisdictio� in wfiich formed: b. Date of forntation: General Partnership � a: Jurisdiction whose laws govern formation: Individual Other. Describe in an Exhibit. d. Name and address of registered agent i� jurisdiction: RSC CORPORATION 1201 THIRD AVENUE, SUITE 3400 SEATTLE, WA 98101 c. Name and address of registered agent in jurisdiction: b. Date of formatio�: Exhibit No. 2. List the transferee/assignee, and, if the transferee/assignee is not a natural perso�, each of its officers, directors, stockholders beneficially holdi�g more than 5% of the outstanding voting stwres, general partners, a�d limited partners holding an equity interest of more tha� 596. Use o�ly one column for each individual or entity. Attach additional pages if necessary. (Read carefu(ly — the lettered items below refer to correspondi�g lines in the following table.) (� Name, residence, occupation or pri�cipal business, and principal place of business. pf other than an individual, also show name, address and citizenship of natural person autlwrized to vote the voting securities of the applicant that it holds.) List the applicant first, officers, next, then directors and, thereafter, remaining stockholders and/or partners. (b) Citizenship. (c) Relationship to the transferee/assignee (e.g., officer, director, etc.). (� Number of shares ar nature of partnersihp interest. (e) Number af votes. (fl Percentage of votes. ' ' ��NORTH�AND CABLE TELEVISION, NORTHLAND TELECOMMUNICATIONS INC. CORPORATION 1201 THIRD AVE., STE. 3600 1201 THIRD AVE., STE. 3600 SEATTLE, WA 98101 SEATTLE, WA 98101 (6)WASHINGTON CORPORATION WASHINGTON CORPORATION ' ' (�)N/A SOLE SHAREHOLDER (d) N�p, 100% (e) N/A 100% (fl N/A 100% � f{C ]91(raEe 3) rw..l... .aa� 5ECTION V - CERTIF(CA710NS Part 1 - Transferor/Assignor All the statements made in the application and attached exhibits are considered rtiaterial represe�tations, and all the Exhibits are a tttaterial part he�eof and are incorporated herei� as if set out in full in the application. MAIiCUS CA��,� PR��'�fiT1�S. INC. Part 11 - Transferee/Assignee All the statements made i� the application and attached Exhibits are considered material representations, and all tfie Exhibits are a material part hereof and are incorparated herein as if set out in full in the application. The transferee/assignee certifies that he/she: (� tlas � current copy of the FCC's Rules governing cable television systems. (b) Has a current copy of the franchise tfiat is ghe subject of this application, and of any applicable state laws or local ordinances and related regulations. (c) �II use its best effarts to comply with the terms of the franchise and applicable state laws or local ordi�ances and related reguldtions, and to effect changes, as prompt(y as practicable, in the operatio� of the system, if any changes are necessary to cure any violations thereof or defaulis thereunder presently in effect or ongoing. NORTHLAND CABLE TELEVISION, INC. Signature 1 CERTIFY that the statements in this application are true complete and correct to the best of my knowledge and belief anc� � are made in good faith. Date WILLFUL FALSE 57A7EMENTS MADE ON THIS FORM ARE AUGU 5, 1996 PUNISNABLE BY FINE AND/OR IMPRISONMENT. U.S. CODE, TITLE 18, SECTION 1001. Print full name JAMES A. PENNEY Check ropriate classification: Corporate Officer � Individual � General Partner � pndicate Title) ❑ Other. Explain: fCC 391(Pa;e 5) Ottofxr 1997 EXHIBIT 4 This is Exhibit 4 to FCC Form 394 submitted by Northl�nd Cnble Television, Inc. to Grant County, Washington, dnted August 5, 1996. TRANSFEI2EE'S/ASSIGNEE'S TECHNICAL QUALIFICATIONS I. Ownexship Iniormation. Northland Cable Television, Ina ("Nortliland") is a corporation formed under the laws of tlie state of Washington. Northland was organized oi� Octobez 25, 1985, to acquire, develop, operate and maintain cable television systems. Northlazid is a wholly- owned subsidiary of Northland Telecomtl�unications Corporation, a Washington corporation. The names, addresses and telephone numbers of Northland's principal contact people in Washington are: Mr. Richard Clarlc Mr. John Waechter Western Division Management Coordinators 1201 Tl�.ird Avenue, Suite 3600 Seattle, WA 98101 (206) 621-1351 Northland's principal place of business is 1201 Third Avenue, Suite 3600, Seattle, WA 98101. II. Transferee's/Assi�nee's Professional and Techi�ical Qualifications. The executive management team respo�lsible for Northland's operations has been involved in the ownership and operation of cable television syste�l�s since the early 1980s. Northla�id, together with its affiliates, currently owns or zizanages approximately 100 cable television systems serving approximately 200,000 subscribers in 10 states. We have l�ighly competent and technically proficient einployees with good sense and a caring, considerate attitude. Nortllland and its affiliates have provided high quality cable television service to its subscribers ii1 Washington since 1985. The following are some of our performance liighlights: Tinancial Abilitv: A. Northland and its affiliates have an 15-year tracic record managing cable television systems and currently are responsible for overseeing the day-to-day operations of cable television systems in 10 states. BA71 �xhibit 4 to FCC Form 394 Page 1 B. We have oxperience with and are baciced financially by major banlcing institutioi�s. C. We maintain an in-house accountillg staff of fve certified public accountants and have the nationally 1czlown accounting firm of Arthur Anderseti & Co. audit each of our companies on an aiulual basis. D. We maintain an in-house invest�nent staff that focuses on raising capital. Le�al Ability: A. We maintain an in-house legal stafi with over 1 S years of cable related experience. In addition, we employ several well-respected law firins as outside couzisel, includir�g s��ecial counsel in Washington, D.C, to advise us on Federal Communic�tioi�s Cominission issues. B. We einploy well-respected local law firms to assist in obtaining easements, rights- of-way aild crossing permits as well as local and state real estate and personal property tax inatters. C. We have special in-house expertise to deal with issues involving health care and izlsurance rnatters under C.O.B.R.A., wage and hour calculations, garnishments and other employee payroll matters, the Equal Employment Opportunity rules of the rederal Communications Commission, the Hazard Communication Standard of O.S.H.A. and the other safety and worlcplace related matters covered under fed�ral and state laws. Teclulical Abilitv: A. Many of our technical employees have over 20 years of experience in the cable television industry. B. We provide quality custonler service, including installation, high quality television sigi�als and prompt system repairs. C. We have initiated a company-wide Quality Assurance Program designed to insure that our customers are satisfied with their service. Our program includes preventive maintenance procedures, customer call-bacics followii�g all service requests, and a procedure to periodically measure overall customer satisfaction with our service. BA71 Exhibit 4 to FCC Form 394 Page 2 � D. Our decentralized management policy allows local managers to give personalized service to the diverse communities that we serve. Our Regional Ma�agers have an average of 18 years experierlce in the cable television business. Northland's Qualitv Service Including Si nal ualit Response to Consumer Complaints, and Billin� Practices. A. Northland strives to upgrade each cable system's equipinent to the greatest degree that is economically feasible. B. Northland's tech�licians monitor their systems' signal quality on a regular basis to be sLue the best possible pictures are transmitted to our stibscribers. C. Subscriber conzplaints azld service requests are responded to within 24 hours. To ensure custozner satisfaction, a systam einployee follows up with a service call, tracicing the entire pzocess -- �rom receipt of a complaint to resolution of the problem -- in a subscriber log. D. Northland has developed and implemented a customized billii�g system to fit the needs of each particular cable system. �. Northland maintains local business offices in Washington that are open durin�; regular business hours to respond to any customer needs. To facilitate subscriber commutlications, Northland provides its customers with a toll-free telephone number so tliey may contact the cable office more easily. We also have an on-call policy to insure that teclinical persoiuzel are available to xespond to emergencies during non-business hours and on weelcends. Training and Certi�cation Pro i�ms Northland recognizes that higl�ly trained a�1d motivated employees with sound technical and interpersonal slcills are essential in providing quality ser�ice to its customers. Northland's tecluzical and office personnel are required to attend various ii�-house and industry-sponsored training courses on a regular basis, and are encouraged (with financial incentives) to enroll in and complete ii�dustry specialty certification programs. The Northland Optional Training and Certification Program provides specific technical training, as well as wage increase and career advancement incentives, for those employees who are interested ii� increasizzg their slcill levels. The prograni provides a means for employees to accelexate their earnings beyond the i�ormal wage progression and rewards employees for certifying at their present position levels and advancii�g their slcills. BA71 �xhibit 4 to FCC Fonn 394 Page 3 The following are descriptions of the training subject matter typically utilized by Northland: A. Northland In-House Training Seminars Quality Assurance Pro�ram �very Customer Service Representative, Office Manager, Technician, Installer, System Manager and Regional Manager attends an orie�itation seminar to become familiar with Northland's Quality Assurance Prograrn to ensure that high quality and consistent service is provided to each Northland subscriber. Training is focused ozz the following elements: - System Parformance Testing - Proof of Performazice Testing - Daily Signal Lealcage - System Lealcage Inspection - rCC Regulations ai�d Compliance - Customer Calls and Call Bacics - Curnulative Lealcage Tndex Repoi-ts - Response Postcard General Technical Trainitl� Sessio�ls Northland tailors its training to meet tile needs of individu�al communities and offices. Training is prepared or directed by the Divisional Vice Presideixt and/or the Regional Managers. Some oitlae zecent seininars conducted in our cable systems are listed below: - Signal Lealcage/Cumulative Lealcage Index - CATV System Operations for Office Ma�iagers and Customer Service Representatives - Oluns Law/Systein Powering - System Pexforznance Testing - First Aid/CPR - System and Drop Grounding - Safety on the Job - System Performance Calculations - Meeting tl�e Hazard Communications Standard of OSHA - System Upgrade and Rebuild Construction BA71 Exhibit 4 to FCC Form 394 Page 4 � � - System Electronics Sweeping - Headend Electronics and �Operation - Time Management - Theory of Operation of: I'ield Strength Meters Spectrum Analyzers Sweep Systems - System Mapping and Desigi� Tzldustrv-spoi�sored Training National Cable Television Institute ("NCTI") NCTI presents technical and non-teclulical traizzing to participants as career path courses or special interest courses. NCTI is an independent industrial trai�ling institute that specializes in programs in the technical area ofi the cable television industry. These courses are helpful in providing fundamentals as well as specialized lcnowledge to our employees and Northland has utilized them extensively, including the following: Career Path Installer Installer Technician Service Tech�zician System Technician Advai�ce Technician Special Interest CATV Technology for Non- Technical Personnel CATV System Overview Broadband RF Technician Society of Cable Televisio�z En�ineers ("SCTE"� SCTE has established a broadband communicatiotls certification prograin for technicians and engineers in the cable industry. The program has Uecome widely accepted throughout the industry as the ineans to learn, review and demonstrate technical proficiency in tl�e practice of broadband communications ei�gineering, Catididates may apply for certification eitlaer as a"Broadband Communications Technician" or "Broadband Comrnunications �ngineer" (or both). �ach program consists of seveii categorias of testing: Category I- Signal Processing Centers Category II - Video and Audio Signals and Systems BA71 Exhibit 4 to FCC Form 394 Page 5 � Category III - Tt•ansportation Systems Category IV - Distribution Signals Category V- Data Networlcin�; and Architecture Category VI - Terminal Devices Category VII - En�ineering Management and Pt•ofessionalism Ii�. 1988, Northland instituted an annual bonus incentive for any eznployee who becomes certified through the SCTE certification program. No�•thland's subscribers benefit from the increased slci111evels of tllose participants in the program as the e��lployees complete each level of certiiication. In addition, the inere�sed inonetary incentive llas attracted and maintained more qualitied personnel. II�. Experience in the Cable TV Business Both Past atld Present. In add�tion to the cable systems operated by Northland-affiliated companies in nixle states outside of Washington, Northland or its affiliates currently hold a franchise from and/or presently provide cable televisioi� services to the Washii�gton communities (or the unincorporated County areas) listed below: Newport, WA Clallam Co�.inty, WA Selciu, WA Utsalady, WA Snohomish County (N. W.), WA Whatcom County (Solrth), WA Lalce McMurray, WA LaConner, WA Slcagit County, WA Suquamish, WA Sandy Hoolc, WA BA71 Page 6 Sequim, WA Clallam Bay, WA Catnano Island, WA Stanwood, WA Bayview, WA Conway, WA Swinomish Tribal Comialunity, WA Shetler Bay Coinmuziity, Inc., WA Bainbridge Island, WA Indianola, WA Port Angeles, WA Exhibit 4 to PCC Form 394 EXHIBIT 2 This is Exhibit 2 to FCC Form 394 submitted by Northland Cable Television, Inc. to Grnnt County, W�shington, d�ted August 5,1996. ADDITIONAL CONTACTS Mr. Johi1 S. Whetzell 1201 Third Avenue Suite 3600 Seattle, WA 98101 (206) 621-1351 Mr. J�ines A. Peiuley 1201 Third Avenue Suite 3600 Seattle, WA 98101 (206) 621-1351 For^ financial matteNs: Mr. Wayne F. Sehattenlcerlc 1201 Third Avenue Suite 3600 Seattle, WA 98101 (206) 621-1351 BA70 ExlliUit 2 to rCC Torm 394 Northland Te 1 e C O 171rYlLl 111 C atl O 11 S Corporation ••� AIVNUAL I�EPORT NORTHLAND TELECOMMUNICATIONS CORPORATION ("NTC" or "Northland") is a communications company that specializes in providing a variely of quality communications services to meet the needs of consumers and businesses located in small cities and towns. NTC is a parent holding company and is currently the sole shareholder of Northland Communications Corporation ("NCC"), Northland Cable Television, Ina ("NCTV"), Northland Media, Ina ("NM["), and Northland Cable Services Corporation ("NCSC"). NCC is principally involved in the management of cable television systems owned by limited partnerships of which NCC is a general partner. NCC currently manages the operations of six limited partnerships. NCC also is the sole shareholder of Northland Cable Properties, Inc. (NCP Inc.), which owns and operates cable systems. NCTV is principally involved in the direct ownership of cable television systems, NCTV is the sole shareholder of Northland Cable News, Inc. ("NCN"), which was formed to produce local news, sports and informational programming that is cablecast on Northland-affiliated cable systems. NMI is a holding company that is presently the sole shareholder of Statesboro Media, Inc., which owns an AM radio station in Statesboro, Georgia. NCSC is a holding company for various companies that provide services to Northland-affiliated cable systems. NCSC's wholly-owned subsidiaries are Cable Television Billing, Ina ("CTB"), Northland Investment Corporation ("NIC") and Cable Ad-Concepts, Ina ("CAC"). CTB is principally involved in the development and production of computer software used in billing and financial recordkeeping for cable systems. NIC is principally involved in the underwriting of NCGsponsored limited partnership securities offerings, NIC acted as the managing broker/dealer in the syndication of the limited partnership units of Northland Cable Properties Eight Limited Partnership and Northland Premier Cable Limited Partnership. CAC is principally involved in the sale, development and production of video commercial advertisements that are cablecast on Northland-affiliated cable systems. TABLE OF CONTENTS Letter to Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Localism: Working for Our Communities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Northland Cable News . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 Financial Review Incorporating Management's Discussion and Analysis ..,.. 7 Northland Owned and Managed Cable Systems . . . . . . . . . . . . . . . . . . . . . . . . 13 Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 Notes to Consolidated Financial Statements . . . . . . . . . . . .' . . . . . . . . . . . . . . . l9 Directors and Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 CorporateInformation ............................................ 30 Letter to Shareholders Fellow Shareholders: In the last year, Northland benefited greatly from some extremely positive developments. First among these developments is the suUstantial deregulatory movement reflected in various Federal Communications Commission rulings and the Telecommunications Act of 1996, signed by the President on rebruary 8, 1996. Although the cable television industry remains heavily regulated in many areas, the deregulatory efforts have substantially alleviated the burden on mid-size and small cable operators (such as Northland) that serve predominantly rural areas. These deregulatory efforts have led to the gradual realization by the financial community that cable television companies serving small rural markets have a good chance of thriving in the new era of competition and communications development. Another apparent trend involves the giant cable television companies' desire to cluster their business in urban markets so as to benefit fully from the expected boom in new telecommunications services. Because such efforts are capital intensive, many of the giant companies are beginning to sell their rural cable systems for much needed cash. Many of these sales represent tremendous opportunities for Northland, especially in adding to our rural clusters, thus providing substantial economies of scale. As we enter this new era of changing technology and competition in the communications industry, Northland's challenge is to provide services with advantages over the competition not only in terms of price, but in the variety of services offered, responsiveness to customer needs, and the technical quality and reliability of services provided. Our major approach to this challenge has always focused on localism. This concept includes a highly trained staff operating from local offices, local programming including locally produced news and sports (exclusive to Northland), and a proactive quality service prograin to ensure attentiveness to our customers. Continued expansion of an array of services that are practical for our customer base while maintaining our pricing advantages will require continual monitoring of specifie market demand as well as precise technical planning. We believe our regional management system and network of 1oca1 offices affords us a tremendous advantage to move swiftly and efficiently. At the same time we are moving strategically to provide flexibility in our systems from a technical capacity standpoint. Our plans this year, for example, include the construction of over 100 miles of fiber optic plant in cable systems selected to benefit the most from new communication services and where immediate economic advantages can be realized. In 1995, Northland made significant acquisitions which added major strength to its financial position. Most importantly, Northland continued its partnership acquisition 1 plan. In the summer of 1995, the assets of two Northland sponsored partnerships were purchased by our wholly-owned subsidiaries, Northland Cable Television, Inc. and Northland Cable Properties, Inc. These assets serve approximately 13,000 subscribers and were valued at $20,484,500. The acquisitions increased the number of wholly-owned subscribers to 84,195, a 31 percent increase from 1994. This is the main reason for our total revenue increasing from approximately $18,501,000 in 1994 to $30,473,000 in 1995. Because of gains in new revenue sources, such as advertising and tier program services, our total debt remains moderate by industiy standards. The outlook for Northland in terms of market performanca, growth and operating income appears to be extremely positive. The management team believes that the next few years of planned acquisitions will provide a significant upsurge in financial strength and growth for Northland. We plan to complete the acquisition of our remaining partnerships and make carefully targeted purchases of prime rural cable systems as they come to market. Our expansion into new services is continually moving forward, but at a practical pace. We are cognizant of our markets and well aware of specific price sensitivities. Furthermore, in a continued effort to meet new challenges, we are advancing training efforts with our local staff as well as our headquarters staff to maximize the new opportunities that can be derived from the new communications era. We view last year as a turning point in which many of our long-term operational goals came to fruition. Looking forward to the next few years, we visualize the possibilities of a major shift in Northland's growth to a significant wholly-owned subscriber position. As a result, considerable excitement exists among all of the Northland team members as we plan our future goals. Sincerely, � John S. Whetzell President and Chairman of the Board 2 Localism: Working for Our Communities Every local community we serve has different qualities, such as demographics, geographic setting and economic diversity. An important reason for Northland's continued success is our localism program, which allows us to adjust our services, on a timely basis, to the specific needs of each community. By specializing in serving only small towns and rural communities, we can concentrate on management systems and structures that provide a superior service for these types of communities. Our local management teams become an integral part of each community by playing an active and meaningful role in local affairs, especially those that improve the quality of life in the community. The following are major aspects of Northland's localism program: • LoCCzl OffiCeS - Northland maintains conveniently accessible local offices in the small communities we serve, many of which don't even have local telephone offices. Our employees live and work in these communities, so they are familiar with local interests, attitudes and lifestyles. We have found that in small communities many customers prefer to personally visit our office to pay their bills or ask questions about their cable television service. The personal relationships that develop from this customer contact have proven invaluable in our efforts [o provide the best possible service. Our local offices also provide us with a variety of ways to disseminate community information to the public, including Northland Cable News, local access studios and local origination channels. Thus, a convenient local office allows both Northland and local residents to more e�sily use the system's capabilities to deliver information to the public on a timely basis. In essence, local offices allow us to be more in touch with our customers. • Deceniralized Management - Northland's decentralized management structure empowers local managers with important decision-making latitude and a strong voice in how their systems can best meet the specific needs and interests of their communities. Our local managers are considered the local experts in our management team meetings. The manageis are trained to be sensitive to local conditions, and they have major decision-making power in such important matters as channel lineups, system expansion, day-to-day operations and the offering of new unregulated services. •"Reach Out and Listen" Program - The foundation of Northland's "Reach Out and Listen" program is our monthly customer survey policy. Each month our local staff conducts a short telephone survey from a randomly selected sample. The survey's key purpose is to elicit information about our customers' satisfaction with the cable television services they receive. We have consistently achieved above a 98 percent approval rating in each of our systems. If we 1Vo�°thland's syster�a offaces� play an inte�r°al �7Cii`t 112 i%28 COYl2h'lll)Zl$leS they se�ve by actir�ely helpzng to imp�°ove ihe local qualit,y of lifea ' /� Dur zcnique "I2each out CIiZCl LtSt�Yl" d?D"Og)'Ci17Z enabdes Nor°thland to provi`% the best poss�ible encounter a less than satisfied customer, we seek to find an immediate solution to the problem. Northland also periodically surveys our customers to ascertain their opinion on the current channel lineup, as well as new programming that may be desired. We do not add or remove programming without surveying our customers. On a broader level, our managers meet regularly with ]ocal officials and participate in community organizations. These relationships provide timely and critical information that enables us to better serve the community. • Employee Training - Northland's employees are encouraged to enroll in our training and certification program. This program is designed to provide employees with a means of accelerating the development of their job-related technical skills and a way to increase their wages. The training program is comprehensive and multi-leveled, offering specific structured steps of home study courses, on-the-job training for specialized tasks and periodic scheduled performance evaluations. Once a particular skill level has been successfully completed, the employee receives a certification for that level and is eligible for an immediate wage increase. Northland recognizes that highly trained employees with sound technical and interpersonal skills are essential if we are to eontinue to meet our goal of providing the highest quality of service to our customers. We are also keenly aware that employees want to be assured of quality career opportunities. Our quality service goals depend on having skilled and motivated employees ready to fill our advanced positions as those positions become available. • Q�cality Assuranee - Northland's Quality Assurance Program demonstrates to local communities that we are committed to maintaining the very highest level of technical performance and customer service possible. Each of our systems follows a rigorous Quality Assurance Program that includes daily technical tests on the system's channels, periodic extensive technical tests on the entire system's performance and call-backs on every service call to ensure that the customer is fully satisfied. service for ou� eusEomers. � • Not'thl(lnd Cable News - Through Northland Cable News, our systems offer unique local programming that focuses on the issues that are rnost imporlant to each of lhe individual communities we serve. The tremendous public support and enthusiasm that our systems continue to receive for Northland Cable News demonstrates that the ]ocal news service benefits both Northland and the communities. Strong community support and positive public relations are imperative to the success of Northland's cable systems and their continuing ability to stand up to any emerging competilion in the years to come. Through Northland's emphasis on localism, we expect our systems to remain strong and profitable, while making important contributions to each of the communities we serve. 4 Northland Cable News We are proud of the continued success of Northland Cable News and the strong community support the service received in 1995. Through NCN, Northland contributes an important and unique service to our customers and the local communities we serve. Cable television subscribers in 19 Northland systems now receive local news and information programming through Northland Cable News. NCN programming focuses on the stories that are of particular interest to the residents of each community, including local news, sports, weather, features and coverage of special people and events. NCN news teams include stories with film footage of familiar sites and interviews with local residents in each of their newscasts, giving NCN viewers the thrill of seeing the people and places they know on the daily news. � � Year end subscriber surveys further substantiate the coverage and success of our NCN program. Recent surveys conducted in our Bainbridge Island and Port Angeles, Washington systems indicate that 87.3% and 82.5% of our customers, respectively, watch NCN at least once a week, This was another year of exciting growth for Northland Cable News, First, our Corsicana, Texas system launched NCN in August 1995 to an overwhelmingly positive response from the local community. Next, our Clemson-Seneca NCN entered into a partnership with Clemson University's Department of Speech and Communication Studies to provide internships for students and the equipment necessary to set up a studio at the school. Equipment will be donated by several NCN locations, while the Clemson- Seneca location will be sponsoring the internships. Finally, NCN's Port Angeles, Washington team was invited to India in February 1995 to follow up on a story which initiated in Port Angeles, The team had originally reported on the first stage salvage of the former aircraft carrier U,S.S. Bennington in Port Angeles. The salvage company then invited NCN to India to report on the final salvage efforts. This trip marked NCN's first movement into international x•eporting. During 1995, several Northland systems received recognition from various outside sources for contributions made by NCN to the communities we serve. 5 The following are just a few examples: At the Texas Cable Show in S1n Antonio, Texas the Corsicana, Texas system's Northland Cable News team was honored by the Texas Cable Television Association and presented with the "Project Community Award". The award was given in recognition of two stories which focused on the actions of local groups working to better their community. One story featured community leaders committed to ridding the community of drug dealers; the other fealured a new food pantry that will help minorities in Che area. Northland Cable News in Statesboro, Georgia was selected by the American Heart Association to receive a statewide News Media Award. The award recognizes outstanding media coverage of the fight against heart disease, and was awarded to Statesboro NCN for an American Heart Association Cablethon held on February 28, 1995. In addition to lhe many benefits it provides for Northland systems, Northland Cable News has enabled several systems to significantly expand local advertising sales over the past six years. NCN advertising teams sell, create and produce advertising spots for community businesses, giving those firms an opportunity to reach local residents with an advertising message tailored specifically to their needs. Local advertising has become an important source oF revenue for many of Norlhland's cable systems. NCN activities will be linked to the broadcasting operations of two AM radio stations owned by Northland affiliates in Statesboro, Georgia and Corsicana, Texas. We believe the geographical proximity of the radio stations and Northland's cable systems in these communities will foster synergistic revenue and promotional opporCunities as well as significant cost efficiencies in the reporting of local news and sports. Strong community support is vital to the success of Northland's cable systems, and we seek to become a fully-participating member of each city and town that we serve. Both Northland and the local coinmunities benefil from Northland Cable News. The communities receive an exclusive local news service that is not available from any other source, and Northland attr�cts subscribers and maintains a positive relationship with the communities. We are enthusiastic about the bright future of Northland Cable News, and we intend to launch the service in more systems in the years ahead. 6 Financial Review Incorporating Management's Discussion and Analysis OPERATING RESULTS % Consolidated Operatioras Operating results for 1995 reflect the continued transformation of Northland from a management company to an owner-operator of cable television systems. Through purchases of partnership assets and strategic acquisitions of unaffiliated cable properties, Northland experienced significant growth in 1995 achieving record revenue and operating income. As Northland pursues this course, we expect to experience a substantial increase in operating income which translates to enhanced value for our shareholders. Consolidaled revenue rose to $30,472,694 from $18,500,886, a 65 percent increase. Cable system acquisition activity is the major force behind this growth. As a result of Northland's shift in focus from management to ownership of cable systems, management operations revenue declined and over the long term we anticipate this trend will continue. Consolidated operating income increased to $16,277,966 from $10,395,334, a 57 percent rise. Cable television operations contributed 92 percent of the total operating income in 1995 compared to 82 percent in 1994. Future operating margins will more closely reflect those achieved from cable television operations as we continue to acquire partnership assets. As Northland continues to consolidate its ownership of cable systems through acquisition of managed assets, the company and CONSOLIDATED REVENUE AND OPERATING INCOME - Consolidated Revenue � Operating Income $18,501 $15,754 $14,282 $1�8 , $10,619 $11�353 � $6,113 1989 � '_ 1990 $7,626 w"'"' 1991 1992 (Dollars ln Thousands) 1993 1994 $16,278 �,395 = = 1995 affiliaYed limited partnerships also expeY•ience strong absolute subscriber growth. 'Total basic subscribers owned and managed grew to 191,825 from 176,42Q, an increase of 8.7 percent. This growth was due primarily to acquisitians of unaffiliated cable systems by Northland and several managed partncrships. Nol�thland shareholders bcnefiteci from 1995's strong operating results. Total shat�es outstanding as of Decembet� 31, 19)5 zind 1994 were 4,494,$6S and 4,572,C�65, respectively, a reduction of 1.7 percent. Tptal revenue per average outstanding share rose to $6.70 from $4.Q6, an zncrease of 65 percent. Net operating income per avaragc outstandin� share rose to $3.58 from $2.28, an inerease of 57 percent. In response to these favarable resa2ts, dividends per share incY�eased to $.39 from $.33, an 18 percent gain. Diviclencls as a percentage of aperating incame decreased f'rom 1994 to 1995 and we expect in the future this wilt be a continuing trend, CaGle Televi,riora LJperations I'or 1)9S, Northland's cable television oper��tians revenue climbed to $27,258,673 1'ronl $'15,344,842, a 78 percent incrcase over 1994. Cable television operations expe►isa increased propprtionately to $12,314,397 from $6,871,510, as operating margins remained cansistent at 55 percent far 1945 and 1R94. Operating income 1'rom cable teievision operatians reached $14,944,276 frt�m $8,473,332, a 76 percent increase. Wholly-owned basic subscribers inereased ta 84, l 95 fr�m f 4,1. 30, a gain af 3l percent. �- . . - + i i' . ' ` � � Service Revenue � Operating Incame $11 1i3 $13,191 148 $15_345 -$14 1989 1990 1991 1992 1993 1994 1995 (Dotlars in Thousands} Acquisitians. In February 1995, Northlar�d formed a new subsidiary, Northland Cable Properties, Inc. (NCP Inc.). In June, NCP Inc. purct�ascd lhe assets of Pend �reille Cable TV Liznited Partt�ership which serve approximatety 4,350 subscribers in Washington and Idaho. In July, Northland Cable Television, Inc. (NC"I'V) purclaased lhe assets of Clemson-Seneca Cable TV Limited Partnership which serve approximately 8,9Q0 subscz•ibers in and around Clemson, South Carolina. NCTV alsa pl�rchased the assets of un�ffiliated cablc systems serving a tatal of 5,950 sabscribcrs in Texas, Califarnia, and Sauth Caro]ina during 1995. Ca1lecYively, these acquisitions accounted for 96 percent af the growih in wholly-awned bas're subscribers. In the future, Northland will continue ta utilize NCTV and NCP Inc. to acquire the assets af managed partnerships and unaffiliated cable praparties. Existing Systems. �xcluding thc acquisition activity described above, Narthland's existi»� cable systcros achieved signii'icant increases in aperating revenue and continued subscriber growth in 1995. Revenue fram cable television operations for existing systems reacl�ed $24,047,231, f'rom $15,344,842, an increase of 57 percent. This rise is duc ko acquisitions completed in Navember af I994. Narmalizzng 1994 revel�ue for these acquisitians resulted in a 14 percent increase in 1495 cabte television revenue over 1994. Driving this revenue growth is higher advertising sales, the launch of new service tiers, madest rata increases, and increases in subscribers sarved. Average monthly revenue per average subscriber maved ta $31.30 from $2�.90, an inerease of over 8 percant. Managemelat O�erations Management fees earned from limited partnerships decx•eased 9�ercent to $2,182,1�5 r'rom $2,408,309. This decrease is a direct result of the afarementioned acquisition oi 37,250 ►na��aged subscribels by NCTV and NCP Inc. duril�g late 1994 and 1995. It was partially offset by the acquisition of 11,800 subscribers by several managed pat�tnersl�zps in 1995. "L'otai managed subscribers at December 31, 1995 and 1994 were 10�,630 and 112,290, respectivcly. We expect management fee revenue ta risa in 1996 due to acquisitions af unaff'iliated cabie systems by managed partnei�ships. Beyond 1996, however, we anticipate management fee revenue to decline, as Northland consolidates its ownership of cable systems through the purchase oP managed partnership assets. Gencral and administrative expenses for mana�;ement operations decreased to $318,771 from $56i,124, a dccreasc of 44 pei•cent. This reduction in cosi was 0 caused by increases in reimbursements received from managed partneiships. Operating income from management operations rose slightly to $1,863,374 from $1,841,185. FINANCIAL CONDITION The acquisition activities that contributed lo our significant subscriber growth in 1995 were substantially funded through bank financing. NCTV's revolving credit and term loan facility, which was refinanced in August 1994, was further utilized in 1995. The remaining credit availability on this facility, approximately $19,500,000, was borrowed in 1995 and used to finance acquisitions. Northland negotiated a credit agreement in May of 1995 to partially fund NCP Inc.'s cable property acquisilion. The $3,050,000 borrowed was used to finance the acquisition and its associated costs. Northland's total outstanding bank debt at December 31, 1995 and 1994 was $85,675,000 and 65,500,000, respectively. Northland's weighted average bank borrowing rate was 9.22 and 9.41 percent at December 31, 1995 and 1994, respectively. At December 31, 1995 approximately 85 percent of Northland's bank debt was subject to interest rate swap agreements, with termination dates ranging from November 1996 to March 1998, reducing exposure to rising interest rates. Despite the increase in debt, Northland's leverage as measured by its ratio of bank debt to annualized fourth quarter consolidated operating income fell to 4,59 at December 31, 1995 from 4.78 for the same period in 1994. In addition, 1995 consolidated operating income covered 1995's debt service requirement by a ratio of 1.65 to 1. 9 8 7 6 5 4 '� • i :�. � : • •' '� • Cable Operations Operating Income - Total Operating Income 1989 1990 1991 1992 1993 1994 1995 10 PARTNERSHIP PROGRAMS NCC did not syndicate a limited partnership program during 1995. Currently, Northland has no immediate plans to raise equity through limited partnerships due mainly to financial market conditions. However, if and when financial markets offer an opportunity to again raise equity through the limited partnership vehicle, Northland will assess future syndication potential. The number of equivalent basic subscribers owned or managed by Northland at December 31, 1995 was 191,825 with 61,770 pay subscribers. NCC managed 64 cable television systems in seven states and served 107,630 equivalent basic subscribers and 36,308 pay subscribers. NCTV owned 30 cable television systems in six states and served 79,848 equivalent basic subscribers and 23,924 pay subscribers. NCP Inc. owned foar cable television systems in two states and served 4,347 equivalent basic subscribers and 1,538 pay subscribers. Number of Subscribers ��n -rhousands� � Pay Subscribers p Basic Subscribers 200 180 160 140 120 100 80 60 40 20 0 11 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 Partnership operations through the first quarter of 1996 have produced consistent cash distributions through increasing cash flows. It is important to note that once the limited partners receive cash distributions equal to their ariginal investment (plus a preferred return only available in later partnerships), Northland's ownership increases from one percent to 20 percent (or more) in each individual partnership. The value of Northland's percentage ownership in the assets of managed partnerships is not reflected in Northland's financial statements under generally accepted accounting principles. This ownership, however, can develop into significant gains once the partnerships are liquidated. The following tabla illustrates the progress towards reaching a 20 percent (or more) ownership in each of the partnerships. NORTHLAI�ID'S LIMITED PARTNERSHIP PROGRAMS Total Total Cumulative Percent of Percent of Date Limited Original L.P. Cash L.P. Capital Northland AS OF MARCH 31, 1996: Funded Partners L.P. Funding Distributed Returned �Q Ownership Northland Communications Corporation Northland Cable Pcoperties Four L.P, 06/18/85 1,028 7,500,000 Northland Cable Properties Five L.P. OS/23/86 995 7,500,000 Northland Cable Properties Six L.P. Northland Cable Properties Seven L.P Northland Cable Properties Eight L.P. Northland Premier Cable L.P. 06/O1/87 1,880 06/14/89 2,906 03/31/90 969 ] 2/31/91 238 8,016 15,000,000 24,893,000 9,568,500 2,394,500 $66,856,000 �'�Percentages are based on current outstanding limited parmership units. 5,186,125 5,613,670 3,818,000 3,107,300 $17,725,095 69.5% 75.0% 25.5% 12.5°Io 12 Northland Owned and Mana�ed Cable Systems Bayvlew LaConner Slip Polnl Camano Island Port Angeles Sequlm Newport ��, Woodburn Yreka Planada • Chowchllla � Riverdale * Northland owned • Northland managed Island River Hlllsboro �,\� Mexia \ Llano Brenham � Burnet Kingsland � Horseshoe Bav Navasota Bay Clry Morton Clemson-Seneca Communities Homes Equivalent Basic Pay Tota11995 As of December 31,1995 Systems Served Employees Passed Subscribers Subscribers Revenue Northland Communications Corporation Northland Cable Properties Four L.P. 27 59 42 41,425 23,138 .. 8,533 $6,617,205 Northland Cable Properties Five L,P. (1) 10 30 38 37,495 23,242 8,507 7,897,009 Northland Cable Properties Six L.P. 10 27 37 31,600 24,430 8,449 8,611,947 Northland Cable Properties Seven L.P. 7 20 36 31,465 22,620 6,076 8,526,053 Northland Cable Properties Eight L.P. 6 18 14 10,945 9,336 2,825 3,529,252 Northland Premier Cable L.P. 4 13 9 6,785 4,864 1,918 1,153,951 Northland Cable Television, Inc. Clemson-Seneca System (2) Oakhurst System Woodburn System Bainbridge Island System Port Angeles System Statesboro System Yreka System Stephenville System Marble Falls System Crockett System Mexia System Navasota System Northland Cable Properties, Inc. Pend Oreille System (2) 64 2 5 1 1 1 1 1 3 6 1 7 1 30 4 167 17 10 4 4 2 3 3 3 18 1 12 1 78 il 176 22 9 9 10 15 16 6 10 9 4 12 3 159,715 25,420 6,765 7,390 8,890 14,050 12,165 4,390 8,015 12,805 3,580 12,210 2,225 107,630 15,382 5,122 4,069 5,380 8,928 9,102 3,863 7,166 9,055 2,456 7,461 1,864 125 117,905 79,848 8 7,095 4,347 98 256 309 284,715 191,825 Total - � - (1) Includes Corsicana Media, Inc., a radio station. (2) Includes revenue throughout the year as these systems moved from partnership status to wholly-owned subscribers. 13 36,308 36,335,417 4,004 5,372,992 1,612 1,715,568 1,544 1,474,311 1,834 2,088,075 1,689 3,374,234 4,004 3,986,867 1,083 1,389,13? 1,719 2,548,072 2,711 3,298,941 508 849,309 2,777 1,397,446 439 687,373 23,924 28,182,325 1,538 1,451,651 61,770 $65,969,393 Northlan�. Teleco�rnmunicat�ar�s Cor��ra�io�. a�d S�.�bs�di�r�es • • i . ' � � . . ' '" ,� �. � . � , � t • � � • • � •�" " � � • . � ,�`�� 14 Consolidated Financial State�'nen�s Nprthland Telecommunica.tions Corporatio�n and Subsidiaries Consolidated Balance Sheets ASSETS Cash........................ . ............................................. Accountsreoeivable........................................... . ............. Other................................. . ....... .... .. .......... ........ Tnvestment in cabl.� television px.operties; �'xopertyandequipment,atcost . ...... . ................... ..... ........ Lessaccumulated depreciat�on . . . . . : . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pranc�'1se. agreements (net of accu.mulated amprtization Qf $.�7,561,303_ in 1995 ar�d $.�3,927,343 izt1994) .,,, . ,. „ ,. ........ ....,�,,, ,,,,,,,,,,�,. , Gooflwi,ll (net qf acour�nulated amortization of $1_,52'1,939 in 19�5 and �1,35�4,824ir� �994)_ ... ..,, .,, ,. . . ........... . ......�., _ .,. COrgan,izat�on, eost� and o#helr intangible assets,(net oi acou,�ul.ated �az�r�o�ti.zaxion of $5,570,674 in 1995 and $5,176i,7$� in 1994) . . . . . . . : . . . . . . . . . . . . . . . . . . . . . . . . . Total investment in cable tel�visinn properties , . . . . . . . . . . . . . . . . . . . . Qtherpropertyandeqai�ncient,�et.- ...... .............. .,,,,,,.,.,, .,.,,, 7'ota�assEts ........ . ................................ ..... � _, ... LiAB��Z`�'i�S AND SHr�1REH0LDERS' DE�'ICIT Liabilities: Accounts payab�e an_d accrued expenses..,.,...:.. •••,..,< . .............•,.. Subscriber prepaymenfs and con�erter deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dividendspayable.,.,. , . ... ................. ... ....................... �ue.tozrianagedlimitedpaz�tz�ersk�ips ............. ..... ....................... Notespayable ..,.,.,.,.., ..,,,, „ . ........................... ...... Accumulated d�fioit in managed limited _�axt�nerships . . . . . . . . . . . . . . . . . .. . . . . . • , • Totalli.abilities ..... ................. ..,.......,....,.,..,....,.,...... Cor�n�itments and Con.ti���ancies (Nnte 8) . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Shar�k�o�ders' Deficit: Common stock, voti�g, _p�r vaXue $.00125 per s�,are; 20,000,000 shares authoz�zed; 4,494,865 and 4,572,665 shares issued and outsta�dxng as of Decer�ber 31, 1995 and 1994,respectively .,. ,,,.: ,... .� .....:............. . ..,,.... ,.. AdditXonalpaid-i�ca�ital,� ,,,,,,,, , ,,,,, , ,�.,,.,,, -- .....,.,..,,,,,.,, Aecamulateddeficit ,... ,. .,� .,., , �.� .. ..:...........�.�.�.��, � Total liabxlities and shareholders' d.efic�t , . , . . . , , , . , . . . . . .. . . . . . . . . . . . . . . . 1995 $ 1,686;295 960,809 44G,005 5�,021,G17 (18,55'7,2�] ). 39,46�„376 2�,�46,092 5,396,494 3,098,314 73,1Q5,276 69�>344 $ 76q890,729 $ 2,655,6QS 8�1�,121 455,2�2 86,124,753 6G0;919 90.,737,633 5,619 1,154,51$ (�S,Oq7,041) (13,8�46,904) $ 76,89q,729 The accor��anyi�g n4t:es �re �n integral part of th�ae co�tsolidated 'balance sheets. 15 199A $ 4,206,9?0 606,317 35.1,697 A�1,517,626 (14,1Q3,941) 2'�,413,66.5 17,$36,605 5,.569,609 2,695;441 53,515,320 501,486 $ 59,18.1,790 $ 2, � 18,030 657,�6Q �,508,979 134,669 65,558,971. 754,Q57 70,732;266 5,'7 � 6 1,147,0�2 , 23�) (�2,663,e _, (11,550,476j $ 59,�81,790 Northland Telecommunications Corporation and Subsidiaxies Consolidated Statements af Operations Tor thc Years Ended December 31, Revenues: 1995 1994 Cable televisian operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2'i,2�$,6'i3 $15,344,842 Managementoperations ...............�.,,..,,...,,,,.,.............,...,..,,, �,�82,145 2,408,309 Otheraperations ............................................................. 1,031,876 747,735 Totalrevenues .....................r,,.....,,.�,..,,..,..,......,..,,,...., � � 0, 472, �94 18, 5 00, 8$ 6 �xpenses; C�bletelevisionnperations ...................................o.,,.,,,,..,.,,... Managementoper�tions ...................o.,.........,,,,.,.,,.....,.,,.,,... Othernperations ,,,,,,,,,,,,,,,,,,r.,...�.�.....,,�,...,,.,..,,.,,.,,,,...... Totale��enses ...................:...:..................................... Z�cbme frozn operations befare de�reciation and arnnrtizat�on , , , , , , , , , , , , , , , � , , . . , Depreaia�ion a�,d Am�rtization �x�ense . . . . . . . . . . : : . . . . . . . . . . . . . . . . . . . � , , , . . . . . , , . Tncoam�from bperation� ..................................................... Otlaer Inco�e (E�cpense): In�terest expe�se .................:.......................�..,,.,,,......,..,., Equity in net incoms of managed �x�ited partnersk�ips . . . . . . . . . . . . . E , , , . , , . , , . , . . . . , Losson clisposal oi�s�ets .........................r,....,.,,,,,,,,..,,.,.,...,, pt�er ..................y.........,,,,..�,.......��..,...," ,..,,.,,..,,..., (Loss) incomebefo�rcinoomet�xes ........................................... inco�ne Tax (Expense) Benefit .................�..,.........,,,.,,,.,,,,�.,,.,,,, Net(Loss) Incame ..,,......,. " ...:....................................�,.,.. �Tet(Loss),Incozat�ePer�hare .........................................�...,. .. (12,314,39i) (318,ii�) �1,561,560) (14,1�4,'�B$) 16,277,966 (8,971,84?) 7,3Q6,�21, (7,315,38� ) 7,4Q7 (103,634) _ „ ,_ 36,53� (68,952) (�7,�80) $ � (�Ob�932J $ , ..iA2) The accom,panyzz�� notes are a�i integr�l paxt af thes� aonsnlxdated �Zn�noial stat�ments. 16 (6;871,510) ( 567,124) 666,918 ) $,lO5,S52) �0,395,334 5,285,666) �,raa,66s (3,281,598) 26�,6Q� (125,�$1) 21,�269� 1,984fA�43 'i,878 $ 1,992,32� $ _ .44 Northland Telecomm�u�nications Corporation and �ubsidiaries Consolidated Statements nf Changes in Sharehold�ars' Deficit For the Years Ended Decen�ber 31, 1995 and 1994 Common Stock Additional Number nf Paid-in A,pcumulated Sbares Amount Capikal Aeficit Total I3alance, at Decembex� 31, 1993 . . . . . . . . . . . . . . . . . . 4,555,665 $5,695 $.r,064;563 $(13,146,576) $(12,076;318) Coznmon stock issued pursuant tp employee stock plans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1"7,000 21 _ 42,479 --� 42,500 Dividends dec�ared . . . . . . . . . . . . . . . . . . . . . . . .. . . — --� — (1,508,979) (1,50$,9-79) Net income . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . — — — 1,992,321, 1,992,321 Balance, at December 31, 1994 . . . . . . . . . . . . . . . . . . �,572,665 5,716 1,107,042 (12,6d3,234) (11,550,A�7G) Cornmon stock zssued pursuant to e�ployes sto.Ck �lans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,000 24 47,476 —W 47,.500 Common stock re�ired . . . . . . . . . . . . . . . . . . . . . . . (96,800) (121) (483,$'�8) (483,999) Dividends declare.d . . . . . . . . . . . . . . . . . . . . , . — — (1,.752,99`1) (1,752,997) Ne�loss ............. ,.,,.,...,. ...,.. -- __,___ � — 106,9_32) �06,932) Balance, at Dseember 31,, 1995 , , . , , . . , . . . • . , . . ,.. 4,494,865 $5,619 $1,154,5:18 $(15,Q07,04.�) �(�3,&46,904) "The accompanying notes aare a� zntegral paxt of these consolidated fi�,an�c�al statements.. 17 Northland Telecommunications Corparation and Subsidia�ries Consolidated �tatements of Cash Flows For the Years Ended December 31, CASH k'LOWS FROM OPERATING ACTIVITIES; Net(loss) income.,,,........r .................................�......,,,... Adjustments to reconcile net (loss) income to net cash pravided by operating activities: Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loss on disposal of assets.,.......� ......................................... �quity in n�t income of managed limited partnerships . . . . . . . . . . . . . . . . . . . . . . . . . . . (InCrease) d�crease in operating assets: Accountsreceivable..................................................... Other......................�,.,,,..,....,...,,......,,,...,.,,.,.,..., Increase (decrease) in operating liabilitiss: Acoounts payable and accraed e�pensas ..............�....,.,..,...,,.,,..,, Subscriber prepayments and convertex deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dueto managed limited partnearships . r , , , � . . . . . . . . . . . . . . . . . . � . . , . . . . . . . . , . . Net cash provided by operatxn$ actit�ities , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , CASH FLUWS FROM TNVESTING ACTI"VTTIES: Acquisitio� of cable systems less k�oXdb�a�C of $1,451,484 in 1995 a�d $719,�26 in 199A� ...................................................... Tnvcstm�nt in cable television pxo��rties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Acq�xisition of xadia stafion, less holdb�ck of $16,150 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gash c�istributions from managed lirnitsd partners�xps . . . . . . . . . . . . . . . . . . . . . . . . : . . . . Puzohase af otk�er property and equzpr��nt, net . . . . . . . . . . . . . . . . . . . . . . . . . . . � . , , , . . . 1'roceedsfxomdisposalnf�ssets ,,,...,.� ...................................... Organizatio�costsandother ...........................�...,....�,..,,,,,,,.,. Net ca�h t�sed in i�vestin�g activiti�s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . CASH �LOWS FROM �'T�TANCING �CT�VTTIES: Proceedsfrom notes pa�able ......................................:........... Frincipalpaymentsonnotespa�able .................................�...,,,.,. (Retixement) issuanceofcom�aonstock, n�t ..�,,;,,,,,,,,,,,,,,,,,,,,,,,,,,,,,, Div�dend�paidtoshareholders ........................�.....,....,..,,,..,..,, Loanfees ............................................ " ......,,..........,. Net cash pravided by financing activitie� , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , (DE�REASE) INCREASE IN GASH .......................................... CASH, begin.�ing of yeax,..,...� ..................�,,,.,.,,.,,..,...,,,.,.,..., CASH, end oFyear ....................�,,,..........,...,,,.,........�.,....,. 1995 $ (106,932) 9,173,952 103,634 (7,4p7) (354,492) ($4,582) 4SZ,342 1a7,049 (58,4�,3) 9,27`�,� (25;151,648J (2;8h�,3��) (63,850) 224,Q�2 (222,915� $,9Q0 . (41,2i9) 2$;140,101) 22,705,298 (2,550,490) �ass,�9�� (3,,261,9i'6) (111,058) 1G,3�5,2i� (2,520,6"75) 4,206,9'i0 $ _�z686,295 SU�'�'LEMENTA� DISCL"OSUR� O�' CASH FLOW TNFORMA'I"�ON; � Cashpaidduringtheyearforinterest .......................................... $ 7,51,5,512 Cash paid (received) durin� the year fo�• income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ �,$,365 The accompanying notes are an integxal part nf these consolidated financ'ra� sCatenaents. 18 1994 $ 1,992,321 5,352,136 125,581 (260,685) (I24,512) ($8,623) 622;640 2�4,�55 �08y906) 7,47A�,907 (26,362,591) (1;$24;681) 74,3�9 (9S,21 S) 4,i00 (L5,�33,) (28,�'�8-,��1) 65,�00,000 (40,1'�9,915 ) a�z,soa (1;20bf00q) �,8_11,�95) _ 22,�51,290 1,60'7,�36 2,599,5�A� $, �4,206,970 �� $ 3,046;155 $ 7,&78) Notes to Consolida�ed Fi�ancial Statements 1, ORGANIZATION AND SIGNIFICANT ACCOUNTING POLIC�ES: Formation and Business Northxand Telecommunications Corporation (NTC), a Washington corporation, and its who�ly awned subsidiaries (collectively, the Company) are �ngaged in the business o£ locating existiz�g cable television systezns and negotiating for their acquisition (directly or on bek�alf of managed limited partnerships). The Company directly oper�tes or manages the operations of these systems. Sammary of Significant Accounting �'olicxes Principles of Consolidation — The consolidated financial stateme�nts of Narthland Telecammunicatio�s Corporation inc�ude tk�e accoun,ts of its four wholly owned subsidiar�es: Northlat�d Communications Corporatioan an,d subsidiary (NCC), Northland Cab�e Television, Inc, and subsidiaxy (NCTV), Noxtkiland Cable Services Gorporatioz� and subsidiaries (NCSC) and North�and Media, Inc, and subsidiary (NMT). Sig�lficant intercompa�y aceounts and transactions have been eliminated. NCC, a Washingtan corporation, is t�e managing gen.eral partner of six limited partnerships which own and operata cab.�a television systems locat�d �hxoughout the w�s.tern LJnited States, Texas, Mississippi, North Caxolina, Alabama and Genrg�a. NCC is also the parent company for Northland Cable i�ropert�es, Tnc. (NCP Tne,)., which was foxmed '1n 1995 to awn and operate c�b�e television syst�ms. NCTV; a Washi�gton� eorporatzon, was formecl to own and oper�te cable telev�sion systems. NCTV is also tk�e parent compa.�ny for Narthland Cable News, Inc. (NCN), which �vas form�d to develap and distribute progran�mi�g to cer�ain of the Company's afi'iliated entities. NCSG, a Washingto� corporation, is the parrent coacr�pany of Cable Te��v�sior� Billing, Inc,. (C"TB), Northland Investment Corporation (NIC) and Cable Ad-Conce�ts, Inc. (CAC). G'�'B provides b�lling services to cable syste�s owned by managed limited partnerships and who11� owned systerz�s. NIC acts as the managirig undea�w�iter of affiliated limite.d partnexsk�ip offerings. CAC develaps and produces v�deo commexcial advertisaznents to be. cablecast on Nort��a�d a#�liated cab�e systems. NMT, a VWashingtan� corporation, is the �arent company of Statesboro Media, �nc. (S1VII), SMI ow�ns and o��rates an ATvI radio station servx�g the city of Statesboro, C�eorgia and surrounding areas. System Acquisttions — Gable television system and radio station acquzsitions. are accounted for as purchase transactioz�s and theix cnst is allocated as follows: first, to the esti�nated �air xnarket walue of net tangible assets acquired; then, ta the franchise and other determinable intangible costs; and then any exces.s purchase prlce is alloeated to goodw'ill. Propsrty and Equipment --- Dapre�i�tion of cable television properties and ot�er property and equipment is provided u�ing the straight-li�e method over the followiang esti�nated service lives; B�ildings ................. . „ ..,, ...,. , ......,,....,. ,,,.,. 20 years Distx�buXion plant .................................................. 10 years Leasehold improve�nnents �nd other . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5-20 years Furniturean.dfixtiures .............................................. l0years Vehicl.es ..............................�..,....,...,,... ,,......,, 5 years Replaeements, renewals and irnprov.ernents are capitalized, Maintenance and repairs are c�.arged to expense as incurrad. Intangible Asseds — Costs assigned fn good�vill, franchise agreements and organization costs ar�d ather intangible assets are amortized using the str�ight,line method over the following estimated useful lives; Goodwill....... .......... . ............................... ... 40 years FranGhrse�g'reements,.,,,,,.. ., ...... .................... 7-20years Organization c.osts and other intangibl� assets . . . . . . . . . . . . . . . . . . . . . . . . . 3-10 years P�evenue Recognition — Cab�e television servic.e revenue is r�cognized in the month service is ��ovided to customers. Advan�e payments received on cab�e servic�s a�e recorded as subscriber prepayments. l�evenue �'ar zraanagernent and other services �rovided to the limit.ed partnerships is recorded on tk�e �ccrual metho.d in the month service is provided. Estimates Used in Finaneial Statetn.ent Presentation -- Th� prepar�tion nf financial statetnents in confor�nity with gen,exa�ly acce�ted accounting principles requires rnanagernent to make estimates and assumptians that affect the re:ported arnount oi assets 19 and liabilities, the disolosure of contingent assets and liabilities at the data of the financial statements and the reported amount oF revennes and expenses during the reporting pariod. Actual results could differ from those estirnates. Reclassifications — Certain reclassificatians have been made to conform the pr'ror yeax's data with the current year presentation, Net Income per Share af Common Stock — Net income per share of common stock is based on the weighted average number af shares of 4,550,931 and 4,556,503 during 1995 and 1994, respectively. 2. TNCOME TAXES; For federal income tax �urposes, the Company files a consolidated federal income tax return, Defearxed income taxes are determined on the asset and liability method in accordance with Stateznent of Financial Accountiang Standards �S�'AS) No. 109, "Accounting far Income Ta�es," The asset and liability method requires the recognition of deferred taxes %r the expected future tax consequences aF tempor�t-y differences between the carrying amounts on the financial stataznents �nd the tax bases af assets and liabilities. The primary components of defe�red income taxes, as of Deca�nber 31, 1995 and 1994, are as follows: �995 199A Deferred income tax assets: Net operating loss carzyforwaard . . . . . . . . . . . . . . . . . . . . . Valuation allowance ............................... Deferred income tax liabilities; Propearty and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated defieit in managed li;nraited partnerships ,,, $ 8,174,000 (1,165,000) '�,009,000 3,539,000 3,470,OOQ 7,OO�,QOq � — $ 7,182,000 1,352,000) 5,$30,000 2,489,OOQ 3,341,000 5,830,000 $ �-- The Co�apany has not recognized any expense for federal income ta�ces in thc accompanying Consolidated Statements of (Opexations due to the availability of net operating loss carryforwards. �or 1995 and 1994,. the C�mpany reported a loss for federal inco�ne tax purposes due to ternparary dii�'erences in depreciation and amortization expens� and its share of incozna or loss g�ner�ted by managed limited partnerships. The fede�al net operating loss carryforward of approximately $24,041,Qq0 expir�s in the years 2003-2010. The Cor�pany has determined that the net daferred tax asset does not satisfy the recognition criteria set forth in SPAS No, 109, Accordingly, a valuation allowance as been established for that amount. — - --- --- — 3. TRANSACTIONS WIT�-I �VIANAGED LIMITED PARTNERSHIPS AND OTHER RELATED PARTIES: Management �'ees NCC and NCTV xecei�e fees for �nanaging the limited partnerships of 5% to 6.i5% af the partnerships' $ross revenues, excluding revenues from� the sale of cable televzsion systems or franchises. Under the terms of cert�in credit agreernents, the �ayment af rnanageznent fees is allowed upon the partnerships' compliance with certain covenants. Reimbursed Operating Expe�ses �NCC provides certain centralized services to managed liinited partnerships and other affiliated entities. As set forth in the partne�ship and intercompany agreetnents, the rna�aged limited partncrships and affiliated entities reimbuxse NC� for the cost af those services, which inolude executive services, engineering, ranarketing, manage�aent services, accounting, bookkee�ing, legal, eopying, of�'ice rent and cornputer services. The amounts billed to managed limited partnerships and ai�'iliated entities %r these services are based nn NCC's cost. The cost of certain s�rviaes are charged direatly to tihese entities, based upon the actual time spent by NCC's employees. The cost of ather services is allocated to these entities based upon theix relative size, xe�venue and other �'actors, Amounts charged for thase ser�vicas were appxoximataly $2,044,000 and $2,207,000 in 1995 and 1994, respectively, 20 NC'�'V also h�s operating management agreements with limited partnerships manage� by NCC, Under the terms. of t�ese agre�ments, NCTV s�rves as the rr�anaging agent for aertain of the li�nited partnerships' cable. televisipn syste�ns and is reimbursed for certa��n o�erating, aflministrative and programn��ng expenses, NCTV xeaeXved approximately $66,pQ0 and $25,000 undex the taxma o� these agree�ents during 1995 and 1994, respectivaly. Accumulated 17eficit in Managed Limited Partnerships NCC is a ge�ex�l partner in linnited partnership� t�at own a�d pperate cab�e televxsfo� systems. AIl items of inCnme, loss, d�duction and credit are allocated 99% to tk�e lzmited partners and �% ta the general partners ur�til th� limited partners have rec�ived aggregate cash distributions in an amount equ_al to the�r aggregate capital contributions (plus, in some aases, a preferred ��eturn). Tk�ereaftex, gencral partnars reGeive 25%b (20% at two paz�tnerships) a�,d the limit�d part�ers are allocated 7�% (80% at two �artnerships) of part_nership inoome, losses and d. istribut�ans, F'rior to th� g�neral partn�rs receivin� ca�h distributians from operat�ans for any year, the limited partners must receiv.e oas� distributions in an .amount equal to°at least 5:0%of the �imit.ed partners' a�loc.abla share of taxable �aet xnconae for such year, �n the case of certain paz'tnerships, the limitatian is the �e. sser o� (�) 50% oF the lirnited partners' alloeable share of net inCome for such yeax or (ii) the. federal �ncome tax payable on, the limited partners' allacable share of net ineome at the then highest marginal federal incom.e tax rate applicable to such net i�tcome, Any distributi4n� other t�an frorn, c�sh flow, su�h as Fro�aa t�� sale or refinancing of a system ox u�on dissolution of the partne�ship, rrvill be de�ermined according to the ��rknexship. agreements. Upon a majority vote of t�e liinited paxtners, t�e assets oF the parTr�ership may be so�d tn NCC, The price to be �ai,d will be b.ased upon an independent appraisal. NCC is not obligated to �urchase the intarests offer�d. bthex Operations CTB cl�arg.es fees to NCT`V, N�P �ne. and rnanaged limited partn�rships �or providing billin� services. Iluring 1995 and 1994, C2B recognized rev�nues of -approximately $246;Op0 and $294,000, respectively, f�ozn tk�e managed limited partnersh�ps. The amounts charged to NCT'V and I�C�' I�nc. by CTB have been el�r�inated in c.onsolidation, NCN and CAC Charge N�CT"V az�d cert.a�n managed �imi.ted partnerships for providing program produetion and advertising sex�vic.es, �es�ectively. Durin� 1995 and 1994, NCN reaogz�ized revenues of approxirnately $602,000 and $34�,OOQ, CAC reca,gnta�d approximately $163,000 and $111,000 in r.evenues c�u�ng 1995 a�d 1994. "I'he a�tnnunts char�ed to NCTV by NCN and GAC havE been elimin�ted in oonsolidation, �te.ce3vables (�ayables) from Managed Limited Partnersh�ps ReceiYableS (pay�b�es) 4onsist of the following: 1995 1994 �o�thl��nd Cable Pxoperties Two . . . . . . . . . .. . . . . . . . . . . . . . . $ — $ (647,675. ) rTorthland Gable Pr.opert�es �'�xee . . . . . . . . . . . . . . . . . . . . . � . —, (11,069) No�`t.k�l�nd Cable Froperties Four , , , , , , , , , , , , , , , , , , , , , , ]0�,942 58,8'll Northland Cable �'ropertxes Five . , , L . . . . . . . . . . . . . . . . . . . . 188,513 96,579 Northland �able �'xoperti�s Six . . . . . . . .. . . . . . . . . . . . . . . . . . 9'7',650 79,215 North�az�d Cable Rrop.erties Seven , , , , , , , , , , , , , , , , , , , , , , , 10b,28'7 64,429 �toxtl�land Cab1e Prpperties Eight. . . . . . . . . . . : . . . . . . . . 7�,960 S l ,791 Clemson-S�n�ca Cable TV , . . . . . , , . . . . . . . . . . . . . . . . . . (47�,622) 44,422 Pend Oreille Cable TV . . . . , , . . . . . . . . . . . . : . . . . . . . (581,03'7) 135,�60 Otk�ers .,.,. ,. . ............................. 4Q�075 6,692) $(455,232) $ 134,669) t�nder the terms of the lir�ited partner�hips'' _revolving credit and term laan agr�ements with oommercial banks, tha partnerships have agreed to finanei�l cove�naz�tS Which re.c�ui�•e the maint�n�nce of certain ratios o�' notes payable to ca�h fiow. NCC, as genexa� partner, subznits quaarterly debt complia�nae r�ports to t�e �artnerships' creditoxs under these arrang�r�ne�ts. 21 4. BORROWING ARRANGEMENTS: Notes payab.le consist of the followxng: December 31, 1995 1994 Revolving credit and term loan, collateralizad by a first liez� p�sition on a11 present and future assets and stock af NCT'V, Interest rates vary based on certain financial covenants; currently 9.24%o (weighted average), C'rraduated prinoipal and interest payaments are due quarterly until maturity on September30,2003 . ..................:............................................ $$2,5G9,998 $b5,500000 , Tarrn lpan, collaterallzed by a first lien position on all present and future assets of NC�' I�nc, Interest rates vary based on certain finanpial covenants; currently 8.71%, Graduated prinoipal and interest payments are due quarterly until maturity an Deceznber 31, 1999, , , , , , , , , , , , , , , , , , , , , , , , , , 2,950,000 — Term laan, s0cured b� parcel of land purchaaed with pro¢eeds, I.nterest accrues at prime plus .7S%; currently 9.b0%. Principal and iz�terest payrrxents ar� due monthly until maturity in 1998. ,..,. 154,'747 — Seller note, currently accruing interest at 8.75�Io. Due fo matu:re in 1996, , , , , , , , , , , , , , , , , , , , , , 232,71Q -� Non-interest bearing sellex notes, due io z�aature during 19g6� . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . �79,264 �--� Other.......................................................:..�.,,,.,.....,...,,.. An�ua1 mat�trities of note� pay�ble are as f��laws: 1996...,.,.,.,,, " .............................................. 1997 ............................................................ 1998 ............................................................ 199g............................................................ 20q0......................................�,...,.,..,,..,,.,.,.. Thereafter....................................................... 3$,434 58,971 $$6,124,753 $65,5S�8,g71 $ 4,158,105 5,704,Od0 8,5�2,650 11,330,d00 10,260,000 46,119,99$ $$6,124,753 Undet� the revolving credit arid terarn lo�n agreement, NCTV has agreed to r�strictive covenants whx�h require the maintenance of certain ratios, including a Fro Forma Debt Serviee Ra�io of 1,2 to 1, an �nterest Coveraga �atio bf not less than 1,7 to 1 and a �,�r�erage Ratio of 5.7� to l, among othar restrictibns, r1GT� subxnits quarterly debt campliance rsports to its creditor t�nder this areangement, NCTV �as entered into �nterest r�te swap agreements to reduoe the impact of chan�es in interest rakzs. Interest rate swap transactions �en�r�lly involvz the exchanga of fixed and floating interest pay�ra�nt obligations without the e�cohange of the under�ying principal amaunts, At Decennber 31, 199�, NCTV had an interest rate swap agreement in ef�'ect with �ts b�nk, T�ese agreeiaaez�ts ef�"ectively ¢hange I�C"�"V's �nterest rate exposure ta a fix�d rate af 6,27�Io, plus an applicable margin vc�hich is based on certain �nancial covenants (the margin at December 31, 1995 was 2,75%), The �otional amount of each swap, tha fixed interest rates �nd the maturity dates are as follows: 1Vl�turity Date Fixed Rate Amount T�overz�ber6, 1996 ..............................�,,... 5.85 $ 3,500,000 l�ecernber 8,1996 .................................... June12, 199'7 ........................................ .�une 30,199"� ...................................r.... August26, 1997 ...................................... September 30, 1997 ................................... Marah9, 1998 ...,.,� ....................�......,..., 5,485 5.b3 5,97 6.55 6.00 7,25 1,800,000 13,500,000 12,900,000 28,592,500 4,20Q,Op0 5,500,000 $69,992,SOp At llecember 31, 1995, NCTV would have beean requ�ared to pay approximately $1,120,000 to s�ttle these agreements based on faxx value estimates rec�ivsd irom financial institutions. 22 Under its cuxrent texm loan agreetnent,. NCP Inc. has agreed ta restrictive cove�ants which r�quix� the maintena�ae af certain ratios, including a Cash Flow to Debt Service Ratio of 1.�0 to 1 and a Funded Debt to Cas� �'low �atio of 4.75 to l, amang other restric.tions, �CC submits quarterly debt compliance rapoarts to NCP Inc,'s creditar under this agreement. NC�',. Inc, has entered into an interest rate �wap agreernent t4 reduce the impaat of ck�a�nges in interest rates, At December 31, 1995, NCP, Inc. had outstanding one interest rat� swap agreement with its creditor, having a�;otional princxpal amount of $2,950,Q00. This a,gxeement effeCtively changes NCP Tnc.'s int�rest rate axposure to a fixe� rate of 5.71%, plus an applicable margzn based on certain fina.�cial covenants (the znargin �� December 31, 1995 was 3.00%), The it�terest rate svvap a�ree�n,ent matures Jur�e 30, 1997. At December 31., NCP Inc, woulc� ha.ve bee�n require.d to pay- appxoxi�atEly $21,500 to settle this agreeme�t, based on faix value estirnates receiyed fx4�n financial inS.titutions, The counter�arties to the Coacnpa�y's interest rate swap agreements. are tl�e Company's creditors. Th� Com�az�y is axpos�d to oredit risk tp the extent of non�er�oxn�ance b� a counterpaxty; k�awever, nnanagement believes the risk of incurxing �osses due to credit risk is remote, The notio�al amou�� of the instr�ments discussed above aCe�eots the extent o#' ir��olve�nent in the instxuz�cnts, but does not represe�tt t�e Company's e�posur� to mar�Czt risk; Conszderable judg��nt is rec�u�red io develop the estimates o£ fair value; thus, tk�e �stixnates provfd.ed above are not necessarily i�dicat�ve of kha a�ounts tk�at could be realiz�� in a cuxrent market exchange. - 5. INV�STiVIENT IN C�.B�.E xEL�VI�IQN PROP�RTIES; Property and equipment consists of the following: , , - iv�s is�a Land ��d buil.din�s . . . . . . .. . . . . . . . . . . . . . . . , $ 1,96�,828 $ 1,452,111 Distribution plant. . . . . . . . : . . . . . . . . . . . . ., . , . , . , . 5�,032,895 37,996,321 Other �quipme�t , . . _ , � . . . . . : . . . . . . . . . � , . . . , , 2,9�1�Q77 2,005-,453 �,easehold i�provements, , . , . • � � . , , , . , . � • � � � • � � • � � � 38,451 3$.,451 , Consti'�t.ct�on-in-pxogxess . . � . . . . . . . . . . . . . . . . . . . . . . . . 33,3 5,,2 66 �0 Sg,02�,6�7 41,517,626 Less ---�- accumulated depreeiation . . . . . . . . . . . . . . . . . . . (]8,557,Z�X) (14,103,961) $ 39,464,376 $ 2"�,413,665 6. OTH�� �'RA]PERTX AND �QUI�'M�NT: Qther �roperty and equipxnent consists oP the followi�g; 1995 1944 Furnituxeandfixtures,,..� ........................... $ 1,111,17� $ 965,618 Vehicl�s .............. .,,,,,.. , ......�,.,,.,., 137,033 �3'7,033 Other„ . ..................... . ...t _ ..,.,...,, 465,$45 367,438 1,714,049 1,A�70,089 L,ess —W �ecumu�ated ��preciation . . . . . . . . . . . . . . . . . , . (1,021,705) 968,603) $ G92,344 $ S.O1,A�86 7. E�VI�'LOYEE B�NEFIT A�tRANGEIVTENTS; N�'� has a nonqua�i�ied stoc� o�iion plan (tk�e P�an) �or cez�ai�. key_executives af the Com�a�y, Under the ternns af the Plan, options grar�ted vest in increz�ent.al amounts over spec�fled ti�e �eriods and are ea�erGisab�e until termination of the Plan on Marck� 3l, 1997. The exercise pric� of each opfion is $2,.50, whic� was co�sidered to approximate fair market va�ue at the date of g�ant. The Plan is administered by the �reszdent o£ NTC, Since est��lish�nent of the Flan, 7q,000 options have been granted. At D�cernbex 31, 1995 and 1994, �o aptian.s. were exercisable, During �995 and 1994, aptions for 19,000 and 17,000 shares, res�ectively, were exercised. , The Company also k�as a 401(�) retirement �la�n £Qr the b�nafit, of i_t� ex'nployees. Full-tzme srnployees who have cozr�pleted one yaar of serviqe and who are at l�ast 21 years of age are a�ig�ble to paxticipate in the plan. 23 In Deceamber 1994, the Board of Directors of N�'C approved a disGretionary regional manager stock bonus plan (fhe Bonus Plan). The �onus Plan is administered by tha president aF NTC. 'The earliest bonus award date was January 1, 1996, In 1�95, NT'C established a discretionary ser�zor exe�utiv� stock bnnus plan, whic� is based on total revenues generated by I�TC and affiliates. �'he earliest banus award date is April 1996, '�he Finianeial Accounting Standards �oard has rec0ntly rssued Statement of �'inancial Aocountiin� Standards �10. 123, "Aoeounting for Stock-Basad Compensatio�." �'hi� statement affects, �zaaong pther thingss the va�uation and disclasure oi stoak- tiased transactians wrth ��plo�ees. As th� Compa�y pla�,s to use tk�e pro �'orma disolasure alte�rnative, the Company does not anticipate any rnatErial impact on its fi�anoi�l positian, re�ults of apexa�ions or cash ftows. $. COMMITMENTS AND CONT�NGENCLESi Lease Arrangeritents Th� Company rents certain p#�ice space, equipm��t, tawer �it�s aric� pole att��hmants und�r operati�g leases, R�nt�l ex�ense (inoluding month�fio-xnant� leasas) was a�pxoxirn�tely $896,QOp and $603,pQQ in 1�95 and �994, respectively, b�forE r�imb�rse- inents frorn manag�d l��ited �Sartnershi�s. Minimum tease payr�ents to the end o.f th� l�a�e tea��s are as fpllpws: 1996. 199�, .�,.,,,,� ..................�,...,.,,.,,,..,,.,......,;..�.,� 1998 .................:....�..,,..,...�.r,.....,9�,...,,.,...,.,., 1999 ................�..�,.,,.,,..,...,....,......,,..,,.,.....,,. 2000......,..,,.� ....:.:......_..,...,:�....,.,....,..,.,......,, 'ih��eaft�r,,:..� ...................e.,,.,......,�...,.,,,�,,.,..,. Conti�g.enc9es and Gaarar�tees $ 492,362 4$1,f1�7 2$,'89� 27,6�� 12,096 75,�"�4 $1_;�,1�,4T3 As gene�al partner, I�C� is ao�it��gently 1ia�1� fo'r p��t�er��i� X�s��s in excess pf a�sounts ���est�d �� tfi� limited p�rtan�rs. NCG is a�sa coz�ti���;ntly �iable fox tl�� debt oblig�tions of �ts r�sp�cfive liniited ,partnexships, whxGlt tag�ther �nta1 appro�imately $g'�,071,b00 as of Decembe� 31, :1955, Effec't� t�f Regrilatifori (J�. Oetober �, �992, Caz�gre�s ehacti.�d thc ��bl� T'�lev�sf�n �qnsu�xier P�ote�tion a�d �o�a�etitiot� Adt ot' 1.992: (�he 1�92 Acti)' � On Apzx1 1, �9935 tfie �'edera� �om�%unicatior�s Cornmzs��qn (�"�C) �da�t�d rules irnp�ern�nting ��te re��tlat.ion a�d certain atk�er p���isions bf tk�� �g92 A�t, which bec�rne eff�ctxve S��t�mb�r 1, 1993, On �'ebru�ry 22, 19�4, tl�� �'CC a���ted further raie xagr��ation-riz��s ��quiring adc�itional ��d�t�tinns, w�ieli became effa�tiv� May � 5; 1994, and 'revisecl the b��:�h�;zarks a�nd �o�rt�ul�s used to cakcu��t� st�ch ra.tes, �1lso x� ��bruat��, the ��C's initial rul�s go��rniing. c�st-�f4s�rvi�e sfxdwings wera adbpt��l„ w.�t� an �f�`ecGive date o� �ay � 5, 199A�, Cabl� np�rators zn�y pursue �astN�f=serviee showi�.gs t� jt�stify cha��in�, ra$es for regulated sarvices in exesss of those e�tiablishecl by the �CC in its benchma�"k regu.latary s��ieme. On May 5, 1995, the �CC an�oui�a�d th� acloption af` a siTrcplif�cd s�t df rate r�gulatian rul�s appl-icab�� to s�aiall cable systerns, subsc�ibers, Undex the pC 15,Q00 ox few�x s�bscriliers, own�d f�y srna1X cozripa�ies; �efined as a c�rnpany serving 4b0,fJ00 ox f�war de�lned as a syst�r�n sarving G's definitint�; tk�.� �o�npany is a sznal� oosnpany a�d eac� of the �ompany's cable systenis are srna11 syst��s. Maximum permitted rafas under t.hese revis�d ��1Bs are depe�dent on seve��1 factbrs i�cludi�g the number bf reg�l�ted channels oi�'er�d, thQ net ��set basis of pla�t and ec�ui�rnent used to delivex r�galated services, the n�tmb�r of subscr�ber� served �nd a�eas�riable rat0 0� �eturn, It is mariagement's dpin�on th�t, in all m�terial respects, f�e rates in e�'ect in the Company's cable s�ste�s �re Within the ���imu�'n allawa`ble ratas pe���tfed und�r th� �CC's �ma11 cab�e syster�a rules. O� �'ebruary 8, 1996, the Talecornmun�cations Act oY 1996 (the 199d Aot} �ecame 7a�� T�e 1996 Act �ill eliminate all ratie Controls on cable pxag�a�nming service fiiers af s�nnall cable systems, defin�d by the 1996 Act as systems serving f'ewer than SO,bOb subsaribers owned by aperatars scrvin� fewer tk�an 1% of a11 subscribers iz� the IJ.�ited States (ap�ro.ximat�ly b00,000 subscriliexs), Al� oi the Cornpany's cable systems qualify as srn��� cable syst�ms. lYTan.y o:f the chat�ges called �or by t�e 1g96 Act wi11 not take �ffect until tl�� �'CC issues riew regulat.iaris, a�rocass Yh�t aoulcl take from sevexal mo�ths to a i'ew ysars, �ecause o#' this, tha fulZ i��aet of 'the 1996 Act on the C�mpany's operatin�s cannpt b� deterrrain�d at this tim�. 24 9. ACQUISITION OF SYSTEMS: During 1995, NCTV purchasad the assets of Clemson-Seneca Cable TV Limited Partnarship and the operat�ng aSsets of .cable television systems in Oconee County,. South Carolina, Madera County, California, and communities in and around Mexia, �e��s adding ap�roximately 15,000 basic subscrxbers, or an increase of 22%, The aggregate purchasa price of the assets was approximately $2.1,600,000. As of Decembar 31, 1995, NCTV had p�id approximately $20,582,000 of tl�e aggregate purchasa price through borrowings ander its revolvzng creflit and term loan and cash oz� hand. As of December 31, 1995, $870,44'� remains payable under the holdback pravisiona of th� respeciive purchase agreements which reflect reduct�ons fox certain post-closing ad�ustzr�ents. At December 31, 1995, $474,622 of this amount was reflected in due to managed li�ited partnerships on the consolidated balance sheet. During 1994, NCTV purehased the assets o.f thre.e partnerships which were managed �� NCC, add.ing approximately 24,090 basie subscxibers, or an inc��ase o�' S9%. The aggregate purchase price of the �artnerships was $27,040,.OQ0. As of Decemb.er 31�, 1994, the Company had paid appro�cimate.ly $26,400,Q00 of the aggregate purchase price throug.h borrowings under its ter� loan, k�ad o�tstanding appro�imately $700,000 of ar�ounts to be paid �nder tk�e holdback provfsio�s af the puxchase agree�n,ents. For purpo.ses of t�e consolidated st�tementi of cash flows, aznounts due under the holdbacks have been txeated as noncash t�ansactions. During 1995, t�e amout�ts outstanding pu�'suant to the holdback provisions of the purchase agreem�nts were paid. On May 31, 1995, NCP'��nc, acquired the assets of the P.end Ore�lle. Cable TV Limited Partners�xp _(the Partnership), a li�i�ed partnership mana�ed by NC�, NC� Ino�'s parent c.oraapa�,x. The aggregate purchase pr�oe of thes� assets was $4,450,000, which was re�luced by $435,000 represer���t�g NC-C's proportiox�ate share of fhe sales proceefls distrl,butable by tk�e Partnersh�p. �'he acquis.itioz� was ��,anced through borrowzngs ur�der NCF T�c.'s texm loan, working capital provided by NCC and approximately $581,000 payable unde�r th.e holdback provisions o� the purc�ase �greement o� August 31, 1996, net o� a�y post-clQsxng a�justments. At December 31, 1995, the holdback was inc�uded in due to xnanaged limited �artnerships on the consolidated balanc� s�te�t. On October �7, 1,995, SM� �equired the ass.ets of WPT"�, �n AM radio station �ervin� _the city of Statesb4�'o, Georgia and surroun(ii�g areas, 'I'he aggregate �u�Cchase pric-e was approxirnately $80,000, SMI paid $70,000 usi�g ca�h oa han.d, with the balance of $�O,QOQ to be paid under the holdback provisipns on April '15, 199-6, net of any post-elosing �djustments, Pra fox�a consolidated operating results (unaudited) of the Compaz�y for 1995 and 1994, assurning the acquisition of the assets described abave h�d been �,ade at the beginning o�' the respective periods, �411ow; Y995 � 99�t (unaudiked) (u�taudited) IZevenue .......................................... $34,11,7,000 $31,422,000 �. Netloss.. ,,., ,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,, $ 1,57$,000) $ 2,200000) Pershare .......................................... $�( � 0,35) 0.48) 25 Report of Independent Public Accountants To the Shareholders_of _ _ _ Northland Telecommunications Corporation: We have audited the accompanying consolidated balance sheets of Northland Telecommunications Corporation (a Washington corporation) and subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of operations, changes in shareholders' deficit and cash flows for the years then ended. These financial statements are the responsibility of the Company'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 Northland Telecommunications Corporation and subsidiaries as of December 31, 1995 and 1994, and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. ARTHUR ANDER.SEN LLP Seattle, Washington, April 4, 1996 26 Directors and Officers Northland's management team is 1 group of business professionals with a total of more than 133 years experience in the cable television industry. The professional backgrounds of the management team are in business management, financial planning, computer systems, economics, accounting, law, engineering and operations. Management's combined experience covers every facet of the cable television industry. The personal backgrounds of each of the officers and directors of Northland Telecommunications Corporation and its subsidiaries are as follows: John S. Whetzell (age 54). Mr. Whetzell is the founder of Northland Communications Corporation and has been President since its inception and a Director since March 1982. Mr, Whetzell became Chairman of the Board of Directors in December 1984. He also serves as President and Chairman of the Board of Northland Telecommunications Corporation, Northland Cable Television, Inc., Northland Cable Services Corporation, Cable Ad-Concepts, Inc., Cable Television Billing, Inc. and Northland Cable News, Inc. He has been involved with the cable television industry for over 21 years and currently serves as a director on the board of the Cable Telecommunications Association, a national cable television association. Between March 1979 and February 1982 he was in charge of the Ernst & Whinney national cable television consulting services. Mr, Whetzell fiist became involved in the cable television industry when he served as the Chief �conomist of the Cable Television Bureau of the Federal Communications Commission (FCC) from May 1974 to February 1979. He provided economic studies to support the deregulation of cable television both in federal and state arenas. He participated in the formulation of accounting standards for the industry and assisted the FCC in negotiating and developing the pole attachment rate formula for cable television. His undergraduate degree is in economics from George Washington University, and he has an MBA degree from New York University. John E. Iverson (age 59). Mr. Iverson is the Assistant Secretary of Northland Communications Corporation and has served on the Board of Directors since December 1984. He also serves on the Board of Directors of Northland Telecommunications Corporation and each of its subsidiaries. He is currently a partner in the law firm of Ryan, Swanson & Cleveland, Northland's general counsel. He is a member of the Washington State Bar Association and American Bar Association and has been practicing law for more than 33 years. Mr. Iverson is the past president and a Trustee of the Pacific Northwest Ballet Association. Mr. Iverson has a Juris Doctor degree from the University of Washington. Arlen I. Prentice (age 58). Since July 1985, Mr, Prentice has served on the Board of Directors of Northland Telecommunications Corporation, and he served on the Board of Directors of Northland Communications Corporation between March 1982 and July 1985. Since 1969, Mr. Prentice has been Chairman and Chief Executive Officer of Kibble & Pren�ice, a diversified financial services firm. Kibble & Prentice has four divisions, which include Estate Planning and Business Insurance, Financial Planning and Investments, Employee Benefit Services, and Property and Casualty Insurance. Mr. Prentice is a Chartered Life Underwriter, Chartered Financial Consultant, plst President of the Million Dollar Round Table and a registered representative of Investment Management and Research. Mr. Prentice has a Bachelor of Arts degree from the University of Washington. Milton A. Barrett, Jr. (age 61). Since April 1986, Mr. Barrett has served on the Board of Directors of Northland Telecommunications Corporation. In 1995 he retired from the Weyerhaeuser Company after lhirty-four years with that company. At the time of his retirement he was a Vice President of Sales and Marketing as well as chairman of Weyerhaeuser's business ethics committee. Mr. Barrett is a graduate of Princeton University magna cum laude and of the Harvard University Graduate School of Business Administration. 27 Richard I. Clark (age 38). Mr. Clark has served as Vice President of Northland since March 1982. He has served on the Board of Directors of both Northland Communications Corporation and Northland Telecommunications Corporation since July 1985. He also serves as Vice President and Director of Northland Cable Services Corporation, Cable Ad-Concepts, Ine., Cable Television Billing, Inc. and Northland Cable News, Inc. Mr. Clark was elected Treasurer in April 1987, prior to which he served as Secretary from March 1982. He also serves as a registered principal, President and director of Northland Investment Corporation. Mr. Clark was an original incorporator of Northland and is responsible for the administration and investor relations activities of Northland, including financial planning and corporate development. From July 1979 to February 1982, Mr. Clark was employed by Ernst & Whinney in the area of providing cable Celevision consultation services and has been involved with the cable television industry for nearly 17 years. He has directed cable television feasibility studies and on-site market surveys. Mr. Clark has assisted in lhe design and maintenance of financial and budget computer programs, and he has prepared documents for major cable television companies in franchising and budgeting projects through the application of these programs. In 1979, Mr. Clark graduated cum laude from Pacific Lutheran University with a Bachelor of Arts degree in accounting. Arthur H. Mazzola (age 73). Mr. Mazzola was elected to the Board of Directors of Northland Telecommunications Corporation in April 1987. From 1985 to 1990, he was Senior Vice President of Benjamin Franklin Leasing Company, Inc., an equipment lease financing company. Currently, Mr. Mazzola is serving as a Business Development Coordinator for the Bank of California. Prior to his association with Benjamin Franklin Leasing Company, Mr. Mazzola served as President of Federal Capital Corporation and Trans Pacific Lease Co., Inc. Both of these companies also engaged exclusively in equipment lease financing. Mr. Mazzola is a past Board Chairman and current Trustee of the Pacific Northwest Ballet Association and current Board Member of the Dante Alighieri Society, Mr. Mazzola attended Boston University School of Business in 1943 where he studied economics. Travis H. Keeler (age 55). Mr. Keeler was elected to the Board of Directors of Northland Telecommunications Corporation in April 1987. Since May 1985, he has served as President of Overall Laundry Services, Inc., an industrial laundry and garment rental firm. Mr. Keeler received a Bachelor of Arts degree from the University of Washington in 1962. James E. Hanlon (age 62). Since June 1985, Mr. Hanlon has been a Divisional Vice PresidenC for Northland's Tyler, Texas regional office and is currently responsible for the management of systems serving approximately 92,900 basic subscribers in Texas, Alabama and Mississippi. He also serves as Vice President for Northland Cable News, Inc. Prior Co his association with Northland, he served as Chief Executive of M.C.T. Communications, a cable television company, from 1981 to June 1985. His responsibilities included supervision of the franchise, construction and operation of a cable television system located near Tyler, Texas. From 1979 to 1981, Mr. Hanlon was President of the CATV Division of Buford Television, Inc., and from 1973 to 1979, he served as President and General Manager of Suffolk Cablevision in Suffolk County, New York. Mr. Hanlon has also served as Vice President and Corporate Controller of Viacom International, Inc, and Division Controller of New York Yankees, Ina Mr. Hanlon has a Bachelor of Science degree in Business Administration from St. Johns University. James A. Penney (age 41). Mr. Penney is Vice President and General Counsel for Northland. He has served as Vice President and General Counsel for Northland Telecommunications Corporation, Northland Communications Corporation and Northland Cable Television, Inc. since September 1985 and was elected Secretary in April 1987, He also serves as Vice President and General Counsel for Northland Cable Services Corporation, Cable Ad-Concepts, Inc., Cable Television Billing, Inc. and Northland Cable News, Inc. Mr. Penney is responsible for advising all Northland systems with regard to legal and regulatory matters, and also is involved in the acquisition and financing of new cable systems. rrom 1983 until 1985 he was associated with the law firm of Ryan, Swanson & Cleveland, Northland's general counsel. Mr. Penney holds a Bachelor of Arts degree from the 28 University of Florida and a Juris Doctor from The College of William and Mary, where he was a member of The William and Mary Law Review. Gary S. Jones (age 38). Mr. Jones is Vice President for Northland. Mr. Jones joined Northland in March 1986 as Controller and has been Vice President of Northland Telecommunications Corporation, Northland Communications Corporation and Northland Cable Television, Inc. since October 1986. He also serves as Vice President for Northland Cable Services Corporation, Cable Ad-ConcepCs, Inc., Cable Television Billing, Inc. and Northland Cable News, Inc. Mr. Jones is responsible for cash management, financial reporting and banking relations for Northland and is involved in the �cquisilion and financing of new cable systems. Prior to joining Northland, Mr. Jones was employed as a Certified Public Accountant with Laventhol & Horwath from 1980 to 1986. Mr. Jones received his Bachelor of Arts degree in Business Administration with a major in accounting from the University of Washington in 1979. Richard J• Dyste (age 50). Mr. Dyste has served as Vice President-Technical Services of Northland Telecommunications Corporation, Northland Communications Corporation and Northland Cable Television, Inc. since April 1987. He also serves as Vice President for Cable Ad-Concepts, Inc. and Northland Cable News, Inc. During 1995, he was responsible for the management of systems serving approximately 48,600 basic subscribers in California, Idaho, Oregon and Washington. Mr. Dyste a past president and current member of the Mount Rainier Chapter of the Society of Cable Television Engineers, Inc. Mr. Dyste joined Northland in 1986 as an engineer and served as Operations Consultant to Northland Communications Corporation from August 1986 until April 1987, From 1977 to 1985, Mr, Dyste owned and operated Bainbridge TV Cable. He is a graduate of Washington Technology Institute. H. Lee Johnson (age 52). Mr. Johnson has served as Divisional Vice President for Northland's Statesboro, Georgia Regional Office since March 1994. He is responsible for the management of systems serving over 50,400 basic subscribers in Georgia, Mississippi, North Carolina and South Carolina. He also serves as Vice President for Northland Cable News, Inc. Prior to his association with Northland he served as Regional Manager for Warner Communications, managing four cable systems in Georgia from 1968 to 1973. Mr. Johnson has also served as President of Sunbelt Finance Corporation and was employed as a System Manager for Statesboro CATV when Northland purchased the system in 1986. Mr. Johnson has been involved in the cable television industry for nearly 27 years and is a current member of the Society of Cable Television Engineers. He is a graduate of Swainsboro Technical Institute and has attended numerous training seminars, including courses sponsored by Jerrold Electronics, Scientific Atlanta, The Society of Cable Television Engineers and CATA. 29 Corporat� Inft�rmation Directors JOHN S. WHE'iZELL JOHN E. IVERSON ARLEN I. PRENTICE MILTON A, BARRETT, 7R. RTCHARD I, CLARK ARTHUR H. MAZZOLA T12AVIS H. KEEL�R Corporate Officers JOHN S. WHETZELL Chairxnan and President RICHARD I. CLAI2K Vice Presidcnt and Treasurer JAMBS A. 1'ENNEY Vice President, Secretary tind General Counsel GARY S. JONES Vice President RICHARD J. DYSTE �ice President - Tecimical Services JAM1aS �. HANLCIN Divisional Vice President H, LEE JO�-TNSON Divisional Vice Presidant Executive Of�ces 1201 Third Avcnue, Suitc 3b00 Scattle, V�ashington 9&l�l (206) 621-1351 Certified Public Accac�ntants ARTHUR ANDERSEN LLP Seattle, t�Vashington Legal Counsel RYAN, SWANSON & CLEVLLAND Seattle, Washington CAIRNCROSS & HEMPELMANN Seattle, Washingtan ARENT, FOX, KINTNER, PLOTKIN & KAT-iN Washington, D.C, Annual Meeting April 24, 199C at 7:30 p.m. Thc Rainicr Club Cukter Room 820 Fourth Avenue Sealtle, Washinglon Equal Opportunity Empinycr It is the policy of NorCllland Telecamrnunications Corporation to ensure equal employmenC opportunily to all qu�lified individuals regardless of race, color, creed, sex, marital stakus, national origin, age or the presence of any sensory, mental or physical handic�tp. Ali emp2oyees and lppiicants are ensured equal a�portunity with respect to alt aspects of employinent including recruiting, hiring, compensation, lraining and promation, The Board of Uirectors, ofi'icers and individual managers acCively supl�ort this program. 3Q ARTHUR ANDERSEN LLP NORTHLAND CABLE TEI,EVISION, INC. AND SUBSIDZARY (.� wholly owned subsidiar� of Northland Telecommunications Corporation) '�` � CONSOLIDATED FINANCIAL STATEMENTS - AS OF DECEMBER 31, 1995 AND 1994 TOGETHER WITH AUDITORS' REPORT ARTHUR ANDERSEN LLP REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Shareholder of Northland Cable Television, Inc.: We have audited the accompanying consolidated balance sheets of Northland Cable Television, Inc. (a Washington corporation and a wholly owned subsidiary of Northland Telecommunications Corporation) and subsidiary as of December 31, 1995 and 1994, and the related consolidated statements of operations, changes in shareholder's deficit and cash flows for the years then ended. These financial statements are the responsibility of the Company'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 Northland Cable Television, Inc. and subsidiary as of December 31, 1995 and 1999, and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles. a►.-��� � L P Seattle, Washington, March 26, 1996 A; CASH DUE FROM MANAGED LIMITED PARTNERSHIPS ACCOUNTS RECEIVABLE UNSECURED ADVANCES TO PARENT INVESTMENT IN MANAGED LIMITED PARTNERSHIP PREPAID EXPENSES INVESTMENT IN CABLE TELEVISION PROPERTIES: Property and equipment, at��, Less-- accumulated deprecie�l Franchise agreements (ne� <; accumulated amortization' $18,334,932 in 1995 and ' $14,356,563 in 1994) ' Goodwill (net of accumulatE� amortization of $1,527,9;� 1995 and $1,354,823 in 11I Organization costs and oth�� intangible assets (net o:l accumulated amortization', $5,543,432 in 1995 and $5,067,791 in 1994) Total assets The CASH �LQWS FROM QPERATING ACTI� Net loss Adjustments to reconcile net' to net cash provided by op; activities- Depreciation and amortiZ Loss an refinancinq of � payable Loss on disposal of asse Equity in net (income) � managed limited partn� (Incr�ase) decrease in � aperating assets: Due from managed liT; partnerships Aecaunts receivable' Prepaid expenses Tnarease {decrease) in operating liabilities; Accounts payable an� accrued expenses ' Converter deposits Subscriber prepaymat Net cash provided by operating activitia CASH FLOWS FROM INVESTING AGTIV, Acquisiti�n of cable systems� holdback of $87fl,447 in 19j $899,158 in 1994 Investment in cable televisiC properties Praceeds from disposal of as5 Cash distributions from manag limited partnership �ranchi�e fees, organization and ath�r intangibles Net cash used in inve, activitias The acc NORTHLAND CABLE TELEVISION, INC. AND SUBSIDIARY (A wholly owned subsidiary of Northland Telecommunications Corporation) NOTES TO CONSOLTDATED FINANCIAL STATEMENTS DECEMBER 31, 1995 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES: Formation and Business Northland Cable Television, Inc. (NCTV), a Washington corporation, was formed to own and operate cable television systems and at December 31, 1995, had 54 non-exclusive tranchises to operate cable television systems. These franchises will expire at various dates through 2020. During 1995, the Company acquired the assets of the Clemson-Seneca Cable TV Limited Partnership (Clemson-Seneca). Prior to the acquisition, NCTV served as the general . partner of Clemson-Seneca. Northland Cable News, Inc. (NCN), a Washington corporation which was formed to develop and distribute programming to certain of the Company's affiliated entities, is a wholly owned subsidiary of NCTV. NCTV and NCN are collectively referred to as the Company. The Company and its affiliates, Northland Communications Corporation and subsidiary (NCC); Nor�hland Cable Services Corporation and subsidiaries (NCSC); and Northland Media, Inc. and subsidiary (NMI) are wholly owned subsidiaries of Northland Telecommunications Corporation and subsidiaries (NTC). NCC is the managing general partner of six limited partnerships, which own and operate cable television systems. Additionally, NCC owns and operates cable systems through Northland Cable Properties, Inc. (NCP, Inc.), its wholly owned subsidiary. NCSC is the parent company for Cable Television Billing, Inc. (CTB), Northland Investment Corporation (NIC) and Cable Ad-Concepts, Inc. (CAC). CTB provides billing services to cable systems owned by managed limited partnerships of NCC and wholly owned systems of the Company and NCC. NIC acts as the managing underwriter of affiliated limited partnership offerings. CAC develops and produces video commercial advertisements to be cablecast on Northland affiliated cable systems. NMT was formed as a holding company to own certain non-cable related assets. Summarv of Sianificant Accountina Policies: Principles of Consolidation The consolidated financial statements of the Company include the accounts of the Company and its wholly owned subsidiary, NCN. Significant intercompany accounts and transactions have been eliminated. The Company merged Cal-Nor Cableview, Inc., a former subsidiary, into the Company during 1994. - 2 - Acauisition of Cable Television Systems Cable television system acquisitions are accounted for as purchase transactions and their cost is allocated as follows: first, to the estimated fair market value of net tangible assets acquired; then, to the franchise and other determinable intangible costs; and then, any excess is allocated to goodwill. Depreciation -- Depreciation of property and equipment is provided using the straight-line method over the following estimated service lives: Buildings 20 years Distribution plant 10 years Other equipment and leasehold improvements 5-20 years Intangible Assets -- Costs assigned to goodwill, franchise agreements and organization costs and other intangible assets are amortized using the straight-line method over the following estimated useful lives: Goodwill 40 years Franchise agreements 10-20 years Organization costs and other intangible assets 3-10 years Reventae Recognition -- Cable television service revenue is recognized in the month service is provided to customers. Advance payments on cable services to be rendered are recorded as subscriber prepayments. Revenue from management services provided to Clemson-Seneca was recorded on the accrual method in the month service was provided. License fee revenue is recognized in the period service is provided. Estimates Used in Financial Statement Presentation -- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates. ReClassifications -- Certain reclassifications have been made to conform prior year's data with the current year presentation. 2. INCOME TAXES: The operations of the Company and its affiliates are included for federal income tax purposes in a consolidated federal income tax return filed by NTC. Deferred income taxes are determined on the asset and liability method in accordance with Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." The asset and liability method requires the recognition of deterred income taxes for the expected future tax consequences of temporary differences between the carrying amounts on the financial statements and the tax bases of assets and liabilities. - 3 - The primary components af deferred income taxes, as of December 31, 1995 and 1994, are as follows: Deferred tax assets: Net operating loss carryforward Valuation allowance ; Deferred tax liabilities: ! Property and equipment Accumulated deficit in managed ; limited partnership 1995 $ 8,762,000 (5,230,000) 3, 532, 000 3,532,000 3,532,000 $ - 1994 $ 6,509,000 (3, 980, 000) 2,529,000 2,074,000 _---455,000 2,529,000 $ - The federal income tax net operating loss carryforward of approximately $25,800,000 expires in the years 2003-2010. The Company determined that the net deferred tax asset did not satisfy the recognition criteria set forth in SFAS No. 109. Accordingly, a valuation allowance was recorded against that amount. 3. TRANSACTIONS WITH MANAGED LIMITED PARTNERSHIP AND OTHER RELATED PARTIES: Management Fees Prior to the acquisition of the assets of Clemson-Seneca, the Company received a fee for its services equal to 6.75$ of Clemson-Seneca's gross revenues, excluding revenues from the sale of cable television systems or franchises. In August 1994, NCTV began paying management fees to NTC equal to 5� of NCTV's gross revenues, excluding revenues from the sale of cable television systems or franchises. The Company paid $1,320,492 and $331,603 to NTC in 1995 and , 1994, respectively. Proqram License Fees ; In July 1994, NCN, a wholly owned subsidiary of the Company, began receiving monthly program license fees from affiliated entities for programming produced ' by NCN. Total license fees earned from affiliates during 1995 and 1994 were $602,263 and $342,462, respectively. - 5 - 4. PROPERTY AND EQUIPMENT: Property and equipment consists of the following: Land and buildings Distribution plant Other equipment Leasehold improvements Construction-in-progress Less-- accumulated depreciation December 31, ---------------------------- 1995 1994 $ 1,935,828 50,293,667 2,940,600 38,451 33,366 55,241,912 (18,444,806) $ 36,797,106 $ 1,452,111 37,996,321 2,080,370 38,451 25,290 41,592,543 (14,146,114) $ 27,446,429 Replacements, renewals and improvements are capitalized. Maintenance and repairs are charged to expense as incurred. 5. BORROWING ARRANGEMENTS: Notes payable consist of the following: Revolving credit and term loan, collateralized by a first lien position on all present and future assets and stock of the Company. Interest rates vary based on certain financial covenants; currently 9.24� (weighted average). Graduated principal and interest payments are due quarterly until maturity on September 30, 2003. Term loan, secured by parcel of land purchased with proceeds. Interest accrues at prime plus .75$; currently 9.00�. Principal and interest payments are due monthly until maturity in 1998. Seller note, currently accruing interest at 8.75$, due to mature in 1996. Non-interest bearing seller notes, due to mature during 1996. Other N December 31, 1995 1994 $82,569,998 $65,500,000 154,747 - 232,710 - 163,114 - 24,342 $83,144,911 31, 020 $65,531,020 - 6 - Annual maturities of notes payable for the years ending after December 31, 1995, are as follows: 1996 1997 1998 1999 2000 Thereafter $ 3,928,263 5,424,000 8,232,650 9,180,000 10,260,000 46, 119, 998 $83,144,911 Under the revolving credit and term loan agreement, the Company has agreed to restrictive covenants which require the maintenance of certain ratios, including a Pro Forma Debt Service Ratio of 1.2 to 1, an Tnterest Coverage Ratio ot not less than 1.7 to 1 and a Leverage Ratio of 5.75 to 1, among other restrictions. The Company submits quarterly debt compliance reports to its creditor under this arrangement. The Company has entered into interest rate swap agreements to reduce the impact of changes in interest rates. Interest rate swap transactions generally involve the exchange of fixed and floating interest payment obligations without the exchange of the underlying principal amounts. At December 31, 1995, the Company had outstanding various interest rate swap agreements with its bank. These agreements effectively change the Company's interest rate exposure to a fixed rate of 6.27�, plus an applicable margin which is based on certain financial covenants (the margin at December 31, 1995 was 2.75$). The notional amount of each swap, the fixed interest rate and the maturity date are as follows: Maturity Date November 6, 1996 December 8, 1996 June 12, 1997 June 30, 1997 August 26, 1997 September 30, 1997 March 9, 1998 Fixed Rate 5.85 5.485 5. 63 5.97 6.65 6.00 7.25 Amount $ 3,500,000 1,800,000 13,500,000 12,900,000 28,592,500 4,200,000 5,500,000 $69,992,500 At December 31, 1995, NCTV would have been required to pay approximately $1,120,000 to settle these agreements based on fair value estimates received from financial institutions. The counterparty to the Company's interest rate swap agreements is the Company's creditor. The Company is exposed to credit risk to the extent of nonperformance by a counterparty; however, management believes the risk of incurring losses due to credit risk is remote. The notional amount of the instruments discussed above reflects the extent of involvement in the instruments, but does not represent the Company's exposure to market risk. Considerable judgment is required to develop the estimates of fair value; thus, the estimates provided above are not necessarily indicative of the amounts that could be realized in a current market exchange. -�- 6. COMMITMENTS AND CONTINGENCIES: Lease Arranaements The Company leases certain tower sites, office facilities and pole attachments under leases accounted for as operating leases. Rental expense (including month-to-month leases) was $439,101 and $214,401 in 1995 and 1994, respectively. Minimum lease payments to the end of the lease terms are as follows: 1996 1997 1998 1999 2000 Thereafter Effects of Reaulation $ 36,465 30,646 27,351 26, 091 11,055 72,252 $203,860 On October 5, 1992, Congress enacted the Cable Television Consumer Protection and Competition Act of 1992 (the 1992 Act). On April 1, 1993, the Federal Communications Commission (FCC) adopted rules implementing rate regulation and certain other provisions of the 1992 Act, which became effective September 1, 1993. On February 22, 1994, the FCC adopted further rate regulation rules requiring additional reductions, which became effective May 15, 1994, and revised the benchmarks and formulas used to calculate such rates. Also in February, the FCC's initial rules governing cost-of-service showings were adopted, with an effective date of May 15, 1994. Cable operators may pursue cost-of-service showings to justify charging rates for regulated services in excess of those established by the FCC in its benchmark regulatory scheme. On May 5, 1995, the FCC announced the adoption of a simplified set of rate regulation rules applicable to small cable systems, defined as a system serving 15,000 or fewer subscribers, owned by small companies, defined as a company serving 400,000 or fewer subscribers. Under the FCC's definition, the Company is a small company and each of the Company's cable systems are small systems. Maximum permitted rates under these revised rules are dependent on several factors including the number of regulated channels offered, the net asset basis of plant and equipment used to deliver regulated services, the number of subscribers served and a reasonable rate of return. It is management's opinion that, in all material respects, the rates in effect in the Company's cable systems are within the maximum allowable rates permitted �under the FCC's small cable system rules. - 8 - On February 8, 1996, the Telecommunications Act of 1996 (the 1996 Act) became law. The 1996 Act will eliminate all rate controls on cable programming service tiers of small cable systems, defined by the 1996 Act as systems serving fewer than 50,000 subscribers owned by operators serving fewer than 1$ of all subscribers in the United States (approximately 600,000 subscribers). Al1 of the Company's cable systems qualify as small cable systems. Many of the changes called for by the 1996 Act will not take effect until the FCC issues new regulations, a process that could take from several months to a few years depending on the complexity of the required changes and the statutory time limits. Because of this, the full impact of the 1996 Act on the Company's operations cannot be determined at this time. 7. ACQUISITION OF SYSTEMS: During 1995, the Company purchased the assets of Clemson-Seneca and the operating assets of cable television systems in OConee County, South Carolina; Madera County, California; and communities in and around Mexia, Texas adding approximately 15,000 basic subscribers, or an increase of 22�. The aggregate purchase price of the assets was approximately $21,600,000. As of December 31, 1995, the Company had paid approximately $20,582,000 of the aggregate purchase price through borrowings under its revolving credit and term loan and cash on hand. As of December 31, 1995, $870,447 remained payable under the holdback provisions of the respective purchase agreements, which reflect reductions for certain post-closing adjus�ments. At December 31, 1995, $474,622 of this amount was included in due to managed limited partnership on the consolidated balance sheet. During 1994, the Company purchased the assets of three partnerships which were managed by NCC, an affiliate of the Company adding approximately 24,000 basic subscribers, or an increase of 59$. The aggregate purchase price of the partnerships was $30,100,000. As of December 31, 1994, the Company had paid approximately $26,400,000 of the aggregate purchase price through borrowings under its term loan, had outstanding approximately $900,000 of amounts to be paid under the holdback provisions of the purchase agreements and had an outstanding payable to an affiliate of approximately $2,800,000. For purposes of the consolidated statement of cash flows, amounts due under the holdback and amounts due to the Company's affiliate have been treated as noncash transactions. During 1995, the amounts outstanding pursuant to the holdback provisions of the purchase agreements were paid. Pro forma operating results (unaudited) of the Company for 1995 and 1994, assuming the acquisitions of the partnerships and systems described above had been made at the beginning of the respective periods, follow: 1995 1994 (unaudited) (unaudited) Revenue $30,214,753 $27,464,910 ----------- ----------- ----------- ----------- Net loss $(4,939,577) $(5,185,845) ----------- ----------- ----------- -----------