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04/29/1986 - City Council SpecialSPECIAL CITY COUNCIL MEETING Tuesday, April 29, 1986 6:00 P.M. EAGAN MUNICIPAL CENTER BUILDING I. ROLL CALL II. FINANCIAL UPDATE * 1987 Budget Process * 1987-1991 C.I.P. * Proposed 1986 Bond Sales III. INSURANCE * Status of General Liability & Worker's Compensation Insurance * Risk Management Issues IV. COMPARABLE WORTH UPDATE V. ORGANIZATIONAL ITEM VI. DISCUSSION RE: DOWNZONING VII. OTHER VIII. JOINT BURNSVILLE CITY COUNCIL & CABLE COMMISSION DISCUSSION RE: SALE OF CABLE SYSTEM IX. ADJOURNMENT MEMO TO.: HONORABLE MAYOR & CITY COUNCILMEMBERS FROM: CITY ADMINISTRATOR HEDGES DATE: APRIL 25, 1986 SUBJECT: SPECIAL CITY COUNCIL MEETING, 4-29-86 At the last regular City Council meeting, a special City Council meeting was scheduled for Tuesday, April 29, 1986, at 6:00 p.m., to handle general management issues, to be followed by a joint Burnsville City Council and Cable Commission meeting at 8:00 p.m. regarding the sale of the Group W system. Box lunches are planned for your convenience (nothing fancy). The City Administrator is planning to eat prior to the meeting so once the City Council arrives, business can start promptly at 6:00 p.m. Those items scheduled for discussion require direction and coordination on the part of the City Council. FINANCIAL UPDATE The City Administrator is planning to make some brief comments about the 1987 budget process which will begin in late May. The Administrator is also planning to comment on the capital improve- ments program (1987 - 1991). A draft is currently in the preparation stages and should be available for review during June. With the recent passage of H.R. 3838 and extention of the tax exempt status on various municipal bond issuances until September 1, 1986, it is suggested that the City consider the sale of bonds prior to that date. The Director of Finance and City Administrator will provide information about three (3) bond sales that are scheduled this year. Bonds to be considered are 1) a $5-$8 million general improvement bond issue, 2) the tax increment financing for Sperry, and 3) a municipal state aid bond sale as previously discussed for certain collector road improvements throughout the City. INSURANCE The Director of Finance and City Administrator would like to provide a further status report on the alternatives for general liability and worker's compensation insurance. There are also some issues related to risk management that need discussion and coordination by the City Council. As an example, the City has a well-trained S.W.A.T. team that is used sparingly as a part of our police enforcement. Insurance carriers are no longer insuring for that type of municipal operation. The City needs to determine whether this type of municipal service should be continued consider- ing the potential risk factor. There are other examples that the City Administrator can share at the meeting on Tuesday. The Director of Finance and City Administrator are continuing their meetings with Bruce Medvec, the City insurance representative. It might be advantageous -to the City Council to refer this item to the Finance Committee under the direction of City Councilmember Smith, to assist in the fact-finding for the City Council since a number of important insurance decisions will be confronting the City this summer. Attached are copies of two letters received today from Mr. Medvec regarding the City's insurance. Staff has not had an opportunity to study these letters in any detail, but have enclosed them for the Council's review and information. COMPARABLE WORTH UPDATE The City Administrator is planning a brief update on the status of comparable worth. The Control Data Business Advisors comparable worth study (sponsored by MAMA) is very close to completion. According to Control Data, the City of Eagan can expect to receive the final results on approximately May 9. The City will receive time spent profiles for each employee position (e.g., police officer, park maintenance worker, recreation programmer, engineering/planning secretary, building inspector, city administrator, etc.). The time spent profiles (TSP's) list each task performed in a position and the average percentage of time spent performing that task. In cases where the duties of a position were similar, no matter which employee was performing the duties, one TSP covers all employees in that position (e.g., police officer, clerk typist in the typing pool, dispatcher, etc.). In cases where the duties of a position are different from duties performed in another position, individual TSP's will cover each separately (e.g., administrative assistant [Finance], admin- istrative assistant [Administration/Personnel, Public Relations], clerk typist [receptionist], clerk typist [utility billing], clerk typist [Parks/Protective Inspections], etc.). The City will also receive a value for each individual position as a whole. Basically, the value is arrived at by taking the value for each individual task in a TSP times (X) the percent of time spent on it. Then all the resulting task/values are added to- gether to arrive at a total job value. The job values will be reported to the City in the form of a value hierarchy from most to least. The previous explanation is overly simplified; the calcula- tion of values is complex and will require more explanation at a later date. After this information is received, it will be studied very thoroughly to determine the impact upon the City's pay structure, if any, and also methods through which any disparities can be adjusted. Please recall that it is the City's intention to implement the first phase of internal equity adjustments for all contract and contract personnel in October 1986. Administrative Assistant Duffy has participated in numerous meetings with Control Data and is very knowledgable of the comparable worth process. The City Administrator has had a brief conversation with City Councilmember Egan about the possibility of a Personnel Committee meeting during the summer months with Admin- istrative Assistant Duffy and the City Administrator to determine the comparable worth values for all cities and present a proposed plan for City Council consideration early this fall. ORGANIZATIONAL ITEM The City Administrator is planning to present a new organizational concept for review and discussion. The organizational schedule provides for the consolidation of various services. The City Administrator is performing final review and analysis this weekend and will have overheads ready for presentation purposes at the meeting on Tuesday. The City Administrator is planning to provide a brief update regarding a personnel item as a part of the workshop meeting. This update could occur after the joint meeting with the Burnsville City Council if time permits. DISUCSSION REGARDING DOWNZONING The City Administrator and City Attorney would like to spend a few minutes discussing the whole concept of downzoning. The City Administrator has learned through several contacts that other communities are initiating rezonings and comp guide plan changes based on community planning without regard to the assumed loss of property values if a parcel of property is rezoned from a higher use to a lower use. It has been our community's position that property cannot be downzoned without compensating for the differ- ence in value. Since there is a difference of opinion among communities regarding this issue, the City Administrator felt a responsibility to at least address the issue with the City Council on Tuesday. City Attorney Hauge is planning to be present and has shared some of.his thoughts in a memorandum which is attached for your review. VACANCIES/MULTI-MEMBER STATE AGENCIES The attached Notice of Vacancies in Multi -Member State Agencies was given to this office by the City Clerk. If anyone is inter- ested in applying for one of these vacancies, please let us know by Monday so we can meet the April 29 application deadline. SUMMARY The City Administrator has spoken with Mayor Blomquist and it is their intention to allocate so much time to each item and move through the agenda with as much brevity as possible so all items are discussed within the time frame alloted on Tuesday. The City Administrator will be concise with his presentation and recognizing that specific motions and action are not necessarily required on any of these items Tuesday evening; the meeting is more a goal - setting, management workshop session. JOINT BURNSVILLE & CABLE COMMISSION MEETING The Cable Administrator has provided the attached memorandum dated April 25, that provides a brief update on all of the current status of transactions to date regarding the sale of Group W. Also enclosed is some additional information supplied to the Cable Commission that may be of interest to you. /s/ Thomas L. Hedges City Administrator Special Note: Karen will be contacting each member of the City Council to determine what kind of sandwich you would prefer for Tuesday evening. i First I eau ra rice Dalley View P. First Insurance Valley View 8200 Highwood Drive Bloomington, Minnesota 55438 612 944-8200 April 24, 1986 Mr. Tom Hedges City Administrator City of Eagan 3830 Pilot Knob Road Eagan, MN 55122 RE: City of Eagan Insurance Renewal 7-1-86 Dear Tom: Pursuant to our recent meeting, we have been informed by The Home Insurance Company that they will be unable to renew coverages for the City of Eagan on July 1, 1986. This non -renewal is based on The Home Insurance Company's decision to withdraw entirely from the municipal insurance market in the State of Minnesota. The lack of re -insurance, as well as the rising number of municipal claims, forced this insurance carrier to make this unfortunate decision. In no way, does the non -renewal notice reflect the City of Eagan's experience, loss prevention measures, or ability to procure insurance at renewal. For your information, I am enclosing a summary of current coverages and the status for renewal. Please note that those coverages subject to non -renewal or renewal difficulty I have highlighted with a yellow marker. As we had previously discussed, I have been in contact with the League of Minnesota Cities Insurance Trust and have been assured of a quotation for the City of Eagan. It is also our intention to receive our quotation no later than June 1, 1986 so that staff and City Council will have sufficient time to exam the many options we intend on presenting. Our research indicates a very limited -marketplace for municipal liability. While we fully intend on contacting other available markets, in all likelihood, the most viable market will indeed be through the L.M.C.I.T. If you should have any comments or questions, please feel free to call on me at any time. Perso r gars uce A. Medvec Senior Account Executive Enclosure Member First Bank System par•rrar-P. Coverage: GENERAL LIABILITY Coverages: AUTO Coverage: Ink.0l 10,114 D1;�Mw 01 Coverage: CITY OF EAGAN Carrier: The Home Insurance Co. Policy #: IST -8776170-65660 Expires: 7-1-86 Property- $9,459,974. limit Blanket Position Bond- 5,000 Dishonesty Bond- 10,000. Comperhensive Valuable Papers & Records -100,000. limit Accounts Receivable Coverage- 100,000. limit Misc. Equipment- $112,215. limit Contractors Equipment- $389,216. limit Status: Non -renewal with The Home Ins. Co. Carrier: The Home Insurance Co. Policy #: GL -1699200 UN 82072 Expires: 7-1-86 Bodily Injury & Property Damage- $1,000,000. limit Status: Non -renewal with The Home Ins. Co. Carrier: The Home Insurance Co. Policy #: BA 6094543 UN 78063 Expires: 7-1-86 Liability- 1,000,000. limit Uninsured Motorist- 50,000. limit Comprehensive- 100. Deductible (per schedule) Collision- 1,000. Deductible (per schedule) Status: Non -renewal with The Home Insurance Co. Carrier: The Home Insurance Co. Policy#: PWC 1776250 UN77145 Expires: 7-1-86 Employers Liability- 100/500/100 (Minnesota Statutory) Status: Non -renewal with The Home Insurance Co. City of Eagan- Coverages Cont. 1 u�Mifl Coverages: Carrier: Auto Owners Policy#: 852106-71961499 Expires: 7-1-86 $2,000,000. limit- Each Occurance $2,000,000. limit- Annual Aggregate $10,000. - Retention Status: Carrier is willing to offer renewal, but requiers $1,000,000. CSL underlying. Availability of coverage is therefore subject to securing the required underlying limits. PUBLIC OFFICIALS LIABLILITY Coverages: Carrier: Int'1 Surplus Lines Policy#: 524-031935-4 Expires: 1-6-87 $1,000,000. limit- Each Occurance $2,500. Deductible $500. Retention Each Loss VOLUNTEER FIREMAN'S BLANI= ACCIDENT POLICY Coverage: Carrier: St. Paul Fire & Marine Policy#: VFP 866JX6578 Expires: 7-1-86 Accidental Death and Dismemberment- $15,000 Weekly Benefit for Disability- $100 Maximum Benefit Period- To Age 65 Status: Coverage will be offered, but through another carrier. AMBULANCE DRIVERS MALPRACTICE LIABILITY Coverage: Carrier: Great American Surplus Lines Polict#: CL40105 Expires: 7-1-86 $500,000.- Each Occurance $500,000.- Aggregate Status: Renewal quotation will be offered by current carrier. City of Eagan- Coverages Cont. AMBULANCE DRIVERS MALPRACTICE LIABILITY (Excess Liability) Coverage: Carrier: Mount Vernon Insurance Co. Policy #: XL128252 Expires: 7-1-86 $500,000.- Each Accident or Occurance $500,000.- Aggregate Status: Carrier has indicated non -renewal due to market of coverage requested. First Insurance ValleyView iew First Insurance Valley View 8200 Highwood Drive z" Bloomington, Minnesota 55438 612 944-8200 April 24, 1986 Mr. Tom Hedges City Administrator City of Eagan 3830 Pilot Knob Road Eagan, MN 55122 RE: Risk Management For Municipalities Dear Tom: It goes without saying that the subject of insurance seems to be on the mind of every manager and insurance buyer in the Nation. For municipalities, the price increases and lack of coverages have been particularly brutal. Many of our clients have indicated strong desires to accept more of the "risk". We have also heard from many city managers indicating a desire to either hire risk managers or take upon themeselves further anaylsis of the exposures and risk at hand. After 15 years in the insurance business, I am pleased to find our clients not only listening but finally taking a pro -active approach to controlling losses. Our agency's involvement in risk management, particularly for municipalities, seems to be growing on a day-to-day basis. Now more than ever, the City of Eagan needs a pro -active approach to its risk management needs. A thorough understanding of exposures and risk will not only reduce the potential of claims but also make the City of Eagan an attractive insurance prospect when this insurance market changes. It is for those reasons that we offer our services to the City of Eagan as your agent and. consultant. Our current risk management functions include, but are not limited to, meetings with various department heads, creation of safety committees, Volunteer Fire Department evaluation, and recognition of liability exposures. Ideally, I would be involved in making suggestions for your Fourth of July celebration, overseeing the creation of a.safety committee, and review of all independent contractors engaged by the City of Eagan. My purpose is to inform all.City of Eagan employees as to their responsibilities and value of their observations. For the past three months, we have worked very closely with the City of Minnetonka and have received Member First Bank System Mr. Tom Hedges Page 2 April 24, 1986 very favorable results. You may wish to contact Mr. Barry Johnson at the City of Minnetonka for his comments. Admittedly, risk management is sometimes no more than common sense. Our job is to simply make the City Council aware before a decision is made. The decision to take a "pro -active" approach to risk management is yours. Insurance underwriters, agents, or brokers do not wish to run your City. Only staff and the City Council can do that. As your agent, I stand ready to help you in any way that I may. Our compensation is earned through our commission income. There is, of course, no additional fee for these services. Only the willingness on the part of the City of Eagan to make the work environment safer and to protect itself through informed decision making. If I may be of any assistance, please feel free to call on me. Perso reards use A. dvec Senior Account Executive BAM/las HAuGE, FIDE & KELLER, P. A. ATTORNEYS AT LAW WATER VIEW OFFICE TOWER, SUITE 303 1200 YANKEE DOODLE ROAD EAGAN, MINNESOTA 55121 PAUL W. HAUGE KEVIN W. EIDE DAVID G. KELLER LORI M. SELLIN MICHAEL J. MAYER April 25, 1986 Mr. Thomas Hedges Eagan City Administrator 3830 Pilot Knob Road Eagan, MN 55121 RE: Downzoning for Development Dear Tom: AREA CODE 612 TELEPHONE 456-9000 454-4224 You have asked in recent weeks for some suggestions regarding City authority to downzone property and in particular, what the current state of the art is regarding case law in Minnesota. As you are aware, there are cases coming out of the Appellate Court and Supreme Court on a fairly regular basis concerning zoning issues and in order to understand the direction of the Courts, we have to review these cases on a regular basis. ISSUES Some of the issues that relate to the question at hand are as follows: 1. Eagan has had a variety of examples where downzoning has occurred either by action of the Planning Commission and City Council or by the development of property with the City's consent, less densely than the zoning had permitted. One example was Duckwood Estates some years ago, where the property was zoned R-4 and the use for at least a portion of the property ended up as R-1. There was a recommendation that the City actually downzoned to R-1 and I have not researched the facts to know whether that was actually done. 2. Another factual situation arose with Drexel Heights on the east side of Pilot Knob Road which was a part of a planned development with the underlying zoning R-4 and R -I Planned Development use designation. The Planning Commission recommended downzoning to R-1 and I believe that was done but I have not checked the record. 3. The Planned Development Agreements generally have provided that in the event that a planned development does not comply with the conditions imposed by the City, incorporated into the Development Agreement at the time of the determination of the planned development, the underlying zoning would revert to A (Agricultural). Mr. Thomas Hedges April 25, 1986 Page 2 4. Also, in Planned Development Agreements, the City has attempted to retain the underlying Agricultural status so that in the event that a planned development is terminated, that the owner would then be required to submit a new plan for approval by the City. 5. The primary question that you've asked is whether the City has the power to downzone property absent an application of a property owner, whether at the time of development of the property or where the City Council determines that prior to any development, it would be desirable from a land planning standpoint to reduce the density for potential future development? nT SCTTSSTnN You are aware that under M.S.A. 462, an owner/developer or the City Council has a right to request a public hearing before the Advisory Planning Commission to determine whether to amend the zoning code or in effect, rezone a specific parcel within the City. If the hearing is called at the instigation of the City Council, the same notice procedures must be adhered to and any event, adequate reasons must be provided by the Advisory Planning Commission and the City Council to rezone under recent Court opinions. The "rational basis test" must be shown by clearly setting forth reasons for the rezoning decision in more than simply a conclusory fashion. This memo is only intended to give the Council an introduction to -the subject, which I understand will be discussed at its special meeting on April 29, 1986. Probably a good resume of law oath in 1978 when the Metro Council did a memo on downzoning and the state of the art today would be the conclusion paragraph: "Downzoning has been, and most probably will continue to be, a fertile area for litigation. It is obviously important for communities in Minnesota, in particular, to have engaged in some sort of comprehensive consideration of existing and future land use and development within their community before considering any governmental rezonings as well as for assessing any private request that rezoning be undertaken. When assessing rezonings, it is important to have accurate professional knowledge regarding the facts and consequences relating to both particular rezoning, as well as the entire community. There should be planning support to back up any rezoning determination. Reports should analyze, explain, and logically trace the consequences of various alternatives which a community could adopt. It is preferable to put these reports and considerations in some written form. It would also be helpful in many instances to bring in an independent objective consultant to assess both governmental and individual proposed rezonings. Attempts should be made to give thorough consideration to any proposed change and to insure that the proposal is consistent with other current land use plans and determinations of the community, and that the determination is logical from an historic land use development standpoint. Ir Mr. Thomas Hedges April 25, 1986 Page 3 When adopting or considering downzonings, communities should be careful to determine the precise objects that they intend to effect and give consideration to mitigating features which should be provided by ordinance or other enactments to minimize impacts including value loss reduction to particular property owners." There are a number of cases that have come out since 1978 that we have reviewed again, and that the Council is also aware that the general tenure of the Appellate Court decisions quite recently have appeared to move more in the direction of City authority. I will be happy to discuss this further with you. Very ru'1y yours, HA GE EIDE & KELLER -'P . A. Paul H. Hauge PHH: ras 4-- .. :YiL T'. "% n, uu [lull league of minnesota cities April 10, 1986 TO: City Clerks FRO,4: Joel Jamnik, Legislative Counsel RE: Notice of Vacancies in Multi -Member State Agencies The League has received notice from the state of several available positions in state agencies. Many of these agencies play very important roles in local government. Applications forms may be obtained at the Office of the Secretary of State, 180 State Office Building, St. Paul, M11 55155, (612) 296-2805. The deadline for applications is April 29 1986. The League strongly encourages interested city officials to submit their applications. Please pass this information on to your mayor and councilmembers. For further information, please contact me at the League. We would be happy to assist in any way possible. MINNESOTA JOINT UNDERWRITING ASSOCIATION -LIABILITY INSURANCE has 6 vacancies open for public members. The association shall provide liability insurance coverage for persons unable to obtain it through ordinary means where coverage is required by law or is necessary for the conduct of business and serves a public purpose. The appointing authority is the Commissioner of Commerce. For specific information contact the Minnesota Joint Underwriting Association -Liability Insurance, Dept. of Commerce, 500 Metro Square Bldg., St. Paul, MN 55101; (612) 297-1118. WASTE MANAGES,1EN T BOARD has 8 vacancies open for members; 1 from. each congressional district. The board selects and may acquire sites for hazardous waste facilities; encourages private sector to develop hazardous waste facilities; develops hazardous waste management plan; reviews petitions for Solid Waste Management Districts; administers solid waste management project grants and loans. Members are appointed by the Governor and confirmed by the Senate. Bi -weekly meetings; members receive $50 per diem plus expenses. Members must file with the Ethical Practices Board. For specific information contact the Waste Management Board, 123 Thorson Blvd., 7323 58th Av.e. N., Crystal, Mid 55428; (612) 536-0816. METROPOLITA14 PARKS AND OPEN SPACE COMMISSION has 1 vacancy open for a public member. 'The commission assists the Metropolitan Council in planning the regional recreation open space system, and in making grants for the acquisition and development of facilities in that 1 83 university avenue east, st. paul, minnesota 551 01 (6121227-5600 regional system; reviews master plan for regional facilities prepared by metropolitan area park districts and counties to make sure they are consistent with the Metropolitan Council regional plan for parks. Members may not be members of the Metropolitan Council, or any other metropolitan agency, board or commission, or hold judicial office. Members are appointed by the Metropolitan Council.. Members must file with the Ethical Practices Board. ►Members receive $50 per diem; meetings twice monthly at Metro Square Bldg. For specific information contact the Metropolitan Parks and Open Space Commission, 300 Metro Square Bldg., St. Paul, MV 55101; (612) 291-6401. MI°1NESOTA RURAL FINANCE ADMINISTRATION has 3 vacancies open for public members. No public member may reside within the metropolitan area. Tne administration shall develop the state's agricultural resources by extending credit on real estate security. Members are appointed by the Governor with the advice and consent of the Senate. Members receive $35 per diem. For specific information contact the Minnesota Rural Finance Administration, Dept. of Finance, 309 Administration Bldg., St. Paul, MN 55155; (612) 29.5-5900. Memorandum Burnsville/Eagan Cable Communcations Commission TO: The Honorable Connie Morrison, Mayor, City of Burnsville, and Members of the City Council The Honorable Bea Blomquist, Mayor, City of Eagan, and Members of the City Council Members of the Board Of Directors, Burnsville/Eagan Cable Communcations Commission FROM: Ralph B. Campbell, III, Administrator SUBJECT: Background for 29 April 1986 Joint Work Session DATE: 25 April 1986 CC: Tom Creighton, Legal Counsel On 10 February 1986, the cities of Burnsville and Eagan and all other cities in the Twin Cities metropolitan area that hold franchises with Group W Cable, Inc. (Group W), received letters from Group W that requested two transfers of ownership and control of these systems. . The first transfer (Transfer 1) would involve a 100% transfer of Group W stock from Westinghouse Broadcasting and Cable, Inc. (Westinghouse), Group W's parent, to a group of five cable companies who joined together to own and operate all Group W systems in the United States. The companies who make up this group are as follows: • Telecommunications Incoraorated (TCI). the largest U.S. cable operator, through a subsidiary called TCI Holdings, Inc., who would own 32.6% of the stock * American Television and Communications Corporation (ATC), the 2nd largest U.S. cable operator, who would own 26.4% of the stock * Comcast Corporation, the 18th largest U.S. cable operator, through five partnerships of two of its subsidiaries, who would own 25.4% of the stock 4 — -W Burnsville/Eagan Cable Communications Commission MEMORANDUM RE: Background for 29 April 1986 Joint Work Session 23 April 1986 + Century Communications Corporation, the 23rd largest U.S. cable operator, through a subsidiary called Century Southwest Cable Television, Inc., who would own 12.0 "M of the stock * Daniels & Associates. Inc.. the 29th largest U.S. cable operator, through an affiliate called Daniels -Hauser Holdings, who would own 3.6% of the stock This group has appointed a board of directors to generally oversee the operations of the systems. To provide day-to-day management for the Twin Cities area systems, the group has indicated an intention to sign a management agreement with North Central Cable Communications, L.P. (North Central), a limited partnership composed of Hauser Cable Communications, Inc. (Hauser), the general and operating partner, and Daniels & Associates (Daniels), Inc., the only limited partner identified at this time. At the conclusion of Transfer 1, the owners would change but the corporate entity that is presently Group W would remain as would all franchise obligations, guarantees, letters of credit, bonds, and other city protections. In short, the franchises and the company would remain intact. The second transfer (Transfer 2) would entail a sale of Group W stock in the Twin Cities area systems from the group to North Central. Precisely what the status of the franchise and the company would be at the conclusion of this transfer is unclear. The receipt of Group W's requests for transfer started a ninety (90) day process within which the Commission's Board of Directors must ascertain whether to recommend that the City Councils approve or deny Transfers 1 and 2, individually, and, the City Councils must act upon these recommendations. This process is provided th in e Cable Communications Ordinances of Burnsville and Eagan. The standards of review mandated by the Minnesota State Cable Act require that the Board and Councils consider three factors. The factors are these: 1) The legal and character qualifications of Group W and the buyers; 2) The technical ability of Group W as a result of the change in control (and, if necessary, the technical ability of the buyers); and, 3) The financial stability of Group W as a result of the change in control (and, if necessary, the financial stability of the stockholder, although such stockholders, as was Westinghouse, are not required to pledge any of their corporate assets to insure the financial stability of Group W). In order to secure information adequate to fully consider these factors, a document entitiled MUNICIPAL REQUEST FOR INFORMATION REGARDING REQUEST FOR APPROVAL AND TRANSFER (Municipal Request) was prepared, in cooperation with legal counsel and staff from the North Centrad Cable Communications Commission, the North Page 2 of 3 Burnsville/Eagan Cable Communications Commission MEMORANDUM RE: Background for 29 April 1986 Joint Work Session 25 April 1986 Suburban Cable Commission, and the Quad -Cities Cable Communications Commission. This document, provided in questionnaire form similar to the original franchising Request for Proposals, was designed to secure unambiguous and accurate information. A key portion of the Municipal Request asked for financial information and was analyzed by a financial advisor retained by franchising authorities listed above. This advisor is Kevin Cattoor (kat -TOUR), an independent municipal cable financial consultant who is thoroughly familiar with the methodology required to properly evaluate the financial portion of the questionnaire. The costs associated with the evaluation of Transfers 1 and 2, including Mr. Cattoor s portion, will be paid by Group W. The information provided by North Central to the Board regarding the financial portion has so far been incomplete and partially inaccurate. As part of the 90 -day process, the Board determined that approval of one or both of these transfers may adversely affect the cable system's subscribers and opened a public hearing on 10 April to receive public testimony. At this hearing staff advised the Board that Transaction 1 met the three standards for review and that Transfer 2 appeared to meet the legal, character and technical standards. Staff requested that the hearing be continued to receive adequate information about Transfer 2 concerning the financial stability standard because North Central had not, at the time of the hearing, provided such information. Because the proponents for Transaction 2 would not acknowledge that Transactions 1 and 2 are separate and unrelated, the Board continued the hearing until 8 May 1986 and directed staff to prepare the documents necessary to deny both transactions. However, the Board took an additional action stating that if all proponents provided to legal counsel proper aknowledgements regarding the separate and unrelated nature of Transactions 1 and 2, the Board would reconsider its denial. Such aknowledgements have been received by legal counsel. Following the Board's actions on 8 May, the process requires that the city councils act to approve or reject the Board's recommendations by Monday, 9 June. After a transfer of ownership or control, the cities must submit all necessary documents to the Minnesota Department of Commerce, thus providing proper notice to the state that the transfer or transfers have occured. Page 3 of 3 Me m o r a n d u m Burnsville/Eagan Cable Communcations Commission TO: Members of the Board of Directors FROM: Ralph B. Campbell, III, Administrator SUBJECT: Work Session with City Councils DATE: Thursday 17 April 1986 A WORK SESSION including the Board of Directors, the Burnsville and Eagan City Councils, and staff has been scheduled for Tuesday 29 April 1986 8:00 p.m. City Council Chambers at Eagan City Hall The purpose of this work session is to inform the Councils of the evaluative process presently being conducted by the Board regarding Croup W Cable, Inc.'s request for transfer of ownership, to receive comments from Council members regarding this process, and to provide a opportunity for discussion among Board and Council members. An explanatory memorandum will be sent to you prior to this work session. Please make every effort to attend this work session. Please call me at 454-8100 if you have any questions or comments. t d MEMORANDUM TO: Directors of the North Central Suburban Cable Communications Commission FROM: Thomas D. Creighton DATE: April 7, 1986 RE: Group W Cable, Incorporated Request for Approval of Transfer of Ownership and Control CHRISTINA W. FLEPS- F. GORDON L CHRISTOPHER D. COURSEN- TIMOTHY M. MAAKE• MICHAEL J. '""WGEORGE J. MANNINA. JR: GILBERT E HARDY CHARNEY REGENSTEIN- PETER M. KAZON• EMILY R. PARAOISE• O. OEB RA AUBIN- ANDREW A. JAKA-DEBICKI• RACHEL DCMARCUS' J. TIMOT MY O'NEILL' TIMOTHY W. JENKINS' DMIO A. ZISSEP- L ARAT O.GALLEGOS- JAMES A. NATIONS' DIANE BLIESZNER- Please find below a summary and analysis of proposed transactions number 1 and 2 regarding a request from Group W Cable, Incorporated, to the Member Cities of the North Central Suburban Cable Communications Commission to approve the sale and transfer of all of the issued and outstanding shares of the capital stock of Group W Cable, Incorporated ("Group W") to a group of five buyers (Transaction #1) and the sale of the stock in Group W Cable of the North Central Suburbs, Incorporated and transfer of the cable franchise to North Central Cable Communications Company, L.P. (Transaction #2). The purpose of this report is to provide the Commission with an understanding of the transactions and the standard for reviewing whether to approve such transactions. TRANSACTION- #1 I. Introduction This portion of the memorandum provides an analysis of the proposed Transaction #1 involving the proposed sale and transfer of all of the issued and outstanding shares of the capital stock of Group W from Westinghouse Broadcasting and Cable, Incorporated ("Westinghouse"), to a group of five buyers. O'CONNOR & HAN NAN ATTORNEYS AT LAW MINNEAPOLIS WASNINOTON PATRICK J. O'CONNOR JOE A. WALTERS LAWRENCE A. G. MOLONEY DAVID KANTOA PATRICK J. O'CONNOR EDWARD W. BROOKE - THOMAS A. KELLER III RICHARD L. EVANS 3800 IDS CENTER M. ROBERT NALPER• MICHAEL E. MCGUIRE ROBERT J. C MRISTIANSON, JR. KEVIN M. BUSCH VIRGINIA M. LORD JOSEPH E. DILLON THOMAS H. OUINN• 'ROBERT R. DORSEY JULE M. XwN NAFORD IV 80 SOUTH EIGHTH STREET DAv10 R. Mf LINCOiF• ANDREW J. SHEA WILLIAM R. MCGRANN LAUREN R. LONERGAN DANIEL L. WILES RICHARD G. MORGAN MILES J. AMBROSE- EYRNIVAL MINNEAPOLIS, MINNESOTA 55402-2254 iYD10MS. - KENT E. JAMES A. RUBENSTEIN THOMAS R. SHCRAN JOHN A. BURTON. JR. MICHAEL J.IGRI ES MARGARET M. VAN VALKENSURG MARK J. ATOTTE ROBERT 8. JASKOWIAK (612) 341-3800 ASR .Biai�r• BARRYJ. CUTLER• PETER C. KISSEL• PATRICK E. O'OONNELL- ROBERT A. BRUNIG WILLIAME. FLYNN DEBRA G. STREHLOW COREY J. AILING JOSEPH M. BLATCHFORD- MICHAEL E. • DONALD S. AASOUR P.O'MEARA TELEX 29-0584 CHARLES W. GAVEV RERISON 111• JAMES DOUGLAS J. FRANZEN Or COUNSEL FREDERICK W. THOMAS DENVER WILLIAM O. MULLTELECOPIER (612) 341-3800 (2561 ARNOLDR.KAPIANNR- DAVID W. KELLEY THOMAS D. CRE IG MTON SPtC1Al COUNSEL THEODORE K. FURSER TEPENCE P. BOYLE- NICK MAY ROBERT O. STRAUGHN WILLIAM C. KELLY 11910-19701 ROBERT WIEGANO 11 - NO LA S. OPAL - DIRECT DIAL NUMBER DENVER OrrIC[ WASMINGTOM. D.C. OrPICE MADRID OFF CZ SUITE 4700 SUITE BOO VELAZOUEZ. 21 ONE UNITED BANK CENTER 1919 PENNSYLVANIA AVENUE ..W. MADRID I. SPAIN ' 1700 LINCOLN STREET WASHINGTON. D. C. 20000.3483 431.31.00 DENVER. CO 80203-4547 12021887.1400 TELE%23343 13031 830.1700 Or COUNSEL LOCAL COUNSEL OF COUNSEL WILLIAM T. HANNAN 11911-19 8 0 1 FRANK J. WIRGA- DAVID BURLINGAME- JOHN J. FLYNN WILLIAM R. FISHMAN- DAVID C. TREEN- MEMORANDUM TO: Directors of the North Central Suburban Cable Communications Commission FROM: Thomas D. Creighton DATE: April 7, 1986 RE: Group W Cable, Incorporated Request for Approval of Transfer of Ownership and Control CHRISTINA W. FLEPS- F. GORDON L CHRISTOPHER D. COURSEN- TIMOTHY M. MAAKE• MICHAEL J. '""WGEORGE J. MANNINA. JR: GILBERT E HARDY CHARNEY REGENSTEIN- PETER M. KAZON• EMILY R. PARAOISE• O. OEB RA AUBIN- ANDREW A. JAKA-DEBICKI• RACHEL DCMARCUS' J. TIMOT MY O'NEILL' TIMOTHY W. JENKINS' DMIO A. ZISSEP- L ARAT O.GALLEGOS- JAMES A. NATIONS' DIANE BLIESZNER- Please find below a summary and analysis of proposed transactions number 1 and 2 regarding a request from Group W Cable, Incorporated, to the Member Cities of the North Central Suburban Cable Communications Commission to approve the sale and transfer of all of the issued and outstanding shares of the capital stock of Group W Cable, Incorporated ("Group W") to a group of five buyers (Transaction #1) and the sale of the stock in Group W Cable of the North Central Suburbs, Incorporated and transfer of the cable franchise to North Central Cable Communications Company, L.P. (Transaction #2). The purpose of this report is to provide the Commission with an understanding of the transactions and the standard for reviewing whether to approve such transactions. TRANSACTION- #1 I. Introduction This portion of the memorandum provides an analysis of the proposed Transaction #1 involving the proposed sale and transfer of all of the issued and outstanding shares of the capital stock of Group W from Westinghouse Broadcasting and Cable, Incorporated ("Westinghouse"), to a group of five buyers. f TRANSACTION #1 I. Introduction This portion of the memorandum provides an analysis of the proposed Transaction #1 involving the proposed sale and transfer of all of the issued and outstanding shares of the capital stock of Group W from Westinghouse Broadcasting and Cable, Incorporated ("Westinghouse"), to a group of five buyers. II. Descriotion of Transaction The proposed Transaction #1 involves the following entities: 1. Westinghouse Broadcasting and Cable, Incorporated; 2. American Television and Communications Corporation and its affiliates and assignees ("ATC"); 3. Comcast Corporation and its affiliates and assignees ("Comcast"); 4. Daniels & Associates, Inc. and its affiliates and assignees ("Daniels"); 5. TCI Holdings, Inc. and its affiliates and assignees ("TCIH"); and 6. Century Southwest Cable Television, Inc. and its affiliates and assignees ("Century"). Numbers two through six, above, or their designated affiliates or assignees are hereby referred to collectively as "buyers". Sometime in June of 1986 (hereinafter referred to as the "closing") the buyers are jointly and severally obligated to close the purchase of Group W's stock subject to the terms and conditions of a purchase agreement dated as of December 23, 1985. Upon the closing, the stock and assets of Group W will be owned by the buyers in the following approximate proportions: TCIH and its affiliates or assignees 32.6% ATC and its affiliates or assignees 26.4% Comcast and its affiliates or assignees 25.4% Century and its affiliates or assignees 12.0% Daniels and its affiliates or assignees 3.6% 100.0% The buyers have agreed that, upon the closing, they will elect the following individuals to serve as directors of Group W: Presentl,•/ an Name Officer of: Office Held Thomas W. Binning ATC Executive Vice President Stewart Blair TCIH Senior Vice President - 2 - 27)3 Julian A. Brodsky Comcast Senior Vice President Thomas A. Marinkovich Daniels President Leonard Tow Century President After the closing -Group W will be supervised by the Board of Directors specified above and each buyer will have primary operational responsibility for a group of cable systems which it has agreed to subsequently purchase or dispose of pursuant to the purchase agreement. For the purpose of our analysis the six suburban Minnesota systems have been assigned to Daniels. Daniels & Associates has assigned its interests to Daniels -Hauser Holding Company ("D -H Holdings"), a Colorado general partnership consisting of Daniels & Associates, Inc. and North Central Cable Communications, L.P. as general partners. North Central Cable Communications, L.P. ("North Central") is a Minnesota limited partnership consisting of Hauser Cable Communications Incorporated as general partner and R.E. Hauser Incorporated as limited partner. The buyers have agreed that as soon as possible after the closing Group W will transfer control and ownership of the Group W subsidiaries to the individual buyers (in our case Daniels which has assigned its interest to D -H Holdings). This transaction is described as Transaction #2, below, and cannot occur without your specific review and approval. Nevertheless, the management of your system will be immediately undertaken by North Central, as agreed by the buyers, upon the conclusion of Transaction #1. Although Transactions #1 and #2 require your approval, this change in management of your system can legally occur without your approval. III. Standard of Review The Commission's task in Transaction #1 is to review Transaction #1 and to recommend to its Member Cities approval or denial of the transfer of stock from Westinghouse to the group of buyers. The Cities must make the ultimate determination. The standard of review is that the Cities' consent shall not be unreasonably withheld. For the purpose of determining whether it will consent to the change of control in Group W, the Commission has made inquiry into the legal, technical, and financial qualifications of the buyers. The analysis of the proposed Transaction #1 is somewhat different from the analysis of the proposed Transaction #2. Since proposed Transaction #1 is a stock transfer, in which Group W Incorporated and Group W of the North Central Suburbs, Incorporated remain intact, it is not necessary to transfer the franchise at the conclusion of Transaction #1. Therefore, the performance of your cable communications franchise is still guaranteed by Group W Incorporated who will be controlled by new stock owners. The assets of Group W Incorporated appear 3 - 27C r to remain intact at the conclusion of Transaction #1. Only the management of Group W, Incorporated (through its Board of Directors) and of the six Minnesota suburban systems through North Central will be affected. The purchase agreement between Westinghouse and the buyers requires that the buyers assume all Group W Incorporated systems "as is". The buyers are not permitted to request or make any franchise modifications, nor have you been requested by the buyers to make any such franchise modifications. The Commission should consider the following factors in determining whether to recommend approval or denial of the transfer to the Group of buyers: 1) Legal and character qualifications of Group W and the buyer; 2) Technical ability of Group W as a result of the change in control (and if necessary the technical ability of the buyers); and 3) Financial stability of Group W as a result of the change of control (and if necessary the financial stability of the stockholder, although such stockholders, as was Westinghouse, are not required to pledge any of their corporate assets to insure the financial stability of Group W Incorporated). IV. Analvsis A. Legal arualifications The legal qualifications standard relates primarily to an analysis of whether the entities involved in the transaction are duly organized and authorized to own the cable system and franchise. Each of the entities involved in this transaction are duly organized and authorized to own a cable system and franchise. Two of the buyers are the two largest cable companies in the United States. The character qualifications of the buyers are satisfactory. Therefore, based upon our review of the information provided, it would appear that the Commission or Cities could not reasonably withhold approval of Transfer #1 based upon the legal or character qualifications of the buyers. B. Technical ability The technical ability factor relates to the technical expertise and experience in operating and maintaining a cable system. Since Group W Incorporated will remain in existence, the technical ability of the franchise holder is not at question. However, a review of the Buyers may be*undertaken. In such a review, IN it is noted that the Buyers have extensive cable television experience. Therefore, in reviewing the technical abilities of the buyers, it would be unreasonable to assume that the buyers are not technically qualified to own and operate your cable system. Since North Central has been designated as the manager of your cable systems, it may be a valid inquiry to determine the technical ability of such management. The analysis found in Transaction #2, below, more fully analyzes the technical ability of North Central. Based upon the information provided to us, North Central through its principals, have extensive cable management capability and experience sufficient to satisfy the technical ability factor as applied to your respective cable - system. Based upon our review of the information provided, it would appear that neither the Commission nor Cities could reasonably withhold approval of Transfer #1 based upon the technical ability of the transferee. C. Financial stability The financial stability factor relates to whether the transferee has the financial resources available or committed to not only acquire the system, but also to meet the existing franchise requirements. It was not necessary to evaluate the financial resources of the buyers for the purpose of Transaction #1. The buyers, and stockholders, are not required to commit their individual corporate assets to the performance of Group W Incorporated or its subsidiaries. Although Westinghouse Incorporated has at times apparently provided financial assistance to Group W, Incorporated, as a stockholder Westinghouse would not be required to commit financial resources to the performance of its subsidiary. Therefore, apparently nothing has changed as to the stockholder resources available to Group W Incorporated. Additionally, the assets of Group W Incorporated apparently remain intact at the conclusion of Transaction #1. This, also, does not change from that situation which existed prior to the closing of Transaction #1. As the new corporate board of directors proceeds to transfer systems in Group W Incorporated to the ultimate buyers, obviously, the resources available to Group W Incorporated will dwindle. While this is of concern, Group W, Inc. could have apparently at any time, even prior to Transaction #1, "sold -off" its other existing systems. A Court would have likely concluded that the Member Cities would not have had authority to stop Group W, Inc. from diluting its assets by selling other systems. Therefore a logical analysis would be that the Member Cities cannot control what the new corporate board will do with the other Group W Systems. So long as Group W, Inc. exists and guarantees performance of the existing franchises, we cannot 5 - 2?F discern a reasonable basis to deny the transfer based on the financial stability of Group W, Inc. in light of the considerable financial resources available to Group W at the conclusion of Transaction #1. V. Conclusion As a result of the above, it would appear that the Commission or Cities could not reasonably withhold approval of Transfer #1. - 6 - Z:),F 2�G w tij m O w W F� �] En G z a rr NO tpo H E 0 (D � u o o 0 h -h G H 0 H rt* 0 (D 0 (D rJ Oz F 1 CD Co 0 0dp "y dP a 0 a rt, En• N 0 7 ft rt, O O ul 0 rt ((D X x F�- 0 0 rt a N n Qj N N 1 � � 1 "C1 "C3 1 1 i I F 1 t 1 I 1 1 1 I i I 1 t 1 °tanPi0 n (D USO HHZ 5 H�:l (D -, � Fl ED (D OOJ0 - (n 0 O (n (D n l7 Fl :4 Q H- rh H (n rr C '•C G a � xnv -cnFl- w 0 0 rra- rh o (D �r O a O H- 0 0 �-3 b (D (D W 0 M O G a (D H rt N m (n "C7 z rr rt, F✓ O - a (D O - :1 Fes- (D A (D O v 0 H a H (D :� F•'• z Fl C is x rt p (n (n (n 0 0 o (D 0 0 H- 0 rt P- H o A O 0 rt � din - �, 0 �. a -. -. a n (n m O w ^ F-+ tr' b a Pi NJ t-0 tQ O R+ (D O O . co 1-nN ((DD o rt,7C r` r rt. d10 ^ 4P rt cn wo`PH- 0 N E E a rn rh dP (D (D rh •- ,-• n n H- K) En (n rON Fl- N a ro zy oW (n 2�G w tij m O w W F� Transaction #2 I. INTRODUCTION This memorandum provides an analysis of the proposed Transaction #2 involving the sale of the stock in Group W Cable of the North Central Suburbs, Inc. and Group W, Inc. and transfer of the cable franchise to North Central Cable Communications Company, L.P. The purpose of this report is to provide the Commission with an understanding of the transaction and the standard for reviewing whether to approve it. II. DESCRIPTION OF TRANSACTION The proposed transaction involves the following entities: 1. Daniels & Associates, Inc. ("Daniels") -- a Delaware Corporation. 2. Daniels - Hauser Holding Company ("D -H Holdings") -- a Colorado general partnership consisting of Daniels & Associates, Inc. and North Central Cable Communications, L.P. as general partners. 3. North Central Cable Communications, L.P. ("North Central") -- a Minnesota limited partnership consisting of Hauser Cable Communications Inc. as general partner, and R.E. Hauser, Inc. as limited partner. 4. Hauser Cable Communications, Inc. ("Hauser") -- a Delaware corporation. We have reviewed the necessary documentation to conclude that each of the entities is duly organized and in existence. We have reviewed a Certification Regarding Daniels -Hauser Holdings, which constitutes the partnership agreement of D -H Holdings, a Certificate of Formation issued by the Minnesota Secretary of State and Limited Partnership Agreement creating North Central, and a Certificate of Formation issued by the Delaware Secretary of State and Articles of Incorporation creating Hauser. Additionally, 8 - 2? F4 L. we have reviewed an Application of Foreign Corporation for a Certificate of Authority to Transact Business in Minnesota on behalf of Hauser. The genuineness of all documents and authenticity of all signatures has been presumed. The organizational existence of Daniels has been certified by the Buyers. To facilitate an understanding of the transaction, it should be kept in mind that each of the aforementioned organizations is a separate and distinct entity. North Central, Hauser, and D -H Holdings are entities which have been newly created for the purpose of accomplishing Transaction #2. From the information we have reviewed, it appears that Daniels is an original member of the Buyer group to acquire the stock in Group W Cable, Inc. from Westinghouse Broadcasting and Cable, Inc. (Transaction #1). The Purchase Agreement allows Daniels to assign its rights to purchase stock to other entities. We have reviewed a certification indicating that Daniels has assigned its rights -and obligations in Transaction #1 to D -H Holdings. In effect, D -H Holdings is now a member of the Buyer group. Upon the closing of Transaction #1 in June of 1986, D -H Holdings, in conjunction with the other four members of the Buyer group, will own 100 percent of the outstanding stock in Group W Cable, Inc. (Group W -New York). D -H Holdings' approximate proportion of ownership is 3.6 percent. The Buyer group has agreed among themselves how they intend to operate Group W -New York, after the closing of Transaction #1. The Buyers have agreed to elect certain individuals to the Board of Directors to supervise the business of.Group W -New York. 9 - 2: 1 D -H Holdings, has an option to purchase and immediately receive transfer of your specific system, from Group W -New York at any time after the closing of Transaction #1. If D -H Holdings exercises this option, it will immediately transfer your system to North Central. Until such time as D -H Holdings exercises this option, North Central will manage your system, which will remain owned by Group W -New York. The apparent reason for the complexity and subsequent transfers of your system is certain potential tax ramifications arising from the transactions. Congress is currently considering legislation which may dramatically increase the tax liability of the transaction. It is possible that enactment of the tax legislation or other unanticipated changes in the business or regulatory climate may delay the exercise of the option to purchase by D -H Holdings and the subsequent transfer of your system to North Central. Nevertheless, the management of your system will be immediately undertaken by North Central, as agreed by the Buyers, upon the conclusion of Transaction #1. Although Transactions #1 and #2 require your approval, this change in management of your system can legally occur without your approval. . III. STANDARD OF REVIEW The Commission's task in Transaction #2 is to review the information provided regarding the transaction and to recommend to its member Cities approval or denial of the transfer of stock and transfer of the franchise from Group W, Inc. to D -H Holdings and subsequently to -North Central. The Cities must make the 10 - 2 -',� -i ultimate determination. The franchise and state statute provides the Cities with the express right to approve or disapprove the transfer of ownership in Group W of the North Central Suburbs, Inc. and the transfer of the franchise. The standard of review is that the Cities' consent shall not be unreasonably withheld. For the purpose of determining whether it will consent to the change in control and transfer of the franchise, the Commission has made inquiry into the legal, technical, and financial qualifications of North Central. In analyzing the proposed transaction, the Commission must consider whether North Central meets all of the criteria originally considered in initially granting the franchise to Group W of the North Suburbs, Inc. Note, however, that this analysis is not a comparison between Group W and North Central to determine which is more qualified. Rather, the analysis is an application of the same factors to determine whether North Central satisfies the standards to the -reasonable satisfaction of the City. The Commission should consider the following factors in determining whether to recommend approval or denial of the transfer to North Central: 1) Legal and character qualifications of North Central; 2) Technical ability of North Central; and 3) Financial stability of North Central. IV. ANALYSIS The sources of information used in examining the legal, technical, and financial abilities of North Central include the Municipal Request For Information and other supplemental information provided by Group W and North Central. 2qK r A. Legal Qualifications The legal qualifications standard relates primarily to an analysis of whether the entities involved in the transaction are duly organized and authorized to own the cable system and franchise. Certain entities, such as certain television broadcasting stations, national television networks, and certain telephone companies, are prohibited by Federal law from owning, operating, or controlling a cable television system. We have reviewed the Federal cross -ownership prohibitions and have determined them to be inapplicable. Moreover, we have been provided with the necessary documentation which shows that each of the entities involved in this transaction are duly organized and authorized to own a cable system and franchise. The character qualifications of North Central, as well as the principals of the organization, are satisfactory. North Central has provided information showing that neither it nor any principal has ever been convicted in a criminal proceeding of any crimes against character. Based upon our review of the information provided, it would appear that the Commission or Cities could not reasonably withhold approval of the transfer based upon the legal or character qualifications of North Central. B. Technical Ability The technical ability factor relates to the technical expertise and experience in operating and maintaining a cable system. This analysis focuses upon the current and former experiences of the transferee. Since North Central is a new entity, it I has not directly owned or operated any cable systems. Therefore, the ability of its managing principals must be reviewed. Information has been provided concerning such other individuals' and entities' experiences in owning, operating, and managing cable systems. Hauser Cable Communications, Inc., as general partner of North Central, will be primarily responsible for the management of North Central. A majority interest in Hauser will be held by Gustave M. Hauser, or a company controlled by Mr. Hauser. Additionally, John D. Evans, or a company controlled by Mr. Evans, will also own stock in Hauser. Moreover, Hauser has stated that it intends to enter into a standard management agreement with Hauser Communications, Inc. ("HC") to be responsible for the day-to-day supervisory management of North Central and the cable systems. The information which we have reviewed indicates that Mr. Hauser, Mr. Evans, and HC have extensive cable management capability and experience sufficient to satisfy the technical ability factor as applied to your respective cable system. Mr. Hauser is Chairman and Chief Executive Officer of HC, Arlington Cable Partners, and Suburban Cablevision Company. He formerly served as Chairman and Chief Executive Officer of Warner Amex Cable Communications, Inc. He has been involved in cable television and other electronic communications since the early 19601s. Mr. Evans, as President of HC and Arlington Cable Partners, has 13 years of management experience in the cable television industry. He manages a 34,000 subscriber cable system in Arlington, Virginia and a 33,000 subscriber system in Brooklyn Park, Minnesota. He has also - 13 - 2-7 M served as System and Regional Manager for over 90,000 subscribers in Columbus, Ohio, for American Television and Communications. Hauser Communications, Inc., which will be the manager of your cable system, has experience in managing the Arlington System, Brooklyn Center system, and is intending to acquire a 23,000 subscriber system in Montgomery County, Maryland. Based upon our review of the information provided, it would appear that neither the Commission nor Cities could reasonably withhold approval of the transfer based upon the technical ability of the transferee. C. Financial Stability The financial stability factor relates to whether the transferee has the financial resources available or committed to not only acquire the system, but also to meet the existing franchise requirements. The Commission has engaged Mr. Kevin P. Cattoor, Financial Communications Consultant, to undertake a review of this factor. Mr. Cattoor has prepared an independent report of his analysis and the Commission is referred thereto. D. Other Relevant Factors Other appropriate factors which have been reviewed for the purpose of determining whether to approve or deny this transaction are contained in the Municipal Request For Information. The most significant factor to be considered is whether the cable franchise will be transferred intact and whether North Central will agree to comply with all existing franchise requirements. The information which we have reviewed indicates that North Central is not currently requesting any franchise modifications - 14 - 2�1� as a condition of the transfer. Moreover, the Purchase Agreement among the parties to Transaction #1 specifically prohibits any franchise modifications. In other words, all systems are to be sold and transferred "as -is". Consequently, North Central will agree to receive transfer of the franchise intact. With respect to the franchise requirements regarding the existing service area and line extensions, North Central has indicated that it will comply with the existing franchise requirements and obligations. The construction practices of North Central regarding aerial and underground installation and standards will also conform to existing franchise requirements. North Central has not propos'ed any modifications to the channel capacity or system design and will assume all existing franchise obligations regarding future activation of channel capacity and upstream capabilities, interconnection, performance testing and system maintenance and customer complaint policies. North Central does not propose any addition or deletion of any programming services. In the area of local programming and public access, North Central will agree to assume all existing franchise commitments, including equipment, facilities, staff, and funding. With respect to the information contained on Form M, North Central has indicated a desire in the future to divest itself of the local origination and access programming functions and transfer these obligations to the Commission or Cities. Additionally, North Central would desire the creation of a non-profit corporation to administer the community programming commitment and would propose a contribution - 15 - of $ .45 per subscriber (with an annual escalation) toward access in addition to the 5 percent franchise fee. It is essential that the Commission understand that the information ccntained in Fcrm M is not a current request for a franchise modification. Moreover, the statements made are not a definite proposal which the Commission or Cities must accept should it approve the transfer to North Central. North Central will agree to accept the transfer of the franchise as it exists without any modification of community programming obligations. To the extent North Central would seek any franchise modification subsequent to a transfer, the Commission would be free to accept or reject any proposal at that time consistent with any applicable law which would affect the negotiations at the time they took place. It is also our opinion that any statements made by North Central with respect to its desire to seek any franchise modifications in the future are legally irrelevant to consideration of the transfer under current applicable law. In other words, the Commission or Cities could not unreasonably withhold approval of the transfer based upon anticipated requests for future franchise modifications. Current litigation involving the new Federal law related to "commercial impracticability" may affect this analysis. Prior to your final consideration, the most current legal decisions in this area must be reviewed. The key point for the Commission's consideration at this point is whether North Central will agree to accept the existing obligations and commitments in the franchise. To this extent, North Central has agreed. - 16 - 2- 4 With respect to proposed rates, North Central is not proposing any changes in the applicable franchise requirements and will operate consistent with federal law in setting rates. For those rates which are deregulated under federal law, North Central is permitted to charge whatever it desires. Any regulated rate will remain the same. North Central has also indicated that it will comply with all federal, state, and local laws relating to discrimination, equal opportunity employment programs and affirmative action programs. Moreover, North Central will abide by all existing franchise requ-irements relating to staff positions and managers, to the extent these issues are subject to the Commission's control. Based upon our review of the information constituting other appropriate factors, and recognizing the uncertainty as to judicial interpretations of the 1984 Federal Cable Act, it does not appear that there is any legally justifiable reason to withhold approval of the transfer to North Central in the areas of legal, technical or other relevant considerations. The area of financial ability to perform the franchise commitments appears to be the only remaining question for the Commission's consideration, albeit an extremely significant consideration. Upon the completion of Mr. Cattocr's analysis, a staff recommendation as to financial ability will be forthcoming. Until such time, the Commission should not approve or disapprove Transaction #2. - 17 - 2�Q ti t Q i C7 O G1 O b7 '"1O ro (D ro r_ ro O �o r n Z I -h r ' � o (DD C) d H W rt (( D o a da o n En rt*o O r z fi to t rt 0 ' ' x ft x CD :j N t � 0 t 1 fD ' rt CD h t I c Di ' t � t ro i t ro I t cn � t d t t I � 1 H t i t cn H ro H i t t cn H W C1 � lV n 1 I b I 1 1 I r I t I I � I i I t I 1 t I I O h O ro r Z ; n tD Z In I ft N o ~ fto N m o tt � O d O n �U" n dP En 0 (DD (D rt- H 0 ¢ COD (D X � O N (D ty a a U) x U] o- rt o En �' p- ea sJ N r m ro � • 2� � n 18 RESOLUTION RECOMMENDING APPROVAL REGARDING THE TRANSFER OF OWNERSHIP OF GROUP W CABIE, INC. WHEREAS, the North Central Suburban Cable Communications Commission II (hereinafter "Commission") is delegated the authority and responsibility to coordinate, administer and enforce the Cable Communications Franchise Ordinances, as amended, of its Member Cities pursuant to the terms of a Joint and Cooperative Agreement for the Adir.inistration of a Cable Television Franchise; and WHEREAS, Group W Cable, Inc., a New York Corporation (hereinafter "Group W Cable"), by and through Group W Cable of the North Central Suburbs, Inc., a wholly-owned subsidiary, owns, operates and maintains a cable television system in the Meirf.er Cities pursuant to the terms and conditions of the Cable Communications Franchise Ordinances, as amended, in effect in the Meurer Cities; and WHEREAS, Group W Cable's parent corporation, Westinghouse Broadcasting and Cable, Inc., an Indiana Corporation (hereinafter "Westinghouse"), desires to sell and otherwise transfer all of the issued and outstanding shares of the capital stock of Group W Cable to Century Southwest Cable Television, Inc., a Delaware Corporation; TCI Holdings, Inc., a Cclorado Corporation; American Television and Communications Corporation, a Delaware Corporation; and affiliates of, or subsidiaries or partnerships owned or controlled by, Houston Industries Incorporated, a Texas Corporation, Comcast Corporation, a Pennsylvania Corporation, Daniels & Associates, Inc., a Delaware Corporation, 2:7S and American Television and Communications Corporation (hereinafter "Buyers"), and thereby transfer control of Group W Cable to the Buyers; and WHEREAS, Group W Cable has requested the consent from the Member Cities to a change in ownership and control of Group W Cable to the Buyers and the transfer of ownership and control and ultimate transfer of the Cable Communications Franchise Ordinance as amended to North Central Cable Communications, L.P.; and WHEREAS, the Commission has reviewed the legal, technical, and financial qualifications of Buyers and found them adequate to own and operate Group W Cable; and WHEREAS, the Commission is continuing to review the legal, technical, and financial qualifications of North Central Cable Communications, L.P. as it relates to the transfer of ownership and control and ultimate transfer of the Cable Communications Franchise Ordinance, as amended; and WHEREAS, the Commission is only willing to recommend to its Member Cities approval of the transfer of control of Group W Cable to Buyers subject to the actual closing of the stock sale in June, 1986; and WHEREAS, the Commission has been advised by Group W Cable that the approval of such stock transfer to Buyers shall in no way be interpreted as an approval of the transfer of ownership and control and ultimate transfer of the Cable Communications Franchise Ordinance to North Central Cable Communications, L.P. NOW THEREFORE, BE IT RESOLVED by the North Central Suburban Cable Communications Commission II: 1. That the North Central Suburban Cable Communications Commission II recommends to its Member Cities approval by resolution of the sale by Westinghouse of all of the issued and outstanding shares of the capital stock of Group W Cable, Inc. and the transfer of control of Group W Cable, Inc. to the Buyers subject to an actual closing of the stock sale transaction in June, 1986 pursuant to the terms and conditions currently understood by the Commission as evidenced by the Notice of transfer to said Commission and its Member Cities. 2. That the approval of the transfer of ownership and control of Group W Cable, Inc. to the Buyers is hereby deemed not to include any approval, either express or implied, as to any subsequent transfer of ownership or control or transfer of the Cable Communications Franchise Ordinance to North Central Cable Communications, L.P., or to any other entity or individual. 3. That the North Central Cable Communications Commission II will continue to review the request of Group W Cable, Inc. regarding a change in control and transfer of the Cable Communications Franchise Ordinance as amended to North Central Cable Communications, L.P. and will in the future prepare a separate recommendation for its Member Cities regarding such change in control and transfer. 4. That this recommendation and its acceptance by the Member Cities shall be null, void and of no effect should any entity or individual successfully litigate that the recommendation 2a U 3 - s or approval is also an approval, either express or implied, as to any subsequent transfer of ownership or control or transfer of the Cable Communications Franchise ordinance to North Central Cable Communications, L.P., or to any other entity or individual. 5. That this approval is specifically conditioned upon payment in full prior to an actual closing of the stock sale transaction in June, 1986 of all expenses incurred by Commission related to the Request for Approval of Transfer dated February 4, 1986, including those related expenses incurred prior to February 4, 1986, but incurred in preparation for the receipt of the Request for Approval. The above listed resolution was moved by Commission Director , and duly seconded by Commission Director The following Commission Directors voted in the affirmative: The following Commission Directors voted in the negative: The above resolution was duly adopted this day of , 1986. ATTEST: - 4 - 27 V i GROUP GIABLE Group W Cable, Inc., A Subsidiary of WESTINGHOUSE BROADCASTING AND CABLE, INC. 888 SEVENTH AVENUE. NEW YORK. NY 10106 (212) 247.8700 April 7, 1986 Thomas D. Creighton, Esq. O'Connor & Hannan 3800 IDS Center 80 South 8th Street Minneapolis, MN 55402-2254 Re: North Suburban Cable Commission; Quad Cities Cable Communications Commission; North Central Cable Commission; Burnsville -Eagan Cable Communications Commission Dear Mr. Creighton: Reference is made to the "Notice Regarding Change of Control of Ownership of Group 41 Cable, Inc." dated February 4, 1986 and the "Notice Regarding Consent to Transfer Franchise" on behalf of North Central Cable Communications, L.P. Copies of both notices are attached for your reference. The Notices concern consent for two distinct and separate transactions. The first is the change in control and ownership of Group 41 Cable, Inc., wherein the stock of Group W Cable, Inc. now held by Westinghouse Broadcasting and Cable, Inc. will be transferred to a group of buyers, which buyers are more fully described in the attached Notices. The second transaction requests consent for the group of buyers to transfer the particular cable systems to North Central Cable Communications, L.P. This second transaction is now envisioned to take place -- assuming express municipal consent is ultimately obtained -- at a future date after the first transaction has been consummated. You have advised us that because of numerous questions regarding North Central Cable Communications, L.P., that the above -captioned Commissions are unable at this time to approve the second transaction, pertaining to the transfer of the particular cable systems to North Central Cable Communications, L.P. However, you have advised that these Commissions could now consider the first transaction separate and apart from the second transaction. 14 71 B Group W Tetevrs+on Grot p W Radio + Group W Clete Ftlmatton AsscCtatt:S • Group W Productions • Group YJ Satetuda Canmwj�cat+ons • Group W Te:ewsron 531es HGme Theater NeIAWK • MuraK • Group W Had.o Saes • rVSC Z.4 W Thomas D. Creighton, Esq. April 7, 1986 page two This letter is formal notice to you that Group W Cable, Inc. specifically requests that you bifurcate your consideration for consent and that you immediately consider consent to the change of control and ownership of Group W Cable, Inc. -- the first transaction -- separate and apart from the second transaction -- the transfer to North Central Cable Communications, L.P. In making this request for bifurcation, we understand that you will later separately consider the ultimate transfer of the cable systems by the group of buyers to North Central Cable Communications, L.P. We also acknowledge and represent that your separate consideration and any ultimate consent of the first transaction shall in no way be construed, interpreted or viewed as consideration or consent to the second transaction. Consent to the First transaction will have absolutely no effect whatsoever upon the second transaction and unless and until the above- captioned Commissions actually grant express written consent to the second transaction, there will be no acceptance or consent by such Commissions to the second transaction regardless of their actions ,respecting the first transaction. Thank you very much for your time and attention. I hope this clarifies the matter. If you have any questions, please contact me directly. Very truly yours, Louis J. Briskman Vice President LJB/ddb Enc. cc: North Central Cable Communications, L.P. Buyer's Group 1471B 2-7X 2 February 4, 1986 NOTICE REGARDING CHANGE IN CONTROL The stock of Group W Cable,'Inc. is'being sold to a group of buyers, including five cable operators. As a result of that sale of stock and pursuant to Minnesota Statute 238.083, the undersigned respectively requests your consent to change in control of ownership of Group W Cable, Inc. A form which recognizes that sale of stock and which specifically identifies the buyers, and all of the subsidiaries or affiliated companies which will be involved in the sale is attached for your review and consideration. Under the buyers' current plan, one of the buyers of the stock will have primary responsibility for the operation and management of the Group W Cable system which serves your community. The enclosed form also recognizes that designation and chain of responsibility and requests your approval of the ultimate transfer of the franchise interest and system facilities to that particular and responsible buyer. Thank you for your continued support and cooperation. We at Group W Cable, Inc. stand ready to assist you in this change of control process. Group W Cable, Inc., a New York corporation B ? " y� Title; Ytei President & Assistant Secretary 23 y 4'Jptp.a: v i ft February 4, 1986 N4lIC REMRDIN6 CHANGE IN CgBTRUL OF CWWERSHIP OF -GROUP W CABLE. INC. The stock .of Group W Cable, Inc. is being sold to a group consisting of the undersigned as shown below. its a result of that sale of stock and pursuant to Minnesota Statute 238.083, the undersigned respectively request your consent to change in control of ownership of Group W Cable, Inc. A form which recognizes that sale of stock and which specifically identifies the buyers, and all of the subsidiaries or affiliated companies which will be involved in the sale is attached for your review and consideration. Under the buyers' current plan, one of the buyers of the stock will have primary responsibility for the operation and management of the Group W Cable system which serves your community. The enclosed form also recognizes that designation and chain of responsibility and requests your approval of the ultimate transfer of the franchise interest and system facilities to that particular and responsible buyer. Thank you for your attention and cooperation. bre look forward to beginning .•thi-snow relationship aad we•stand. ady to.As;1s1 WUJA-,t4I*,4KaO%W..4; �,_..�...: change of control process. Century Sout t Cab14 Television, Inc., a Delaware TOP0.7 r _4 Tit 7 e ,�' `-XI--Holdings, Inc., a Colorado corporation By: Title / American television and Communications Corporation ("ATC'), a Delaware corporation on behalf of itself and on behalf of its joint -venture consisting of ATC and KBLCOH, Incorporated, a Texas corporation, which is a wholly-owned subsidiary of Houston Industries, Incorporated By: Title 2:7 2- ri ,NOTICE .REGARDING CONSENT TO'NANSFER FRANC •rne stock of Group buyers which P W Cable, Inc. is being sold to a transfer the' ne a uent to obtaining control of ownership in ownershi grOtip of affiliates of P and control of particular cables ' tense t,� its members. systems to The and control Of intends to cause Group of Group W Cable of RamsW Cable to transfer ownership Cable Communications, L.P., a Minnesota Jim Inc to limited North Central Pursuant to partnership. requests your conMinnesota Statute 238.083 er f thethe franchiselanddthesSectfully business and facilities to North Central Cable Communications, L.P. s A form of consent to the Cable Communications, L.P, is attachedforto consideration. North Central Your review and Thank you for your continued support stand .ready .to assist you I'm this and cooperation. We proce NORTH CENTRAL CABLE COMMUNICATIONS, L.P. 4780 IDS Center Minneapolis, Minnesota C/O Hessian McKasy and Soderberg, P.A. By: Hauser Cable Communications, Inc. General Partner Gustave Hauser Chairman 2� AAt KEVIN P. CATTOOR FINANCIAL COMMUNICATIONS CONSULTANT 2224 73rd COURT NORTH MINNEAPOLIS, MN 55444 Bus. (612)-370-0688 April 3, 1986 Res. (612)-566.5294 Mr. Ralph Campbell Burnsville/Eagan Cable Cc uunication Commission 3830 Pilot Knob Road PO Box 21199 Eagan, MN 55121 Dear Ralph: As we discussed, I am enclosing the following: 1) Final copy of my Preliminary Analysis of the North Central Communications Company, L.P. (North Central) Financial Projections. 2) A copy of Group W's Budget Variance Reports (BVR's) as of 12/31/85 for your system identifying revenues, expenses and cash profit. 3) A copy of Group W's capital expenditure estimate as of 12/31/85, broken down by system and by general expenditure category. The financial analysis enclosed represents only a preliminary analysis of North Central's plan. I've requested additional information from North Central so a complete analysis can be performed. Assuming that North Central is responsive in supplying the additional information, I will try to give you and your Commission a good understanding of what the impact of the operating assumptions have on North Central's plan and for the communities. The enclosed financial analysis does not include a review of the projected financial performance of your system individually. If you wish to pursue the potential financial performance of your system individually, you may call me and we can discuss this matter. In order to determine how Group W is currently operating your system, I requested frau Tom Sharrard a copy of the BVR's noted in 2) above. I've enclosed these reports for your information. At this point, I am going to proceed to request additional information from Mr. Sharrard supporting the BVR's (employment levels, local access, miles of plant, etc.). As we discussed previously, I would appreciate it if you would please summarize certain requirements that Group W is obligated to provide in operating your system under the current franchise agreement. It is necessary that you provide only those requirements that have a significant financial impact (staffing, local programming facilities and equipment, system construction, etc.) to either North Central and/or your communities. This information is necessary for me to perform a complete analysis of North Central's plan. Should you have any questions, please do not hesitate to call me. Sincerely, ,4,e: (11e`� 27 2R PRELIMINARY FINANCIAL ANALYSIS OF THE NORTH CENTRAL COMMUNICATIONS COMPANY, L.P. FINANCIAL PROJECTIONS SUBMITTED TO THE BURNSVILLE/EAGAN CABLE COMMUNICATIONS COMMISSION April 3, 1986 Prepared By: KEVIN P. CATTOOR FINANCIAL COMMUNICATIONS CONSULTANT 2224 - 73rd Court North Minneapolis, Minnesota 55444 (612) 370-0688 27 CC PRELIMINARY FINANCIAL ANALYSIS This report represents a preliminary analysis of the cable television financial projections presented to the Burnsville/Eagan Cable Communications Commission (Commission) by the North Central Cable Communications Company, Limited Partnership (North Central). The financial projections submitted by North Central in the Municipal Request for Information Regarding Request for Approval and Transfer (Response) propose for the acquisition and operation of six cable systems in the Twin Cities area. The six cable systems proposed to be acquired by North Central from Group W, Inc. (Group W) are listed below: Group W Cable of the North Central Suburbs, Inc. Group W Cable of Quad Cities, Inc. Group W Cable of Burnsville/Eagan, Inc. Group W Cable of Columbia Heights/Hilltop, Inc. Group W Cable of North Suburbs, Inc. Group W Cable of Ramsey/Washington, Inc. It should be noted that this report represents a preliminary analysis of North Central's proposal to acquire and operate the six cable systems above on;a consolidated basis. Statements documented in this report in no shape or form represent an analysis of financial projections for any of the six - cable systems individually. Additionally, all statements made herein are subject to a final analysis to be completed at a later date. The purpose of performing a financial analysis of North Central's projections is to give the Commission a better understanding of North Central's plans for purchasing 2-q DD r and operating the systems and determine whether an economically viable plan has been proposed. In performing the analysis, concentration is placed on the following: 1. Determine terms of purchase price and whether the price is properly reflected in the projections. 2. Determine if proposed financing is adequate to purchase and operate the cable systems and whether the terms of financing are properly reflected in the projections. 3. Determine if assumptions used to project revenues and expenses are reasonable and whether operating margins projected therefrom are adequate enough to service debt, and generate a favorable return on equity investment. 4. Determine that the income tax assumptions used in the projections are reasonable and properly reflected. 5. Determine whether the capital expenditures projected reasonably reflect the following: a. Expenditures required to be made to complete the construction of the systems within the franchise agreement. b. Expenditures required to be made in the future are in compliance with line extension policies or other requirements as defined. In order to perform a complete financial analysis of North Central's plan additional information will be required. The financial projections included in North Central's Response do not document many of the assumptions used to develop their plan. Therefore, financial analysis performed to date is preliminary. The completeness of the financial analysis documented in a final report will be dependent upon North Central's response to the questions attached. In performing a financial analysis to date the following observations are made within each of the five categories listed above: - 2 - 2,4 EE 1. Purchase Price North Central has indicated that the purchase price is estimated at $56,660,000. If one assumes that this price is final, North Central will be paying approximately $1,030 to $1,130 per subscriber. These amounts are calculated using a base of 50,000 to 55,000 subscribers for the six systems. This rate per subscriber approximates the market rate paid for a cable system. Acquisition prices per subscriber in the cable industry range from as low as $800 to as high as $1,200 per subscriber. Another approach to determining the purchase price of a cable system is to relate the price to the operating cash flow (operating revenues less operating expenses before depreciation, income taxes and interest) of a system. Generally, cable systems sell at a factor of eight to ten times current operating cash flow. This approach cannot completely be applied to the purchase of the Group W systems as current operating margins (operating cash flow as a percentage of operating revenues) are significantly below the industry averages. However, if one were to take the purchase price of $56,660,000 and divide by nine, you would determine an operating cash flow level of $6,296,000. In reviewing North Central's projected operating cash flow (assuming implementation of proposed community programming funding) for 1987, it is noted that they project $6,981,000. The fact that these amounts approximate each other may - 3 - 2-4 FT7 support that North Central appears to be paying a fair market price for the Group W systems. Additional information has been requested from North Central regarding the purchase price for the Group W systems. 2. Financing In reviewing North Central's plans for financing the purchase and operation of the Group W systems, equity and debt investment are anticipated. In North Central's Response, it is indicated that the sources of financing are as follows: Equity (and/or Senior Subordinated Debt) $13,000,000 Daniels Equity 7,660,000 Senior Debt 42,200,000 Operations 1,500,000 $64,360,000 The above investment will be used to finance the following: Purchase Price Closing Costs and , Working Capital Capital Expenditures Interest Total $56,660,000 1,000,000 3,700,000 2,800,000 $64,160,000 The capital expenditures and interest shown above both represent costs which are projected for the first six months after the purchase is expected to close in June of 1986. At this point, North Central's financing is not finalized. North Central is proposing to obtain a total of $50,000,000 in Senior debt per Schedule B of Exhibit II in the Response. Of the $50,000,000 in senior debt proposed, it assumed in North Central's projections that $42,100,000 will be drawn in the first six months of system operation. It is noted that this amount does not agree with the $42,200,000 documented above. Clarification of this discrepancy should 4 - 2 :� &G- be made by North Central. Additional debt financing of $3,700,000 in 1987, $4,100,000 in 1988 and $8,000,000 in 1991 is proposed. These amounts total to $57,900,000 which exceeds the amount of financing proposed on Schedule B of Exhibit II. North Central should also clarify this discrepancy. Interest will be tied to either the prime rate, LIBOR, or the Federal funds rate plus a margin. It is assumed in North Central's projections that interest will cost 14% per year. North Central has also proposed that they will repay the principal balance on debt investment in ten years. All these terms for the senior debt as proposed appear reasonable in comparison to other acquisitions in the.communications industry but subject to North Central finalizing the terms and conditions of financing. It is uncertain at this point what the amount of equity investment is going to be. On Schedule B of Exhibit II in the Response, it is indicated that $20,660,000 will be invested as equity and/or subordinated debt. Of this amount, North Central indicates that the Daniels LP (Daniels) will invest $7,660,000 in equity. The projections indicate that Daniels will receive a payout of $3,000,000 in 1988 -and $8,101,032 in 1991. The terms and conditions of Daniels' investment have not been revealed. They have been requested from North Central. It is not determinable whether the remaining $13,000,000 will be equity -and/or subordinated debt. North Central in their projections is assuming that a« - 5 2'-�-HR the entire $13,000,000 will be equity. However, to the extent that any of the $13,000,000 is subordinated debt, North Central's projections would need to reflect this change. Dependent upon the terms of any potential subordinated debt, it could have a significant impact upon North Central's ability to service the debt and interest. On a preliminary basis, it appears that the resources needed to finance the acquisition and operation of the six cable systems are not clearly identified. Additionally, it appears that the projection could change significantly based upon the levels of equity, subordinated debt and senior debt ultimately invested. It is important to verify what the financing arrangements are going to be in order to accurately assess the economic viability of North Central's proposed venture. 3. Revenues and Exnenses In reviewing the operating margins of the financial plan, North Central is projecting an average margin of 40% over the 1011 years. This margin is consistent with what mature cable systems are experiencing in the industry. Margins can range from as low as 35% to as high as 50%. It appears that North Central is projecting a favorable relationship between revenues and expenses. At this point, these are the only observations that can be made. The projected operating margins are subject to determining whether the assumptions used for projecting revenues and expenses are reasonable. This review is subject to North Central's response to the attached questions. Imperative to North Central's plan are the following assumptions: 1. North Central is proposing to purchase all six systems and operate them on a consolidated basis. 2. North Central is anticipating that they will be able to improve operating margins if the following occurs: a. Subscriber penetration levels will increase from approximately 37% in 1986 to 50% in 1991. b. Basic rates per month per subscriber are projected to increase 5% in 1987, 12% in 1988, and approximately 5-6% in the years thereafter. c. Responsibility for all local origination and access (community programming) will be transferred to the Commission or cities. 4. Income Taxes North Central has not projected that income taxes will be paid in their plan. This appears to be an accurate assumption as the tax basis of the property acquired (and therefore tax depreciation) may be significant enough to generate taxable losses through 1991. If North Central is in fact a limited partnership, the limited partners will be able to utilize the tax losses generated from the system. It should be determined what the exact tax ramifications are planned to be. Information has been requested in the attached letter. 5. Caoital Expenditures The scope for reviewing capital expenditures in North Central's plan is certainly different from that in a plan which requires a system to be built from the beginning. Certainly the major investment in capital expenditures for the Group W system has already been made. Therefore, review of capital expenditures should concentrate on those needed to improve the performance of the system and/or those expenditures necessary to be in compliance with the current franchise agreements. Documentation of the capital expenditures is limited in North Central's plan. Information has been requested from both North Central and the Cable Administrator to evaluate the expenditures projected and the expenditures required under the franchise agreement. Summary At this point, North Central's projected financial plan lacks a significant amount of documentation and support. The financing arrangements are not finalized. It is important that the details of financing and operating assumptions be determined in order to assess the economical viability of North Central's-plan. Once the necessary information is remitted, an analysis will be made to the economic viability of North Central's plan. A specific analysis will be made of the assumptions for local access programming. The Commission at this point should begin to consider the ramification of the following: I. North Central is proposing to consolidate the operations of all six systems. Is this an acceptable proposal on behalf of the cable Commissions? 2. Is the Commission willing to accept North Central's proposal for the Commission to become responsible for local programming? The answers to these two questions may determine the alternatives the Commission may wish to consider. 8 - 27 KK KEVIN P. CATTDOR 2224 73RD COURT NORTH MINNEAPOLIS, MN 55444 March 25, 1986 Mr. John D. Evans Arlington Cable Partners 2707 Wilson Boulevard Arlington, VA 22201 Dear John: I have reviewed your response to the Municipal Request for Information Regarding Request for Approval and Transfer (Response) as submitted to the Burnsville/Eagan Cable Communications Commission (Commission). Per my discussion with you last week I will need additional information in order to perform a complete analysis of your financial projections. In performing the analysis, I will concentrate on the following areas: I. Determine terms of purchase price and whether the price is properly reflected in the projections. II. Determine whether financing is adequate to purchase and operate the cable systems and whether the terms of financing are properly reflected in -the projections. III. Determine whether the assumptions to project revenues and expenses are reasonable and that operating margins projected therefrom are adequate enough to service debt and generate a favorable return on equity investment. IV. Determine that the income tax assumptions used in the projections are reasonable and properly reflected. V. Determine whether the capital expenditure projected reasonably reflect the following: a. Expenditures required to be made to complete the construction of the systems within the franchise agreements. b. Expenditures required to be made in the future are in compliance with line extension policies or other requirements as defined. .;john, I understand that some of -he ite:as above such as purchase price and financing are .not finalized. To 2-:� LL Mr. John D. Evans Page Two March 25, 1986 the extent that certain information is not final or information not supplied, my report will conclude "subject to" or "except for" the review of the items for which the information was not final or not supplied. I have attached to this letter my list of questions. The questions are categorized into the areas stated above. Look forward to hearing from you. Should you have any questions, please do not hesitate to call. KPC:abg Enclosure Sincerely, Kevin P. Cattoor 2-4 MM 0 QUESTIONS FOR NORTH CENTRAL CABLE COMMUNICATIONS COMPANY, L.P. REGARDING FINANCIAL PROJECTIONS SUBMITTED TO THE BURNSVILLE/EAGAN CABLE COMMUNICATIONS COMMISSION March 24, 1986 Prepared By: KEVIN P. CATTOOR FINANCIAL COMMUNICATIONS CONSULTANT 2224 - 73rd Court North Minneapolis, Minnesom 55444 (612) 370-0688 2 w N v41 I. Purchase Price 1. On Form A of your Response, you indicate that the total cost to the group of buyers purchasing all Group W systems is approximately $2.1 billion. This amount you indicate has been estimated by industry financial analysts. Can you provide a summary of the analyst's estimate? 2. How is the $2.1 billion purchase price broken down between the price for the stock, tax recapture, assumption of certain liabilities etc.? 3. Would you please provide an analysis of how you reconcile the $56,660,000 purchase price to North Central with the total $2.1 billion purchase price for the group of buyers? 4. Would you provide the detail for your $1 million of closing costs and working capital as projected? 5. Can you break the $56,660,000 purchase price down by system? If so, please provide a summary. II. Financing 1. In Schedule B of Exhibit II, you indicate that Daniels will invest $7,660,000 into this venture. What are the terms of this investment? 2. The remaining equity to be invested may be in the form of subordinated debt. Are there any new developments? Is a definite portion going to be subordinated debt? If so, please indicate. 3. What progress has been made recarding debt investment. If you can provide any documentation substantiating the amount urojected, please do so. 4. After the acquisition'is complete, what financing will be available to cover capital expenditures and any potential operating cash shortfalls that may occur? III. Revenues and Expenses 1. What financial goals have you set for this system? Please state at a minimum your goals in the following areas: a. Operating margins b. Subscriber penetration V Rate of "eturn on 4nve:t:-e :t (please _ndicate rte z.^od of determining raze c-_ re zu_n ) 2. Please provide a breakdown of your average subscriber levels by individual system for each of =he 102 years projected. In doing this, I need only the following for each franchise area: a. Households b. Households passed C. Subscribers (Basic and pay) 3. Please provide a breakdown of the average cable miles by individual system for each of the 10� years projected. 4. How do you calculate average density/plant mile? You've calculated 53. I calculate approximately 62. Please provide a sample calculation. 5. Under your Homes Passed Data, you indicate that growth of homes in area will be 2,920 per year. Is this right? Or should it be 2% per year on the beginning homes in franchise area each year? 6. How do you calculate average subscribers per year? For 1987 I've taken the subscribers beginning (57,986) and subscribers ending (64,565), added them and divided by two. My average is 61,275, your average is 60,891. Please explain. 7. What assumptions have you made regarding price increases for the basic and pay services? 8. Under your expense assumptions, please provide a detailed summary of the salaries and positions projected. 9. Please document your assumptions for pay TV service fees. 10. Please document your assumptions for satellite signal fees. 11. Please document your zssummptions for copyright fees. 12. Please provide your assumptions for payroll taxes and c=oup insurance. 13. Please provide your assumptions for the following Operating Expenses: a. Repairs and maintenance b. Auto accident expense C. System maintenance d. Dasa processsing service e. Postage b_'_-_r:g f. Converter maintenance g. Vehicle operating expense h. Light, heat and power i. Pole rent j. Productivt? 2 - Z �V9 14. Please provide your assumptions for the following Administrative Expense: a. Repairs and maintenance b. Light, heat and power C. Telephone expense d. General insurance e. Office rent f. Legal fees g. Professional consultant h. Bad debt write-off i. Employee benefits j. Equipment rent 15. Please provide your assumptions for the following Marketing Expenses: a. Telephone market b. Other market/Data processing c. Contract sales d. Direct sales OV -RD e. Direct mail promo f. Mass media promo g. Subscriber maintenance h. Creative services i. Less Coop dollars 16. For all your expenses what general inflation assumptions have you made. 17. Overall, would you please discuss how you intend to increase the current subscriber penetration levels? What do you plan zo do that Group W hasn't been successful at? 18. Overall, would you please address the current financial performance of each Group W system. Can you provide financial statements (balance sheet and income statement) supporting their performance? 19. Would you please address how your plans for operating the system differ from tha;. of Group W's? Please cover the following specific items: a. Employee levels b. Local origination (what is Group W currently obligated to?) c. Major administrative expenses _v. T_nccme Tax Assumpzlons 1. how do you determine the allocation of purchase price to the following: - 3 - 2 77- Q. Q a. Goodwill b. Franchise fee c. Loan origination fee d. Organization fee e. Property 2. How are the profits and losses from the system being treated for tax purposes? V. Capital Expenditures 1. What are the assumptions supporting the capitalized tv operating expenses below: a. Office electronics b. Vehicle capital leases c. Billing computer d. Telephone system 2. How do you compute projected costs for install material, house install labor capital, and sub -contract labor? 3. What's the basis for the converter costs projected? 4. Please address the current plant miles constructed, what the franchise requires to be constructed and how these relate to the capital costs that you've projected. 5. 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