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HomeMy WebLinkAboutS30 - Adelphia Franchise Transfer DenialCITY OF NEWPORT BEACH CITY COUNCIL STAFF REPORT Agenda Item No. s30 January 10, 2006 TO: HONORABLE MAYOR AND MEMBERS OF THE CITY COUNCIL FROM: City Manager's Office Dave Kiff, Assistant City Manager 949/644 -3002 or dkiff @city.newport- beach.ca.us SUBJECT: REJECTION AND DENIAL WITHOUT PREJUDICE OF AN APPLICATION TO THE TRANSFER ADELPHIA'S FRANCHISE TO EITHER TIME WARNER OR COMCAST ISSUE: Should the City reject and deny without prejudice a Federal Communications Commission ( "FCC ") Form 394 ( "Application ") requesting consent of the City Council to the assignment of the cable television franchise, or control thereof, (the "Franchise ") granted to an entity currently controlled by Adelphia Communications Corporation ( "Adelphia ") [Comcast Cable Communications, Inc. ( "Comcast ")] (the "Franchisee "), to an unspecified entity ( "Proposed Transferee ") to be ultimately controlled by Time Warner, Inc. ( "TWI ") or Comcast (the "Transfer"). RECOMMENDATION: Adopt the attached Resolution rejecting and denying the Application without prejudice. DISCUSSION: Background: Adelphia has held a franchise to operate a cable system in about 60% of the community for the past several years. Prior to Adelphia's arrival, Comcast held the franchise over the same territory. Cox Communications holds a franchise for the roughly 40% of the City not served by Adelphia. The most recent data on how many subscribers each company has in Newport Beach is as follows: Resolution Relating to Adelphia -Time Warner Transfer January 10, 2006 Page 2 In 2002, Adelphia filed for bankruptcy. In April of 2005, TWI and Comcast agreed to acquire Adelphia for $17.6 billion through a deal with Adelphia's creditors. In June 2005, the FCC received a submittal by TWI and Comcast to jointly acquire (and transfer associated licenses and documents from) Adelphia. Part of the FCC process involves the companies' (in our case, TWI, because TWI will take over Adelphia's west coast systems and Comcast will take its east coast systems) asking our consent to approve the Application whereby TWI would takeover the Franchise that Adelphia holds. Legal, Technical and Financial Qualifications To approve the Transfer, the applicant must demonstrate, among other things, that it is a legally, technically, and financially qualified applicant. To properly analyze the financial qualifications, it is important to look at, among other things, the personal wealth of the Proposed Transferee, the economic reasonableness of the transaction to determine whether the transaction will impose unreasonable financial burdens upon the purchaser, the borrowing capacity of the Proposed Transferee, and financial obligations of the Proposed Transferee. This is important because if the applicant is unqualified, it could result in material rate increases beyond that associated with normal operation of a cable system, reduction in service quality based upon cost cutting and expense minimalization, a combination thereof, a premature sale of the system, or financial insolvency. As part of the City's analysis of the proposed Transfer, the City tendered numerous information requests to the parties submitting the Application (the "Applicants ") relating to the legal, technical, and financial qualifications of the Proposed Transferee, and the potential impact on rates and services. As set forth in detail in the Resolution and the documents which constitute the Administrative Record, which will be available at the Newport Beach Cable Fact Sheet Subscriber Information Adelphia Cox Total # of cable drops in Franchise Area 31,123 13,900 45,023 # of cable N subscribers 16,978 10,100 27,078 % of cable drops who take cable 55% 73% 60% Franchise Fee Revenue to City Adelphia -- 1999 (Calendar Year) $ 656,558 $ 266,671 $ 923,229 - -2000 $ 722,714 $ 280,602 $ 1,003,316 - -2001 $ 705,709 $ 395,824 $ 1,101,533 —2002 $ 714,762 $ 394,732 $ 1,109,494 - -2003 $ 640,330 $ 470,404 $ 1,110,734 —2004 $ 766,343 $ 494,411 $ 1,260,753 — 2005 (to date, includes 4th Q '04) $ 411,480 $ 402,014 $ 813,494 In 2002, Adelphia filed for bankruptcy. In April of 2005, TWI and Comcast agreed to acquire Adelphia for $17.6 billion through a deal with Adelphia's creditors. In June 2005, the FCC received a submittal by TWI and Comcast to jointly acquire (and transfer associated licenses and documents from) Adelphia. Part of the FCC process involves the companies' (in our case, TWI, because TWI will take over Adelphia's west coast systems and Comcast will take its east coast systems) asking our consent to approve the Application whereby TWI would takeover the Franchise that Adelphia holds. Legal, Technical and Financial Qualifications To approve the Transfer, the applicant must demonstrate, among other things, that it is a legally, technically, and financially qualified applicant. To properly analyze the financial qualifications, it is important to look at, among other things, the personal wealth of the Proposed Transferee, the economic reasonableness of the transaction to determine whether the transaction will impose unreasonable financial burdens upon the purchaser, the borrowing capacity of the Proposed Transferee, and financial obligations of the Proposed Transferee. This is important because if the applicant is unqualified, it could result in material rate increases beyond that associated with normal operation of a cable system, reduction in service quality based upon cost cutting and expense minimalization, a combination thereof, a premature sale of the system, or financial insolvency. As part of the City's analysis of the proposed Transfer, the City tendered numerous information requests to the parties submitting the Application (the "Applicants ") relating to the legal, technical, and financial qualifications of the Proposed Transferee, and the potential impact on rates and services. As set forth in detail in the Resolution and the documents which constitute the Administrative Record, which will be available at the Resolution Relating to Adelphia -Time Warner Transfer January 10, 2006 Page 3 City Council meeting, the Applicants unreasonably delayed, refused and failed to provide a material portion of the requested information. Specifically, in regards to the transactional documents, the exhibits and schedules to the transactional documents were not provided to the City until November 11, 2005. To obtain these documents, representatives of the City had to spend literally months attempting to negotiate an appropriate Non - Disclosure Agreement which complied with relevant state law and provided for the disclosure of the requested documents upon terms and conditions such that they could be utilized by the City Council in terms of making a final decision. For months, the Applicants proposed to provide disclosure upon terms and conditions which either failed to comply with relevant state law, provided the documents upon a basis which rendered them unusable in the deliberative process, or hinged their provision upon contortions of the attorney - client privilege which exceeded its legitimate scope and potentially conflicted with public policy. As a result, some of the requested documents, but certainly not all of them, were provided 140 days into the process and without sufficient time to have them fully integrated into the due diligence analysis. Similarly, in regards to financial disclosures, it was not until relatively late into the due diligence process that the Applicants offered to provide a written guaranty of Time Warner Cable, Inc. ( "TWC). The vast majority of the financial disclosure was not provided at the TWC level but rather at the TWI level, the ultimate parent. At this point in time, no audited financial data has been provided specifically relating to TWC, although revenue and cost allocations are contained in the filings of TWI. The financial condition of TWC is rendered more problematic by the public announcements as to the intended reorganization of TWC through the spin off of the interests held by Comcast therein and the intended IPO relating to that entity. Given the fact that the vast majority of the financial disclosure has been provided at the TWI level and further given the fact that the corporate and financial structure of TWC appears to be a moving target at this point in time, it cannot be safely concluded without additional analysis that TWC constitutes a legally and financially sufficient guarantor within the meaning of the applicable franchise ordinance and franchise agreement. Additionally, the existence of the SEC Settlement and the Deferred Prosecution Agreement, and the circumstances surrounding its entry, create serious doubts and concerns regarding the legal, financial and technical qualifications of the Proposed Transferee, and /or TWI/TWC. This is a cause for concern because the alleged commission of illegal acts, including without limitation alleged security fraud by Adelphia caused, or materially contributed to, the Adelphia Bankruptcy and all of the negative impacts upon subscribers and local franchising authorities that flowed therefrom. In addition, the City has recently learned that TWI has recently agreed to a $2.65 Billion settlement of certain private civil claims (In Re AOL Time Warner, Inc. Securities and ERISA Litigation (MDL Docket 1500, 02 -Civ -5575 (SWK)). Resolution Relating to Adelphia -Time Warner Transfer January 10, 2006 Page 4 The existence of the Deferred Prosecution Agreement, and the circumstances surrounding its entry, provides a strong and independent basis for rejection of the Transfer absent the provision, which provision has not been provided as of this date, of assurances that the type of acts and omissions which allegedly occurred in relation to the SEC Litigation and the Deferred Prosecution will not repeat on a going forward basis and that the SEC Settlement Agreement and the Deferred Prosecution Agreement themselves, and their implementation, will not materially hinder the operational and financial status of TWI and its subsidiaries. Because the Applicant has failed to demonstrate that it is a legally, technically and financially qualified applicant and for the reasons set forth in the Resolution, counsel for the City, Mr. William M. Marticorena, has advised the City that it should reject and deny the Application without prejudice. The basis for Mr. Marticorena's recommendation is set forth in detail in the attached Resolution, the Administrative Record which will be available for review at the City Council meeting, and the Final Report by Front Range Consulting, Inc. and Ashpaugh & Sculco, CPAs, PLC, regarding the proposed Transfer from Adelphia Communications Corporation and Comcast Cable Communications, Inc. to Time Warner Cable which is attached hereto. Committee Action: None. Environmental Review: The City Council's approval of this Agenda Item does not require environmental review. Public Notice: This agenda item may be noticed according to the Ralph M. Brown Act (72 hours in advance of the public meeting at which the City Council considers the item). Submitted by: Dave K' Assis t City Manager Attachment: Resolution No. Final Report by Front Range Consulting, Inc. and Ashpaugh & Sculco, CPAs, PLC. F: \users \cal \sh ared\ Sl affReports \AdelphiaTransfer01,05.06.doc RESOLUTION NO. 2006- A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF NEWPORT BEACH, CALIFORNIA REJECTING AND DENYING WITHOUT PREJUDICE A FCC FORM 394 RELATING TO THE TRANSFER OF THE CABLE TELEVISION FRANCHISE, AND /OR CONTROL THEREOF, TO AN ENTITY CONTROLLED BY TIME WARNER INC.. OR COMCAST CABLE COMMUNICATIONS, INC. WHEREAS, the City of Newport Beach (the "City ") has received a FCC Form 394 (the "Application ") requesting consent of the City Council to the assignment of the cable television franchise, or control thereof, (the "Franchise ") granted to an entity currently controlled by Adelphia Communications Corporation ( "Adelphia ") [Comcast Cable Communications, Inc. ( "Comcast ")) (the "Franchisee "), to an entity (the "Proposed Transferee ") ultimately controlled by Time Warner Inc. ( "TWI ") or Comcast (the "Transfer"); WHEREAS, City has tendered numerous information requests to the parties submitting the Application (the "Applicants ") relating to, among other things, the legal, technical, and financial qualifications of the Proposed Transferee, and the potential impact on rates and services; and WHEREAS, the Applicants have failed or refused to timely provide requested information in relation to, among other things, the following issues: (1) Complete and accurate copies of the relevant transactional documents, including all exhibits and schedules thereto, which are necessary for the City to exercise its legislative authority in reviewing the Transfer; (2) The provision of financial disclosure relating specifically to that entity or entities which will possess a legally enforceable obligation to comply with franchise obligations; (3) The provision of requested information relating to how the Transfer will potentially impact cable services including, without limitation, how will the operational changes be implemented in Southern California, how call center operations will be handled, if and how local offices will be merged or reorganized, how and when will local construction and equipment needs be financed and prioritized, what will be the rollout schedule for new services, and other issues which relate directly to the day -to -day operations of the Proposed Transferee; (4) The potential impact of the Settlement Agreement between the Securities and Exchange Commission ( "SEC ") and TWI and the Deferred Prosecution Agreement between TWI and the Department of Justice ( "DOX) upon Proposed Transferee's legal technical, and financial qualifications and the continued viability of TWI and /or TWC and their affiliates and subsidiaries; and a WHEREAS, the Applicants unreasonably delayed or refused or failed to provide a material portion of the requested information; and WHEREAS, the City has reviewed the FCC Form 394, all supplemental information submitted in relation thereto, as well as information compiled in any compliance audit, and the various Staff reports and related documents; and WHEREAS, the following documents, without limitation, are deemed to be incorporated into the Administrative Record relating hereto: (1) Letter of William M. Marticorena to Sheila R. Willard and Gary Matz dated June 29, 2005; (2) Letter of Sheila R. Willard to William M. Marticorena dated July 12, 2005; (3) Letter of Gary Matz to William M. Marticorena dated July 12, 2005; (4) Letter of William M. Marticorena to Sheila R. Willard and Gary Matz dated July 29, 2005; (5) Letter of Gary Matz to William M. Marticorena dated August 12, 2005; (6) Letter of Gary Matz to William M. Marticorena dated August 19, 2005; (7) Letter of Gary Matz to William M. Marticorena dated August 19, 2005; (8) Letter of William M. Marticorena to Sheila R. Willard and Gary Matz dated August 22, 2005; (9) Letter of William M. Marticorena to Sheila R. Willard and Gary Matz dated August 25, 2005; (10) Letter of Gary Matz to William M. Marticorena dated September 27, 2005; (11) Letter of William M. Marticorena to Gary Matz dated September 27, 2005; (12) Letter of Sheila R. Willard to William M. Marticorena dated September 30, 2005; (13) Letter of Gary R. Matz to William M. Marticorena dated October 7, 2005; (14) Letter of William M. Marticorena to Gary Matz dated October 12, 2005; (15) Letter of Gary R. Matz to William M. Marticorena dated October 28, 2005; (16) Letter of Gary Matz to William M. Marticorena dated November 14, 2005; (17) Letter of Kristy Hennessey to Mary Morales dated November 15, 2005 (PCTA); and (18) Final Report by Front Range Consulting, Inc. and Ashpaugh & Sculco, CPAs, PLC, Regarding the Proposed Transfers of the Cable System from Adelphia -2- /I Communications Corporation and Comcast Cable Communications, Inc. to Time Warner Cable; and WHEREAS, all of the information provided by the Applicants including, without limitation, the Applications, the transactional documents, numerous SEC disclosure documents, and other information provided to the City and retained in the files of the City, its attorneys and /or consultants, is hereby incorporated by reference into the Administrative Record and is available upon request; and WHEREAS, the Franchise Agreement has expired as of this date without renewal, extension, or otherwise; and WHEREAS, the expiration of the Franchise Agreement was not a result of the City stalling, frustrating, or otherwise interfering with the orderly process for renewal under Section 546 of the Cable Communications Policy Act of 1984, as amended (the "Cable Act ") to the detriment and prejudice of the Cable Operator; and WHEREAS, the Cable Operator possesses no statutory rights pursuant to Section 537 of the Cable Act, or otherwise, given the expired and extinguished nature of the Franchise Agreement ( Comcast of California 1, Inc., et al. v. City of Walnut Creek, California, Order Denying Plaintiffs' Motion for Preliminary Injunction, p.p.s. 10-13 (N.D.Cal., Case No. C05 -00824 (WHA) (2005)); and WHEREAS, the City has determined that it would not be in the public interest in the exercise of its legislative discretion to approve the Transfer at this point in time and has determined that it would be in the public interest to disapprove the Transfer without prejudice subject to potential future and further consideration. NOW, THEREFORE, the City Council of the City of Newport Beach does hereby resolve as follows: SECTION 1: The Application for approval of the Transfer is hereby rejected and denied without prejudice for one, or more, or all of the following reasons: A. Failure to timely provide "additional information required by the terms of the Franchise Agreement or applicable state or local law." B. Failure to timely provide other requested additional information. C. Failure on the part of the Applicant to timely cooperate with Staff, its attorneys and consultants, in performing due diligence relating to the Application, the legal, technical, and financial qualifications of the Proposed Transferee and /or the impact of the transaction upon cable television rates and /or services. D. Failure to demonstrate the legal, technical and financial qualifications of the Transferee. E. Failure to provide a written financial guarantee, acceptable as to form and substance by the City Manager, of the legal entity(s) for which financial disclosure was provided in the Application of and /or additional filings. 15611 F. Due to the specific circumstances that exist in this matter, the unconditional grant of a franchise transfer during the "renewal window ", or subsequent to the expiration of the franchise, destroys or significantly impedes the proper operation of the renewal provisions of Section 626 of the Cable Act and results in the inability of the City to consider, for the purposes of renewal, the operating history of the existing franchisee. The unconditional grant of a franchise transfer at this point in time during the "renewal window ", as established by Section 626 of the Cable Act, circumvents its legislative intent, terminates the ability of the City to consider, as envisioned by the statute, the operating history of the existing franchisee, the existing franchisee's compliance or lack thereof, with applicable law, and the legal, technical and financial qualifications of the existing franchisee, which is the entity which filed the application for renewal pursuant to Section 626 and thus invoked the protections and burdens of Section 626 of the Cable Act. G. The approval of the Transfer would not be in the public interest. H. The expired and extinguished nature of the Franchise Agreement eliminates any right on the part of the Applicants to require the approval of the Transfer pursuant to Section 537 of the Cable Act, or otherwise, and the approval of a transfer of an expired and extinguished franchise at this point in time based upon the facts set forth in the record, without any commitment as to renewal, extension, or otherwise on the part of the Applicants, will create a significant risk to the City based upon the uncertain nature of the Cable Operator's continued occupancy of the public rights -of -way and operation of the cable system. (See, Comcast of California 1, Inc. v. City of Walnut Creek, California, Id. at p. 14). SECTION 2. The Recitals above are hereby declared to be true, accurate, and correct. SECTION 3. The Proposed Transferee has failed to demonstrate that it is a legally, technically and financially qualified applicant for the following reasons: A. The burden of proof is upon the Proposed Transferee to demonstrate its legal, technical, and financial qualifications to assume control of the Franchise and the Franchisee. B. The Proposed Transferee has failed to present any business plan or other documents indicating its short-term and long -term intent as to how it will operate the cable television system and how it intends to achieve an acceptable and reasonable return of and on its investment. C. The City has attempted to carefully review the financial qualifications of the Proposed Transferee. In order to determine the qualifications of a buyer for a cable television system, or a series of cable television systems, it is necessary to not only review the personal wealth, or lack thereof, of the individual or entity assuming control of the franchise operations, but it is also necessary to evaluate the economic reasonableness of the transaction to determine whether the transaction will impose unreasonable financial burdens upon the purchaser which could result in material rate increases beyond that associated with normal operation of a cable system, reduction in service quality based upon cost cutting ME and expense minimalization, a combination thereof, a premature sale of the system, or financial insolvency. The lack of financial qualifications on the part of the Proposed Transferee can impose significant and serious financial consequences upon the City and its subscribers. The Proposed Transferee has failed to provide the necessary information to perform this critical analysis. D. The individual wealth of a Proposed Transferee, corporate or personal, is only the starting point for the financial qualification analysis. Obviously, if the Proposed Transferee does not possess sufficient cash or borrowing capacity to acquire necessary proceeds to close the transaction, financial unsuitability is established. In addition, if the Proposed Transferee does not possess sufficient financial resources, by way of cash or reasonable and customary borrowing capacity, to operate the system, meet current and long -term liabilities when due including, but not limited to, capital expenditure requirements, financial unsuitability is the logical conclusion. However, even in the case of a Proposed Transferee which possesses sufficient cash to close the transaction and operate the system consistent with franchise requirements, there are circumstances under which a buyer or Proposed Transferee may assume such financial obligations that render it financially impossible for that buyer, absent massive influxes of additional capital, to operate that cable television system in a manner which pays current and long -term liabilities, covers debt service, and provides a reasonable and adequate return of and on equity investment. E. In this particular case, all, or substantially all, of the independently- audited financial information provided by the Applicants in relation to the Transfer has been provided at the TWI level. Information relating to TWC has, in whole or at least material part, constituted allocations of parent -level information without independent verification. In addition, the Applicants have informed the City, as well as the financial community as a whole, that they intend to implement a material restructuring of TWC which will involve, based upon information provided by the Applicants, the redemption of an eighteen percent (18 %) interest held by Comcast, through an FCC - mandated trust and the creation of a new publicly- traded company in which TWI will retain an approximate 84% ownership interest and 90% of the voting interest. Little if any information has been provided regarding the financial and legal structure of TWC subsequent to its restructuring and thus significant uncertainty exists as to whether or not any disclosure provided in relation to TWC, independently audited or otherwise, will survive the restructuring. In addition, and without limitation, the Applicants have refused to guaranty post - closing, certain indices of financial health, or lack thereof, including the amount of debt, debt -to- equity ratios, and other important financial indicators and predictors of financial health. Thus, without said guarantees, information provided "as of closing," although relevant, is not necessarily indicative of long -range financial structuring, especially in light of announced changes in the ownership and financial structure of TWC. The Applicants have further failed to provide meaningful assurance to the City that the financial commitments made "as of closing" will carry forward in the future. In fact, the Applicants have even refused to guaranty that the Franchise will end up in the hands of a TWI affiliate. As a practical matter, it is relatively commonplace over the past several years for major cable operators to significantly increase -5- 0 their debt load or otherwise modify "at closing conditions," as times moves on. For example, and without limitation, the amount of debt ultimately incurred by Adelphia, for both legitimate and allegedly illegitimate purposes, significantly exceeded the debt as of the day of closing of the transfer of the cable system to Adelphia. F. The existence of the SEC Settlement and the Deferred Prosecution Agreement, and the circumstances surrounding its entry, create serious doubts and concerns regarding the legal, financial and technical qualifications of the Proposed Transferee, and /or TWI/TWC. First, it must be noted that the alleged commission of illegal acts, including without limitation security fraud by Adelphia cause, or materially contributed to, the Adelphia Bankruptcy and all of the negative impacts upon subscribers and local franchising authorities that flowed therefrom. The existence of the Deferred Prosecution Agreement, and the circumstances surrounding its entry, provides a strong and independent basis for rejection of the Transfer absent the provision, which provision has not been provided as of this date, of assurances that the type of acts and omissions which allegedly occurred in relation to the SEC Litigation and the Deferred Prosecution will not repeat on a going forward basis and that the SEC Settlement Agreement and the Deferred Prosecution Agreement themselves, and their implementation, will not materially hinder the operational and financial status of TWI and its subsidiaries. Any allegation that these settlements are irrelevant to this Transfer based upon the fact that entry is between TWI, the parent entity, and the SEC /DOJ is simply wrong for several reasons. First, TWI possesses a controlling interest in both TWC and the Proposed Transferee and thus its operating history, its management philosophy, its compliance, or lack thereof, with applicable law, directly speaks to its going forward control of the Proposed Transferee and this cable franchise and system. Second, the Deferred Prosecution Agreement does directly involve the operation of TWI's cable subsidiary since several of the agreements which have been earmarked for review by the Independent Monitor appointed by the DOJ involve programming agreements relating to the cable division. The fact that these programming agreements have been earmarked for further scrutiny casts doubt upon the operating history of the cable division and directly brings into analytical focus its prior compliance with applicable law and its legal, financial and technical qualifications. At a minimum, it is reasonable to defer approval of the Transfer until the Independent Monitor has concluded its examination as to whether or not TWi's cable division had committed prohibited and /or unlawful acts in relation to programming and other contracts directly related to the operation of its cable systems. G. The Applicants have failed to provide evidence denying the existence of the various risks described above or demonstrating the potential benefits to the City and subscribers which might justify the incurrence of the risks described above. H. Given the risks associated with the Transfer, as identified above, it will not be in the public interest for the City to unconditionally approve the Transfer at this time. This disapproval of the Transfer contained herein is without prejudice and may be reconsidered by the City Council when and if the Applicants are able to in 0 present evidence demonstrating the Proposed Transferee's technical and financial suitability and the lack of a negative impact on rates and /or services. The Applicants have asked the City to determine the legal, technical, and financial qualifications for the Transfer based primarily upon the legal, technical, and financial qualifications of the proposed parent entity. The Applicants have failed to present sufficient information to the City sustaining, if otherwise sustainable, a finding of legal, technical, and financial qualifications other than in relation to TWI and /or TWC. More specifically, and without limitation, absent the financial qualifications of TWI as set forth in the FCC Form 394, the Applicants could make no reasonable argument whatsoever for a finding of financial qualification. Notwithstanding the Applicants' reliance upon the financial disclosure of the parent entity, the City has been informed by authorized attorneys for the Applicants that no transfer agreement can include TWI as an obligated party thereto. A guaranty from TWC is certainly more substantial but not without its own problems as explained above. It is reasonable to conclude that the proposed parent entity is not willing to commit the assets set forth in the FCC Form 394 to franchise obligations and thus the use of the financial qualifications of the proposed parent entity is inappropriate since those assets are not pledged or otherwise made legally available for the performance of franchise obligations. Thus, based upon the express refusal of the proposed parent entity to commit the financial resources identified in the FCC Form 394, or any specific portion thereof, to performance of franchise obligations, the Proposed Transferee is hereby found not to possess the financial qualifications to control the Franchise. SECTION 4. The Franchisee, which is currently controlled by Adelphia, has filed an application for renewal pursuant to Section 626 of the Cable Act. By invoking the benefits and burdens of the renewal provisions of the Cable Act, the Franchisee has initiated a statutorily- created process whereby its operating history throughout the franchise term constitutes the relevant operating history for the purposes of consideration in the renewal process. Both the express language and legislative intent of Section 626 of the Cable Act rewards those cable operators who have, throughout their franchise term, complied with franchise requirements, complied with applicable law, and possess the legal, technical, and financial qualifications for renewal. On the other hand, the same statutory scheme potentially penalizes those franchisees who fail to meet one or more of these statutory criteria. The unconditional grant of a transfer potentially eliminates the ability of the City to consider the relevant operating history of Adelphia and thus destroys or materially impedes the proper operation of the renewal provisions of the Cable Act. The unconditional approval of the Transfer at this point in time would, in essence, make a mockery of the renewal provisions of Section 626 and encourage the going forward "laundering" of franchises and franchisees which have failed to comply with the renewal criteria set forth in the Cable Act through late -term sales. Although the Franchisee was not required to invoke the benefits and burdens of Section 626 in seeking renewal of its franchise, having made that election, the statutory scheme can only be properly implemented through a completion of that process with the existing Franchisee. -7- SECTION 5. A transfer of the Franchise, transfer of actual or managerial control of the Franchise, and /or transfer of control of the Franchisee, shall be deemed a material breach of the Franchise. SECTION 6. The decision pursuant to this Resolution shall, without further action of the City Council, constitute an act of the Franchising Authority within the meaning of 47 C.F.R. § 76.502 and a "final decision" of the City Council within the meaning of §§ 617(e) of the Cable Television Consumer Protection and Competition Act of 1992, Pub. L.No. 103 -385, 106 Stat. 1477 (1992). SECTION 7. This denial, disapproval, and rejection issued pursuant to the authority of this Resolution shall be deemed "without prejudice" to the ability of the Applicant to file another FCC Form 394 relating to the same or a different transaction. However, nothing herein shall limit the authority of the City Council, or their written designee, to reject any subsequent FCC Form 394 based upon the same grounds set forth in the written notice of denial or such other grounds as might exist in relation to said future FCC Form 394. PASSED and ADOPTED by the City Council of the City of Newport Beach, at a regular meeting held on the day of 2006. Don Webb, Mayor ATTEST: LaVonne Harkless, City Clerk of the City of Newport Beach F fuse rs\ cat\ shared\ ResoIAon \AdeI phi aTransfer01.05.06.doc in 12 Final Report R Front Range Consulting, Inc. And Ashpaugh & Sculco, CPAs, PLC Regarding the Proposed Transfers of the Cable System From Adelphia Communications Corporation And Comcast Cable Communications, Inc. To Time Warner Cable December 1. 2005 FRONT RANGE CONSULTING, INC ASHPAUGH & SCULCO, CPAS, PLC 4152 Bell Mountain Drive 1133 Louisiana Avenue, Suite 106 Castle Rock, CO 80104 Winter Park, FL 32789 13 This is the report of Front Range Consulting, Inc. ( "FRC ") and Ashpaugh & Sculco, CPAs, PLC ( "A &S ") (collectively "Consultants ") concerning the proposed transfer of cable franchises of Adelphia Communications Corporation ( "Adelphia ") and Comcast Cable Communications, Inc ( "Comcast') to Time Warner Cable, Inc. ( "Time Warner Cable "). As part of the transfer process, Rutan & Tucker, LLP ( "Rutan ") has retained the Consultants for certain of their clients. The Rutan clients have been notified by Adelphia, Comcast and Time Warner that it has the opportunity to review the transaction and to approve or deny the transfer application. Time Warner Cable submitted the transfer request to the Rutan clients by filing FCC Form 394s by a cover letter dated June 10, 2005.1 The Adelphia and Comcast franchises and the assets comprising the cable television systems operating in the designated franchise areas will be transferred to Time Warner NY Cable LLC ( "TW NY "), which will be a wholly owned subsidiary of Time Warner Cable. Time Warner Cable currently is a wholly owned subsidiary of Time Warner, Inc. ( "TWI "). As a component of this transaction, TWI will spin off Time Warner Cable as a separate company, but TWI will maintain ownership of approximately 84% of the common stock according to the filed 394s. Approximately 16% of the common stock will be owned by creditors of Adelphia. It should be noted that different scenarios of this arrangement have been made public by many interested parties since the filing. It is unknown how or what the ultimate arrangement may be. Under the Cable Act and other applicable law, the Rutan clients are authorized to review the financial, legal, technical and other relevant and appropriate qualifications of the new transferee. TW NY, and the impact the transfer would have on subscriber rates and services, if approved. This report addresses the financial qualifications of TW NY and Time Warner Cable and the impact the proposed transfer would have on subscriber rates and services. I. Report Synopsis The Consultants have not been able to prepare a unique analysis of the financial qualifications of TW NY or Time Warner Cable based on the complete lack of any relevant financial information on either of these two entities, even though relevant financial data was requested. Neither of these two entities currently operates or controls any cable franchises in the magnitude it is proposing after the transfer and therefore neither entity has any historical financial data and historical information that would be relevant z Time Warner Cable was asked to supply historical and projected financial data on both of these new entities and as of the date of this report, neither has supplied any specific and relevant data even though it is clear that Time Warner Cable has sufficient historical to prepare a projection of cash flow for the acquired systems and the new company under this transaction. Without any specific financial data, the Consultants cannot conclude that either TW NY or Time Warner Cable possesses the required financial qualifications to hold the current ' FCC For in 394s were provided to local franchise authorities ( "LFAs ") on or about June 15, 2005. Time Warner Cable has been notified by some of the LFAs that the transfer application was incomplete. z The transfer will result in Time Warner Cable absorbing properties of Adelphia and Comcast and transferring some Time Warner Cable and Adelphia properties to Comcast. The ultimate makeup of Time Warner Cable and TW NY is not reflected in any of the historical financial data. FRON "1' RANGE CONSULTING, INC. AND ASHPAUGH & SCULCO, CPAs, PLC Page 2 of 11 Iy franchise. The Consultants recommend that the Rutan clients should consider one of the three options detailed below with regards to the proposed transfer: • Deny without prejudice the transfer of the current franchise to TW NY and Time Warner Cable based on the lack of any specific and relevant financial information for a reasonable planning horizon on the new franchisee; • Approve the transfer of the current franchises to TW NY and Time Warner Cable with a specific guarantee by TWI of the performance of all of the prior, current and future financial requirements set forth in the franchise agreement; or • Secure an extension of time for the Rutan clients to require TW NY and Time Warner Cable to respond to the financial information requests such that a full and complete analysis of the financial qualifications may be prepared. Time Warner Cable would need to agree to an extension of the 120 -day review period set forth in federal law. II. Summary of the Proposed Transaction The proposed transaction whereby the current franchisee will be transferred to TW NY, a wholly owned subsidiary of Time Warner Cable, is just part of a much larger and complicated transaction between Time Warner, Inc., Comcast and Adelphia. Adelphia filed for bankruptcy protection in June 25, 2002 as a result of significant financial fraud by management of Adelphia. Adelphia has proposed a Plan of Reorganization whereby the assets of Adelphia will be sold to Time Warner Cable and Comcast. Time Warner Cable and Comcast have also agreed that they would swap systems across the country as part of the agreement to purchase the assets of Adelphia. The Adelphia purchase is contingent on approval of the Bankruptcy Court. Included in the purchase agreement with Adelphia, Time Warner Cable has also agreed to purchase all of the systems Comcast was supposed to purchase from Adelphia to the extent Comcast is unable to secure the necessary governmental approvals. The system swap agreements between Time Warner Cable and Comcast appear to be contingent on the approval of the Adelphia/Time Warner Cable /Comcast agreement but Time Warner Cable and Comcast have an option to proceed with the swap agreement notwithstanding the Adelphia agreements not being consummated. The proposed transfers of each of the individual franchises from Adelphia to TW NY, from Adelphia to Comcast and between Time Warner Cable and Comcast are the small individual portions of the much larger deal between Adelphia, Time Warner Cable and Comcast. The proposal is for all of the Adelphia purchases and the system swaps to occur essentially simultaneously after Bankruptcy Court approval. It is unclear when this will occur and if the approvals are not consummated as planned will any or all of the contingent transactions still take place. Adelphia and Comcast need to transfer the current franchise to new holding company, TW NY. TW NY will be the franchisee and a wholly owned subsidiary of Time Warner Cable. It appears that TW NY will only exist on paper and not have any real cable operations. While TWI and Time Warner Cable have many years of experience in cable operations, these ' The 4" Plan of Reorganization, which is the latest, was filed on November 3, 2005. This plan was amended by Adelphia on November 15, 2005 and on November 21, 2005. FRONT RANGG CONSULTING, INC. allo ASHPAUGH & SCULCO, CPAs, PLC Page 3 of I I k5 entities have no apparent financial history and will be operating the cable systems without the benefit of the financial backing of TWI, one of the largest corporations in the world. Time Warner Cable will have approximately 15 million subscribers included in many different franchises across the nation. The Consultants conclude that the Rutan clients do not have the ability to assess the financial viability of Time Warner Cable absent the financial data requested. III. Summary of the Adelphia Plan of Reorganization On June 24, 2005, Adelphia Communications Corporation, et al., filed its Second Amended Joint Plan of Reorganization ( "Plan of Reorganization "). This Plan of Reorganization details the purchase agreements by both Time Warner, Inc. ( "TW Adelphia Acquisition ") and Comcast ( "Comcast Adelphia Acquisition ") whereby Time Warner Cable and Comcast will acquire substantially all of Adelphia's U.S. assets and assume certain liabilities. Under the purchase agreements, Adelphia will receive approximately $12.7 billion in cash and approximately sixteen percent (16 %) of the stock in a new publicly traded entity, Time Warner Cable, Inc. From the information provided, it appears that some of the Rutan clients are part of the Purchase Agreement. Adelphia's Plan of Reorganization is subject to a confirmation process with the Bankruptcy Court including a vote by the creditors of Adelphia. The Plan of Reorganization is subject to many conditions. The proposed Disclosure Statement submitted by Adelphia contains the following description of the conditions. The Sale Transaction Closing is subject to the satisfaction or waiver of conditions customary to transactions of this Type, including, among others, ( I ) receipt of applicable regulatory approvals; including the consent of the Federal Communications Commission (the "FCC ") to the transfer of licenses and any applicable approvals of local franchising authorities ( "LFAs ") to die change in ownership of the cable systems operated by the Company to the extent not preempted by section 365 of the Bankruptcy Code, (2) expiration or termination of the applicable waiting period under the Hart - Scott- Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act "), (3) the offer and sale of the shares of Time Warner Cable Class A Common Stock to be issued in die Sale Transaction having been exempted From registration pursuant to an order of the Bankruptcy Court confirming the Plan or a no- action letter from the staff of the SEC, or a registration statement covering the offer and sale of such shares having been declared effective, (4) the Time Warner Cable Class A Common Stock to be issued in the Sale Transaction being freely tradable and not subject to resale restrictions, except in certain circuinstai ces, (5) approval of the shares of Time Warner Cable Class A Common Stock to be issued in the transaction for listing on the NYSE, (6) envy by the Bankruptcy Court of a final order confirming the Plan and, contemporaneously with the Sale Transaction Closing, consummation of the Plan, (7) satisfactory settlement by ACC of the claims and causes of actions brought by the SEC and the investigations by the DoJ, (3) the absence of any material adverse effect with respect to (a) Time Warner Cable's business and (b) certain Specified Businesses (without taking into consideration any loss of subscribers by the Company's business (or the results thereof) already reflected in the projections specified in the Purchase Agreements or the related purchase price adjustment), (9) the number of eligible basic subscribers (as the term is used in the Purchase Agreements) served by the Specified Businesses, each as specified in the Purchase Agreements and comprised of cable systems, as of a specified date prior to the Sale Transaction Closing not being below an agreed upon threshold, (10) the absence of an actual change in law, or proposed change in law that has a reasonable possibility of being enacted, that would adversely affect the tax treatment accorded to the Sale Transaction with respect to Tw NY, (11) a filing of an election under Section 754 of the Internal Revenue Code of FRONT RANGE CONSULTING, INC. Ann ASIIPAUGI I & SCULCO, CPAs, PLC Page 4 of I I 1986, as amended (the 'Tax Code "), by each of Century-TCI California Communications, L.P.. Parnassos Communications, L.P. and Western NY Cablevision L.P. (collectively, the "Century- TCl/Parnassos JVs ") and (12) the provision of certain audited and unaudited financial information by ACC. Subject to the Expanded Transaction, the closing under each Purchase Agreement is also conditioned on a contemporaneous closing under the other Purchase Agreement. (Disclosure Statement, page 48) The original expectation of the confirmation by the Bankruptcy Court was anticipated at the end of 2005 with a closing in early 2006. The Disclosure Statement now contains an expected closing "during the first half of 2006." In the draft Disclosure Statement release November 21, 2005, Adelphia included a new potential risk condition in its disclosure. Specifically Adelphia states: The potential appointment of a chapter t I trustee pursuant to the request by the ad hoc committee of Arahova noteholders (the "Arahova Noteholder's Committee "), or a request by another party in interest, which may lead to a default under the Extended DIP Facility, may prevent consummation of the Sales Transaction and would give TW NY and Comcast the right to terminate the Purchase Agreements. (Fourth Amended Disclosure Statement released Novembcr 21; 2005, page xi) This new disclosure underscores the difficulty presented to local franchising authorities when asked to approve the transfer before the final details of the transaction are known and previously undisclosed, undefined risks are revealed. Further complicating the transaction is the inclusion in the Plan of Reorganization of the "Expanded Transaction Letter Agreement." This agreement allows Time Warner Cable to purchase all of the assets that Comcast was originally slated to purchase to the extent Comcast is unable to secure all of the necessary "FCC or applicable antitrust regulatory approvals." The number of the significant approvals and conditions included within the Plan of Reorganization makes it impossible to foresee what the final transactions will ultimately look like. The Purchase Agreement under which many of the assets will be valued contains the following conditions: The Purchase Agreements include certain customary conditions to the Sale Transaction Closing, including, among otlier things, the following: • the Bankruptcy Court must enter a confirmation order, which order must be a final order in full force and effect, and the Plan must be effective in accordance with its terms; • all conditions precedent to consummation of the Plan must be satisfied or waived and the Plan must be consummated substantially contemporaneously with the Sale Transaction Closing; • settlements that impose no liability (including risk of criminal prosecution) on any Specified Business or owner thereof must be reached with the SEC and Dot; subject to the Bankruptcy Court and District Court orders approving such settlements becoming final orders, ACC, TW NY and Comcast have agreed that this condition will be deemed satisfied; • the waiting periods under the HSR Act must expire or be terminated; • no law, order, judgment or decree prohibiting the transactions contemplated by the Purchase Agreements may be in effect; • all necessary approvals that are required pursuant to the Purchase Agreements must be obtained by ACC, TW NY and Comcast, as applicable; and FRONT RANGE CONSULTING, INC. AND ASHPAUGH & SCULCO, CPAs, PLC Page 5 of 1 I • except in the case of the Expanded Transaction, the closing of the transactions under each of the Purchase Agreements must occur simultaneously. (Disclosure Statement pages 249 — 250) IV. Time Warner, Inc. — Comcast Exchange & Redemption Agreements As part of the agreement by Time Warner and Comcast to jointly acquire the systems from Adelphia, Comcast and Time Warner have entered into five other agreements: • Exchange Agreement; • Time Warner Cable Redemption Agreement; • TWE Redemption Agreement; • Time Warner Cable Failsafe Agreement; and • Time Warner Cable Alternate Failsafe Agreement. Exchange Agreement The Exchange Agreement anticipates Time Warner Cable will transfer cable systems comprising approximately 2.43 million subscribers to Comcast and Comcast will transfer cable systems comprising approximately 2.35 million subscribers to Time Warner Cable. Some of the systems being transferred between Time Warner Cable and Comcast are systems that are currently owned or operated by Adelphia. Therefore, the Exchange Agreement is contingent on the closing of the Adelphia Plan of Reorganization. From the information provided, it appears that some of the Rutan clients are part of the Exchange Agreement. The Disclosure statement lists the conditions of the Time Warner Cable Redemption Agreement. Those being: f. Conditions Pursuant to the Exchange Agreement, each party's obligation to consummate the Exchanges is subject to the satisfaction or waiver, where permissible, of a number of customary closing conditions, including the following conditions: • the Sale Transaction Closing; • the representations and warranties of the other party regarding valid organization and qualification to do business, corporate authority, third party consents and approvals, absence of conflicts, transactions with affiliates and finder's fees, certain matters with respect to the subsidiaries being transferred in the Exchanges, and absence of undisclosed agreements regarding the Sale Transaction (such representations, the "Exchange Class I Representations ") being true and correct in all material respects, and all other representations and warranties being true and correct (without giving effect to any materiality qualifiers) except as would not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect (as defined in the Exchange Agreement); • the obligations, agreements and covenants of the other party being performed in all material respects; • no provision of any applicable law or orders of any governmental entity of competent jurisdiction being in effect that has the effect of making the Exchanges illegal or otherwise restrains or prohibits the consummation of the Exchanges or requires separation or divestiture by such party of a significant portion of the assets to be acquired by such party in the Exchanges or otherwise materially and adversely affects the cable systems to be acquired by such party in the Exchanges, mud the absence of litigation by certain governmental entities seeking such an effect; FRONT RANGE CONSULTING, INC. nNO ASHPAUGH & SCULCO, CPAs, PLC Page 6 of 11 m • expiration or termination of any waiting period (and any extension thereof) applicable to the consmmnation of the Exchanges under the HSR Act; • third party consents, including franchise consents, that are required under the Exchange Agreement being obtained; and • delivery by each of Comcast and Time Warner Cable of certain Financial information required under Form 8 -K of the Exchange Act. (Disclosure Statement, page 262) Additionally, the Exchange Agreement requires that Comcast secure consent to transfer from at least 90% of the Comcast systems being transferred to Time Warner Cable. This requirement is set forth in Section 7.2 0) of the Exchange Agreement which states: 0) Franchise Required Consents. The aggregate number of Individual Subscribers served by die Comcast Transferred Systems in the Service Areas that are, as of the Closing, Transferable Service Areas shall be at least 90% of the Individual Subscribers served by the Comcast Transferred Systems at such time (the "Comcast Required Threshold "); provided that if any portion of the Comcast Transferred Systems containing active headends is not within such Transferable Service Areas as of the Closing, then any other portion of the Comcast Transferred Systems served by such headends shall be deemed not to be included in such Transferable Service Areas. Time Warner Cable Redemption Agreement The Time Warner Cable Redemption Agreement essentially transfers cable systems comprising 587,000 subscribers of Time Warner Cable and $1.9 billion in cash to Comcast in return for Comcast's 17.9% interest in Time Warner Cable Class A Common Stock. The legal entity that will hold the cable systems comprising the 587,000 subscribers will be a Comcast entity called Cable Holdco 11. TWE Redemption Agreement The TWE Redemption Agreement is similar to the Time Warner Cable Redemption Agreement in that Time Warner is redeeming the 4.7% interest Comcast currently has in Time Warner Entertainment Company, L.P. ( "TWE ") by transferring cable systems comprising approximately 168,000 subscribers and cash in the amount ol'$133 million. The conditions as detailed above for the Time Warner Cable Redemption Agreement are similar in the TWE Redemption Agreement. Time Warner Cable Failsafe and Alternate Failsafe Agreements Time Warner and Comcast have provided alternate agreements whereby Time Warner can re- acquire 23.8% of the 16.7% of the Class A Common Stock of Time Warner Cable owned by Comcast. Either agreement allows Time Warner Cable to transfer cable systems with approximately 148,000 subscribers and acash payment of $422 million to Comcast. If both the Time Warner Cable and the TWE Redemption Agreements are terminated, the Time Warner Cable Failsafe Agreement would occur. If only the Time Warner Cable Redemption Agreement is terminated, then the Alternate Failsafe Agreement would occur. Because Time Warner Cable and Comcast have not provided the schedules listing the systems that will be transferred under either of these two agreements, the Consultants cannot ascertain the impact. V. Summary of the FCC Form 394 Filed Time Warner Cable delivered to the Rutan clients letters dated June 10, 2005 transmitting the required FCC Form 394, FCC Form 394 is a five ('5) page form providing an "Application for Franchise Authority Consent to Assignment or Transfer of Control of Cable Television FRONT RANGE CONSULTING, INC. sau ASHPAUGH & Scum, CPAs, PLC Page 7 of 11 16 Franchise." The form is general in nature allowing for a general description of the proposed transaction with a detailed description and other materials to be provided in exhibits attached to the Form 394. Time Warner Cable attached additional pages of printed materials and approximately 50 megabytes of computer generated exhibits. The computer generated exhibits contain many of the purchase, exchange and redemption agreements underlying the Adelphia — TimeWarner — Comcast transaction. (While the documents were attached Comcast did not attach the exhibits and schedules to those agreements). Time Warner Cable also included publicly available financial data on TWI and Comcast (2004 l OK, Is` Q 2005 1 OQ and selected 3Ks). For a variety of reasons, certain of the Rutan clients have concluded that the Form 394s were incomplete, and informed Time Warner Cable, Adelphia and Comcast of this fact. Time Warner Cable responded disputing the incompleteness of the tiling and proving very limited additional information. The requested financial support was not provided. VI. Requests for Information Time Warner Cable was requested to provide additional information with regards to the proposed transaction. The first request was sent on June 29, 2005 from Rutan to both Cornetist and Time Warner. Time Warner Cable and Cornetist responded with a letter dated July 12, 2005. Rutan also delivered addition requests for information subsequent to June 29, 2005. Time Warner Cable was requested to provide specific information regarding the "Opinions of the Financial Advisors, date April 19, 2005" in request H (6) in the June 29. 2005 request. Time Warner Cable responded in the letter of July 12 by stating: These opinions are not publicly available, and TWC's agreements with its financial advisors prohibit TWC from sharing the opinions with third parties without first obtaining the consent of those financial advisors. TWC will seek to obtain such consents and, if such consents are obtained, will make the opinions available for your review at its offices, pursuant to a signed confidentiality agreement. The November 21, 2005 Disclosure Statement prepared by Adelphia clearly identifies the steps taken by TWC's M &A Advisors in presenting the valuation of the 16% equity being transferred to the Adelphia creditors. It is clear from that review, that the M &A Advisors prepared a discounted cash flow analysis of the Pro Forma TWC. This effort appears to have been completed by the M &A Advisors in April 2005. (See attachment A). It is precisely this estimated Pro Forma TWC financial information that was sought by the Consultants. Instead of providing this information for review, TWC prevented Rutan's clients the opportunity to evaluate the financial picture of TWC after this proposed acquisition and exchange of cable systems throughout the country. Time Warner Cable submitted with the FCC Form 394 a copy of the TWI SEC Form 10 -K for 2004 and the TWI SEC Form IO -Q for the first quarter of 2005. Time Warner Cable has provided no financial projections of any sort with the filing or in response to either of these two requests for information. However, the information disclosed in the CD provided with the Form 394 indicated that Time Warner Cable has presented a projected cash flow analysis to its investors and credit reporting agencies. Time Warner Cable has been unwilling to provide any projected information with regards to the "new" Time Warner Cable, Inc. after the proposed acquisitions and transfers. FRONT RANGE CONSULTING, INC. Ano ASHPAUGH & SCULCO, CPAS, PLC Page 3 of I I Rutan has also provided the Consultants with copies of documents redacted from the purchase and exchange agreements.` While these documents are subject to a specific confidentiality and non - disclosure agreement, the confidential information provided does not come close to allowing the Consultants to make any reasonable projection of the anticipated earnings, balance sheet and cash flow positions of Time Warner Cable, Inc. after the proposed transactions. From the confidential information provided, the Consultants seriously question whether the Time Warner M &A Advisors could have made any projection over any reasonable planning horizon based on this limited information. In summary, Time Warner Cable has not provided any significantly detailed financial projections or historical financial data for TW NY after the proposed transaction or for Time Warner Cable as the company will be after the transactions yet it is apparent that Time Warner Cable has provided such information to its Board of Directors and investors.5 VII. Financial Analysis A financial analysis of any proposed transfer or assignment is critical in order to assure the franchising authority that the new owner /operator of the franchise is financially qualified to take over the franchise operation from the previous owner. The financial qualifications of the current franchisee were a significant consideration in the awarding of the franchise. The FCC Form 394 is supposed to facilitate this review by requiring the proposed transferee to provide historical financial information sufficient to prove that the transferee will be able to meet its financial obligations. The proposed transfer contemplated by this FCC Form 394 is extremely complicated and subject to a number of complex transaction all interdependent on each other. For example, the proposed Time Warner Cable Redemption Agreement is conditioned on the approval of the Adelphia Plan of Reorganization; yet the proposed Plan of Reorganization was not filed nor was it available when the FCC Form 394 was sent to the City. In addition, the submitted FCC Form 394 did little to explain the precise make -up of the new entity, TW NY or Time Warner Cable and the financial qualifications. Further, Adelphia has filed two significant amendments to the Plan of Reorganization since the Form 394 was filed. Time Warner Cable has refused to provide any financial forecasts or historical financial data. Based on the responses to the requests for information and the listing of the excluded exhibits to the Time Warner Cable Redemption Agreement, the Consultants believe that Time Warner Cable could have provided at least some historical and budgeted financial data. (See Section IV above). Time Warner Cable has provided a summarized financial pro -forma statement in the Fourth Disclosure Statement but that is only for the year 2004 and does not project any costs associated with franchise commitments over a reasonable planning horizon. The Consultants were provided information bate stamped TW 00001 through TW 00135. The Consultants are aware that in other reviews of the Time Warner Form 394 related to this transaction with Adelphia, that Time Warner has refused to provide a ten year projection of an income statement, balance sheet and cash flow statement for the new Time Warner Cable, Inc. e It has been asserted that the filed FCC Form 394 was incomplete and therefore the federal 120 -day review period has not yet begun. This report does not in any way waive that position but attempts to review the financial qualifications of based on the limited data submitted. FRONT RANGE CONSULTING, INC. AND ASHPAUGH & SCULCO, CPAs, PLC Page 9 of 1 1 Interestingly enough, Time Warner Cable is projecting that its percentage of debt will increase from 29.9% to 43% as a result of this transaction.7 Increasing the debt leverage of a company increase the risk of the entity as it increases the level of fixed costs that must be recovered by the entity. Analysis Time Warner Cable has provided historical financial data on Time Warner Cable as a wholly -owned subsidiary ofTWI in its 2004 Form 10 -K which provides little or no relevant information on the financial qualification the new entity of TW NY or of the separate company of Time Warner Cable from this transaction. Time Warner Cable has refused to provide the operating and capital budgets for 2006 of the entities. Time Warner Cable was also asked to provide all analyses of the viability of this transaction by both internal and external organizations. It is very common for companies to have independent analyses of a large transaction of this type for presentation to its Board of Directors in considering the approval of the transaction. These analyses will typically project income statements and cash flow projection over a reasonable planning horizon showing the effects of the transaction on the current organization. Time Warner Cable refused to provide this type of information. This refused information would again be helpful in assessing the financial viability of the proposed franchisee and the financial ramifications of the proposed transaction. It is clear that these projections should exist. The Consultants believe it to be unreasonable for Time Warner Cable to suggest that the historical financial operation is sufficient given that a material portion of Time Warner Cable's existing cable systems will be transferred to Comcast, a material portion of Comcast's cable systems will be transferred to Time Warner Cable and the Adelphia systems will need to be absorbed into Time Warner Cable. Furthermore, while Time Warner Cable is suggesting its overall financial structure is sufficient to prove its "financial qualifications," it is appears to be unwilling to provide a financial guarantee such as a bond or a line of credit. Essentially Time Warner Cable is asking that the LFAs "trust us" with regards to the financial qualifications. Time Warner Cable continues to suggest throughout its responses to data requests that it has sufficient financial experience and financial strength to operate all of its franchises.$ However, the LFAs have been asked to approve a transfer of the franchise to a new entity which has no separate financial history and an undefined management structure. In summary, the Consultants have been prevented from preparing any financial analysis of either TW NY or Time Warner Cable because of Time Warner Cable's refusal to provide underlying financial projections, analyses and assumptions. The Consultants believe that there could be significant financial risk with regards to TW NY and Time Warner Cable because these entities will be operating a new entity without the financial backing ofTWI. Rate Impacts l See page 290 of the 4" Plan of Reorganization, filed on November S. 2005 and amended by Adelphia on November 15. 2005. e See response to H (6) discussed above. FRONT RANGE CONSULTING, INC. AND ASHPAUGH & SCULCO, CPAS, PLC Page 10 of I 1 , The Consultants cannot conclude, based on the limited financial data provide, that subscriber rates will not be adversely impacted by this transaction. For example, in the regulated equipment and installation rates, Time Warner Cable has used national and regional "equipment averaging" methodology. To the extent Time Warner Cable will be adding systems in high cost areas or that require significant financial investment in new technologies and exchanging systems in low cost areas, the equipment rates are likely to rise. Asset costs for the systems being acquired are also significant in determining the regulated equipment rates. To the extent Time Warner Cable is acquiring systems with higher then average asset values for converters (either based on the age of the equipment or valuation changes), service vehicles, or maintenance facilities, equipment rates and installation charges will also likely ri se. VIII. Recommendations The Consultants recommend that the Rutan clients consider one of the following three alternatives: A. Deny without prejudice the transfer of the current franchise to TW NY and Time Warner Cable based on the lack of any specific and relevant financial information for a reasonable planning horizon on the new franchisee; B. Approve the transfer of the current franchise to TW NY and Time Warner Cable with a specific guarantee by TWI of the performance of all of the prior, current and future financial requirements set forth in the franchise agreement; or C. Secure an extension of time for the LFA to require TW NY and Time Warner Cable to respond to the financial information requests such that a full and complete analysis of the financial qualifications may be prepared. Time Warner Cable would need to agree to an extension of the 120 -day review period set forth in federal law. The Consultants make these recommendations based on the complete failure by Time Warner Cable to provide any reasonable financial data on TW NY or Time Warner Cable. To the extent Option B is selected, the approval must also be conditioned on the current Adelphia Plan of Reorganization. To the extent the Plan of Reorganization changes in any material way, the Rutan clients must reserve its right to withdraw its approval. FRONT RANGE. CONSULTING, INC. AND ASHPAUGH & SCULCO, CPAS, PLC Page 11 of 11 .n Attachment A l l4 X.VALUATION OF TWC EQUITY A. INTRODUCTION Under the Purchase Agreements, except in the case ofthe Expanded Transaction, the Company will receive as consideration, subject to adjustment, approximately $12.7 billion in cash and such number of shares of TWC Class A Common Stock that, subject to the TWC Equity Securities Exceptions, will represent 16% of We outstanding equity securities of TWC as of die Sale Transaction Closing on a fully diluted basis. The TW Purchase Agreement does not contain any guarantee of the value of the TWC Class A Common Stock. The Purchase Agreements do permit the Company not to effect the Sale Transaction Closing if, with respect to the TW Purchase Agreement, either there has been a Parent Material Adverse Event or if TW NY is unable to make the TW Representation Bring -Down or the Buyer Covenant Bring -Down. To assist the Board in determining the estimated value of the shares of TWC Class A Common Stock to be received by We Debtors' constituents pursuant to the Sale Transaction, as contemplated by the Plan, the Board requested that the M &A Advisors, as part of their overall engagement, undertake an analysis of the estimated equity value of TWC, after giving effect to the Sale Transaction and the TWC /Comcast Transactions (for purposes of this Section X, "Valuation of TWC Equity" only, TWC, after giving such effect, "Pro Forma TWC "). The M &A Advisors completed their analysis on April 5, 2005 and reviewed their analysis with the Board at a meeting held on April 9, 2005 to evaluate the Sale Transaction and the TWC /Comcast Transactions. As described below, the M&A Advisors subsequently updated their analysis, as of April 19, 2005, for presentation to the Board on April 20, 2005 prior to the Board's approval of die Sale Transaction. Distributions under the Plan are based on the Deemed Value of tine TWC Class A Common Stock, which may be greater or less than any valuation of Pro Forma TWC as of the Confirmation Date, or as of the Effective Date, or the actual trading value of the TWC Class A Common Stock when it begins to trade or at any time thereafter. Thus, the Debtors have not updated the valuation contained in this Disclosure Statement. Constituents whose recoveries include TWC Class A Common Stock bear the risk that the actual value of the recoveries they receive will be materially different than the Estimated Recoveries in respect of their claims included in this Disclosure Statement. In conducting their analysis, the M &A Advisors, among other things: (1) reviewed certain publicly available business and historical financial information relating to TWC, We Company and Comcast; (2) reviewed certain internal fmaucial information and other data relating to the business and financial prospects of TWC, tine Company and Comcast; (3) reviewed certain financial projections (including estimated synergies) for Pro Forma TWC (tile "Financial Projections "), prepared by management of TWC, and reviewed by management of the Company; (4) reviewed the projected tax attributes resulting from the Sale Transaction and the TWC /Comcast Transactions that Pro Forma TWC expects to realize, as provided by management of TWC; (5) conducted discussions with members of TWC's senior management concerning tine business and financial prospects of TWC and Pro Forma TWC; (6) conducted discussions with members of tine Company's senior management concerning tine business and financial prospects of the Company and Pro Forma TWC; (7) reviewed publicly available financial and stock market data with respect to certain other publicly traded companies in lutes of business the M &A Advisors believed to be comparable in certain respects to Pro Forma TWC's businesses; and (3) conducted such other Financial studies, analyses and investigations, and considered such other information, as the M &A Advisors deemed necessary or appropriate. The estimated equity value of Pro Forma TWC set forth in this section represents a hypothetical valuation of Pro Forma TWC, assuming the consummation of the Sale Transaction and the TWC /Comcast Transactions and that Pro Forma TWC continues as an operating business, based on the valuation methodologies described below. The estimated equity value of Pro Forma TWC set forth in this section does not purport to constitute an appraisal or necessarily reflect the actual market value that might be realized through a sale or liquidation of Pro Forma TWC, its securities or its assets, which value may be significantly higher or lower than the estimate set forth in this section. In addition, the estimated equity value of Pro Forma TWC set forth in this section is not uccessarily indicative of the prices at which the TWC Class A Common Stuck may trade at any time, which prices may be significantly higher or lower, than implied by such estimate. The market prices of the TWC Class A Common Stock will depend upon, among other things, prevailing interest rates, conditions in the financial markets, the investment decisions of tlne Company's prepetitiou creditors receiving shares of TWC Class A Common Stock under the Plan 364 2� (some of whom may prefer to sell these shares rather than hold them on a long -term basis) and other factors that generally influence the prices of securities. There can be no assurance as to the trading market, if any, that may be available in the future with respect to the TWC Class A Common Stock. The YI &A Advisors' estimate of the equity value of Pro Forma TWC was based upon, among other assumptions, Pro Fonna TWC achieving the Financial Projections. The future results of Pro Forma TWC will depend upon various factors, many of which are beyond the control or knowledge ofTWC and the Company, and consequently, are inherently difficult to project. The financial results reflected in the Financial Projections are based on the assumption of the successful combination of certain cable systems of TWC, the Company and Conicast, as well as the realization of estimated synergies, and, thus, are materially different from the historical results of operations of TWC. In addition, the Financial Projections were prepared by management of TWC based upon information available at the time of preparation. Subsequent to the April 9, 2005 and April 20, 2005 presentations by the M &A Advisors to the Board as described in this section, the Financial Projections were refined by TWC as part of its updated business plan, which reflected updated information provided by Company management regarding the Adelphia Acquired Systems; such £mancial projections, as so refined, are set forth in Section IX, titled `"f WC Projections." The Company views the Projections included in this Disclosure Statement as not materially different from those used by the M &A Advisors in their analyses. Pro Forma TWC's actual future results may differ materially from the Financial Projections, and such differences may affect the equity value of Pro Forma TWC. Therefore the estimated equity value of Pro Forma TWC set forth in this section is inherently subject to substantial uncertainty. Accordingly, none of the Company, TWC, the M &A Advisors or any other person makes any representation that the estimated equity value of Pro Forma TWC is indicative of the actual equity value of Pro Forma TWC or the prices at which the TWC Class A Common Stock may trade at any time, which may be significantly higher or lower than the estimates contained in this section. The M &A Advisors' analysis described below addresses the estimated equity value of Pro Forma TWC and does not address any other aspect of the Sale Transaction and the TWC /Comcast Transactions, the Plan or any other transactions. The M &A Advisors' estimated equity value of Pro Forma TWC does not constitute a recommendation to any holder of Claims or Equity Interests as to how such holder should vote or otherwise act with respect to the Plan or any other transaction. The estimated equity value of Pro Forma TWC set forth in this section does not constitute an opinion as to fairness from a financial point of view to any person of the consideration to be received by such person under the Plan or of the terms and provisions of the Plan. As part of their respective investment banking business, each of the M &A Advisors is regularly engaged in evaluating businesses and their securities in connection with mergers and acquisitions, negotiated underwritings, competitive bids, secondary distributions of listed and unlisted securities, private placements, restructurings and reorganizations and valuations for estate, corporate and other purposes. In the ordinary course of business, each of the M &A Advisors and their successors and affiliates may trade, and may in the future trade, for their own accounts and the accounts of their customers, securities of Time Wamer, TWC, Comcast and, except as restricted under then respective engagement letters from trading for then own account, of ACC and its subsidiaries and, accordingly, may at any time hold long or short positions in such securities. B. METHODOLOGY In preparing their valuation, the M &A Advisors performed a variety of financial analyses and considered a variety of factors. The following is a brief summary of the material financial analyses performed by the NI &A Advisors, which consisted of (1) an analysis of the market value and trading multiples of selected publicly traded companies in lines of business the M &A Advisors believed to be comparable in certain respects to Pro Forma TWC's businesses, which will include those cable systems of TWC, the Company and Comcast to be included in Pro Forma TWC, and (2) a discounted cash flow analysis to estimate the present value of Pro Forma TWC's projected future unhevered, after -tax cash flows available to debt and equity investors based on the Financial Projections. This summary does not purport to be a complete description of the analyses performed and factors considered by die M &A Advisors. The preparation of a valuation analysis is a complex analytical process involvbng various judgmental determinations as to the most appropriate and relevant methods of £mancial analysis and the application 365 ,pv of those methods to particular facts and circmustances, and such analyses and judgment's are not readily susceptible to summary description. The M &A Advisors believe that their analyses of Pro Forma 'f WC must be considered as a whole and that selecting portions of their analyses, without considering all of their analyses and all parts thereof, could create a misleading or incomplete view of the processes underlying the M &A Advisors' conclusions. The M &A Advisors did not draw, in isolation, conclusions from or with regard to any one analysis or factor, nor did the M &A Advisors place any particular reliance or weight on any individual analysis. Rather, the M &A Advisors arrived at their views based on all the analyses undertaken by them assessed as a whole. Each M &A Advisor is separately responsible for its own analyses and estimated valuation, and neither M &A Advisor is responsible for any action or omission of die other M &A Advisor. For purposes of the M &A Advisor's' financial analyses, the equity value of Pro Forma TWC was calculated as the estimated consolidated enterprise value of the cable operations of Pro Forma TWC (including the estimated value of synergies) plus the value of unconsolidated assets and the estimated value of tax attributes to be realized by TWC as a result of the Sale Transaction and the TWC /Comcast Transactions, less book value of estimated net indebtedness and of preferred stock, less minority interests. At the Company's direction, the M &A Advisors calculated the equity value of Pro Forma TWC assuming no discount in respect of any trading anomalies attributable to the possibility that initial holders are not necessarily the natural long -term holders or other supply /demand imbalances on the TWC Class A Common Stock to be received by the Debtors' prepetition creditors under the Plan. Selected Publicly Trader) Contimnies Analysis. Tlie M &A Advisors analyzed the enterprise value and trading multiples of selected publicly held companies in lines of business tine A4 &A Advisors believed to be comparable in certain respects to Pro Forma TWC's businesses, which will include those cable systems of TWC, the Company and Conncast to be included in Pro Forma TWC. The companies selected for this analysis were: Comcast, Charter Communications, Cablevisiou Systems, Insight Conunumcations and Mediacom Communications. In calculating the enterprise values of the above companies, the M &A Advisors adjusted such enterprise values where necessary by subtracting the estimated value of non -cable assets to arrive at a cable asset value ( "�AV "). The M &A Advisors then calculated the CAV of the selected companies as a multiple of certain historical) and projected financial and operational data of such companies such as cable EBITDA and basic subscribers. The M &A Advisors then analyzed those multiples and considered them in deriving a range of multiples appropriate for each of the TWC, Company and Comcast cable systems comprising Pro Forma TWC, taking into consideration the different attributes of each. Based on the derived multiples, a range of CAVs for Pro Forma TWC was calctdated factoring in the relative size of the cable system contributions to Pro Forma TWC of TWC, the Company and Comcast In arriving at a range of enterprise values for Pro Forma TWC, the M &A Advisors separately factored in a range of estimated values for die estimated synergies and tax attributes as provided by TWC management. The projected financial and operational data for Pro Forma TWC's businesses were based on the Financial Projections, and the projected financial and operational data for the selected companies were based on publicly available research analyst reports and other publicly available information. Although the selected companies were used for comparison purposes, no selected company is either identical or directly comparable to die businesses of Pro Forma TWC. Accordingly, the M &A Advisors' comparison of the selected companies to Pro Forma TWC and analysis of the results of such comparisons was not purely mathematical, but instead necessarily Lrvolved complex considerations andjudgments concerning differences in fmarncial and operating characteristics and other factors that could affect the relative values of the selected companies and of Pro Forma TWC. Discounted Cash F/ory Analysis. The M &A Advisors performed a discounted cash flow analysis for Pro Forma TWC to estimate the present value of the projected future unlevered, after -tax cash flows based on The Financial Projections. The present value range of the projected future unlevered, alter -tax cash flows was calculated as the son of the present value of Pro Forma TWC's cash flows through tlne final year projected in die Financial Projections (the "terminal year ") and the present value of its estimated terminal value at the end of the terminal year. 366 ti,I For the purpose of calculating Pro Forma TWC's terminal value at the end of the tenninal year, the M &A Advisors applied a range of EBITDA multiples to the projected terminal year EBITDA. The M &A Advisors then applied a range of discount rates to the after -tax cash flows described above and the range of terminal values at the end of the terminal year of Pro Forma TWC to arrive at a range of present values for those cash flows and the terminal values. The discounted cash flow analysis also involves complex considerations and judgments conceming terminal year EBITDA multiples and discount rates. While tar attributes were not included in the Financial Projections and, thus, were not reflected in the consolidated enterprise value of the cable operations of Pro Forma TWC derived from the discounted cash flow analysis, the M &A Advisors also factored in a range of estimated values of the projected tax attributes provided by TWC management in order to calculate die equity value of Pro Forma TWC based on the discounted cash flow analysis. C. ESTIMATED EQUITY VALUE OF PRO FORMA TWC In connection with the M &A Advisors' analysis, with the Company's consent, the M &A Advisors did not assume any responsibility for independent verification of any of the information provided to the M &A Advisors, publicly available to the M &A Advisors or otherwise reviewed by the M &A Advisors, and the M &A Advisors relied, with the Company's consent, on such information being complete and accurate in all material respects. The M &A Advisors further assumed, at the Company's direction, that the Financial Projections were reasonably prepared on a basis reflecting the best currently available estimates and judgments (including regarding projected synergies and tax attributes) of the Company's and TWC's senior management as to the future performance of pro Forma TWC. In addition, with the Company's consent, the M &A Advisors did not assume any responsibility for independently evaluating the achievability of the Financial Projections or the reasonableness of the assumptions upon which they were based, did not conduct a physical inspection of the properties, facilities and products of TWC, We Company or Comcast, and did not make any independent evaluation or appraisal of any of the assets or liabilities (contingent or otherwise) of TWC, the Company and Comcast. The M &A Advisors also assumed, with the Company's consent, the following (as to which the M &A Advisors made no representation): • Pro Forma'rWC will achieve the Financial Projections; • the Sale Transaction and the TWC /Comcast Transactions are consummated as described in the Plan; • Pro Forma TWC's capitalization will be as set forth in the Financial Projections; • the projected tax attributes of Pro Foram TWC shall be as provided to the M &A Advisor's by TWC's management; • Pro Forma TWC will be able to obtain all future fntu cings on the terms mid at die times necessary to achieve the Financial Projections; • Pro Forma TWC will not engage in any material asset sales or other strategic transactions, and no material asset sales or strategic transactions are required to meet Pro Forma TWC's ongoing cash requirements or to achieve the Financial Projections; • all governmental, regulatory or other consents and approvals necessary for the consummation of the Salo Transaction and the TWC /Comcast Transactions will be obtained without any material adverse effect on Pro Forma TWC; • there will not be any material change, from the date of valuation, in the business, condition (financial or otherwise), results of operations, assets, liabilities or prospects of Pro Forma TWC other than as reflected in the Financial Projections; and 367 n. A • there will riot be any material change, from the date of valuation, in economic, market, financial and other conditions. Based on the M &A Advisors' estimated equity value of Pro Forma TWC, the Company asked the M &A Advisors to calculate an estimated equity value for 16% of Pro Forma TWC. For the proposes of preparing an estimated equity value for 16% of Pro For-ma TWC, the M &A Advisors assumed, with the Company's consent, (i) no premium or discount for the minority position represented by the 16% interest or the inferior per share voting rights of the TWC Class A Common Stock relative to the TWC Class B Common Stock and (ii) that 16% of the equity securities of Pro Fonna TWC would be issued to the Debtors' constituents pursuant to the TW Adelphia Acquisition, notwithstanding that such equity interest is subject to dilution due to the TWC Equity Securities Exceptions. Based upon the review and analyses described in this section and subject to the assumptions, limitations and qualifications described herein, at a meeting of the Board held on April 9, 2005 to evaluate the Sale Transaction and the TWC /Comcast Transactions, the M &A Advisors advised the Board that the M &A Advisors' view was that the midpoint of the range of estimated equity values for 16% of Pro Forma TWC would be $4.985 billion as of April 5, 2005. At the request of the Company, the M &A Advisors updated their April 5, 2005 valuation of the equity of Pro Fonna TWC as a result of a decline in the daily trading prices of several publicly traded cable companies subsequent to that date. Based on such updated review and analyses as described in this section and subject to the assumptions, limitations and qualifications described herein, the M &A Advisors advised the Board on April 20, 2005 that their view was that the midpoint of the range of estimated equity values for 16% of Pro Forma TWC would be $4.802 billion as of April 19, 2005. The Board discussed the updated range and analyses. Al the conclusion of the April 20, 2005 meeting, the Board approved the execution of the Purchase Agreements. The $4.96 billion valuation midpoint for 16% of Pro Forma TWC set forth in die TW Purchase Agreement reflects an agreement between the parties to the TW Purchase Agreement as to the midpoint of the range of estimated values, which midpoint was to be set forth in this Disclosure Statement. The Company believes that fluctuations of such magnitude hi trading prices of cable companies are typical. 'the range of estimated equity values of Pro Forma TWC was necessarily based on economic, market, financial and other conditions as they existed on, and oil the information available to the M &A Advisors as of, the date of the respective analyses. Although developments subsequent to the analyses may have affected or may affect the M &A Advisors' analyses and views, die M &A Advisors did not and do not have any obligation to update, revise or reaffirm their estimate. 368 nr1