Document Missoula_doc_d3ed33cbc2

1673156v2 Report to the City of Missoula, Montana Regarding the Proposed Change of control of Bresnan Communications, LLC to BBHI Holdings LLC and an entity wholly owned by Cablevision Systems Corporation October 7, 2010 Prepared by: Brian T. Grogan, Esq. Yuri B. Berndt, Esq. Moss & Barnett A Professional Association 4800 Wells Fargo Center 90 South Seventh Street Minneapolis, MN 55402-4129 (612) 877-5340 (phone) ---PAGE BREAK--- 1673156v2 i Table of Contents SECTION 1. INTRODUCTION 1 SECTION 2. APPLICABLE LAW 1 SECTION 3. LEGAL QUALIFICATIONS 5 SECTION 4. TECHNICAL QUALIFICATIONS 5 SECTION 5. FINANCIAL QUALIFICATIONS 5 SECTION 6. 13 RESOLUTION NO. 14 CORPORATE GUARANTY 17 CERTIFICATES 20 ---PAGE BREAK--- 1673156v2 1 Section 1. Introduction Bresnan Communications, LLC, a Delaware limited liability company (“Bresnan”) operates a cable system in the City of Missoula Montana pursuant to a November 3, 2003 Franchise Agreement adopted by the City as Ordinance No. 3237 (“Franchise”). Under the Franchise Bresnan is authorized to operate a cable television system (“System”) that provides cable services and other communications services in the City. Bresnan has requested the City’s approval of the proposed change of control of Bresnan (the “Transaction”) to BBHI Holdings LLC, a Delaware limited liability company and an entity indirectly wholly owned by Cablevision Systems Corporation, a Delaware corporation (collectively “Cablevision”). On or about July 2, 2010, Bresnan and Cablevision submitted to the City FCC Form 394 “Application for Franchise Authority Consent to Assignment or Transfer of Control of Cable Television Franchise,” (the “Application”) along with such other exhibits as provided therewith. Moss & Barnett, PA has reviewed selected financial information that was provided by Bresnan and Cablevision to assess the financial qualifications of Bresnan, as an entity indirectly wholly-owned by Cablevision following completion of the Transaction. Pursuant to the Franchise the Transaction is prohibited without the written consent of the City. Federal law provides the City with 120 days to examine the Transaction and the legal, technical and financial qualifications of Bresnan resulting from the Transaction. Section 2. Applicable Law The following provisions of federal law and the Franchise govern the actions of the City in acting on Bresnan’s request for approval of the proposed change of control. FEDERAL LAW 1. The Cable Communications Policy Act of 1984, as amended by the Cable Consumer Protection and Competition Act of 1992 and the Telecommunications Act of 1996 (“Cable Act”), provides at Section 617 (47 U.S.C. § 537): Sales of Cable Systems. A franchising authority shall, if the franchise requires franchising authority approval of a sale or transfer, have 120 days to act upon any request for approval of such sale or transfer that contains or is accompanied by such information as is required in accordance with Commission regulations and by the franchising authority. If the franchising authority fails to render a final decision on the request within 120 days, such request shall be deemed granted ---PAGE BREAK--- 1673156v2 2 unless the requesting party and the franchising authority agree to an extension of time. 2. The Cable Act also provides at Section 613(d) (47 U.S.C. § 533(d)) as follows: Regulation of ownership by States or franchising authorities. Any State or franchising authority may not prohibit the ownership or control of a cable system by any person because of such person’s ownership or control of any other media of mass communications or other media interests. Nothing in this section shall be construed to prevent any State or franchising authority from prohibiting the ownership or control of a cable system in a jurisdiction by any person because of such person’s ownership or control of any other cable system in such jurisdiction, or in circumstances in which the State or franchising authority determines that the acquisition of such a cable system may eliminate or reduce competition in the delivery of cable service in such jurisdiction. 3. Further, the Federal Communications Commission (“FCC”) has promulgated regulations governing the sale of cable systems. Section 76.502 of the FCC’s regulations (47 C.F.R. § 76.502) provides: Time Limits Applicable to Franchise Authority Consideration of Transfer Applications. A franchise authority shall have 120 days from the date of submission of a completed FCC Form 394, together with all exhibits, and any additional information required by the terms of the franchise agreement or applicable state or local law to act upon an application to sell, assign, or otherwise transfer controlling ownership of a cable system. A franchise authority that questions the accuracy of the information provided under paragraph must notify the cable operator within 30 days of the filing of such information, or such information shall be deemed accepted, unless the cable operator has failed to provide any additional information reasonably requested by the franchise authority within 10 days of such request. If the franchise authority fails to act upon such transfer request within 120 days, such request shall be deemed granted unless the franchise authority and the requesting party otherwise agree to an extension of time. LOCAL LAW 1. The Franchise at Section 9 subparagraph 5 provides: Sale or Transfer of Franchise ---PAGE BREAK--- 1673156v2 3 City and Grantee shall comply with the requirements of Title 5, Chapter 5.80.060 of the Missoula Municipal Code. The City hereby reserves the right to impose a guaranty requirement on any subsequent transferee should the City determine that the corporate structure, financial condition or other factors warrant the requirement of a guaranty. In such event the form of the guaranty shall be substantially the same as that attached hereto as Exhibit D. 2. Title 5, Chapter 5.80.060 of the Missoula Municipal Code provides: Franchise Transfer or Assignment 1. A franchise awarded under this chapter shall be a privilege to be held in personal trust by the franchisee. The franchise shall not be sublet or assigned, nor shall any rights or privileges therein granted or authorized be leased, assigned, mortgaged, sold, transferred, pledged or disposed of either in whole or in part, either by forced or involuntary sale or by voluntary sale, merger, consolida-tion or otherwise, nor shall title thereto, either legal or equitable, or any right, interest or property therein, pass to or vest in any person(s), except the franchisee or a company controlling, controlled by or under common control with the franchisee, either by act of the franchisee or by operation of law, without the consent of the city expressed by ordinance; provided, however, that no such consent shall be required for any transfer in trust, mortgage or other hypothecation, as a whole, to secure an indebtedness. 2. The franchisee shall notify in writing the city, but not less than ninety days prior to, of any proposed change in or transfer of, or acquisition by, any other party of control of the franchisee with respect to which the consent of the city is required, pursuant to subsection D(1) of this section, providing with such noti-fication a summary explanation of the nature, purpose and terms of the transaction. 3. The franchisee shall, if requested by the city and within thirty days of such request, provide the city attorney a copy of deeds, leases, mortgages, agreements or other written instruments evidencing such transaction, certified as correct by the franchisee. A change in bene-ficial ownership of ten percent of stock or other interest in the franchisee shall be presumed to be a change in control of the franchisee. Such change of control shall make the franchise subject to revocation unless and until the council have consented thereto. 4. Consent of the council shall not be granted until it has examined the proposed assignee's legal, financial, technical, character and other qualifications to construct, operate and maintain a cable communications system in the city and has afforded all interested parties notice and an opportunity to be heard on the question. The franchisee shall assist the city in any such examination. The city may condition any transfer upon such conditions it deems appropriate. ---PAGE BREAK--- 1673156v2 4 5. The said consent of the council may not be unreasonably refused; provided, however, the proposed as-signee must show financial responsibility as determined by council and this chapter; and provided, further, that no such consent shall be required for a transfer in trust, mortgage or other hypothecation, in whole or in part, to secure an indebtedness. 6. In the event that the franchisee is a corporation, prior approval of the council shall be required where there is an actual change in control or where ownership of more than fifty percent of the voting stock of the franchisee is acquired by a person or group of persons acting in concert, none of whom already own fifty percent or more of the voting stock, singly or collectively. Any such acquisition occurring without prior approval of the council shall constitute a failure to comply with a provision of this chapter within the meaning of Section 5.80.260(B)(1). 7. No transfer for which the city's consent by ordinance is required may occur until the successor or lessee has complied with the requirements of subsection C(1) of this section, including, but not limited to, providing certificates of insurance, unless the city council waives such compliance by resolution. 8. The city shall make a final decision upon a proposed change of control within one hundred and twenty days of receiving a written request for approval of a change in control containing or accompanied by such infor-mation as is required by federal law and by the city. If the city fails to render a final decision on the request within one hundred twenty days, then the proposed change shall be deemed to be consented to by the city. At any time during the one hundred twenty‑day period, the city may request in writing that franchisee provide or cause to provide any information reasonably necessary to rendering a final decision on the request. The city and franchisee may, at any time, agree to extend the one hundred twenty-day period. 9. Any such transfer or assignment shall be made by an instrument in writing, which shall include acceptance of all terms and conditions of the franchise, a duly executed copy of which shall be filed with the city clerk within thirty days after any such transfer or assignment. 10. Nothing contained in this section shall be deemed to prohibit the mortgage, pledge or assignment of tangible assets of franchisee's cable system, including but not limited to accounts receivable, inventory or monetary assets, for the purpose of financing acquisition of equip-ment or for the acquisition, construction and operation of the cable system of franchisee or any affiliated entity, without the city's consent, but any such mortgage, pledge or assignment shall be subject to the city's other rights contained in the franchise. The franchisee may also sell tangible assets of the cable system in the ordinary conduct of its business without the consent of the city. ---PAGE BREAK--- 1673156v2 5 11. Nothing contained in this section shall be deemed to prohibit franchisee's lease or sublease to other city franchisees any of the rights or privileges granted or authorized by the franchise, with or without the city's consent, so long as franchisee remains solely responsible for locating, servicing, repairing, relocating or removing its system. (Ord. 2931 1995). Section 3. Legal Qualifications The legal qualification standard relates primarily to the analysis of whether Bresnan, following closing of the Transaction, possesses the required authorization to operate and control the System serving the City under the Franchise. The applicable standard of review is that the City’s consent shall not be unreasonably withheld. Since this proposed Transaction does not result in a new operating entity under the Franchise, the legal review is limited to compliance with all applicable procedural requirements associated with the Transaction as set forth in Section 2 of this report, as well as a review of the corporate standing of each of the entities. See the end of this Report (starting at page 20) for copies of the relevant certificates form the Delaware Secretary of State Based upon our review, we do not believe the City can reasonably deny the proposed change of control set forth in the Application based upon the legal qualifications of Bresnan following close of the Transaction. Section 4. Technical Qualifications In a transfer proceeding, the technical qualification standard typically relates to the technical expertise and experience of the applicant to operate and maintain the System in the City. In such a review, the standard is once again that the City’s consent shall not be unreasonably withheld. Under the Transaction, the operating entity in the City will remain Bresnan. Control of Bresnan will shift but the employees, local technicians and operational management do not appear to be changing based upon our review of the Application. Based upon our review, we do not believe the City can reasonably deny the proposed change of control set forth in the Application based upon the technical qualifications of Bresnan following close of the Transaction. Section 5. Financial Qualifications I. SCOPE OF REVIEW At the request of the City, Moss & Barnett, has reviewed selected financial information that was provided by Bresnan and Cablevision to assess the financial qualifications of Bresnan following completion of the Transaction. ---PAGE BREAK--- 1673156v2 6 The financial information that was provided or available through other public sources and to which our review has been limited, consists solely of the following (hereinafter referred to collectively as the “Financial Statements”): 1. FCC Form 394 “Application for Franchise Authority Consent to Assignment or Transfer of Control of Cable Television Franchise,” dated July 2, 2010, provided by Bresnan and Cablevision (the “Application”) along with such other exhibits as provided therewith; 2. Agreement and Plan of Merger among Bresnan Broadband Holdings, LLC, Providence Equity Bresnan Cable LLC, BBHI Holdings LLC, BBHI Acquisition LLC, and CSC Holdings, LLC dated June 13, 2010 (the “Merger Agreement”); 3. Form 10-K for Cablevision Systems Corporation and CSC Holdings, LLC filed with the Securities and Exchange Commission on February 25, 2010, for the fiscal year ended December 31, 2009; 4. Form 8-K for Cablevision Systems Corporation and CSC Holdings, LLC filed with the Securities and Exchange Commission on May 21, 2010, which amends the 2009 Form 10-K; 5. Form 10-Q for Cablevision Systems Corporation and CSC Holdings, LLC filed with the Securities and Exchange Commission on May 6, 2010 for the fiscal quarter ended March 31, 2010; 6. Form 10-Q for Cablevision Systems Corporation and CSC Holdings, LLC filed with the Securities and Exchange Commission on August 5, 2010 for the fiscal quarter ended June 30, 2010; 7. The audited financial statements of Cablevision Systems Corporation and Subsidiaries as of December 31, 2009 and 2008, including Consolidated Balance Sheets as of December 31, 2009 and 2008, Consolidated Statements of Operations, Cash Flows and Stockholders’ Deficiency and Comprehensive Income(Loss) for the years ended December 31, 2009, 2008 and 2007, and the Independent Auditors’ Report of KPMG LLP dated February 25, 2010 and as reissued for certain items on May 21, 2010; 8. The unaudited financial statements of Cablevision Systems Corporation and Subsidiaries as of March 31, 2010 and June 30, 2010, including a Condensed Consolidated Balance Sheet as of March 31, 2010 and June 30, 2010, and Statements of Operations, Cash Flows and Stockholders’ Deficiency and Comprehensive Income(Loss) for the quarters ended March 31, 2009 and 2010 and June 30, 2009 and 2010; and 9. Such other information as we requested and that was provided by Bresnan and Cablevision relating to the transfer. ---PAGE BREAK--- 1673156v2 7 Our procedure is limited to providing a summary of our analysis of the Financial Statements in order to facilitate the City’s assessment of the financial capabilities of Cablevision to obtain, maintain and operate the System in the City. II. OVERVIEW OF TRANSACTION Bresnan and Cablevision entered into the Merger Agreement that provides for the indirect acquisition of Bresnan, the entity that owns the System that serves the City, by Cablevision.1 Under the Merger Agreement, Cablevision through a chain of single member limited liability companies will acquire one hundred percent (100%) of the membership interests of Bresnan Broadband Holdings, LLC, a Delaware limited liability company, which as of the current date does, and acquisition date will, hold all of the membership interests of Bresnan.2 The cost of the Cablevision acquisition under the Merger is $1.365 billion.3 The complex merger transaction, includes the formation of new acquisition entities, and provides that Bresnan Broadband Holdings, LLC will, as part of the merger, be merged with and into the Cablevision entity, BBHI Acquisition LLC.4 This ultimately results in Bresnan Communications, LLC’s membership interests being indirectly wholly-owned by Cablevision.5 The Merger Agreement provides for Cablevision’s payment of initial consideration of $1.365 billion (reduced by certain estimated closing funded indebtedness, working capital adjustments, estimated closing transaction expenses, and acquisition deductions, as are customary and standard in transactions of this type and size as provided in the Merger Agreement) in cash at closing to the Bresnan Broadband Holdings, LLC’s owners and equity benefit holders or escrow accounts for their benefit.6 BBHI Acquisition LLC will obtain financing to fund the acquisition through new debt of approximately $1.09 billion and Cablevision will provide equity of $380 million.7 Cablevision has provided us with a copy of its confidential equity and debt commitment letters that provide for its lenders’ and equity holders’ funding commitments. The Merger Agreement provides for an effective closing date after certain conditions and approvals as set forth in the Merger Agreement have been achieved or received, including franchise approvals that represent more than 80% of Bresnan Broadband Holdings, LLC’s basic cable subscribers, which the parties project will occur in the second half of 1 Agreement and Plan of Merger among Bresnan Broadband Holdings, LLC, Providence Equity Bresnan Cable LLC, BBHI Holdings LLC, BBHI Acquisition LLC, and CSC Holdings, LLC dated June 13, 2010 (the “Merger Agreement”) at pp. 15-21. 2 FCC Form 394 “Application for Franchise Authority Consent to Assignment or Transfer of Control of Cable Television Franchise”, dated July 2, 2010 provided by Bresnan Communications, LLC and Cablevision Systems Corporation (the “Application”) at Exhibit 1, Section 2. 3 Merger Agreement at p. 6. 4 Id. at pp. 2-5. 5 Id. 6 Id. at pp. 9, 16, & 17. 7 Id. at pp. 35-36 and Form 10-Q for Cablevision Systems Corporation for the quarter ended June 30, 2010, as filed with the Securities and Exchange Commission on August 5, 2010 (“2nd Q Form 10-Q”), at p. 37. ---PAGE BREAK--- 1673156v2 8 2010 or in early 2011.8 CSC Holdings, LLC, a Delaware limited liability company, a single member limited liability company wholly-owned by Cablevision, is subject to a $50 million termination fee if the transaction is not consummated under certain circumstances.9 III. OVERVIEW OF CABLEVISION BBHI Acquisition LLC, a Delaware limited liability company, will be the merged entity and is a wholly-owned subsidiary of BBHI Holdings LLC, which in turn is wholly- owned by CSC Holdings, LLC.10 CSC Holdings, LLC is wholly-owned by Cablevision Systems Corporation.11 The Dolan Family Group owns a majority of Cablevision stock, approximately 70%.12 Cablevision through CSC Holdings, LLC is the fifth largest cable operator in the United States.13 CSC Holdings, LLC also operates “cable programming networks, entertainment businesses, telecommunications companies and a newspaper publishing business.”14 Cablevision and its predecessors have been in operation for over 35 years and have managed more than 700 cable franchises over their history.15 With the acquisition of the Bresnan entities, Cablevision will expand its cable operations to the states of Colorado, Montana, Wyoming, and Utah and add approximately 300,000 basic cable subscribers.16 Cablevision currently serves approximately 3.1 million residential and small business subscribers in its operating areas located in the states of Connecticut, New Jersey, and New York.17 In February of 2010, Cablevision distributed all of the outstanding stock of Madison Square Garden, Inc., an entity that owns sports, entertainment, and media business to its shareholders.18 Cablevision has declared dividends payable to its shareholders in the first and second quarters of 2010.19 Cable providers and telecommunication companies operate in a competitive environment and the financial performance of cable television operators, like Cablevision and other cable operators, are subject to many factors, including, but not limited to, the general business conditions, incumbent operators, digital broadcast satellite service, technology advancements, employment issues, and customer preferences, as well as competition from multiple sources, which provide and distribute 8 Merger Agreement at p. 57 and Form 2nd Q Form 10-Q at p. 37. 9 Merger Agreement at p. 58. 10 Form 394 at Exhibit 2. 11 Id. 12 Id. 13 Form 10-K for Cablevision Systems Corporation for the year ended December 31, 2009, as filed with the Securities and Exchange Commission on February 25, 2010 (“Form 10-K”), at p. 1 14 Id. 15 Form 394, Exhibit 4. 16 Merger Agreement, Schedule 1.1(h). 17 Form 10-K at pp. 1 & 44. 18 Id. at p. 2. 19 Form 10-Q for Cablevision Systems Corporation for the quarter ended March 31, 2010, as filed with the Securities and Exchange Commission on May 6, 2010 (“1st Q Form 10-Q”), at p. 13 and 2nd Q Form 10-Q at p. 12. ---PAGE BREAK--- 1673156v2 9 programming, information, news, entertainment and other telecommunication services.20 The Dolan family, due to its significant ownership of Cablevision, has the ability to influence certain Cablevision decisions, which could affect Cablevision’s ongoing operations.21 In addition, Cablevision is highly leveraged which may reduce their ability to withstand prolonged adverse business conditions.22 The cable business is inherently capital intensive, requiring capital for the construction and maintenance of its communications systems. Each of these factors could have a significant financial impact on Cablevision and its ability to acquire and continue to operate the System. IV. FINDINGS We have analyzed all of the Financial Statements, both historical and projected, as well as Cablevision’s financing and equity contribution for the transaction. Cablevision provided us with its confidential Bresnan Broadband Holdings, LLC projected financial information, including its projected annual revenue, annual earnings before interest, taxes, depreciation, and amortization (commonly referred to as EBITDA), and cash flow for a 3-year period after the acquisition of Bresnan’s cable operations. Cablevision also provided its 3-year projected capital expenditure budget. These projected financial statements are based upon Bresnan and Cablevision management’s assertions and are confidential and proprietary to Cablevision. Since Cablevision’s acquisition of Bresnan will result from the transfer/merger of all of the ownership interests of Bresnan Broadband Holdings, LLC into an entity wholly-owned by Cablevision and due to the confidential nature of the projected financial information, we are reporting our Findings hereunder based upon Cablevision’s historical information. Overall, from a financial point-of-view, the information provided below with respect to the Cablevision’s Financial Statements shows that Cablevision has been more profitable in the recent past than Bresnan Broadband Holdings, LLC, but that Cablevision has a significantly larger debt load, in dollar amount and as a percentage of its assets.23 1. Analysis of Financial Statements. Neither federal law nor FCC regulations provide franchising authorities such as the City with any guidance concerning the evaluation of the financial qualifications of an applicant for a cable franchise. In evaluating the financial capabilities of Cablevision and the ability of Bresnan to continue to operate the System serving the City with the new ownership structure, we believe it is appropriate to consider the performance of an applicant based on the applicant’s historical performance. Given the fact that the Bresnan Broadband Holdings, LLC’s (a non-publicly traded entity) current and projected financial information contains confidential information, we are providing only specific financial information for Cablevision, as an ultimate owner of Bresnan after the Merger transaction. Cablevision’s historical operations do not consider the additional debt load, along with the additional revenue 20 Id. at p. 13 & pp. 17-35. 21 Id. at p. 31. 22 Id. at p. 27. 23 2nd Q Form 10-Q, pp 3-5. ---PAGE BREAK--- 1673156v2 10 and expenses that will be recognized as part of the transaction under the Merger Agreement. However, we believe a general review of the Cablevision financial information is appropriate and may provide some insight into the general ongoing financial operations of Cablevision with respect to the Application. As noted above, Cablevision’s operations include both cable television video services (which represents approximately 41% of its operations as of December 31, 2009) and other non-cable television video services (which represents approximately 59% of its revenues) (we note however that Madison Square Garden, Inc.’s revenues represented approximately 12% of Cablevision’s revenues as of December 31, 2009 were subsequently distributed in 2010).24 The Cablevision financial information discussed below includes all of the Cablevision operations, including the non-cable television video services and reflects the distribution of Madison Square Garden Inc.’s operations for all periods. We have analyzed Cablevision’s Financial Statements as of December 31, 2008 and 2009 and June 30, 2010, in providing the information in this Section. 2. Specific Financial Statement Data and Analysis. Assets. Cablevision had current assets of $1,950 million, $2,280 million, and $1,891 million; (ii) working capital of $4 million, a negative $15 million, and a negative $440 million; and (iii) total assets of $7,632 million, $9,556 million, and $9,920 million as of June 30, 2010, and December 31, 2009 and 2008, respectively.25 Working capital, which is the excess of current assets over current liabilities, is a short-term analytical tool used to assess the ability of a particular entity to meet its current financial obligations in the ordinary course of business. The trend shows a significant increase in working capital from December 31, 2008 to June 30, 2010 and suggests that Cablevision has sufficient cash to fund current operations. Cablevision’s current ratio (current assets divided by current liabilities) as of June 30, 2010, of 1.00:1 is in-line with a generally recognized standard of 1:1 for a sustainable business operation. Liabilities and Net Equity. Cablevision had current liabilities of $1,946 million, $2,295 million and $2,331 million; (ii) long-term debt of $10,919 million, $10,789 million and $11,229 million; and (iii) shareholders’ deficiency (negative net equity) of $6,200 million, $5,155 million and $5,368 million as of June 30, 2010, 24 Form 10-K at p. 48-51. 25 2n Q Form 10-Q at pp. 3-4, Form 8-K at pp. I-5, I-6 and Form 8-K for Cablevision Systems Corporation for the year ended December 31, 2009, as filed with the Securities and Exchange Commission on May 21, 2010 (“Form 8-K”) at pp. I-5-I-6. ---PAGE BREAK--- 1673156v2 11 December 31, 2009 and 2008, respectively.26 Cablevision issued $1.25 billion of debt as of April 15, 2010 which accounted for a portion of the increase in long-term debt in 2010; much of this debt was used to pay down existing debt.27 As part of the transaction, Cablevision has received debt commitments that will be used as merger consideration that will increase the amount of debt outstanding by approximately $1.1 billion after the Merger. This additional debt will require Cablevision to generate additional cash flow, including through the acquired Bresnan operations, to fund its debt service. The interest rates on Cablevision’s existing debt ranged from 6.75% to approximately 10% and the debts mature in varying amounts over the next nine years.28 Cablevision maintains a revolving credit facility that was extended by an amended agreement in early 2010 that includes $820 million of available credit into 2015.29 This available credit should allow Cablevision to fund its operations if Cablevision experiences operational cash flow deficiencies. Income and Expense. Cablevision had revenue of $3,555 million, $6,847 million, and $6,320 million; (ii) operating expenses of $2,783 million, $5,496 million and $5,642 million; and (iii) operating income of $772 million, $1,351 million and $678 million for the six month period ending June 30, 2010, and the years ending December 31, 2009 and 2008, respectively.30 Cablevision’s net income has improved from 2008 through the second quarter of 2010. For the six-month period ending on June 30, 2010, Cablevision generated a net increase in cash of $281 million.31 The ability to generate cash is important for Cablevision due to its highly leveraged operations. We also note that Cablevision has paid dividends in both the first and second quarters of 2010, which suggests that such dividends were not in excess of any covenants required under their significant debt obligations. V. SUMMARY Using the FCC Form 394 to establish an absolute minimum standard of financial qualifications that a proposed applicant must demonstrate in order to be qualified as the successor operator of the System, Cablevision has the burden of demonstrating to the City’s satisfaction that Cablevision has “sufficient net liquid assets on hand or available from committed resources” to consummate the Merger Agreement and operate the System acquired thereunder, together with its existing operations, for three months. 26 Id. 27 2nd Q Form 10-Q at p. 19. 28 Form 10-K at pp. I-44 - I-51. 29 2nd Q Form 10-Q at p. 18. 30Form 2nd Q 10-Q at p. 5 and Form 10-K at p. I-7. 31 Form 2nd Q 10-Q at p. 6. ---PAGE BREAK--- 1673156v2 12 This minimum standard is not easy to apply to the complex organizational structure of Cablevision and the multiple wholly-owned companies that hold cable operations in other geographical locations. Based solely on the Cablevision’s debt and equity commitments and Bresnan financial information that we reviewed, Cablevision has sufficient debt and equity commitments to consummate the Merger Agreement and operate the System. Based on the foregoing and limited strictly to the financial information analyzed in conducting this review, we do not believe that Bresnan’s request for transfer of control of the System can reasonably be denied based solely on a lack of financial qualifications of Cablevision if the financing and equity committed under its confidentially provided information is obtained (the failure to obtain the debt and equity committed to Cablevision would almost certainly result in the termination of the Merger Agreement and proposed System transfer). In the event the City elects to proceed with approving the proposed transfer of control, the assessment of Cablevision’s financial qualifications should not be construed in any way to constitute an opinion as to the financial capability or stability of Cablevision to operate Bresnan under the Franchise, (ii) operate its other operations, or (iii) successfully consummate the transaction as contemplated in the Merger Agreement. The sufficiency of the procedures used in making an assessment of Cablevision’s financial qualifications and its capability to become the successor operator of the System is solely the responsibility of the City. Consequently, we make no representation regarding the sufficiency of the procedures used either for the purpose for which this analysis of financial capabilities and qualifications was requested or for any other purpose. Finally, Section 8.1 of the Franchise requires a $200,000 performance bond to be posted by Bresnan until the system upgrade has been completed. It is our understanding that the upgrade is now completed and Bresnan has no performance bond in the City. In addition, Section 8.2 of the Franchise allows the City to demand a Letter of Credit from Bresnan in the sum of $25,000 in the event the City “alleges” a violation of the Franchise. The Letter of Credit is only posted by Bresnan once the City issues a written notice of violation. Therefore, the City has no real financial security available should the “Grantee” lack the financial resources to comply with the terms of the Franchise. However, pursuant to Section 9.5 of the Franchise (See section 2 of this Report for relevant Franchise language), the City has the right to impose a “corporate guaranty” when considering a change of control of the Grantee under the Franchise. In order to ensure Bresnan’s compliance with its Franchise obligations and since we have based a significant part of our analysis on the Financial Statements of Cablevision, the parent entity, we recommend that the City consider conditioning any approval of the proposed change of control on the delivery of a guaranty from Bresnan Broadband Holding, LLC in a form reasonably consistent with Attachment A to the ---PAGE BREAK--- 1673156v2 13 sample resolution.32 After closing of the Transaction, Bresnan Broadband Holding, LLC will essentially hold all the franchises operated by Bresnan and affiliated companies in Montana and other states (total of 300,000 subscribers). Obtaining a corporate guaranty from Bresnan Broadband Holding, LLC will provide the City with additional security should the Grantee under the Franchise lack sufficient financial resources to meet its Franchise obligations. Section 6. Recommendation Based on the foregoing, we recommend that the City review this Report, listen to any additional public comment or information, as necessary or appropriate, and undertake all necessary action to pass and adopt a resolution approving the Transaction in a form substantially similar to the attached resolution. 32 The proposed resolution is virtually identical to the sample resolution included as Exhibit D to the Franchise. ---PAGE BREAK--- 1673156v2 14 City of Missoula, Montana Resolution No. Approving the Proposed Transfer of Control of Bresnan Communications, LLC to BBHI Holdings LLC, and an entity wholly owned by Cablevision Systems Corporation RECITALS: WHEREAS, Bresnan Communications, LLC (“Grantee”) owns, operates and maintains a cable television system (the “System”) in the City of Missoula, Montana (“City”) pursuant to a November 3, 2003 Franchise Agreement adopted by the City as Ordinance No. 3237 (“Franchise”); WHEREAS, pursuant to an Agreement and Plan of Merger (“Agreement”), BBHI Holdings, LLC, a Delaware limited liability company (“Acquiror”), a newly-created, wholly-owned indirect subsidiary of Cablevision Systems Corporation, a Delaware corporation (“Cablevision”), will acquire control of Bresnan Broadband Holdings, LLC, a Delaware limited liability company (which owns 100% of the ownership interests in Grantee), and, as a result, the indirect control of Grantee will change (the “Change of Control”); WHEREAS, Grantee and Acquiror have requested the consent of the City to the Change of Control in accordance with the requirements of Section 9 of the Franchise, 5.80.060 of the Missoula Municipal Code and applicable provisions of federal law, and have filed FCC Form 394 with the City (the “Application”), and have provided the City with information to facilitate a review of the qualifications of the Grantee following the Change of Control; and WHEREAS, under applicable federal law, the Franchise, and Section 5.80.060 of the Missoula Municipal Code, the Change of Control contemplated in the Application requires the written consent of the City; and WHEREAS, the City retained Moss & Barnett, a Professional Association, to prepare a written report regarding the Change of Control for review and consideration by the City (“Report”); and WHEREAS, the City has reviewed the Report, Application and Change of Control and has determined that following completion of the Change of Control Grantee will possess the requisite legal, technical and financial qualifications to own, operate and maintain the System; and WHEREAS, Grantee has represented to the City that after the Change of Control is completed, Grantee will remain the legal entity which holds the Franchise and Grantee will continue to operate the System; and ---PAGE BREAK--- 1673156v2 15 WHEREAS, Grantee has agreed to comply with the Franchise as well as with applicable law from and after the completion of the Change of Control; and WHEREAS, the City believes it is in the interest of the City to approve the Change of Control as described in the Application. NOW, THEREFORE, BE IT RESOLVED BY THE CITY OF MISSOULA MONTANA AS FOLLOWS: 1. The Franchise is in full force and effect and Grantee is the lawful holder of the Franchise. 2. Each of the foregoing recitals are hereby incorporated by reference. 3. The City hereby consents and approves of the Change of Control as contemplated in the Application, subject to: a. Within thirty (30) days of the date of adoption of this Resolution, Grantee shall pay to the City reimbursement for any and all costs, expenses and professional fees incurred by the City related to the City’s review and consent of the Change of Control. Said reimbursement of fees and costs shall not be itemized on subscribers’ bills nor in any way deducted from past, present or future franchise fees or any other fees or taxes owed to the City. b. Within thirty (30) days of the date of closing of the Change of Control contemplated in the Application, Grantee shall submit to City an executed Corporate Guaranty by and between Bresnan Broadband Holding, LLC as “Guarantor,” the City of Missoula, Montana, as “Franchising Authority,” and Bresnan Communications, LLC as the “Company” or Grantee under the Franchise. The Corporate Guaranty shall be in the form reasonably consistent with Attachment A to this resolution and otherwise acceptable to the City attorney. 4. Since the Grantee remains unchanged as a result of the Change of Control, nothing in this Resolution shall be interpreted to modify or alter Grantee’s past performance under the Franchise and Grantee shall remain fully liable for any and all Franchise obligations unless specifically modified or altered by mutual written agreement of the City and Grantee. 5. By this consent the City does not waive any of Grantee’s commitments, duties and obligations under the Franchise, including any accrued and unfulfilled obligation of the Grantee, whether known or unknown, relating to the Franchise. 6. In the event the Change of Control is not completed, for any reason, or is modified in any material manner, the City’s consent provided hereunder shall not be effective. ---PAGE BREAK--- 1673156v2 16 This Resolution shall take effect and continue and remain in effect from and after the date of its passage, approval, and adoption. PASSED, ADOPTED AND APPROVED this day of 2010. CITY OF MISSOULA, MONTANA By: Its: ATTEST: Clerk ---PAGE BREAK--- 1673156v2 17 Attachment A CORPORATE GUARANTY THIS AGREEMENT is made this day of , between Bresnan Broadband Holding, LLC (“Guarantor”), the City of Missoula, Montana (“Franchising Authority”), and Bresnan Communications, LLC (“Company”). WITNESSETH WHEREAS, the Franchising Authority has entered into a Franchise Agreement with the Company dated November 3, 2003 adopted by the City as Ordinance No. 3237 (“Franchise Agreement”), pursuant to which the Franchising Authority has granted the Company a Franchise, to own, operate, and maintain a cable television system (“System”); and WHEREAS, Guarantor is the parent company of the Company and has a substantial interest in the System and the conduct of the Company in complying with the Franchise Agreement and any and all amendments thereof and any agreements related thereto, which Franchise Agreement and amendments are hereby specifically referred to, incorporated herein, and made a part hereof; WHEREAS, the Guarantor desires to provide its unconditional guaranty as part of such security fund. NOW, THEREFORE, in consideration of the foregoing premises and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Guarantor hereby unconditionally guarantees the due and punctual payment and performance of all of the debts, liabilities and obligations of Company contained in the Franchise Agreement (“Indebtedness”). This Agreement, unless terminated, substituted, or canceled, as provided herein, shall remain in full force and effect for the duration of the term of the Franchise Agreement, except as expressly provided otherwise in the Franchise Agreement. Upon substitution of another Guarantor reasonably satisfactory to the Franchising Authority, this Agreement may be terminated, substituted, or canceled upon thirty (30) days prior written notice from Guarantor to the Franchising Authority and the Company. Such termination shall not affect liability incurred or accrued under this Agreement prior to the effective date of such termination or cancellation. The Guarantor will not exercise or enforce any right of contribution, reimbursement, recourse or subrogation available to the Guarantor against the Company or any other Person liable for payment of the Indebtedness any collateral ---PAGE BREAK--- 1673156v2 18 security therefor, unless and until all of the Indebtedness shall have been fully paid and discharged. The Guarantor will pay or reimburse the Franchising Authority for all costs and expenses (including reasonable attorneys’ fees and legal expenses) incurred by the Franchising Authority in connection with the protection, defense or enforcement of this guarantee in any arbitration, litigation or bankruptcy or insolvency proceedings. Whether or not any existing relationship between the Guarantor and the Company has been changed or ended and whether or not this guarantee has been revoked, the Franchising Authority may, but shall not be obligated to, enter into transactions resulting in the creation or continuance of Indebtedness, without any consent or approval by the Guarantor and without any notice to the Guarantor. The liability of the Guarantor shall not be affected or impaired by any of the following acts or things (which the Franchising Authority is expressly authorized to do, omit or suffer from time to time, without notice to or approval by the Guarantor): any acceptance of collateral security, guarantors, accommodation parties or sureties for any or all Indebtedness; (ii) any one or more extensions or renewals of Indebtedness (whether or not for longer than the original period) or any modification of the interest rates, maturities or other contractual terms applicable to any Indebtedness; (iii) any waiver or indulgence granted to the Company, any delay or lack of diligence in the enforcement of any Indebtedness, or any failure to institute proceedings, file a claim, give any required notices or otherwise protect any Indebtedness; (iv) any full or partial release of, settlement with, or agreement not to sue, the Company or any other guarantor or other Person liable in respect of any Indebtedness; any discharge of any evidence of Indebtedness or the acceptance of any instrument in renewal thereof or substitution therefor; (vi) any failure to obtain collateral security (including rights of setoff) for Indebtedness, or to see to the proper or sufficient creation and perfection thereof, or to establish the priority thereof, or to protect, insure, or enforce any collateral security; or any modification, substitution, discharge, impairment, or loss of any collateral security; (vii) any foreclosure or enforcement of any collateral security; (viii) any transfer of any Indebtedness or any evidence thereof; (ix) any order of application of any payments or credits upon Indebtedness; any election by the Franchising Authority under § 1111(b)(2) of the United States Bankruptcy Code. The Guarantor waives presentment, demand for payment, notice of dishonor or nonpayment, and protest of any instrument evidencing Indebtedness. The Franchising Authority shall not be required first to resort for payment of the Indebtedness to the Company or other Persons or their properties, or first to enforce, realize upon or exhaust any collateral security for Indebtedness, before enforcing this guaranty. The Guarantor will not assert, plead or enforce against the Franchising Authority any defense of discharge in bankruptcy of the Company, statute of frauds, or unenforceability of the Guaranty which may be available to the Company or any other Person liable in respect of any Indebtedness, or any setoff available against the Franchising Authority to the Company or any such other Person, whether or not on account of a related transaction. ---PAGE BREAK--- 1673156v2 19 Any notices given pursuant to this Agreement shall be addressed to the Guarantor and Company at Robert V. Bresnan, Esq., Senior Vice President and General Counsel, Bresnan Communications, LLC, One Manhattan Road, Purchase, NY 10577 and to the Franchising Authority, Mayor and Members of the City Council, City of Missoula, 435 Ryman Street, Missoula, Montana 59802. IN WITNESS WHEREOF, the Company, Franchising Authority, and Guarantor have executed this Corporate Guaranty as of the day, month and year first above written. GUARANTOR: BRESNAN BROADBAND HOLDING, LLC By: Its: COMPANY: BRESNAN COMMUNICATIONS, LLC By: Its: FRANCHISING AUTHORITY: CITY OF MISSOULA, MONTANA By: Its: ---PAGE BREAK--- 1673156v2 20 Certificates ---PAGE BREAK--- 1673156v2 21 ---PAGE BREAK--- 1673156v2 22 ---PAGE BREAK--- 1673156v2 23 ---PAGE BREAK--- 1673156v2 24 ---PAGE BREAK--- 1673156v2 25