<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to
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Commission File Number: 0-14505
ENSTAR INCOME PROGRAM II-2, L.P.
(Exact name of Registrant as specified in its charter)
GEORGIA 58-1628872
(State or other jurisdiction of I.R.S. Employer
incorporation or organization) Identification Number)
10900 WILSHIRE BOULEVARD - 15TH FLOOR
LOS ANGELES, CALIFORNIA 90024
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (310) 824-9990
Securities registered pursuant to Section 12 (b) of the Act: NONE
Securities registered pursuant to Section 12 (g) of the Act:
Name of each exchange
Title of each Class on which registered
UNITS OF LIMITED PARTNERSHIP INTEREST NONE
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
State the aggregate market value of the voting equity securities held
by non-affiliates of the registrant - all of the registrant's 29,880 units of
limited partnership interests, its only class of equity securities, are held by
non-affiliates. There is no public trading market for the units, and transfers
of units are subject to certain restrictions; accordingly, the registrant is
unable to state the market value of the units held by non-affiliates.
The Exhibit Index is located at Page E-1.
<PAGE> 2
PART I
ITEM 1. BUSINESS
INTRODUCTION
Enstar Income Program II-2, L.P., a Georgia limited partnership (the
"Partnership"), is engaged in the ownership, operation and development, and,
when appropriate, sale or other disposition, of cable television systems in
small to medium-sized communities. The Partnership was formed on July 3, 1984.
The general partners of the Partnership are Enstar Communications Corporation, a
Georgia corporation (the "Corporate General Partner"), and Robert T. Graff, Jr.
(the "Individual General Partner" and, together with the Corporate General
Partner, the "General Partners"). On September 30, 1988, ownership of the
Corporate General Partner was acquired by Falcon Cablevision, a California
limited partnership that has been engaged in the ownership and operation of
cable television systems since 1984 ("Falcon Cablevision"). Until March 1993,
the general partner of the general partner of Falcon Cablevision was Falcon
Holding Group, Inc., a California corporation ("FHGI"), which provided certain
management services to the Partnership. On March 29, 1993, a newly formed
entity, Falcon Holding Group, L.P. ("FHGLP"), was organized to consolidate the
ownership of various cable television businesses (including that of Falcon
Cablevision) that were previously under the common management of FHGI. The
management of FHGLP is substantially the same as that of FHGI. See Item 13.,
"Certain Relationships and Related Transactions." The Corporate General Partner,
FHGLP and affiliated companies are responsible for the day to day management of
the Partnership and its operations. See "Employees" below.
A cable television system receives television, radio and data signals
at the system's "headend" site by means of over-the-air antennas, microwave
relay systems and satellite earth stations. These signals are then modulated,
amplified and distributed, primarily through coaxial and fiber optic
distribution systems, to customers who pay a fee for this service. Cable
television systems may also originate their own television programming and other
information services for distribution through the system. Cable television
systems generally are constructed and operated pursuant to non-exclusive
franchises or similar licenses granted by local governmental authorities for a
specified term of years.
The Partnership's cable television systems, (the "systems") offer
customers various levels (or "tiers") of cable services consisting of broadcast
television signals of local network, independent and educational stations, a
limited number of television signals from so-called "super stations" originating
from distant cities (such as WTBS, WGN and WOR), various satellite-delivered,
non-broadcast channels (such as Cable News Network ("CNN"), MTV: Music
Television ("MTV"), the USA Network ("USA"), ESPN and Turner Network Television
("TNT"), programming originated locally by the cable television system (such as
public, governmental and educational access programs) and informational displays
featuring news, weather, stock market and financial reports and public service
announcements. A number of the satellite services are also offered in certain
packages. For an extra monthly charge, the systems also offer "premium"
television services to their customers. These services (such as Home Box Office
("HBO"), Showtime, The Disney Channel and selected regional sports networks) are
satellite channels that consist principally of feature films, live sporting
events, concerts and other special entertainment features, usually presented
without commercial interruption. See "Legislation and Regulation."
A customer generally pays an initial installation charge and fixed
monthly fees for basic, expanded basic, other tiers of satellite services and
premium programming services. Such monthly service fees constitute the primary
source of revenues for the systems. In addition to customer revenues, the
systems receive revenue from the sale of available advertising spots on
advertiser-supported programming. The systems also offer to their customers home
shopping services, which pay the systems a share of revenues from sales of
products in the systems' service areas, in addition to paying the systems a
separate fee in return for carrying their shopping service.
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The Partnership began its cable television business operations in
February 1986 with the acquisition of certain cable television systems that
provide service to customers in the cities of Pana, Hillsboro, Nokomis and
Jerseyville, Illinois. In January 1987, the Partnership expanded its operations
by acquiring a cable television system that provides service to customers in the
cities of Malden and Campbell, Missouri. As of December 31, 1995, the
Partnership served approximately 8,800 homes subscribing to cable service in
these areas. The Partnership does not expect to make any additional material
acquisitions during the remaining term of the Partnership.
FHGLP receives a management fee and reimbursement of expenses from the
Corporate General Partner for managing the Partnership's cable television
operations. See Item 11., "Executive Compensation."
The Chief Executive Officer of FHGLP is Marc B. Nathanson. Mr.
Nathanson has managed FHGLP or its predecessors since 1975. Mr. Nathanson is a
veteran of more than 26 years in the cable industry and, prior to forming
FHGLP's predecessors, held several key executive positions with some of the
nation's largest cable television companies. The principal executive offices of
the Partnership, the General Partner and FHGLP are located at 10900 Wilshire
Boulevard, 15th Floor, Los Angeles, California 90024, and their telephone number
is (310) 824-9990. See Item 10., "Directors and Executive Officers of the
Registrant."
BUSINESS STRATEGY
Historically, the Partnership has followed a systematic approach to
acquiring, operating and developing cable television systems based on the
primary goal of increasing operating cash flow while maintaining the quality of
services offered by its cable television systems. The Partnership's business
strategy has focused on serving small to medium-sized communities. The
Partnership believes that its cable television systems generally involve less
risk of increased competition than systems in large urban cities. In the
Partnership's markets, consumers have access to only a limited number of
over-the-air broadcast television signals. In addition, these markets typically
offer fewer competing entertainment alternatives than large cities. As a result,
the Partnership's cable television systems generally have a higher basic
penetration rate (the number of homes subscribing to cable service as a
percentage of homes passed by cable) with a more stable customer base than
systems in large cities. Nonetheless, the Partnership believes that all cable
operators will face increased competition in the future from alternative
providers of multi-channel video programming services. See "Competition."
On March 30, 1994, the Federal Communications Commission (the "FCC")
adopted significant amendments to its rules implementing certain provisions of
the 1992 Cable Act. The Partnership believes that compliance with these amended
rules has had a negative impact on the Partnership's revenues and cash flow.
These rules are subject to further amendment to give effect to the
Telecommunications Act of 1996 (the "1996 Telecom Act"). The 1996 Telecom Act is
expected to have a significant affect on all participants in the
telecommunications industry, including the Partnership. See "Legislation and
Regulation" and Item 7., "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Clustering
The Partnership has sought to acquire cable television systems in
communities that are proximate to other owned or affiliated systems in order to
achieve the economies of scale and operating efficiencies associated with
regional "clusters" of systems. The Partnership believes clustering can reduce
marketing and personnel costs and can also reduce capital expenditures in cases
where cable service can be delivered to a number of systems within a single
region through a central headend reception facility.
Capital Expenditures
As noted in "Technological Developments," some of the Partnership's
systems have no available channel capacity with which to add new channels or to
provide pay-per-view offerings to customers. As a result,
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significant amounts of capital for future upgrades will be required in order to
increase available channel capacity, improve quality of service and facilitate
the marketing of additional new services such as advertising, pay-per-view, new
unregulated tiers of satellite-delivered services and home shopping, so that the
systems remain competitive within the industry.
The Partnership's management has selected a technical standard that
mandates a 750 MHz fiber to the feeder architecture for the majority of all its
systems that are to be rebuilt. A system built to a 750 MHz standard can provide
approximately 95 channels of analog service. Such a system will also permit the
introduction of high speed data transmission and telephony services in the
future after incurring incremental capital expenditures related to these
services.
The Partnership's future capital expenditure plans are, however, all
subject to the availability of adequate capital on terms satisfactory to the
Partnership, of which there can be no assurance. As discussed in prior reports,
the Partnership postponed a number of rebuild and upgrade projects that were
planned for 1993, 1994 and 1995 because of the uncertainty related to
implementation of the 1992 Cable Act and the negative impact thereof on the
Partnership's business and access to capital. As a result, the Partnership's
systems will be significantly less technically advanced than had been expected
prior to the implementation of re-regulation. The Partnership believes that the
delays in upgrading its systems will, under present market conditions, most
likely have an adverse effect on the value of those systems compared to systems
that have been rebuilt to a higher technical standard. See "Legislation and
Regulation" and Item 7., "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources."
Decentralized Management
The Corporate General Partner manages the Partnership's systems on a
decentralized basis. The Corporate General Partner believes that its
decentralized management structure, by enhancing management presence at the
system level, increases its sensitivity to the needs of its customers, enhances
the effectiveness of its customer service efforts, eliminates the need for
maintaining a large centralized corporate staff and facilitates the maintenance
of good relations with local governmental authorities.
Marketing
The Partnership has made substantial changes in the way in which it
packages and sells its services and equipment in the course of its
implementation of the FCC's rate regulations promulgated under the 1992 Cable
Act. Historically, the Partnership had offered four programming packages in its
upgraded addressable systems. These packages combined services at a lower rate
than the aggregate rates for such services purchased individually on an "a la
carte" basis. The new rules require that charges for cable- related equipment
(e.g., converter boxes and remote control devices) and installation services be
unbundled from the provision of cable service and based upon actual costs plus a
reasonable profit. On November 10, 1994, the FCC announced the adoption of
further significant amendments to its rules. One amendment allows cable
operators to create new tiers of program services which the FCC has chosen to
exclude from rate regulation, so long as the programming is new to the system.
In addition, the FCC decided that discounted packages of non-premium "new
product tier" services will be subject to rate regulation in the future.
However, in applying this new policy to new product tier packages such as those
already offered by the Partnership and numerous other cable operators, the FCC
decided that where only a few services were moved from regulated tiers to the
new product tier package, the package will be treated as if it were a tier of
new program services as discussed above. Substantially all of the new product
tier packages offered by the Partnership have received this desirable treatment.
These amendments to the FCC's rules have allowed the Partnership to resume its
core marketing strategy and reintroduce programmed service packaging. As a
result, in addition to the basic service package, customers in substantially all
of the Systems may purchase an expanded basic service, additional unregulated
packages of satellite-delivered services and premium services on either an a la
carte or a discounted packaged basis. See "Legislation and Regulation."
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The Partnership has employed a variety of targeted marketing
techniques to attract new customers by focusing on delivering value, choice,
convenience and quality. The Partnership employs direct mail, radio and local
newspaper advertising, telemarketing and door-to-door selling utilizing
demographic "cluster codes" to target specific messages to target audiences. In
certain systems, the Partnership offers discounts to customers who purchase
premium services on a limited trial basis in order to encourage a higher level
of service subscription. The Partnership also has a coordinated strategy for
retaining customers that includes televised retention advertising to reinforce
the initial decision to subscribe and encourage customers to purchase higher
service levels.
Customer Service and Community Relations
The Partnership places a strong emphasis on customer service and
community relations and believes that success in these areas is critical to its
business. The Partnership has developed and implemented a wide range of monthly
internal training programs for its employees, including its regional managers,
that focus on the Partnership's operations and employee interaction with
customers. The effectiveness of the Partnership's training program as it relates
to the employees' interaction with customers is monitored on an on-going basis,
and a portion of the regional managers' compensation is tied to achieving
customer service targets. The Partnership conducts an extensive customer survey
on an annual basis and uses the information in its efforts to enhance service
and better address the needs of its customers. In addition, the Partnership is
participating in the industry's recently announced Customer Service Initiative
which emphasizes an on-time guarantee program for service and installation
appointments. The Partnership's corporate executives and regional managers lead
the Partnership's involvement in a number of programs benefiting the communities
the Partnership serves, including, among others, Cable in the Classroom, Drug
Awareness, Holiday Toy Drive and the Cystic Fibrosis Foundation. Cable in the
Classroom is the cable television industry's public service initiative to enrich
education through the use of commercial-free cable programming. In addition, a
monthly publication, Cable in the Classroom magazine provides educational
program listings by curriculum area, as well as feature articles on how teachers
across the country use the programs.
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DESCRIPTION OF THE PARTNERSHIP'S SYSTEMS
The table below sets forth certain operating statistics for the
Partnership's cable systems as of December 31, 1995.
<TABLE>
<CAPTION>
Average
Monthly
Revenue
Homes Per Home
Subscribing Premium Subscribing
Homes to Cable Basic Service Premium to Cable
System Passed(1) Service Penetration(2) Units(3) Penetration(4) Service(5) Subscribers(6)
- ------ ------ ------- ----------- ------- ----------- ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Hillsboro, IL 10,785 6,155 57.1% 2,156 35.0% $31.01 8,776
Malden, MO 3,617 2,667 73.7% 480 18.0% $27.04 3,164
------ ----- ---- ------ -----
Total 14,402 8,822 61.3% 2,636 29.9% $29.80 11,940
======= ===== ===== ====== ======
</TABLE>
1 Homes passed refers to estimates by the Partnership of the
approximate number of dwelling units in a particular community that can be
connected to the distribution system without any further extension of principal
transmission lines. Such estimates are based upon a variety of sources,
including billing records, house counts, city directories and other local
sources.
2 Homes subscribing to cable service as a percentage of homes passed
by cable.
3 Premium service units include only single channel services offered
for a monthly fee per channel and do not include tiers of channels offered as a
package for a single monthly fee.
4 Premium service units as a percentage of homes subscribing to cable
service. A customer may purchase more than one premium service, each of which is
counted as a separate premium service unit. This ratio may be greater than 100%
if the average customer subscribes for more than one premium service.
5 Average monthly revenue per home subscribing to cable service has
been computed based on revenue for the year ended December 31, 1995.
6 The Partnership reports subscribers for the Systems on an equivalent
subscriber basis and, unless otherwise indicated, the term "SUBSCRIBERS" means
equivalent subscribers, calculated by dividing aggregate basic service revenues
by the average lowest basic service rate within an operating entity, adjusted to
reflect the impact of regulation. Basic service revenues include charges for
basic programming, bulk and commercial accounts and certain specialized
"packaged programming" services, including the appropriate components of new
product tier revenue, and excluding premium television and non-subscription
services. Consistent with past practices, Subscribers is an analytically derived
number which is reported in order to provide a basis of comparison to previously
reported data. The computation of Subscribers has been impacted by changes in
service offerings made in response to the 1992 Cable Act.
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CUSTOMER RATES AND SERVICES
The Partnership's cable television systems offer customers packages of
services that include the local area network, independent and educational
television stations, a limited number of television signals from distant cities,
numerous satellite-delivered, non-broadcast channels (such as CNN, MTV, USA,
ESPN and TNT) and certain information and public access channels. For an extra
monthly charge, the systems provide certain premium television services, such as
HBO, Showtime, The Disney Channel and regional sports networks.
The Partnership also offers other cable television services to its
customers. For additional charges, in most of its systems, the Partnership also
rents remote control devices and VCR compatible devices (devices that make it
easier for a customer to tape a program from one channel while watching a
program on another).
The service options offered by the Partnership vary from system to
system, depending upon a system's channel capacity and viewer interests. Rates
for services also vary from market to market and according to the type of
services selected.
Prior to the adoption of the 1992 Cable Act, the systems generally
were not subject to any rate regulation, i.e., they were adjudged to be subject
to effective competition under then-effective FCC regulations. The 1992 Cable
Act, however, substantially changed the statutory and FCC rate regulation
standards. Under the new definition of effective competition, nearly all cable
television systems in the United States have become subject to local rate
regulation of basic service. The 1996 Telecom Act expanded this definition to
include situations where a local telephone company, or anyone using its
facilities, offers comparable video service by any means except direct broadcast
satellite ("DBS"). In addition, the 1992 Cable Act eliminated the 5% annual
basic rate increases previously allowed by the 1984 Cable Act without local
approval; allows the FCC to review rates for nonbasic service tiers other than
premium services in response to complaints filed by franchising authorities
and/or cable customers; prohibits cable television systems from requiring
customers to purchase service tiers above basic service in order to purchase
premium services if the system is technically capable of doing so; and adopted
regulations to establish, on the basis of actual costs, the price for
installation of cable television service, remote controls, converter boxes, and
additional outlets. The FCC implemented these rate regulation provisions on
September 1, 1993, which affected all the Partnership's systems which are not
deemed to be subject to effective competition under the FCC's definition. The
FCC substantially amended its rate regulation rules on February 22, 1994 and
again on November 10, 1994. The FCC will have to conduct a number of rulemaking
proceedings in order to implement many of the provisions of the 1996 Telecom
Act. See "Legislation and Regulation."
At December 31, 1995, the Partnership's monthly rates for basic cable
service for residential customers, excluding special senior citizen discount
rates, ranged from $15.42 to $20.98 and premium service rates ranged from $8.00
to $11.00, excluding special promotions offered periodically in conjunction with
the Partnership's marketing programs. A one-time installation fee, which the
partnership may wholly or partially waive during a promotional period, is
usually charged to new customers. The Partnership, prior to September 1, 1993,
generally charged monthly fees for additional outlets, converters, program
guides and descrambling and remote control tuning devices. As described above,
these charges have either been eliminated or altered by the implementation of
rate regulation, and as a result of such implementation under the FCC's
guidelines, the rates for basic cable service for residential customers
correspondingly increased in some cases. As a result, while many customers
experienced a decrease in their monthly bill for all services, some customers
experienced an increase. However, substantially all the Partnership's customers
did receive a decrease in their monthly charges in July 1994 upon implementation
of the FCC's amended rules. Commercial customers, such as hotels, motels and
hospitals, are charged a negotiated, non-recurring fee for installation of
service and monthly fees based upon a standard discounting procedure. Most
multi-unit dwellings are offered a negotiated bulk rate in exchange for
single-point billing and basic service to all units. These rates are also
subject to regulation.
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EMPLOYEES
The various personnel required to operate the Partnership's business
are employed by the Partnership, the Corporate General Partner, its subsidiary
corporation and FHGLP. As of February 12, 1996, the Partnership had 7 employees,
the cost of which is charged directly to the Partnership. The Partnership
believes that its relations with its employees are good. The employment costs
incurred by the Corporate General Partner, its subsidiary corporation and FHGLP
are allocated and charged to the Partnership for reimbursement pursuant to the
partnership agreement and management agreement. The amounts of these
reimbursable costs are set forth below in Item 11., "Executive Compensation."
TECHNOLOGICAL DEVELOPMENTS
As part of its commitment to customer service, the Partnership seeks
to apply technological advances in the cable television industry to its cable
television systems on the basis of cost effectiveness, capital availability,
enhancement of product quality and service delivery and industry-wide
acceptance. The Partnership's present plan is to upgrade the technical quality
of the Partnership's systems' cable plant and to increase channel capacity for
the delivery of additional programming and new services. Currently, the
Partnership's systems have an average channel capacity of 32 in systems that
serve 30% of its customers and an average channel capacity of 53 in systems that
serve 70% of its customers and, on average, utilize 100% and 79% of their
channel capacity, respectively. The Partnership believes that system upgrades
would enable it to provide customers with greater programming diversity, better
picture quality and alternative communications delivery systems made possible by
the introduction of fiber optic technology and by the possible future
application of digital compression. The implementation of the Partnership's
capital expenditure plans is, however, subject to the availability of adequate
capital on terms satisfactory to the Partnership, of which there can be no
assurance. Also, as a result of the uncertainty created by recent regulatory
changes, the Partnership has deferred all plant rebuilds and upgrades. See
"Legislation and Regulation" and Item 7., "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
The use of fiber optic cable as an alternative to coaxial cable is
playing a major role in expanding channel capacity and improving the performance
of cable television systems. Fiber optic cable is capable of carrying hundreds
of video, data and voice channels and, accordingly, its utilization is essential
to the enhancement of a cable television system's technical capabilities. The
Partnership's current policy to utilize fiber optic technology in substantially
all rebuild projects which it undertakes is based upon the benefits that the
utilization of fiber optic technology provides over traditional coaxial cable
distribution plant, including lower per mile rebuild costs due to a reduction in
the number of required amplifiers, the elimination of headends, lower ongoing
maintenance and power costs and improved picture quality and reliability.
DIGITAL COMPRESSION
The Partnership has been closely monitoring developments in the area
of digital compression, a technology which is expected to enable cable operators
to increase the channel capacity of cable television systems by permitting a
significantly increased number of video signals to fit in a cable television
system's existing bandwidth. The Partnership believes that the utilization of
digital compression technology in the future could enable its systems to
increase channel capacity in certain systems in a manner that could be more cost
efficient than rebuilding such systems with higher capacity distribution plant.
The use of digital compression in its systems also could expand the number and
types of services these systems offer and enhance the development of current and
future revenue sources. Equipment vendors are beginning to market products to
provide this technology, but the Partnership's management has no plans to
install it at this time based on its present understanding of the costs as
compared to the benefits of the digital equipment currently available.
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PROGRAMMING
The Partnership purchases basic and premium programming for its
systems from Falcon Cablevision. In turn, Falcon Cablevision charges the
Partnership for these costs based on an estimate of what the Partnership could
negotiate for such services for the fifteen partnerships managed by the
Corporate General Partner as a group (approximately 94,600 homes subscribing to
cable service at December 31, 1995), which is generally based on a fixed fee per
customer or a percentage of the gross receipts for the particular service.
Falcon Cablevision's programming contracts are generally for a fixed period of
time and are subject to negotiated renewal. Falcon Cablevision does not have
long-term programming contracts for the supply of a substantial amount if its
programming. Accordingly, no assurances can be given that its, and
correspondingly the Partnership's, programming costs will not increase
substantially in the near future, or that other materially adverse terms will
not be added to Falcon Cablevision's programming contracts. Management believes,
however, that Falcon Cablevision's relations with its programming suppliers
generally are good.
The Partnership's cable programming costs have increased in recent
years and are expected to continue to increase due to additional programming
being provided to basic customers, requirements to add channels under
retransmission carriage agreements entered into with certain programming
sources, increased costs to produce or purchase cable programming generally,
inflationary increases and other factors. Under the FCC rate regulations,
increases in programming costs for regulated cable services occurring after the
earlier of March 1, 1994, or the date a system's basic cable service became
regulated, may be passed through to customers. See "Legislation and Regulation -
Federal Regulation - Carriage of Broadcast Television Signals." Generally,
programming costs are charged among systems on a per customer basis.
FRANCHISES
Cable television systems are generally constructed and operated under
non-exclusive franchises granted by local governmental authorities. These
franchises typically contain many conditions, such as time limitations on
commencement and completion of construction; conditions of service, including
number of channels, types of programming and the provision of free service to
schools and certain other public institutions; and the maintenance of insurance
and indemnity bonds. The provisions of local franchises are subject to federal
regulation under the 1984 Cable Act, the 1992 Cable Act and the 1996 Telecom
Act. See "Legislation and Regulation."
As of December 31, 1995, the Partnership held 11 franchises. These
franchises, all of which are non-exclusive, provide for the payment of fees to
the issuing authority. Annual franchise fees imposed on the Partnership systems
range up to 5% of the gross revenues generated by a system. The 1984 Cable Act
prohibits franchising authorities from imposing franchise fees in excess of 5%
of gross revenues and also permits the cable system operator to seek
renegotiation and modification of franchise requirements if warranted by changed
circumstances.
The following table groups the franchises of the Partnership's cable
television systems by date of expiration and presents the number of franchises
for each group of franchises and the approximate number and percentage of homes
subscribing to cable service (as a percentage of its Partnership total) for each
group as of December 31, 1995.
<TABLE>
<CAPTION>
Number of Percentage of
Homes Homes
Year of Number of Subscribing to Subscribing to
Franchise Expiration Franchises Cable Service Cable Service
- -------------------- ---------- ------------- -------------
<S> <C> <C> <C>
Prior to 1997 3 2,293 26.0%
1997 - 2001 6 5,694 64.5%
2002 and after 2 351 4.0%
----- ----- -----
Total 11 8,338 94.5%
===== ===== =====
</TABLE>
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The Partnership operates cable television systems which serve multiple
communities and, in some circumstances, portions of such systems extend into
jurisdictions for which the Partnership believes no franchise is necessary. In
the aggregate, approximately 484 customers, comprising approximately 5.5% of the
Partnership's customers, are served by unfranchised portions of such systems. In
certain instances, where a single franchise comprises a large percentage of the
customers in an operating region, the loss of such franchise could decrease the
economies of scale achieved by the Partnership's clustering strategy The
Partnership has never had a franchise revoked for any of its systems and
believes that it has satisfactory relationships with substantially all of its
franchising authorities.
The 1984 Cable Act provides, among other things, for an orderly
franchise renewal process in which franchise renewal will not be unreasonably
withheld or, if renewal is withheld, the franchise authority must pay the
operator the "fair market value" for the system covered by such franchise. In
addition, the 1984 Cable Act establishes comprehensive renewal procedures which
require that an incumbent franchisee's renewal application be assessed on its
own merit and not as part of a comparative process with competing applications.
See "Legislation and Regulation."
COMPETITION
Cable television systems compete with other communications and
entertainment media, including over the air television broadcast signals which a
viewer is able to receive directly using the viewer's own television set and
antenna. The extent to which a cable system competes with over-the-air
broadcasting depends upon the quality and quantity of the broadcast signals
available by direct antenna reception compared to the quality and quantity of
such signals and alternative services offered by a cable system. In many areas,
television signals which constitute a substantial part of basic service can be
received by viewers who use their own antennas. Local television reception for
residents of apartment buildings or other multi-unit dwelling complexes may be
aided by use of private master antenna services. Cable systems also face
competition from alternative methods of distributing and receiving television
signals and from other sources of entertainment such as live sporting events,
movie theaters and home video products, including videotape recorders and
cassette players. In recent years, the FCC has adopted policies providing for
authorization of new technologies and a more favorable operating environment for
certain existing technologies that provide, or may provide, substantial
additional competition for cable television systems. The extent to which cable
television service is competitive depends in significant part upon the cable
television system's ability to provide an even greater variety of programming
than that available over the air or through competitive alternative delivery
sources. In addition, certain provisions of the 1992 Cable Act and the 1996
Telecom Act are expected to increase competition significantly in the cable
industry. See "Legislation and Regulation."
Individuals presently have the option to purchase earth stations,
which allow the direct reception of satellite-delivered program services
formerly available only to cable television subscribers. Most
satellite-distributed program signals are being electronically scrambled to
permit reception only with authorized decoding equipment for which the consumer
must pay a fee. From time to time, legislation has been introduced in Congress
which, if enacted into law, would prohibit the scrambling of certain
satellite-distributed programs or would make satellite services available to
private earth stations on terms comparable to those offered to cable systems.
Broadcast television signals are being made available to owners of earth
stations under the Satellite Home Viewer Copyright Act of 1988, which became
effective January 1, 1989 for an initial six-year period. This Act establishes a
statutory compulsory license for certain transmissions made by satellite owners
to home satellite dishes, for which carriers are required to pay a royalty fee
to the Copyright Office. This Act has been extended by Congress until December
31, 1999. The 1992 Cable Act enhances the right of cable competitors to purchase
nonbroadcast satellite-delivered programming. See "Legislation and
Regulation-Federal Regulation."
Television programming is now also being delivered to individuals by
high-powered direct broadcast satellites ("DBS") utilizing video compression
technology. This technology has the capability of
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providing more than 100 channels of programming over a single high-powered DBS
satellite with significantly higher capacity available if multiple satellites
are placed in the same orbital position. Video compression technology may also
be used by cable operators in the future to similarly increase their channel
capacity. DBS service can be received virtually anywhere in the United States
through the installation of a small rooftop or side-mounted antenna, and it is
more accessible than cable television service where cable plant has not been
constructed or where it is not cost effective to construct cable television
facilities. DBS service is being heavily marketed on a nation-wide basis. The
extent to which DBS systems will be competitive with cable television systems
will depend upon, among other things, the ability of DBS operators to obtain
access to programming, the availability of reception equipment, and whether
equipment and service can be made available to consumers at reasonable prices.
Multi-channel multipoint distribution systems ("MMDS") deliver
programming services over microwave channels licensed by the FCC received by
subscribers with special antennas. MMDS systems are less capital intensive, are
not required to obtain local franchises or to pay franchise fees and are subject
to fewer regulatory requirements than cable television systems. To date, the
ability of these so-called "wireless" cable services to compete with cable
television systems has been limited by channel capacity constraints and the need
for unobstructed line-of-sight over-the-air transmission. Although relatively
few MMDS systems in the United States are currently in operation or under
construction, virtually all markets have been licensed or tentatively licensed.
The FCC has taken a series of actions intended to facilitate the development of
MMDS and other wireless cable systems as alternative means of distributing video
programming, including reallocating certain frequencies to these services and
expanding the permissible use and eligibility requirements for certain channels
reserved for educational purposes. The FCC's actions enable a single entity to
develop an MMDS system with a potential of up to 35 channels that could compete
effectively with cable television. MMDS systems qualify for the statutory
compulsory copyright license for the retansmission of television and radio
broadcast stations. FCC rules and the 1992 Cable Act prohibit the common
ownership of cable systems and MMDS facilities serving the same area.
Additional competition may come from private cable television systems
servicing condominiums, apartment complexes and certain other multiple unit
residential developments. The operators of these private systems, known as
satellite master antenna television ("SMATV") systems, often enter into
exclusive agreements with apartment building owners or homeowners' associations
which preclude franchised cable television operators from serving residents of
such private complexes. Although a number of states have enacted laws to afford
operators of franchised cable television systems access to such private
complexes, the U.S. Supreme Court has held that cable companies cannot have such
access without compensating the property owner. The access statutes of several
states have been challenged successfully in the courts, and other such laws are
under attack. However, the 1984 Cable Act gives franchised cable operators the
right to use existing compatible easements within their franchise areas upon
nondiscriminatory terms and conditions. Accordingly, where there are preexisting
compatible easements, cable operators may not be unfairly denied access or
discriminated against with respect to the terms and conditions of access to
those easements. There have been conflicting judicial decisions interpreting the
scope of the access right granted by the 1984 Cable Act, particularly with
respect to easements located entirely on private property.
Due to the widespread availability of reasonably-priced earth
stations, SMATV systems can offer both improved reception of local television
stations and many of the same satellite-delivered program services which are
offered by franchised cable television systems. Further, while a franchised
cable television system typically is obligated to extend service to all areas of
a community regardless of population density or economic risk, the SMATV system
may confine its operation to small areas that are easy to serve and more likely
to be profitable. Under the 1996 Telecom Act, SMATV systems can interconnect
non-commonly owned buildings without having to comply with local, state and
federal regulatory requirements that are imposed upon cable systems providing
similar services, as long as they do not use public rights-of-way. However, a
SMATV system is subject to the 1984 Cable Act's franchise requirement if it uses
physically closed transmission paths such as wires or cables to interconnect
separately owned and managed buildings if its lines use or cross any public
right-of-way. In some cases, SMATV operators may be able to charge a lower price
than could a cable system providing comparable services and the FCC's new
regulations implementing the 1992 Cable Act limit a cable operator's ability to
reduce
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its rates to meet this competition. Furthermore, the U.S. Copyright
Office has tentatively concluded that SMATV systems are "cable systems" for
purposes of qualifying for the compulsory copyright license established for
cable systems by federal law. The 1992 Cable Act prohibits the common ownership
of cable systems and SMATV facilities serving the same area. However, a cable
operator can purchase a SMATV system serving the same area and technically
integrate it into the cable system.
The FCC has authorized a new interactive television service which will
permit non-video transmission of information between an individual's home and
entertainment and information service providers. This service will provide an
alternative means for DBS systems and other video programming distributors,
including television stations, to initiate the new interactive television
services. This service may also be used as well by the cable television
industry.
The FCC also has initiated a new rulemaking proceeding looking toward
the allocation of frequencies in the 28 Ghz range for a new multi-channel
wireless video service which could make 98 video channels available in a single
market. It cannot be predicted at this time whether competitors will emerge
utilizing such frequencies or whether such competition would have a material
impact on the operations of cable television systems.
The 1996 Telecom Act eliminates the restriction against ownership and
operation of cable systems by local telephone companies within their local
exchange service areas. Telephone companies are now free to enter the retail
video distribution business through any means, such as DBS, MMDS, SMATV or as
traditional franchised cable system operators. Alternatively, the 1996 Telecom
Act authorizes local telephone companies to operate "open video systems" without
obtaining a local cable franchise, although telephone companies operating such
systems can be required to make payments to local governmental bodies in lieu of
cable franchise fees. Up to two-thirds of the channel capacity on an "open video
system" must be available to programmers unaffiliated with the local telephone
company. The open video system concept replaces the FCC's video dialtone rules.
The 1996 Telecom Act also includes numerous provisions designed to make it
easier for cable operators and others to compete directly with local exchange
telephone carriers. With certain limited exceptions, neither a local exchange
carrier nor a cable operator can acquire more than 10% of the other entity
operating within its own service area.
Advances in communications technology, as well as changes in the
marketplace and the regulatory and legislative environment, are constantly
occurring. Thus, it is not possible to predict the effect that ongoing or future
developments might have on the cable industry. The ability of cable systems to
compete with present, emerging and future distribution media will depend to a
great extent on obtaining attractive programming. The availability and exclusive
use of a sufficient amount of quality programming may in turn be affected by
developments in regulation or copyright law. See "Legislation and Regulation."
The cable television industry competes with radio, television and
print media for advertising revenues. As the cable television industry continues
to develop programming designed specifically for distribution by cable,
advertising revenues may increase. Premium programming provided by cable systems
is subject to the same competitive factors which exist for other programming
discussed above. The continued profitability of premium services may depend
largely upon the continued availability of attractive programming at competitive
prices.
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LEGISLATION AND REGULATION
The cable television industry is regulated by the FCC, some state
governments and substantially all local governments. In addition, various
legislative and regulatory proposals under consideration from time to time by
the Congress and various federal agencies have in the past, and may in the
future materially affect the Partnership and the cable television industry. The
following is a summary of federal laws and regulations affecting the growth and
operation of the cable television industry and a description of certain state
and local laws.
RECENT DEVELOPMENTS
On February 8, 1996, the President signed the 1996 Telecom Act, into
law. This statute substantially amended the Communications Act of 1934 (the
"Communications Act") by, among other things, removing barriers to competition
in the cable television and telephone markets and reducing the regulation of
cable television rates. As it pertains to cable television, the 1996 Telecom
Act, among other things, (i) ends the regulation of certain nonbasic programming
services in 1999; (ii) expands the definition of effective competition, the
existence of which displaces rate regulation; (iii) eliminates the restriction
against the ownership and operation of cable systems by telephone companies
within their local exchange service areas; and (iv) liberalizes certain of the
FCC's cross-ownership restrictions. The FCC will have to conduct a number of
rulemaking proceedings in order to implement many of the provisions of the 1996
Telecom Act. See "Business - Competition" and "-Federal Regulation-Rate
Regulation."
The Partnership believes that the regulation of its industry remains a
matter of interest to Congress, the FCC and other regulatory authorities. There
can be no assurance as to what, if any, future actions such legislative and
regulatory authorities may take or the effect thereof on the Partnership.
CABLE COMMUNICATIONS POLICY ACT OF 1984
The 1984 Cable Act became effective on December 29, 1984. This federal
statute, which amended the Communications Act, creates uniform national
standards and guidelines for the regulation of cable television systems.
Violations by a cable television system operator of provisions of the
Communications Act, as well as of FCC regulations, can subject the operator to
substantial monetary penalties and other sanctions. Among other things, the 1984
Cable Act affirmed the right of franchising authorities (state or local,
depending on the practice in individual states) to award one or more franchises
within their jurisdictions. It also prohibited non-grandfathered cable
television systems from operating without a franchise in such jurisdictions. In
connection with new franchises, the 1984 Cable Act provides that in granting or
renewing franchises, franchising authorities may establish requirements for
cable-related facilities and equipment, but may not establish or enforce
requirements for video programming or information services other than in broad
categories. The 1984 Cable Act grandfathered, for the remaining term of existing
franchises, many but not all of the provisions in existing franchises which
would not be permitted in franchises entered into or renewed after the effective
date of the 1984 Cable Act.
CABLE TELEVISION CONSUMER PROTECTION AND COMPETITION ACT OF 1992
On October 5, 1992, Congress enacted the 1992 Cable Act. This
legislation has effected significant changes to the legislative and regulatory
environment in which the cable industry operates. It amends the 1984 Cable Act
in many respects. The 1992 Cable Act became effective on December 4, 1992,
although certain provisions, most notably those dealing with rate regulation and
retransmission consent, became effective at later dates. The legislation
required the FCC to initiate a number of rulemaking proceedings to implement
various provisions of the statute, virtually all of which have been completed.
The 1992 Cable Act allows for a greater degree of regulation of the cable
industry with respect to, among other things: (i) cable system rates for both
basic and certain nonbasic services; (ii) programming access and exclusivity
arrangements; (iii) access to cable channels by unaffiliated programming
services; (iv) leased access terms and conditions; (v) horizontal and vertical
ownership of cable systems; (vi) customer service requirements; (vii) franchise
renewals; (viii) television broadcast signal
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carriage and retransmission consent; (ix) technical standards; (x) customer
privacy; (xi) consumer protection issues; (xii) cable equipment compatibility;
(xiii) obscene or indecent programming; and (xiv) requiring subscribers to
subscribe to tiers of service other than basic service as a condition of
purchasing premium services. Additionally, the legislation encourages
competition with existing cable television systems by allowing municipalities to
own and operate their own cable television systems without having to obtain a
franchise; preventing franchising authorities from granting exclusive franchises
or unreasonably refusing to award additional franchises covering an existing
cable system's service area; and prohibiting the common ownership of cable
systems and co-located MMDS or SMATV systems. The 1992 Cable Act also precludes
video programmers affiliated with cable television companies from favoring cable
operators over competitors and requires such programmers to sell their
programming to other multichannel video distributors.
A constitutional challenge to the must-carry provisions of the 1992
Cable Act is still ongoing. On April 8, 1993, a three-judge district court panel
granted summary judgment for the government upholding the must-carry provisions.
That decision was appealed directly to the U.S. Supreme Court which remanded the
case back to the district court to determine whether there was adequate evidence
that the provisions were needed and whether the restrictions chosen were the
least intrusive. On December 12, 1995, the district court again upheld the
must-carry provisions. The Supreme Court has again agreed to review the district
court's decision.
On September 16, 1993, a constitutional challenge to the balance of
the 1992 Cable Act provisions was rejected by the U.S. District Court in the
District of Columbia which upheld the constitutionality of all but three
provisions of the statute (multiple ownership limits for cable operators,
advance notice of free previews for certain programming services and channel
set- asides for DBS operators). An appeal from that decision is pending before
the U.S. Court of Appeals for the District of Columbia Circuit.
FEDERAL REGULATION
The FCC, the principal federal regulatory agency with jurisdiction
over cable television, has heretofore promulgated regulations covering such
areas as the registration of cable television systems, cross-ownership between
cable television systems and other communications businesses, carriage of
television broadcast programming, consumer education and lockbox enforcement,
origination cablecasting and sponsorship identification, children's programming,
the regulation of basic cable service rates in areas where cable television
systems are not subject to effective competition, signal leakage and frequency
use, technical performance, maintenance of various records, equal employment
opportunity, and antenna structure notification, marking and lighting. The FCC
has the authority to enforce these regulations through the imposition of
substantial fines, the issuance of cease and desist orders and/or the imposition
of other administrative sanctions, such as the revocation of FCC licenses needed
to operate certain transmission facilities often used in connection with cable
operations. The 1992 Cable Act required the FCC to adopt additional regulations
covering, among other things, cable rates, signal carriage, consumer protection
and customer service, leased access, indecent programming, programmer access to
cable television systems, programming agreements, technical standards, consumer
electronics equipment compatibility, ownership of home wiring, program
exclusivity, equal employment opportunity, and various aspects of direct
broadcast satellite system ownership and operation. The 1996 Telecom Act
requires certain changes to various of these regulations. A brief summary of
certain of these federal regulations as adopted to date follows.
RATE REGULATION
The 1984 Cable Act codified existing FCC preemption of rate regulation
for premium channels and optional nonbasic program tiers. The 1984 Cable Act
also deregulated basic cable rates for cable television systems determined by
the FCC to be subject to effective competition. The 1992 Cable Act substantially
changed the previous statutory and FCC rate regulation standards. The 1992 Cable
Act replaced the FCC's old standard for determining effective competition, under
which most cable systems were not subject to local rate regulation, with a
statutory provision that resulted in nearly all cable television systems
becoming subject to local rate regulation of
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basic service. The 1996 Telecom Act expands the definition of effective
competition to cover situations where a local telephone company or its
affiliate, or any multichannel video provider using telephone company
facilities, offers comparable video service by any means except DBS.
Satisfaction of this test deregulates both basic and nonbasic tiers.
Additionally, the 1992 Cable Act eliminated the 5% annual rate increase for
basic service previously allowed by the 1984 Cable Act without local approval;
required the FCC to adopt a formula, for franchising authorities to enforce, to
assure that basic cable rates are reasonable; allowed the FCC to review rates
for nonbasic service tiers (other than per-channel or per-program services) in
response to complaints filed by franchising authorities and/or cable customers;
prohibited cable television systems from requiring subscribers to purchase
service tiers above basic service in order to purchase premium services if the
system is technically capable of doing so; required the FCC to adopt regulations
to establish, on the basis of actual costs, the price for installation of cable
service, remote controls, converter boxes and additional outlets; and allows the
FCC to impose restrictions on the retiering and rearrangement of cable services
under certain limited circumstances. The 1996 Telecom Act ends FCC regulation of
nonbasic tier rates on March 31, 1999.
The FCC adopted rules designed to implement the 1992 Cable Act's rate
regulation provisions on April 1, 1993, and then significantly amended them on
reconsideration on February 22, 1994. The FCC's regulations contain standards
for the regulation of basic and nonbasic cable service rates (other than
per-channel or per-program services). The FCC's original rules became effective
on September 1, 1993. The rules have been further amended several times. The
rate regulations adopt a benchmark price cap system for measuring the
reasonableness of existing basic and nonbasic service rates, and a formula for
calculating additional rate increases. Alternatively, cable operators have the
opportunity to make cost-of-service showings which, in some cases, may justify
rates above the applicable benchmarks. The rules also require that charges for
cable-related equipment (e.g., converter boxes and remote control devices) and
installation services be unbundled from the provision of cable service and based
upon actual costs plus a reasonable profit.
Local franchising authorities and/or the FCC are empowered to order a
reduction of existing rates which exceed the maximum permitted level for either
basic and/or nonbasic cable services and associated equipment, and refunds can
be required, measured from the date of a complaint to the FCC challenging an
existing nonbasic cable service rate or from September 1993, for existing basic
cable service rates under the original rate regulations, and from May 15, 1994,
under the February 22, 1994 amendments thereto. In general, the reduction for
existing basic and nonbasic cable service rates under the original rate
regulations would be to the greater of the applicable benchmark level or the
rates in force as of September 30, 1992, minus 10 percent, adjusted forward for
inflation. The amended regulations require an aggregate reduction of 17 percent,
adjusted forward for inflation, from the rates in force as of September 30,
1992. The regulations also provide that future rate increases may not exceed an
inflation-indexed amount, plus increases in certain costs beyond the cable
operator's control, such as taxes, franchise fees and increased programming
costs. Cost-based adjustments to these capped rates can also be made in the
event a cable operator adds or deletes channels. Amendments adopted on November
10, 1994 incorporated an alternative method for adjusting the rate charged for a
regulated nonbasic tier when new services are added. Cable operators can
increase rates for such tiers by as much as $1.50 over a two year period to
reflect the addition of up to six new channels of service on nonbasic tiers (an
additional $0.20 for a seventh channel is permitted in the third year). In
addition, new product tiers consisting of services new to the cable system can
be created free of rate regulation as long as certain conditions are met such as
not moving services from existing tiers to the new tier. These provisions
currently provide limited benefit to the Partnership's systems due to the lack
of channel capacity previously discussed. There is also a streamlined
cost-of-service methodology available to justify a rate increase on basic and
regulated nonbasic tiers for "significant" system rebuilds or upgrades.
Franchising authorities have become certified by the FCC to regulate
the rates charged by the Partnership for basic cable service and for associated
basic cable service equipment. In addition, a number of the Partnership's
customers have filed complaints with the FCC regarding the rates charged for
non-basic cable service.
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The Partnership has adjusted its regulated programming service rates
and related equipment and installation charges in substantially all of its
systems so as to bring these rates and charges into compliance with the
applicable benchmark or equipment and installation cost levels. The Partnership
also implemented a program in substantially all of its systems under which a
number of the Partnership's satellite-delivered and premium services are now
offered individually on a per channel (i.e., a la carte) basis, or as a group at
a discounted price. A la carte services were not subject to the FCC's rate
regulations under the rules originally issued to implement the 1992 Cable Act.
The FCC, in its reconsideration of the original rate regulations,
stated that it was going to take a harder look at the regulatory treatment of
such a la carte packages on an ad hoc basis. Such packages which are determined
to be evasions of rate regulation rather than true enhancements of subscriber
choice will be treated as regulated tiers and, therefore, subject to rate
regulation. There have been no FCC rulings related to systems owned by the
Partnership. There have been two rulings, however, on such packages offered by
affiliated partnerships managed by FHGLP. In one case, the FCC's Cable Services
Bureau ruled that a nine- channel a la carte package was an evasion of rate
regulation and ordered this package to be treated as a regulated tier. In the
other case, a six-channel package was held not to be an evasion, but rather is
to be considered an unregulated new product tier under the FCC's November 10,
1994 rule amendments. The deciding factor in all of the FCC's decisions related
to a la carte tiers appears to be the number of channels moved from regulated
tiers, with six or fewer channels being deemed not to be an evasion. Almost all
of the Partnership's systems moved six or fewer channels to a la carte packages.
Under the November 10, 1994 amendments, any new a la carte package created after
that date will be treated as a regulated tier, except for packages involving
traditional premium services (e.g., HBO).
In December 1995, the Partnership, and all of its affiliated
partnerships, filed petitions with the FCC seeking a determination that they are
eligible for treatment as "small cable operators" for purposes of being able to
utilize the FCC's streamlined cost-of-service rate-setting methodology. If such
relief is granted, many of the Partnership's systems would be able to increase
their basic and/or nonbasic service tier rates.
On March 11, 1993, the FCC adopted regulations pursuant to the 1992
Act which require cable systems to permit customers to purchase video
programming on a per channel or a per program basis without the necessity of
subscribing to any tier of service, other than the basic service tier, unless
the cable system is technically incapable of doing so. Generally, this exemption
from compliance with the statute for cable systems that do not have such
technical capability is available until a cable system obtains the capability,
but not later than December 2002.
CARRIAGE OF BROADCAST TELEVISION SIGNALS
The 1992 Cable Act contains new signal carriage requirements. These
new rules allowed commercial television broadcast stations which are "local" to
a cable system, i.e., the system is located in the station's Area of Dominant
Influence, to elect every three years whether to require the cable system to
carry the station, subject to certain exceptions, or whether the cable system
will have to negotiate for "retransmission consent" to carry the station. The
first such election was made on June 17, 1993. Local non-commercial television
stations are also given mandatory carriage rights, subject to certain
exceptions, within the larger of: (i) a 50 mile radius from the station's city
of license; or (ii) the station's Grade B contour (a measure of signal
strength). Unlike commercial stations, noncommercial stations are not given the
option to negotiate retransmission consent for the carriage of their signal. In
addition, cable systems will have to obtain retransmission consent for the
carriage of all "distant" commercial broadcast stations, except for certain
"superstations," i.e., commercial satellite-delivered independent stations such
as WTBS. The 1992 Cable Act also eliminated, effective December 4, 1992, the
FCC's regulations requiring the provision of input selector switches. The
must-carry provisions for non-commercial stations became effective on December
4, 1992. Implementing must-carry rules for non-commercial and commercial
stations and retransmission consent rules for commercial stations were adopted
by the FCC on March 11, 1993. All commercial stations entitled to carriage were
to have been carried by June 2, 1993, and any non-must-carry stations (other
than superstations) for which retransmission consent had not been obtained could
no longer be carried after October 5,
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1993. A number of stations previously carried by the Partnership's cable
television systems elected retransmission consent. The Partnership was able to
reach agreements with broadcasters who elected retransmission consent or to
negotiate extensions to the October 6, 1993 deadline and has therefore not been
required to pay cash compensation to broadcasters for retransmission consent or
been required by broadcasters to remove broadcast stations from the cable
television channel line-ups. The Partnership has, however, agreed to carry some
services (e.g., ESPN2 and a new service by FOX) in specified markets pursuant to
retransmission consent arrangements which it believes are comparable to those
entered into by most other large cable operator, and for which it pays monthly
fees to the service providers, as it does with other satellite providers. The
next election between must-carry and retransmission consent for local commercial
television broadcast stations will be October 1, 1996.
NONDUPLICATION OF NETWORK PROGRAMMING
Cable television systems that have 1,000 or more customers must, upon
the appropriate request of a local television station, delete the simultaneous
or nonsimultaneous network programming of a distant station when such
programming has also been contracted for by the local station on an exclusive
basis.
DELETION OF SYNDICATED PROGRAMMING
FCC regulations enable television broadcast stations that have
obtained exclusive distribution rights for syndicated programming in their
market to require a cable system to delete or "black out" such programming from
other television stations which are carried by the cable system. The extent of
such deletions will vary from market to market and cannot be predicted with
certainty. However, it is possible that such deletions could be substantial and
could lead the cable operator to drop a distant signal in its entirety. The FCC
also has commenced a proceeding to determine whether to relax or abolish the
geographic limitations on program exclusivity contained in its rules, which
would allow parties to set the geographic scope of exclusive distribution rights
entirely by contract, and to determine whether such exclusivity rights should be
extended to noncommercial educational stations. It is possible that the outcome
of these proceedings will increase the amount of programming that cable
operators are requested to black out. Finally, the FCC has declined to impose
equivalent syndicated exclusivity rules on satellite carriers who provide
services to the owners of home satellite dishes similar to those provided by
cable systems.
FRANCHISE FEES
Although franchising authorities may impose franchise fees under the
1984 Cable Act, such payments cannot exceed 5% of a cable system's annual gross
revenues. Under the 1996 Telecom Act, franchising authorities may not exact
franchise fees from revenues derived from telecommunications services.
Franchising authorities are also empowered in awarding new franchises or
renewing existing franchises to require cable operators to provide cable-related
facilities and equipment and to enforce compliance with voluntary commitments.
In the case of franchises in effect prior to the effective date of the 1984
Cable Act, franchising authorities may enforce requirements contained in the
franchise relating to facilities, equipment and services, whether or not
cable-related. The 1984 Cable Act, under certain limited circumstances, permits
a cable operator to obtain modifications of franchise obligations.
RENEWAL OF FRANCHISES
The 1984 Cable Act established renewal procedures and criteria
designed to protect incumbent franchisees against arbitrary denials of renewal.
While these formal procedures are not mandatory unless timely invoked by either
the cable operator or the franchising authority, they can provide substantial
protection to incumbent franchisees. Even after the formal renewal procedures
are invoked, franchising authorities and cable operators remain free to
negotiate a renewal outside the formal process. Nevertheless, renewal is by no
means assured, as the franchisee must meet certain statutory standards. Even if
a franchise is renewed, a franchising authority may impose new and more onerous
requirements such as upgrading facilities and equipment, although the
municipality must take into account the cost of meeting such requirements.
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The 1992 Cable Act makes several changes to the process under which a
cable operator seeks to enforce his renewal rights which could make it easier in
some cases for a franchising authority to deny renewal. While a cable operator
must still submit its request to commence renewal proceedings within thirty to
thirty-six months prior to franchise expiration to invoke the formal renewal
process, the request must be in writing and the franchising authority must
commence renewal proceedings not later than six months after receipt of such
notice. The four-month period for the franchising authority to grant or deny the
renewal now runs from the submission of the renewal proposal, not the completion
of the public proceeding. Franchising authorities may consider the "level" of
programming service provided by a cable operator in deciding whether to renew.
For alleged franchise violations occurring after December 29, 1984, franchising
authorities are no longer precluded from denying renewal based on failure to
substantially comply with the material terms of the franchise where the
franchising authority has "effectively acquiesced" to such past violations.
Rather, the franchising authority is estopped if, after giving the cable
operator notice and opportunity to cure, it fails to respond to a written notice
from the cable operator of its failure or inability to cure. Courts may not
reverse a denial of renewal based on procedural violations found to be "harmless
error."
A recent federal court decision could, if upheld and if adopted by
other federal courts, make the renewal of franchises more problematical in
certain circumstances. The United States District Court for the Western District
of Kentucky held that the statute does not authorize it to review a franchising
authority's assessment of its community needs to determine if they are
reasonable or supported by any evidence. This result would seemingly permit a
franchising authority which desired to oust an existing operator to set
cable-related needs at such a high level that the incumbent operator would have
difficulty in making a renewal proposal which met those needs. This decision has
been appealed. The Partnership was not a party to this litigation.
CHANNEL SET-ASIDES
The 1984 Cable Act permits local franchising authorities to require
cable operators to set aside certain channels for public, educational and
governmental access programming. The 1984 Cable Act further requires cable
television systems with thirty-six or more activated channels to designate a
portion of their channel capacity for commercial leased access by unaffiliated
third parties. While the 1984 Cable Act presently allows cable operators
substantial latitude in setting leased access rates, the 1992 Cable Act requires
leased access rates to be set according to a formula determined by the FCC.
COMPETING FRANCHISES
Questions concerning the ability of municipalities to award a single
cable television franchise and to impose certain franchise restrictions upon
cable television companies have been considered in several recent federal
appellate and district court decisions. These decisions have been somewhat
inconsistent and, until the U.S. Supreme Court rules definitively on the scope
of cable television's First Amendment protections, the legality of the
franchising process and of various specific franchise requirements is likely to
be in a state of flux. It is not possible at the present time to predict the
constitutionally permissible bounds of cable franchising and particular
franchise requirements. However, the 1992 Cable Act, among other things,
prohibits franchising authorities from unreasonably refusing to grant franchises
to competing cable television systems and permits franchising authorities to
operate their own cable television systems without franchises.
OWNERSHIP
The 1984 Cable Act codified existing FCC cross-ownership regulations,
which, in part, prohibit local exchange telephone companies ("LECs") from
providing video programming directly to customers within their local exchange
telephone service areas, except in rural areas or by specific waiver of FCC
rules. This restriction had been ruled unconstitutional in several court cases,
and was before the Supreme Court for review, when the 1996 Telecom Act was
passed. That statute repealed the rule in its entirety.
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The 1984 Cable Act and the FCC's rules prohibit the common ownership,
operation, control or interest in a cable system and a local television
broadcast station whose predicted grade B contour (a measure of a television
station's significant signal strength as defined by the FCC's rules) covers any
portion of the community served by the cable system. The 1996 Telecom Act
eliminates the statutory ban and directs the FCC to review its rule within two
years. Common ownership or control has historically also been prohibited by the
FCC (but not by the 1984 Cable Act) between a cable system and a national
television network. The 1996 Telecom Act eliminates this prohibition. Finally,
in order to encourage competition in the provision of video programming, the FCC
adopted a rule prohibiting the common ownership, affiliation, control or
interest in cable television systems and MDS facilities having overlapping
service areas, except in very limited circumstances. The 1992 Cable Act codified
this restriction and extended it to co-located SMATV systems. Permitted
arrangements in effect as of October 5, 1992 are grandfathered. The 1996 Telecom
Act exempts cable systems facing effective competition from this restriction.
The 1992 Cable Act permits states or local franchising authorities to adopt
certain additional restrictions on the ownership of cable television systems.
Pursuant to the 1992 Cable Act, the FCC has imposed limits on the
number of cable systems which a single cable operator can own. In general, no
cable operator can have an attributable interest in cable systems which pass
more than 30% of all homes nationwide. Attributable interests for these purposes
include voting interests of 5% or more (unless there is another single holder of
more than 50% of the voting stock), officerships, directorships and general
partnership interests. The FCC has stayed the effectiveness of these rules
pending the outcome of the appeal from the U.S. District Court decision holding
the multiple ownership limit provision of the 1992 Cable Act unconstitutional.
The FCC has also adopted rules which limit the number of channels on a
cable system which can be occupied by programming in which the entity which owns
the cable system has an attributable interest. The limit is 40% of all activated
channels.
EEO
The 1984 Cable Act includes provisions to ensure that minorities and
women are provided equal employment opportunities within the cable television
industry. The statute requires the FCC to adopt reporting and certification
rules that apply to all cable system operators with more than five full-time
employees. Pursuant to the requirements of the 1992 Cable Act, the FCC has
imposed more detailed annual EEO reporting requirements on cable operators and
has expanded those requirements to all multichannel video service distributors.
Failure to comply with the EEO requirements can result in the imposition of
fines and/or other administrative sanctions, or may, in certain circumstances,
be cited by a franchising authority as a reason for denying a franchisee's
renewal request.
PRIVACY
The 1984 Cable Act imposes a number of restrictions on the manner in
which cable system operators can collect and disclose data about individual
system customers. The statute also requires that the system operator
periodically provide all customers with written information about its policies
regarding the collection and handling of data about customers, their privacy
rights under federal law and their enforcement rights. In the event that a cable
operator is found to have violated the customer privacy provisions of the 1984
Cable Act, it could be required to pay damages, attorneys' fees and other costs.
Under the 1992 Cable Act, the privacy requirements are strengthened to require
that cable operators take such actions as are necessary to prevent unauthorized
access to personally identifiable information.
FRANCHISE TRANSFERS
The 1992 Cable Act precluded cable operators from selling or otherwise
transferring ownership of a cable television system within 36 months after
acquisition or initial construction, with certain exceptions. The 1996
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Telecom Act repealed this restriction. The 1992 Cable Act also requires
franchising authorities to act on any franchise transfer request submitted after
December 4, 1992 within 120 days after receipt of all information required by
FCC regulations and by the franchising authority. Approval is deemed to be
granted if the franchising authority fails to act within such period.
REGISTRATION PROCEDURE AND REPORTING REQUIREMENTS
Prior to commencing operation in a particular community, all cable
television systems must file a registration statement with the FCC listing the
broadcast signals they will carry and certain other information. Additionally,
cable operators periodically are required to file various informational reports
with the FCC. Cable operators who operate in certain frequency bands are
required on an annual basis to file the results of their periodic cumulative
leakage testing measurements. Operators who fail to make this filing or who
exceed the FCC's allowable cumulative leakage index risk being prohibited from
operating in those frequency bands in addition to other sanctions.
TECHNICAL REQUIREMENTS
Historically, the FCC has imposed technical standards applicable to
the cable channels on which broadcast stations are carried, and has prohibited
franchising authorities from adopting standards which were in conflict with or
more restrictive than those established by the FCC. The FCC has revised such
standards and made them applicable to all classes of channels which carry
downstream National Television System Committee (NTSC) video programming. The
FCC also has adopted additional standards applicable to cable television systems
using frequencies in the 108-137 Mhz and 225-400 Mhz bands in order to prevent
harmful interference with aeronautical navigation and safety radio services and
has also established limits on cable system signal leakage. Periodic testing by
cable operators for compliance with the technical standards and signal leakage
limits is required. The 1992 Cable Act requires the FCC to periodically update
its technical standards to take into account changes in technology. Under the
1996 Telecom Act, local franchising authorities may not prohibit, condition or
restrict a cable system's use of any type of subscriber equipment or
transmission technology.
The FCC has adopted regulations to implement the requirements of the
1992 Cable Act designed to improve the compatibility of cable systems and
consumer electronics equipment. These regulations, inter alia, generally
prohibit cable operators from scrambling their basic service tier and from
changing the infrared codes used in their existing customer premises equipment.
This latter requirement could make it more difficult or costly for cable
operators to upgrade their customer premises equipment and the FCC has been
asked to reconsider its regulations. The 1996 Telecom Act directs the FCC to set
only minimal standards to assure compatibility between television sets, VCRs and
cable systems, and to rely on the marketplace. The FCC must adopt rules to
assure the competitive availability to consumers of customer premises equipment,
such as converters, used to access the services offered by cable systems and
other multichannel video programming distributors.
POLE ATTACHMENTS
The FCC currently regulates the rates and conditions imposed by
certain public utilities for use of their poles unless state public service
commissions are able to demonstrate that they regulate the rates, terms and
conditions of cable television pole attachments. A number of states and the
District of Columbia have certified to the FCC that they regulate the rates,
terms and conditions for pole attachments. In the absence of state regulation,
the FCC administers such pole attachment rates through use of a formula which it
has devised. The 1996 Telecom Act directs the FCC to adopt a new rate formula
for any attaching party, including cable systems, which offer telecommunications
services. This new formula will result in significantly higher attachment rates
for cable systems which choose to offer such services.
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OTHER MATTERS
FCC regulation pursuant to the Communications Act, as amended, also
includes matters regarding a cable system's carriage of local sports
programming; restrictions on origination and cablecasting by cable system
operators; application of the fairness doctrine and rules governing political
broadcasts; customer service; obscenity and indecency; home wiring and
limitations on advertising contained in nonbroadcast children's programming.
The 1996 Telecom Act establishes a process for the creation and
implementation of a "voluntary" system of ratings for video programming
containing sexual, violent or other "indecent" material and directs the FCC to
adopt rules requiring most television sets manufactured in the United States or
shipped in interstate commerce to be technologically capable of blocking the
display of programs with a common rating. The 1996 Telecom Act also requires
video programming distributors to employ technology to restrict the reception of
programming by persons not subscribing to those channels. In the case of
channels primarily dedicated to sexually-oriented programming, the distributor
must fully block reception of the audio and video portion of the channels; a
distributor that is unable to comply with this requirement may only provide such
programming during a "safe harbor" period when children are not likely to be in
the audience, as determined by the FCC. With respect to other kinds of channels,
the 1996 Telecom Act only requires that the audio and video portions of the
channel be fully blocked, at no charge, upon request of the person not
subscribing to the channel. The specific blocking requirements applicable to
sexually-oriented programming are being challenged in court on constitutional
grounds.
COPYRIGHT
Cable television systems are subject to federal copyright licensing
covering carriage of broadcast signals. In exchange for making semi-annual
payments to a federal copyright royalty pool and meeting certain other
obligations, cable operators obtain a statutory license to retransmit broadcast
signals. The amount of this royalty payment varies, depending on the amount of
system revenues from certain sources, the number of distant signals carried, and
the location of the cable system with respect to over-the-air television
stations. Originally, the Federal Copyright Royalty Tribunal was empowered to
make and, in fact, did make several adjustments in copyright royalty rates. This
tribunal was eliminated by Congress in 1993. Any future adjustment to the
copyright royalty rates will be done through an arbitration process to be
supervised by the U.S. Copyright Office. Requests to adjust the rates were made
in January, 1996 and are pending before the Copyright Office.
Cable operators are liable for interest on underpaid and unpaid
royalty fees, but are not entitled to collect interest on refunds received for
overpayment of copyright fees.
The Copyright Office has commenced a proceeding aimed at examining its
policies governing the consolidated reporting of commonly owned and contiguous
cable television systems. The present policies governing the consolidated
reporting of certain cable television systems have often led to substantial
increases in the amount of copyright fees owed by the systems affected. These
situations have most frequently arisen in the context of cable television system
mergers and acquisitions. While it is not possible to predict the outcome of
this proceeding, any changes adopted by the Copyright Office in its current
policies may have the effect of reducing the copyright impact of certain
transactions involving cable company mergers and cable television system
acquisitions.
Various bills have been introduced into Congress over the past several
years that would eliminate or modify the cable television compulsory license.
Without the compulsory license, cable operators would have to negotiate rights
from the copyright owners for all of the programming on the broadcast stations
carried by cable systems. Such negotiated agreements would likely increase the
cost to cable operators of carrying broadcast signals. The 1992 Cable Act's
retransmission consent provisions expressly provide that retransmission consent
agreements between television broadcast stations and cable operators do not
obviate the need for cable operators to obtain a copyright license for the
programming carried on each broadcaster's signal.
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Copyrighted music performed in programming supplied to cable
television systems by pay cable networks (such as HBO) and basic cable networks
(such as USA Network) is licensed by the networks through private agreements
with the American Society of Composers and Publishers ("ASCAP") and BMI, Inc.
("BMI"), the two major performing rights organizations in the United States. As
a result of extensive litigation, both ASCAP and BMI now offer "through to the
viewer" licenses to the cable networks which cover the retransmission of the
cable networks' programming by cable systems to their customers.
Copyrighted music performed by cable systems themselves on local
origination channels, in advertisements inserted locally on cable networks, et
cetera, must also be licensed. A blanket license is available from BMI. Cable
industry negotiations with ASCAP are still in progress.
STATE AND LOCAL REGULATION
Because a cable television system uses local streets and
rights-of-way, cable television systems are subject to state and local
regulation, typically imposed through the franchising process. State and/or
local officials are usually involved in franchise selection, system design and
construction, safety, service rates, consumer relations, billing practices and
community related programming and services.
Cable television systems generally are operated pursuant to
nonexclusive franchises, permits or licenses granted by a municipality or other
state or local government entity. Franchises generally are granted for fixed
terms and in many cases are terminable if the franchise operator fails to comply
with material provisions. Although the 1984 Cable Act provides for certain
procedural protections, there can be no assurance that renewals will be granted
or that renewals will be made on similar terms and conditions. Franchises
usually call for the payment of fees, often based on a percentage of the
system's gross customer revenues, to the granting authority. Upon receipt of a
franchise, the cable system owner usually is subject to a broad range of
obligations to the issuing authority directly affecting the business of the
system. The terms and conditions of franchises vary materially from jurisdiction
to jurisdiction, and even from city to city within the same state, historically
ranging from reasonable to highly restrictive or burdensome. The 1984 Cable Act
places certain limitations on a franchising authority's ability to control the
operation of a cable system operator and the courts have from time to time
reviewed the constitutionality of several general franchise requirements,
including franchise fees and access channel requirements, often with
inconsistent results. On the other hand, the 1992 Cable Act prohibits exclusive
franchises, and allows franchising authorities to exercise greater control over
the operation of franchised cable television systems, especially in the area of
customer service and rate regulation. The 1992 Cable Act also allows franchising
authorities to operate their own multichannel video distribution system without
having to obtain a franchise and permits states or local franchising authorities
to adopt certain restrictions on the ownership of cable television systems.
Moreover, franchising authorities are immunized from monetary damage awards
arising from regulation of cable television systems or decisions made on
franchise grants, renewals, transfers and amendments.
The specific terms and conditions of a franchise and the laws and
regulations under which it was granted directly affect the profitability of the
cable television system. Cable franchises generally contain provisions governing
charges for basic cable television services, fees to be paid to the franchising
authority, length of the franchise term, renewal, sale or transfer of the
franchise, territory of the franchise, design and technical performance of the
system, use and occupancy of public streets and number and types of cable
services provided. The 1996 Telecom Act prohibits a franchising authority from
either requiring or limiting a cable operator's provision of telecommunications
services.
Various proposals have been introduced at the state and local levels
with regard to the regulation of cable television systems, and a number of
states have adopted legislation subjecting cable television systems to the
jurisdiction of centralized state governmental agencies, some of which impose
regulation of a character similar to that of a public utility.
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The attorneys general of approximately 25 states have announced the
initiation of investigations designed to determine whether cable television
systems in their states have acted in compliance with the FCC's rate
regulations.
The foregoing does not purport to describe all present and proposed
federal, state and local regulations and legislation relating to the cable
television industry. Other existing federal regulations, copyright licensing
and, in many jurisdictions, state and local franchise requirements, currently
are the subject of a variety of judicial proceedings, legislative hearings and
administrative and legislative proposals which could change, in varying degrees,
the manner in which cable television systems operate. Neither the outcome of
these proceedings nor their impact upon the cable television industry can be
predicted at this time.
ITEM 2. PROPERTIES
The Partnership owns or leases parcels of real property for signal
reception sites (antenna towers and headends), microwave facilities and business
offices, and owns or leases its service vehicles. The Partnership believes that
its properties, both owned and leased, are in good condition and are suitable
and adequate for the Partnership's business operations.
The Partnership owns substantially all of the assets related to its
cable television operations, including its program production equipment, headend
(towers, antennae, electronic equipment and satellite earth stations), cable
plant (distribution equipment, amplifiers, customer drops and hardware),
converters, test equipment and tools and maintenance equipment.
ITEM 3. LEGAL PROCEEDINGS
There are no material legal proceedings involving the Partnership
pending as of the date of this report.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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<PAGE> 24
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S EQUITY SECURITIES AND RELATED SECURITY
HOLDER MATTERS
While the Partnership's equity securities, which consist of units of
limited partnership interests, are publicly held, there is no established public
trading market for the units and it is not expected that a market will develop.
The approximate number of equity security holders of record was 932 as of
December 31, 1995. In addition to restrictions on the transferability of units
contained in the partnership agreement, the transferability of units may be
affected by restrictions on resales imposed by federal or state law.
DISTRIBUTIONS
The amended partnership agreement generally provides that all cash
distributions (as defined) be allocated 1% to the general partners and 99% to
the limited partners until the limited partners have received aggregate cash
distributions equal to their original capital contributions ("Capital Payback").
The partnership agreement also provides that all partnership profits, gains,
operational losses, and credits (all as defined) be allocated 1% to the general
partners and 99% to the limited partners until the limited partners have been
allocated net profits equal to the amount of cash flow required for Capital
Payback. After the limited partners have received cash flow equal to their
initial investments, the general partners will receive a 1% allocation of cash
flow from sale or liquidation of a system until the limited partners have
received an annual simple interest return of at least 18% of their initial
investments less any distributions from previous system sales and cash
distributions from operations after Capital Payback. Thereafter, the respective
allocations will be made 15% to the general partners and 85% to the limited
partners. Any losses from system sales or exchanges shall be allocated first to
all partners having positive capital account balances (based on their respective
capital accounts) until all such accounts are reduced to zero and thereafter to
the Corporate General Partner. All allocations to individual limited partners
will be based on their respective limited partnership ownership interests.
Upon the disposition of substantially all of the partnership assets,
gain shall be allocated first to the limited partners having negative capital
account balances until their capital accounts are increased to zero, next
equally among the general partners until their capital accounts are increased to
zero, and thereafter as outlined in the preceding paragraph. Upon dissolution of
the Partnership, any negative capital account balances remaining after all
allocations and distributions are made must be funded by the respective
partners.
The policy of the Corporate General Partner (although there is no
contractual obligation to do so) is to cause the Partnership to make cash
distributions on a quarterly basis throughout the operational life of the
Partnership, assuming the availability of sufficient cash flow from Partnership
operations. The amount of such distributions, if any, will vary from quarter to
quarter depending upon the Partnership's results of operations and the Corporate
General Partner's determination of whether otherwise available funds are needed
for the Partnership's ongoing working capital and liquidity requirements.
However, on February 22, 1994, the FCC announced significant amendments to its
rules implementing certain provisions of the 1992 Cable Act. Compliance with
these rules has had a negative impact on the Partnership's revenues and cash
flow.
The Partnership began making periodic cash distributions to limited
partners from operations during 1986. No distributions were made during 1993,
1994 or 1995.
The Partnership's ability to pay distributions, the actual level of
distributions and the continuance of distributions will, if any, depend on a
number of factors, including the amount of cash flow from operations, projected
capital expenditures, provision for contingent liabilities, availability of bank
refinancing, regulatory or legislative developments governing the cable
television industry, and growth in customers. Some of these factors
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<PAGE> 25
are beyond the control of the partnership, and consequently, no assurances can
be given regarding the level or timing of future distributions.
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------------------
INCOME STATEMENT DATA 1991 1992 1993 1994 1995
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Revenues $2,594,800 $2,780,200 $2,991,800 $2,985,500 $3,126,900
Costs and expenses (1,500,100) (1,564,800) (1,660,200) (1,757,700) (1,792,100)
Depreciation and amortization (1,003,000) (922,400) (968,500) (1,000,700) (924,600)
---------- ---------- ---------- ---------- -----------
Operating income 91,700 293,000 363,100 227,100 410,200
Interest expense (138,600) (90,500) (65,500) (74,300) (81,700)
Interest income 5,200 12,000 16,600 24,300 73,400
Gain on disposal of cable assets 30,300 - 1,100 - 1,100
--------- ---------- ---------- ---------- ----------
Net income (loss) $ (11,400) $ 214,500 $ 315,300 $ 177,100 $ 403,000
========== ========== ========== ========== ==========
PER UNIT OF LIMITED
PARTNERSHIP INTEREST:
Net income (loss) $ (.38) $ 7.11 $ 10.45 $ 5.87 $ 13.35
========== ========== ========== ========== ==========
OTHER OPERATING DATA
Net cash provided by operating activities $ 143,300 $ 762,100 $ 710,000 $ 977,100 $1,415,300
EBITDA(1) 1,094,700 1,215,400 1,331,600 1,227,800 1,334,800
EBITDA to revenues 42.2% 43.7% 44.5% 41.1% 42.7%
Total debt to EBITDA 1.1x .8x .4x .4x .4x
Capital expenditures $ 138,700 $ 71,700 $ 352,500 $ 142,600 $ 674,000
As of December 31,
------------------------------------------------------------------------------------
BALANCE SHEET DATA 1991 1992 1993 1994 1995
---------- ---------- ---------- ---------- ----------
Total assets $5,473,300 $5,222,200 $4,513,800 $4,551,900 $5,026,700
Total debt 1,207,500 945,000 483,700 483,700 483,700
General partners' deficit (43,400) (41,200) (38,000) (36,200) (32,200)
Limited partners' capital 3,084,100 3,296,400 3,608,500 3,783,800 4,182,800
</TABLE>
- --------------------------
(1) Operating income before depreciation and amortization. The Partnership
measures its financial performance by its EBITDA, among other items. Based
on its experience in the cable television industry, the Partnership believes
that EBITDA and related measures of cash flow serve as important financial
analysis tools for measuring and comparing cable television companies in
several areas, such as liquidity, operating performance and leverage. This
is evidenced by the covenants in the primary debt instruments of the
Partnership, in which EBITDA derived calculations are used as a measure of
financial performance. EBITDA should not be considered by the reader as an
alternative to net income as an indicator of the Partnership's financial
performance or as an alternative to cash flows as a measure of liquidity.
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<PAGE> 26
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
Compliance with the rules adopted by the Federal Communications
Commission (the "FCC") to implement the rate regulation provisions of the 1992
Cable Act has had a significant negative impact on the Partnership's revenues
and cash flow. Based on certain FCC decisions that have been released, however,
the Partnership's management presently believes that revenues for 1995 reflect
the impact of the 1992 Cable Act in all material respects. Moreover, recent
policy decisions by the FCC make it more likely that in the future the
Partnership will be permitted to increase regulated service rates in response to
specified cost increases, although certain costs may continue to rise at a rate
in excess of that which the Partnership will be permitted to pass on to its
customers. The FCC has recently adopted a procedure under which cable operators
may file abbreviated cost of service showings for system rebuilds and upgrades,
the result of which would be a permitted increase in regulated rates to allow
recovery of a portion of those costs. The FCC has also proposed a new procedure
for the pass-through of increases in inflation and certain external costs, such
as programming costs, under which cable operators could increase rates based on
actual and anticipated cost increases for the coming year. In addition to these
FCC actions, on February 8, 1996, President Clinton signed into law the 1996
Telecom Act. The 1996 Telecom Act revises, among other things, certain rate
regulation provisions of the 1992 Cable Act. Given events since the enactment of
the 1992 Cable Act, there can also be no assurance as to what, if any, future
action may be taken by the FCC, Congress or any other regulatory authority or
court, or the effect thereof on the Partnership's business. Accordingly, the
Partnership's historical annual financial results as described below are not
necessarily indicative of future performance. See "Legislation and Regulation"
and "Liquidity and Capital Resources."
RESULTS OF OPERATIONS
1995 COMPARED TO 1994
The Partnership's revenues increased from $2,985,500 to $3,126,900, or
by 4.7%, for the year ended December 31, 1995 as compared with 1994. Of the
$141,400 increase, $173,000 was due to increases in regulated service rates
permitted under the 1992 Cable Act that were implemented by the Partnership in
April 1995, $149,200 was due to increases in the number of subscriptions for
services, $29,900 was due to increases in advertising sales and other revenue
producing items and $3,200 was due to increases in unregulated rates charged for
premium services. These increases were partially offset by rate decreases
implemented in September 1994 to comply with the 1992 Cable Act, estimated by
the Partnership to be approximately $213,900. As of December 31, 1995, the
Partnership had 8,822 homes subscribing to cable service and 2,636 premium
service units.
Service costs increased from $954,500 to $1,034,100, or by 8.3%, for
the year ended December 31, 1995 as compared to 1994. Service costs represent
costs directly attributable to providing cable services to customers. Of the
$79,600 increase, $65,000 was due to increases in programming fees charged by
program suppliers (including primary satellite fees) and $24,200 was due to an
increase in copyright fees resulting from a change in copyright filing
requirements. These increases were partially offset by a $14,700 decrease in
repair and maintenance expense. The increase in programming expense was also due
to expanded programming usage relating to channel line-up restructuring and to
retransmission consent arrangements implemented to comply with the 1992 Cable
Act.
General and administrative expenses decreased from $346,600 to
$333,200, or by 3.9%, for the year ended December 31, 1995 as compared to 1994.
Of the $13,400 decrease, $16,000 was due to a decrease in marketing expense and
$6,700 was due to costs associated with reregulation of the cable industry.
These decreases were partially offset by a $10,600 increase in professional
fees.
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<PAGE> 27
Management fees and reimbursed expenses decreased from $456,600 to
$424,800, or by 7.0%, for the year ended December 31, 1995 as compared to 1994.
Of the $31,800 decrease, $38,800 was due to lower reimbursable expenses charged
by the General Partner including lower allocated personnel costs, postage costs,
property taxes, telephone expense, office rent and costs related to compliance
with the 1992 Cable Act. Management fees increased by $7,000 in direct relation
to increased revenues as described above.
Depreciation and amortization expense decreased from $1,000,700 to
$924,600, or by 7.6%, for the year ended December 31, 1995 compared to 1994 due
to the effect of certain tangible assets becoming fully depreciated, and due to
a change in the estimated useful lives of certain assets.
Operating income increased from $227,100 to $410,200, or by 80.6%, for
the year ended December 31, 1995 compared to 1994 primarily due to increases in
revenues and decreases in depreciation and amortization expense.
Interest expense increased from $74,300 to $81,700, or by 10.0%, for
the year ended December 31, 1995 compared to 1994. The increase was due to
higher average interest rates during 1995 compared to 1994 (10.3% during 1995
compared to 8.6% during 1994). Interest income increased from $24,300 in 1994 to
$73,400 in 1995 due to higher average interest rates earned on higher investment
balances.
Due to the factors described above, the Partnership's net
income increased from $177,100 to $403,000 for the year ended December 31, 1995
compared to 1994.
1994 COMPARED TO 1993
The Partnership's revenues decreased from $2,991,800 to $2,985,500, or
.2%, for the year ended December 31, 1994 as compared with 1993. Of the $6,300
decrease, $21,000 was due to decreases in the number of subscriptions for
services and $2,600 was estimated to be due to decreases in rates mandated by
the 1992 Cable Act. Decreases were partially offset by an increase of $17,300
from other revenue producing items, specifically advertising sales and
installation revenue. As of December 31, 1994, the Partnership had 8,666 homes
subscribing to cable service and 2,773 premium service units.
Service costs increased from $898,800 to $954,500, or by 6.2%, for the
year ended December 31, 1994 as compared to 1993. Service costs represent costs
directly attributable to providing cable services to customers. Of the $55,700
increase, $57,700 was due to increases in programming fees charged by program
suppliers (including satellite fees), $13,600 was due to franchise fees, $6,000
was due to increased repair and maintenance expense and $4,200 was due to higher
pole rent expense. These increases were partially offset by a $28,500 decrease
due to greater capitalization of labor and overhead expense resulting from more
capital projects during 1994. The increase in programming expense was also due
to expanded programming usage caused by channel line-up restructuring and to
retransmission consent arrangements implemented to comply with the 1992 Cable
Act.
General and administrative expenses increased from $336,000 to
$346,600, or by 3.2%, for the year ended December 31, 1994 as compared to 1993.
Of the $10,600 increase, $14,500 was due to higher insurance expense, $8,100 to
bad debt expense, $6,300 to decreased capitalization of labor and overhead costs
resulting from fewer capital projects in the 1994 period, and $6,200 to expenses
incurred to comply with the 1992 Cable Act. These increases were partially
offset by a $12,800 decrease in professional fees and a $10,200 decrease in
telephone expense.
Management fees and reimbursed expenses increased from $425,400 to
$456,600, or by 7.3%, for the year ended December 31, 1994 as compared to 1993.
Of the $31,200 increase, $31,500 related to reimbursable expenses, which
increased due to higher personnel costs, marketing expenses, telephone expense
and costs related to compliance with the 1992 Cable Act.
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<PAGE> 28
Depreciation and amortization expense increased from $968,500 to
$1,000,700, or by 3.3% for the year ended December 31, 1994 compared to 1993.
The increase was due to depreciation of asset additions, partially offset by the
effect of certain intangible assets becoming fully amortized during 1994.
Operating income decreased from $363,100 to $227,100, or by 37.5%, for
the year ended December 31, 1994 compared to 1993 primarily due to lower
revenues and higher programming fees, depreciation and amortization and
reimbursable expenses as described above.
Interest expense increased from $65,500 to $74,300, or by 13.4%, for
the year ended December 31, 1994 compared to 1993. The increase was due to
higher average interest rates during 1994 compared to 1993 (8.6% during 1994
compared to 7.5% during 1993), partially offset by lower average borrowings of
$483,700 in 1994 versus $809,700 in 1993. Interest income increased from $16,600
in 1993 to $24,300 in 1994, or by 46.4%, due to higher average interest rates
earned on investment balances.
Due to the factors described above, the Partnership's net income
decreased from $315,300 to $177,100, or by 43.8%, for the year ended December
31, 1994 compared to 1993.
LIQUIDITY AND CAPITAL RESOURCES
The FCC's amended rate regulation rules were implemented during the
quarter ended September 30, 1994. Compliance with these rules has had a negative
impact on the Partnership's revenues and cash flow. See "Legislation and
Regulation."
The Partnership's primary objective, having invested its net offering
proceeds in cable systems, is to distribute to its partners all available cash
flow from operations and proceeds from the sale of cable systems, if any, after
providing for expenses, debt service and capital requirements relating to the
expansion, improvement and upgrade of its cable systems. The Partnership relies
upon the availability of cash generated from operations and possible borrowings
to fund its ongoing expenses, debt service and capital requirements. In general,
these requirements involve expansion, improvement and upgrade of the
Partnership's existing cable television systems. The Partnership is required to
rebuild one of its Illinois cable systems at an estimated cost of approximately
$1,475,000 as a condition of a franchise renewal obtained. Construction will
begin in 1996. Other capital expenditures budgeted for 1996 include
approximately $305,000 for the improvement and upgrade of other assets.
Additionally, the Corporate General Partner believes that it is essential for
the Partnership to preserve liquidity through retention of cash for a required
rebuild of its cable plant in Missouri at an estimated cost of approximately
$1,100,000. Management is continuing to evaluate these liquidity issues,
including whether or not it will be possible to resume paying distributions.
In December 1993, the Partnership obtained from a lender a $2,250,000
revolving bank credit agreement (the "Facility") maturing on September 30, 1997.
Loans under the Facility are secured by substantially all of the Partnership's
assets. Interest is payable at the Base Rate plus 1.5%. "Base Rate" means the
higher of the lender's prime rate or the Federal Funds Effective Rate plus 1/2%.
The Facility provides for quarterly reductions of the maximum commitment
beginning September 30, 1994, payable at the end of each fiscal quarter. The
Partnership is permitted to prepay amounts outstanding under the Facility at any
time without penalty, and is able to re-borrow throughout the term of the
Facility up to the maximum commitment then available so long as no event of
default exists. The Partnership is also required to pay a commitment fee of 1/2%
per annum on the unused portion of the Facility. The Facility contains certain
conditions, events of default and financial tests as well as other covenants
including, among others, restrictions on capital expenditures, incurrence of
indebtedness, distributions and investments, sale of assets and acquisitions.
The Partnership believes that it was in compliance with the Facility's loan
covenants as of December 31, 1995. The maximum amount available under the
Facility will decrease by $650,000 in 1996 to $1,050,000 and is payable in full
during 1997. Repayment of principal is required to the extent the loan balance
then outstanding exceeds the maximum commitment, as adjusted. At December 31,
1995, the outstanding loan balance under the Facility was $483,700.
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<PAGE> 29
1995 VS. 1994
Operating activities provided $438,200 more cash in 1995 than in 1994.
The increase was primarily due to a $210,800 decrease in the payment of
liabilities owed to the Corporate General Partner and third party creditors.
Cash generated by Partnership operations increased by $148,700 after adding back
non-cash depreciation and amortization charges and recognized gain on disposal
of cable assets. Lower inventory balances in 1995 provided $122,000 more cash
than in 1994. The Partnership used $2,400 less cash for the payment of deferred
loan costs in 1995 than in 1994. Increases in cash were partially offset by
changes in accounts receivable, prepaid expenses and other assets which used
$45,700 more cash in 1995 than in the prior year.
The Partnership used $531,700 more cash in investing activities in
1995 than in 1994 primarily due to increases of $531,400 and $1,400 in
expenditures for tangible and intangible assets, respectively. Proceeds from the
sale of cable system assets provided $1,100 in 1995.
Operating income before depreciation and amortization (EBITDA) as a
percentage of revenues increased from 41.1% during 1994 to 42.7% in 1995,
primarily due to higher revenues. EBITDA increased from $1,227,800 to
$1,334.800, or by 8.7%, during 1995 compared to 1994.
1994 VS. 1993
Operating activities provided $267,100 more cash in 1994 than in 1993.
The increase was primarily due to a $423,400 decrease in the payment of
liabilities owed to the Corporate General Partner and third party creditors. The
Partnership also used $47,600 less cash for the payment of deferred loan costs.
Changes in accounts receivable, prepaid expenses and other assets provided
$4,100 additional cash in 1994 compared with 1993. Increases in cash were
partially offset by a decrease of $115,900 due to higher inventory balances in
1994. Income generated by Partnership operations decreased by $92,100 after
adding back non-cash depreciation and amortization charges and recognized gain
on disposal of cable assets.
The Partnership used $226,600 less cash in investing activities in
1994 than in 1993 primarily due to decreased expenditures of $209,900 and
$17,800 for tangible and intangible assets, respectively. Proceeds from the sale
of cable system assets decreased $1,100. Financing activities used $461,300 less
cash in 1994 than in 1993 due to the elimination of debt repayments and
borrowings.
Operating income before depreciation and amortization (EBITDA) as a
percentage of revenues decreased from 44.5% during 1993 to 41.1% in 1994,
primarily due to higher programming fees and reimbursable expenses. EBITDA
decreased from $1,331,600 to $1,227,800, or by 7.8%, during 1994 compared to
1993.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1995, the FASB issued Statement No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,
which requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. In such cases, impairment losses are to be recorded based on
estimated fair value, which would generally approximate discounted cash flows.
Statement 121 also addresses the accounting for long-lived assets that are
expected to be disposed of. The Partnership will adopt Statement 121 in the
first quarter of 1996 and, based on current circumstances, does not believe the
effect of adoption will be material.
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<PAGE> 30
INFLATION
Certain of the Partnership's expenses, such as those for wages and
benefits, equipment repair and replacement, and billing and marketing generally
increase with inflation. However, the Partnership does not believe that its
financial results have been, or will be, adversely affected by inflation in a
material way , provided that Partnership is able to increase its service rates
periodically, of which there can be no assurance. See "Legislation and
Regulation."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and related financial information required to
be filed hereunder are indexed on Page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable
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<PAGE> 31
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The general partners of a partnership may be considered, for certain
purposes, the functional equivalents of directors and executive officers. The
Corporate General Partner is Enstar Communications Corporation, and Robert T.
Graff, Jr. is the Individual General Partner. As part of Falcon Cablevision's
September 30, 1988 acquisition of the Corporate General Partner, Falcon
Cablevision received an option to acquire Mr. Graff's interest as Individual
General Partner of the Partnership and other affiliated cable limited
partnerships that he previously co-sponsored with the Corporate General Partner,
and Mr. Graff received the right to cause Falcon Cablevision to acquire such
interests. These arrangements were modified and extended in an amendment dated
September 10, 1993 pursuant to which, among other things, the Corporate General
Partner obtained the option to acquire Mr. Graff's interest in lieu of the
purchase right described above which was originally granted to Falcon
Cablevision.
Since its incorporation in Georgia in 1982, the Corporate General
Partner has been engaged in the cable/telecommunications business, both as a
general partner of 15 limited partnerships formed to own and operate cable
television systems and through a wholly-owned operating subsidiary. As of
December 31, 1995, the Corporate General Partner managed cable television
systems serving approximately 126,200 Subscribers.
Falcon Cablevision was formed in 1984 as a California limited
partnership and has been engaged in the ownership and operation of cable
television systems since that time. Falcon Cablevision is a wholly-owned
subsidiary of FHGLP. FHGI is the sole general partner of FHGLP. FHGLP currently
operates cable systems through a series of affiliated limited partnerships,
including Falcon Cablevision, Falcon Cable Systems Company, Falcon Telecable,
Falcon Cable Media, Falcon Classic Cable Income Properties, Falcon First, Inc.,
Falcon Community Cable and Falcon Video Communications, and also controls the
general partners of the 15 limited partnerships which operate under the Enstar
name (including the Partnership). Although these limited partnerships are
affiliated with FHGLP, their assets are owned by legal entities separate from
the Partnership.
Set forth below is certain general information about the Directors and
Executive Officers of the Corporate General Partner, all of whom have served in
such capacities since October 1988:
NAME POSITION
- ---- --------
Marc B. Nathanson Director, Chairman of the Board,
Chief Executive Officer and President
Frank J. Intiso Executive Vice President and Chief
Operating Officer
Stanley S. Itskowitch Director, Executive Vice President and
General Counsel
Michael K. Menerey Chief Financial Officer and Secretary
MARC B. NATHANSON, 50, has been Chairman of the Board, Chief Executive Officer
and President of FHGI and its predecessors since 1975. Prior to 1975, Mr.
Nathanson was Vice President of Marketing for Teleprompter Corporation, at that
time the largest multiple-system cable operator in the United States. He also
held executive positions with Warner Cable and Cypress Communications
Corporation. He is a former President of the California Cable Television
Association and a member of Cable Pioneers. He is currently a Director of the
National Cable Television Association ("NCTA") and serves on its Executive
Committee. At the 1986 NCTA convention, Mr. Nathanson was honored by being named
the recipient of the Vanguard Award for outstanding contributions to the growth
and development of the cable television industry. Mr. Nathanson is a 26-year
veteran of the cable television industry. He is a founder of the Cable
Television Administration and Marketing Society ("CTAM") and
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<PAGE> 32
the Southern California Cable Television Association. Mr. Nathanson is also a
Director of TV Por Cable Nacional, S.A. de C.V. Mr. Nathanson is also Chairman
of the Board and Chief Executive Officer of Falcon International Communications,
LLC ("FIC"). Mr. Nathanson was appointed by President Clinton and confirmed by
the U.S. Senate for a three year term on the Board of Governors of International
Broadcasting of the United States Information Agency.
FRANK J. INTISO, 49, has been Executive Vice President and Chief Operating
Officer of FHGI and its predecessors since 1982. Mr. Intiso has been President
and Chief Operating Officer of Falcon Cable Group since its inception. Mr.
Intiso is responsible for the day-to-day operations of all cable television
systems under the management of FHGI. Mr. Intiso has a Master's Degree in
Business Administration from the University of California, Los Angeles, and is a
Certified Public Accountant. He serves as chair of the California Cable
Television Association, and is on the boards of Cable Advertising Bureau, Cable
In The Classroom, Community Antenna Television Association and California Cable
Television Association. He is a member of the American Institute of Certified
Public Accountants, the American Marketing Association, the American Management
Association, and the Southern California Cable Television Association.
STANLEY S. ITSKOWITCH, 57, has been a Director of FHGI and its predecessors
since 1975, and Senior Vice President and General Counsel from 1987 to 1990 and
has been Executive Vice President and General Counsel since February 1990. He
has been President and Chief Executive Officer of F.C. Funding, Inc. (formerly
Fallek Chemical Company), which is a marketer of chemical products, since 1980.
He is a Certified Public Accountant and a former tax partner in the New York
office of Touche Ross & Co. (now Deloitte & Touche). He has a J.D. Degree and an
L.L.M. Degree in Tax from New York University School of Law. Mr. Itskowitch is
also Executive Vice President and General Counsel of FIC.
MICHAEL K. MENEREY, 44, has been Chief Financial Officer and Secretary of FHGI
and its predecessors since 1984 and has been Chief Financial Officer and
Secretary of Falcon Cable Group since its inception. Mr. Menerey is a Certified
Public Accountant and is a member of the American Institute of Certified Public
Accountants and the California Society of Certified Public Accountants.
CERTAIN KEY PERSONNEL
The following sets forth, as of December 31, 1995, biographical information
about certain officers of FHGI and Falcon Cable Group, a division of FHGLP, who
share certain responsibilities with the officers of the Corporate General
Partner with respect to the operation and management of the Partnership.
JAMES V. ASHJIAN, 51, has been Controller of FHGI and its predecessors since
October 1985 and Controller of Falcon Cable Group since its inception. Mr.
Ashjian is a Certified Public Accountant and was a partner in Bider &
Montgomery, a Los Angeles-based CPA firm, from 1978 to 1983, and self-employed
from 1983 to October 1985. He is a member of the American Institute of Certified
Public Accountants and the California Society of Certified Public Accountants.
LYNNE A. BUENING, 42, has been Vice President of Programming of Falcon Cable
Group since November 1993. From 1989 to 1993, she served as Director of
Programming for Viacom Cable, a division of Viacom International Inc. Prior to
that, Ms. Buening held programming and marketing positions in the cable,
broadcast, and newspaper industries.
OVANDO COWLES, 42, has been Vice President of Advertising Sales and Production
of Falcon Cable Group since January 1992. From 1988 to 1991, he served as a
Director of Advertising Sales and Production at Cencom Cable Television in
Pasadena, California. He was an Advertising Sales Account Executive at Choice
Television from 1985 to 1988. From 1983 to 1985, Mr. Cowles served in various
sales and advertising positions.
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<PAGE> 33
HOWARD J. GAN, 49, has been Vice President of Corporate Development and
Government Affairs of FHGI and its predecessors since 1988 and Vice President of
Corporate Development and Government Affairs of Falcon Cable Group since its
inception. He was General Counsel at Malarkey-Taylor Associates, a Washington,
DC based telecommunications consulting firm, from 1986 to 1988. He was Vice
President and General Counsel at the Cable Television Information Center from
1978 to 1983. In addition, he was an attorney and an acting Branch Chief of the
Federal Communications Commission's Cable Television Bureau from 1975 to 1978.
R.W. ("SKIP") HARRIS, 48, has been Vice President of Marketing of Falcon Cable
Group since June 1991. He is a member of the CTAM Premium Television Committee.
Mr. Harris was National Director of Affiliate Marketing for the Disney Channel
from 1985 to 1991. He was also a sales manager, regional marketing manager and
director of marketing for Cox Cable Communications from 1978 to 1985.
JOE A. JOHNSON, 51, has been Executive Vice President - Operations of FHGI since
September 1995, and between January 1992 and that date was Senior Vice President
of Falcon Cable Group. He was a Divisional Vice President of FHGI between 1989
and 1992 and a Divisional Vice President of Falcon Cable Group from its
inception until 1992. From 1982 to 1989, he held the positions of Vice President
and Director of Operations for Sacramento Cable Television, Group W Cable of
Chicago and Warner Amex. From 1975 to 1982, Mr. Johnson held Cable System and
Regional Manager positions with Warner Amex and Teleprompter.
JON W. LUNSFORD, 36, has been Vice President - Finance and Corporate Development
FHGI since September 1994. From 1991 to 1994 he served as Director of Corporate
Finance at Continental Cablevision, Inc. Prior to 1991, Mr. Lunsford was a Vice
President with Crestar Bank.
JOAN SCULLY, 60, has been Vice President of Human Resources of FHGI and its
predecessors since May 1988 and Vice President of Human Resources of Falcon
Cable Group since its inception. From 1987 to May 1988, she was self-employed as
a Management Consultant to cable and transportation companies. She served as
Director of Human Resources of a Los Angeles based cable company from 1985
through 1987. Prior to that time she served as a human resource executive in the
entertainment and aerospace industries. Ms. Scully holds a Masters Degree in
Human Resources Management from Pepperdine University.
MICHAEL D. SINGPIEL, 48, was appointed Vice President of Operations of Falcon
Cable Group in March 1996. Mr. Singpiel joined Falcon in October 1992 as
Divisional Vice President of Falcon's Eastern Division. From 1990 to 1992,
Mr. Singpiel was Vice President of C-Tec Cable Systems in Michigan.
Mr. Singpiel held various positions with Comcast in New Jersey and Michigan
from 1980 to 1990.
RAYMOND J. TYNDALL, 48, has been Vice President of Engineering of Falcon Cable
Group since October 1989. From 1975 to September 1989 he held various technical
positions with Choice TV and its predecessors. From 1967 to 1975, he held
various technical positions with Sammons Communications. He is a certified
National Association of Radio and Television Engineering ("NARTE") engineer in
lightwave, microwave, satellite and broadband.
In addition, Falcon Cable Group has six Divisional Vice Presidents who
are based in the field. They are Ron L. Hall, Michael E. Kemph, Nicholas A.
Nocchi, Larry L. Ott, Robert S. Smith and Victor A. Wible.
Each director of the Corporate General Partner is elected to a
one-year term at the annual shareholder meeting to serve until the next annual
shareholder meeting and thereafter until his respective successor is elected and
qualified. Officers are appointed by and serve at the discretion of the
directors of the Corporate General Partner.
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<PAGE> 34
ITEM 11. EXECUTIVE COMPENSATION
MANAGEMENT FEE
The Partnership has a management agreement (the "Management
Agreement") with Enstar Cable Corporation, a wholly owned subsidiary of the
Corporate General Partner (the "Manager"), pursuant to which Enstar Cable
Corporation manages the Partnership's systems and provides all operational
support for the activities of the Partnership. For these services, the Manager
receives a management fee of 5% of the Partnership's gross revenues, excluding
revenues from the sale of cable television systems or franchises, calculated and
paid monthly. In addition, the Partnership reimburses the Manager for certain
operating expenses incurred by the Manager in the day-to-day operation of the
Partnership's cable systems. The Management Agreement also requires the
Partnership to indemnify the Manager (including its officers, employees, agents
and shareholders) against loss or expense, absent negligence or deliberate
breach by the Manager of the Management Agreement. The Management Agreement is
terminable by the Partnership upon sixty (60) days written notice to the
Manager. The Manager has engaged FHGLP to provide certain management services
for the Partnership and pays FHGLP a portion of the management fees it receives
in consideration of such services and reimburses FHGLP for expenses incurred by
FHGLP on its behalf. The Corporate General Partner also performs certain
supervisory and administrative services for the Partnership, for which it is
reimbursed.
For the fiscal year ended December 31, 1995, the Partnership accrued
approximately $156,300 of management fees and $268,500 of reimbursed expenses.
In addition, certain programming services are purchased through Falcon
Cablevision. The Partnership paid Falcon Cablevision approximately $682,700 for
these programming services for fiscal year 1995.
PARTICIPATION IN DISTRIBUTIONS
The General Partners are entitled to share in distributions from, and
profit and losses in, the Partnership. See Item 5, "Market for Registrant's
Equity Securities and Related Security Holder Matters."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of March 3, 1996, the common stock of FHGI was owned as follows:
78.5% by Falcon Cable Trust, a grantor trust of which Marc B. Nathanson is
trustee and he and members of his family are beneficiaries; 20% by Greg A.
Nathanson; and 1.5% by Stanley S. Itskowitch. In connection with the formation
of Falcon Community Cable, on August 15, 1989, FHGI issued to Hellman & Friedman
Capital Partners, A California Limited Partnership ("H&F"), a $1,293,357
convertible debenture due 1999 convertible under certain circumstances into 10%
of the common stock of FHGI and entitling H&F to elect one director to the board
of directors of FHGI. H&F elected Marc B. Nathanson pursuant to such right. In
1991 FHGI issued to Hellman & Friedman Capital Partners II, A California Limited
Partnership ("H&FII"), additional convertible debentures due 1999 in the
aggregate amount of $2,006,198 convertible under certain circumstances into
approximately 6.3% of the common stock of FHGI and entitling H&FII to elect one
director to the board of directors of FHGI. As of March 3, 1996, H&FII had not
exercised this right. FHGLP also held 12.1% of the interests in the General
Partner, and Falcon Cable Trust, Frank Intiso, H&FII and two other individuals
held 58.9%, 12.1%, 16.3% and 0.6% of the General Partner, respectively. Such
interests entitle the holders thereof to an allocable share of cash
distributions and profits and losses of the General Partner in proportion to
their ownership. Greg A. Nathanson is Marc B. Nathanson's brother.
As of March 3, 1996, Marc B. Nathanson and members of his family
owned, directly or indirectly, outstanding partnership interests (comprising
both general partner interests and limited partner interests) aggregating
approximately 0.46% of Falcon Classic Cable Income Properties, L.P., 2.58% of
Falcon Video
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<PAGE> 35
Communications and 30.0% of Falcon Cable Systems Company. In accordance with the
respective partnership agreements of the partnerships mentioned above, after the
return of capital to and the receipt of certain preferred returns by the limited
partners of such partnerships, FHGLP and certain of its officers and directors
had rights to future profits greater than their ownership interests of capital
in such partnerships.
On March 29, 1993, FHGLP was organized to effect the consolidation of
certain cable television businesses, including Falcon Cablevision, Falcon
Telecable, Falcon Cable Media and Falcon Community Cable, into FHGLP. At the
same time FHGLP assumed the cable system management operations of FHGI. On
December 28, 1995, FHGLP acquired the remaining 72.3% of outstanding shares of
common stock of Falcon First, Inc., ("First"), that it did not previously own.
First was an affiliated entity prior to December 28, 1995. The ownership
interests in FHGLP are as follows: Falcon management, directors and affiliated
individuals and entities: 38.2% (including 35.3% owned by Marc B. Nathanson and
members of his family directly or indirectly), H&F and H&FII: 35.9%, Leeway &
Co.: 10.9%, Boston Ventures Limited Partnership II and Boston Ventures II-A
Investment Corporation: 6.9%, Falcon First Communications, LLC: 2.1% and other
institutional investors, individuals and trusts: 6.0%.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CONFLICTS OF INTEREST
In March 1993, FHGLP, a new entity, assumed the management services
operations of FHGI. Effective March 29, 1993, FHGLP began receiving management
fees and reimbursed expenses which had previously been paid by the Partnership,
as well as the other affiliated entities mentioned above, to FHGI. The
management of FHGLP is substantially the same as that of FHGI.
FHGLP also manages the operations of Falcon Cable Systems Company,
Falcon Classic Cable Income Properties, L.P., Falcon Video Communications, L.P.,
and, through its management of the operation of Falcon Cablevision (a subsidiary
of FHGLP), the partnerships of which Enstar Communications Corporation is the
Corporate General Partner, including the Partnership. On September 30, 1988,
Falcon Cablevision acquired all of the outstanding stock of Enstar
Communications Corporation. Certain members of management of the General Partner
have also been involved in the management of other cable ventures. FHGLP
contemplates entering into other cable ventures, including ventures similar to
the Partnership.
Conflicts of interest involving acquisitions and dispositions of cable
television systems could adversely affect Unitholders. For instance, the
economic interests of management in other affiliated partnerships are different
from those in the Partnership and this may create conflicts relating to which
acquisition opportunities are preserved for which partnerships.
These affiliations subject FHGLP and the General Partner and their
management to certain conflicts of interest. Such conflicts of interest relate
to the time and services management will devote to the Partnership's affairs and
to the acquisition and disposition of cable television systems. Management or
its affiliates may establish and manage other entities which could impose
additional conflicts of interest.
FHGLP and the Corporate General Partner will resolve all conflicts of
interest in accordance with their fiduciary duties.
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<PAGE> 36
FIDUCIARY RESPONSIBILITY AND INDEMNIFICATION OF THE GENERAL PARTNERS
A general partner is accountable to a limited partnership as a
fiduciary and consequently must exercise good faith and integrity in handling
partnership affairs. Where the question has arisen, some courts have held that a
limited partner may institute legal action on his own behalf and on behalf of
all other similarly situated limited partners (a class action) to recover
damages for a breach of fiduciary duty by a general partner, or on behalf of the
partnership (a partnership derivative action) to recover damages from third
parties. Section 14-9-1001 of the Georgia Revised Uniform Limited Partnership
Act also allows a partner to maintain a partnership derivative action if general
partners with authority to do so have refused to bring the action or if an
effort to cause those general partners to bring the action is not likely to
succeed. Certain cases decided by federal courts have recognized the right of a
limited partner to bring such actions under the Securities and Exchange
Commission's Rule 10b-5 for recovery of damages resulting from a breach of
fiduciary duty by a general partner involving fraud, deception or manipulation
in connection with the limited partner's purchase or sale of partnership units.
The partnership agreement provides that the General Partners will be
indemnified by the Partnership for acts performed within the scope of their
authority under the partnership agreement if such general partner (i) acted in
good faith and in a manner that it reasonably believed to be in, or not opposed
to, the best interests of the Partnership and the partners, and (ii) had no
reasonable grounds to believe that its conduct was negligent. In addition, the
partnership agreement provides that the General Partners will not be liable to
the Partnership or its limited partners for errors in judgment or other acts or
omissions not amounting to negligence or misconduct. Therefore, limited partners
will have a more limited right of action than they would have absent such
provisions. In addition, the Partnership maintains insurance on behalf of the
General Partner, and such other persons as the General Partner shall determine
against any liability that may be asserted against or expense that may be
incurred by such person and against which the Partnership would be entitled to
indemnify such person pursuant to the Partnership Agreement. To the extent that
the exculpatory provisions purport to include indemnification for liabilities
arising under the Securities Act of 1933, it is the opinion of the Securities
and Exchange Commission that such indemnification is contrary to public policy
and therefore unenforceable.
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<PAGE> 37
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
Reference is made to the Index to Financial Statements on page
F-1.
(a) 2. Financial Statement Schedules
Reference is made to the Index to Financial Statements on page
F-1.
(a) 3. Exhibits
Reference is made to the Index to Exhibits on Page E-1.
(b) Reports on Form 8-K
None
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<PAGE> 38
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on March 25, 1996.
ENSTAR INCOME PROGRAM II-2, L.P.
By: Enstar Communications Corporation,
Corporate General Partner
By: /s/ Marc B. Nathanson
------------------------------
Marc B. Nathanson
President
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signatures Title(*) Date
---------- ----- ----
<S> <C> <C>
/s/ Marc B. Nathanson Chairman of the Board, March 25, 1996
- ------------------------- Chief Executive Officer
Marc B. Nathanson and President (Principal
Executive Officer)
/s/ Michael K. Menerey Chief Financial Officer, March 25, 1996
- ------------------------- Secretary and Director
Michael K. Menerey (Principal Financial and
Accounting Officer)
/s/ Frank J. Intiso Chief Operating Officer, March 25, 1996
- -------------------------- Executive Vice President
Frank J. Intiso and Director
/s/ Stanley S. Itskowitch Executive Vice President, March 25, 1996
- ---------------------------- General Counsel and
Stanley S. Itskowitch Director
</TABLE>
(*) Indicates position(s) held with Enstar Communications Corporation, the
Corporate General Partner of the registrant.
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<PAGE> 39
INDEX TO FINANCIAL STATEMENTS
PAGE
Report of Independent Auditors F-2
Balance Sheets - December 31, 1994 and 1995 F-3
Financial Statements for each of
the three years in the period
ended December 31, 1995:
Statements of Income F-4
Statements of Partnership Capital (Deficit) F-5
Statements of Cash Flows F-6
Summary of Accounting Policies F-7
Notes to Financial Statements F-9
All schedules have been omitted because they are either not required,
not applicable or the information has otherwise been supplied.
F-1
<PAGE> 40
REPORT OF INDEPENDENT AUDITORS
Partners
Enstar Income Program II-2, L.P. (A Georgia Limited Partnership)
We have audited the balance sheets of Enstar Income Program II-2, L.P. (A
Georgia Limited Partnership) as of December 31, 1994 and 1995, and the related
statements of income, partnership capital (deficit), and cash flows for the
years then ended. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audits. The statements of income, partnership
capital (deficit), and cash flows of Enstar Income Program II-2, L.P. for the
year ended December 31, 1993 were audited by other auditors whose report dated
February 16, 1994, expressed an unqualified opinion on those financial
statements.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Enstar Income Program II-2,
L.P. at December 31, 1994 and 1995, and the results of its operations and its
cash flows for the years then ended in conformity with generally accepted
accounting principles.
/s/ ERNST & YOUNG LLP
Los Angeles, California
February 20, 1996
F-2
<PAGE> 41
ENSTAR INCOME PROGRAM II-2, L.P.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
--------------------------
1994 1995
---------- ----------
<S> <C> <C>
ASSETS:
Cash and cash equivalents $1,147,600 $1,863,800
Accounts receivable, less allowance of $6,300 and $5,000
for possible losses 24,500 68,900
Prepaid expenses and other 21,400 29,500
Property, plant and equipment, less
accumulated depreciation and amortization 2,538,500 2,414,700
Franchise cost, net of accumulated
amortization of $867,500 and $967,800 570,000 467,700
Cable materials, equipment and supplies 194,800 138,100
Deferred loan costs and other, net 55,100 44,000
---------- ----------
$4,551,900 $5,026,700
LIABILITIES AND PARTNERSHIP CAPITAL
LIABILITIES:
Accounts payable $ 175,300 $ 282,300
Due to affiliates 145,300 110,100
Note payable 483,700 483,700
---------- ----------
TOTAL LIABILITIES 804,300 876,100
---------- ----------
COMMITMENTS AND CONTINGENCIES
PARTNERSHIP CAPITAL (DEFICIT):
General partners (36,200) (32,200)
Limited partners 3,783,800 4,182,800
---------- ----------
TOTAL PARTNERSHIP CAPITAL 3,747,600 4,150,600
---------- ----------
$4,551,900 $5,026,700
</TABLE>
See accompanying summary of accounting
policies and notes to financial statements.
F-3
<PAGE> 42
ENSTAR INCOME PROGRAM II-2, L.P.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------------------------
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
REVENUES $2,991,800 $2,985,500 $3,126,900
---------- ---------- ----------
OPERATING EXPENSES:
Service costs 898,800 954,500 1,034,100
General and administrative expenses 336,000 346,600 333,200
General Partner management fees
and reimbursed expenses 425,400 456,600 424,800
Depreciation and amortization 968,500 1,000,700 924,600
---------- --------- ----------
2,628,700 2,758,400 2,716,700
---------- --------- ----------
Operating income 363,100 227,100 410,200
---------- --------- ----------
OTHER INCOME (EXPENSE):
Interest expense (65,500) (74,300) (81,700)
Interest income 16,600 24,300 73,400
Gain on disposal of cable assets 1,100 - 1,100
---------- ---------- ----------
(47,800) (50,000) (7,200)
---------- ---------- ----------
NET INCOME $ 315,300 $ 177,100 $ 403,000
========== ========== ===========
NET INCOME PER UNIT OF LIMITED
PARTNERSHIP INTEREST $ 10.45 $ 5.87 $ 13.35
========== ========== ==========
WEIGHTED AVERAGE LIMITED PARTNERSHIP
UNITS OUTSTANDING DURING THE YEAR 29,880 29,880 29,880
========== ========= ==========
</TABLE>
See accompanying summary of accounting
policies and notes to financial statements.
F-4
<PAGE> 43
ENSTAR INCOME PROGRAM II-2, L.P.
STATEMENTS OF PARTNERSHIP CAPITAL (DEFICIT)
<TABLE>
<CAPTION>
General Limited
Partners Partners Total
-------- -------- -----
<S> <C> <C> <C>
PARTNERSHIP CAPITAL (DEFICIT),
January 1, 1993 $(41,200) $3,296,400 $3,255,200
Net income for year 3,200 312,100 315,300
-------- ---------- ----------
PARTNERSHIP CAPITAL (DEFICIT),
December 31, 1993 (38,000) 3,608,500 3,570,500
Net income for year 1,800 175,300 177,100
-------- --------- ---------
PARTNERSHIP CAPITAL (DEFICIT),
December 31, 1994 (36,200) 3,783,800 3,747,600
Net income for year 4,000 399,000 403,000
-------- ---------- ----------
PARTNERSHIP CAPITAL (DEFICIT),
December 31, 1995 $(32,200) $4,182,800 $4,150,600
======== ========== ==========
</TABLE>
See accompanying summary of accounting
policies and notes to financial statements.
F-5
<PAGE> 44
ENSTAR INCOME PROGRAM II-2, L.P.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------------------------------------
1993 1994 1995
------ ------ ------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 315,300 $ 177,100 $ 403,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 968,500 1,000,700 924,600
Amortization of deferred loan costs - 12,800 12,800
Gain on disposal of cable assets (1,100) - (1,100)
Increase (decrease) from changes in:
Accounts receivable, prepaid expenses
and other assets (10,900) (6,800) (52,500)
Cable materials, equipment and supplies 50,600 (65,300) 56,700
Deferred loan costs (50,000) (2,400) -
Accounts payable and due to affiliates (562,400) (139,000) 71,800
----------- ---------- ----------
Net cash provided by operating activities 710,000 977,100 1,415,300
----------- ---------- ----------
Cash flows from investing activities:
Capital expenditures (352,500) (142,600) (674,000)
Increase in intangible assets (42,600) (24,800) (26,200)
Proceeds from sale of property, plant
and equipment 1,100 - 1,100
----------- ---------- ----------
Net cash used in investing activities (394,000) (167,400) (699,100)
----------- ---------- ----------
Cash flows from financing activities:
Repayment of debt (1,195,000) - -
Borrowings from note payable 733,700 - -
----------- ---------- ----------
Net cash used in
financing activities (461,300) - -
----------- ---------- ----------
Net increase (decrease) in cash
and cash equivalents (145,300) 809,700 716,200
Cash and cash equivalents
at beginning of year 483,200 337,900 1,147,600
----------- ---------- -----------
Cash and cash equivalents
at end of year $ 337,900 $1,147,600 $1,863,800
=========== ========== ==========
</TABLE>
See accompanying summary of accounting
policies and notes to financial statements.
F-6
<PAGE> 45
ENSTAR INCOME PROGRAM II-2, L.P.
SUMMARY OF ACCOUNTING POLICIES
FORM OF PRESENTATION
Enstar Income Program II-2, L.P., a Georgia limited partnership (the
"Partnership") operates cable television systems in rural areas of Illinois and
Missouri. As a Partnership, Enstar Income Program II-2, L.P. pays no income
taxes. All of the income, gains, losses, deductions and credits of the
Partnership are passed through to its partners. The basis in the Partnership's
assets and liabilities differs for financial and tax reporting purposes. At
December 31, 1995, the book basis of the Partnership's net assets exceeded its
tax basis by $494,500.
The financial statements do not give effect to any assets that the
partners may have outside of their interest in the Partnership, nor to any
obligations, including income taxes, of the partners.
CASH EQUIVALENTS
For purposes of the statements of cash flows, the Partnership
considers all highly liquid debt instruments purchased with an initial maturity
of three months or less to be cash equivalents.
CABLE MATERIALS, EQUIPMENT AND SUPPLIES
Cable materials, equipment and supplies are stated at cost using the
first-in first-out method. These items are capitalized until they are used for
system upgrades, customer installations or repairs to existing systems. At such
time, they are either transferred to property, plant and equipment or expensed,
as appropriate.
PROPERTY, PLANT, EQUIPMENT AND DEPRECIATION AND AMORTIZATION
Property, plant and equipment are stated at cost. Direct costs
associated with installations in homes not previously served by cable are
capitalized as part of the distribution system, and reconnects are expensed as
incurred. For financial reporting, depreciation and amortization is computed
using the straight-line method over the following estimated useful lives:
Cable television systems 5-15 years
Vehicles 3 years
Furniture and equipment 5-7 years
Leasehold improvements Life of lease
FRANCHISE COST
The excess of cost over the fair values of tangible assets and
customer lists of cable television systems acquired represents the cost of
franchises. In addition, franchise cost includes capitalized costs incurred in
obtaining new franchises. These costs (primarily legal fees) are direct and
incremental to the acquisition of the franchise and are amortized using the
straight-line method over the lives of the franchises, ranging up to 15 years.
The Partnership periodically evaluates the amortization periods of these
intangible assets to determine whether events or circumstances warrant revised
estimates of useful lives. Costs relating to unsuccessful franchise applications
are charged to expense when it is determined that the efforts to obtain the
franchise will not be successful.
F-7
<PAGE> 46
ENSTAR INCOME PROGRAM II-2, L.P.
SUMMARY OF ACCOUNTING POLICIES
(CONCLUDED)
DEFERRED LOAN COSTS AND OTHER DEFERRED CHARGES
Deferred loan costs and other deferred charges include loan costs
which are amortized to interest expense over the life of the related loan and
costs which are amortized using the straight-line method over two to five years.
RECOVERABILITY OF ASSETS
The Partnership assesses on an on-going basis the recoverability of
intangible assets, including goodwill, and capitalized plant assets based on
estimates of future undiscounted cash flows compared to net book value. If the
future undiscounted cash flow estimate were less than net book value, net book
value would then be reduced to the undiscounted cash flow estimate. The
Partnership also evaluates the amortization periods of assets, including
goodwill and other intangible assets, to determine whether events or
circumstances warrant revised estimates of useful lives.
In March 1995, the FASB issued Statement No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,
which requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. In such cases, impairment losses are to be recorded based on
estimated fair value, which would generally approximate discounted cash flows.
Statement 121 also addresses the accounting for long-lived assets that are
expected to be disposed of. The Partnership will adopt Statement 121 in the
first quarter of 1996 and, based on current circumstances, does not believe the
effect of adoption will be material.
REVENUE RECOGNITION
Revenues from cable services are recognized as the services are
provided.
RECLASSIFICATIONS
Certain 1993 and 1994 amounts have been reclassified to conform to the
1995 presentation.
EARNINGS PER UNIT OF LIMITED PARTNERSHIP INTEREST
Earnings and losses are allocated 99% to the limited partners and 1%
to the general partners. Earnings and losses per unit of limited partnership
interest is based on the weighted average number of units outstanding during the
year.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
F-8
<PAGE> 47
ENSTAR INCOME PROGRAM II-2, L.P.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - PARTNERSHIP MATTERS
The Partnership was formed on July 3, 1984 to acquire, construct,
improve, develop and operate cable television systems in various locations in
the United States. The partnership agreement provides for Enstar Communications
Corporation (the "Corporate General Partner") and Robert T. Graff, Jr. to be the
general partners and for the admission of limited partners through the sale of
interests in the Partnership. On September 30, 1988, Falcon Cablevision, a
California limited partnership, purchased all of the outstanding capital stock
of the Corporate General Partner.
The Partnership was formed with an initial capital contribution of
$1,100 comprising $1,000 from the Corporate General Partner and $100 from the
initial limited partner. Sale of interests in the Partnership began in January
1985, and the initial closing took place in October 1985. The Partnership
continued to raise capital until $7,500,000 (the maximum) was sold by January
1986.
The amended partnership agreement generally provides that all cash
distributions (as defined) be allocated 1% to the general partners and 99% to
the limited partners until the limited partners have received aggregate cash
distributions equal to their original capital contributions ("Capital Payback").
The partnership agreement also provides that all partnership profits, gains,
operational losses, and credits (all as defined) be allocated 1% to the general
partners and 99% to the limited partners until the limited partners have been
allocated net profits equal to the amount of cash flow required for Capital
Payback. After the limited partners have received cash flow equal to their
initial investments, the general partners will receive a 1% allocation of cash
flow from sale or liquidation of a system until the limited partners have
received an annual simple interest return of at least 18% of their initial
investments less any distributions from previous system sales and cash
distributions from operations. Thereafter, the respective allocations will be
made 15% to the general partners and 85% to the limited partners. Any losses
from system sales or exchanges shall be allocated first to all partners having
positive capital account balances (based on their respective capital accounts)
until all such accounts are reduced to zero and thereafter to the Corporate
General Partner. All allocations to individual limited partners will be based on
their respective limited partnership ownership interests.
Upon the disposition of substantially all of the partnership assets,
gains shall be allocated first to the limited partners having negative capital
account balances until their capital accounts are increased to zero, next
equally among the general partners until their capital accounts are increased to
zero, and thereafter as outlined in the preceding paragraph. Upon dissolution of
the Partnership, any negative capital account balances remaining after all
allocations and distributions are made must be funded by the respective
partners.
F-9
<PAGE> 48
ENSTAR INCOME PROGRAM II-2, L.P.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
NOTE 2 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of:
<TABLE>
<CAPTION>
December 31,
----------------------------
1994 1995
---- ----
<S> <C> <C>
Cable television systems $8,405,300 $8,992,400
Vehicles, furniture and
equipment, and leasehold
improvements 228,800 241,700
---------- ----------
8,634,100 9,234,100
Less accumulated depreciation
and amortization (6,095,600) (6,819,400)
--------- ---------
$2,538,500 $2,414,700
========== ==========
</TABLE>
NOTE 3 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is practicable to
estimate that value:
Cash and Cash Equivalents
The carrying amount approximates fair value due to the short maturity
of those instruments.
Note Payable
The carrying amount approximates fair value due to the variable
rate nature of the note payable.
NOTE 4 - NOTE PAYABLE
During 1993, the Partnership entered into a $2,250,000 reducing
revolving line of credit agreement (the "Agreement") with a final maturity of
December 31, 1997. The Agreement provides for quarterly reductions of the
maximum commitment commencing September 30, 1995, permanently reducing the
maximum available borrowings under the Agreement. The commitment reduces in
quarterly installments of $75,000 through June 30, 1995, $125,000 through June
30, 1996, $200,000 through June 30, 1997 and $325,000 through December 31, 1997.
Considering the scheduled reduction in the commitment amount, the Partnership's
note payable balance at December 31, 1995 will be payable in 1997. The
Partnership has additional borrowing capacity under the revolving line of credit
at December 31, 1995 of $1,216,300. Repayment of principal is required to the
extent the loan balance then outstanding exceeds the reduced maximum commitment.
The Partnership is permitted to prepay amounts outstanding under the Agreement
at any time without penalty, and is able to reborrow throughout the term of the
Agreement up to the maximum commitment then available so long as no event of
default exists.
F-10
<PAGE> 49
ENSTAR INCOME PROGRAM II-2, L.P.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
NOTE 4 - NOTE PAYABLE (Continued)
Borrowings bear interest at the lender's base rate (8.5% at December
31, 1995), as defined, plus 1.5%, payable quarterly. The Partnership is also
required to pay a commitment fee of .5% per annum on the unused portion of the
revolver. Borrowings under the Agreement are collateralized by substantially all
assets of the Partnership and by a pledge of the general partners' interest in
the Partnership.
The Agreement contains various requirements and restrictions,
including financial covenants, restriction of sale of assets, and limitations on
investments, loans and advances. Management believes that the Partnership was in
compliance with all loan covenants at December 31, 1995.
NOTE 5 - COMMITMENTS AND CONTINGENCIES
The Partnership leases buildings and tower sites associated with the
systems under operating leases expiring in various years through 2003.
Future minimum rental payments under noncancelable operating leases
that have terms in excess of one year as of December 31, 1995 are as follows:
<TABLE>
<CAPTION>
Year Amount
---- ------
<C> <C>
1996 $ 3,200
1997 2,500
1998 2,400
1999 2,400
2000 2,400
Thereafter 7,200
-------
$20,100
=======
</TABLE>
Rentals, other than pole rentals, charged to operations amounted to
$13,600, $15,500 and $12,300 in 1993, 1994 and 1995, respectively. Pole rentals
were $23,200, $27,400 and $30,900 in 1993, 1994 and 1995, respectively.
Other commitments include approximately $1,472,900 at December 31,
1995 to rebuild certain existing cable systems.
The Partnership is subject to regulation by various federal, state and
local government entities. The Cable Television Consumer Protection and
Competition Act of 1992 (the "1992 Cable Act") provides for, among other things,
federal and local regulation of rates charged for basic cable service, cable
programming services and equipment and installation services. Regulations issued
in 1993 and significantly amended in 1994 by the Federal Communications
Commission (the "FCC") have resulted in changes in the rates charged for the
Partnership's cable
F-11
<PAGE> 50
ENSTAR INCOME PROGRAM II-2, L.P.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
NOTE 5 - COMMITMENTS AND CONTINGENCIES (Continued)
services. The Partnership believes that compliance with the 1992 Cable Act has
had a significant negative impact on its operations and cash flow. It also
believes that any potential future liabilities for refund claims or other
related actions would not be material. The Telecommunications Act of 1996 (the
"1996 Telecom Act") was signed into law on February 8, 1996. This statute
contains a significant overhaul of the federal regulatory structure. As it
pertains to cable television, the 1996 Telecom Act, among other things, (i) ends
the regulation of certain nonbasic programming services in 1999; (ii) expands
the definition of effective competition, the existence of which displaces rate
regulation; (iii) eliminates the restriction against the ownership and operation
of cable systems by telephone companies within their local exchange service
areas; and (iv) liberalizes certain of the FCC's cross-ownership restrictions.
The FCC will have to conduct a number of rulemaking proceedings in order to
implement many of the provisions of the 1996 Telecom Act.
The attorneys general of approximately 25 states have announced the
initiation of investigations designed to determine whether cable television
systems in their states have acted in compliance with the FCC's rate
regulations.
A recent federal court decision could if upheld and if adopted by
other federal courts, make the renewal of franchises more problematic in certain
circumstances. The United States District Court for the Western District of
Kentucky held that the statute does not authorize it to review a franchising
authority's assessment of its community needs to determine if they are
reasonable or supported by any evidence. This result would seemingly permit a
franchising authority which desired to oust an existing operator to set
cable-related needs at such a high level that the incumbent operator would have
difficulty in making a renewal proposal which met those needs. This decision has
been appealed. The Partnership was not a party to this litigation.
NOTE 6 - EMPLOYEE BENEFIT PLANS
The Partnership has a cash or deferred profit sharing plan (the
"Profit Sharing Plan") covering substantially all of its employees. The Profit
Sharing Plan provides that each participant may elect to make a contribution in
an amount up to 15% of the participant's annual compensation which otherwise
would have been payable to the participant as salary. The Partnership's
contribution to the Profit Sharing Plan, as determined by management, is
discretionary but may not exceed 15% of the annual aggregate compensation (as
defined) paid to all participating employees. There were no contributions
charged against operations of the Partnership for the Profit Sharing Plan in
1993, 1994 or 1995.
NOTE 7 - TRANSACTIONS WITH THE GENERAL PARTNERS AND AFFILIATES
The Partnership has a management and service agreement with a wholly
owned subsidiary of the Corporate General Partner (the "Manager") for a monthly
management fee of 5% of gross receipts, as defined, from the operation of the
Partnership. Management fee expense was $149,600, $149,300 and $156,300 in 1993,
1994 and 1995, respectively.
F-12
<PAGE> 51
ENSTAR INCOME PROGRAM II-2, L.P.
NOTES TO FINANCIAL STATEMENTS
(CONCLUDED)
NOTE 7 - TRANSACTIONS WITH THE GENERAL PARTNERS AND AFFILIATES (Continued)
In addition to the monthly management fee above, the Partnership
reimburses the Manager for direct expenses incurred on behalf of the Partnership
and for the Partnership's allocable share of operational costs associated with
services provided by the Manager. All cable television properties managed by the
Corporate General Partner and its subsidiaries are charged a proportionate share
of these expenses. Corporate office allocations and district office expenses are
charged to the properties served based primarily on the respective percentage of
basic customers or homes passed (dwelling units within a system) within the
designated service areas. Reimbursed expenses were $275,800, $307,300 and
$268,500 in 1993, 1994 and 1995, respectively.
Certain programming services have been purchased through Falcon
Cablevision. In turn, Falcon Cablevision charges the Partnership for these costs
based on an estimate of what the Partnership could negotiate for such
programming services on a stand-alone basis. Programming fees expense was
$560,000, $617,700 and $682,700 `in 1993, 1994 and 1995, respectively.
NOTE 8 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
During the years ended December 31, 1993, 1994 and 1995, the
Partnership paid cash interest amounting to $65,500, $74,100 and $81,600,
respectively.
F-13
<PAGE> 52
EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
3 Second Amended and Restated Agreement of Limited Partnership of Enstar
Income Program II-2, L.P., dated as of August 1, 1988.(3)
3.1 Amendment to Section 5.3.1 dated December 17, 1992. Incorporated by
reference to the exhibits to the Registrant's Current Report on Form 8-K
dated December 17, 1992.
10.1 Management Agreement between Enstar Income Program II-2 and Enstar Cable
Corporation.(1)
10.2 Credit Facility dated January 9, 1987 between Enstar Income Program
II-2 and The Indiana National Bank.(2)
10.3 Franchise Ordinance and related documents thereto granting a
non-exclusive community antenna television franchise for the City
of Hillsboro, IL.(2)
10.4 Franchise Ordinance and related documents thereto granting a
non-exclusive community antenna television franchise for the City of
Jerseyville, IL.(2)
10.5 Franchise Ordinance and related documents thereto granting a
non-exclusive community antenna television franchise for the City of
Nokomis, IL.(2)
10.6 Franchise Ordinance and related documents thereto granting a
non-exclusive community antenna television franchise for the City of
Witt, IL.(2)
10.7 Franchise Ordinance and related documents thereto granting a
non-exclusive community antenna television franchise for the City of
Malden, MO.(2)
10.8 Franchise Ordinance and related documents thereto granting a
non-exclusive community antenna television franchise for the City of
Campbell, MO.(2)
10.9 Service Agreement between Enstar Communications Corporation, Enstar
Cable Corporation, and Falcon Holding Group, Inc. dated as of October 1,
1988.(3)
10.10 Ordinance No. 1162 of the City of Pana, Illinois authorizing an
extension of a cable television franchise and authorizing and renewing
an agreement between the City of Pana, Illinois and Enstar Cable. Passed
and approved February 8, 1993.(4)
E-1
<PAGE> 53
EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
10.11 Franchise Agreement between the City of Pana, Illinois and Enstar
Communications Corporation and Enstar Income Program II-2.(5)
10.12 A resolution of the City Council of Malden, Missouri extending the Cable
Television Franchise of Enstar Income Program II-2. Passed and approved
September 2, 1993.(6)
10.13 A resolution of the City Council of Witt, Illinois extending the Cable
Television Franchise of Enstar Income Program II-2. Passed and adopted
September 10, 1993.(6)
10.14 Loan Agreement between Enstar Income Program II-2 and
Kansallis-Osake-Pankki dated December 9, 1993.(7)
10.15 Franchise Agreement and related documents thereto granting a
non-exclusive community antenna television system franchise for the City
of Jerseyville.(8)
16.1 Report of change in accountants.(9)
21.1 Subsidiaries: None
FOOTNOTE REFERENCES
(1) Incorporated by reference to the exhibits to the Registrant's Annual
Report on Form 10-K, File No. 0-14505 for the fiscal year ended December
31, 1986.
(2) Incorporated by reference to the exhibits to the Registrant's Annual
Report on Form 10-K, File No. 0-14505 for the fiscal year ended December
31, 1987.
(3) Incorporated by reference to the exhibits to the Registrant's Annual
Report on Form 10-K, File No. 0-14505 for the fiscal year ended December
31, 1988.
(4) Incorporated by reference to the exhibits to the Registrant's Annual
Report on Form 10-K, File No. 0-14505 for the fiscal year ended December
31, 1992.
(5) Incorporated by reference to the exhibits to the Registrant's Quarterly
Report on Form 10-Q, File No. 0-14505 for the quarter ended June 30,
1993
(6) Incorporated by reference to the exhibits to the Registrant's Quarterly
Report on Form 10-Q, File No. 0-14505 for the quarter ended September
30, 1993.
(7) Incorporated by reference to the exhibits to the Registrant's Annual
Report on Form 10-K, File No. 0-14505 for the fiscal year ended December
31, 1993.
(8) Incorporated by reference to the exhibits to the Registrant's Quarterly
Report on Form 10-Q, File No. 0-14505 for the quarter ended June 30,
1994.
(9) Incorporated by reference to the exhibit to the Registrant's Current
Report on Form 8-K, File No. 0-14505 dated October 17, 1994.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AT DECEMBER 31, 1995, AND THE STATEMENTS OF OPERATIONS FOR THE NINE MONTHS
ENDED DECEMBER 31, 1995, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 1,863,800
<SECURITIES> 0
<RECEIVABLES> 73,900
<ALLOWANCES> 5,000
<INVENTORY> 138,100
<CURRENT-ASSETS> 0
<PP&E> 9,234,100
<DEPRECIATION> 6,819,400
<TOTAL-ASSETS> 5,026,700
<CURRENT-LIABILITIES> 392,400
<BONDS> 483,700
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 5,026,700
<SALES> 0
<TOTAL-REVENUES> 3,126,900
<CGS> 0
<TOTAL-COSTS> 2,716,700
<OTHER-EXPENSES> 74,500
<LOSS-PROVISION> 45,800
<INTEREST-EXPENSE> 81,700
<INCOME-PRETAX> 403,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 403,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 403,000
<EPS-PRIMARY> 13.35
<EPS-DILUTED> 0
</TABLE>
