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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__________
Commission File Number 0-15705
ENSTAR INCOME PROGRAM IV-1, L.P.
(Exact name of Registrant as specified in its charter)
GEORGIA 58-1648322
(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
---- ----
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
39,982 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.
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The Exhibit Index is located at Page E-1.
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PART I
ITEM 1. BUSINESS
INTRODUCTION
Enstar Income Program IV-1, 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 October 16,
1985. 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
new entity, Falcon Holding Group, L.P. ("FHGLP"), was organized to effect the
consolidation of 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. 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 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 additional fees paid by customers for pay-per-
view programming of movies and special events and 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
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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.
All of the Partnership's cable television business operations
are conducted through its participation as a co-general partner in both Enstar
IV/PBD Systems Venture and Enstar Cable of Macoupin County (collectively the
"Joint Ventures"), the other general partners of which are also cable
television limited partnerships sponsored by the General Partners of the
Partnership. The Joint Ventures were formed in order to enable each of their
partners to participate in the acquisition and ownership of a more diverse pool
of systems by combining certain of their financial resources. Because all of
the Partnership's operations are conducted through its participation in the
Joint Ventures, much of the discussion in this report relates to the Joint
Ventures and their activities.
Enstar IV/PBD Systems Venture began its cable television
business operations in 1986 with the acquisition of three cable television
systems providing service in and around the cities of Poplar Bluff, Missouri,
Dexter and Bloomfield, Missouri and Mount Carmel, Illinois. Enstar Cable of
Macoupin County began its cable television business operations in 1988 with the
acquisition of a cable television system providing service in and around the
cities of Carlinville, Virden, Girard, Thayer and Auburn, Illinois. As of
December 31, 1995, cable systems owned by Enstar IV/PBD Systems Venture and
Enstar Cable of Macoupin County served approximately 13,500 and 4,400 homes
subscribing to cable services, respectively. The Joint Ventures do not expect
to make any additional material acquisitions during the remaining terms of the
Joint Ventures.
FHGLP receives a management fee and reimbursement of expenses
from the Corporate General Partner for managing the Joint Ventures' 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 Joint Ventures have 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 their cable television systems. The Joint
Ventures' business strategy has focused on serving small to medium-sized
communities. The Joint Ventures believe that their cable television systems
generally involve less risk of increased competition than systems in large
urban cities. Cable television service is necessary in many of the Joint
Ventures' markets to receive a wide variety of broadcast and other television
signals. In addition, these markets typically offer fewer competing
entertainment alternatives than large cities. As a result, the Joint Ventures'
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 Joint Ventures believe that all cable operations 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 Joint Ventures believe that compliance
with these amended rules has had a negative impact on the Joint Ventures'
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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 Joint Ventures. See "Legislation and
Regulation" and Item 7., "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Clustering
The Joint Ventures have 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 Joint Ventures believe
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," the Joint Ventures'
systems have almost no available channel capacity with which to add new
channels or to further expand their use of pay-per-view offerings to customers.
As a result, 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 Joint Ventures' 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 Joint Ventures' systems have an average channel capacity of
36 with 100% of the channel capacity utilized at December 31, 1995. As a
result, and to the extent permitted by covenants in the Partnership's credit
agreement, significant amounts of capital for future upgrades may 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 and home shopping, so that the systems remain competitive within
the industry.
The Joint Ventures' plans are to continue to upgrade its cable
plant, including the utilization of addressable technology and fiber optic
cable, in order to increase its current channel capacity and to seek to
position the Joint Ventures to benefit from the further development of
advertising, pay-per-view and home shopping, as well as possible new services
such as video games, video-on-demand and other interactive applications. In
addition to these potential revenue opportunities, plant upgrades will enhance
picture quality and system reliability, reduce operating costs and improve
overall customer satisfaction.
The Joint Ventures have budgeted capital expenditures of $1.2
million in 1996. The Joint Ventures' future capital expenditure plans are,
however, all subject to the availability of adequate capital on terms
satisfactory to the Joint Ventures, of which there can be no assurance. As
discussed in prior reports, the Joint Ventures postponed a number of rebuild
and upgrade projects that were planned for 1993 and 1995 because of the
uncertainty related to implementation of the 1992 Cable Act and the negative
impact thereof on the Joint Ventures' businesses and access to capital. As a
result, the Joint Ventures' systems will be significantly less technically
advanced than had been expected prior to the implementation of re-regulation.
The Joint Ventures believe that the delays in upgrading many of their systems
will, under present market conditions, most likely have an adverse effect on
the value of those systems compared to
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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 its four regions 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 Joint Ventures have made substantial changes in the way in
which they package and sell their services and equipment in the course of its
implementation of the FCC's rate regulations promulgated under the 1992 Cable
Act. Historically, the Joint Ventures had offered four programming packages in
their 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 Joint Ventures 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 Joint Ventures have received
this desirable treatment. These amendments to the FCC's rules have allowed the
Joint Ventures to resume their 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."
The Joint Ventures have employed a variety of targeted marketing
techniques to attract new customers by focusing on delivering value, choice,
convenience and quality. The Joint Ventures employ 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 Joint Ventures offer discounts to customer who purchase
premium services on a limited trial basis in order to encourage a higher level
of service subscription. The Joint Ventures also have a coordinated strategy
for retaining customers that includes televised retention advertising that
reinforces the value associated with the initial decision to subscribe and that
encourages customers to purchase higher service levels.
Customer Service and Community Relations
The Joint Ventures place a strong emphasis on customer service
and community relations and believe that success in these areas is critical to
their business. The Joint Ventures have developed and implemented a wide range
of monthly internal training programs for their employees, including their
regional managers, that focus on the Joint Venture's operations and employee
interaction with customers. The effectiveness of the Joint Ventures' training
programs as they relate to the employees' interaction with
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customers are monitored on an on-going basis, and a portion of the regional
managers' compensation is tied to achieving customer service targets. The Joint
Ventures conduct an extensive customer survey on an annual basis and use the
information in their efforts to enhance service and better address the needs of
their customers. In addition, the Joint Ventures are participating in the
industry's recently announced Customer Service Initiative which emphasizes an
on-time guarantee program for service and installation appointments. The Joint
Ventures' corporate executives and regional managers lead the Joint Ventures'
involvement in a number of programs benefiting the communities the Joint
Ventures serve, 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 JOINT VENTURES' SYSTEMS
The table below sets forth certain operating statistics for the
Joint Ventures' cable systems 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>
Enstar IV/PBD
Systems Venture:
Poplar Bluff, MO 15,554 11,117 71.5% 4,192 37.7% $31.22 14,715
Mt. Carmel, IL 3,327 2,432 73.1% 841 34.6% $31.32 3,249
------ ------ ----- ------
Total 18,881 13,549 71.8% 5,033 37.1% $31.24 17,964
====== ====== ===== ======
Enstar Cable of
Macoupin County:
Macoupin, IL 6,533 4,373 66.9% 2,083 47.6% $31.43 6,182
====== ====== ===== ======
</TABLE>
________________
(1) Homes passed refers to estimates by the Joint Ventures 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 Joint Ventures report 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 Joint Ventures' 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 Joint Ventures also offer other cable television services to
their customers, including pay-per-view programming and, in certain test
markets, the Sega Channel. For additional charges, in most of the Systems, the
Joint Ventures also rent 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 Joint Ventures 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 Joint Ventures' 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 Joint Ventures' monthly rates for
basic cable service for residential customers, excluding special senior citizen
discount rates, ranged from $16.94 to $20.02 and premium service rates ranged
from $8.45 to $11.95 excluding special promotions offered periodically in
conjunction with the Joint Ventures' marketing programs. A one-time
installation fee, which the Joint Ventures may wholly or partially waive during
a promotional period, is usually charged to new customers. The Joint Ventures,
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 Joint Ventures' 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
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bulk rate in exchange for single-point billing and basic service to all units.
These rates are also subject to regulation.
EMPLOYEES
The various personnel required to operate the Joint Ventures'
businesses are employed by the Joint Ventures, the Corporate General Partner,
its subsidiary corporation and FHGLP. As of February 12, 1996, the Joint
Ventures had 16 employees, the cost of which is charged directly to the Joint
Ventures. The employment costs incurred by the Corporate General Partner, its
subsidiary corporation and FHGLP are allocated and charged to the Joint
Ventures for reimbursement pursuant to the respective Joint Venture agreements
and management agreements. The amounts of these reimbursable costs are set
forth below in Item 11., "Executive Compensation."
TECHNOLOGICAL DEVELOPMENTS
As part of their commitment to customer service, the Joint
Ventures emphasize the highest technical standards and prudently seek to apply
technological advances in the cable television industry to their cable
television systems on the basis of cost effectiveness. The Joint Ventures'
systems have an average channel capacity of 36 with 100% of the channel
capacity utilized at December 31, 1995. The Joint Ventures believe that system
upgrades would enable them 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
Joint Ventures' capital expenditure plans is, however, subject to the
availability of adequate capital on terms satisfactory to the Joint Ventures,
of which there can be no assurance. Also, as a result of the uncertainty
created by recent regulatory changes, the Joint Ventures have 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 Joint Ventures' current policy to utilize fiber
optic technology in substantially all rebuild projects which they undertake 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.
As of December 31, 1995, approximately 62% of the Joint
Ventures' customers were served by systems that utilize addressable technology.
Addressable technology permits the cable operator to activate from a central
control point the cable television services to be delivered to a customer if
that customer has also been supplied with an addressable converter box. To
date, the Joint Ventures have supplied addressable converter boxes to customers
of the systems utilizing addressable technology who subscribe to one or more
premium services and, in selected systems, to customers who subscribe to new
product tier services. As a result, if the system utilizes addressable
technology and the customer has been supplied with an addressable converter
box, the Joint Ventures can upgrade or downgrade services immediately, without
the delay or expense associated with dispatching a technician to the home.
Addressable technology also reduces pay service theft, is an effective
enforcement tool in collecting delinquent payments and allows the Joint
Ventures to offer pay-per-view services. See "Customer Rates and Services."
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DIGITAL COMPRESSION
The Joint Ventures have 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 Joint Ventures believe 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 their 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 Joint
Ventures' 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.
PROGRAMMING
The Joint Ventures purchase basic and premium programming for
their systems from Falcon Cablevision. Falcon Cablevision charges the Joint
Ventures for these services based on an estimate of what the Joint Ventures
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 assurance can be given that its, and
correspondingly the Joint Ventures', 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 Joint Ventures' cable programming costs have increased in
recent years and are expected to continue to increase due to additional
programming being provided to basic customers, the 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. Increases in the cost of premium
programming services have been offset in part by additional volume discounts as
a result of increases in the number of customers of the Joint Ventures' systems
and all of the affiliated systems managed by FHGLP. Under the FCC rate
regulations, increases in programming costs for regulated cable services
occurring after the earlier of March 1, 1995, or the date a system's basic
cable service became regulated, may be passed through to customers. See
"Legislation and 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."
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PBD Joint Venture
As of December 31, 1995, the Joint Venture held four 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 Joint
Venture's 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 Joint Venture'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 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 1 2,359 17.4%
1997 - 2001 2 5,985 44.2
2002 and after 1 2,641 19.5
------ ----------- ----------
Total 4 10,985 81.1%
====== =========== ===========
</TABLE>
The Joint Venture operates cable television systems which serve
multiple communities and, in some circumstances, portions of such systems
extend into jurisdictions for which the Joint Venture believes no franchise is
necessary. In the aggregate, approximately 2,564 customers, comprising
approximately 18.9% of the Joint Venture'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 Joint Venture clustering strategy. The Joint Venture has never had a
franchise revoked for any of its systems and believe that it has satisfactory
relationships with substantially all of its franchising authorities.
-11- IV-1
<PAGE> 12
Macoupin Joint Venture
As of December 31, 1995, the Joint Venture held seven
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
Joint Venture's 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 Joint Venture'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 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 2 1,144 26.2%
1997-2001 3 3,082 70.5
2002 and after 2 147 3.3
------- ----------- --------
Total 7 4,373 100.0%
======= ========== ========
</TABLE>
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 Joint Venture's
clustering strategy. The Joint Venture believes that it has satisfactory
relationships with its franchising communities. The Joint Venture has never had
a franchise revoked for any of its systems.
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
-12- IV-1
<PAGE> 13
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 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
-13- IV-1
<PAGE> 14
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 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
-14- IV-1
<PAGE> 15
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.
-15- IV-1
<PAGE> 16
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, Joint Ventures 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 Joint Ventures believe that the regulation of their 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
Joint Ventures.
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
-16- IV-1
<PAGE> 17
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 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.
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<PAGE> 18
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 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
-18- IV-1
<PAGE> 19
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
Joint Ventures' 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 Joint Ventures for basic cable service and
for associated basic cable service equipment. In addition, a number of the
Joint Ventures' customers have filed complaints with the FCC regarding the
rates charged for non-basic cable service.
The Joint Ventures have adjusted their regulated programming
service rates and related equipment and installation charges in substantially
all of their systems so as to bring these rates and charges into compliance
with the applicable benchmark or equipment and installation cost levels. The
Joint Ventures also implemented a program in substantially all of its systems
under which a number of the Joint Ventures' 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 Joint Ventures. 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 Joint Ventures' 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 (including the Joint Ventures), 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 Joint Ventures' 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
-19- IV-1
<PAGE> 20
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, 1993. A number of
stations previously carried by the Joint Ventures' cable television systems
elected retransmission consent. The Joint Ventures were able to reach agreements
with broadcasters who elected retransmission consent or to negotiate extensions
to the October 6, 1993 deadline and have 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 Joint Ventures have, however, agreed to carry some services (e.g.,
ESPN2 and a new service by FOX) in specified markets pursuant to retransmission
consent arrangements which they believe are comparable to those entered into by
most other large cable operator, and for which they pay monthly fees to the
service providers, as they do 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,
-20- IV-1
<PAGE> 21
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.
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 Joint Ventures were 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
-21- IV-1
<PAGE> 22
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.
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.
-22- IV-1
<PAGE> 23
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 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
-23- IV-1
<PAGE> 24
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.
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.
-24- IV-1
<PAGE> 25
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.
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.
-25- IV-1
<PAGE> 26
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.
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.
-26- IV-1
<PAGE> 27
ITEM 2. PROPERTIES
The Joint Ventures own or lease parcels of real property for signal
reception sites (antenna towers and headends), microwave facilities and business
offices, and owns or lease their service vehicles. The Joint Ventures believe
that their properties, both owned and leased, are in good condition and are
suitable and adequate for the Joint Ventures' business operations.
The Joint Ventures own substantially all of the assets related to
their cable television operations, including their 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
The Partnership and Joint Ventures are party to various legal
proceedings. Such legal proceedings are ordinary and routine litigation
proceedings that are incidental to the Partnership's and Joint Ventures'
business and management believes that the outcome of all pending legal
proceedings will not, in the aggregate, have a material adverse effect on the
financial condition of the Partnership and Joint Ventures.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
-27- IV-1
<PAGE> 28
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S EQUITY SECURITIES AND RELATED SECURITY
HOLDER MATTERS
LIQUIDITY
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
in the future. The approximate number of equity security holders of record was
1,750 as of March 1, 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 one percent 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 one percent
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 only receive a one
percent 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 12%
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 20% to the general partners and 80% 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 monthly 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 month to
month 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, and most likely will continue to have, a significant
negative impact on the Partnership's revenues and cash flow.
-28- IV-1
<PAGE> 29
The Partnership began making periodic cash distributions to limited
partners from operations during 1986 and distributed $499,800 ($12.50 per unit)
during 1993, 1994 and 1995. The distributions were primarily funded from cash
flow generated by Partnership operations, which consisted of cash flow
distributions received by the Partnership from the Joint Ventures. The
Partnership will continue to determine its ability to pay distributions on a
quarter-by-quarter basis.
The Partnership's ability to pay distributions, the actual level of
distribution, and the continuance of distributions, if any, will 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 are beyond
the control of the Partnership, and consequently, no assurances can be given
regarding the level or timing of future distributions.
-29- IV-1
<PAGE> 30
ITEM 6. SELECTED FINANCIAL DATA
Set forth below is selected financial data of the Partnership, Enstar
IV/PBD Systems Venture and Enstar Cable of Macoupin County.
THE PARTNERSHIP
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------------------
OPERATIONS STATEMENT DATA 1991 1992 1993 1994 1995
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Costs and expenses (69,900) (69,500) (49,600) (51,500) (32,100)
Depreciation and amortization (6,100) (1,700) -- -- --
------------ ------------ ------------ ------------ ------------
Operating loss (76,000) (71,200) (49,600) (51,500) (32,100)
Interest expense (261,700) (172,700) (136,500) (112,500) (126,500)
Interest income 26,100 6,100 12,400 2,800 3,700
Equity in net income of
Enstar IV/PBD Systems Venture 8,900 139,700 79,800 20,600 216,200
Equity in net income (loss) of
Enstar Cable of Macoupin County (76,800) (52,400) (36,200) 11,900 28,000
------------ ------------ ------------ ------------ ------------
Net income (loss) $ (379,500) $ (150,500) $ (130,100) $ (128,700) $ 89,300
============ ============ ============ ============ ============
Distributions to partners $ - $ - $ 504,800 $ 504,800 $ 504,800
============ ============ ============ ============ ============
PER UNIT OF LIMITED PARTNERSHIP INTEREST:
Net income (loss) $ (9.40) $ (3.73) $ (3.22) $ (3.19) $ 2.21
============ ============ ============ ============ ============
Distributions $ - $ - $ 12.50 $ 12.50 $ 12.50
============ ============ ============ ============ ============
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------------------
BALANCE SHEET DATA 1991 1992 1993 1994 1995
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Total assets $ 6,211,500 $ 5,664,700 $ 3,751,400 $ 3,110,300 $ 2,689,900
Total debt 2,689,800 2,285,700 1,008,900 1,008,900 1,008,900
General partners' deficit (48,500) (50,000) (56,300) (62,600) (66,700)
Limited partners' capital 3,548,400 3,399,400 2,770,800 2,143,600 1,732,200
ENSTAR IV/PBD SYSTEMS VENTURE
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------------------
INCOME STATEMENT DATA 1991 1992 1993 1994 1995
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues $ 4,315,100 $ 4,625,200 $ 4,964,400 $ 4,857,600 $ 5,075,500
Costs and expenses (2,441,100) (2,511,100) (2,824,000) (2,989,000) (2,992,300)
Depreciation and amortization (1,884,400) (1,889,700) (1,995,100) (1,835,100) (1,692,800)
------------ ------------ ------------ ------------ ------------
Operating income (loss) (10,400) 224,400 145,300 33,500 390,400
Net income $ 17,800 $ 279,400 $ 159,600 $ 41,200 $ 432,400
============ ============ ============ ============ ============
Distributions to venturers $ 159,400 $ 2,400,000 $ 2,200,000 $ 1,249,000 $ 666,000
============ ============ ============ ============ ============
OTHER OPERATING DATA
Net cash provided by
operating activities $ 2,225,400 $ 1,735,000 $ 2,031,700 $ 2,120,400 $ 2,006,100
EBITDA(1) 1,874,000 2,114,100 2,140,400 1,868,600 2,083,200
EBITDA to revenues 43.4% 45.7% 43.1% 38.5% 41.0%
Capital expenditures $ 171,500 $ 441,000 $ 340,600 $ 286,800 $ 791,600
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------------------
BALANCE SHEET DATA 1991 1992 1993 1994 1995
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Total Assets $ 10,061,100 $ 7,788,500 $ 5,555,200 $ 4,593,500 $ 4,188,300
Venturers' capital 9,146,400 7,025,800 4,985,400 3,777,600 3,544,000
</TABLE>
-30- IV-1
<PAGE> 31
ENSTAR CABLE OF MACOUPIN COUNTY
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------------------
OPERATIONS STATEMENT DATA 1991 1992 1993 1994 1995
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues $ 1,321,100 $ 1,466,700 $ 1,572,900 $ 1,590,800 $ 1,646,000
Costs and expenses (755,400) (826,000) (863,500) (876,900) (959,200)
Depreciation and amortization (799,300) (811,700) (826,500) (703,900) (634,800)
------------ ------------ ------------ ------------ ------------
Operating income (loss) (233,600) (171,000) (117,100) 10,000 52,000
Net income (loss)
$ (230,400) $ (157,200) $ (108,600) $ 35,700 $ 84,000
============ ============ ============ ============ ============
Distributions to venturers $ -- $ 600,000 $ -- $ 1,050,000 $ --
============ ============ ============ ============ ============
OTHER OPERATING DATA
Net cash provided by
operating activities $ 622,200 $ 529,700 $ 734,100 $ 750,300 $ 799,900
EBITDA(1) 565,700 640,700 709,400 713,900 686,800
EBITDA to revenues 42.8% 43.7% 45.1% 44.9% 41.7%
Capital expenditures $ 43,200 $ 84,100 $ 115,500 $ 126,900 $ 325,500
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------------------
BALANCE SHEET DATA 1991 1992 1993 1994 1995
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Total assets $ 4,630,300 $ 3,745,600 $ 3,662,700 $ 2,647,600 $ 2,840,100
Venturers' capital 4,280,700 3,523,500 3,414,900 2,400,600 2,484,600
</TABLE>
- -----------------------
(1) Operating income before depreciation and amortization. The Joint
Ventures measure their financial performance by their EBITDA, among other items.
Based on their experience in the cable television industry, the Joint Ventures
believe 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 Joint
Ventures, 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 Joint Ventures' financial
performance or as an alternative to cash flows as a measure of liquidity.
-31- IV-1
<PAGE> 32
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 Joint Ventures' revenues
and cash flow. Based on certain FCC decisions that have been released, however,
the Joint Ventures' management presently believe 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 Joint
Ventures 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 Joint Ventures 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 Joint Ventures' businesses. Accordingly, the
Joint Ventures' historical annual financial results as described below are not
necessarily indicative of future performance. See "Legislation and Regulation"
and "Liquidity and Capital Resources."
All of the Partnership's cable television business operations are
conducted through its participation as a general partner in both Enstar IV/PBD
Systems Venture and Enstar Cable of Macoupin County (collectively the "Joint
Ventures"). The Partnership has a 50% interest in Enstar IV/PBD Systems Venture
(the "PBD Joint Venture") and a one-third (1/3) interest in Enstar Cable of
Macoupin County (the "Macoupin Joint Venture"). The PBD Joint Venture is owned
equally by the Partnership and an affiliated partnership (Enstar Income Program
IV-2, L.P). The Macoupin Joint Venture is owned equally by the Partnership and
two affiliated Partnerships (Enstar Income Program IV-2, L.P. and Enstar Income
Program IV-3, L.P.) The Partnership participates in the Joint Ventures equally
with its co-partners, based on its proportionate interest, with respect to
capital contributions, obligations and commitments, and results of operations.
Accordingly, in considering the financial condition and results of operations of
the Partnership, consideration must also be made of those matters as they relate
to the Joint Ventures. The following discussion reflects such consideration, and
with respect to Results of Operations, a separate discussion is provided for
each entity.
RESULTS OF OPERATIONS
THE PARTNERSHIP
As discussed above, all of the Partnership's cable television
business operations are conducted through its participation as a partner in the
Joint Ventures. The Joint Ventures distributed $1,100,000, $974,500 and $333,000
to the Partnership, representing the Partnership's pro rata share of the cash
flow distributed from the Joint Ventures' respective operations, during 1993,
1994 and 1995. The Partnership distributed $504,800 to its partners during
1993,1994 and 1995.
-32- IV-1
<PAGE> 33
Interest expense increased from $112,500 in 1994 to $126,500 in 1995,
or by 12.4%, for the year ended December 31, 1995 compared to 1994. The increase
was due to higher interest rates during 1995 compared to 1994 (10.3% in 1995
compared to 8.7% in 1994).
THE PBD JOINT VENTURE
1995 COMPARED TO 1994
The Joint Venture's revenues increased from $4,857,600 to $5,075,500,
or by 4.5%, for the year ended December 31, 1995 compared to 1994. Of the
$217,900 increase in revenues, $156,700 was due to increases in regulated
service rates permitted under the 1992 Cable Act that were implemented by the
Partnership in April 1995, $141,300 was due to increases in the number of
subscriptions for services, $43,000 was due to increases in advertising sales
and other revenue producing items and $33,500 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 Joint Venture to be approximately $156,600. As of
December 31, 1995 the Joint Venture had 13,549 homes subscribing to cable
service and 5,033 premium service units.
Service costs increased from $1,713,600 to $1,778,300, or by 3.8%,
for the year ended December 31, 1995 compared to 1994. Service costs represent
costs directly attributable to providing cable services to customers. Of the
$64,700 increase, $140,700 was due to higher programming fees charged by program
suppliers (including primary satellite fees), partially offset by a $38,900
decrease in repair and maintenance expense, a $31,000 increase in capitalization
of labor and overhead costs and a $9,800 decrease in pole rent 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 $625,600 to
$591,100, or by 5.5%, for the year ended December 31, 1995 compared to 1994. Of
the $34,500 decrease, $25,100 was due to a decrease in marketing expense and
$10,100 was due to a decrease in customer billing expense.
Management fees and reimbursed expenses decreased from $649,800 to
$622,900, or by 4.1%, for the year ended December 31, 1995 as compared to 1994.
Of the $26,900 decrease, $37,800 was due to decreased reimbursable expenses
allocated by the Corporate General Partner, including lower allocated personnel
costs and costs associated with implementation of the 1992 Cable Act. Management
fees increased by $10,900, or 4.5%, in direct relation with increased revenues
as described above.
Depreciation and amortization expense decreased by $142,300 from
$1,835,100 to $1,692,800, or by 7.8%, for the year ended December 31, 1995 as
compared to 1994 due to the effect of certain tangible assets becoming fully
depreciated and intangible assets becoming fully amortized.
Operating income increased by $356,900 from $33,500 to $390,400, for
the year ended December 31, 1995 as compared to 1994, primarily due to decreased
depreciation and amortization expense and increased revenues as described above.
Interest income, net of interest expense, increased by $35,100 from
$6,900 to $42,000, for the year ended December 31, 1995 compared to 1994, due to
higher average investment balances and higher interest rates earned during 1995.
Operating income before depreciation and amortization (EBITDA) as a
percentage of revenues increased from 38.5% during 1994 to 41.0% in 1995. The
increase was primarily caused by
-33- IV-1
<PAGE> 34
increased revenues and decreased depreciation and amortization expense. EBITDA
increased from $1,868,600 to $2,083,200, or by 11.5%, during 1995 compared to
1994.
Due to the factors described above, the Joint Venture's net income
increased from $41,200 to $432,400 for the year ended December 31, 1995 as
compared to 1994.
1994 COMPARED TO 1993
The Joint Venture's revenues decreased from $4,964,400 to $4,857,600
or by 2.2%, for the year ended December 31, 1994 compared to 1993. Of the
$106,800 decrease in revenues, approximately $89,200 was due to decreases in the
number of subscriptions for services and $21,500 was estimated to be due to
decreases in rates charged to subscribers for cable service mandated by the 1992
Cable Act. These decreases were partially offset by a $3,900 increase due to
other revenue producing items. As of December 31, 1994, the Joint Venture had
13,529 homes subscribing to cable service and 5,153 premium service units.
Service costs increased from $1,612,200 to $1,713,600, or by 6.3%,
for the year ended December 31, 1994 compared to 1993. Service costs represent
costs directly attributable to providing cable services to customers. The
$101,400 increase was primarily due to an increase of $76,900 in programming
fees charged by program suppliers (including primary satellite fees) and an
increase of $52,900 in copyright fees as a result of changes in copyright filing
requirements. The increase in programming expense was also due to expanded
programming usage relating to channel line-up restructuring and retransmission
consent arrangements implemented to comply with the 1992 Cable Act. Other
increases related to property taxes and pole rent expense and were partially
offset by a $47,800 increase in capitalization of labor and overhead expense due
to more capital projects during 1994.
General and administrative expenses increased from $573,600 to
$625,600, or by 9.1%, for the year ended December 31, 1994 compared to 1993. Of
the $52,000 increase, $21,300 was due to increased insurance costs, $18,400
related to costs associated with re-regulation of the cable industry and $12,800
to marketing costs.
Management fees and reimbursed expenses increased from $638,200 to
$649,800, or by 1.8%, for the year ended December 31, 1994 compared to 1993. Of
the $11,600 increase, $16,900 was due to increased reimbursable expenses
allocated by the General Partner. Reimbursed expenses increased primarily due to
higher allocated wages, telephone costs, marketing expense and costs related to
compliance with the 1992 Cable Act. Management fees decreased due to lower
revenues in 1994.
Depreciation and amortization expense decreased from $1,983,700 to
$1,782,400, or by 10.1%, for the year ended December 31, 1994 compared to 1993,
due to retirement of certain tangible and intangible assets.
Operating income decreased from $156,700 to $86,200, or by 45.0%, for
the year ended December 31, 1994 compared to 1993, principally due to decreased
revenues and higher programming expense, copyright fees and insurance expense as
described above.
Interest income, net of interest expense, decreased from $14,300 to
$6,900, or by 51.7%, for the year ended December 31, 1994 compared to 1993, due
to lower average investment balances during 1994.
Operating income before depreciation and amortization (EBITDA) as a
percentage of revenues decreased from 43.1% during 1993 to 38.5% in 1994. The
decrease was primarily caused by
-34- IV-1
<PAGE> 35
decreased revenues and increased programming fees, copyright fees and insurance
expense. EBITDA decreased from $2,140,400 to $1,868,600, or by 12.7%, during
1994 compared to 1993.
Due to the factors described above, the Joint Venture's net income
decreased from $159,600 to $41,200 for the year ended December 31, 1994 as
compared to 1993.
Distributions Made By The PBD Joint Venture
The PBD Joint Venture distributed $2,200,000, $1,249,000 and $66,000
equally between its two partners during 1993, 1994 and 1995, respectively.
THE MACOUPIN JOINT VENTURE
1995 COMPARED TO 1994
The Joint Venture's revenues increased from $1,590,800 to $1,646,000,
or by 3.5%, for the year ended December 31, 1995 compared to 1994. Of the
$55,200 increase in revenues, $53,400 was due to increases in regulated service
rates permitted under the 1992 Cable Act that were implemented by the
Partnership in April 1995, $27,600 was due to increases in the number of
subscriptions for services, $11,600 was due to increases in advertising sales
and other revenue producing items and $2,300 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 Joint Venture to be approximately $39,700. As of December 31,
1995 the Joint Venture had 4,373 homes subscribing to cable service and 2,083
premium service units.
Service costs increased from $484,100 to $500,300, or by 3.3%, for
the year ended December 31, 1995 compared to 1994. Service costs represents
costs directly attributable to providing cable services to customers. Of the
$16,200 increase, $18,400 was due to higher programming fees charged by program
suppliers (including primary satellite fees), $11,000 was due to an increase in
copyright fees, and $9,200 was due to an increase in personnel costs. These
increases were partially offset by a $24,400 increase in capitalization of labor
and overhead costs. 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 increased from $161,600 to
$232,300, or by 43.8%, for the year ended December 31, 1995 as compared to 1994.
Of the $70,700 increase, $84,700 was due to higher insurance premiums partially
offset by an $8,600 decrease in bad debt expense and a $7,700 decrease in
marketing expense.
Management fees and reimbursed expenses decreased from $231,200 to
$226,600, or by 2.0%, for the year ended December 31, 1995 as compared to 1994.
Of the $4,600 decrease, $7,400 was due to decreased reimbursable expenses
allocated by the Corporate General Partner, including lower allocated personnel
costs, property taxes, professional fees, costs associated with implementation
of the 1992 Cable Act, telephone and postage and messenger expense. Management
fees increased by $2,800, or 3.5%, in direct relation with increased revenues as
described above.
Depreciation and amortization expense decreased by $69,100 from
$703,900 to $634,800, or by 9.8%, for the year ended December 31, 1995 as
compared to 1994 due to the effect of certain tangible assets becoming fully
depreciated and intangible assets becoming fully amortized.
-35- IV-1
<PAGE> 36
Operating income increased by $42,000 from $10,000 to $52,000, for
the year ended December 31, 1995 as compared to 1994, primarily due to decreased
depreciation and amortization expense and increased revenues as described above.
Interest income, net of interest expense, increased by $6,300 from
$25,700 to $32,000, or by 24.5%, for the year ended December 31, 1995 compared
to 1994 due to higher average interest rates earned on invested cash balances
during 1995 (5.3% during 1995 compared to 3.5% during 1994).
Operating income before depreciation and amortization (EBITDA) as a
percentage of revenues decreased from 44.9% to 41.7% for the year ended December
31, 1995 compared to 1994 primarily due to higher insurance premiums. EBITDA
decreased from $713,900 to $686,700, or by 3.8%, during 1995 compared to 1994.
Due to the factors described above, the Joint Venture's net income
increased from $35,700 to $84,000 for the year ended December 31, 1995 as
compared to 1994.
1994 COMPARED TO 1993
The Joint Venture's revenues increased from $1,572,900 to $1,590,800,
or by 1.1%, for the year ended December 31, 1994 compared to 1993. Of the
$17,900 increase in revenues, approximately $34,900 was due to increases in the
number of subscriptions for services and $1,000 was due to other revenue
producing items. Increases were partially offset by a reduction of $18,000
estimated to be due to decreases in rates charged to subscribers for cable
service mandated by the 1992 Cable Act. As of December 31, 1994 the Joint
Venture had 4,355 homes subscribing to cable service and 2,243 premium service
units.
Service costs decreased from $501,600, to $484,100, or by 3.5%, for
the year ended December 31, 1994 compared to 1993. Service costs represents
costs directly attributable to providing cable services to customers. The
$17,500 decrease in service costs was primarily due to a $17,100 increase in the
capitalization of labor and overhead expense due to more capital projects during
1994, a $13,000 decrease in copyright fees and a decrease of $10,200 in
personnel costs. Decreases were partially offset by an increase of $15,000 in
programming fees charged by program suppliers (including primary satellite fees)
and a $3,300 increase in repair and maintenance expense. The increase in
programming expense in 1994 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 increased from $151,100 to
$161,600, or by 7.0%, for the year ended December 31, 1994 compared to 1993. The
$10,500 increase included a $9,300 increase in insurance costs, an $8,700
increase in bad debt expense and a $5,600 increase in professional fees.
Increases were partially offset by a $6,800 decrease in telephone expense and a
$4,200 decrease in personnel costs.
Management fees and reimbursed expenses increased from $210,800 to
$231,200, or by 9.7%, for the year ended December 31, 1994 compared to 1993,
primarily due to an increase of $19,500 in reimbursable expenses payable to the
General Partner. The increases were caused principally by higher allocated
utility expenses, personnel costs, marketing expense and costs related to
compliance with the 1992 Cable Act.
Depreciation and amortization expense decreased from $826,500 to
$687,300, or by 16.8%, for the year ended December 31, 1994 compared to 1993,
primarily due to the retirement of certain tangible and intangible assets.
-36- IV-1
<PAGE> 37
Operating income increased $143,700 from an operating loss of
$117,100 in 1993 to operating income of $26,600 for the year ended December 31,
1994, principally due to lower depreciation and amortization expense as
described above.
Interest income, net of interest expense, increased from $8,500 to
$25,700, for the year ended December 31, 1994 compared to 1993, primarily due to
higher average investment balances and higher average interest rates earned
during 1994.
Operating income before depreciation and amortization (EBITDA) as a
percentage of revenues remained approximately the same at 45% for the year ended
December 31, 1994 compared to 1993. EBITDA increased from $709,400 to $713,900,
or by .6%, during 1994 compared to 1993.
Due to the factors described above, the Joint Venture's net income
increased from a $108,600 loss for the year ended December 31, 1993 to $35,700
of income for the year ended December 31, 1994.
Distributions Made By The Macoupin Joint Venture
The Joint Venture distributed $1,050,000 equally among its three
partners during 1994. No distributions were made during 1993 or 1995.
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 the Joint Ventures, is to distribute to its partners all available
cash flow from operations and proceeds from the sale of cable systems, after
providing for expenses, debt service and capital requirements relating to the
expansion, improvement and upgrade of the Joint Ventures' cable systems. The
Joint Ventures rely upon the availability of cash generated from operations and
possible borrowings to fund their ongoing capital requirements. In general,
these requirements involve expansion, improvement and upgrade of the Joint
Ventures' existing cable television systems. The Joint Ventures have budgeted
capital expenditures of approximately $1,242,000 in 1996 of which the
Partnership's pro-rata share will approximate $446,000 for line extensions,
rebuild and upgrades of existing cable plant. Management believes that cash
generated by the Joint Ventures' operations in 1996, together with available
borrowings, will be adequate to fund capital expenditures and allow for
continued distributions to partners. Management also believes, however, that it
is essential to preserve liquidity by reserving cash for future rebuild
requirements, including a planned rebuild in the community of Auburn, Illinois
which is expected to cost approximately $1,500,000.
The Partnership paid distributions totaling $504,800 during the year
ended December 31, 1995. However, there can be no assurance regarding the level,
timing or continuation of future distributions beyond 1996.
In December, 1993 the Partnership obtained from a lender a $2,100,000
revolving bank credit agreement (the "Facility") maturing on December 31, 1998.
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 Partnership paid a facility fee of $31,500 to the lender prior to funding
the Facility. The Facility provides for quarterly reductions of the maximum
commitment beginning September 30, 1995, payable at the end of each fiscal
quarter. The Partnership will be permitted to prepay amounts outstanding under
the Facility at any time
-37- IV-1
<PAGE> 38
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 will also be required to pay a commitment fee of 1/2%
per year on the unused portion of the Facility. The Facility contains certain
financial tests and other covenants including, among others, restrictions on
capital expenditures, incurrence of indebtedness, distributions and investments,
sale of assets, acquisitions, and other covenants, defaults and conditions. The
Partnership believes that it was in compliance with the loan covenants at
December 31, 1995. Its commitment will decrease by $400,000 in 1996 to
$1,600,000 and since the outstanding amount at December 31, 1995 is $1,008,925,
no principal payments of debt are due in 1996.
1995 VS. 1994
Operating activities used $14,200 additional cash during 1995 than in
1994, primarily due to receivables and payables, which used $33,100 of
additional cash. This was offset by decreased payments of $12,600 for deferred
loan costs, while the Partnership's net loss decreased by $6,300 after adding
back non-cash items consisting of amortization of deferred loan costs and equity
in net income of Joint Ventures.
Cash provided by investing activities decreased by $641,500 in 1995
as compared to 1994 due to reduced distributions from the Joint Ventures.
1994 VS. 1993
Operating activities used $38,600 less cash during 1994 than in 1993,
primarily due to decreased payments of $58,500 for deferred loan costs. The
Partnership's net loss decreased by $29,000 after adding back non-cash items
consisting of amortization of deferred loan costs and equity in net income of
Joint Ventures. Changes in other operating items (receivables and payables) used
$48,900 of additional cash.
Cash provided by investing activities decreased by $125,500 in 1994
as compared to 1993 due to reduced distributions from the Joint Ventures. The
Partnership used $1,276,800 less cash in financing activities in 1994 as
compared to 1993 due to the elimination of debt repayments and to borrowings
under the facility during 1994.
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.
INFLATION
Certain of the Partnership's and Joint Venture'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 the Joint Venture is able to
increase its service rates periodically, of which there can be no assurance. See
"Legislation and Regulation."
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<PAGE> 39
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
-39- IV-1
<PAGE> 40
PART III
ITEM 10. DIRECTORS AND EXECUTIVES OFFICERS OF THE REGISTRANT
The General Partners of the 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
with 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 15 other 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 the Southern
California Cable Television
-40- IV-1
<PAGE> 41
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.
-41- IV-1
<PAGE> 42
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
-42- IV-1
<PAGE> 43
successor is elected and qualified. Officers are appointed by and serve at the
discretion of the directors of the Corporate General Partner.
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 Joint Ventures' systems and provides all operational
support for the activities of the Joint Ventures. For these services, the
Manager receives a management fee of 5% of the Joint Ventures' 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 Joint Ventures' cable systems. The Management Agreement also
requires the Joint Ventures 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 Joint Ventures upon sixty (60) days written
notice to the Manager. The Manager has engaged FHGLP to provide certain
management services for the Joint Ventures 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
Joint Ventures, for which it is reimbursed.
For the fiscal year ended December 31, 1995 the Joint Ventures paid
approximately $319,600 of management fees and $513,400 of reimbursed expenses.
In addition, the Macoupin Joint Venture paid the Corporate General Partner
approximately $16,500 in respect of its 1% special interest in the Joint
Venture. Certain programming services are negotiated and purchased through
Falcon Cablevision. The Joint Ventures paid Falcon Cablevision approximately
$1,608,100 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,
-43- IV-1
<PAGE> 44
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 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 completed the acquisition of all of the direct and
indirect ownership interests in 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.
-44- IV-1
<PAGE> 45
FHGLP and the Corporate General Partner will resolve all conflicts of
interest in accordance with their fiduciary duties.
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, at its expense and in such
reasonable amounts and at such reasonable prices as the Corporate General
Partner shall determine, a liability insurance policy which insures the
Corporate General Partner, FHGI and its affiliates (which includes FHGLP),
officers and directors and such other persons as the Corporate General Partner
shall determine against liabilities which they may incur with respect to claims
made against them for certain wrongful or allegedly wrongful acts, including
certain errors, misstatements, misleading statements, omissions, neglect or
breaches of duty. 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.
-45- IV-1
<PAGE> 46
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
-46- IV-1
<PAGE> 47
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 IV-1, 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.
-47- IV-1
<PAGE> 48
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----------------------------------------------------------------------------
Enstar Income Enstar IV/PBD Enstar Cable
Program Systems of Macoupin
IV-1, L.P. Venture County
--------------------- ------------------------- -------------------
<S> <C> <C> <C>
Reports of Independent Auditors F-2 F-11 F-21
Balance Sheets - December 31,
1994 and 1995 F-3 F-12 F-22
Financial Statements for each of the three years
in the period ended December 31, 1995:
Statements of Income/Operations F-4 F-13 F-23
Statements of Partnership/
Venturers' Capital (Deficit) F-5 F-14 F-24
Statements of Cash Flows F-6 F-15 F-25
Summary of Accounting Policies F-7 F-16 F-26
Notes to Financial Statements F-8 F-18 F-28
</TABLE>
All schedules have been omitted because they are either not required, not
applicable or the information has otherwise been supplied.
F-1 IV-1
<PAGE> 49
REPORT OF INDEPENDENT AUDITORS
Partners
Enstar Income Program IV-1, L.P.
We have audited the accompanying balance sheets of Enstar
Income Program IV-1, L.P. as of December 31, 1994 and 1995, and the related
statements of operations, 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 operations,
partnership capital (deficit), and cash flows of Enstar Income Program IV-1,
L.P. for the year ended December 31, 1993 were audited by other auditors whose
report dated March 2, 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 IV-1, 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 IV-1
<PAGE> 50
ENSTAR INCOME PROGRAM IV-1, L.P.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-------------------------------
1994 1995
------------ -----------
<S> <C> <C>
ASSETS:
Cash and cash equivalents $ 354,100 $ 3,200
Equity in net assets of Joint Ventures:
Enstar IV/PBD Systems Venture 1,888,900 1,772,100
Enstar Cable of Macoupin County 800,100 828,100
----------- -----------
2,689,000 2,600,200
Due from affiliates -- 35,700
Deferred loan costs, net 67,200 50,800
----------- -----------
$ 3,110,300 $ 2,689,900
=========== ===========
LIABILITIES AND PARTNERSHIP CAPITAL
LIABILITIES:
Accounts payable $ 10,200 $ 15,500
Due to affiliates 10,200 --
Note payable 1,008,900 1,008,900
----------- -----------
TOTAL LIABILITIES 1,029,300 1,024,400
----------- -----------
PARTNERSHIP CAPITAL (DEFICIT):
General partners (62,600) (66,700)
Limited partners 2,143,600 1,732,200
----------- -----------
TOTAL PARTNERSHIP CAPITAL 2,081,000 1,665,500
----------- -----------
$ 3,110,300 $ 2,689,900
=========== ===========
</TABLE>
See accompanying summary of
accounting policies and notes to
financial statements.
F-3 IV-1
<PAGE> 51
ENSTAR INCOME PROGRAM IV-1, L.P.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------
1993 1994 1995
--------- ---------- ---------
<S> <C> <C> <C>
OPERATING EXPENSES:
General and administrative expenses $ 25,300 $ 25,700 $ 32,100
General Partner reimbursed expenses 24,300 25,800 --
--------- --------- ---------
Operating loss (49,600) (51,500) (32,100)
--------- --------- ---------
OTHER INCOME (EXPENSE):
Interest expense (136,500) (112,500) (126,500)
Interest income 12,400 2,800 3,700
--------- --------- ---------
(124,100) (109,700) (122,800)
--------- --------- ---------
Loss before equity in net income
(loss) of joint ventures (173,700) (161,200) (154,900)
--------- --------- ---------
EQUITY IN NET INCOME (LOSS) OF
JOINT VENTURES:
Enstar IV/PBD Systems Venture 79,800 20,600 216,200
Enstar Cable of Macoupin County (36,200) 11,900 28,000
--------- --------- ---------
43,600 32,500 244,200
--------- --------- ---------
NET INCOME (LOSS) $(130,100) $(128,700) $ 89,300
========= ========= =========
NET INCOME (LOSS) PER UNIT OF LIMITED
PARTNERSHIP INTEREST $ (3.22) $ (3.19) $ 2.21
========= ========= =========
WEIGHTED AVERAGE LIMITED PARTNERSHIP
UNITS OUTSTANDING DURING THE YEAR 39,982 39,982 39,982
========= ========= =========
</TABLE>
See accompanying summary of
accounting policies and notes to
financial statements.
F-4 IV-1
<PAGE> 52
ENSTAR INCOME PROGRAM IV-1, L.P.
STATEMENTS OF PARTNERSHIP CAPITAL (DEFICIT)
<TABLE>
<CAPTION>
General Limited
Partners Partners Total
--------- ------------ ------------
<S> <C> <C> <C>
PARTNERSHIP CAPITAL (DEFICIT),
January 1, 1993 $(50,000) $ 3,399,400 $ 3,349,400
Distributions to partners (5,000) (499,800) (504,800)
Net loss for year (1,300) (128,800) (130,100)
-------- ----------- -----------
PARTNERSHIP CAPITAL (DEFICIT),
December 31, 1993 (56,300) 2,770,800 2,714,500
Distributions to partners (5,000) (499,800) (504,800)
Net loss for year (1,300) (127,400) (128,700)
-------- ----------- -----------
PARTNERSHIP CAPITAL (DEFICIT),
December 31, 1994 (62,600) 2,143,600 2,081,000
Distributions to partners (5,000) (499,800) (504,800)
Net income for year 900 88,400 89,300
-------- ----------- -----------
PARTNERSHIP CAPITAL (DEFICIT)
December 31, 1995 $(66,700) $ 1,732,200 $ 1,665,500
======== =========== ===========
</TABLE>
See accompanying summary of
accounting policies and notes to
financial statements.
F-5 IV-1
<PAGE> 53
ENSTAR INCOME PROGRAM IV-1, 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 (loss) $ (130,100) $(128,700) $ 89,300
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Equity in net income of joint ventures (43,600) (32,500) (244,200)
Amortization of deferred loan costs -- 16,500 16,500
Increase (decrease) from changes in:
Accounts receivable 42,900 -- --
Deferred loan costs (71,100) (12,600) --
Accounts payable and due to affiliates (1,600) (7,600) (5,000)
Due from affiliates -- -- (35,700)
----------- --------- ---------
Net cash used in
operating activities (203,500) (164,900) (179,100)
----------- --------- ---------
Cash flows from investing activities:
Distributions from joint ventures 1,100,000 974,500 333,000
----------- --------- ---------
Cash flows from financing activities:
Distributions to partners (504,800) (504,800) (504,800)
Borrowings from note payable 2,008,900 -- --
Repayment of debt (3,285,700) -- --
----------- --------- ---------
Net cash used in
financing activities (1,781,600) (504,800) (504,800)
----------- --------- ---------
Net increase (decrease) in cash and cash
equivalents (885,100) 304,800 (350,900)
Cash and cash equivalents at beginning of year 934,400 49,300 354,100
----------- --------- ---------
Cash and cash equivalents at end of year $ 49,300 $ 354,100 $ 3,200
=========== ========= =========
</TABLE>
See accompanying summary of
accounting policies and notes to
financial statements.
F-6 IV-1
<PAGE> 54
ENSTAR INCOME PROGRAM IV-1, L.P.
SUMMARY OF ACCOUNTING POLICIES
FORM OF PRESENTATION
Enstar Income Program IV-1, L.P. is a Georgia limited
partnership (the "Partnership"). As a Partnership, Enstar Income Program IV-1,
L.P. pays no income taxes. All of the income, gains, losses, deductions and
credits of the Partnership are passed through to its Partners. Nominal taxes are
assessed by certain state jurisdictions. 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 exceeds its tax basis by
$78,200.
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.
INVESTMENT IN JOINT VENTURES
The Partnership's investment and share of the income or loss in
the joint ventures is accounted for on the equity method of accounting.
DEFERRED LOAN COSTS
Costs related to obtaining new loan agreements are capitalized
and amortized to interest expense over the life of the related loan.
EARNINGS PER UNIT OF LIMITED PARTNERSHIP INTEREST
Earnings and losses per unit of limited partnership interest are
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-7 IV-1
<PAGE> 55
ENSTAR INCOME PROGRAM IV-1, L.P.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - PARTNERSHIP MATTERS
The Partnership was formed on October 16, 1985, 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 comprised of $1,000 from the Corporate General Partner and $100 from
the initial limited partner. Sale of interests in the Partnership began in
January 1986, and the initial closing took place in March 1986. The Partnership
continued to raise capital until $10,000,000 (the maximum) was sold by July
1986.
The amended partnership agreement generally provides that all
cash distributions (as defined) be allocated one percent 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 one percent 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
only receive a one percent 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 12% 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 20% to the general
partners and 80% 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.
The Partnership's operating expenses, interest expense and
distributions to partners are funded primarily from distributions received from
the joint ventures.
F-8 IV-1
<PAGE> 56
ENSTAR INCOME PROGRAM IV-1, L.P.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
NOTE 2 - 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 3 - NOTE PAYABLE
In December 1993, the Partnership entered into a $2,100,000
reducing revolving line of credit agreement (the "Agreement") with a final
maturity of December 31, 1998. 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 $50,000 through June 30, 1996, $150,000 through June
30, 1997, $225,000 through June 30, 1998 and $200,000 through December 31, 1998.
Repayment of principal will be required to the extent the loan balance then
outstanding exceeds the reduced maximum commitment. The Partnership will be
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.
Borrowings bear interest at the lender's base rate (8.5% at
December 31, 1995), as defined, plus 1 1/2 percent, 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, by a pledge of
the general partners' interest in the Partnership and by all assets of the Joint
Ventures (Enstar IV/PBD Systems Venture and Enstar Cable of Macoupin County).
The Credit Agreement contains various requirements and
restrictions, including required financial reporting, capital expenditures and
restrictions on 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.
Principal maturities of the note payable as of December 31, 1995
are as follows:
<TABLE>
<CAPTION>
Year Amount
---------------
<C> <C>
1997 $ 158,900
1998 850,000
---------------
$ 1,008,900
===============
</TABLE>
F-9 IV-1
<PAGE> 57
ENSTAR INCOME PROGRAM IV-1, L.P.
NOTES TO FINANCIAL STATEMENTS
(CONCLUDED)
NOTE 4 - EQUITY IN NET ASSETS OF JOINT VENTURES
Enstar IV/PBD Systems Venture
The Partnership and an affiliate partnership (Enstar Income
Program IV-2, L.P.) each own 50% of Enstar IV/PBD Systems Venture, a Georgia
general partnership (the "PBD Joint Venture"). The PBD Joint Venture was
initially funded through capital contributions made by each venturer during
1986. In 1986, the PBD Joint Venture acquired cable television systems in
Missouri and Illinois. Each venturer shares equally in the profits and losses of
the PBD Joint Venture. The PBD Joint Venture generated income of $159,600,
$41,200 and $432,400 for 1993, 1994 and 1995, respectively, of which $79,800,
$20,600 and $216,200 was allocated to the Partnership. The operations of the PBD
Joint Venture are significant to the Partnership and should be read in
conjunction with these financial statements. Reference is made to the
accompanying financial statements of the PBD Joint Venture on pages F-11 to F-20
of this Form 10-K.
Enstar Cable of Macoupin County
The Partnership and two affiliate partnerships (Enstar Income
Program IV-2, L.P. and Enstar Income Program IV-3, L.P.) each owns one third of
Enstar Cable of Macoupin County, a Georgia general partnership (the "Macoupin
Joint Venture"). The Macoupin Joint Venture was initially funded through capital
contributions made by each venturer during 1988 of $2,199,700 in cash and
$40,000 in capitalized system acquisition and related costs. In 1988, the
Macoupin Joint Venture acquired cable television systems in Illinois. Each
venturer shares equally in the profits and losses of the Macoupin Joint Venture.
The Macoupin Joint Venture incurred a loss of $108,600 and generated income of
$35,700 and $84,000 for 1993, 1994 and 1995 of which $36,200, $11,900 and
$28,000 was allocated to the Partnership for the respective years. The
operations of the Macoupin Joint Venture are significant to the Partnership and
should be read in conjunction with these financial statements. Reference is made
to the accompanying financial statements of the Macoupin Joint Venture on pages
F-21 to F-30 of this Form 10-K.
NOTE 5 - TRANSACTIONS WITH THE GENERAL PARTNERS AND AFFILIATES
The Partnership has a management and service agreement (the
"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 operations of the Partnership. The Partnership did not own or
operate any cable television operations in 1993, 1994 or 1995 other than through
its investment in the Joint Ventures. Accordingly, no management fees were paid
by the Partnership during 1993, 1994 and 1995.
The Agreement also provides that the Partnership will reimburse
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. Reimbursed expenses totaled approximately $24,300 and
$25,800 in 1993 and 1994. There were no reimbursed expenses in 1995.
NOTE 6 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest amounted to $136,700, $112,200 and $126,200 in
1993, 1994 and 1995, respectively.
F-10 IV-1
<PAGE> 58
REPORT OF INDEPENDENT AUDITORS
To the Venturers of
Enstar IV/PBD Systems Venture
We have audited the accompanying balance sheets of Enstar IV/PBD
Systems Venture (a Georgia limited partnership) as of December 31, 1994 and
1995, and the related statements of income, venturers' capital, and cash flows
for the years then ended. These financial statements are the responsibility of
the Joint Venture's management. Our responsibility is to express an opinion on
these financial statements based on our audits. The statements of income,
venturers' capital, and cash flows of Enstar IV/PBD Systems Venture for the year
ended December 31, 1993 were audited by other auditors whose report thereon
dated March 2, 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
IV/PBD Systems Venture 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-11 IV-1
<PAGE> 59
ENSTAR IV/PBD SYSTEMS VENTURE
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
---------------------------
ASSETS: 1994 1995
---------- -----------
<S> <C> <C>
Cash and cash equivalents $ 836,200 $1,297,900
Accounts receivables, less allowance of $1,900
and $17,400 for possible losses 53,800 97,300
Prepaid expenses and other 77,100 115,100
Cable materials, equipment and supplies 208,900 90,900
Property, plant and equipment, less
accumulated depreciation and
amortization 2,659,800 2,367,300
Franchise cost, net of accumulated
amortization of $5,429,000
and $4,223,200 757,700 219,800
---------- ----------
$4,593,500 $4,188,300
========== ==========
LIABILITIES AND VENTURERS' CAPITAL
LIABILITIES:
Accounts payable $ 313,500 $ 412,000
Due to affiliates 502,400 232,300
---------- ----------
TOTAL LIABILITIES 815,900 644,300
---------- ----------
COMMITMENTS AND CONTINGENCIES
VENTURERS' CAPITAL:
Enstar Income Program IV-1, L.P 1,888,800 1,772,000
Enstar Income Program IV-2, L.P. 1,888,800 1,772,000
---------- ----------
TOTAL VENTURERS' CAPITAL 3,777,600 3,544,000
---------- ----------
$4,593,500 4,188,300
========== ==========
</TABLE>
See accompanying summary of
accounting policies and notes to
financial statements.
F-12 IV-1
<PAGE> 60
ENSTAR IV/PBD SYSTEMS VENTURE
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
REVENUES $4,964,400 $4,857,600 $5,075,500
---------- ---------- ----------
OPERATING EXPENSES:
Service costs 1,612,200 1,713,600 1,778,300
General and administrative expenses 573,600 625,600 591,100
General Partner management fees
and reimbursed expenses 638,200 649,800 622,900
Depreciation and amortization 1,995,100 1,835,100 1,692,800
---------- ---------- ----------
4,819,100 4,824,100 4,685,100
---------- ---------- ----------
Operating income 145,300 33,500 390,400
---------- ---------- ----------
INTEREST INCOME, net 14,300 6,900 42,000
GAIN ON DISPOSAL OF ASSETS -- 800 --
---------- ---------- ----------
14,300 7,700 42,000
---------- ---------- ----------
NET INCOME $ 159,600 $ 41,200 $ 432,400
========== ========== ==========
</TABLE>
See accompanying summary of
accounting policies and notes to
financial statements.
F-13 IV-1
<PAGE> 61
ENSTAR IV/PBD SYSTEMS VENTURE
STATEMENTS OF VENTURERS' CAPITAL
<TABLE>
<CAPTION>
Enstar Income Enstar Income
Program Program
IV-1, L.P IV-2, L.P Total
------------- ------------- -----------
<S> <C> <C> <C>
BALANCE, January 1, 1993 $ 3,512,900 $ 3,512,900 $ 7,025,800
Distributions to venturers (1,100,000) (1,100,000) (2,200,000)
Net income for year 79,800 79,800 159,600
----------- ----------- -----------
BALANCE, December 31, 1993 2,492,700 2,492,700 4,985,400
Distributions to venturers (624,500) (624,500) (1,249,000)
Net income for year 20,600 20,600 41,200
----------- ----------- -----------
BALANCE, December 31, 1994 1,888,800 1,888,800 3,777,600
Distributions to venturers (333,000) (333,000) (666,000)
Net income for year 216,200 216,200 432,400
----------- ----------- -----------
BALANCE, December 31, 1995 $ 1,772,000 $ 1,772,000 $ 3,544,000
=========== =========== ===========
</TABLE>
See accompanying summary of
accounting policies and notes to
financial statements.
F-14 IV-1
<PAGE> 62
ENSTAR IV/PBD SYSTEMS VENTURE
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------
1993 1994 1995
----------- ----------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 159,600 $ 41,200 $ 432,400
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 1,995,100 1,835,100 1,692,800
Gain on disposal of fixed assets -- (800)
Increase (decrease) from changes in:
Accounts receivable, prepaid expenses
and other assets 10,400 26,300 (65,500)
Cable material, equipment and
supplies 59,500 (27,500) 118,000
Accounts payable and due to
affiliates (192,900) 246,100 (171,600)
----------- ----------- -----------
Net cash provided by
operating activities 2,031,700 2,120,400 2,006,100
----------- ----------- -----------
Cash flows from investing activities:
Capital expenditures (340,600) (286,800) (791,600)
Increase in intangible assets (35,100) (72,200) (86,800)
Proceeds from sale of assets -- 800 --
----------- ----------- -----------
Net cash used in investing
activities (375,700) (358,200) (878,400)
----------- ----------- -----------
Cash flows from financing activities:
Distributions to venturers (2,200,000) (1,249,000) (666,000)
----------- ----------- -----------
Net increase (decrease) in cash and
cash equivalents (544,000) 513,200 461,700
Cash and cash equivalents at beginning of year 867,000 323,000 836,200
----------- ----------- -----------
Cash and cash equivalents at end of year $ 323,000 $ 836,200 $ 1,297,900
=========== =========== ===========
</TABLE>
See accompanying summary of
accounting policies and notes to
financial statements.
F-15 IV-1
<PAGE> 63
ENSTAR IV/PBD SYSTEMS VENTURE
SUMMARY OF ACCOUNTING POLICIES
FORM OF PRESENTATION
Enstar IV/PBD Systems Venture, a Georgia general partnership
(the "Venture"), operates cable television systems in rural areas of Illinois
and Missouri. As a partnership, Enstar IV/PBD Systems Venture pays no income
taxes. All of the income, gains, losses, deductions and credits of the Venture
are passed through to the Joint Venturers. The basis in the Venture's assets and
liabilities differs for financial and tax reporting purposes. At December 31,
1995 the book basis of the Venture's net assets exceeds its tax basis by
$279,000.
The financial statements do not give effect to any assets that
the Venturers may have outside of their interest in the Venture, nor to any
obligations, including income taxes, of the Venturers.
CASH EQUIVALENTS
For purposes of the statements of cash flows, the Venture
considers all highly liquid debt instruments purchased with an initial maturity
of three months or less to be cash equivalents. The carrying value of cash and
cash equivalents approximates fair value due to the short maturity of those
instruments.
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:
<TABLE>
<S> <C>
Cable television systems 5-15 years
Vehicles 3 years
Furniture and equipment 5-7 years
Leasehold improvements Life of lease
</TABLE>
F-16 IV-1
<PAGE> 64
ENSTAR IV/PBD SYSTEMS VENTURE
SUMMARY OF ACCOUNTING POLICIES
(CONCLUDED)
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 Venture 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.
RECOVERABILITY OF ASSETS
The Venture assesses on an on-going basis the recoverability
of intangible assets, including franchise costs, 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
Venture also evaluates the amortization periods of assets, including franchise
costs 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 Venture 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 prior year amounts have been reclassified to conform to
the 1995 presentation.
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-17 IV-1
<PAGE> 65
ENSTAR IV/PBD SYSTEMS VENTURE
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - JOINT VENTURE MATTERS
The Venture was formed under the terms of a general partnership
agreement effective July 23, 1986 between Enstar Income Program IV-1, L.P. and
Enstar Income Program IV-2, L.P. (the "Venturers"), two limited partnerships
sponsored by Enstar Communications Corporation as their corporate general
partner. The Venture was formed to pool the resources of the two limited
partnerships to acquire, own, operate, and dispose of certain cable television
systems. In 1986, the Venture acquired cable television systems in Missouri and
Illinois.
Under the terms of the agreement, the Venturers share equally in
profits, losses, allocations, and assets. Capital contributions, as required,
are also made equally.
On September 30, 1988, Falcon Cablevision, a California limited
partnership, purchased all of the outstanding capital stock of Enstar
Communications Corporation.
NOTE 2 - TRANSACTIONS WITH AFFILIATES
The Venture has a management and service agreement (the
"Agreement") with a wholly owned subsidiary of the Corporate General Partner
(the "Manager") of an affiliate (Enstar Communications Corporation - Note 1) for
a monthly management fee of 5% of gross receipts, as defined, from the
operations of the Venture. Management fee expense was $248,200, $242,900 and
$253,800 in 1993, 1994 and 1995, respectively.
In addition to the monthly management fee, the Venture
reimburses the Manager for direct expenses incurred on behalf of the Venture and
for the Venture's allocable share of operational costs associated with services
provided by the Manager. All cable television properties managed by the
affiliate 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. The total amounts charged to the Venture for these services
approximated $390,000, $406,900 and $369,100 during 1993, 1994 and 1995,
respectively.
Certain programming services have been purchased through Falcon
Cablevision. In turn, Falcon Cablevision charges the Venture for these costs
based on an estimate of what the Venture could negotiate for such programming
services on a stand-alone basis. The Venture recorded programming fee expense of
$1,025,700, $1,102,600 and $1,243,300 in 1993, 1994 and 1995, respectively.
F-18 IV-1
<PAGE> 66
ENSTAR IV/PBD SYSTEMS VENTURE
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
NOTE 3 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of:
<TABLE>
<CAPTION>
December 31,
--------------------------------
1994 1995
------------ ------------
<S> <C> <C>
Cable television systems $ 9,745,100 $ 10,368,300
Vehicles, furniture and
equipment, and leasehold
improvements 574,300 609,400
------------ ------------
10,319,400 10,977,700
Less accumulated depreciation
and amortization (7,659,600) (8,610,400)
------------ ------------
$ 2,659,800 $ 2,367,300
============ ============
</TABLE>
NOTE 4 - COMMITMENTS AND CONTINGENCIES
The Venture leases buildings and tower sites associated with the
systems under operating leases expiring in 1997.
Rentals, other than pole rentals, charged to operations amounted
to $19,600, $22,300 and $23,400 in 1993, 1994 and 1995, while pole rental
expense totaled $44,100, $53,000 and $43,200 in 1993, 1994 and 1995,
respectively.
The Venture has guaranteed the debt of Enstar Income/Growth
Program IV-1 and Enstar Income/Growth Program IV-2.
The Venture 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 Venture's cable
services. The Venture 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.
F-19 IV-1
<PAGE> 67
ENSTAR IV/PBD SYSTEMS VENTURE
NOTES TO FINANCIAL STATEMENTS
(Concluded)
NOTE 4 - COMMITMENTS AND CONTINGENCIES (Continued)
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 Venture was not a party to this litigation.
NOTE 5 - EMPLOYEE BENEFITS PLANS
The Venture 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 Venturer'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 Venture for the Profit Sharing Plan in 1993,
1994 or 1995.
F-20 IV-1
<PAGE> 68
REPORT OF INDEPENDENT AUDITORS
To the Venturers of
Enstar Cable of Macoupin County
We have audited the accompanying balance sheets of Enstar Cable
of Macoupin County as of December 31, 1994 and 1995, and the related statements
of operations, venturers' capital, and cash flows for the years then ended.
These financial statements are the responsibility of the Venture's management.
Our responsibility is to express an opinion on these financial statements based
on our audits. The statements of operations, venturers' capital, and cash flows
of Enstar Cable of Macoupin County for the year ended December 31, 1993 were
audited by other auditors whose report dated March 2, 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 Cable
of Macoupin County 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-21 IV-1
<PAGE> 69
ENSTAR CABLE OF MACOUPIN COUNTY
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
---------------------
1994 1995
--------- ---------
<S> <C> <C>
ASSETS:
Cash and cash equivalents $ 611,900 $1,071,800
Accounts receivable, less allowance of $3,700
and $4,700, for possible losses 7,000 28,700
Prepaid expenses and other 9,900 16,800
Property, plant and equipment, less
accumulated depreciation and
amortization 973,100 1,021,500
Franchise cost, net of accumulated
amortization of $2,478,900
and $2,829,600 1,045,700 701,300
---------- ----------
$2,647,600 $2,840,100
========== ==========
LIABILITIES AND VENTURERS' CAPITAL
----------------------------------
LIABILITIES:
Accounts payable $ 112,200 $ 287,300
Due to affiliates 134,800 68,200
---------- ----------
TOTAL LIABILITIES 247,000 355,500
---------- ----------
COMMITMENTS AND CONTINGENCIES
VENTURERS' CAPITAL:
Enstar Income Program IV-1, L.P. 800,200 828,200
Enstar Income Program IV-2, L.P. 800,200 828,200
Enstar Income Program IV-3, L.P. 800,200 828,200
---------- ----------
TOTAL VENTURERS' CAPITAL 2,400,600 2,484,600
---------- ----------
$2,647,600 $2,840,100
========== ==========
</TABLE>
See accompanying summary of accounting
policies and notes to financial
statements.
F-22 IV-1
<PAGE> 70
ENSTAR CABLE OF MACOUPIN COUNTY
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
REVENUES $1,572,900 $1,590,800 $1,646,000
---------- ---------- ----------
OPERATING EXPENSES:
Service costs 501,600 484,100 500,300
General and administrative expenses 151,100 161,600 232,300
General Partner management fees
and reimbursed expenses 210,800 231,200 226,600
Depreciation and amortization 826,500 703,900 634,800
---------- ---------- ----------
1,690,000 1,580,800 1,594,000
---------- ---------- ----------
Operating income (loss) (117,100) 10,000 52,000
INTEREST INCOME, net 8,500 25,700 32,000
---------- ---------- ----------
NET INCOME (LOSS) $ (108,600) $ 35,700 $ 84,000
========== ========== ==========
</TABLE>
See accompanying summary of accounting
policies and notes to financial statements.
F-23 IV-1
<PAGE> 71
ENSTAR CABLE OF MACOUPIN COUNTY
STATEMENTS OF VENTURERS' CAPITAL
<TABLE>
<CAPTION>
Enstar Enstar Enstar
Income Income Income
Program Program Program
IV-1, L.P. IV-2, L.P. IV-3, L.P. Total
---------- ---------- ---------- -----
<S> <C> <C> <C> <C>
BALANCE, January 1, 1993 $1,174,500 $1,174,500 $1,174,500 $ 3,523,500
Net loss for year (36,200) (36,200) (36,200) (108,600)
---------- ---------- ---------- -----------
BALANCE, December 31, 1993 1,138,300 1,138,300 1,138,300 3,414,900
Distributions to venturers (350,000) (350,000) (350,000) (1,050,000)
Net income for year 11,900 11,900 11,900 35,700
---------- ---------- ---------- -----------
BALANCE, December 31, 1994 800,200 800,200 800,200 2,400,600
Net income for year 28,000 28,000 28,000 84,000
---------- ---------- ---------- -----------
BALANCE, December 31, 1995 $ 828,200 $ 828,200 $ 828,200 $ 2,484,600
========== ========== ========== ===========
</TABLE>
See accompanying summary of accounting
policies and notes to financial statements.
F-24 IV-1
<PAGE> 72
ENSTAR CABLE OF MACOUPIN COUNTY
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (108,600) $ 35,700 $ 84,000
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 826,500 703,900 634,800
Increase (decrease) from changes in:
Accounts receivable and prepaid expenses (9,500) 11,500 (27,400)
Accounts payable and due to
affiliates 25,700 (800) 108,500
---------- ----------- ----------
Net cash provided by
operating activities 734,100 750,300 799,900
---------- ----------- ----------
Cash flows from investing activities:
Capital expenditures (115,500) (126,900) (325,500)
Increase in intangible assets (8,000) (7,800) (14,500)
---------- ----------- ----------
Net cash used in investing
activities (123,500) (134,700) (340,000)
---------- ----------- ----------
Cash flows from financing activities:
Distributions to venturers -- (1,050,000) --
---------- ----------- ----------
Net increase (decrease) in cash and
cash equivalents 610,600 (434,400) 459,900
Cash and cash equivalents at beginning of year 435,700 1,046,300 611,900
---------- ----------- ----------
Cash and cash equivalents at end of year $1,046,300 $ 611,900 $1,071,800
========== =========== ==========
</TABLE>
See accompanying summary of accounting
policies and notes to financial statements.
F-25 IV-1
<PAGE> 73
ENSTAR CABLE OF MACOUPIN COUNTY
SUMMARY OF ACCOUNTING POLICIES
----------------------
FORM OF PRESENTATION
Enstar Cable of Macoupin County, a Georgia general partnership (the
"Venture") operates cable television systems in rural areas of Illinois. As a
Partnership, Enstar Cable of Macoupin County pays no income taxes. All of the
income, gains, losses, deductions and credits of the Venture are passed through
to its Joint Venturers. The basis in the Venture's assets and liabilities
differs for financial and tax reporting purposes. At December 31, 1995 the tax
basis of the Venture's net assets exceeds its book basis by $163,900.
The financial statements do not give effect to any assets that the
Venturers may have outside of their interest in the Venture, nor to any
obligation including income taxes, of the Venturers.
CASH EQUIVALENTS
For purposes of the statements of cash flows, the Venture considers all
highly liquid debt instruments purchased with an initial maturity of three
months or less to be cash equivalents. The carrying value of cash and cash
equivalents approximates fair value due to the short maturity of those
instruments.
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:
<TABLE>
<S> <C>
Cable television systems 5-15 years
Vehicles 3 years
Furniture and equipment 5-7 years
Leasehold improvements Life of lease
</TABLE>
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 Venture
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-26 IV-1
<PAGE> 74
ENSTAR CABLE OF MACOUPIN COUNTY
SUMMARY OF ACCOUNTING POLICIES
(CONCLUDED)
RECOVERABILITY OF ASSETS
The Venture assesses on an on-going basis the recoverability of
intangible assets, including franchise costs, 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
Venture also evaluates the amortization periods of assets, including franchise
costs 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 Venture 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 prior year amounts have been reclassified to conform to the
1995 presentation.
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-27 IV-1
<PAGE> 75
ENSTAR CABLE OF MACOUPIN COUNTY
NOTES TO FINANCIAL STATEMENTS
----------------------
NOTE 1 - JOINT VENTURE MATTERS
The Venture was formed under the terms of a joint venture
agreement effective December 30, 1987 between Enstar Income Program IV-1, L.P.,
Enstar Income Program IV-2, L.P., and Enstar Income Program IV-3, L.P. (the
"Venturers"), three limited partnerships sponsored by Enstar Communications
Corporation as their corporate general partner. The Venture was formed to pool
the resources of the three limited partnerships to acquire, own, operate, and
dispose of certain cable television systems. In 1988, the Venture acquired two
cable television systems in Illinois.
Under the terms of the agreement, the Venturers share equally in
profits, losses, allocations, and assets. Capital contributions, as required,
are also made equally.
On September 30, 1988, Falcon Cablevision, a California limited
partnership, purchased all of the outstanding capital stock of the Enstar
Communications Corporation.
NOTE 2 - TRANSACTIONS WITH AFFILIATES
The Venture has a management and service agreement (the
"Agreement") with a wholly owned subsidiary of the Corporate General Partner
(the "Manager") for a monthly management fee of 4% of gross receipts, as
defined, from the operations of the Venture. Prior to 1994, the management fee
was 5%. Management fees approximated $78,600, $63,600 and $65,800 in 1993, 1994
and 1995. In addition, beginning in 1994, the Venture is required to distribute
1% of its gross revenues to the Corporate General Partner in respect to its
interest as the Corporate General Partner. Such expenses were $15,900 and
$16,500 in 1994 and 1995, respectively.
In addition to the monthly management fee, the Venture reimburses
the Manager for direct expenses incurred on behalf of the Venture and for the
Venture's allocable share of operational costs associated with services provided
by the Manager. All cable television properties managed by the affiliate 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. The
total amounts charged to the Venture for these services approximated $132,200,
$151,700 and $144,300 during 1993, 1994 and 1995.
Certain programming services have been purchased through Falcon
Cablevision. In turn, Falcon Cablevision charges the Venture for these costs
based on an estimate of what the Venture could negotiate for such programming
services on a stand-alone basis. The Venture recorded programming fee expense of
$331,400, $346,400 and $364,800 in 1993, 1994 and 1995, respectively.
F-28 IV-1
<PAGE> 76
ENSTAR CABLE OF MACOUPIN COUNTY
NOTES TO FINANCIAL STATEMENTS
(Continued)
----------------------
NOTE 3 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of:
<TABLE>
<CAPTION>
December 31,
-----------------------------
1994 1995
----------- -----------
<S> <C> <C>
Cable television systems $ 2,568,800 $ 2,872,400
Vehicles, furniture and
equipment, and leasehold
improvements 167,900 172,900
----------- -----------
2,736,700 3,045,300
Less accumulated depreciation
and amortization (1,763,600) (2,023,800)
----------- -----------
$ 973,100 $ 1,021,500
=========== ===========
</TABLE>
NOTE 4 - COMMITMENTS AND CONTINGENCIES
The Venture leases buildings and tower sites associated with the
systems under operating leases expiring in 1999.
Future minimum rental payments under noncancelable operating leases
that have remaining terms in excess of one year as of December 31, 1995 are as
follows:
<TABLE>
<CAPTION>
Year Amount
---- ------
<S> <C>
1996 5,900
1997 5,900
1998 5,900
1999 2,800
-------
$20,500
=======
</TABLE>
Rentals, other than pole rentals, charged to operations approximated
$7,300, $7,200 and $8,200 in 1993, 1994 and 1995, while pole rental expense
approximated $10,800, $12,100 and $16,300 in 1993, 1994 and 1995, respectively.
The Venture has guaranteed the debt of Enstar Income Program IV-1 and
Enstar Income Program IV-2.
Other commitments include approximately $905,300 at December 31, 1995
to rebuild certain existing cable systems.
F-29 IV-1
<PAGE> 77
ENSTAR CABLE OF MACOUPIN COUNTY
NOTES TO FINANCIAL STATEMENTS
(CONCLUDED)
----------------------
NOTE 5 - COMMITMENTS AND CONTINGENCIES (Continued)
The Venture 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
Venture's cable services. The Venture 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 Venture was not a party to this litigation.
NOTE 6 - EMPLOYEE BENEFITS PLANS
The Venture 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 Venturer'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 Venture for the Profit Sharing Plan in 1993, 1994 or 1995.
F-30 IV-1
<PAGE> 78
EXHIBIT INDEX
Exhibit
Number Description
- ------------------
3 Second Amended and Restated Agreement of Limited Partnership of
Enstar Income Program IV-1, L.P., dated as of August 1, 1988.(3)
10.1 Amended and Restated Partnership Agreement of Enstar IV/PBD
Systems Venture, as of December 15, 1986.(1)
10.2 Management Agreement between Enstar IV/PBD Systems Venture and
Enstar Cable Corporation.(1)
10.3 Management Agreement between Enstar Income Program IV-1, L.P.
and Enstar Cable Corporation.(1)
10.4 Partnership Agreement of Enstar Cable of Macoupin County, dated
as of December 30, 1987.(2)
10.5 Management Agreement between Enstar Cable of Macoupin County
and Enstar Cable Corporation.(3)
10.6 Revolving Credit and Term Note Agreement dated September 23,
1986 between Enstar Income Program IV-1 and Rhode Island
Hospital Trust National Bank, as amended.(3)
10.7 Franchise Ordinance and related documents thereto granting a
non-exclusive community antenna television system franchise for
the City of Poplar Bluff, MO.(3)
10.8 Franchise Ordinance and related documents thereto granting a
non-exclusive community antenna television system franchise for
the City of Dexter, MO.(3)
10.9 Franchise Ordinance and related documents thereto granting a
non-exclusive community antenna television system franchise for
the City of Bloomfield, MO.(2)
10.10 Franchise Ordinance and related documents thereto granting a
non-exclusive community antenna television system franchise for
the City of Mt. Carmel, IL.(2)
10.11 Franchise Ordinance and related documents thereto granting a
non-exclusive community antenna television system franchise for
the City of Carlinville, IL.(2)
10.12 Franchise Ordinance and related documents thereto granting a
non-exclusive community antenna television system franchise for
the City of Virden, IL.(2)
10.13 Franchise Ordinance and related documents thereto granting a
non-exclusive community antenna television system franchise for
the City of Girard, IL.(2)
10.14 Franchise Ordinance and related documents thereto granting a
non-exclusive community antenna television system franchise for
the City of Thayer, IL.(2)
10.15 Franchise Ordinance and related documents thereto granting a
non-exclusive community antenna television system franchise for
the City of Auburn, IL.(2)
E-1 IV-1
<PAGE> 79
EXHIBIT INDEX
Exhibit
Number Description
- ------------------
10.16 Service agreement between Enstar Communications Corporation,
Enstar Cable Corporation and Falcon Holding Group, Inc. dated as
of October 1, 1988.(4)
10.17 Amendment No. 2 to Revolving Credit and Term Loan Agreement dated
September 23, 1986 between Enstar Income Program IV-1 and Rhode
Island Hospital Trust National Bank, dated January 18, 1989.(5)
10.18 Amendment No. 3 to Revolving Credit and Term Loan Agreement dated
September 23, 1986 between Enstar Income Program IV-1 and Rhode
Island Hospital Trust National Bank, dated June 15, 1990.(5)
10.19 Loan Agreement between Enstar Income Program IV-1, L.P. and
Kansallis-Osake-Pankki dated December 9, 1993.(6)
10.20 Amended and Restated Partnership Agreement of Enstar Cable of
Macoupin County, as of October 1, 1993. (7)
16.1 Report of change in accountants.(8)
21.1 Subsidiaries: Enstar IV/PBD Systems Venture and Enstar Cable of
Macoupin County
FOOTNOTE REFERENCES
(1) Incorporated by reference to the exhibits to the Registrant's Annual
Report on Form 10-K, File No. 0-15705 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. 0-15705 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. 0-15705 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. 0-15705 for the fiscal year ended
December 31, 1989.
(5) Incorporated by reference to the exhibits to the Registrant's Annual
Report on Form 10-K, File No. 0-15705 for the fiscal year ended
December 31, 1990.
(6) Incorporated by reference to the exhibits to the Registrant's Annual
Report on Form 10-K, File No. 0-15705 for the fiscal year ended
December 31, 1993.
(7) Incorporated by reference to the exhibits to the Registrant's Quarterly
Report on Form 10-K, File No. 0-15705 for the quarter ended March 31,
1995.
(8) Incorporated by reference to the exhibit to the Registrant's Current
Report on Form 8-K, File No. 0-15705 dated October 17, 1995.
E-2 IV-1
<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 TWELVE
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> 3,200
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,689,900
<CURRENT-LIABILITIES> 15,500
<BONDS> 1,008,900
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 2,689,900
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 32,100
<OTHER-EXPENSES> (3,700)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 126,500
<INCOME-PRETAX> 89,300
<INCOME-TAX> 0
<INCOME-CONTINUING> 89,300
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 89,300
<EPS-PRIMARY> 2.21
<EPS-DILUTED> 0.00
</TABLE>
