<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 0-15705
ENSTAR INCOME PROGRAM IV-1, L.P.
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(Exact name of Registrant as specified in its charter)
GEORGIA 58-1648322
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
10900 WILSHIRE BOULEVARD - 15TH FLOOR
LOS ANGELES, CALIFORNIA 90024
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including
area code: (310)824-9990
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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
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UNITS OF LIMITED PARTNERSHIP INTEREST NONE
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant' 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 system since 1984 ("Falcon Cablevision"). The general partner
of Falcon Cablevision is Falcon Holding Group, L.P. ("FHGLP"), which provides
certain management services to the Partnership. The general partner of FHGLP is
Falcon Holding Group, Inc., a California corporation ("FHGI"). See Item 13.,
"Certain Relationships and Related Transactions." The General Partner, FHGLP and
affiliated companies are responsible for the day to day management of the
Partnership and its operations. See "Employees" below.
A cable television system receives television, radio and data
signals at the system's "headend" site by means of over-the-air antennas,
microwave relay systems and satellite earth stations. These signals are then
modulated, amplified and distributed, primarily through coaxial and fiber optic
distribution systems, to customers who pay a fee for this service. Cable
television systems may also originate their own television programming and other
information services for distribution through the system. Cable television
systems generally are constructed and operated pursuant to non-exclusive
franchises or similar licenses granted by local governmental authorities for a
specified term of years.
The 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
and WGN), various satellite-delivered, non-broadcast channels (such as Cable
News Network ("CNN"), MTV: Music Television ("MTV"), the USA Network ("USA"),
ESPN, Turner Network Television ("TNT") and The Disney Channel), programming
originated locally by the cable television system (such as public, educational
and governmental 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 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
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.
Certain other new channels have also recently offered the cable systems managed
by FHGLP, including those of the Partnership, fees in return for carrying their
service. Due to a lack of channel capacity available for adding new channels,
the Partnership's management cannot predict the impact of such potential
payments on the Partnership's business. See Item 7., "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources."
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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,
1996, cable systems owned by Enstar IV/PBD Systems Venture and Enstar Cable of
Macoupin County served approximately 13,400 and 4,500 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 27 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 Corporate 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 given a similar technical profile, 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 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."
Adoption of rules implementing certain provisions of the Cable
Television Consumer Protection and Competition Act of 1992 (the "1992 Cable
Act") by the Federal Communications Commission (the "FCC") has had a negative
impact on the Joint Ventures' revenues and cash flow. These rules are subject to
further amendment to give effect to the Telecommunications Act of 1996 (the
"1996 Telecom Act"). See "Legislation and Regulation" and Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
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Clustering
The Joint Ventures have sought to acquire cable television
operations 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." 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 through a central headend reception
facility.
Capital Expenditures
As noted in "Technological Developments", the Joint Ventures'
systems have 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,
and to the extent permitted by covenants in the Partnership's credit agreement,
significant amounts of capital for future upgrades will be required in order to
increase available channel capacity, improve quality of service and facilitate
the expansion of new services such as advertising, pay-per-view, new unregulated
tiers of satellite-delivered services and home shopping, as well as possible new
services such as video games, video-on-demand and other interactive
applications, so that the systems remain competitive within the industry. 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' management has selected a technical standard
that incorporates 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' future capital expenditure plans are, however,
all subject to the availability of adequate capital on terms satisfactory to the
Partnership, of which there can be no assurance. The Macoupin Joint Venture is
required to rebuild its cable system in the community of Auburn, Illinois by
June 30, 1997 at an estimated total cost of $379,000 as a condition of its
franchise agreement. Construction began in July 1996 and is expected to be
completed prior to the required date. Capital expenditures related to the
rebuild approximated $226,000 in 1996, with additional construction costs of
$153,000 projected for 1997. The Joint Venture is also rebuilding portions of
its cable systems in surrounding communities at an estimated total additional
cost of approximately $770,000, which includes expenditures of approximately
$310,000 in 1997 to complete the project. The PBD Joint Venture has budgeted
$1,248,800 for the rebuild of its Mt. Carmel, Illinois cable system in 1997.
Other capital expenditures budgeted by the Joint Ventures for 1997 include
approximately $478,100 to upgrade other equipment. As discussed in prior
reports, the Joint Ventures postponed a number of rebuild and upgrade projects
that were planned for 1994 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, a majority of the
Joint Ventures' systems will be significantly less technically advanced than had
been expected prior to the implementation of reregulation. 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 systems that have been rebuilt to a higher technical
standard. See "Legislation and Regulation" and Item 7, "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources."
Decentralized Management
The Corporate General Partner manages the Joint Ventures' systems on
a decentralized basis. The Corporate General Partner believes that its
decentralized management structure, by enhancing management presence at the
system level, increases its sensitivity to the needs of its customers, enhances
the effectiveness of its customer service efforts, eliminates the need for
maintaining a large centralized corporate staff and facilitates the maintenance
of good relations with local governmental authorities.
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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 programming packages in their
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. However, in
applying this new policy to 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 a non-premium "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. In
addition, the FCC decided that discounted packages of non-premium programming
services will be subject to rate regulation in the future. 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 group of regulated services, 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 customers are monitored on an
ongoing 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 a periodic 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 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, 1996.
<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 15,582 11,017 70.7% 3,878 35.2% $33.69 11,172
Mt. Carmel, IL 3,327 2,409 72.4% 669 27.8% $32.86 5,347
------ ------ ----- ------
Total 18,909 13,426 71.0% 4,547 33.9% $33.54 16,519
====== ====== ===== ======
Enstar Cable of
Macoupin County:
Macoupin, IL 6,483 4,463 68.8% 1,776 39.8% $35.28 4,889
</TABLE>
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(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. Prior to July 1, 1996, The Disney Channel was
offered as a premium service. Effective July 1, 1996, it was offered as part of
an unregulated tier of services. As a result, the number of reported premium
service units was artificially reduced by this service offering change. The
number of Disney Channel premium service units at June 30, 1996 was 305.
(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, 1996.
(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 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, TNT and The Disney Channel) and certain information and
public access channels. For an extra monthly charge, the systems provide certain
premium television services, such as HBO, Showtime and regional sports networks.
The Joint Ventures also offer other cable television services to their
customers, including pay-per-view programming. 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 definition of effective competition provided for in the
1992 Cable Act, nearly all cable television systems in the United States have
become subject to local rate regulation of basic service. The 1996 Telecom Act
expanded the definition of effective competition to include situations in which
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 non-basic 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, affecting all of the
Joint Ventures' systems 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 is in the process of
conducting a number of additional rulemaking proceedings in order to implement
many of the provisions of the 1996 Telecom Act. See "Legislation and
Regulation."
At December 31, 1996, the Joint Ventures' monthly rates for basic
cable service for residential customers, excluding special senior citizen
discount rates, ranged from $19.17 to $23.70 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. Prior to September 1, 1993, the
Joint Ventures 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. Substantially all the Joint Ventures'
customers received a decrease in their monthly charges in July 1994 upon
implementation of the FCC's amended rules. Commercial customers, such as hotels,
motels and hospitals, are charged a negotiated, non-recurring fee for
installation of service and monthly fees based upon a standard discounting
procedure. Most multi-unit dwellings are offered a negotiated bulk rate in
exchange for single-point billing and basic service to all units. These rates
are also subject to regulation.
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EMPLOYEES
The various personnel required to operate the PBD Joint Venture's
business are employed by the Joint Venture, the Corporate General Partner, its
subsidiary corporation and FHGLP. As of February 7, 1996, the PBD Joint Venture
had 15 employees, the cost of which is charged directly to the Joint Venture. As
of February 7, 1997, the Macoupin Joint Venture had no employees. The various
personnel required to operate the Joint Venture's business are employed by the
Corporate General Partner, its subsidiary corporation and FHGLP. 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. Other
personnel required to operate the PBD Joint Venture's business are employed by
an affiliate of the General Partner. The cost of such employment is allocated
and charged to the Joint Venture. 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 had an average channel capacity of 37 with 100% of the channel capacity
utilized at December 31, 1996. 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, dependent in part on the
availability of adequate capital on terms satisfactory to the Partnership, of
which there can be no assurance. Also, as a result of the uncertainty created by
recent regulatory changes, the Joint Ventures have deferred most plant rebuilds
and upgrades. See "Business Strategy - Capital Expenditures," "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 is to utilize fiber optic technology in
substantially all rebuild projects which they undertake. The benefits of fiber
optic technology over traditional coaxial cable distribution plant include 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, 1996, approximately 82% 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 certain new
product tiers. 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 the current
technological profile of the Joint Ventures' systems and management's present
understanding of the costs as compared to the benefits of the digital equipment
currently available. This issue is under frequent management review.
PROGRAMMING
The Joint Ventures purchase basic and premium programming for their
systems from Falcon Cablevision. In turn, Falcon Cablevision charges the Joint
Ventures for these costs based on an estimate of what the Corporate General
Partner could negotiate for such services for the 15 partnerships managed by the
Corporate General Partner as a group (approximately 94,300 homes subscribing to
cable service at December 31, 1996), which is generally based on a fixed fee per
customer or a percentage of the gross receipts for the particular service.
Certain other new channels have also recently offered Cablevision and the Joint
Ventures' systems fees in return for carrying their service. Due to a lack of
channel capacity available for adding new channels, the Partnership's management
cannot predict the impact of such potential payments on is business. 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 of 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 carry 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. The 1996 retransmission
carriage agreement negotiations were completed with essentially no change to the
previous agreements. 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, 1996, 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, 1996.
<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 1998 2 7,787 58.0%
1998 - 2002 1 567 4.2
2003 and after 1 2,617 19.5
- ------ ----
Total 4 10,971 81.7%
= ====== ====
</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 2,455 customers, comprising
approximately 18.3% 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 believes that it has satisfactory relationships with
substantially all of its franchising authorities.
Macoupin Joint Venture
As of December 31, 1996, 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.
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<PAGE> 11
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, 1996.
<TABLE>
<CAPTION>
Number of Percentage of
Year of Homes Homes
Franchise Number of Subscribing to Subscribing to
Expiration Franchises Cable Service Cable Service
---------- ---------- ------------- -------------
<S> <C> <C> <C>
Prior to 1998 3 2,351 52.7%
1998-2002 1 931 20.9
2003 and after 3 1,181 26.4
- ----- -----
Total 7 4,463 100.0%
= ===== =====
</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 has never had a franchise revoked for any of its
systems and believes that it has satisfactory relationships with its franchising
authorities.
The 1984 Cable Act provides, among other things, for an orderly
franchise renewal process in which franchise renewal will not be unreasonably
withheld or, if renewal is withheld, the franchise authority must pay the
operator the "fair market value" for the system covered by such franchise. In
addition, the 1984 Cable Act establishes comprehensive renewal procedures which
require that an incumbent franchisee's renewal application be assessed on its
own merit and not as part of a comparative process with competing applications.
See "Legislation and Regulation."
COMPETITION
Cable television systems compete with other communications and
entertainment media, including over-the-air television broadcast signals which a
viewer is able to receive directly using the viewer's own television set and
antenna. The extent to which a cable system competes with over-the-air
broadcasting depends upon the quality and quantity of the broadcast signals
available by direct antenna reception compared to the quality and quantity of
such signals and alternative services offered by a cable system. In many areas,
television signals which constitute a substantial part of basic service can be
received by viewers who use their own antennas. Local television reception for
residents of apartment buildings or other multi-unit dwelling complexes may be
aided by use of private master antenna services. Cable systems also face
competition from alternative methods of distributing and receiving television
signals and from other sources of entertainment such as live sporting events,
movie theaters and home video products, including videotape recorders and
videodisk players. In recent years, the FCC has adopted policies providing for
authorization of new technologies and a more favorable operating environment for
certain existing technologies that provide, or may provide, substantial
additional competition for cable television systems. The extent to which cable
television service is competitive depends in significant part upon the cable
television system's ability to provide an even greater variety of programming
than that available over the air or through competitive alternative delivery
sources. In addition, certain provisions of the 1992 Cable Act and the 1996
Telecom Act are expected to increase competition significantly in the cable
industry. See "Legislation and Regulation."
Individuals presently have the option to purchase earth stations,
which allow the direct reception of satellite-delivered program services
formerly available only to cable television subscribers. Most
satellite-distributed program signals are being electronically scrambled to
permit reception only with authorized decoding equipment for which the consumer
must pay a fee. From time to time, legislation has been introduced in Congress
which, if enacted into law, would prohibit the scrambling of certain satellite-
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<PAGE> 12
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 nationwide basis by
several service providers.
Multichannel 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 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. The use of digital compression technology may
enable MMDS systems to deliver even more channels. MMDS systems qualify for the
statutory compulsory copyright license for the retransmission of television and
radio broadcast stations. Several of the Regional Bell Operating Companies have
begun to enter the MMDS business as a way of breaking into video programming
delivery.
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. 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.
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, a 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. 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
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<PAGE> 13
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 FCC has initiated 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 by the cable television industry.
The FCC also has a pending rulemaking proceeding looking toward the
allocation of frequencies in the 28 Ghz range for a new multichannel wireless
video service which could make 98 video channels available in a single market.
It cannot be predicted at this time whether competitors will emerge utilizing
such frequencies or whether such competition would have a material impact on the
operations of cable television systems.
The 1996 Telecom Act eliminates the restriction against ownership
and operation of cable systems by local telephone companies within their local
exchange service areas. Telephone companies are now free to enter the retail
video distribution business through any means, such as DBS, MMDS, SMATV or as
traditional franchised cable system operators. Alternatively, the 1996 Telecom
Act authorizes local telephone companies to operate "open video systems" without
obtaining a local cable franchise, although telephone companies operating such
systems can be required to make payments to local governmental bodies in lieu of
cable franchise fees. Up to two-thirds of the channel capacity on an "open video
system" must be available to programmers unaffiliated with the local telephone
company. The open video system concept replaces the FCC's video dialtone rules.
The 1996 Telecom Act also includes numerous provisions designed to make it
easier for cable operators and others to compete directly with local exchange
telephone carriers. With certain limited exceptions, neither a local exchange
carrier nor a cable operator can acquire more than 10% of the other entity
operating within its own service area.
Advances in communications technology, as well as changes in the
marketplace and the regulatory and legislative environment, are constantly
occurring. Thus, it is not possible to predict the effect that ongoing or future
developments might have on the cable industry. The ability of cable systems to
compete with present, emerging and future distribution media will depend to a
great extent on obtaining attractive programming. The availability and exclusive
use of a sufficient amount of quality programming may in turn be affected by
developments in regulation or copyright law. See "Legislation and Regulation."
The cable television industry competes with radio, television and
print media for advertising revenues. As the cable television industry continues
to develop programming designed specifically for distribution by cable,
advertising revenues may increase. Premium programming provided by cable systems
is subject to the same competitive factors which exist for other programming
discussed above. The continued profitability of premium services may depend
largely upon the continued availability of attractive programming at competitive
prices.
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<PAGE> 14
LEGISLATION AND REGULATION
The cable television industry is regulated by the FCC, some state
governments and substantially all local governments. In addition, various
legislative and regulatory proposals under consideration from time to time by
the Congress and various federal agencies have in the past, and may in the
future, materially affect the Partnership and the cable television industry. The
following is a summary of federal laws and regulations affecting the growth and
operation of the cable television industry and a description of certain state
and local laws. The Partnership believes that the regulation of its industry
remains a matter of interest to Congress, the FCC and other regulatory
authorities. There can be no assurance as to what, if any, future actions such
legislative and regulatory authorities may take or the effect thereof on the
Partnership and 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 of 1934 (the
"Communications Act"), created 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 conduct a number of rulemaking proceedings to implement
various provisions of the statute. The 1992 Cable Act allows for a greater
degree of regulation of the cable industry with respect to, among other things:
(i) cable system rates for both basic and certain nonbasic services; (ii)
programming access and exclusivity arrangements; (iii) access to cable channels
by unaffiliated programming services; (iv) leased access terms and conditions;
(v) horizontal and vertical ownership of cable systems; (vi) customer service
requirements; (vii) franchise renewals; (viii) television broadcast signal
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
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<PAGE> 15
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 is
reviewing 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). On August 30, 1996, the U.S. Court of Appeals for
the District of Columbia Circuit sustained the constitutionality of all
provisions except for the multiple ownership limits and the limits on the number
of channels which can be occupied by programmers affiliated with the cable
operator, both of which are being challenged in a separate appeal.
TELECOMMUNICATIONS ACT OF 1996
On February 8, 1996, the President signed the 1996 Telecom Act into
law. This statute substantially amended 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 is in the process of conducting a number of additional rulemaking
proceedings in order to implement many of the provisions of the 1996 Telecom
Act. See "Business - Competition" and "Federal Regulation-Rate Regulation."
FEDERAL REGULATION
The FCC, the principal federal regulatory agency with jurisdiction
over cable television, has heretofore promulgated regulations covering such
areas as the registration of cable television systems, cross-ownership between
cable television systems and other communications businesses, carriage of
television broadcast programming, consumer education and lockbox enforcement,
origination cablecasting and sponsorship identification, children's programming,
the regulation of basic cable service rates in areas where cable television
systems are not subject to effective competition, signal leakage and frequency
use, technical performance, maintenance of various records, equal employment
opportunity, and antenna structure notification, marking and lighting. The FCC
has the authority to enforce these regulations through the imposition of
substantial fines, the issuance of cease and desist orders and/or the imposition
of other administrative sanctions, such as the revocation of FCC licenses needed
to operate certain transmission facilities often used in connection with cable
operations. The 1992 Cable Act required the FCC to adopt additional regulations
covering, among other things, cable rates, signal carriage, consumer protection
and customer service, leased access, indecent programming, programmer access to
cable television systems, programming agreements, technical standards, consumer
electronics equipment compatibility, ownership of home wiring, program
exclusivity, equal employment opportunity, and various aspects of direct
broadcast satellite system ownership and operation. The 1996 Telecom Act
requires certain changes to various of these regulations. A brief summary of
certain of these federal regulations as adopted to date follows.
RATE REGULATION
The 1984 Cable Act codified existing FCC preemption of rate
regulation for premium channels and optional nonbasic program tiers. The 1984
Cable Act also deregulated basic cable rates for cable television systems
determined by the FCC to be subject to effective competition. The 1992 Cable Act
substantially changed the previous statutory and FCC rate regulation standards.
The 1992 Cable Act replaced
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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 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 limits the class of complainants
regarding nonbasic tier rates to franchising authorities only and 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 February 22 and November 10, 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 rules have been further amended
several times. 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. The rate regulations adopt a benchmark price cap system
for measuring the reasonableness of existing basic and nonbasic service rates.
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. 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. 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.
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 their 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
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<PAGE> 17
systems owned by the Joint Ventures. There have been three 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 second case, a seven-channel a la carte package was
ordered to be treated as a regulated tier. In the third 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).
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 contained new signal carriage requirements. These
rules allow commercial television broadcast stations which are "local" to a
cable system, i.e., the system is located in the station's Area of Dominant
Influence, to elect every three years whether to require the cable system to
carry the station, subject to certain exceptions, or whether the cable system
will have to negotiate for "retransmission consent" to carry the station. 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 Joint Ventures have thus far 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 second election between must-carry and retransmission consent for
local commercial television broadcast stations was October 1, 1996, and the
Joint Ventures were once again able to reach agreements with broadcasters who
elected retransmission consent or to negotiate extensions to the December 31,
1996 deadline and have therefore continued not to have 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 next election between must-carry and retransmission consent for
local commercial television broadcast stations will be October 1, 1999.
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
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<PAGE> 18
deletions will vary from market to market and cannot be predicted with
certainty. However, it is possible that such deletions could be substantial and
could lead the cable operator to drop a distant signal in its entirety. The FCC
also has commenced a proceeding to determine whether to relax or abolish the
geographic limitations on program exclusivity contained in its rules, which
would allow parties to set the geographic scope of exclusive distribution rights
entirely by contract, and to determine whether such exclusivity rights should be
extended to noncommercial educational stations. It is possible that the outcome
of these proceedings will increase the amount of programming that cable
operators are requested to black out. Finally, the FCC has declined to impose
equivalent syndicated exclusivity rules on satellite carriers who provide
services to the owners of home satellite dishes similar to those provided by
cable systems.
FRANCHISE FEES
Although franchising authorities may impose franchise fees under the
1984 Cable Act, such payments cannot exceed 5% of a cable system's annual gross
revenues. Under the 1996 Telecom Act, franchising authorities may not exact
franchise fees from revenues derived from telecommunications services.
Franchising authorities are also empowered in awarding new franchises or
renewing existing franchises to require cable operators to provide cable-related
facilities and equipment and to enforce compliance with voluntary commitments.
In the case of franchises in effect prior to the effective date of the 1984
Cable Act, franchising authorities may enforce requirements contained in the
franchise relating to facilities, equipment and services, whether or not
cable-related. The 1984 Cable Act, under certain limited circumstances, permits
a cable operator to obtain modifications of franchise obligations.
RENEWAL OF FRANCHISES
The 1984 Cable Act established renewal procedures and criteria
designed to protect incumbent franchisees against arbitrary denials of renewal.
While these formal procedures are not mandatory unless timely invoked by either
the cable operator or the franchising authority, they can provide substantial
protection to incumbent franchisees. Even after the formal renewal procedures
are invoked, franchising authorities and cable operators remain free to
negotiate a renewal outside the formal process. Nevertheless, renewal is by no
means assured, as the franchisee must meet certain statutory standards. Even if
a franchise is renewed, a franchising authority may impose new and more onerous
requirements such as upgrading facilities and equipment, although the
municipality must take into account the cost of meeting such requirements.
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."
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
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<PAGE> 19
their channel capacity for commercial leased access by unaffiliated third
parties. While the 1984 Cable Act allowed 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 uncertain. 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 1996 Telecom Act repealed the 1984 Cable Act's prohibition
against local exchange telephone companies ("LECs") providing video programming
directly to customers within their local telephone exchange service areas.
However, with certain limited exceptions, a LEC may not acquire more than a 10%
equity interest in an existing cable system operating within the LEC's service
area. The 1996 Telecom Act also authorized LECs and others to operate "open
video systems" without obtaining a local cable franchise. See "Competition."
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 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 eliminated 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 MMDS 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 the MMDS and SMATV
restriction. In addition, a cable operator can purchase a SMATV system serving
the same area and technically integrate it into the cable system. 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 the
first 75 activated channels.
-19-
<PAGE> 20
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 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.
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 and an annual filing of the results of these measurements is
required. The 1992 Cable Act requires the FCC to periodically update its
technical standards to take into account changes in technology. Under the 1996
Telecom Act, local franchising authorities may not prohibit, condition or
restrict a cable system's use of any type of subscriber equipment or
transmission technology.
The FCC has adopted regulations to implement the requirements of the
1992 Cable Act designed to improve the compatibility of cable systems and
consumer electronics equipment. These
-20-
<PAGE> 21
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. This provision has been temporarily
stayed while certain programmers seek Supreme Court review on constitutional
grounds. 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.
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. Any future adjustment to the copyright royalty rates will be done
through an arbitration process supervised by the U.S. Copyright Office.
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<PAGE> 22
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.
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
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<PAGE> 23
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 foregoing does not purport to describe all present and proposed
federal, state and local regulations and legislation relating to the cable
television industry. Other existing federal regulations, copyright licensing
and, in many jurisdictions, state and local franchise requirements, currently
are the subject of a variety of judicial proceedings, legislative hearings and
administrative and legislative proposals which could change, in varying degrees,
the manner in which cable television systems operate. Neither the outcome of
these proceedings nor their impact upon the cable television industry can be
predicted at this time.
ITEM 2. PROPERTIES
The Joint Ventures own or lease parcels of real property for signal
reception sites (antenna towers and headends), microwave facilities and business
offices, and own 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.
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<PAGE> 24
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
1,713 as of December 31, 1996. 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's
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 a negative impact on the Partnership's revenues and cash
flow.
The Partnership began making periodic cash distributions to limited
partners from operations during 1986 and distributed $499,800 ($12.50 per unit)
in each of 1994, 1995 and 1996. The distributions were primarily funded from
cash flow generated by Partnership operations, which consisted of cash flow
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<PAGE> 25
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. See Item 7., "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources."
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.
-25-
<PAGE> 26
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 for the five
years ended December 31, 1996. This data should be read in conjunction with the
Partnership's and Joint Ventures' financial statements included in Item 8 hereof
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in Item 7.
I. THE PARTNERSHIP
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------------------------------
OPERATIONS STATEMENT DATA 1992 1993 1994 1995 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Costs and expenses $ (69,500) $ (49,600) $ (51,500) $ (32,100) $ (33,800)
Depreciation and amortization (1,700) -- -- -- --
--------- --------- --------- --------- ---------
Operating loss (71,200) (49,600) (51,500) (32,100) (33,800)
Interest expense (172,700) (136,500) (112,500) (126,500) (119,900)
Interest income 6,100 12,400 2,800 3,700 20,500
Equity in net income of
Enstar IV/PBD Systems Venture 139,700 79,800 20,600 216,200 627,400
Equity in net income (loss) of
Enstar Cable of Macoupin County (52,400) (36,200) 11,900 28,000 123,500
--------- --------- --------- --------- ---------
Net income (loss) $(150,500) $(130,100) $(128,700) $ 89,300 $ 617,700
========= ========= ========= ========= =========
Distributions to partners $ -- $ 504,800 $ 504,800 $ 504,800 $ 504,800
========= ========= ========= ========= =========
PER UNIT OF LIMITED
PARTNERSHIP INTEREST:
Net income (loss) $ (3.73) $ (3.22) $ (3.19) $ 2.21 $ 15.30
========= ========= ========= ========= =========
Distributions $ -- $ 12.50 $ 12.50 $ 12.50 $ 12.50
========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------------------------------
BALANCE SHEET DATA 1992 1993 1994 1995 1996
---------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Total assets $5,664,700 $ 3,751,400 $ 3,110,300 $ 2,689,900 $ 2,812,000
Total debt 2,285,700 1,008,900 1,008,900 1,008,900 1,008,900
General partners' deficit (50,000) (56,300) (62,600) (66,700) (65,500)
Limited partners' capital 3,399,400 2,770,800 2,143,600 1,732,200 1,843,900
</TABLE>
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<PAGE> 27
II. ENSTAR IV/PBD SYSTEMS VENTURE
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------------------------
OPERATIONS STATEMENT DATA 1992 1993 1994 1995 1996
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues $ 4,625,200 $ 4,964,400 $ 4,857,600 $ 5,075,500 $ 5,428,600
Costs and expenses (2,511,100) (2,824,000) (2,989,000) (2,992,300) (3,194,100)
Depreciation and amortization (1,889,700) (1,995,100) (1,835,100) (1,692,800) (1,013,000)
----------- ----------- ----------- ----------- -----------
Operating income 224,400 145,300 33,500 390,400 1,221,500
Net income $ 279,400 $ 159,600 $ 41,200 $ 432,400 $ 1,254,800
=========== =========== =========== =========== ===========
Distributions to venturers $ 2,400,000 $ 2,200,000 $ 1,249,000 $ 666,000 $ 1,260,000
=========== =========== =========== =========== ===========
OTHER OPERATING DATA
Net cash provided by
operating activities $ 1,735,000 $ 2,031,700 $ 2,120,400 $ 2,006,100 $ 2,180,800
EBITDA(1) 2,114,100 2,140,400 1,868,600 2,083,200 2,234,500
EBITDA to revenues 45.7% 43.1% 38.5% 41.0% 41.2%
Capital expenditures $ 441,000 $ 340,600 $ 286,800 $ 791,600 $ 190,300
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------------------------
BALANCE SHEET DATA 1992 1993 1994 1995 1996
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Total assets $ 7,788,500 $ 5,555,200 $ 4,593,500 $ 4,188,300 $ 4,224,300
Venturers' capital 7,025,800 4,985,400 3,777,600 3,544,000 3,538,800
</TABLE>
III. ENSTAR CABLE OF MACOUPIN COUNTY
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------------------------
OPERATIONS STATEMENT DATA 1992 1993 1994 1995 1996
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues $ 1,466,700 $ 1,572,900 $ 1,590,800 $ 1,646,000 $ 1,870,600
Costs and expenses (826,000) (863,500) (876,900) (959,200) (898,300)
Depreciation and amortization (811,700) (826,500) (703,900) (634,800) (614,400)
----------- ----------- ----------- ----------- -----------
Operating income (loss) (171,000) (117,100) 10,000 52,000 357,900
Net income (loss) (157,200) $ (108,600) $ 35,700 $ 84,000 $ 370,500
=========== =========== =========== =========== ===========
Distributions to venturers $ 600,000 $ -- $ 1,050,000 $ -- $ 1,050,000
=========== =========== =========== =========== ===========
OTHER OPERATING DATA
Net cash provided by
operating activities $ 529,700 $ 734,100 $ 750,300 $ 799,900 $ 860,200
EBITDA(1) 640,700 709,400 713,900 686,800 972,300
EBITDA to revenues 43.7% 45.1% 44.9% 41.7% 52.0%
Capital expenditures 84,100 $ 115,500 $ 126,900 $ 325,500 $ 411,200
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------------------------
BALANCE SHEET DATA 1992 1993 1994 1995 1996
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Total assets $ 3,745,600 $ 3,662,700 $ 2,647,600 $ 2,840,100 $ 2,084,400
Venturers' capital 3,523,500 3,414,900 2,400,600 2,484,600 1,805,100
</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 instrument of the Partnership, in
which EBITDA-derived calculations are used as a measure of financial
performance. EBITDA should not be considered by the reader as an alternative to
net income, as an indicator of the Joint Ventures' financial performance or as
an alternative to cash flows as a measure of liquidity.
-27-
<PAGE> 28
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
On February 8, 1996, President Clinton signed into law the 1996
Telecom Act. This statute substantially changed the competitive and regulatory
environment for telecommunications providers by significantly amending the
Communications Act, including certain of the rate regulation provisions
previously imposed by the 1992 Cable Act. Compliance with those rate regulations
has had a negative impact on the Joint Ventures' revenues and cash flow.
However, in accordance with the FCC's regulations, the Joint Ventures will be
able to increase regulated service rates in the future in response to inflation
and specified historical and anticipated 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 their customers. The 1996 Telecom Act provides that
certain of the rate regulations will be phased-out altogether in 1999. Further,
the regulatory environment will continue to change pending, among other things,
the outcome of legal challenges and FCC rulemaking and enforcement activity in
respect of the 1992 Cable Act and the 1996 Telecom Act. There can 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' business. Accordingly, the Joint Ventures' historical financial
results as described below are not necessarily indicative of future performance.
This Report includes certain forward looking statements regarding,
among other things, future results of operations, regulatory requirements,
competition, capital needs and general business conditions applicable to the
Partnership. Such forward looking statements involve risks and uncertainties
including, without limitation, the uncertainty of legislative and regulatory
changes and the rapid developments in the competitive environment facing cable
television operators such as the Joint Ventures, as discussed more fully
elsewhere in this Report.
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 $974,500, $333,000 and $980,000
to the Partnership, representing the Partnership's pro rata share of the cash
flow distributed from the Joint Ventures' respective operations, during 1994,
1995 and 1996, respectively. The Partnership distributed $504,800 to its
partners in each of 1994, 1995 and 1996.
Interest expense decreased from $126,500 to $119,900, or by 5.2%,
for the year ended December 31, 1996 compared to 1995. The decrease was due to
lower interest rates during 1996 compared to 1995 (9.8% in 1996 compared to
10.3% in 1995). Interest expense increased from $112,500 to $126,500, or
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by 12.4%, for the year ended December 31, 1995 compared to 1994, due to higher
interest rates in 1995 (10.3% in 1995 compared to 8.7% in 1994).
THE PBD JOINT VENTURE
1996 COMPARED TO 1995
The Joint Venture's revenues increased from $5,075,500 to
$5,428,600, or by 7.0%, for the year ended December 31, 1996 as compared to
1995. Of the $353,100 increase in revenues for the year ended December 31, 1996
as compared to 1995, $219,000 was due to increases in regulated service rates
that were implemented by the Joint Venture in the second and fourth quarters of
1996, $174,900 was due to increases in other revenue producing items including
advertising sales revenue and $4,700 was due to the restructuring of The Disney
Channel from a premium channel to a tier channel effective July 1, 1996. These
increases were offset by a $45,500 decrease in revenues due to decreases in the
number of subscriptions for service. As of December 31, 1996, the Joint Venture
had approximately 13,400 homes subscribing to cable service and 4,500 premium
service units.
Service costs increased from $1,778,300 to $1,866,800, or by 5.0%,
for the year ended December 31, 1996 as compared to 1995. Service costs
represent costs directly attributable to providing cable services to customers.
Of the $88,500 increase in service costs for the year ended December 31, 1996 as
compared to 1995, $40,100 was due to an increase in copyright fees resulting
from revenue increases as described above, $35,900 was due to an increase in
personnel costs, $7,800 was due to a decrease in capitalization of labor and
overhead expense resulting from fewer capital projects during 1996 and $6,300
was due to an increase in franchise fees. These increases were partially offset
by a $2,200 decrease in repair and maintenance expense. Copyright fees also
increased due to new charges in 1996 for retransmission of copyrighted music
included in cable networks' programming that is carried on the Joint Venture's
systems. See "Legislation and Regulation."
General and administrative expenses increased from $591,100 to
$739,600, or by 25.1%, for the year ended December 31, 1996 as compared to 1995.
Of the $148,500 increase for the year ended December 31, 1996 as compared to
1995, $63,600 was due to an increase in expenses allocated by an affiliate of
the Corporate General Partner that provides system operating management services
to the Joint Venture, $39,000 was due to an increase in marketing expenses,
$37,700 was due to an increase in personnel costs and $21,700 was due to an
increase in telephone expense. These increases were partially offset by a
$10,400 decrease in professional fees and a $5,900 increase in capitalization of
labor and overhead expense due to a greater number of hours spent on franchise
renewal activities in 1996.
Management fees and reimbursed expenses decreased from $622,900 to
$587,700, or by 5.7%, for the year ended December 31, 1996 as compared to 1995.
Reimbursed expenses decreased by $52,800 for the year ended December 31, 1996 as
compared to 1995, primarily due to lower allocated personnel costs and marketing
expenses. Management fees increased by $17,600 for the year ended December 31,
1996 as compared to 1995 in direct relation to increased revenues as described
above.
Depreciation and amortization expense decreased from $1,692,800 to
$1,013,000, or by 40.2%, for the year ended December 31, 1996 as compared to
1995 due to the effect of certain tangible assets becoming fully depreciated and
certain intangible assets becoming fully amortized.
Operating income increased from $390,400 to $1,221,500 for the year
ended December 31, 1996 as compared to 1995, primarily due to decreased
depreciation and amortization expense and increased revenues as described above.
Interest income, net of interest expense, decreased from $42,000 to
$34,800, or by 17.1%, for the year ended December 31, 1996 as compared to 1995
due to lower average interest rates earned on investment balances.
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<PAGE> 30
Due to the factors described above, the Joint Venture's net income
increased from $432,400 to $1,254,800 for the year ended December 31, 1996 as
compared to 1995.
Operating income before depreciation and amortization (EBITDA) as a
percentage of revenues remained relatively unchanged at approximately 41% for
the years ended December 31, 1995 and 1996. EBITDA increased from $2,083,200 to
$2,234,500, or by 7.3%, for the year ended December 31, 1996 as compared to 1995
primarily due to increases in revenues as described above.
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
Joint Venture 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 approximately 13,500 homes subscribing
to cable service and 5,000 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 compliance costs associated with reregulation by the FCC. Management
fees increased by $10,900, or 4.5%, in direct relation to 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.
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.
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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 increased revenues as discussed above. EBITDA
increased from $1,868,600 to $2,083,200, or by 11.5%, during 1995 compared to
1994.
DISTRIBUTIONS MADE BY THE PBD JOINT VENTURE
The PBD Joint Venture distributed $1,249,000, $666,000 and
$1,260,000 equally between its two partners during 1994, 1995 and 1996,
respectively.
THE MACOUPIN JOINT VENTURE
1996 COMPARED TO 1995
The Joint Venture's revenues increased from $1,646,000 to
$1,870,600, or by 13.6%, for the year ended December 31, 1996 as compared to
1995. Of the $224,600 increase in revenues for the year ended December 31, 1996
as compared to 1995, $134,700 was due to increases in regulated service rates
that were implemented by the Joint Venture in the second and fourth quarters of
1996, $74,400 was due to increases in other revenue producing items including
advertising sales and $25,800 was due to the restructuring of The Disney Channel
from a premium channel to a tier channel effective July 1, 1996. These increases
were offset by a $10,300 decrease due to decreases in the number of
subscriptions for service. As of December 31, 1996, the Joint Venture had
approximately 4,500 homes subscribing to cable service and 1,800 premium service
units.
Service costs increased from $500,300 to $532,500, or by 6.4%, for
the year ended December 31, 1996 as compared to 1995. Service costs represent
costs directly attributable to providing cable services to customers. Of the
$32,200 increase in service costs for the year ended December 31, 1996 as
compared to 1995, $24,100 was due to an increase in programming fees charged by
program suppliers (including primary satellite fees), $23,400 was due to an
increase in copyright fees, $17,400 was due to an increase in franchise fees,
$8,200 was due to an increase in personnel costs, $5,400 was due to an increase
in program guide expense and $4,000 was due to an increase in system power
costs. These increases were partially offset by a $50,200 increase in
capitalization of labor and overhead expense resulting from the rebuild of the
Joint Venture's Auburn, Illinois cable system. The increase in programming fees
for the year ended December 31, 1996 included a $6,000 increase related to the
restructuring of The Disney Channel discussed above. Copyright and franchise
fees increased in direct relation to increased revenues. Franchise fees also
increased due to an increase in the fee percentage imposed by one of the Joint
Venture's franchising authorities. Copyright fees also increased due to new
charges in 1996 for retransmission of copyrighted music included in cable
networks' programming that is carried on the Joint Venture's systems. See
"Legislation and Regulation."
General and administrative expenses decreased from $232,300 to
$109,500, or by 52.9%, for the year ended December 31, 1996 as compared to 1995.
Of the $122,800 decrease for the year ended December 31, 1996 as compared to
1995, $101,300 was due to lower insurance expense, primarily workers'
compensation insurance costs, $28,000 was due to an increase in capitalization
of labor and overhead expense resulting from the Auburn rebuild discussed above
and $8,200 was due a decrease in personnel costs. These decreases were partially
offset by an $18,200 increase in marketing expense.
Management fees and reimbursed expenses increased from $226,600 to
$256,300, or by 13.1%, for the year ended December 31, 1996 as compared to 1995.
Reimbursable expenses increased by $18,500 for the year ended December 31, 1996
as compared to 1995, primarily due to higher allocated personnel costs,
professional service fees and compliance costs associated with reregulation by
the FCC. Management fees increased by $11,200 for the year ended December 31,
1996 as compared to 1995 in direct relation to increased revenues as described
above.
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<PAGE> 32
Depreciation and amortization expense decreased from $634,800 to
$614,400, or by 3.2%, for the year ended December 31, 1996 as compared to 1995
due to the effect of certain tangible assets becoming fully depreciated and
certain intangible assets becoming fully amortized.
Operating income increased from $52,000 to $357,900 for the year
ended December 31, 1996 as compared to 1995, primarily due to increased revenues
and lower insurance expense as described above.
Interest income, net of interest expense, decreased from $32,000 to
$12,000, or by 62.5%, for the year ended December 31, 1996 as compared to 1995
due to lower average cash balances available for investment.
Due to the factors described above, the Joint Venture's net income
increased from $84,000 to $370,500 for the year ended December 31, 1996 as
compared to 1995.
Operating income before depreciation and amortization (EBITDA) as a
percentage of revenues increased from 41.7% to 52.0% for the year ended December
31, 1996 as compared to 1995. EBITDA increased from $686,800 to $972,300, or by
41.6%, for the year ended December 31, 1996 as compared to 1995, primarily due
to increased revenues and lower insurance expense as described above.
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 approximately 4,400 homes subscribing to cable
service and 2,100 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, compliance costs associated with
reregulation by the FCC, telephone costs and postage and messenger expense.
Management fees increased by $2,800, or by 3.5%, in direct relation to increased
revenues as described above.
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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.
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).
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.
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 $686,800, or by 3.8%, during 1995 compared to 1994.
DISTRIBUTIONS TO PARTNERS
The Macoupin Joint Venture distributed $1,050,000
equally among its three partners in each of 1994 and 1996. No
distributions were made during 1995.
LIQUIDITY AND CAPITAL RESOURCES
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, and amounted to $601,500 in 1996.
The Macoupin Joint Venture is required to rebuild its Auburn, Illinois cable
system by June 30, 1997 at an estimated total cost of $379,000 as a condition of
its franchise agreement. Capital expenditures related to the rebuild totaled
approximately $226,000 in 1996, and the Joint Venture has budgeted additional
expenditures of $153,000 in 1997 to complete the rebuild. The Joint Venture is
also rebuilding portions of its cable systems in surrounding communities at an
estimated additional cost of approximately $770,000. Capital expenditures
approximated $460,000 in 1996 and additional construction expenditures of
$310,000 are budgeted for 1997. The PBD Joint Venture has budgeted capital
expenditures of approximately $1,509,200 in 1997, which include $1,248,800 for
the rebuild of its Mt. Carmel, Illinois cable system. Management believes that
cash generated by the Joint Ventures' operations in 1997, together with
available borrowings, will be adequate to fund capital expenditures and allow
for continued distributions to partners. To incur this level of capital
expenditures, however, the Partnership will be required to obtain a waiver from
its lender that would permit the Joint Ventures to exceed the limitation on such
expenditures imposed by the loan covenants in the Partnership's bank credit
agreement.
As discussed in prior reports, the Joint Ventures postponed a number
of rebuild and upgrade projects that were planned for 1994 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, a majority of the Joint Ventures' systems will be significantly less
technically advanced than had been expected prior to the implementation of
reregulation. 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 systems that have been rebuilt
to a higher technical standard.
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<PAGE> 34
The Partnership paid distributions totaling $504,800 during the year
ended December 31, 1996. However, there can be no assurance regarding the level,
timing or continuation of future distributions.
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 is permitted to prepay amounts outstanding under
the Facility at any time without penalty, and is able to reborrow throughout
the term of the Facility up to the maximum commitment then available so long as
no event of default exists. The Partnership is also required to pay a commitment
fee of 1/2% per 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's management believes that it was in compliance with
the loan covenants at December 31, 1996. The maximum commitment under the credit
facility will decrease by $750,000 in 1997 to $850,000. Since the aggregate
principal amount outstanding at December 31, 1996 was $1,008,925, principal
payments of $158,925 will be due in 1997.
1996 VS. 1995
Operating activities used $107,400 less cash during 1996 than in
1995. Changes in receivables from affiliates generated $71,400 more cash in 1996
than in 1995 due to the timing of collections. Partnership expenses used $21,800
less cash after adding back non-cash amortization of deferred loan costs and
equity in net income of Joint Ventures. The Partnership used $14,200 less cash
to pay liabilities owed to the Corporate General Partner and third-party
creditors in the 1996 period due to the timing of payments.
Cash provided by investing activities increased by $647,000 in 1996
as compared to 1995 due to an increase in distributions from the Joint Ventures.
1995 VS. 1994
Operating activities used $26,800 more cash during 1995 than in 1994,
primarily due to changes in receivables from affiliates, which used $35,700 more
cash in 1995 due to the timing of collections. Partnership expenses used $6,300
less cash after adding back non-cash items consisting of amortization of
deferred loan costs and equity in net income of Joint Ventures. The Partnership
used $2,600 less cash in 1995 than in 1994 to pay liabilities owed to the
Corporate General Partner and third party creditors due to the timing of
payments.
Cash provided by investing activities decreased by $641,500 in 1995
as compared to 1994 due to reduced distributions from the Joint Ventures.
Financing activities used $12,600 less cash in 1995 due to the payment of
deferred loan costs related to the Partnership's bank credit agreement in 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 Joint Ventures adopted Statement 121 in the
first quarter of 1996, the effects of which were not material.
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<PAGE> 35
INFLATION
Certain of the Joint Ventures' 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 Ventures are able to increase their
service rates periodically, of which there can be no assurance. See "Legislation
and Regulation."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and related financial information required
to be filed hereunder are indexed on Page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
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<PAGE> 36
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, 1996 the Corporate General Partner managed cable television systems
with approximately 125,000 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 subsidiaries 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:
<TABLE>
<CAPTION>
NAME POSITION
- ---- --------
<S> <C>
Marc B. Nathanson Director, Chairman of the Board and Chief Executive Officer
Frank J. Intiso Director, President and Chief Operating Officer
Stanley S. Itskowitch Director, Executive Vice President and General Counsel
Michael K. Menerey Director, Chief Financial Officer and Secretary
Joe A. Johnson Executive Vice President - Operations
Jon W. Lunsford Vice President - Finance and Corporate Development
Abel C. Crespo Controller
</TABLE>
MARC B. NATHANSON, 51, has been Chairman of the Board and Chief Executive
Officer of FHGI and its predecessors since 1975, and prior to September 19, 1995
also served as President. He has been Chairman of the Board and Chief Executive
Officer of Enstar Communications Corporation since October 1988, and also served
as its President prior to September 1995. 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 27-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
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<PAGE> 37
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, 50, was appointed President and Chief Operating Officer of FHGI
in September 1995, and between 1982 and that date held the positions of
Executive Vice President and Chief Operating Officer. He has been President and
Chief Operating Officer of Enstar Communications Corporation since September
1995, and between October 1988 and September 1995 held the positions of
Executive Vice President and Chief Operating Officer. Mr. Intiso is responsible
for the day-to-day operations of all cable television systems under the
management of FHGI. Mr. Intiso has a Masters 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, 58, 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 Executive Vice President and General Counsel of Enstar Communications
Corporation since October 1988. 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, 45, has been Chief Financial Officer and Secretary of FHGI
and its predecessors since 1984. He has been Chief Financial Officer and
Secretary of Enstar Communications Corporation since October 1988. 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.
JOE A. JOHNSON, 52, has been Executive Vice President Operations of FHGI since
September 1995, and between January 1992 and that date was Senior Vice
President. He has been Executive Vice President-Operations of Enstar
Communications Corporation since January 1996. He was a Divisional Vice
President of FHGI between 1989 and 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, 37, has been Vice President - Finance and Corporate Development
FHGI since September 1994. He has been Vice President-Finance and Corporate
Development of Enstar Communications Corporation since January 1996. 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.
ABEL C. CRESPO, 37, has been Controller of FHGI since January 1997. Mr. Crespo
joined Falcon in December 1984, and has held various accounting positions during
that time, most recently that of Senior Assistant Controller. Mr. Crespo holds a
Bachelor of Science degree in Business Administration from California State
University, Los Angeles.
CERTAIN KEY PERSONNEL
The following sets forth, as of December 31, 1996, 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.
-37-
<PAGE> 38
LYNNE A. BUENING, 43, 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, 43, 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.
HOWARD J. GAN, 50, has been Vice President of Regulatory Affairs of FHGI and its
predecessors since 1988 and Vice President of Regulatory 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, 49, 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.
JOAN SCULLY, 61, 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, 49, 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, 49, has been Vice President of Engineering of Falcon Cable
Group since October 1989. From 1975 to September 1989 he held various technical
positions with Choice TV and its predecessors. From 1967 to 1975, he held
various technical positions with Sammons Communications. He is a certified
National Association of Radio and Television Engineering ("NARTE") engineer in
lightwave, microwave, satellite and broadband.
In addition, Falcon Cable Group has six Divisional Vice Presidents
who are based in the field. They are Ron L. Hall, Michael E. Kemph, Nicholas A.
Nocchi, Larry L. Ott, Robert S. Smith and Victor A. Wible.
Each director of the Corporate General Partner is elected to a
one-year term at the annual shareholder meeting to serve until the next annual
shareholder meeting and thereafter until his respective successor is elected and
qualified. Officers are appointed by and serve at the discretion of the
directors of the Corporate General Partner.
-38-
<PAGE> 39
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 PBD Joint Venture's gross
revenues and 4% of the Macoupin Joint Venture's gross revenues, excluding
revenues from the sale of cable television systems or franchises, calculated and
paid monthly. The Macoupin Joint Venture also is required to distribute 1% of
its gross revenues to the Corporate General Partner in respect of its interest
as the Corporate General Partner of the Partnership. 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.
Additionally, the PBD Joint Venture receives certain system operating management
services from an affiliate of the Manager in lieu of directly employing
personnel to perform such services. The Joint Venture reimburses the affiliate
for its allocable share of the affiliate's operating costs. 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, 1996, the Manager charged the
Joint Ventures management fees of approximately $346,200 and reimbursed expenses
of $479,100. In addition, the Macoupin Joint Venture paid the Corporate General
Partner approximately $18,700 in respect of its 1% special interest. The PBD
Joint Venture also reimbursed an affiliate approximately $135,900 for system
operating management services. Certain programming services are purchased
through Falcon Cablevision. The Joint Ventures paid Falcon Cablevision
approximately $1,630,400 for these programming services for fiscal year 1996.
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, 1997, 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 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, 1997, 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 and H&FII
held 58.9%, 12.1% and 16.3% of the General Partner, respectively. Such interests
entitle the holders thereof to an allocable share of cash
-39-
<PAGE> 40
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, 1997, 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. and 2.58% of
Falcon Video Communications. In accordance with the respective partnership
agreements of these two partnerships, 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.
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 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 Corporate 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 Corporate General Partner
and their management to certain conflicts of interest. Such conflicts of
interest relate to the time and services management will devote to the
Partnership's affairs and to the acquisition and disposition of cable television
systems. Management or its affiliates may establish and manage other entities
which could impose additional conflicts of interest.
FHGLP and the Corporate General Partner will resolve all conflicts
of interest in accordance with their fiduciary duties.
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
-40-
<PAGE> 41
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.
-41-
<PAGE> 42
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
The Registrant filed a Form 8-K dated November 14, 1996, in which
it reported under Item 5 that an unsolicited offer to purchase
partnership units had been made without the consent of the
Corporate General Partner.
-42-
<PAGE> 43
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
26, 1997.
ENSTAR INCOME PROGRAM IV-1, L.P.
By: Enstar Communications Corporation,
Corporate General Partner
By: /s/ Marc B. Nathanson
--------------------------------
Marc B. Nathanson
Chairman of the Board and
Chief Executive Officer
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 indicated on the 26th day of March 1997.
<TABLE>
<CAPTION>
Signatures Title(*)
---------- --------
<S> <C>
/s/ Marc B. Nathanson Chairman of the Board and Chief Executive Officer
---------------------------- (Principal Executive Officer)
Marc B. Nathanson
/s/ Michael K. Menerey Chief Financial Officer, Secretary and Director
---------------------------- (Principal Financial and Accounting Officer)
Michael K. Menerey
/s/ Frank J. Intiso President, Chief Operating Officer
---------------------------- and Director
Frank J. Intiso
/s/ Stanley S. Itskowitch Executive Vice President, General Counsel
---------------------------- and Director
Stanley S. Itskowitch
</TABLE>
(*) Indicates position(s) held with Enstar Communications Corporation, the
Corporate General Partner of the Registrant.
-43-
<PAGE> 44
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----------------------------------------------
Enstar Enstar
Income Enstar IV/PBD Cable
Program Systems of Macoupin
IV-1, Venture County
L.P.
------------- -------------- -------------
<S> <C> <C> <C>
Reports of Independent Auditors F-2 F-12 F-22
Balance Sheets - December 31, 1995 F-3 F-13 F-23
and 1996
Financial Statements for each of
the three years in the period
ended December 31, 1996:
Statements of Operations F-4 F-14 F-24
Statements of Partnership/
Venturers' Capital (Deficit) F-5 F-15 F-25
Statements of Cash Flows F-6 F-16 F-26
Notes to Financial Statements F-7 F-17 F-27
</TABLE>
All schedules have been omitted because they are either not required, not
applicable or the information has otherwise been supplied.
F-1
<PAGE> 45
REPORT OF INDEPENDENT AUDITORS
Partners
Enstar Income Program IV-1, L.P. (A Georgia Limited Partnership)
We have audited the accompanying balance sheets of Enstar Income Program IV-1,
L.P. (A Georgia Limited Partnership) as of December 31, 1995 and 1996, and the
related statements of operations, partnership capital (deficit), and cash flows
for each of the three years in the period ended December 31, 1996. 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.
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, 1995 and 1996, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Los Angeles, California
February 21, 1997
F-2
<PAGE> 46
ENSTAR INCOME PROGRAM IV-1, L.P.
BALANCE SHEETS
=================================
<TABLE>
<CAPTION>
December 31,
------------------------------
1995 1996
----------- -----------
<S> <C> <C>
ASSETS:
Cash and cash equivalents $ 3,200 $ 406,700
----------- -----------
Equity in net assets of joint ventures:
Enstar IV/PBD Systems Venture 1,772,100 1,769,400
Enstar Cable of Macoupin County 828,100 601,700
----------- -----------
2,600,200 2,371,100
----------- -----------
Due from affiliates 35,700 --
Deferred loan costs, net 50,800 34,200
----------- -----------
$ 2,689,900 $ 2,812,000
=========== ===========
LIABILITIES AND PARTNERSHIP CAPITAL
LIABILITIES:
Accounts payable $ 15,500 $ 15,900
Due to affiliates -- 8,800
Note payable 1,008,900 1,008,900
----------- -----------
TOTAL LIABILITIES 1,024,400 1,033,600
----------- -----------
PARTNERSHIP CAPITAL (DEFICIT):
General partners (66,700) (65,500)
Limited partners 1,732,200 1,843,900
----------- -----------
TOTAL PARTNERSHIP CAPITAL 1,665,500 1,778,400
----------- -----------
$ 2,689,900 $ 2,812,000
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE> 47
ENSTAR INCOME PROGRAM IV-1, L.P.
STATEMENTS OF OPERATIONS
================================
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
OPERATING EXPENSES:
General and administrative expenses $ 25,700 $ 32,100 $ 33,800
General Partner reimbursed expenses 25,800 -- --
--------- --------- ---------
Operating loss (51,500) (32,100) (33,800)
--------- --------- ---------
OTHER INCOME (EXPENSE):
Interest expense (112,500) (126,500) (119,900)
Interest income 2,800 3,700 20,500
--------- --------- ---------
(109,700) (122,800) (99,400)
--------- --------- ---------
Loss before equity in net income of joint
ventures (161,200) (154,900) (133,200)
--------- --------- ---------
EQUITY IN NET INCOME OF JOINT VENTURES:
Enstar IV/PBD Systems Venture 20,600 216,200 627,400
Enstar Cable of Macoupin County 11,900 28,000 123,500
--------- --------- ---------
32,500 244,200 750,900
--------- --------- ---------
NET INCOME (LOSS) $(128,700) $ 89,300 $ 617,700
========= ========= =========
NET INCOME (LOSS) PER UNIT OF LIMITED
PARTNERSHIP INTEREST $ (3.19) $ 2.21 $ 15.30
========= ========= =========
WEIGHTED AVERAGE LIMITED PARTNERSHIP
UNITS OUTSTANDING DURING THE YEAR 39,982 39,982 39,982
========= ========= =========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 48
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, 1994 $(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
Distributions to partners (5,000) (499,800) (504,800)
Net income for year 6,200 611,500 617,700
-------- ----------- -----------
PARTNERSHIP CAPITAL (DEFICIT)
December 31, 1996 $(65,500) $ 1,843,900 $ 1,778,400
======== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 49
ENSTAR INCOME PROGRAM IV-1, L.P.
STATEMENTS OF CASH FLOWS
=================================
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $(128,700) $ 89,300 $ 617,700
Adjustments to reconcile net income (loss) to
net cash used in operating activities:
Equity in net income of joint ventures (32,500) (244,200) (750,900)
Amortization of deferred loan costs 16,500 16,500 16,600
Increase (decrease) from changes in:
Due from affiliates -- (35,700) 35,700
Accounts payable and due to affiliates (7,600) (5,000) 9,200
--------- --------- ---------
Net cash used in operating activities (152,300) (179,100) (71,700)
--------- --------- ---------
Cash flows from investing activities:
Distributions from joint ventures 974,500 333,000 980,000
--------- --------- ---------
Cash flows from financing activities:
Distributions to partners (504,800) (504,800) (504,800)
Deferred loan costs (12,600) -- --
--------- --------- ---------
Net cash used in financing activities (517,400) (504,800) (504,800)
--------- --------- ---------
Net increase (decrease) in cash and cash
equivalents 304,800 (350,900) 403,500
Cash and cash equivalents at beginning of year 49,300 354,100 3,200
--------- --------- ---------
Cash and cash equivalents at end of year $ 354,100 $ 3,200 $ 406,700
========= ========= =========
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE> 50
ENSTAR INCOME PROGRAM IV-1, L.P.
NOTES TO FINANCIAL STATEMENTS
=========================================
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES
FORM OF PRESENTATION
Enstar Income Program IV-1, L.P. is a Georgia limited partnership
(the "Partnership") whose cable television operations are conducted through its
participation as a co-general partner in both Enstar IV/PBD Systems Venture and
Enstar Cable of Macoupin County (the "Joint Ventures").
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.
Cash equivalents at December 31, 1996 include $405,000 of short-term
investments in commercial paper.
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.
INCOME TAXES
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,
1996 the book basis of the Partnership's net assets exceeds its tax basis by
$87,400.
EARNINGS PER UNIT OF LIMITED PARTNERSHIP INTEREST
Earnings and losses are allocated 99% to the limited partners and 1%
to the general partners. Earnings and losses per unit of limited partnership
interest are based on the weighted average number of units outstanding during
the year.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the
1996 presentation.
F-7
<PAGE> 51
ENSTAR INCOME PROGRAM IV-1, L.P.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
========================================
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES (CONCLUDED)
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.
NOTE 2 - 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 comprising $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 1% to the general partners and 99% to
the limited partners until the limited partners have received aggregate cash
distributions equal to their original capital contributions ("Capital Payback").
The amended partnership agreement also provides that all partnership profits,
gains, operational losses, and credits (all as defined) be allocated 1% to the
general partners and 99% to the limited partners until the limited partners have
been allocated net profits equal to the amount of cash flow required for Capital
Payback. After the limited partners have received cash flow equal to their
initial investments, the general partners will only receive a 1% allocation of
cash flow from sale or liquidation of a system until the limited partners have
received an annual simple interest return of at least 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's
assets, gains shall be allocated first to the limited partners having negative
capital account balances until their capital accounts are increased to zero,
next equally among the general partners until their capital accounts are
increased to zero, and thereafter as outlined in the preceding paragraph. Upon
dissolution of the Partnership, any negative capital account balances remaining
after all allocations and distributions are made must be funded by the
respective partners.
F-8
<PAGE> 52
ENSTAR INCOME PROGRAM IV-1, L.P.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
========================================
NOTE 2 - PARTNERSHIP MATTERS (CONCLUDED)
The Partnership's operating expenses, interest expense and
distributions to partners are funded primarily from distributions received from
the Joint Ventures.
The amended partnership agreement limits the amount of debt the
Partnership may incur.
NOTE 3 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is practicable to
estimate that value:
Cash and Cash Equivalents
The carrying amount approximates fair value due to the short
maturity of those instruments.
Note Payable
The carrying amount approximates fair value due to the variable rate
nature of the note payable.
NOTE 4 - 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 of
$7,270,000 in cash and $460,000 in capitalized system acquisition and related
costs. 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 $41,200,
$432,400 and $1,254,800 for 1994, 1995 and 1996, respectively, of which $20,600,
$216,200 and $627,400 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-12 to F-21
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 own 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 generated income of $35,700, $84,000 and $370,500 for
1994, 1995 and 1996, respectively, of which $11,900, $28,000 and 123,500 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
F-9
<PAGE> 53
ENSTAR INCOME PROGRAM IV-1, L.P.
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
========================================
NOTE 4 - EQUITY IN NET ASSETS OF JOINT VENTURES (CONCLUDED)
conjunction with these financial statements. Reference is made to the
accompanying financial statements of the Macoupin Joint Venture on pages F-22 to
F-30 of this Form 10-K.
NOTE 5 - 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 is required to the extent the loan balance then
outstanding exceeds the reduced maximum commitment. The Partnership is permitted
to prepay amounts outstanding under the Agreement at any time without penalty,
and is able to reborrow throughout the term of the Agreement up to the maximum
commitment then available so long as no event of default exists.
Borrowings bear interest at the lender's base rate (8.25% at
December 31, 1996), as defined, plus 1.5%, payable quarterly. The Partnership is
also required to pay a commitment fee of .5% per annum on the unused portion of
the revolver. Borrowings under the Agreement are collateralized by substantially
all assets of the Partnership, 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 maintenance of minimum operating results, required financial
reporting, restrictions on sales of assets and limitations on investments,
loans, advances and capital expenditures. Management believes that the
Partnership was in compliance with all loan covenants at December 31, 1996.
Principal maturities of the note payable as of December 31, 1996 are
as follows:
<TABLE>
<CAPTION>
Year Amount
---- ------
<S> <C>
1997 $ 158,900
1998 850,000
----------
$1,008,900
==========
</TABLE>
NOTE 6 - 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 1994, 1995 or 1996 other than through
its investment in the Joint Ventures. Accordingly, no management fees were paid
by the Partnership during 1994, 1995 and 1996.
F-10
<PAGE> 54
ENSTAR INCOME PROGRAM IV-1, L.P.
NOTES TO FINANCIAL STATEMENTS
(CONCLUDED)
========================================
NOTE 6 - TRANSACTIONS WITH THE GENERAL PARTNERS AND AFFILIATES (CONCLUDED)
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 $25,800 in
1994. No reimbursable expenses were incurred on behalf of the Partnership during
1995 or 1996.
NOTE 7 - SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest amounted to $112,200, $126,200 and $120,500
in 1994, 1995 and 1996, respectively.
F-11
<PAGE> 55
REPORT OF INDEPENDENT AUDITORS
To the Venturers of
Enstar IV/PBD Systems Venture (A Georgia General Partnership)
We have audited the accompanying balance sheets of Enstar IV/PBD Systems Venture
(A Georgia General Partnership) as of December 31, 1995 and 1996, and the
related statements of operations, venturers' capital, and cash flows for each of
the three years in the period ended December 31, 1996. 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.
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, 1995 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Los Angeles, California
February 21, 1997
F-12
<PAGE> 56
ENSTAR IV/PBD SYSTEMS VENTURE
BALANCE SHEETS
===============================
<TABLE>
<CAPTION>
December 31,
---------------------------
1995 1996
---------- ----------
<S> <C> <C>
ASSETS:
Cash and cash equivalents $1,297,900 $1,952,900
Accounts receivable, less allowance of $17,400 and
$4,500 for possible losses 97,300 212,800
Prepaid expenses and other 115,100 126,800
Cable materials, equipment and supplies 90,900 89,900
Property, plant and equipment, less accumulated
depreciation and amortization 2,367,300 1,820,900
Franchise cost, net of accumulated
amortization of $4,223,200 and $13,800 219,800 21,000
---------- ----------
$4,188,300 $4,224,300
========== ==========
LIABILITIES AND VENTURERS' CAPITAL
LIABILITIES:
Accounts payable $ 412,000 $ 342,300
Due to affiliates 232,300 343,200
---------- ----------
TOTAL LIABILITIES 644,300 685,500
---------- ----------
COMMITMENTS AND CONTINGENCIES
VENTURERS' CAPITAL:
Enstar Income Program IV-1, L.P 1,772,000 1,769,400
Enstar Income Program IV-2, L.P. 1,772,000 1,769,400
---------- ----------
TOTAL VENTURERS' CAPITAL 3,544,000 3,538,800
---------- ----------
$4,188,300 $4,224,300
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-13
<PAGE> 57
ENSTAR IV/PBD SYSTEMS VENTURE
STATEMENTS OF OPERATIONS
==================================
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------
1994 1995 1996
---------- ---------- -----------
<S> <C> <C> <C>
REVENUES $4,857,600 $5,075,500 $ 5,428,600
---------- ---------- -----------
OPERATING EXPENSES:
Service costs 1,713,600 1,778,300 1,866,800
General and administrative expenses 625,600 591,100 739,600
General Partner management fees
and reimbursed expenses 649,800 622,900 587,700
Depreciation and amortization 1,835,100 1,692,800 1,013,000
---------- ---------- -----------
4,824,100 4,685,100 4,207,100
---------- ---------- -----------
Operating income 33,500 390,400 1,221,500
---------- ---------- -----------
INTEREST INCOME, net 6,900 42,000 34,800
GAIN (LOSS) ON SALE OF CABLE ASSETS 800 -- (1,500)
---------- ---------- -----------
NET INCOME $ 41,200 $ 432,400 $ 1,254,800
========== ========== ===========
</TABLE>
See accompanying notes to financial statements.
F-14
<PAGE> 58
ENSTAR IV/PBD SYSTEMS VENTURE
STATEMENTS OF VENTURERS' CAPITAL
================================
<TABLE>
<CAPTION>
Enstar Enstar
Income Income
Program Program
IV-1, L.P IV-2, L.P Total
----------- ----------- -----------
<S> <C> <C> <C>
BALANCE, January 1, 1994 $ 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
Distributions to venturers (630,000) (630,000) (1,260,000)
Net income for year 627,400 627,400 1,254,800
----------- ----------- -----------
BALANCE, December 31, 1996 $ 1,769,400 $ 1,769,400 $ 3,538,800
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-15
<PAGE> 59
ENSTAR IV/PBD SYSTEMS VENTURE
STATEMENTS OF CASH FLOWS
=============================
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 41,200 $ 432,400 $ 1,254,800
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 1,835,100 1,692,800 1,013,000
(Gain) loss on sale of cable assets (800) -- 1,500
Increase (decrease) from changes in:
Accounts receivable and prepaid expenses 26,300 (65,500) (130,700)
Cable material, equipment and supplies (27,500) 118,000 1,000
Accounts payable and due to affiliates 246,100 (171,600) 41,200
----------- ----------- -----------
Net cash provided by operating activities 2,120,400 2,006,100 2,180,800
----------- ----------- -----------
Cash flows from investing activities:
Capital expenditures (286,800) (791,600) (190,300)
Increase in intangible assets (72,200) (86,800) (75,600)
Proceeds from sale of property, plant and
equipment 800 -- 100
----------- ----------- -----------
Net cash used in investing activities (358,200) (878,400) (265,800)
----------- ----------- -----------
Cash flows from financing activities:
Distributions to venturers (1,249,000) (666,000) (1,260,000)
----------- ----------- -----------
Net increase in cash and cash equivalents 513,200 461,700 655,000
Cash and cash equivalents at beginning of year 323,000 836,200 1,297,900
----------- ----------- -----------
Cash and cash equivalents at end of year $ 836,200 $ 1,297,900 $ 1,952,900
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-16
<PAGE> 60
ENSTAR IV/PBD SYSTEMS VENTURE
NOTES TO FINANCIAL STATEMENTS
========================================
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES
FORM OF PRESENTATION
Enstar IV/PBD Systems Venture, a Georgia general partnership (the
"Venture"), owns and operates cable television systems in rural areas of
Illinois and Missouri.
The financial statements do not give effect to any assets that
Enstar Income Program IV-1, L.P. and Enstar Income Program IV-2, L.P. (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.
Cash equivalents at December 31, 1996 include $1,814,000 of
short-term investments in commercial paper.
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-17
<PAGE> 61
ENSTAR IV/PBD SYSTEMS VENTURE
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
========================================
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES (CONCLUDED)
RECOVERABILITY OF ASSETS
The Venture assesses on an ongoing 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 estimated fair value, which would generally
approximate discounted cash flows. The Joint 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.
REVENUE RECOGNITION
Revenues from cable services are recognized as the services are
provided.
INCOME TAXES
As a partnership, the Venture pays no income taxes. All of the
income, gains, losses, deductions and credits of the Venture are passed through
to the Venturers. The basis in the Venture's assets and liabilities differs for
financial and tax reporting purposes. At December 31, 1996, the book basis of
the Venture's net assets exceeds its tax basis by $204,000.
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.
NOTE 2 - JOINT VENTURE MATTERS
The Venture was formed under the terms of a general partnership
agreement effective July 23, 1986 between 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.
F-18
<PAGE> 62
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,
--------------------------------
1995 1996
------------ ------------
<S> <C> <C>
Cable television systems $ 10,368,300 $ 10,454,200
Vehicles, furniture and
equipment, and leasehold
improvements 609,400 631,900
------------ ------------
10,977,700 11,086,100
Less accumulated depreciation
and amortization (8,610,400) (9,265,200)
------------ ------------
$ 2,367,300 $ 1,820,900
============ ============
</TABLE>
NOTE 4 - COMMITMENTS AND CONTINGENCIES
The Venture leases buildings and tower sites associated with the
systems under operating leases expiring in 2005.
Future minimum rental payments under noncancelable operating leases
that have remaining terms in excess of one year as of December 31, 1996 are as
follows:
<TABLE>
<CAPTION>
Year Amount
---- ----------
<S> <C> <C>
1997 $ 6,300
1998 2,200
1999 2,200
2000 2,200
2001 2,200
Thereafter 8,300
----------
$ 23,400
==========
</TABLE>
Rentals, other than pole rentals, charged to operations amounted to
$22,300, $23,400 and $22,000 in 1994, 1995 and 1996, respectively, while pole
rental expense approximated $53,000, $43,200 and $44,400 in 1994, 1995 and 1996,
respectively.
The Venture has guaranteed the debt of Enstar Income Program IV-1,
L.P. and Enstar Income Program IV-2, L.P.
F-19
<PAGE> 63
ENSTAR IV/PBD SYSTEMS VENTURE
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
========================================
NOTE 4 - COMMITMENTS AND CONTINGENCIES (CONCLUDED)
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 non-basic 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 is in the process of conducting a number of additional rulemaking
proceedings in order to implement many of the provisions of the 1996 Telecom
Act.
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 1994, 1995 or 1996.
NOTE 6 - TRANSACTIONS WITH THE GENERAL PARTNERS AND AFFILIATES
The Venture has a management and service agreement with a wholly
owned subsidiary of the Corporate General Partner (the "Manager") for a monthly
management fee of 5% of gross receipts, as defined, from the operations of the
Venture. Management fee expense was $242,900, $253,800 and $271,400 in 1994,
1995 and 1996, 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 $406,900,
$369,100 and $316,300 during 1994, 1995 and 1996, respectively.
F-20
<PAGE> 64
ENSTAR IV/PBD SYSTEMS VENTURE
NOTES TO FINANCIAL STATEMENTS
(CONCLUDED)
========================================
NOTE 6 - TRANSACTIONS WITH THE GENERAL PARTNERS AND AFFILIATES (CONCLUDED)
The Joint Venture also receives certain system operating management
services from an affiliate of the Corporate General Partner in addition to the
Manager, due to the fact that there are no such employees directly employed by
one of the Joint Venture's cable systems. The Joint Venture reimburses the
affiliate for its allocable share of the affiliate's operational costs. The
total amount charged to the Joint Venture for these costs approximated $27,900,
$37,900 and $135,900 in 1994, 1995 and 1996, respectively. No management fee is
payable to the affiliate by the Joint Venture and there is no duplication of
reimbursed expenses and costs paid to the Manager.
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 Corporate General Partner could negotiate for
such programming services for the 15 partnerships managed by the Corporate
General Partner as a group. The Venture recorded programming fee expense of
$1,102,600, $1,243,300 and $1,241,500 in 1994, 1995 and 1996, respectively.
Programming fees are included in service costs in the statements of operations.
F-21
<PAGE> 65
REPORT OF INDEPENDENT AUDITORS
To the Venturers of
Enstar Cable of Macoupin County (A Georgia General Partnership)
We have audited the accompanying balance sheets of Enstar Cable of Macoupin
County (A Georgia General Partnership) as of December 31, 1995 and 1996, and the
related statements of operations, venturers' capital, and cash flows for each of
the three years in the period ended December 31, 1996. 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.
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, 1995 and 1996, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1996 in
conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Los Angeles, California
February 21, 1997
F-22
<PAGE> 66
ENSTAR CABLE OF MACOUPIN COUNTY
BALANCE SHEETS
=================================
<TABLE>
<CAPTION>
December 31,
---------------------------
1995 1996
---------- ----------
<S> <C> <C>
ASSETS:
Cash and cash equivalents $1,071,800 $ 442,200
Accounts receivable, less allowance of $4,700 and
$3,900, for possible losses 28,700 66,100
Prepaid expenses and other 16,800 25,700
Property, plant and equipment, less accumulated
depreciation and amortization 1,021,500 1,149,400
Franchise cost, net of accumulated
amortization of $2,829,600 and $3,162,000 701,300 401,000
---------- ----------
$2,840,100 $2,084,400
========== ==========
LIABILITIES AND VENTURERS' CAPITAL
LIABILITIES:
Accounts payable $ 287,300 $ 196,200
Due to affiliates 68,200 83,100
---------- ----------
TOTAL LIABILITIES 355,500 279,300
---------- ----------
COMMITMENTS AND CONTINGENCIES
VENTURERS' CAPITAL:
Enstar Income Program IV-1, L.P. 828,200 601,700
Enstar Income Program IV-2, L.P. 828,200 601,700
Enstar Income Program IV-3, L.P. 828,200 601,700
---------- ----------
TOTAL VENTURERS' CAPITAL 2,484,600 1,805,100
---------- ----------
$2,840,100 $2,084,400
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-23
<PAGE> 67
ENSTAR CABLE OF MACOUPIN COUNTY
STATEMENTS OF OPERATIONS
================================
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
REVENUES $1,590,800 $1,646,000 $1,870,600
---------- ---------- ----------
OPERATING EXPENSES:
Service costs 484,100 500,300 532,500
General and administrative expenses 161,600 232,300 109,500
General Partner management fees
and reimbursed expenses 231,200 226,600 256,300
Depreciation and amortization 703,900 634,800 614,400
---------- ---------- ----------
1,580,800 1,594,000 1,512,700
---------- ---------- ----------
Operating income 10,000 52,000 357,900
---------- ---------- ----------
INTEREST INCOME, net 25,700 32,000 12,000
GAIN ON SALE OF CABLE ASSETS -- -- 600
---------- ---------- ----------
NET INCOME $ 35,700 $ 84,000 $ 370,500
========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-24
<PAGE> 68
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, 1994 $ 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
Distributions to venturers (350,000) (350,000) (350,000) (1,050,000)
Net income for year 123,500 123,500 123,500 370,500
----------- ----------- ----------- -----------
BALANCE, December 31, 1996 $ 601,700 $ 601,700 $ 601,700 $ 1,805,100
=========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-25
<PAGE> 69
ENSTAR CABLE OF MACOUPIN COUNTY
STATEMENTS OF CASH FLOWS
===============================
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 35,700 $ 84,000 $ 370,500
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 703,900 634,800 614,400
Gain on sale of cable assets -- -- (600)
Increase (decrease) from changes in:
Accounts receivable and prepaid expenses 11,500 (27,400) (47,900)
Accounts payable and due to affiliates (800) 108,500 (76,200)
----------- ----------- -----------
Net cash provided by operating activities 750,300 799,900 860,200
----------- ----------- -----------
Cash flows from investing activities:
Capital expenditures (126,900) (325,500) (411,200)
Increase in intangible assets (7,800) (14,500) (37,700)
Proceeds from sale of property, plant and
equipment -- -- 9,100
----------- ----------- -----------
Net cash used in investing activities (134,700) (340,000) (439,800)
----------- ----------- -----------
Cash flows from financing activities:
Distributions to venturers (1,050,000) -- (1,050,000)
----------- ----------- -----------
Net increase (decrease) in cash and
cash equivalents (434,400) 459,900 (629,600)
Cash and cash equivalents at beginning of year 1,046,300 611,900 1,071,800
----------- ----------- -----------
Cash and cash equivalents at end of year $ 611,900 $ 1,071,800 $ 442,200
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-26
<PAGE> 70
ENSTAR CABLE OF MACOUPIN COUNTY
NOTES TO FINANCIAL STATEMENTS
==========================================
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES
FORM OF PRESENTATION
Enstar Cable of Macoupin County, a Georgia general partnership (the
"Venture"), owns and operates cable television systems in rural areas of
Illinois.
The financial statements do not give effect to any assets that
Enstar Income Program IV-1, L.P., Enstar Income Program IV-2, L.P. and Enstar
Income Program IV-3, L.P. (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.
Cash equivalents at December 31, 1996 include $385,000 of short-term
investments in commercial paper.
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-27
<PAGE> 71
ENSTAR CABLE OF MACOUPIN COUNTY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
==========================================
NOTE 1 - SUMMARY OF ACCOUNTING POLICIES (CONCLUDED)
RECOVERABILITY OF ASSETS
The Venture assesses on an ongoing 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 estimated fair value, which would generally
approximate discounted cash flows. 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.
REVENUE RECOGNITION
Revenues from cable services are recognized as the services are
provided.
INCOME TAXES
As a partnership, the Venture pays no income taxes. All of the
income, gains, losses, deductions and credits of the Venture are passed through
to its Venturers. The basis in the Venture's assets and liabilities differs for
financial and tax reporting purposes. At December 31, 1996, the tax basis of the
Venture's net assets exceeds its book basis by $12,300.
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.
NOTE 2 - JOINT VENTURE MATTERS
The Venture was formed under the terms of a joint venture agreement
effective December 30, 1987 among 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.
F-28
<PAGE> 72
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,
------------------------------
1995 1996
----------- -----------
<S> <C> <C>
Cable television systems $ 2,872,400 $ 3,263,300
Vehicles, furniture and
equipment, and leasehold
improvements 172,900 170,400
----------- -----------
3,045,300 3,433,700
Less accumulated depreciation
and amortization (2,023,800) (2,284,300)
----------- -----------
$ 1,021,500 $ 1,149,400
=========== ===========
</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 non-cancelable operating leases
that have remaining terms in excess of one year as of December 31, 1996 are as
follows:
<TABLE>
<CAPTION>
Year Amount
---- ------
<S> <C> <C>
1997 $ 5,900
1998 5,900
1999 2,800
----------
$ 14,600
==========
</TABLE>
Rentals, other than pole rentals, charged to operations approximated
$7,200, $8,200 and $8,300 in 1994, 1995 and 1996, respectively, while pole
rental expense approximated $12,100, $16,300 and $13,600 in 1994, 1995 and 1996,
respectively.
The Venture has guaranteed the debt of Enstar Income Program IV-1,
L.P. and Enstar Income Program IV-2, L.P.
Other commitments include approximately $153,000 at December 31,
1996 to complete the rebuild of the Venture's Auburn, Illinois cable system that
was started in 1996. However, the Venture is also rebuilding portions of its
cable systems in surrounding communities at an estimated additional cost of
$310,000 in 1997 to complete the project.
F-29
<PAGE> 73
ENSTAR CABLE OF MACOUPIN COUNTY
NOTES TO FINANCIAL STATEMENTS
(CONCLUDED)
==========================================
NOTE 4 - COMMITMENTS AND CONTINGENCIES (CONCLUDED)
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 non-basic 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 is in the process of conducting a number of additional rulemaking
proceedings in order to implement many of the provisions of the 1996 Telecom
Act.
NOTE 5 - TRANSACTIONS WITH THE GENERAL PARTNERS AND AFFILIATES
The Venture has a management and service 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. Management fees approximated $63,600, $65,800 and $74,800 in 1994, 1995
and 1996, respectively. In addition, the Venture is required to distribute 1% of
its gross revenues to the Corporate General Partner in respect of its interest
as the Corporate General Partner of the Partnership. This fee approximated
$15,900, $16,500 and $18,700 in 1994, 1995 and 1996, respectively.
The Venture also 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 Corporate General Partner and its subsidiaries are
charged a proportionate share of these expenses. Corporate office allocations
and district office expenses are charged to the properties served based
primarily on the respective percentage of basic customers or homes passed
(dwelling units within a system) within the designated service areas. The total
amounts charged to the Venture for these services approximated $151,700,
$144,300 and $162,800 during 1994, 1995 and 1996, 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 Corporate General Partner could negotiate for
such programming services for the 15 partnerships managed by the Corporate
General Partner as a group. The Venture recorded programming fee expense of
$346,400, $364,800 and $388,900 in 1994, 1995 and 1996, respectively.
Programming fees are included in service costs in the statements of operations.
F-30
<PAGE> 74
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
<PAGE> 75
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 exhibits to the Registrant's
Current Report on Form 8-K, File No. 0-15705 dated October 17, 1995.
E-2
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AT DECEMBER 31, 1996, AND THE STATEMENTS OF OPERATIONS FOR THE TWELVE
MONTHS ENDED DECEMBER 31, 1996 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-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 406,700
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,812,000
<CURRENT-LIABILITIES> 24,700
<BONDS> 1,008,900
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 2,812,000
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 33,800
<OTHER-EXPENSES> (20,500)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 119,900
<INCOME-PRETAX> 617,700
<INCOME-TAX> 0
<INCOME-CONTINUING> 617,700
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 617,700
<EPS-PRIMARY> 15.30
<EPS-DILUTED> 0
</TABLE>
